What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 212 added, 192 removed, 622 unchanged (39% of the section changed)

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three and six months ended June 30, 2020.

The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three and nine months ended September 30, 2020.

This analysis should be read in conjunction with our 2019 Annual Report to Shareholders on Form 10-K, and with the unaudited financial statements and notes as set forth in this report.

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In June 2020 these orders were substantially lifted, but then on July 13, 2020, due to a significant increase in reported COVID-19 cases, the orders were reinstated in most California counties, including those in which the Company operates.

The Governor has now developed guidelines as to when a given county can re-open certain business and other activities but all counties in which the Company operates remain under some level of restrictions.

Businesses have been designated as “essential” or “non-essential.” Non-essential businesses have either been closed or had the scope of their activities significantly reduced.

Unemployment has continued to increase in the communities we serve.

The economic impact of this situation has already been severe, and this second “shelter-in-place” order will only exacerbate the situation.

The duration of these orders is not known at this time nor is the pace of recovery once they are lifted.

The economic impact of this situation has already been severe, and continuing restrictions will only exacerbate the situation.

The duration of these restrictions is not known at this time nor is the pace of recovery once they are lifted.

Designated as an “essential business”, Farmers & Merchants Bank of Central California has kept all branches open and maintained regular business hours during this difficult time.

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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 up to $349 billion (subsequently expanded by an additional $310 billion) in loans to small businesses with less than 500 employees to assist these businesses in meeting their payroll and other financial obligations over the next several months.

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.

These government guaranteed loans are made with an interest rate of 1%, a risk weight of 0% under risk-based capital rules, have a term of 2 years, and under certain conditions the SBA can forgive them after eight weeks.

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All fees have been capitalized and are being amortized over the life of the loans.

Since the current assumption is that most of these loans will be forgiven after eight weeks, the income statement impact to the Company in the third or fourth quarter of 2020 could be significant.

The Company has collected $11.3 million in fees from the SBA.

The Company has collected $11.3 million in fees from the SBA, and as of September 30, 2020, $2.1 million of these fees have been accreted into income.

Since the current assumption is that these loans will be forgiven beginning in October, the income statement impact to the Company in the fourth quarter of 2020 and early 2021 could be significant.

Main Street Lending Program (“MSLP”) … The Federal Reserve Bank is administering a program to provide up to $600 billion of credit to small and medium-sized eligible businesses that were in sound financial condition before COVID-19 and that were either unable to access the PPP or that require additional financial support after receiving a PPP loan.

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If sold, lenders are required to retain 5% of each loan with the remaining 95% sold to the Federal Reserve Bank.

The Company has registered as an eligible lender under the MSLP and is considering how to best use the program to assist customers.

The Company has registered as an eligible lender under the MSLP, but has not yet used the program.

Temporary Relief from Troubled Debt Restructurings … The CARES Act provides 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 for up to six months, moving to either interest only payments or interest only with principal deferral for up to six months.

After six months, any deferred amounts would then be added to the loan payments for the remaining term of the loan.

During the second quarter we restructured $270.7 million of loans under the CARES Act guidelines.

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 $276.9 million of loans under the CARES Act guidelines.

The payment status of these loans as of October 31, 2020 is as follows:

– $3.1 million have paid-off or paid-down;

– $157.8 million have resumed full principal and interest payments;

– $91.9 million are making interest only payments;

– $24.1 million remain in full payment deferral.

As of September 30, 2020, accrued interest receivable on these loans totals $3.6 million, with only $505,000 of that amount related to borrowers that remain in full payment deferral.

At the current time, the Company believes its accrued interest is collectible, but continues to monitor each borrower.

Foreclosure Actions … The CARES Act restricts the ability of financial institutions to exercise their foreclosure rights on residential and multi-family properties backed by federally guaranteed mortgage loans.

The State of California has gone further and temporarily suspended all residential and commercial foreclosures.

The State of California has gone further and temporarily suspended all residential and commercial foreclosures through January 31, 2021.

The Company is working with its borrowers when they make requests to defer payments on their mortgage loans.

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Furthermore, since these FRB borrowings are on a non-recourse basis, the loans will not be counted under the calculation of leverage capital ratios.

Since Farmers & Merchants Bank of Central California has significant liquidity at the current time, management is currently considering how to best use the PPPLF.

The Company has until September 30, 2020 to borrow under this facility.

Since Farmers & Merchants Bank of Central California has significant liquidity at the current time, no borrowings have been made under the PPPLF.

The Company has until December 31, 2020 to borrow under this facility.

Impact on Farmers & Merchants Bancorp and Farmers & Merchants Bank of Central California

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(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) the recent “shelter-in-place” orders imposed by local, state and federal officials (e.g., small businesses determined to be “non-essential”).

or (2) continuing levels of “shelter-in-place” orders imposed by local, state and federal officials (e.g., small businesses determined to be “non-essential”).

Our liquidity position may be affected as a result of significant and unusual deposit outflows or loan drawdowns.

However, from a financial perspective, as reflected by the following June 30, 2020 measures, we remain in a strong financial position which should continue to assist us in responding to the risks of COVID-19:

However, from a financial perspective, as reflected by the following September 30, 2020 measures, we remain in a strong financial position which should continue to assist us in responding to the risks of COVID-19:

Liquidity consisting of $300 million of Fed Funds Sold and $638 million of Investment Securities;

Strong Asset Quality as reflected by only $498,000 of non-performing loans, and a negligible delinquency ratio of .036% of total loans;

Risk Based Capital Ratio of 13.12%;

Allowance for Credit Losses of $56.8 million or 2.05% of total loans and leases (exclusive of government guaranteed SBA PPP loans);

ROAA of 1.41% and ROAE of 14.35% in second quarter 2020.

