Companies: 10,796     total market cap: $144.532 T
โ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$AUD๐Ÿ‡ฆ๐Ÿ‡บ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
TriCo Bancshares
TCBK
#5228
Rank
$1.63 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$50.30
Share price
1.66%
Change (1 day)
38.04%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. TriCo Bancshares
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q2

TriCo Bancshares - 10-Q quarterly report FY2019 Q2


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Table of Contents
 
 
 
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: June 30, 2019​​​​​​​
☐
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:
000-10661
 
TriCo Bancshares
(Exact Name of Registrant as Specified in Its Charter)
 
CALIFORNIA
 
94-2792841
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
63 Constitution Drive
Chico, California 95973
(Address of Principal Executive Offices)(Zip Code)
(530)
898-0300
(Registrant’s Telephone Number, Including Area Code)
 
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
 
TCBK
 
NASDAQ Global Select
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 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, non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large 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
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:
Common stock, no par value: 30,509,637 shares outstanding as of August 5, 2019
 
 
 
 
 
Table of Contents
 
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
TRICO BANCSHARES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited)
 
At June 30,
2019
  
At December 31,
2018
 
Assets:
  
   
 
Cash and due from banks
 $
106,939
  $
119,781
 
Cash at Federal Reserve and other banks
  
68,643
   
107,752
 
         
Cash and cash equivalents
  
175,582
   
227,533
 
Investment securities:
  
   
 
Marketable equity securities
  
2,952
   
2,874
 
Available for sale debt securities
  
1,133,994
   
1,115,036
 
Held to maturity debt securities
  
412,524
   
444,936
 
Restricted equity securities
  
17,250
   
17,250
 
Loans held for sale
  
5,875
   
3,687
 
Loans
  
4,103,687
   
4,022,014
 
Allowance for loan losses
  
(32,868
)  
(32,582
)
         
Total loans, net
  
4,070,819
   
3,989,432
 
Premises and equipment, net
  
88,534
   
89,347
 
Cash value of life insurance
  
116,606
   
117,318
 
Accrued interest receivable
  
20,990
   
19,412
 
Goodwill
  
220,972
   
220,972
 
Other intangible assets, net
  
26,418
   
29,280
 
Operating leases,
right-of-use
  
30,030
   
—  
 
Other assets
  
72,626
   
75,364
 
         
Total assets
 $
6,395,172
  $
6,352,441
 
         
Liabilities and Shareholders’ Equity:
  
   
 
Liabilities:
  
   
 
Deposits:
  
   
 
Noninterest-bearing demand
 $
 1,780,339
  $
 1,760,580
 
Interest-bearing
  
3,561,834
   
3,605,886
 
         
Total deposits
  
5,342,173
   
5,366,466
 
Accrued interest payable
  
2,665
   
1,997
 
Operating lease liability
  
29,434
   
—  
 
Other liabilities
  
74,590
   
83,724
 
Other borrowings
  
13,292
   
15,839
 
Junior subordinated debt
  
57,132
   
57,042
 
         
Total liabilities
  
5,519,286
   
5,525,068
 
         
Commitments and contingencies (Note 8)
            
Shareholders’ equity:
  
   
 
Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at June 30, 2019 and
December 31, 2018
  
—  
   
—  
 
Common stock, no par value: 50,000,000 shares authorized; 30,502,757 and 30,417,223 issued and outstanding
at June 30, 2019 and December 31, 2018, respectively
  
542,939
   
541,762
 
Retained earnings
  
335,145
   
303,490
 
Accumulated other comprehensive loss, net of tax
  
(2,198
)  
(17,879
)
         
Total shareholders’ equity
  
875,886
   
827,373
 
         
Total liabilities and shareholders’ equity
 $
6,395,172
  $
6,352,441
 
         
See accompanying notes to unaudited condensed consolidated financial statements.
 
2
 
 
Table of Contents
 
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data; unaudited)
                 
 
Three months ended
June 30,
  
Six months ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Interest and dividend income:
  
   
   
   
 
Loans, including fees
 $
55,491
  $
39,304
  $
109,889
  $
77,353
 
Investments:
  
   
   
   
 
Taxable securities
  
10,457
   
7,438
   
21,012
   
14,760
 
Tax exempt securities
  
1,061
   
1,042
   
2,134
   
2,083
 
Dividends
  
305
   
298
   
665
   
634
 
Interest bearing cash at Federal Reserve and other banks
  
866
   
396
   
1,937
   
769
 
                 
Total interest and dividend income
  
68,180
   
48,478
   
135,637
   
95,599
 
                 
Interest expense:
  
   
   
   
 
Deposits
  
2,999
   
1,234
   
5,718
   
2,330
 
Other borrowings
  
37
   
586
   
50
   
928
 
Junior subordinated debt
  
829
   
789
   
1,684
   
1,486
 
                 
Total interest expense
  
3,865
   
2,609
   
7,452
   
4,744
 
                 
Net interest income
  
64,315
   
45,869
   
128,185
   
90,855
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for (reversal of) loan losses
  
537
   
(638
)  
(1,063
)  
(874
)
                 
Net interest income after provision for (benefit from reversal of) loan losses
  
63,778
   
46,507
   
129,248
   
91,729
 
                 
Noninterest income:
  
   
   
   
 
Service charges and fees
  
10,128
   
9,228
   
19,198
   
18,584
 
Gain on sale of loans
  
575
   
666
   
987
   
1,292
 
Asset management and commission income
  
739
   
810
   
1,381
   
1,686
 
Increase in cash value of life insurance
  
746
   
656
   
1,521
   
1,264
 
Other
  
1,390
   
814
   
2,355
   
1,638
 
                 
Total noninterest income
  
13,578
   
12,174
   
25,442
   
24,464
 
                 
Noninterest expense:
  
   
   
   
 
Salaries and related benefits
  
26,719
   
21,453
   
51,847
   
43,105
 
Other
  
20,133
   
16,417
   
40,518
   
32,927
 
                 
Total noninterest expense
  
46,852
   
37,870
   
92,365
   
76,032
 
                 
Income before provision for income taxes
  
30,504
   
20,811
   
62,325
   
40,161
 
Provision for income taxes
  
7,443
   
5,782
   
16,538
   
11,222
 
                 
Net income
 $
23,061
  $
15,029
  $
45,787
  $
28,939
 
                 
Earnings per share:
  
   
   
   
 
Basic
 $
0.76
  $
0.65
  $
1.50
  $
1.26
 
Diluted
 $
0.75
  $
0.65
  $
1.49
  $
1.24
 
 
 
 
 
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
3
 
 
 
Table of Contents
 
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands; unaudited)
                 
 
Three months ended
June 30,
  
Six months ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Net income
 $ 
23,061
  $ 
15,029
  $
45,787
  $
28,939
 
Other comprehensive income (loss), net of tax:
  
   
   
   
 
Unrealized gains (losses) on available for sale securities arising during the period
  
6,729
   
(3,998
)  
15,681
   
(15,024
)
Change in minimum pension liability
  
—  
   
80
   
—  
   
160
 
                 
Other comprehensive income (loss)
  
6,729
   
(3,918
)  
15,681
   
(14,864
)
                 
Comprehensive income
 $
29,790
  $
11,111
  $ 
61,468
  $ 
14,075
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data; unaudited)
 
Shares of
Common
Stock
  
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
 
Balance at March 31, 2019
  
30,432,419
  $
 542,340
  $
 319,865
  $
 (8,927
) $
 853,278
 
Net income
  
   
   
23,061
   
   
23,061
 
Other comprehensive income
  
   
   
   
6,729
   
6,729
 
Stock option vesting
  
   
   
   
   
—  
 
Stock options exercised
  
116,000
   
1,853
   
   
   
1,853
 
RSU vesting
  
   
289
   
   
   
289
 
PSU vesting
  
   
129
   
   
   
129
 
RSUs released
  
25,856
   
   
   
   
—  
 
PSUs released
  
22,237
   
   
   
   
—  
 
Repurchase of common stock
  
(93,755
)  
(1,672
)  
(1,988
)  
   
(3,660
)
Dividends paid ($ 0.19 per share)
  
   
   
(5,793
)  
   
(5,793
)
                     
Three months ending June 30, 2019
  
30,502,757
  $
 542,939
  $
 335,145
  $
 (2,198
) $
 875,886
 
                     
Balance at January 1, 2019
  
30,417,223
  $
 541,762
  $
 303,490
  $
 (17,879
) $
 827,373
 
Net income
  
   
   
45,787
   
   
45,787
 
Other comprehensive income
  
   
   
   
15,681
   
15,681
 
Stock option vesting
  
   
   
   
   
—  
 
Stock options exercised
  
157,000
   
2,500
   
   
   
2,500
 
RSU vesting
  
   
567
   
   
   
567
 
PSU vesting
  
   
248
   
   
   
248
 
RSUs released
  
26,211
   
   
   
   
—  
 
PSUs released
  
22,237
   
   
   
   
—  
 
Repurchase of common stock
  
(119,914
)  
(2,138
)  
(2,557
)  
   
(4,695
)
Dividends paid ($ 0.38 per share)
  
   
   
(11,575
)  
   
(11,575
)
                     
Six months ending June 30, 2019
  
30,502,757
  $
 542,939
  $
 335,145
  $
 (2,198
) $
 875,886
 
                     
See accompanying notes to unaudited condensed consolidated financial statements.
 
4
 
 
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data; unaudited)
 
Shares of
Common
Stock
  
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
 
Balance at March 31, 2018
  
22,956,323
  $
256,226
  $
266,235
  $
(17,205
) $
505,256
 
Net income
  
   
   
15,029
   
   
15,029
 
Adoption ASU
2016-01
  
   
           
  
 
Adoption ASU
2018-02
  
   
           
  
 
Other comprehensive loss
  
   
   
   
(3,918
)  
(3,918
)
Stock option vesting
  
   
17
   
   
   
17
 
Stock options exercised
  
14,500
   
223
   
   
   
223
 
RSU vesting
  
   
233
   
   
   
233
 
PSU vesting
  
   
81
   
   
   
81
 
RSUs released
  
24,904
   
   
   
   
—  
 
PSUs released
  
25,512
   
   
   
   
—  
 
Repurchase of common stock
  
(17,086
)  
(190
)  
(477
)  
   
(667
)
Dividends paid ($
0.17
 per share)
  
   
   
(3,910
)  
   
(3,910
)
                     
Three months ending June 30, 2018
  
23,004,153
  $
256,590
  $
276,877
  $
(21,123
) $
512,344
 
                     
Balance at January 1, 2018
  
22,955,963
  $
255,836
  $
255,200
  $
(5,228
) $
505,808
 
Net income
  
   
   
28,939
   
   
28,939
 
Adoption ASU 2016-01
 
 
 
 
 
 
 
 
(62
)
 
 
62
 
 
 
—  
 
Adoption ASU 2018-02
 
 
 
 
 
 
 
 
1,093
 
 
 
(1,093
) 
 
 
—  
 
Other comprehensive loss
  
   
       
(14,864
)  
(14,864
)
Stock option vesting
  
   
54
           
54
 
Stock options exercised
  
14,500
   
223
   
       
223
 
RSU vesting
  
   
471
   
   
   
471
 
PSU vesting
  
   
197
   
   
   
197
 
RSUs released
  
25,398
   
   
   
   
—
 
PSUs released
  
25,512
   
   
   
   
—
 
Repurchase of common stock
  
(17,220
)  
(191
)  
(480
)  
   
(671
)
Dividends paid ($
0.34
 per share)
  
   
   
(7,813
)  
   
(7,813
)
                     
Six months ending June 30, 2018
  
23,004,153
  $
 256,590
  $
276,877
  $
(21,123
) $
512,344
 
                     
See accompanying notes to unaudited condensed consolidated financial statements.
 