Our credit exposure to the “Hospitality” (primarily hotels) and “Entertainment” (primarily restaurants, health clubs and movie theaters) industries totals $146.3 million in loans and leases outstanding at June 30, 2020.

ROAA of 1.40% and ROAE of 14.40% in third quarter 2020.

Our credit exposure to the “Hospitality” (primarily hotels) and “Entertainment” (primarily restaurants, health clubs and movie theaters) industries totals $147.4 million in loans and leases outstanding at September 30, 2020.

This represents 4.7% of total loans and leases outstanding and 35.1% of total shareholders’ equity, both measures that are thought to be reasonable when compared to peers.

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and (2) have financially strong guarantors with liquidity that provides additional protection.

Over and above the impact on the Hospitality and Entertainment industries there has been a general economic slowdown as a result of the “shelter-in-place” orders.

This is resulting in increased unemployment in many sectors.

Over and above the impact on the Hospitality and Entertainment industries, there has been a general economic slowdown as a result of the continuing levels of “shelter-in-place” orders.

The Central Valley of California may be in a better position than other areas to weather this impact because agricultural activity has substantially continued.

We are monitoring the impact on our borrowers, and working closely with them using all of the tools at our disposal, including the SBA PPP program, the FRB Main Street Lending Program and other loan restructuring strategies, to help them move through this period of reduced business activity.

During the second quarter, we restructured $270.7 million of loans under the CARES Act guidelines (primarily payment or interest deferrals up to six months).

Since April 2020, we have restructured $276.9 million of loans under the CARES Act guidelines (primarily payment or interest deferrals up to six months).

Although we continue to believe that our 2020 financial performance will, in all likelihood, be negatively impacted over the next six months by sustained low interest rates and the potential for increased borrower stress, the full extent of this impact cannot be determined at this time.

Although we continue to believe that our 2020 financial performance will, in all likelihood, be negatively impacted over the next three months 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.

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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 Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”).

The Bank is a California state-chartered non-FRB member bank subject to the regulation and examination by the Department of Financial Protection and Innovation (“DFPI”) and the Federal Deposit Insurance Corporation (“FDIC”).

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 2019 Annual Report on Form 10-K), the Company’s primary service area remains the mid Central Valley of California, a region that can be significantly impacted by the seasonal needs of the agricultural industry.

Business – Service Area located in the Company’s 2019 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.

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The State of California experienced drought conditions from 2013 through most of 2016.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’s primary service area.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in California.

As a result, reservoir levels are normal and the availability of water in our primary service area should not be an issue.

However, these recent weather patterns further reinforce the fact that the long-term risks associated with the availability of water are significant.

For the three and six months ended June 30, 2020, Farmers & Merchants Bancorp reported net income of $14,309,000 and $28,431,000, earnings per share of $18.03 and $35.83 and return on average assets of 1.41% and 1.47%, respectively.

Return on average shareholders’ equity was 14.35% and 14.62% for the three and six months ended June 30, 2020.

For the three and six months ended June 30, 2019, Farmers & Merchants Bancorp reported net income of $14,105,000 and $27,654,000, earnings per share of $17.92 and $35.19 and return on average assets of 1.66% and 1.63%, respectively.

Return on average shareholders’ equity was 16.88% and 16.92% for the three and six months ended June 30, 2019.

The following is a summary of the financial results for the six-month period ended June 30, 2020 compared to June 30, 2019:

Net income increased 2.8% to $28,431,000 from $27,654,000.

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.

For the three and nine months ended September 30, 2019, Farmers & Merchants Bancorp reported net income of $13,738,000 and $41,392,000, earnings per share of $17.45 and $52.64 and return on average assets of 1.58% and 1.61%, respectively.

Return on average shareholders’ equity was 15.76% and 16.52% for the three and nine months ended September 30, 2019.

The following is a summary of the financial results for the nine-month period ended September 30, 2020, compared to September 30, 2019:

Net income increased 4.5% to $43.2 million from $41.4 million.

Earnings per share increased 3.5% to $54.49 from $52.64.

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Total deposits increased 21.5% to $3.8 billion from $3.1 billion.

The primary reasons for the Company’s $777,000 or 2.8% increase in net income in the first half of 2020 as compared to the same period of 2019 were:

The primary reasons for the Company’s $1.8 million or 4.5% increase in net income in the first nine months of 2020 as compared to the same period of 2019 were:

A $3.7 million increase in net interest income related to the growth in earning assets.

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A $787,000 decrease in service charges collected on deposit accounts.

A $929,000 increase in other non-interest expense.

A $1.8 million increase in the provision for credit losses.

A $1.1 million increase in other non-interest expense.

Results of Operations

Net Interest Income / Net Interest Margin

The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the three month periods ended June 30, 2020 and 2019.

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, 2020 and 2019.

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.

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(in thousands)

Three Months Ended June 30,

Three Months Ended Sept 30,

Interest Bearing Deposits with Banks

Investment Securities:

US Government Agency SBA

Government Agency & Government-Sponsored Entities

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Total Earning Assets

Unrealized Gain on Securities Available-for-Sale

Unrealized Gain (Loss) on Securities Available-for-Sale

Allowance for Credit Losses

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The amortized portion of net loan origination fees is included in interest income on loans & leases, representing an adjustment to the yield.

(3) Includes PPP loans.

(3) Interest rate spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

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(in thousands)

Six Months Ended June 30,

Nine Months Ended Sept.

Interest Bearing Deposits with Banks

Investment Securities:

US Government Agency SBA

Government Agency & Government-Sponsored Entities

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Loans & Leases:

Home Equity Line & Loans

Home Equity Lines & Loans

Total Loans & Leases

Total Earning Assets

Unrealized (Loss) Gain on Securities Available-for-Sale

Unrealized Gain (Loss) on Securities Available-for-Sale

Allowance for Credit Losses

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The amortized portion of net loan origination fees is included in interest income on loans & leases, representing an adjustment to the yield.

(3) Includes PPP loans.

(3) Interest rate spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

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Three Months Ended

Six Months Ended

June 30, 2020 compared to June 30, 2019

30, 2020 compared to Sept.

Nine Months Ended

30, 2020 compared to Sept.

Interest Earning Assets

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Investment Securities:

US Government Agency SBA

Government Agency & Government-Sponsored Entities

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Loans & Leases:

Home Equity Line & Loans

Home Equity Lines & Loans

Total Loans & Leases

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Interest Bearing Deposits:

Interest Bearing DDA

Savings and Money Market

Time Deposits

Total Interest Bearing Deposits

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Total Change on a Tax Equivalent Basis

(1) Includes PPP loans.

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.

Second Quarter 2020 vs.

Second Quarter 2019

Net interest income for the second quarter of 2020 increased .12% or $42,000 to $35.4 million.

On a fully taxable equivalent basis, net interest income increased .05% and totaled $35.5 million for the second quarter of 2020.

As more fully discussed below, the increase in net interest income was primarily due to a $614.4 million increase in average earning assets offset by a 72 basis point decrease in the net interest margin.

Third Quarter 2020 vs.

Third Quarter 2019

Net interest income for the third quarter of 2020 increased 6.9% or $2.4 million to $37.7 million.

On a fully taxable equivalent basis, net interest income increased 7.0% and totaled $37.8 million for the third quarter of 2020.

As more fully discussed below, the increase in net interest income was due primarily to a $703.5 million increase in average earning assets offset by a 51 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 June 30, 2020, the Company’s net interest margin was 3.78% compared to 4.50% for the quarter ended June 30, 2019.

For the quarter ended September 30, 2020, the Company’s net interest margin was 3.80% compared to 4.31% for the quarter ended September 30, 2019.

This decrease in net interest margin was due primarily to a 73 basis point decrease in yield on earning assets offset somewhat by a 32 basis point decrease in the cost of interest bearing liabilities.

Average loans & leases totaled $3.0 billion for the quarter ended June 30, 2020;

an increase of $393.4 million compared to the average balance for the quarter ended June 30, 2019.

Average loans & leases totaled $3.1 billion for the quarter ended September 30, 2020;

an increase of $466.2 million compared to the average balance for the quarter ended September 30, 2019.

A significant portion of this increase was due to loans funded under the SBA PPP.

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(See “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for additional information).

Loans & leases decreased from 81.2% of average earning assets at June 30, 2019 to 78.4% at June 30, 2020.

The annualized yield on the Company’s loan & lease portfolio decreased to 4.66% for the quarter ended June 30, 2020, compared to 5.42% for the quarter ended June 30, 2019.

Some of this decrease was due to $347.4 million of PPP loans funded at a rate of 1.00% with the remaining decrease due to an overall drop in market interest rates.

This lower yield offset somewhat the positive impact of increased average loan & lease balances resulting in interest revenue from loans & leases to only decrease by 1.17% to $34.3 million.

Loans & leases decreased from 80.4% of average earning assets at September 30, 2019 to 77.9% at September 30, 2020.

The annualized yield on the Company’s loan & lease portfolio decreased to 4.70% for the quarter ended September 30, 2020, compared to 5.28% for the quarter ended September 30, 2019.

Some of this decrease was due to $347.4 million of PPP loans funded at a rate of 1.00% (plus accreted loan fees) with the remaining decrease due to an overall drop in market interest rates.

This lower yield was offset by the positive impact of increased average loan & lease balances resulting in interest revenue from loans & leases to increase by 4.52% to $36.4 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.

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and (3) investment grade bank-qualified municipal bonds.

However, at certain times the Company selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity.

However, at certain times the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity.

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 $563.1 million for the quarter ended June 30, 2020;

an increase of $159.8 million compared to the average balance for the quarter ended June 30, 2019.

The average investment portfolio yield, on a tax equivalent (TE) basis, was 2.63% for the quarter ended June 30, 2020, compared to 2.86% for the quarter ended June 30, 2019.

Average investment securities totaled $561.6 million for the quarter ended September 30, 2020;

an increase of $178.5 million compared to the average balance for the quarter ended September 30, 2019.

The average investment portfolio yield, on a tax equivalent (TE) basis, was 2.43% for the quarter ended September 30, 2020, compared to 2.76% for the quarter ended September 30, 2019.

This overall decrease in yield was caused primarily by a decrease in market interest rates.

As a result of the combined impact of these mix, balance and yield changes, tax equivalent interest income on securities increased $816,000 to $3.70 million for the quarter ended June 30, 2020, compared to $2.88 million for the quarter ended June 30, 2019.