5
 
 
Table of Contents
 
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
 
 
For the six months ended June 30,
 
 
2019
  
2018
 
Operating activities:
  
   
 
Net income
 $
 45,787
  $
 28,939
 
Adjustments to reconcile net income to net cash provided by operating activities:
  
   
 
Depreciation of premises and equipment, and amortization
  
3,582
   
3,229
 
Amortization of intangible assets
  
2,862
   
678
 
Reversal of provision for loan losses
  
(1,063
)  
(874
)
Amortization of investment securities premium, net
  
1,186
   
1,340
 
Originations of loans for resale
  
(46,936
)  
(43,389
)
Proceeds from sale of loans originated for resale
  
45,407
   
45,437
 
Gain on sale of loans
  
(987
)  
(1,292
)
Change in market value of mortgage servicing rights
  
1,197
   
(75
)
Provision for losses on foreclosed assets
  
62​​​​​​​
   
90
 
Gain on transfer of loans to foreclosed assets
  
(97
)  
—
 
Gain on sale of foreclosed assets
 
 
(199
)
 
 
(388)
Loss on disposal of fixed assets
  
80
   
54
 
Increase in cash value of life insurance
  
(1,521
)  
(1,264
)
Gain on life insurance death benefit
  
(728
)  
—  
 
(Gain) loss on marketable equity securities
  
(78
)  
70
 
Equity compensation vesting expense
  
815
   
722
 
Change in:
  
   
 
Interest receivable
  
(1,578
)  
(481
)
Interest payable
  
668
   
245
 
Other assets and liabilities, net
  
(14,592
)  
(97
)
         
Net cash from operating activities
  
33,867
   
32,944
 
         
Investing activities:
  
   
 
Proceeds from maturities of securities available for sale
  
39,845
   
32,906
 
Proceeds from maturities of securities held to maturity
  
31,938
   
36,587
 
Purchases of securities available for sale
  
(37,253
)  
(81,300
)
Loan origination and principal collections, net
  
(80,440
)  
(131,073
)
Proceeds from sale of other real estate owned
  
1,082
   
2,150
 
Proceeds from sale of premises and equipment
  
11
   
36
 
Purchases of premises and equipment
  
(2,586
)  
(4,119
)
         
Net cash from investing activities
  
(47,403
)  
(144,813
)
         
Financing activities:
  
   
 
Net change in deposits
  
(24,293
)  
68,091
 
Net change in other borrowings
  
(2,547
)  
30,673
 
Repurchase of common stock, net
  
—  
   
(448
)
Dividends paid
  
(11,575
)  
(7,813
)
         
Net cash used by financing activities
  
(38,415
)  
90,503
 
         
Net change in cash and cash equivalents
  
(51,951
)  
(21,366
)
 
        
Cash and cash equivalents and beginning of year
  
227,533
   
205,428
 
 
        
Cash and cash equivalents at end of year
 $
 175,582
  $
 184,062
 
         
Supplemental disclosure of noncash activities:
  
   
 
Unrealized gain (loss) on securities available for sale
 $
 22,263
  $
 (21,304
)
Loans transferred to foreclosed assets
  
116
   
—  
 
Market value of shares tendered
in-lieu
of cash to pay for exercise of options and/or related taxes
  
4,695
   
671
 
Obligations incurred in conjunction with leased assets
 
 
156
 
 
 
—​​​​​​​
 
Supplemental disclosure of cash flow activity:
  
   
 
Cash paid for interest expense
  
6,982
   
4,499
 
Cash paid for income taxes
  
22,000
   
8,525
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
6
 
 
Table of Contents
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 –Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 29 California counties. The Company has
five
capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including
two
organized by the Company and three acquired with the acquisition of North Valley Bancorp.
The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,716,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidtated financial statements and notes thereto included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2018 (the “2018 Annual Report”). The Company believes that the disclosures made are adequate to make the inforamtion not misleading.
Segment and Significant Group Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout northern and central California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into
one
business segment that it denotes as community banking.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.
Cash and Cash Equivalents
Net cash flows are reported for loan and deposit transactions and other borrowings. For purposes of the consolidated statement of cash flows, cash, due from banks with original maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents.
Accounting Standards Adopted in 2019
The Financial Accounting Standards Board (“FASB”) issued ASU No.
 2016-02,
Leases (Topic 842)
. ASU
 2016-02,
which among other things, requires lessees to recognize most leases
on-balance
sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. The FASB has issued incremental guidance to Topic 842 standard through ASU No.
 2018-11, 
2018-20,
and
2019-01.
The Company has elected to use the transition relief approach as provided in ASU
2018-11,
which permits the Company to use January 1, 2019 as both the application date and the adoption date, rather than the modified retrospective approach which would have required an application date of January 1, 2017 and adoption date of January 1, 2019. The Company also elected certain relief options offered within the new standard, which include the package of practical expedients, the option not to recognize a
right-of-use
asset (ROUA) and lease liability that arise from short-term leases (i.e. leases with terms of 12 months or less), and the option of hindsight when determining lease term. Substantially
 
7
 
 
Table of Contents
 
all of the Company’s lease agreements are considered operating leases and were not previously recognized on the Company’s balance sheets. As of January 1, 2019, the Company recorded a ROUA and corresponding lease liability for all applicable operating leases. While the guidance increased the Company’s gross assets and liabilities, the adoption of ASU
2016-02
did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 6 for more information.
The FASB issued ASU
2017-08,
Receivables - Nonrefundable Fees and Other Costs (Topic 310).
ASU
 2017-08
shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual,
non-pooled
callable debt securities as a yield adjustment over the contractual life of the security. ASU
 2017-08
does not change the accounting for callable debt securities held at a discount. ASU
 2017-08
was effective for the Company on January 1, 2019, and did not have an impact on the Company’s consolidated financial statements.
Accounting Standards Pending Adoption
The FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326)
. ASU 2016-13 is the final guidance on the new current expected credit loss (‘‘CECL’’) model. ASU 2016-13, among other things, requires the incurred loss impairment methodology in current GAAP be replaced with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (‘‘HTM’’) debt securities. ASU 2016-13 amends the accounting for credit losses on available-for-sale securities (‘‘AFS’’), whereby credit losses will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, ASU 2016-13 requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. ASU 2016-13 allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). ASU 2016-13 will be effective for the Company on January 1, 2020, and early adoption is permitted. While the Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. While detailed modeling efforts are ongoing, the validation of expected credit loss estimates will likely not be available until late in 2019. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.
FASB issued ASU No.
 2017-04,
Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment 
(Topic 350):
ASU
2017-04
eliminates step two of the goodwill impairment test (the hypothetical purchase price allocation used to determine the implied fair value of goodwill) when step one (determining if the carrying value of a reporting unit exceeds its fair value) is failed. Instead, entities simply will compare the fair value of a reporting unit to its carrying amount and record goodwill impairment for the amount by which the reporting unit’s carrying amount exceeds its fair value. ASU
 2017-04
will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No.
 2018-13,
“Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”
This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No.
 2018-13
is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No.
 2018-13
only revises disclosure requirements, it will not have a significant impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No.
 2018-14,
“Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
.” This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU
2018-14
is effective for fiscal years ending after December 15, 2020; early adoption is permitted. As ASU
2018-14
only revises disclosure requirements, it will not have a significant impact on the Company’s consolidated financial statements.
 
8
 
 
Table of Contents
 
Note 2 - Business Combinations
Merger with FNB Bancorp
On July 6, 2018, the Company completed the acquisition of FNB Bancorp (“FNBB”) for an aggregate transaction value of $291,132,000. FNBB was merged into the Company, and the Company issued 7,405,277 shares of common stock to the former shareholders of FNBB. FNBB’s subsidiary, First National Bank of Northern California, merged into the Bank on the same day. The Company also paid $
6.7
 million to settle and retire all FNBB stock options outstanding as of the acquisition date. Upon the consummation of the merger, the Company added 12 branches within San Mateo, San Francisco, and Santa Clara counties.
In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core deposit intangibles on the acquisition date. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase price accounting adjustments including goodwill are all
non-taxable
and /or
non-deductible.
Acquisition related costs of $601,000 and $1,077,000 
are included in the consolidated statements of income for the three and six months ended June 
30
,
2018
. There have been
no
acquisition costs incurred during the six months ended June 
30
,
2019
.
 
The acquisition was consistent with the Company’s strategy to expand into the Bay Area market. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of the estimated cost savings resulting from the combined operations.
The following table summarizes the consideration paid for FNBB and the amounts of assets acquired and liabilities assumed that were recorded at the acquisition date (in thousands).
     
 
FNB Bancorp
 
 
July 6, 2018
 
Fair value of consideration transferred:
  
 
Fair value of shares issued
 $
284,437
 
Cash consideration
  
6,695
 
     
Total fair value of consideration transferred
  
291,132
 
     
Assets acquired:
  
 
Cash and cash equivalents
  
37,308
 
Securities available for sale
  
335,667
 
Restricted equity securities
  
7,723
 
Loans
  
834,683
 
Premises and equipment
  
30,522
 
Cash value of life insurance
  
16,817
 
Core deposit intangible
  
27,605
 
Other assets
  
16,214
 
     
Total assets acquired
  
1,306,539
 
     
Liabilities assumed:
  
 
Deposits
  
991,935
 
Other liabilities
  
15,133
 
Short-term borrowings - Federal Home Loan Bank
  
165,000
 
     
Total liabilities assumed
  
1,172,068
 
     
Total net assets acquired
  
134,471
 
     
Goodwill recognized
 $
156,661
 
 
 
 
 
 
 
9
 
 
Table of Contents
 
A summary of the estimated fair value adjustments resulting in the goodwill recorded in the FNB Bancorp acquisition are presented below (in thousands):
     
 
FNB Bancorp
 
 
July 6, 2018
 
Value of stock consideration paid to FNB Bancorp Shareholders
 $
284,437
 
Cash consideration
  
6,695
 
     
Less:
  
 
Cost basis net assets acquired
  
114,030
 
Fair value adjustments:
  
 
Investments
  
(1,081
)
Loans
  
(22,390
)
Premises and equipment
  
21,590
 
Core deposit intangible
  
27,327
 
Deferred income taxes
  
(6,394
)
Other
  
1,389
 
     
Goodwill
 $
156,661
 
 
 
 
 
 
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired (PNCI loans) as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans (PCI loans), which have shown evidence of credit deterioration since origination. The gross contractual amounts receivable and fair value for PNCI loans as of the acquisition date was $866,189,000 and $833,381,000, respectively. The gross contractual amounts receivable and fair value for PCI loans as of the acquisition date was $1,683,000 and $1,302,000, respectively. At the acquisition date, the Company was unable to estimate the expected contractual cash flows to be collected from the purchased credit impaired loans.
 
10
 
 
Table of Contents
 
Note 3 - Investment Securities
The amortized cost and estimated fair values of investments in debt securities are summarized in the following tables:
 
June 30, 2019
 
 
  
Gross
  
Gross
  
Estimated
 
 
Amortized
  
Unrealized
  
Unrealized
  
Fair
 
 
Cost
  
Gains
  
Losses
  
Value
 
 
(in thousands)
 
Debt Securities Available for Sale
 
 
Obligations of U.S. government agencies
 $
627,996
  $
5,193
  $
(2,278
) $
630,911
 
Obligations of states and political subdivisions
  
123,626
   
2,462
   
(108
)  
125,980
 
Corporate bonds
  
4,407
   
114
   
—  
   
4,521
 
Asset backed securities
  
376,676
   
252
   
(4,346
)  
372,582
 
                 
Total debt securities available for sale
 $
1,132,705
  $
8,021
  $
(6,732
) $
1,133,994
 
                 
Debt Securities Held to Maturity
  
   
   
   
 
Obligations of U.S. government agencies
 $
398,714
  $
3,661
  $
(1,199
) $
401,176
 
Obligations of states and political subdivisions
  
13,810
   
290
   
—  
   
14,100
 
                 
Total debt securities held to maturity
 $
412,524
  $
3,951
  $
(1,199
) $
415,276
 
                 
    
 
December 31, 2018
 
 
  
Gross
  
Gross
  
Estimated
 
 
Amortized
  
Unrealized
  
Unrealized
  
Fair
 
 
Cost
  
Gains
  
Losses
  
Value
 
 
(in thousands)
 
Debt Securities Available for Sale
 
 
Obligations of U.S. government agencies
 $
647,288
  $
771
  $
(18,078
) $
629,981
 
Obligations of states and political subdivisions
  
128,890
   
294
   
(3,112
)  
126,072
 
Corporate bonds
  
4,381
   
97
   
—  
   
4,478
 
Asset backed securities
  
355,451
   
73
   
(1,019
)  
354,505
 
                 
Total debt securities available for sale
 $
1,136,010
  $
1,235
  $
(22,209
) $
1,115,036
 
                 
Debt Securities Held to Maturity
  
   
   
   
 
Obligations of U.S. government agencies
 $
430,343
  $
327
  $
(7,745
) $
422,925
 
Obligations of states and political subdivisions
  
14,593
   
82
   
(230
)  
14,445
 
                 
Total debt securities held to maturity
 $
444,936
  $
409
  $
(7,975
) $
437,370
 
                 
There were no sales of investment securities during the six months ended June 30, 2019 and 2018. Investment securities with an aggregate carrying value of $569,296,000 and $597,591,000 at June 30, 2019 and December 31, 2018, respectively, were pledged as collateral for specific borrowings, lines of credit or local agency deposits.
 
11
 
 
Table of Contents
 
The amortized cost and estimated fair value of debt securities at June 30, 2019 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2019, obligations of U.S. government corporations and agencies with a cost basis totaling $1,026,710,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At June 30, 2019, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 5.1 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.
Debt Securities
 
Available for Sale
  
Held to Maturity
 
(In thousands)
 
Amortized
  
Estimated
  
Amortized
  
Estimated
 
Cost
  
Fair Value
  
Cost
  
Fair Value
 
Due in one year
 $
2,415
  $
2,421
  $
—  
  $
—  
 
Due after one year through five years
  
14,287
   
14,636
   
1,254
   
1,269
 
Due after five years through ten years
  
44,325
   
45,235
   
21,922
   
22,166
 
Due after ten years
  
1,071,678
   
1,071,702
   
389,348
   
391,841
 
 
                
Totals
 $
1,132,705
  $
1,133,994
  $
412,524
  $
415,276
 
                 
Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
 
Less than 12 months
  
12 months or more
  
Total
 
 
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
 
Value
  
Loss
  
Value
  
Loss
  
Value
  
Loss
 
 
 
(in thousands)
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Available for Sale
  
   
   
   
   
   
 
Obligations of U.S. government agencies
 $
—  
  $
—  
  $
247,286
  $
(2,278
) $
247,286
  $
(2,278
)
Obligations of states and political subdivisions
  
5,208
   
(108
)  
—  
   
—  
   
5,208
   
(108
)
Corporate Bonds
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Asset backed securities
  
340,012
   
(4,346
)  
—  
   
—  
   
340,012
   
(4,346
)
Total debt securities available for sale
 $
 
345,220
  $
(4,454
) $
 
247,286
  $
(2,278
) $
592,506
  $
(6,732
)
Debt Securities Held to Maturity
  
   
   
   
   
   
 
Obligations of U.S. government agencies
 $
—  
  $
—  
  $
110,702
  $
(1,199
) $
110,702
  $
(1,199
)
Obligations of states and political subdivisions
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Total debt securities held to maturity
 $
—  
  $
—  
  $
110,702
  $
(1,199
) $
110,702
  $
(1,199
)
          
 
Less than 12 months
  
12 months or more
  
Total
 
 
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
 
Value
  
Loss
  
Value
  
Loss
  
Value
  
Loss
 
 
 
(in thousands)
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Available for Sale
  
   
   
   
   
   
 
Obligations of U.S. government agencies
 $
171,309
  $
(3,588
) $
394,630
  $
(14,490
) $
565,939
  $
(18,078
)
Obligations of states and political subdivisions
  
63,738
   
(1,541
)  
20,719
   
(1,571
)  
84,457
   
(3,112
)
Asset backed securities
  
101,386
   
(1,019
)  
—  
   
—  
   
101,386
   
(1,019
)
Total debt securities available for sale
 $
336,433
  $
(6,148
) $
415,349
  $
(16,061
) $
751,782
  $
(22,209
)
Debt Securities Held to Maturity
  
   
   
   
   
   
 
Obligations of U.S. government agencies
 $
223,810
  $
(2,619
) $
158,648
  $
(5,126
) $
382,458
  $
(7,745
)
Obligations of states and political subdivisions
  
5,786
   
(114
)  
4,042
   
(116
)  
9,828
   
(230
)
Total debt securities held to maturity
 $
229,596
  $
(2,733
) $
162,690
  $
(5,242
) $
392,286
  $
(7,975
)
Obligations of U.S. government agencies: Unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2019, 46 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of (1.0%) from the Company’s amortized cost basis.
 
12
 
 
Table of Contents
 
Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2019, 13 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of (2.0%) from the Company’s amortized cost basis.
Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors in these types of securities. At the time of purchase, each of these securities was rated AA or AAA and through June 30, 2019 has not experienced any deterioration in credit rating. The Company continues to monitor these securities for changes in credit rating or other indications of credit deterioration. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2019, 28 asset backed securities had unrealized losses with aggregate depreciation of (1.3%) from the Company’s amortized cost basis.
Marketable equity securities: All unrealized losses recognized during the reporting period were for equity securities still held at June 30, 2019.
Note 4 – Loans
A summary of loan balances follows (in thousands):
                 
 
June 30, 2019
 
 
Originated
  
PNCI
  
PCI
  
Total
 
Mortgage loans on real estate:
  
   
   
   
 
Residential
1-4
family
 $
348,737
  $
155,872
  $
1,440
  $
506,049
 
Commercial
  
2,005,985
   
660,737
   
5,959
   
2,672,681
 
                 
Total mortgage loan on real estate
  
2,354,722
   
816,609
   
7,399
   
3,178,730
 
Consumer:
  
   
   
   
 
Home equity lines of credit
  
294,541
   
35,231
   
1,128
   
330,900
 
Home equity loans
  
29,041
   
2,875
   
429
   
32,345
 
Other
  
53,340
   
17,802
   
1
   
71,143
 
                 
Total consumer loans
  
376,922
   
55,908
   
1,558
   
434,388
 
Commercial
  
248,523
   
24,984
   
2,538
   
276,045
 
Construction:
  
   
   
   
 
Residential
  
148,432
   
9,083
   
—  
   
157,515
 
Commercial
  
56,289
   
720
   
—  
   
57,009
 
                 
Total construction
  
204,721
   
9,803
   
—  
   
214,524
 
                 
Total loans, net of deferred loan fees and discounts
 $ 
3,184,888
  $ 
907,304
  $
11,495
  $ 
4,103,687
 
                 
Total principal balance of loans owed, net of charge-offs
 $
3,193,938
  $
940,627
  $ 
17,975
  $
4,152,540
 
Unamortized net deferred loan fees
  
(9,050
)  
—  
   
—  
   
(9,050
)
Discounts to principal balance of loans owed, net of charge-offs
  
—  
   
(33,323
)  
(6,480
)  
(39,803
)
                 
Total loans, net of unamortized deferred loan fees and discounts
 $
3,184,888
  $
907,304
  $
11,495
  $
4,103,687
 
                 
Allowance for loan losses
 $
(32,273
) $
(585
) $
(10
) $
(
32,868
)
                 
 
 
 
 
 
13
 
 
Table of Contents
 
                 
 
December 31, 2018
 
 
Originated
  
PNCI
  
PCI
  
Total
 
Mortgage loans on real estate:
  
   
   
   
 
Residential
1-4
family
 $
343,796
  $
169,792
  $
1,674
  $
515,262
 
Commercial
  
1,910,981
   
708,401
   
8,456
   
2,627,838
 
                 
Total mortgage loan on real estate
  
2,254,777
   
878,193
   
10,130
   
3,143,100
 
Consumer:
  
   
   
   
 
Home equity lines of credit
  
284,453
   
40,957
   
1,167
   
326,577
 
Home equity loans
  
32,660
   
3,585
   
439
   
36,684
 
Other
  
34,020
   
21,659
   
42
   
55,721
 
                 
Total consumer loans
  
351,133
   
66,201
   
1,648
   
418,982
 
Commercial
  
228,635
   
45,468
   
2,445
   
276,548
 
Construction:
  
   
   
   
 
Residential
  
90,703
   
30,593
   
—  
   
121,296
 
Commercial
  
56,208
   
5,880
   
—  
   
62,088
 
                 
Total construction
  
146,911
   
36,473
   
—  
   
183,384
 
                 
Total loans, net of deferred loan fees and discounts
 $ 
2,981,456
  $ 
1,026,335
  $ 
14,223
  $ 
4,022,014
 
                 
Total principal balance of loans owed, net of charge-offs
 $
2,991,324
  $
1,062,655
  $
21,265
  $
4,075,244
 
Unamortized net deferred loan fees
  
(9,868
)  
—  
   
—  
   
(9,868
)
Discounts to principal balance of loans owed, net of charge-offs
  
—  
   
(36,320
)  
(7,042
)  
(43,362
)
                 
Total loans, net of unamortized deferred loan fees and discounts
 $
2,981,456
  $
1,026,335
  $
14,223
  $
4,022,014
 
                 
Allowance for loan losses
 $
(31,793
) $
(667
) $
(122
) $
(32,582
)
                 
 
 
 
 
The following is a summary of the change in accretable yield for PCI during the periods indicated (in thousands):
                 
 
Three months ended June 30,
  
Six months ended June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Change in accretable yield:
  
   
   
   
 
Balance at beginning of period
 $
5,747
  $
6,022
  $
6,059
  $
6,137
 
Accretion to interest income
  
(109
)  
(261
)  
(410
)  
(516
)
Reclassification (to) from nonaccretable difference
  
(320
)  
110
   
(331
)  
250
 
                 
Balance at end of period
 $
5,318
  $
5,871
  $
5,318
  $
5,871
 
                 
 
 
 
 
 
14
 
 
Table of Contents
 
Note 5 – Allowance for Loan Losses
The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the periods indicated.
                     
 
Allowance for Loan Losses – Three Months Ended June 30, 2019
 
(in thousands)
 
Beginning
Balance
  
Charge-offs
  
Recoveries
  
Provision
(benefit)
  
Ending Balance
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
2,500
  $
(2
) $
3
  $
75
  $
2,576
 
Commercial
  
12,330
   
—  
   
10
   
(241
)  
12,099
 
                     
Total mortgage loans on real estate
  
14,830
   
(2
)  
13
   
(166
)  
14,675
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
6,015
   
—  
   
183
   
(339
)  
5,859
 
Home equity loans
  
1,286
   
—  
   
171
   
(215
)  
1,242
 
Other
  
1,040
   
(153
)  
108
   
456
   
1,451
 
                     
Total consumer loans
  
8,341
   
(153
)  
462
   
(98
)  
8,552
 
Commercial
  
6,078
   
(138
)  
85
   
720
   
6,745
 
Construction:
  
   
   
   
   
 
Residential
  
2,408
   
—  
   
—  
   
130
   
2,538
 
Commercial
  
407
   
—  
   
—  
   
(49
)  
358
 
                     
Total construction
  
2,815
   
—  
   
—  
   
81
   
2,896
 
                     
Total
 $
32,064
  $
(293
) $
560
  $
537
  $
32,868
 
                     
    
 
Allowance for Loan Losses – Six Months Ended June 30, 2019
 
(in thousands)
 
Beginning
Balance
  
Charge-offs
  
Recoveries
  
Provision
(benefit)
  
Ending Balance
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
2,676
  $
(2
) $
5
  $
(103
) $
2,576
 
Commercial
  
12,944
   
—  
   
1,391
   
(2,236
)  
12,099
 
                     
Total mortgage loans on real estate
  
15,620
   
(2
)  
1,396
   
(2,339
)  
14,675
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
6,042
   
—  
   
278
   
(461
)  
5,859
 
Home equity loans
  
1,540
   
—  
   
258
   
(556
)  
1,242
 
Other
  
793
   
(360
)  
183
   
835
   
1,451
 
                     
Total consumer loans
  
8,375
   
(360
)  
719
   
(182
)  
8,552
 
Commercial
  
6,090
   
(657
)  
253
   
1,059
   
6,745
 
Construction:
  
   
   
   
   
 
Residential
  
1,834
   
—  
   
—  
   
704
   
2,538
 
Commercial
  
663
   
—  
   
—  
   
(305
)  
358
 
                     
Total construction
  
2,497
   
—  
   
—  
   
399
   
2,896
 
                     
Total
 $
 32,582
  $
 (1,019
) $
 2,368
  $
 (1,063
) $
 32,868
 
 
 
 
 
 
 
                 
 
Allowance for Loan Losses – As of June 30, 2019
 
(in thousands)
 
Loans pooled
for evaluation
  
Individually
evaluated for
impairment
  
Loans acquired
with deteriorated
credit quality
  
Total allowance
for loan losses
 
Mortgage loans on real estate:
  
   
   
   
 
Residential
1-4
family
 $
2,522
  $
54
  $
 —  
  $
2,576
 
Commercial
  
12,015
   
84
   
—
   
12,099
 
                 
Total mortgage loans on real estate
  
14,537
   
138
   
—  
   
14,675
 
Consumer:
  
   
   
   
 
Home equity lines of credit
  
5,764
   
85
   
10
   
5,859
 
Home equity loans
  
1,181
   
61
   
—  
   
1,242
 
Other
  
1,433
   
18
   
—  
   
1,451
 
                 
Total consumer loans
  
8,378
   
164
   
10
   
8,552
 
Commercial
  
4,605
   
2,140
   
—  
   
6,745
 
Construction:
  
   
   
   
 
Residential
  
2,538
   
—  
   
—  
   
2,538
 
Commercial
  
358
   
—  
   
—  
   
358
 
                 
Total construction
  
2,896
   
—  
   
—  
   
2,896
 
                 
Total
 $
 30,416
  $
 2,442
  $
10
  $
 32,868
 
 
 
 
 
 
15
 
 
Table of Contents
 
                 
 
Loans, Net of Unearned fees – As of June 30, 2019
 
(in thousands)
 
Loans pooled
for evaluation
  
Individually
evaluated for
impairment
  
Loans acquired
with deteriorated
credit quality
  
Total loans, net
of unearned fees
 
Mortgage loans on real estate:
  
   
   
   
 
Residential
1-4
family
 $
500,304
  $
4,305
  $
1,440
  $
506,049
 
Commercial
  
2,655,692
   
11,030
   
5,959
   
2,672,681
 
                 
Total mortgage loans on real estate
  
3,155,996
   
15,335
   
7,399
   
3,178,730
 
Consumer:
  
   
   
   
 
Home equity lines of credit
  
327,726
   
2,046
   
1,128
   
330,900
 
Home equity loans
  
29,860
   
2,056
   
429
   
32,345
 
Other
  
70,986
   
156
   
1
   
71,143
 
                 
Total consumer loans
  
428,572
   
4,258
   
1,558
   
434,388
 
Commercial
  
268,405
   
5,102
   
2,538
   
276,045
 
Construction:
  
   
   
   
 
Residential
  
157,515
   
—  
   
—  
   
157,515
 
Commercial
  
57,009
   
—  
   
—  
   
57,009
 
                 
Total construction
  
214,524
   
—  
   
—  
   
214,524
 
                 
Total
 $ 
4,067,497
  $
24,695
  $
11,495
  $
4,103,687
 
 
 
 
 
 
                     
 
Allowance for Loan Losses – Year Ended December 31, 2018
 
(in thousands)
 
Beginning
Balance
  
Charge-offs
  
Recoveries
  
Provision
(benefit)
  
Ending Balance
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
2,317
  $
(77
) $
—  
  $
436
  $
2,676
 
Commercial
  
11,441
   
(15
)  
68
   
1,450
   
12,944
 
                     
Total mortgage loans on real estate
  
13,758
   
(92
)  
68
   
1,886
   
15,620
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
5,800
   
(277
)  
846
   
(327
)  
6,042
 
Home equity loans
  
1,841
   
(24
)  
297
   
(574
)  
1,540
 
Other
  
586
   
(783
)  
288
   
702
   
793
 
                     
Total consumer loans
  
8,227
   
(1,084
)  
1,431
   
(199
)  
8,375
 
Commercial
  
6,512
   
(1,188
)  
541
   
225
   
6,090
 
Construction:
  
   
   
   
   