As a result of the combined impact of mix, balance and yield changes, tax equivalent interest income on securities increased $768,000 to $3.41 million for the quarter ended September 30, 2020, compared to $2.64 million for the quarter ended September 30, 2019.

See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2020.

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Average interest-bearing deposits with banks consisted primarily of FRB deposits.

Balances with the FRB earn interest at the Fed Funds rate, which was 0.10% in June 2020 compared to 2.35% in June 2019.

Average interest bearing deposits with banks for the quarter ended June 30, 2020, was $254.8 million, an increase of $61.1 million compared to the average balance for the quarter ended June 30, 2019.

Interest income on interest bearing deposits with banks for the quarter ended June 30, 2020, decreased $1.1 million to $65,000 compared to the quarter ended June 30, 2019.

Average interest-bearing liabilities increased $289.7 million or 14.0% during the second quarter of 2020.

Balances with the FRB earn interest at the Fed Funds rate, which was .10% in September 2020 compared to 1.80% in September 2019.

Average interest bearing deposits with banks for the quarter ended September 30, 2020, was $314.0 million, an increase of $58.7 million compared to the average balance for the quarter ended September 30, 2019.

Interest income on interest bearing deposits with banks for the quarter ended September 30, 2020, decreased $1.3 million to $81,000 compared to the quarter ended September 30, 2019.

Average interest-bearing liabilities increased $346.6 million or 16.3% during the third quarter of 2020.

Of that increase:

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(2) savings and money market deposits increased $245.7 million;

(3) time deposits increased $1.8 million (see “Financial Condition – Deposits”);

(3) time deposits decreased $56.0 million (see “Financial Condition – Deposits”);

(4) FHLB advances remained unchanged (see “Financial Condition – Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings”);

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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 $2.5 million for the second quarter of 2020 as compared to $3.1 million for the second quarter of 2019.

The average rate paid on interest-bearing deposits was 0.42% for the second quarter of 2020 compared to 0.60% for the second quarter of 2019.

Total interest expense on interest bearing deposits was $2.0 million for the third quarter of 2020 as compared to $3.4 million for the third quarter of 2019.

The average rate paid on interest-bearing deposits was 0.32% for the third quarter of 2020 compared to 0.63% for the third quarter of 2019.

The Company continues to experience aggressive competitor rates on interest bearing deposits which it may need to meet in order to retain key customers.

This could place negative pressure on future deposit rates and net interest margin.

Six Months Ended June 30, 2020 vs.

Six Months Ended June 30, 2019

During the first six months of 2020, net interest income increased 1.81% to $70.8 million, compared to $69.6 million at June 30, 2019.

On a fully taxable equivalent basis, net interest income increased 1.76% and totaled $71.1 million at June 30, 2020, compared to $69.8 million at June 30, 2019.

Nine Months Ended September 30, 2020 vs.

Nine Months Ended September 30, 2019

During the first nine months of 2020, net interest income increased 3.51% to $108.5 million, compared to $104.9 million at September 30, 2019.

On a fully taxable equivalent basis, net interest income increased 3.51% and totaled $108.9 million at September 30, 2020, compared to $105.2 million at September 30, 2019.

The increase in net interest income was primarily due to a $535.4 million increase in average earning assets offset by a 50 basis point decrease in the net interest margin.

For the six months ended June 30, 2020, the Company’s net interest margin was 3.99% compared to 4.45% for the same period in 2019.

For the nine months ended September 30, 2020, the Company’s net interest margin was 3.90% compared to 4.40% for the same period in 2019.

This decrease in net interest margin was due primarily to a decrease of 0.63% in the yield received on earning assets, offset somewhat by a 17 basis point decrease in the cost of interest bearing liabilities.

The average balance of loans & leases increased by $242.4 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The yield on the loan & lease portfolio decreased 43 basis points to 4.92% for the six months ended June 30, 2020 compared to 5.35% for the six months ended June 30, 2019.

This lower yield offset somewhat the positive impact of increased average loan & lease balances resulting in interest revenue from loans & leases increasing .85% or $578,000 for the first six months of 2020.

Average investment securities were $543.9 million for the six months ended June 30, 2020 compared to $417.2 million for the same period in 2019.

The average tax equivalent yield for the six months ended June 30, 2020 was 2.72% compared to 2.81% for the six months ended June 30, 2019.

The average balance of loans & leases increased by $317.5 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

A significant portion of this increase was due to loans funded under the SBA PPP.

Since April 2020 we have funded $347.4 million of loans for 1,540 of our small business customers.

(See “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for additional information).

The yield on the loan & lease portfolio decreased 49 basis points to 4.84% for the nine months ended September 30, 2020, compared to 5.33% for the nine months ended September 30, 2019.

This lower yield offset somewhat the positive impact of increased average loan & lease balances resulting in interest revenue from loans & leases increasing 2.09% or $2.2 million for the first nine months of 2020.

Average investment securities were $549.9 million for the nine months ended September 30, 2020, compared to $405.7 million for the same period in 2019.

The average tax equivalent yield for the nine months ended September 30, 2020, was 2.62% compared to 2.80% for the nine months ended September 30, 2019.

This overall decrease in yield was caused primarily by a decrease in market interest rates.

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Interest bearing deposits with banks consisted primarily of FRB deposits.

Balances with the FRB earn interest at the Fed Funds rate, which was .10% in June 2020 compared to 2.35% in June 2019.