 
Residential
  
1,184
   
—  
   
—  
   
650
   
1,834
 
Commercial
  
642
   
—  
   
—  
   
21
   
663
 
                     
Total construction
  
1,826
   
—  
   
—  
   
671
   
2,497
 
                     
Total
 $ 
30,323
  $
(2,364
) $
2,040
  $
2,583
  $
32,582
 
 
 
 
 
 
                 
 
Allowance for Loan Losses – As of December 31, 2018
 
(in thousands)
 
Loans pooled
for evaluation
  
Individually
evaluated for
impairment
  
Loans acquired
with deteriorated
credit quality
  
Total allowance
for loan losses
 
Mortgage loans on real estate:
  
   
   
   
 
Residential
1-4
family
 $
2,620
  $
56
  $
 —  
  $
2,676
 
Commercial
  
12,737
   
91
   
116
   
12,944
 
                 
Total mortgage loans on real estate
  
15,357
   
147
   
116
   
15,620
 
Consumer:
  
   
   
   
 
Home equity lines of credit
  
5,838
   
198
   
6
   
6,042
 
Home equity loans
  
1,486
   
54
   
—  
   
1,540
 
Other
  
779
   
14
   
—  
   
793
 
                 
Total consumer loans
  
8,103
   
266
   
6
   
8,375
 
Commercial
  
4,309
   
1,781
   
—  
   
6,090
 
Construction:
  
   
   
   
 
Residential
  
1,834
   
—  
   
—  
   
1,834
 
Commercial
  
663
   
—  
   
—  
   
663
 
                 
Total construction
  
2,497
   
—  
   
—  
   
2,497
 
                 
Total
 $
30,266
  $
2,194
  $
122
  $
32,582
 
 
 
 
 
 
16
 
 
Table of Contents
 
                 
 
Loans, Net of Unearned fees – As of December 31, 2018
 
(in thousands)
 
Loans pooled
for evaluation
  
Individually
evaluated for
impairment
  
Loans acquired
with deteriorated
credit quality
  
Total loans, net
of unearned fees
 
Mortgage loans on real estate:
  
   
   
   
 
Residential
1-4
family
 $
509,267
  $
4,321
  $
1,674
  $
515,262
 
Commercial
  
2,606,819
   
12,563
   
8,456
   
2,627,838
 
                 
Total mortgage loans on real estate
  
3,116,086
   
16,884
   
10,130
   
3,143,100
 
Consumer:
  
   
   
   
 
Home equity lines of credit
  
322,764
   
2,646
   
1,167
   
326,577
 
Home equity loans
  
33,142
   
3,103
   
439
   
36,684
 
Other
  
55,483
   
196
   
42
   
55,721
 
                 
Total consumer loans
  
411,389
   
5,945
   
1,648
   
418,982
 
Commercial
  
268,885
   
5,218
   
2,445
   
276,548
 
Construction:
  
   
   
   
 
Residential
  
121,296
   
—  
   
—  
   
121,296
 
Commercial
  
62,088
   
—  
   
—  
   
62,088
 
                 
Total construction
  
183,384
   
—  
   
—  
   
183,384
 
                 
Total
 $ 
3,979,744
  $
28,047
  $
14,223
  $
4,022,014
 
                 
 
 
 
 
 
                     
 
Allowance for Loan Losses – Three Months Ended June 30, 2018
 
(in thousands)
 
Beginning
Balance
  
Charge-offs
  
Recoveries
  
Provision
(benefit)
  
Ending Balance
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
2,170
  $
(51
) $
—  
  $
(128
) $
1,991
 
Commercial
  
11,495
   
(15
)  
21
   
106
   
11,607
 
                     
Total mortgage loans on real estate
  
13,665
   
(66
)  
21
   
(22
)  
13,598
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
5,412
   
(24
)  
317
   
(657
)  
5,048
 
Home equity loans
  
1,736
   
—  
   
23
   
(227
)  
1,532
 
Other
  
570
   
(174
)  
66
   
95
   
557
 
                     
Total consumer loans
  
7,718
   
(198
)  
406
   
(789
)  
7,137
 
Commercial
  
6,392
   
(54
)  
80
   
(40
)  
6,378
 
Construction:
  
   
   
   
   
 
Residential
  
1,351
   
—  
   
—  
   
83
   
1,434
 
Commercial
  
847
   
—  
   
—  
   
130
   
977
 
                     
Total construction
  
2,198
   
—  
   
—  
   
213
   
2,411
 
                     
Total
 $
29,973
  $
(318
) $
507
  $
(638
) $
29,524
 
                     
    
 
Allowance for Loan Losses – Six Months Ended June 30, 2018
 
(in thousands)
 
Beginning
Balance
  
Charge-offs
  
Recoveries
  
Provision
(benefit)
  
Ending Balance
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
2,317
  $
(52
) $
—  
  $
(274
) $
1,991
 
Commercial
  
11,441
   
(15
)  
36
   
145
   
11,607
 
                     
Total mortgage loans on real estate
  
13,758
   
(67
)  
36
   
(129
)  
13,598
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
5,800
   
(104
)  
526
   
(1,174
)  
5,048
 
Home equity loans
  
1,841
   
—  
   
37
   
(346
)  
1,532
 
Other
  
586
   
(368
)  
144
   
195
   
557
 
                     
Total consumer loans
  
8,227
   
(472
)  
707
   
(1,325
)  
7,137
 
Commercial
  
6,512
   
(259
)  
130
   
(5
)  
6,378
 
Construction:
  
   
   
   
   
 
Residential
  
1,184
   
—  
   
—  
   
250
   
1,434
 
Commercial
  
642
   
—  
   
—  
   
335
   
977
 
                     
Total construction
  
1,826
   
—  
   
—  
   
585
   
2,411
 
                     
Total
 $
30,323
  $
(798
) $
873
  $
(874
) $
29,524
 
                     
 
 
 
 
 
 
17
 
 
Table of Contents
 
                 
 
Allowance for Loan Losses – As of June 30, 2018
 
(in thousands)
 
Loans pooled
for evaluation
  
Individually
evaluated for
impairment
  
Loans acquired
with deteriorated
credit quality
  
Total allowance
for loan losses
 
Mortgage loans on real estate:
  
   
   
   
 
Residential
1-4
family
 $
 1,794
  $
 147
  $
 50
  $
 1,991
 
Commercial
  
11,466
   
82
   
59
   
11,607
 
                 
Total mortgage loans on real estate
  
13,260
   
229
   
109
   
13,598
 
Consumer:
  
   
   
   
 
Home equity lines of credit
  
4,754
   
287
   
7
   
5,048
 
Home equity loans
  
1,340
   
192
   
—  
   
1,532
 
Other
  
503
   
54
   
—  
   
557
 
                 
Total consumer loans
  
6,597
   
533
   
7
   
7,137
 
Commercial
  
4,228
   
2,127
   
23
   
6,378
 
Construction:
  
   
   
   
 
Residential
  
1,434
   
—  
   
—  
   
1,434
 
Commercial
  
977
   
—  
   
—  
   
977
 
                 
Total construction
  
2,411
   
—  
   
—  
   
2,411
 
                 
Total
 $
 26,496
  $
 2,889
  $
 139
  $
 29,524
 
                 
    
 
Loans, Net of Unearned fees – As of June 30, 2018
 
(in thousands)
 
Loans pooled
for evaluation
  
Individually
evaluated for
impairment
  
Loans acquired
with deteriorated
credit quality
  
Total loans, net
of unearned fees
 
Mortgage loans on real estate:
  
   
   
   
 
Residential
1-4
family
 $
 376,628
  $
 6,344
  $
 1,720
  $
 384,692
 
Commercial
  
1,997,591
   
11,162
   
7,595
   
2,016,348
 
                 
Total mortgage loans on real estate
  
2,374,219
   
17,506
   
9,315
   
2,401,040
 
Consumer:
  
   
   
   
 
Home equity lines of credit
  
282,611
   
2,250
   
1,575
   
286,436
 
Home equity loans
  
38,074
   
2,457
   
455
   
40,986
 
Other
  
23,213
   
247
   
43
   
23,503
 
                 
Total consumer loans
  
343,898
   
4,954
   
2,073
   
350,925
 
Commercial
  
230,395
   
4,751
   
2,473
   
237,619
 
Construction:
  
   
   
   
 
Residential
  
73,578
   
—  
   
—  
   
73,578
 
Commercial
  
83,151
   
—  
   
—  
   
83,151
 
                 
Total construction
  
156,729
   
—  
   
—  
   
156,729
 
                 
Total
 $
 3,105,241
  $
 27,211
  $
 13,861
  $
 3,146,313
 
                 
 
 
 
 
As part of the
on-going
monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii)
 non-performing
loans, and (iv) delinquency within the portfolio.
The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows:
•
Pass
– This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital.
 
 
 
 
 
 
•
Special Mention
– This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention.
 
 
 
 
 
 
•
Substandard
– This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well-defined workout/rehabilitation program.
 
 
 
 
 
18
 
 
Table of Contents
 
 
•
Doubtful
– This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans.
 
 
 
 
•
Loss
– This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the quarter in which the loss is identified.
 
 
 
 
The following tables present ending loan balances by loan category and risk grade for the periods indicated:
                     
 
Credit Quality Indicators Originated Loans – As of June 30, 2019
 
(in thousands)
 
Pass
  
Special
Mention
  
Substandard
  
Doubtful / Loss
  
Total Originated
Loans
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
 342,847
  $
 1,048
  $
 4,842
  $
 —  
  $
 348,737
 
Commercial
  
1,964,292
   
32,562
   
9,131
   
—  
   
2,005,985
 
                     
Total mortgage loans on real estate
  
2,307,139
   
33,610
   
13,973
   
—  
   
2,354,722
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
290,524
   
1,673
   
2,344
   
—  
   
294,541
 
Home equity loans
  
26,265
   
564
   
2,212
   
—  
   
29,041
 
Other
  
53,044
   
189
   
107
   
—  
   
53,340
 
                     
Total consumer loans
  
369,833
   
2,426
   
4,663
   
—  
   
376,922
 
Commercial
  
237,025
   
5,194
   
5,993
   
311
   
248,523
 
Construction:
  
   
   
   
   
 
Residential
  
148,178
   
—  
   
254
   
—  
   
148,432
 
Commercial
  
55,958
   
331
   
—  
   
—  
   
56,289
 
                     
Total construction
  
204,136
   
331
   
254
   
—  
   
204,721
 
                     
Total loans
 $
 3,118,133
  $
 41,561
  $
 24,883
  $
 311
  $
 3,184,888
 
                     
    
 
Credit Quality Indicators PNCI Loans – As of June 30, 2019
 
(in thousands)
 
Pass
  
Special
Mention
  
Substandard
  
Doubtful / Loss
  
Total PNCI
Loans
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
 154,238
  $
 864
  $
 770
  $
 —  
  $
 155,872
 
Commercial
  
650,821
   
3,141
   
6,775
   
—  
   
660,737
 
                     
Total mortgage loans on real estate
  
805,059
   
4,005
   
7,545
   
—  
   
816,609
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
33,345
   
795
   
1,091
   
—  
   
35,231
 
Home equity loans
  
2,727
   
69
   
79
   
—  
   
2,875
 
Other
  
17,545
   
254
   
3
   
—  
   
17,802
 
                     
Total consumer loans
  
53,617
   
1,118
   
1,173
   
—  
   
55,908
 
Commercial
  
24,650
   
1
   
333
   
—  
   
24,984
 
Construction:
  
   
   
   
   
 
Residential
  
9,083
   
—  
   
—  
   
—  
   
9,083
 
Commercial
  
475
   
—  
   
245
   
—  
   
720
 
                     
Total construction
  
9,558
   
—  
   
245
   
—  
   
9,803
 
                     
Total loans
 $
 892,884
  $
 5,124
  $
 9,296
  $
 —  
  $
 907,304
 
                     
 
 
 
19
 
 
Table of Contents
 
                     
 
Credit Quality Indicators Originated Loans – As of December 31, 2018
 
(in thousands)
 
Pass
  
Special
Mention
  
Substandard
  
Doubtful / Loss
  
Total Originated
Loans
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
 337,189
  $
 1,724
  $
 4,883
  $
 —  
  $
 343,796
 
Commercial
  
1,861,627
   
33,483
   
15,871
   
—  
   
1,910,981
 
                     
Total mortgage loans on real estate
  
2,198,816
   
35,207
   
20,754
   
—  
   
2,254,777
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
279,491
   
2,309
   
2,653
   
—  
   
284,453
 
Home equity loans
  
29,289
   
1,054
   
2,317
   
—  
   
32,660
 
Other
  
33,606
   
341
   
73
   
—  
   
34,020
 
                     
Total consumer loans
  
342,386
   
3,704
   
5,043
   
—  
   
351,133
 
Commercial
  
217,126
   
6,127
   
5,382
   
—  
   
228,635
 
Construction:
  
   
   
   
   
 
Residential
  
90,412
   
32
   
259
   
—  
   
90,703
 
Commercial
  
55,863
   
345
   
—  
   
—  
   
56,208
 
                     
Total construction
  
146,275
   
377
   
259
   
—  
   
146,911
 
                     
Total loans
 $
 2,904,603
  $
 45,415
  $
 31,438
  $
 —  
  $
 2,981,456
 
                     
    
 
Credit Quality Indicators PNCI Loans – As of December 31, 2018
 
(in thousands)
 
Pass
  
Special
Mention
  
Substandard
  
Doubtful / Loss
  
Total PNCI
Loans
 
Mortgage loans on real estate:
  
   
   
   
   
 
Residential
1-4
family
 $
 167,908
  $
 1,086
  $
 798
  $
 —  
  $
 169,792
 
Commercial
  
701,868
   
3,085
   
3,448
   
—  
   
708,401
 
                     
Total mortgage loans on real estate
  
869,776
   
4,171
   
4,246
   
—  
   
878,193
 
Consumer:
  
   
   
   
   
 
Home equity lines of credit
  
38,780
   
1,124
   
1,053
   
—  
   
40,957
 
Home equity loans
  
3,413
   
74
   
98
   
—  
   
3,585
 
Other
  
21,481
   
173
   
5
   
—  
   
21,659
 
                     
Total consumer loans
  
63,674
   
1,371
   
1,156
   
—  
   
66,201
 
Commercial
  
45,027
   
321
   
120
   
—  
   
45,468
 
Construction:
  
   
   
   
   
 
Residential
  
30,593
   
—  
   
—  
   
—  
   
30,593
 
Commercial
  
5,880
   
—  
   
—  
   
—  
   
5,880
 
                     
Total construction
  
36,473
   
—  
   
—  
   
—  
   
36,473
 
                     
Total
 $
 1,014,950
  $
 5,863
  $
 5,522
  $
 —  
  $
 1,026,335
 
                     
 
 
 
20
 
 
Table of Contents
 
Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are susceptible to three primary risks;
non-payment
due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value. Typically, payment performance will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate;
non-payment
is likely due to loss of employment. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of the two. Problem consumer loans are generally identified by payment history and current performance of the borrower (delinquency). The Bank manages its consumer loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggesting modifications if appropriate, and, when continued scheduled payments become unrealistic, initiating repossession or foreclosure through appropriate channels.
Commercial real estate loans generally fall into two categories, owner-occupied and
non-owner
occupied. Loans secured by owner occupied real estate are primarily susceptible to changes in the business conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual fortunes of the business owner, and general economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by equipment or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by
non-owner
occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often these shifts are a result of changes in general economic or market conditions or overbuilding and resultant over-supply. Losses are dependent on value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.
Construction loans, whether owner occupied or
non-owner
occupied commercial real estate loans or residential development loans, are not only susceptible to the related risks described above but the added risks of construction itself including cost over-runs, mismanagement of the project, or lack of demand or market changes experienced at time of completion. Again, losses are primarily related to underlying collateral value and changes therein as described above.
Problem commercial loans are generally identified by periodic review of financial information which may include financial statements, tax returns, rent rolls and payment history of the borrower (delinquency). Based on this information the Bank may decide to take any of several courses of action including demand for repayment, additional collateral or guarantors, and, when repayment becomes unlikely through borrower’s income and cash flow, repossession or foreclosure of the underlying collateral.
Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations or revaluations are obtained at initiation of the credit and periodically, but not less than every twelve months depending on collateral type, once repayment is questionable and the loan has been classified.
Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer 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 Bank will estimate its probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to the estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue the underlying collateral and take additional charge-offs as warranted. Revaluations may occur as often as every
3-12
months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued through lawsuit and attachment of wages or judgment liens on borrower’s other assets.
 
21
 
 
Table of Contents
 
The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:
                             
 
Analysis of Originated Past Due Loans - As of June 30, 2019
  
 
(in thousands)
 
30-59
 days
  
60-89
 days
  
> 90 days
  
Total Past
Due Loans
  
Current
  
Total
  
> 90 Days and
Still Accruing
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
635
  $
1,132
  $
758
  $
2,525
  $
346,212
  $
348,737
  $
 —  
 
Commercial
  
1,022
   
174
   
901
   
2,097
   
2,003,888
   
2,005,985
   
—  
 
                             
Total mortgage loans on real estate
  
1,657
   
1,306
   
1,659
   
4,622
   
2,350,100
   
2,354,722
   
—  
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1,197
   
557
   
157
   
1,911
   
292,630
   
294,541
   
—  
 
Home equity loans
  
565
   
89
   
217
   
871
   
28,170
   
29,041
   
 
Other
  
44
   
13
   
7
   
64
   
53,276
   
53,340
   
12
 
                             
Total consumer loans
  
1,806
   
659
   
381
   
2,846
   
374,076
   
376,922
   
12
 
Commercial
  
1,154
   
1,560
   
333
   
3,047
   
245,476
   
248,523
   
10
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
151
   
—  
   
—  
   
151
   
148,281
   
148,432
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
56,289
   
56,289
   
—  
 
                             
Total construction
  
151
   
—  
   
—  
   
151
   
204,570
   
204,721
   
—  
 
                             
Total originated loans
 $
4,768
  $ 
3,525
  $ 
2,373
  $ 
10,666
  $ 
3,174,222
  $ 
3,184,888
  $
22
 
                             
 
 
 
The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated:
                             
 
Analysis of PNCI Past Due Loans - As of June 30, 2019
  
 
(in thousands)
 
30-59
 days
  
60-89
 days
  
> 90 days
  
Total Past
Due Loans
  
Current
  
Total
  
> 90 Days and
Still Accruing
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
—  
  $
682
  $
—  
  $
682
  $
155,190
  $
155,872
  $
 —  
 
Commercial
  
—  
   
195
   
950
   
1,145
   
659,592
   
660,737
   
—  
 
                             
Total mortgage loans on real estate
  
—  
   
877
   
950
   
1,827
   
814,782
   
816,609
   
—  
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
101
   
73
   
24
   
198
   
35,033
   
35,231
   
—  
 
Home equity loans
  
62
   
—  
   
—  
   
62
   
2,813
   
2,875
   
—  
 
Other
  
119
   
—  
   
—  
   
119
   
17,683
   
17,802
   
—  
 
                             
Total consumer loans
  
282
   
73
   
24
   
379
   
55,529
   
55,908
   
—  
 
Commercial
  
820
   
150
   
113
   
1,083
   
23,901
   
24,984
   
—  
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
9,083
   
9,083
   
—  
 
Commercial
  
245
   
—  
   
—  
   
245
   
475
   
720
   
—  
 
                             
Total construction
  
245
   
—  
   
—  
   
245
   
9,558
   
9,803
   
—  
 
                             
Total PNCI loans
 $
1,347
  $
1,100
  $
1,087
  $
3,534
  $ 
903,770
  $ 
907,304
  $
—  
 
                             
 
 
 
The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:
                             
 
Analysis of Originated Past Due Loans - As of December 31, 2018
  
 
(in thousands)
 
30-59
 days
  
60-89
 days
  
> 90 days
  
Total Past
Due Loans
  
Current
  
Total
  
> 90 Days and
Still Accruing
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
1,675
  $
132
  $
478
  $
2,285
  $
341,511
  $
343,796
  $
—  
 
Commercial
  
431
   
1,200
   
296
   
1,927
   
1,909,054
   
1,910,981
   
—  
 
                             
Total mortgage loans on real estate
  
2,106
   
1,332
   
774
   
4,212
   
2,250,565
   
2,254,777
   
—  
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
908
   
47
   
609
   
1,564
   
282,889
   
284,453
   
—  
 
Home equity loans
  
1,043
   
24
   
214
   
1,281
   
31,379
   
32,660
   
—  
 
Other
  
298
   
17
   
—  
   
315
   
33,705
   
34,020
   
—  
 
                             
Total consumer loans
  
2,249
   
88
   
823
   
3,160
   
347,973
   
351,133
   
—  
 
Commercial
  
1,053
   
579
   
1,247
   
2,879
   
225,756
   
228,635
   
—  
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
209
   
—  
   
—  
   
209
   
90,494
   
90,703
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
56,208
   
56,208
   
—  
 
                             
Total construction
  
209
   
—  
   
—  
   
209
   
146,702
   
146,911
   
—  
 
                             
Total loans
 $
5,617
  $
1,999
  $
2,844
  $
10,460
  $ 
2,970,996
  $ 
2,981,456
  $
—  
 
                             
 
 
 
22
 
 
Table of Contents
 
The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated:
                             
 
Analysis of PNCI Past Due Loans - As of December 31, 2018
  
 
(in thousands)
 
30-59
 days
  
60-89
 days
  
> 90 days
  
Total Past
Due Loans
  
Current
  
Total
  
> 90 Days and
Still Accruing
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
1,009
  $
133
  $
156
  $
1,298
  $
168,494
  $
169,792
  $
 —  
 
Commercial
  
1,646
   
1,136
   
1,082
   
3,864
   
704,537
   
708,401
   
—  
 
                             
Total mortgage loans on real estate
  
2,655
   
1,269
   
1,238
   
5,162
   
873,031
   
878,193
   
—  
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
304
   
35
   
237
   
576
   
40,381
   
40,957
   
—  
 
Home equity loans
  
74
   
—  
   
—  
   
74
   
3,511
   
3,585
   
—  
 
Other
  
160
   
—  
   
—  
   
160
   
21,499
   
21,659
   
—  
 
                             
Total consumer loans
  
538
   
35
   
237
   
810
   
65,391
   
66,201
   
—  
 
Commercial
  
678
   
145
   
113
   
936
   
44,532
   
45,468
   
—  
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
30,593
   
30,593
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
5,880
   
5,880
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
36,473
   
36,473
   
—  
 
                             
Total loans
 $  
3,871
  $  
1,449
  $  
1,588
  $  
6,908
  $  
1,019,427
  $  
1,026,335
  $
—  
 
                             
 
 
 
 
 
Interest income on originated nonaccrual loans that would have been recognized during the three months ended June 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $289,000 and $341,000, respectively. Interest income actually recognized on these originated loans during the three months ended June 30, 2019 and 2018 was $53,000 and $53,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the three months ended June 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $160,000 and $26,000, respectively. Interest income actually recognized on these PNCI loans during the three months ended June 30, 2019 and 2018 was $111,000 and $12,000.
Interest income on originated nonaccrual loans that would have been recognized during the six months ended June 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $568,000 and $626,000, respectively. Interest income actually recognized on these originated loans during the six months ended June 30, 2019 and 2018 was $86,000 and $75,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the six months ended June 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $281,000 and $54,000, respectively. Interest income actually recognized on these PNCI loans during the six months ended June 30, 2019 and 2018 was $171,000 and $11,000.
The following table shows the ending balance of nonaccrual originated
and PNCI loans by loan category as of the date indicated:
                         
 
Non Accrual Loans
 
 
As of June 30, 2019
  
As of December 31, 2018
 
(in thousands)
 
Originated
  
PNCI
  
Total
  
Originated
  
PNCI
  
Total
 
Mortgage loans on real estate:
  
   
   
   
   
   
 
Residential
1-4
family
 $
3,357
  $
300
  $
3,657
  $
3,244
  $
334
  $
3,578
 
Commercial
  
4,354
   
3,461
   
7,815
   
9,263
   
1,468
   
10,731
 
                         
Total mortgage loans on real estate
  
7,711
   
3,761
   
11,472
   
12,507
   
1,802
   
14,309
 
Consumer:
  
   
   
   
   
   
 
Home equity lines of credit
  
880
   
516
   
1,396
   
1,429
   
885
   
2,314
 
Home equity loans
  
1,610
   
34
   
1,644
   
1,722
   
47
   
1,769
 
Other
  
58
   
3
   
61
   
3
   
4
   
7
 
                         
Total consumer loans
  
2,548
   
553
   
3,101
   
3,154
   
936
   
4,090
 
Commercial
  
3,873
   
183
   
4,056
   
3,755
   
120
   
3,875
 
Construction:
  
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                         
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                         
Total non accrual loans
 $
14,132
  $
4,497
  $
18,629
  $
19,416
  $
2,858
  $
22,274
 
                         
 
 
 
 
 
Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due in accordance with the original contractual terms of the loan agreement. The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated. The average recorded investment in impaired loans and interest income recognized on impaired loans during the three months ended June 30, 2019 and 2018 was not considered significant for financial reporting purposes.
 