Average interest bearing deposits with banks for the six-months ended June 30, 2020, was $271.9 million, an increase of $81.3 million compared to the average balance for the six-months ended June 30, 2019.

Interest income on interest bearing deposits with banks for the six-months ended June 30, 2020, decreased $1.3 million to $1.0 million compared to the six-months ended June 30, 2019.

Average interest-bearing liabilities increased $219.9 million or 10.5% during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Balances with the FRB earn interest at the Fed Funds rate, which was .10% in September 2020, compared to 1.80% in September 2019.

Average interest bearing deposits with banks for the nine-months ended September 30, 2020, was $286.0 million, an increase of $73.7 million compared to the average balance for the nine-months ended September 30, 2019.

Interest income on interest bearing deposits with banks for the nine-months ended September 30, 2020, decreased $2.6 million to $1.1 million compared to the nine-months ended September 30, 2019.

Average interest-bearing liabilities increased $262.4 million or 12.5% during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.

Of that increase:

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(2) savings and money market deposits increased $177.7 million;

(3) time deposits increased $5.3 million (see “Financial Condition – Deposits”);

(3) time deposits decreased $15.3 million (see “Financial Condition – Deposits”);

and (4) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

Total interest expense on interest bearing deposits was $5.6 million for the first six months of 2020 as compared to $5.9 million for the first six months of 2019.

The average rate paid on interest-bearing deposits was 0.49% in the first six months of 2020 and 0.58% in the first six months of 2019.

Total interest expense on interest bearing deposits was $7.6 million for the first nine months of 2020 as compared to $9.3 million for the first nine months of 2019.

The average rate paid on interest-bearing deposits was 0.43% in the first nine months of 2020 and 0.60% in the first nine months of 2019.

The Company continues to experience aggressive competitor rates on interest bearing deposits, which it may need to meet in order to retain key customers.

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See “Note 1 Significant Accounting Policies - Allowance for Credit Losses.”

In addition, the Company's and Bank's regulators, including the FRB, DBO and FDIC, as an integral part of their examination process, review the adequacy of the allowance.

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.

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The State of California experienced drought conditions from 2013 through most of 2016.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’s primary service area.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in California.

As a result, reservoir levels are normal and the availability of water in our primary service area should not be an issue.

However, these recent weather patterns further reinforce the fact that the long-term risks associated with the availability of water are significant.

The Company made a $300,000 provision for credit losses during the first half of 2020 compared to $200,000 during the first half of 2019.

Net charge-offs during the first half of 2020 were $254,000 compared to net charge-off of $341,000 in the first half of 2019.

The Company made a $2.0 million provision for credit losses during the first nine months of 2020 compared to $200,000 for the same period in 2019.

Net charge-offs during the first nine months of 2020 were $214,000 compared to net charge-offs of $512,000 in the first nine months of 2019.

See “Overview – Looking Forward:

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Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” located in the Company’s 2019 Annual Report on Form 10-K.

After reviewing all factors above, management concluded that the allowance for credit losses, as of June 30, 2020, and June 30, 2019 were adequate .

After reviewing all factors above, management concluded that the allowance for credit losses, as of September 30, 2020, and September 30, 2019 were adequate .

The table below contains the allowance for credit losses for the three and nine-month periods ended September 2020 and 2019:

Three Months Ended

Six Months Ended

Allowance for Credit Losses (in thousands)

September 30,

Nine Months Ended

September 30,

(in thousands)

Balance at Beginning of Period

Loans or Leases Charged Off

Recoveries of Loans or Leases Previously Charged Off

Provision Charged to Expense

Balance at End of Period

The table below breaks out current quarter activity by portfolio segment (in thousands):

June 30, 2020

Residential 1st

Lines & Loans

September 30, 2020

Commercial Real Estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines & Loans

Consumer & Other

Year-To-Date Allowance for Credit Losses:

Beginning Balance- January 1, 2020

Ending Balance- June 30, 2020

Second Quarter Allowance for Credit Losses:

Beginning Balance- April 1, 2020

Ending Balance- June 30, 2020

The Allowance for Credit Losses at June 30, 2020 decreased an insignificant $67,000 from June 30, 2019 and increased an insignificant $46,000 from December 31, 2019.

Ending Balance- September 30, 2020

Third Quarter Allowance for Credit Losses:

Beginning Balance- July 1, 2020

Ending Balance- September 30, 2020

The Allowance for Credit Losses at September 30, 2020 increased $1.84 million from September 30, 2019 and increased $1.79 million from December 31, 2019.

The Company believes that an allowance of 1.82% of gross loans (2.05% when government guaranteed SBA PPP loans are excluded) provides sufficiently for our exposure at the current time.

Changes to the reserve during the first six months of 2020 are due to changes in the underlying credit quality of the loan portfolio.

Changes to the reserve during the first nine months of 2020 are due to changes in the underlying credit quality of the loan portfolio.

(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 been reduced significantly;

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and (6) fees from other miscellaneous business services.

Second Quarter 2020 vs.

Second Quarter 2019

Non-interest income decreased $886,000 or 20.1% for the three months ended June 30, 2020, compared to the same period of 2019.

This decrease was primarily due to:

(1) a $527,000 decrease in service charges collected on deposit accounts resulting from the Bank complying with the Governor of California’s request that banks not charge overdraft and other fees during the early stages of the COVID-19 crisis;

and (2) a $295,000 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.

Third Quarter 2020 vs.