23
 
 
Table of Contents
 
                             
 
Impaired Originated Loans – As of, or for the Six Months Ended, June 30, 2019
 
(in thousands)
 
Unpaid
principal
balance
  
Recorded
investment with
no related
allowance
  
Recorded
investment with
related
allowance
  
Total recorded
investment
  
Related
Allowance
  
Average
recorded
investment
  
Interest income
recognized
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
4,739
  $
3,705
  $
300
  $
4,005
  $
54
  $
4,291
  $
18
 
Commercial
  
7,906
   
5,103
   
2,465
   
7,568
   
808
   
10,004
   
40
 
                             
Total mortgage loans on real estate
  
12,645
   
8,808
   
2,765
   
11,573
   
862
   
14,295
   
58
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1,333
   
1,271
   
—  
   
1,271
   
—  
   
1,510
   
8
 
Home equity loans
  
2,373
   
1,571
   
268
   
1,839
   
61
   
2,003
   
4
 
Other
  
76
   
3
   
54
   
57
   
13
   
48
   
1
 
                             
Total consumer loans
  
3,782
   
2,845
   
322
   
3,167
   
74
   
3,561
   
13
 
Commercial
  
5,150
   
1,884
   
3,035
   
4,919
   
1,301
   
5,065
   
15
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total
 $
21,577
  $
13,537
  $
6,122
  $
19,659
  $
2,237
  $
22,921
  $
86
 
                             
    
 
Impaired PNCI Loans – As of, or for the Six Months Ended, June 30, 2019
 
(in thousands)
 
Unpaid
principal
balance
  
Recorded
investment with
no related
allowance
  
Recorded
investment with
related
allowance
  
Total recorded
investment
  
Related
Allowance
  
Average
recorded
investment
  
Interest income
recognized
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
339
  $
300
  $
—  
  $
300
  $
—  
  $
317
  $
—  
 
Commercial
  
5,079
   
3,462
   
—  
   
3,462
   
—  
   
2,465
   
171
 
                             
Total mortgage loans on real estate
  
5,418
   
3,762
   
—  
   
3,762
   
—  
   
2,782
   
171
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
612
   
534
   
241
   
775
   
85
   
889
   
—  
 
Home equity loans
  
167
   
148
   
69
   
217
   
44
   
229
   
—  
 
Other
  
62
   
62
   
37
   
99
   
6
   
105
   
—  
 
                             
Total consumer loans
  
841
   
744
   
347
   
1,091
   
135
   
1,223
   
—  
 
Commercial
  
113
   
113
   
70
   
183
   
70
   
151
   
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total
 $
6,372
  $
4,619
  $
417
  $
5,036
  $
205
  $
4,156
  $
171
 
                             
    
 
Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2018
 
(in thousands)
 
Unpaid
principal
balance
  
Recorded
investment with
no related
allowance
  
Recorded
investment with
related
allowance
  
Total recorded
investment
  
Related
Allowance
  
Average
recorded
investment
  
Interest income
recognized
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
4,594
  $
3,663
  $
308
  $
3,971
  $
56
  $
3,517
  $
90
 
Commercial
  
13,081
   
10,676
   
1,765
   
12,441
   
42
   
13,115
   
137
 
                             
Total mortgage loans on real estate
  
17,675
   
14,339
   
2,073
   
16,412
   
98
   
16,632
   
227
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1,900
   
1,749
   
111
   
1,860
   
71
   
1,885
   
43
 
Home equity loans
  
2,374
   
1,892
   
65
   
1,957
   
2
   
1,520
   
23
 
Other
  
3
   
—  
   
3
   
3
   
3
   
17
   
2
 
                             
Total consumer loans
  
4,277
   
3,641
   
179
   
3,820
   
76
   
3,422
   
68
 
Commercial
  
5,433
   
2,924
   
2,287
   
5,211
   
1,774
   
4,654
   
91
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
5
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
5
   
—  
 
                             
Total
 $  
27,385
  $
20,904
  $
4,539
  $
25,443
  $
1,948
  $  
24,713
  $
386
 
                             
 
 
 
 
 
 
24
 
 
Table of Contents
 
 
Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2018
 
(in thousands)
 
Unpaid
principal
balance
  
Recorded
investment with
no related
allowance
  
Recorded
investment with
related
allowance
  
Total recorded
investment
  
Related
Allowance
  
Average
recorded
investment
  
Interest income
recognized
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
375
  $
334
  $
—  
  $
334
  $
—  
  $
529
  $
5
 
Commercial
  
3,110
   
1,468
   
—  
   
1,468
   
—  
   
1,713
   
183
 
                             
Total mortgage loans on real estate
  
3,485
   
1,802
   
—  
   
1,802
   
—  
   
2,242
   
188
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1,027
   
587
   
367
   
954
   
127
   
1,120
   
18
 
Home equity loans
  
252
   
47
   
197
   
244
   
101
   
155
   
—  
 
Other
  
106
   
21
   
85
   
106
   
11
   
114
   
—  
 
                             
Total consumer loans
  
1,385
   
655
   
649
   
1,304
   
239
   
1,389
   
18
 
Commercial
  
120
   
113
   
7
   
120
   
7
   
60
   
1
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total
 $
4,990
  $
2,570
  $
656
  $
3,226
  $
246
  $
3,691
  $
207
 
                             
    
 
Impaired Originated Loans – As of, or for the Six Months Ended, June 30, 2018
 
(in thousands)
 
Unpaid
principal
balance
  
Recorded
investment with
no related
allowance
  
Recorded
investment with
related
allowance
  
Total recorded
investment
  
Related
Allowance
  
Average
recorded
investment
  
Interest income
recognized
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
5,656
  $
3,947
  $
1,050
  $
4,997
  $
147
  $
4,600
  $
28
 
Commercial
  
11,280
   
9,763
   
1,076
   
10,839
   
82
   
10,975
   
9
 
                             
Total mortgage loans on real estate
  
16,936
   
13,710
   
2,126
   
15,836
   
229
   
15,575
   
37
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1,244
   
1,108
   
106
   
1,214
   
29
   
1,315
   
3
 
Home equity loans
  
2,558
   
1,828
   
351
   
2,179
   
38
   
1,784
   
15
 
Other
  
3
   
—  
   
3
   
3
   
3
   
3
   
—  
 
                             
Total consumer loans
  
3,805
   
2,936
   
460
   
3,396
   
70
   
3,102
   
18
 
Commercial
  
4,952
   
809
   
3,942
   
4,751
   
2,127
   
4,686
   
20
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
68
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
68
   
—  
 
                             
Total
 $
25,693
  $
17,455
  $
6,528
  $
23,983
  $
2,426
  $
23,431
  $
75
 
                             
    
 
Impaired PNCI Loans – As of, or for the Six Months Ended, June 30, 2018
 
(in thousands)
 
Unpaid
principal
balance
  
Recorded
investment with
no related
allowance
  
Recorded
investment with
related
allowance
  
Total recorded
investment
  
Related
Allowance
  
Average
recorded
investment
  
Interest income
recognized
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
 $
1,417
  $
1,348
  $
—  
  $
1,348
  $
—  
  $
1,339
  $
—
 
Commercial
  
323
   
323
   
—  
   
323
   
—  
   
161
   
9
 
                             
Total mortgage loans on real estate
  
1,740
   
1,671
   
—  
   
1,671
   
—  
   
1,500
   
9
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1,098
   
529
   
506
   
1,035
   
258
   
1,035
   
2
 
Home equity loans
  
293
   
36
   
242
   
278
   
154
   
281
   
—
 
Other
  
244
   
—  
   
244
   
244
   
51
   
259
   
—
 
                             
Total consumer loans
  
1,635
   
565
   
992
   
1,557
   
463
   
1,575
   
2
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
   
—  
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total
 $
3,375
  $
2,236
  $
992
  $
3,228
  $
463
  $
3,075
  $
11
 
                             
 
Originated loans classified as TDRs and impaired were $10,998,000​​​​​​​, $10,253,000, and $9,450,000 at June 30, 2019, December 31, 2018, and June 30, 2018, respectively. PNCI loans classified as TDRs and impaired were $811,000, $615,000, and $1,459,000 at June 30, 2019, December 31, 2018 and June 30, 2018, respectively. The Company had no significant obligations to lend additional funds on Originated or PNCI TDRs as of June 30, 2019, December 31, 2018, or June 30, 2018.
 
25
 
 
Table of Contents
 
The following tables show certain information regarding TDRs that occurred during the periods indicated:
 
TDR Information for the Three Months Ended June 30, 2019
 
(dollars in thousands)
 
Number
  
Pre-mod

outstanding
principal
balance
  
Post-mod

outstanding
principal
balance
  
Financial
impact due to
TDR taken as
additional
provision
  
Number that
defaulted during
the period
  
Recorded
investment of
TDRs that
defaulted during
the period
  
Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
  
  $
  $
  $
—  
   
—  
  $
—  
  $
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total mortgage loans on real estate
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1
   
65
   
68
   
—  
   
—  
   
—  
   
—  
 
Home equity loans
  
1
   
28
   
27
   
27
   
—  
   
—  
   
—  
 
Other
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total consumer loans
  
2
   
93
   
95
   
27
   
—  
   
—  
   
—  
 
Commercial
  
4
   
1,754
   
1,722
   
2
   
   
   
—  
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total
  
6
  $
1,847
  $
1,817
  $
29
   
—  
  $
—  
  $
—  
 
                             
    
 
TDR Information for the Six Months Ended June 30, 2019
 
(dollars in thousands)
 
Number
  
Pre-mod

outstanding
principal
balance
  
Post-mod

outstanding
principal
balance
  
Financial
impact due to
TDR taken as
additional
provision
  
Number that
defaulted during
the period
  
Recorded
investment of
TDRs that
defaulted during
the period
  
Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
  
1
  $
163
  $
162
  $
—  
   
—  
  $
—  
  $
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total mortgage loans on real estate
  
1
   
163
   
162
   
—  
   
—  
   
—  
   
—  
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1
   
65
   
68
   
—  
   
—  
   
—  
   
—  
 
Home equity loans
  
2
   
149
   
147
   
29
   
—  
   
—  
   
—  
 
Other
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total consumer loans
  
3
   
214
   
215
   
29
   
—  
   
—  
   
—  
 
Commercial
  
6
   
1,768
   
1,737
   
2
   
1
   
7
   
—  
 
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total
  
10
  $
2,145
  $
2,114
  $
31
   
1
  $
7
  $
—  
 
                             
    
 
TDR Information for the Three Months Ended June 30, 2018
 
(dollars in thousands)
 
Number
  
Pre-mod

outstanding
principal
balance
  
Post-mod

outstanding
principal
balance
  
Financial
impact due to
TDR taken as
additional
provision
  
Number that
defaulted during
the period
  
Recorded
investment of
TDRs that
defaulted during
the period
  
Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
  
—  
  $
—  
  $
—  
  $
—  
   
—  
  $
—  
  $
—  
 
Commercial
  
1
   
34
   
34
   
34
   
—  
   
—  
   
—  
 
                             
Total mortgage loans on real estate
  
1
   
34
   
34
   
34
   
—  
   
—  
   
—  
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
   
   
   
—  
   
—  
   
—  
   
—  
 
Home equity loans
  
   
   
   
—  
   
—  
   
—  
   
—  
 
Other
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total consumer loans
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
2
   
416
   
421
   
(2
)  
4
   
340
   
(2
)
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total
  
3
  $
450
  $
455
  $
32
   
4
  $
340
  $
(2
)
                             
 
26
 
 
Table of Contents
 
 
TDR Information for the Six Months Ended June 30, 2018
 
(dollars in thousands)
 
Number
  
Pre-mod

outstanding
principal
balance
  
Post-mod

outstanding
principal
balance
  
Financial
impact due to
TDR taken as
additional
provision
  
Number that
defaulted during
the period
  
Recorded
investment of
TDRs that
defaulted during
the period
  
Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
 
Mortgage loans on real estate:
  
   
   
   
   
   
   
 
Residential
1-4
family
  
—  
  $
—  
  $
—  
  $
—  
   
—  
  $
—  
  $
—  
 
Commercial
  
2
   
417
   
417
   
46
   
1
   
169
   
—  
 
                             
Total mortgage loans on real estate
  
2
   
417
   
417
   
46
   
1
   
169
   
—  
 
Consumer:
  
   
   
   
   
   
   
 
Home equity lines of credit
  
1
   
133
   
138
   
—  
   
—  
   
—  
   
—  
 
Home equity loans
  
1
   
121
   
121
   
—  
   
—  
   
—  
   
—  
 
Other
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total consumer loans
  
2
   
254
   
259
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
2
   
416
   
421
   
(2
)  
4
   
340
   
(2
)
Construction:
  
   
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total construction
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                             
Total
  
6
  $
1,087
  $
1,097
  $
44
   
5
  $
509
  $
(2
)
                             
Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions.
For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above.
Typically if a
TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting from default of previously modified TDR’s are noted above. Loans that defaulted within the twelve month period subsequent to modification were not considered significant for financial reporting purposes.
 
27
 
 
Table of Contents
 
Note 6 – Leases
The Company adopted ASU
2016-02
“Leases” (Topic 842) as of January 1, 2019, which requires the Company to record a
right-of-use
asset (“ROUA”) on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company is also required to record a lease liability on the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is lessee of real estate property for branches, ATM locations, and general administration and operations. The Company elected not to include short-term leases (i.e. leases with initial terms of twelve months or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance were unknown and not determinable at lease commencement and therefore, were not included in the determination of the Company’s ROUA or lease liability.
The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the amount of lease liability and adjusted for prepaid or accrued lease payments, remaining lease incentives, unamortized direct costs (if any), and impairment (if any).
The following table presents the components of lease expense for the three and six months ended June 30, 2019:
(in thousands)
 
Three months ended
June 30, 2019
  
Six months ended
June 30, 2019
 
Operating lease cost
 $
1,310
  $
2,621
 
Short-term lease cost
  
58
   
129
 
Variable lease cost
  
(17
)  
(22
)
Sublease income
  
(32
)  
(66
)
         
Total lease cost
 $
1,319
  $
2,662
 
         
Prior to the adoption of ASU
2016-02,
rent expense under operating leases was $892,000 and $1,776,000 during the three and six months ended June 30, 2018. Rent expense was offset by rent income of $10,000 and $21,000 during the three and six months ended June 30, 2018.
The following table presents supplemental cash flow information related to leases for the six months ended June 30, 2019:
(in thousands)
 
Three months ended
June 30, 2019
  
Six months ended
June 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities:
  
   
 
Operating cash flows for operating leases
 $
1,229
  $
2,447
 
ROUA obtained in exchange for operating lease liabilities
 $
156
  $
32,162
 
The following table presents the weighted average operating lease term and discount rate at June 30, 2019:
Weighted-average remaining lease term
  
9.5 years
 
Weighted-average discount rate
  
3.18
%
 
28
 
 
Table of Contents
 
At June 30, 2019, future expected operating lease payments are as follows:
(in thousands)
 
 
Periods ending December 31,
  
 
2019
 $
 2,352
 
2020
  
4,387
 
2021
  
4,235
 
2022
  
3,896
 
2023
  
3,216
 
Thereafter
  
16,682
 
     
  
34,768
 
Discount for present value of expected cash flows
  
(5,334
)
     