Third Quarter 2019

Non-interest income increased $565,000 or 14.2% for the three months ended September 30, 2020, compared to the same period of 2019.

This increase was primarily due to:

(1) a $159,000 increase related Debit Card and ATM fees;

and (2) a $815,000 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).

Six Months Ended June 30, 2020 vs.

Six Months Ended June 30, 2019

Non‑interest income decreased $2.4 million or 27.3% for the six months ended June 30, 2020 compared to the same period of 2019.

This increase was partially offset by:

(1) a $304,000 decrease in Service Charges on Deposit Accounts;

(2) a $64,000 decrease resulting from the net gain on the sale of leases during the third quarter of the prior year (2019);

and (3) a decrease of 47,000 in dividends received from the FHLB.

Nine Months Ended September 30, 2020 vs.

Nine Months Ended September 30, 2019

Non‑interest income decreased $1.9 million or 14.5% for the nine months ended September 30, 2020, compared to the same period of 2019.

This decrease was primarily due to:

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and (12) other miscellaneous expenses.

Second Quarter 2020 vs.

Second Quarter 2019

Overall, non-interest expense decreased $778,000 or 3.8% for the three months ended June 30, 2020, compared to the same period in 2019.

Third Quarter 2020 vs.

Third Quarter 2019

Overall, non-interest expense decreased $73,000 or 4.0% for the three months ended September 30, 2020, compared to the same period in 2019.

This decrease was primarily comprised of:

(1) a $804,000 decrease in legal expense;

(1) a $715,000 decrease in salaries and employee benefits;

and (2) a $577,000 decrease in legal expenses.

These decreases were partially offset by a $815,000 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.

and (3) a $344,000 increase in salaries and employee benefits.

Six Months Ended June 30, 2020 vs.

Six Months Ended June 30, 2019

Non-interest expense decreased $1.4 million or 3.5% for the six months ended June 30, 2020, compared to the same period of 2019.

Nine Months Ended September 30, 2020 vs.

Nine Months Ended September 30, 2019

Non-interest expense decreased $1.5 million or 2.4% for the nine months ended September 30, 2020, compared to the same period of 2019.

This decrease was primarily comprised of:

(1) decreased legal expenses of $1.6 million;

(2) a $2.0 million 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 expense, an offsetting entry is also required to be made to non-interest income resulting in no effect on the Company’s net income);

and (3) a $1.8 million increase in salaries and employee benefits.

The Bank’s provision for income taxes decreased 6.33% to $9.0 million for the first six months of 2020.

The Company’s effective tax rate for the first six months of 2020 was 24.0% compared to 25.7% for the same period in 2019.

(1) a $2.2 million decrease in legal expenses;

and (2) a $1.2 million 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.

These decreases were partially offset by;

(1) a $1.1 million increase in salaries and employee benefits;

and (2) a $453,000 increase in occupancy and equipment.

The Bank’s provision for income taxes increased 6.1% to $4.9 million for the third quarter of 2020 compared to the third quarter of 2019.

The Company’s effective tax rate for the third quarter of 2020 was 25.03% compared to 25.33% for the third quarter of 2019.

The Company’s effective tax rate fluctuates from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources.

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Financial Condition

This section discusses material changes in the Company’s consolidated balance sheet at June 30, 2020, as compared to December 31, 2019 and to June 30, 2019.

This section discusses material changes in the Company’s consolidated balance sheet at September 30, 2020, as compared to December 31, 2019, and to September 30, 2019.

As previously discussed (see “Overview”), the Company’s consolidated financial condition can be influenced by the seasonal banking needs of its agricultural customers.

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However, at certain times, the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities.

The Company’s investment portfolio at June 30, 2020 was $638.4 million compared to $548.4 million at the end of 2019, an increase of $90.0 million or 16.4%.

At December 31, 2019, the investment portfolio totaled $567.6 million.

The Company’s investment portfolio at September 30, 2020, was $638.4 million compared to $567.6 million at the end of 2019, an increase of $70.8 million or 12.5%.

At September 30, 2019, the investment portfolio totaled $553.3 million.

The Company uses its investment portfolio to help balance its overall interest rate risk.

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Conversely, when rates are falling, 30 year mortgage backed securities or longer term Treasury and Agency securities may be increased.

The Company's total investment portfolio currently represents 15.0% of the Company’s total assets as compared to 15.3% at December 31, 2019, and 16.0% at June 30, 2019.

As of June 30, 2020, the Company held $69 million of municipal investments, all classified as HTM.

The Company's total investment portfolio currently represents 14.8% of the Company’s total assets as compared to 15.3% at December 31, 2019, and 15.5% at September 30, 2019.

As of September 30, 2020, the Company held $70 million of municipal investments, all classified as HTM.

Of this balance, $26.4 million were bank-qualified municipal bonds, and $43.6 million were private placement municipal bonds, warrants, and CRA qualified investments in our service area.

In order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds.

As of June 30, 2020, 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.

As of September 30, 2020, 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, 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.

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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 $303.9 million at June 30, 2020, $223.2 million at December 31, 2019 and $50.2 million at June 30, 2019.

The Company classifies its investments as held-to-maturity (“HTM”), trading, or available-for-sale (“AFS”).

Interest bearing deposits with banks totaled $299.6 million at September 30, 2020, $223.2 million at December 31, 2019, and $150.9 million at September 30, 2019.

The Company classifies its investments in securities 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.

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 June 30, 2020, December 31, 2019 and June 30, 2019, there were no securities in the trading portfolio.