Lease liability at June 30, 2019
 $
29,434
 
     
Note 7 - Deposits
A summary of the balances of deposits follows (in thousands):
 
June 30,
2019
  
December 31,
2018
 
Noninterest-bearing demand
 $
 1,780,339
  $
 1,760,580
 
Interest-bearing demand
  
1,263,635
   
1,252,366
 
Savings
  
1,856,749
   
1,921,324
 
Time certificates, $250,000 or more
  
130,061
   
132,429
 
Other time certificates
  
311,389
   
299,767
 
         
Total deposits
 $
5,342,173
  $
5,366,466
 
         
Certificate of deposit balances of $50,000,000 and $60,000,000 from the State of California were included in time certificates, over $250,000, at June 30, 2019 and December 31, 2018, respectively. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company. Overdrawn deposit balances of $1,242,000 and $1,469,000 were classified as consumer loans at June 30, 2019 and December 31, 2018, respectively.
Note 8 - Commitments and Contingencies
The following table presents a summary of the Bank’s commitments and contingent liabilities:
(in thousands)
 
June 30,
2019
  
December 31,
2018
 
Financial instruments whose amounts represent risk:
  
   
 
Commitments to extend credit:
   
    
 
Commercial loans
 $
311,850
  $
306,191
 
Consumer loans
  
506,448
   
496,575
 
Real estate mortgage loans
  
173,451
   
140,292
 
Real estate construction loans
  
210,143
   
248,996
 
Standby letters of credit
  
11,338
   
11,346
 
Deposit account overdraft privilege
  
108,941
   
111,956
 
 
29
 
 
Table of Contents
 
Note 9 – Shareholders’ Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of $10,236,000 and $4,770,000 during the three months ended June 30, 2019 and 2018, respectively and $18,350,000 and $9,142,000 during the six months ended June 30, 2019 and 2018, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California Department of Business Oversight (DBO). Absent approval from the Commissioner of the DBO, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period.
Stock Repurchase Plan
On August 21, 2007, the Board of Directors adopted a plan to repurchase, as conditions warrant, up to 500,000 shares of the Company’s common stock on the open market. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. This stock repurchase plan has no expiration date. As of June 30, 2019, the Company had repurchased 196,566 shares under this plan. During the six month periods ended June 30, 2019 and 2018, there were no shares of common stock repurchased under this plan.
Stock Repurchased Under Equity Compensation Plans
During the three months ended June 30, 2019 and 2018, employees tendered 93,755 and 17,086 shares, respectively, of the Company’s common stock with market value of $3,659,000, and $667,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. During the six months ended June 30, 2019 and 2018, employees tendered 119,914 and 17,220 shares, respectively, of the Company’s common stock with market value of $4,695,000, and $671,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is exercised. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.
Note 10 - Stock Options and Other Equity-Based Incentive Instruments
The Company’s 2009 Equity Incentive Plan (2009 Plan) expired on March 26, 2019. While no new awards can be granted under the 2009 Plan, existing grants continue to be governed by the terms, conditions and procedures set forth in any applicable award agreement. On April 16, 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (2019 Plan) which was ratified by shareholders on May 21, 2019. The 2019 Plan allows for up to 1,500,000 shares to be issued in connection with equity-based incentives. All grants of equity awards made during the six months ended June 30, 2019 were made from the 2019 Plan.
Stock option activity during the six months
ended June 30, 2019 is summarized in the following table:
 
Number
of Shares
  
Option Price
per Share
  
Weighted
Average
Exercise Price
 
Outstanding at December 31, 2018
  
343,000
   
$
12.63
 to $23.21
  $
16.67
 
Options granted
  
—  
   
— to —
   
—  
 
Options exercised
  
(157,000
)  
$12.63 to $19.46
   
15.92
 
Options forfeited
  
—  
   
— to —
   
—  
 
             
Outstanding at June 30, 2019
  
186,000
   
$14.54 to $23.21
  $
17.45
 
The following table shows the number, weighted-average exercise price, intrinsic value, and weighted average remaining contractual life of options exercisable, options not yet exercisable and total options outstanding as of June 30, 2019:
 
Currently
Exercisable
  
Currently Not
Exercisable
  
Total
Outstanding
 
Number of options
  
185,250
   
750
   
186,000
 
Weighted average exercise price
 $
17.43
  $
23.21
  $
17.45
 
Intrinsic value (in thousands)
 $
3,774
  $
11
  $
3,785
 
Weighted average remaining contractual term (yrs.)
  
3.1
   
5.3
   
3.1
 
The 750 options that are currently not exercisable as of June 30, 2019 are expected to vest, on a weighted-average basis, over the next three months. The Company did not modify any option grants during 2018 or the six months ended June 30, 2019.
 
30
 
 
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Restricted stock unit (RSU) activity is summarized in the following table for the dates indicated:
         
 
Service
Condition
Vesting RSUs
  
Market Plus
Service
Condition
Vesting RSUs
 
Outstanding at December 31, 2018
  
66,947
   
45,536
 
RSUs granted
  
35,272
   
22,898
 
RSUs added through dividend and performance credits
  
519
   
7,414
 
RSUs released
  
(26,211
)  
(22,237
)
RSUs forfeited/expired
  
—  
   
—  
 
         
Outstanding at June 30, 2019
  
76,527
   
53,611
 
         
 
 
 
 
The 76,527 of service condition vesting RSUs outstanding as of June 30, 2019 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of RSUs outstanding under the original grant. The dividend credits follow the same vesting requirements as the RSU awards and are not considered participating securities. The 76,527 of service condition vesting RSUs outstanding as of June 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next 1.4 years. The Company expects to recognize $2,495,000 of
pre-tax
compensation costs related to these service condition vesting RSUs between June 30, 2019 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2018 or during the six months ended June 30, 2019.
The 53,611 of market plus service condition vesting RSUs outstanding as of June 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next 2.1 years. The Company expects to recognize $1,227,000 of
pre-tax
compensation costs related to these RSUs between June 30, 2019 and their vesting dates. As of June 30, 2019, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 80,417 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 2018 or during the six months ended June 30, 2019.
Note 11 - Noninterest Income and Expense
The following table summarizes the Company’s noninterest income for the periods indicated:
                 
 
Three months ended June 30,
  
Six months ended June 30,
 
(dollars in thousands)
 
2019
  
2018
  
2019
  
2018
 
ATM and interchange fees
 $
5,404
  $
4,510
  $
9,985
  $
8,745
 
Service charges on deposit accounts
  
4,182
   
3,613
   
8,062
   
7,392
 
Other service fees
  
619
   
630
   
1,390
   
1,344
 
Mortgage banking service fees
  
475
   
511
   
958
   
1,028
 
Change in value of mortgage servicing rights
  
(552
)  
(36
)  
(1,197
)  
75
 
                 
Total service charges and fees
  
10,128
   
9,228
   
19,198
   
18,584
 
                 
Increase in cash value of life insurance
  
746
   
656
   
1,521
   
1,264
 
Asset management and commission income
  
739
   
810
   
1,381
   
1,686
 
Gain on sale of loans
  
575
   
666
   
987
   
1,292
 
Lease brokerage income
  
239
   
200
   
459
   
328
 
Sale of customer checks
  
135
   
138
   
275
   
239
 
Gain on sale of foreclosed assets
  
197
   
17
   
296
   
388
 
Gain (loss) on marketable equity securities
  
42
   
(23
)  
78
   
(70
)
Loss on disposal of fixed assets
  
(42
)  
(41
)  
(80
)  
(54
)
Other
  
819
   
523
   
1,327
   
807
 
                 
Total other noninterest income
  
3,450
   
2,946
   
6,244
   
5,880
 
                 
Total noninterest income
 $
13,578
  $
12,174
  $
25,442
  $
24,464
 
                 
 
 
 
 
 
31
 
 
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The components of noninterest expense were as follows (in thousands):
                 
 
Three months ended June 30,
  
Six months ended June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Base salaries, net of deferred loan origination costs
 $
17,211
  $
14,429
  $
33,968
  $
28,391
 
Incentive compensation
  
3,706
   
2,159
   
6,273
   
4,611
 
Benefits and other compensation costs
  
5,802
   
4,865
   
11,606
   
10,103
 
                 
Total salaries and benefits expense
  
26,719
   
21,453
   
51,847
   
43,105
 
                 
Occupancy
  
3,738
   
2,720
   
7,512
   
5,401
 
Data processing and software
  
3,354
   
2,679
   
6,703
   
5,193
 
Equipment
  
1,752
   
1,637
   
3,619
   
3,188
 
Intangible amortization
  
1,431
   
339
   
2,862
   
678
 
Advertising
  
1,533
   
1,035
   
2,864
   
1,873
 
ATM and POS network charges
  
1,270
   
1,437
   
2,593
   
2,663
 
Professional fees
  
1,057
   
774
   
1,896
   
1,546
 
Telecommunications
  
773
   
681
   
1,570
   
1,382
 
Regulatory assessments and insurance
  
490
   
417
   
1,001
   
847
 
Merger and acquisition expense
  
—  
   
601
   
—  
   
1,077
 
Postage
  
315
   
301
   
625
   
659
 
Operational losses
  
226
   
252
   
451
   
546
 
Courier service
  
412
   
224
   
682
   
491
 
Other miscellaneous expense
  
3,782
   
3,320
   
8,140
   
7,383
 
                 
Total other noninterest expense
  
20,133
   
16,417
   
40,518
   
32,927
 
                 
Total noninterest expense
 $
46,852
  $
37,870
  $
92,365
  $
76,032
 
                 
 
 
 
 
Note 12 – Earnings Per Share
Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate from outstanding stock options and restricted stock units (RSUs), and are determined using the treasury stock method. Earnings per share have been computed based on the following:
         
 
Three months ended June 30,
 
(in thousands)
 
2019
  
2018
 
Net income
 $
23,061
  $
15,029
 
Average number of common shares outstanding
  
30,458
   
22,983
 
Effect of dilutive stock options and restricted stock
  
185
   
293
 
         
Average number of common shares outstanding used to calculate diluted earnings per share
  
30,643
   
23,276
 
         
Options excluded from diluted earnings per share because the effect of these options was antidilutive
  
—  
   
—  
 
 
 
 
 
 
         
 
Six months ended June 30,
 
(in thousands)
 
2019
  
2018
 
Net income
 $  
 45,787
        $  
 28,939
 
Average number of common shares outstanding
  
30,441
   
22,970
 
Effect of dilutive stock options and restricted stock
  
209
   
310
 
         
Average number of common shares outstanding used to calculate diluted earnings
per share
  
30,650
   
23,280
 
         
Options excluded from diluted earnings per share because the effect of these
options was antidilutive
  
—  
   
—  
 
 
 
 
 
 
32
 
 
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Note 13 – Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale
securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of other comprehensive income.
The components of other comprehensive income (loss) and related tax effects are as follows:
                 
 
Three months ended June 30,
  
Six months ended June 30,
 
(in thousands)
 
2019
  
2018
  
2019
  
2018
 
Unrealized holding gains (losses) on available for sale securities before reclassifications
 $
9,553
  $
(5,676
) $
22,263
  $
(20,941
)
Amounts reclassified out of accumulated other comprehensive income:
  
   
   
   
 
Adoption ASU
2016-01
  
—  
   
—  
   
—  
   
62
 
Adoption ASU
2018-02
  
—  
   
—  
   
—  
   
(425
)
                 
Total amounts reclassified out of accumulated other comprehensive income
  
—  
   
—  
   
—  
   
(363
)
                 
Unrealized holding gains (losses) on available for sale securities after reclassifications
  
9,553
   
(5,676
)  
22,263
   
(21,304
)
Tax effect
  
(2,824
)  
1,678
   
(6,582
)  
6,280
 
                 
Unrealized holding gains (losses) on available for sale securities, net of tax
  
6,729
   
(3,998
)  
15,681
   
(15,024
)
                 
Change in unfunded status of the supplemental retirement plans before reclassifications
  
(89
)  
—  
   
(177
)  
668
 
Amounts reclassified out of accumulated other comprehensive income:
  
   
   
   
 
Amortization of prior service cost
  
(13
)  
(13
)  
(27
)  
(27
)
Amortization of actuarial losses
  
102
   
127
   
204
   
254
 
Adoption ASU
2018-02
  
—  
   
—  
   
—  
   
(668
)
                 
Total amounts reclassified out of accumulated other comprehensive income
  
89
   
114
   
177
   
(441
)
                 
Change in unfunded status of the supplemental retirement plans after reclassifications
  
—  
   
114
   
—  
   
227
 
Tax effect
  
—  
   
(34
)  
—  
   
(67
)
                 
Change in unfunded status of the supplemental retirement plans, net of tax
  
—  
   
80
   
—  
   
160
 
                 
Total other comprehensive income (loss)
 $
6,729
  $
(3,918
) $
15,681
  $
(14,864
)
                 
 
 
 
 
The components of accumulated other comprehensive loss, included in shareholders’ equity, are as follows:
         
 
June 30,
  
December 31,
 
(in thousands)
 
2019
  
2018
 
Net unrealized loss on available for sale securities
 $
1,289
  $
(20,974
)
Tax effect
  
(381
)  
6,201
 
         
Unrealized holding loss on available for sale securities, net of tax
  
908
   
(14,773
)
         
Unfunded status of the supplemental retirement plans
  
(4,802
)  
(4,802
)
Tax effect
  
1,420
   
1,420
 
         
Unfunded status of the supplemental retirement plans, net of tax
  
(3,382
)  
(3,382
)
         