As of September 30, 2020, December 31, 2019, and September 30, 2019, 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.

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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.

The Company has a very minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.

Leases - These are leases to businesses or individuals, for the purpose of financing the acquisition of equipment.

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Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk” for further details.

Overall, the Company's loan & lease portfolio at June 30, 2020 totaled $3.1 billion, an increase of $465.6 million or 17.9% over June 30, 2019.

This increase occurred as a result of:

Overall, the Company's loan & lease portfolio at September 30, 2020, totaled $3.1 billion, an increase of $494.8 million or 18.9% over September 30, 2019.

This increase has occurred as a result of:

(1) the Company’s business development efforts directed toward credit-qualified borrowers;

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and (3) the origination of $347.4 million of PPP loans (See “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for additional information of the Company’s COVID-19 exposure).

No assurances can be made that this growth in the loan & lease portfolio will continue, and it is anticipated that the majority of the PPP loans will be forgiven by the SBA in the second half of 2020.

Loans & leases at June 30, 2020 increased $391 million from $2.7 billion at December 31, 2019.

No assurances can be made that this growth in the loan & lease portfolio will continue, and it is anticipated that the majority of the PPP loans will be forgiven by the SBA in the fourth quarter of 2020 and early 2021.

Loans & leases at September 30, 2020 increased $438.9 million from $2.7 billion at December 31, 2019.

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

Loan & Lease Portfolio

June 30, 2020

September 30, 2020

December 31, 2019

June 30, 2019

September 30, 2019

(in thousands)

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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 June 30, 2020, classified loans totaled $21 million compared to $16.2 million at December 31, 2019 and $14.6 million at June 30, 2019.

As of September 30, 2020, classified loans totaled $20.8 million compared to $16.2 million at December 31, 2019, and $15.3 million at September 30, 2019.

Classified loans & leases with higher levels of credit risk can be further designated as “impaired” loans & leases.

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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 June 30, 2020 non-accrual loans & lease totaled $473,000.

There were no non-accrual loans & leases at December 31, 2019 or June 30, 2019.

At September 30, 2020, non-accrual loans & leases totaled $498,000.

There were no non-accrual loans & leases at December 31, 2019 or September 30, 2019.

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.

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However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.

As of June 30, 2020, restructured loans & leases on accrual totaled $7.6 million as compared to $13.5 million at December 31, 2019.

Restructured loans on accrual at June 30, 2019 were $12.1 million.

During the second quarter, we restructured $270.7 million of loans under the CARES Act guidelines (primarily payment or interest deferrals up to six months).

As of September 30, 2020, restructured loans & leases on accrual totaled $7.9 million as compared to $12.1 million at December 31, 2019, and $12 million at September 30, 2019.

Since April 2020, we have restructured $276.9 million of loans under the CARES Act guidelines (primarily payment or interest deferrals up to six months).

As of September 30, 2020, $103.8 million of these loans remain in a deferral status, the other loans having returned to making principal and/or interest payments.

By October 31, 2020, the loans still in a deferral status had dropped to $24.1 million.

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(in thousands)

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Non-Performing Loans & Leases

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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 $79,000 $0, and $0 have been established for non-performing loans & leases at June 30, 2020, December 31, 2019 and June 30, 2019, 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 $8,100 for the period ended June 30, 2020, and $0 for the year ended December 31, 2019, and period ended June 30, 2019.

The Company reported $873,000 of ORE at June 30 , 2020, December 31, 2019, and June 30 , 2019.

Specific reserves of $92,400, $0, and $0 have been established for non-performing loans & leases at September 30, 2020, December 31, 2019 and September 30, 2019, 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 $15,530, $0, and $0 at September 30, 2020 , December 31, 2019, and September 30, 2019, respectively .

The Company reported $873,000 of ORE at September 30, 2020 , December 31, 2019, and September 30, 2019 .

(i) those classified and non-performing loans & leases discussed above;

and (ii) those loans modified under the COVID-19 guidelines of the CARES Act.

the Company’s management is not aware of any loans & leases as of June 30, 2020, 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.

the Company’s management is not aware of any loans & leases as of September 30, 2020, 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.

The State of California experienced drought conditions from 2013 through most of 2016.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’s primary service area.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in California.

As a result, reservoir levels are normal and the availability of water in our primary service area should not be an issue.

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The agricultural industry is facing challenges associated with:

(1) weakness in export markets due to a stronger dollar, uncertain trade policies and shipping restrictions related to COVID-19;

(1) downward pressures on commodity prices (somewhat offset by higher yields);

(2) tight labor markets and higher wages due to legislative changes at the state and federal levels;

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In June, these orders were substantially lifted, but then on July 13, 2020, due to a significant increase in reported COVID-19 cases, the orders were reinstated in most California counties, including those in which the Company operates.

The Governor has now developed guidance as to when a given county can re-open certain business and other activities, but all counties in which the Company operates remain under some level of restriction.

Businesses have been designated as “essential” or “non-essential.” Non-essential businesses have either been closed or had the scope of their activities significantly reduced.

Unemployment has increased.

The economic impact of this situation has already been severe, and this second “shelter-in-place” order will only exacerbate the situation.

The duration of these orders is not known at this time nor is the pace of recovery once they are lifted, therefore, the Company cannot determine the ultimate impact on classified and non-performing loans and leases (see “Part I, Item 2.

The economic impact of this situation has already been severe, and continuing restrictions will only exacerbate the situation.