Joint beneficiary agreement liability
  
276
   
276
 
Tax effect
  
—  
   
—  
 
         
Joint beneficiary agreement liability, net of tax
  
276
   
276
 
         
Accumulated other comprehensive loss
 $
(2,198
) $
(17,879
)
         
 
 
 
 
 
33
 
 
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Note 14 - Fair Value Measurement
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Marketable equity securities, debt securities
available-for-sale,
loans held for sale, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application impairment write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observable nature of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Marketable equity securities and debt securities available for sale
– Marketable equity securities and debt securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are
not
available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active
over-the-counter
markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had
no
securities classified as Level 3 during any of the periods covered in these financial statements.
Loans held for sale
– Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to recurring fair value adjustments as Level 2.
Impaired originated and PNCI loans
– Originated and PNCI loans are not recorded at fair value on a recurring basis. However, from time to time, an originated or PNCI loan is considered impaired and an allowance for loan losses is established. Originated and PNCI loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are considered impaired. The fair value of an impaired originated or PNCI loan is estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired originated and PNCI loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired originated and PNCI loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated or PNCI loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the impaired originated or PNCI loan as nonrecurring Level 3.
Foreclosed assets
- Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense.
Mortgage servicing rights
- Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value
 
34
 
 
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measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3.
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):
                 
Fair value at June 30, 2019
 
Total
  
Level 1
  
Level 2
  
Level 3
 
Marketable equity securities
 $
2,952
  $
2,952
  $
—  
  $
—  
 
Debt securities available for sale:
  
   
   
   
 
Obligations of U.S. government corporations and agencies
  
630,911
   
—  
   
630,911
   
—  
 
Obligations of states and political subdivisions
  
125,980
   
—  
   
125,980
   
—  
 
Corporate bonds
  
4,521
   
—  
   
4,521
   
—  
 
Asset backed securities
  
372,582
   
—  
   
372,582
   
—  
 
Loans held for sale
  
5,875
   
—  
   
5,875
   
—  
 
Mortgage servicing rights
  
6,229
   
—  
   
—  
   
6,229
 
                 
Total assets measured at fair value
 $
1,149,050
  $
2,952
  $
1,139,869
  $
6,229
 
                 
             
Fair value at December 31, 2018
 
Total
  
Level 1
  
Level 2
  
Level 3
 
Marketable equity securities
 $
2,874
  $
2,874
  $
—  
  $
—  
 
Debt securities available for sale:
  
   
   
   
 
Obligations of U.S. government corporations and agencies
  
629,981
   
—  
   
629,981
   
—  
 
Obligations of states and political subdivisions
  
126,072
   
—  
   
126,072
   
—  
 
Corporate bonds
  
4,478
   
—  
   
4,478
   
—  
 
Asset backed securities
  
354,505
   
—  
   
354,505
   
—  
 
Loans held for sale
  
3,687
   
—  
   
3,687
   
—  
 
Mortgage servicing rights
  
7,098
   
—  
   
—  
   
7,098
 
                 
Total assets measured at fair value
 $
1,128,695
  $
2,874
  $
1,118,723
  $
7,098
 
                 
 
 
 
 
 
 
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were
no
transfers between any levels during the six months ended June 30, 2019 or the year ended December 31, 2018.
The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the time periods indicated. Had there been any transfer into or out of Level 3 during the time periods indicated, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands):
                     
 
  
Transfers
  
Change
  
  
 
 
Beginning
  
into (out of)
  
Included
  
  
Ending
 
Three months ended June 30,
 
Balance
  
Level 3
  
in Earnings
  
Issuances
  
Balance
 
2019: Mortgage servicing rights
 $
6,572
   
—  
  $
(552
) $
209
  $
6,229
 
2018: Mortgage servicing rights
 $
6,953
   
—  
  $
(36
) $
104
  $
7,021
 
 
 
 
 
 
 
 
                     
Six months ended June 30,
 
Beginning
Balance
  
Transfers
into (out of)
Level 3
  
Change
Included
in Earnings
  
Issuances
  
Ending
Balance
 
2019: Mortgage servicing rights
 $
 7,098
   
—  
  $
 (1,197
) $
 328
  $
 6,229
 
2018: Mortgage servicing rights
 $
 6,687
   
—  
  $
75
  $
 259
  $
 7,021
 
 
 
 
 
The key unobservable inputs used in determining the fair value of mortgage servicing rights are mortgage prepayment speeds and the discount rate used to discount cash projected cash flows. Generally, any significant increases in the mortgage prepayment speed and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the mortgage prepayment speed and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement).
 
35
 
 
Table of Contents
 
The following table presents quantitative information about recurring Level 3 fair value measurements at June 30, 2019 and December 31, 2018:
                 
 
Fair Value
  
Valuation
  
Unobservable
  
Range,
Weighted
 
As of June 30, 2019:
 
(in thousands)
  
Technique
  
Inputs
  
Average
 
Mortgage Servicing Rights
 $
6,229
   
Discounted cash flow
   
Constant prepayment rate
   
6.9%
 -
 39.0%; 10.5
%
  
   
   
Discount rate
   
10% - 14%;12
%
As of December 31, 2018:
 
  
  
  
 
Mortgage Servicing Rights
 $
7,098
   
Discounted cash flow
   
Constant prepayment rate
   
5.0% - 27.3%; 7.6
%
  
   
   
Discount rate
   
12% - 13%;12
%
 
 
 
 
 
 
The tables below present the recorded investment in assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated (in thousands):
                     
 
  
  
  
  
Total Gains
 
June 30, 2019
 
Total
  
Level 1
  
Level 2
  
Level 3
  
(Losses)
 
Fair value:
  
   
   
   
   
 
Impaired Originated & PNCI loans
 $
1,164
   
—  
   
—  
  $
1,164
  $
(808
)
Foreclosed assets
  
454
   
—  
   
—  
   
454
   
(63
)
                     
Total assets measured at fair value
 $
1,618
   
—  
   
—  
  $
1,618
  $
(871
)
                     
                
 
  
  
  
  
Total Gains
 
December 31, 2018
 
Total
  
Level 1
  
Level 2
  
Level 3
  
(Losses)
 
Fair value:
  
   
   
   
   
 
Impaired Originated & PNCI loans
 $
281
   
—  
   
—  
  $
281
  $
(294
)
Foreclosed assets
  
1,311
   
—  
   
—  
   
1,311
   
(8
)
                     
Total assets measured at fair value
 $
1,592
   
—  
   
—  
  $
1,592
  $
(302
)
                     
                
 
  
  
  
  
Total Gains
 
June 30, 2018
 
Total
  
Level 1
  
Level 2
  
Level 3
  
(Losses)
 
Fair value:
  
   
   
   
   
 
Impaired Originated & PNCI loans
 $
1,647
   
—  
   
—  
  $
1,647
  $
(505
)
Foreclosed assets
  
584
   
—  
   
—  
   
584
   
(90
)
                     
Total assets measured at fair value
 $
2,231
   
—  
   
—  
  $
2,231
  $
(595
)
                     
 
 
 
 
 
 
The impaired originated and PNCI loan amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When the Company identifies a collateral dependent loan as impaired, the Company measures the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If the Company determines that the value of the impaired loan is less than the recorded investment in the loan, the Company recognizes this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully
charged-off
is
zero
.
The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on real estate owned for fair value adjustments based on the fair value of the real estate.
The Company’s property appraisals are primarily based on the sales comparison approach and 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.
 
36
 
 
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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2019:
                 
June 30, 2019
 
Fair Value
(in thousands)
  
Valuation
Technique
  
Unobservable Inputs
  
Range,
Weighted Average
 
Impaired Originated & PNCI loans
 $
—
   
Sales comparison approach
Income approach
   
Adjustment for differences between comparable sales
Capitalization rate
   
Not meaningful
N/A
 
Foreclosed assets (Residential real estate)
 $
—
   
Sales comparison approach
   
Adjustment for differences between comparable sales
   
Not meaningful
 
 
 
 
 
 
 
 
 
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2018:
                 
December 31, 2018
 
Fair Value
(in thousands)
  
Valuation
Technique
  
Unobservable Inputs
  
Range,
Weighted Average
 
Impaired Originated & PNCI loans
 $
281
   
Sales comparison approach
Income approach
   
Adjustment for differences between comparable sales
Capitalization rate
   
(16.3%)
 -
 35.14%; 10.45% N/A
 
Foreclosed assets (Residential real estate)
 $
693
   
Sales comparison approach
   
Adjustment for differences between comparable sales
   
(21.83%) - 7.25%;
(3.75%)
 
Foreclosed assets (Commercial real estate)
 $
618
   
Sales comparison approach
   
Adjustment for differences between comparable sales
   
(65%) - 20%; (45%)
 
 
 
 
 
 
 
 
Fair values for financial instruments are management’s estimates of the values at which the instruments could be exchanged in a transaction between willing parties. The Company uses the exit price notion when measuring the fair value of financial instruments. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates.
                 
 
June 30, 2019
  
December 31, 2018
 
(in thouands)
 
Carrying
Amount
  
Fair
Value
  
Carrying
Amount
  
Fair
Value
 
Financial assets:
  
   
   
   
 
Level 1 inputs:
  
   
   
   
 
Cash and due from banks
 $
 106,939
  $
106,939
  $
119,781
  $
119,781
 
Cash at Federal Reserve and other banks
  
68,643
   
68,643
   
107,752
   
107,752
 
Level 2 inputs:
  
   
   
   
 
Securities held to maturity
  
412,524
   
415,276
   
444,936
   
437,370
 
Restricted equity securities
  
17,250
   
N/A
   
17,250
   
N/A
 
Loans held for sale
  
5,875
   
5,875
   
3,687
   
4,616
 
Level 3 inputs:
  
   
   
   
 
Loans, net
  
4,070,819
   
4,057,792
   
3,989,432
   
4,006,986
 
Financial liabilities:
  
   
   
   
 
Level 2 inputs:
  
   
   
   
 
Deposits
  
5,342,173
   
5,341,105
   
5,366,466
   
5,362,173
 
Other borrowings
  
13,292
   
13,292
   
15,839
   
15,839
 
Level 3 inputs:
  
   
   
   
 
Junior subordinated debt
  
57,132
   
56,209
   
57,042
   
62,610
 
             
(in thouands)
 
Contract
Amount
  
Fair
Value
  
Contract
Amount
  
Fair
Value
 
Off-balance
sheet:
  
   
   
   
 
Level 3 inputs:
  
   
   
   
 
Commitments
 $
 1,201,892
  $
12,019
  $
1,192,054
  $
11,921
 
Standby letters of credit
  
11,338
   
113
   
11,346
   
113
 
Overdraft privilege commitments
  
108,941
   
1,089
   
111,956
   
1,120
 
 
 
 
 
 
 
 
 
37
 
 
Table of Contents
 
Note 15 - Regulatory Matters
The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain
off-balance-sheet
items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. The following tables present actual and required capital ratios as of June 30, 2019 and December 31, 2018 for the Company and the Bank under applicable Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of June 30, 2019 and December 31, 2018 based on the then
phased-in
provisions of the Basel III Capital Rules. As of January 1, 2019, the minimum required capital levels of the Basel III Capital Rules have been fully
phased-in.
Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
                         
 
Actual
  
Minimum Capital
Required – Basel III
Fully Phased In
  
Required to be
Considered Well
Capitalized
 
 
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
 
 
(dollars in thousands)
 
As of June 30, 2019:
  
   
   
   
   
   
 
Total Capital (to Risk Weighted Assets):
  
   
   
   
   
   
 
Consolidated
 $
718,901
   
14.93
% $
 505,569
   
10.50
%  
N/A
   
N/A
 
Tri Counties Bank
 $
714,018
   
14.83
% $
 505,385
   
10.50
% $
 481,320
   
10.00
%
Tier 1 Capital (to Risk Weighted Assets):
  
   
   
   
   
   
 
Consolidated
 $
683,043
   
14.19
% $
 409,270
   
8.50
%  
N/A
   
N/A
 
Tri Counties Bank
 $
678,160
   
14.09
% $
 409,122
   
8.50
% $
 385,056
   
8.00
%
Common equity Tier 1 Capital (to Risk Weighted Assets):
  
   
   
   
   
 
Consolidated
 $
627,627
   
13.03
% $
 337,046
   
7.00
%  
N/A
   
N/A
 
Tri Counties Bank
 $
678,160
   
14.09
% $
 336,924
   
7.00
% $
 312,858
   
6.50
%
Tier 1 Capital (to Average Assets):
  
   
   
   
   
   
 
Consolidated
 $
683,043
   
11.08
% $
 246,599
   
4.00
%  
N/A
   
N/A
 
Tri Counties Bank
 $
678,160
   
11.00
% $
 246,594
   
4.00
% $
 308,242
   
5.00
%
 
 
 
 
 
 
 
 
                                 
 
Actual
  
Minimum Capital
Required – Basel III
Phase-in
Schedule
  
Minimum Capital
Required – Basel III
Fully Phased In
  
Required to be
Considered Well
Capitalized
 
 
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
 
 
(dollars in thousands)
 
As of December 31, 2018:
  
   
   
   
   
   
   
   
 
Total Capital (to Risk Weighted Assets):
  
   
   
   
   
   
   
   
 
Consolidated
 $
682,419
   
14.40
% $
 467,874
   
9.875
% $
 497,486
   
10.50
%  
N/A
   
N/A
 
Tri Counties Bank
 $
680,624
   
14.37
% $
 467,704
   
9.875
% $
 497,305
   
10.50
% $
 473,624
   
10.00