The duration of these restrictions is not known at this time nor is the pace of recovery once they are lifted, therefore, the Company cannot determine the ultimate impact on classified and non-performing loans and leases (see “Part I, Item 2.

COVID-19 (Coronavirus) Disclosure)”.

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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 June 30, 2020 have increased $756.8 million or 25.0% compared to June 30, 2019.

The Company's deposit balances at September 30, 2020, have increased $675.4 million or 21.5% compared to September 30, 2019.

In addition to the Company’s ongoing business development activities for deposits, the following factors positively impacted year-over-year deposit growth:

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The Company remains selective in how they respond to competitor rates, which may impact future deposit growth.

Although total deposits have increased 25.0% since June 30, 2019, importantly, low cost transaction accounts have grown at a strong pace as well:

Demand and interest-bearing transaction accounts increased $486.1 million or 30.3% since June 30, 2019.

Savings and money market accounts have increased $258.4 million or 28.7% since June 30, 2019.

Time deposit accounts have increased $12.2 million or 2.4% since June 30, 2019.

The Company's deposit balances at June 30, 2020 have increased $504.0 million or 15.38% compared to December 31, 2019.

Interest-bearing transaction accounts increased by $163.2 million or 16.4%, Savings and money market deposits increased 16.4% or $163.2 million and time deposit accounts increased by $13.8 million or 2.7%.

Deposit trends in the first half of the year can be impacted by the seasonal needs of our agricultural customers.

Although total deposits have increased 21.5% since September 30, 2019, importantly, low cost transaction accounts have grown at a strong pace as well:

Demand and interest-bearing transaction accounts increased $488.2 million or 29.3% since September 30, 2019.

Savings and money market accounts have increased $253.2 million or 26.7% since September 30, 2019.

Time deposit accounts have decreased $66 million or 12.5% since September 30, 2019.

The Company's deposit balances at September 30, 2020, have increased $536.8 million or 16.4% compared to December 31, 2019.

Demand and interest-bearing transaction accounts increased by $387.8 million or 22.0%, savings and money market deposits increased 20.8% or $206.6 million while time deposit accounts decreased by $57.6 million or 11.1%.

This decrease in time deposit accounts was due to the Company’s decision not to renew $57 million in higher rate public funds time deposit accounts from the State of California.

Deposit trends in the first six-to-nine months of the year can be impacted by the seasonal needs of our agricultural customers.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

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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 June 30, 2020, December 31, 2019, or June 30, 2019.

There were no Federal Funds purchased or advances from the FRB at June 30, 2020, December 31, 2019 or June 30, 2019.

As of June 30, 2020 the Company has additional borrowing capacity of $622.7 million with the Federal Home Loan Bank and $423.7 million with the Federal Reserve Bank.

There were no FHLB Advances at September 30, 2020, December 31, 2019, or September 30, 2019.

There were no Federal Funds purchased or advances from the FRB at September 30, 2020, December 31, 2019, or September 30, 2019.

As of September 30, 2020, the Company has additional borrowing capacity of $613.9 million with the Federal Home Loan Bank and $446.3 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.

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These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%.

Interest rates reset quarterly and were 3.15% as of June 30, 2020, 4.75% at December 31, 2019 and 5.26 at June 30, 2019.

The average rate paid for these securities for the first half of 2020 was 4.15% and 5.59% for the first half of 2019.

Interest rates reset quarterly and were 3.10% as of September 30, 2020, 4.75% at December 31, 2019, and 4.99% at September 30, 2019.

The average rate paid for these securities for the first nine months of 2020 was 3.83% and 5.50% for the first nine months of 2019.

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.

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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 $403.7 million at June 30, 2020, $369.3 million at December 31, 2019, and $341.5 million at June 30, 2019.

Shareholders’ Equity totaled $416.9 million at September 30, 2020, $369.3 million at December 31, 2019, and $355.7 million at September 30, 2019.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.

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Corrective Action

As of June 30, 2020

As of September 30, 2020

Total Capital Ratio

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Corrective Action

As of June 30, 2020

As of September 30, 2020

Total Capital Ratio

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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 71 basis point improvement to the June 30, 2020 tier 1 leverage capital ratio, increasing the ratio to 10.27%.

Had the Company not participated in the PPP program, the net result would have been a 86 basis point improvement to the September 30, 2020 tier 1 leverage capital ratio, increasing the ratio to 10.36%.

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.

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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s 2019 Annual Report on Form 10-K for additional information.

There were no stock repurchases during the first half of 2020 or 2019.

There were no stock repurchases during the first nine months of 2020 or 2019.

The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20 million.

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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s 2019 Annual Report on Form 10-K for further explanation.

During the first quarter of 2020, the Company issued 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans.

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.

During the nine months ended September 30, 2019, the Company issued 3,586 shares of common stock to the Bank’s non-qualified defined contribution retirement plans.

These shares were issued at a price of $715.00 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

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(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

June 30, 2019

September 30, 2019

Commitments to Extend Credit

Letters of Credit

Performance Guarantees Under Interest Rate Swap Contracts Entered

Into Between Our Borrowing Customers and Third Parties

Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties

The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments.

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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 June 30, 2020, December 31, 2019, and June 30, 2019.

Additionally, the Company maintains a reserve for off balance sheet commitments, which totaled $315,000 at September 30, 2020, December 31, 2019, and September 30, 2019.

We do not anticipate any material losses as a result of these transactions.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis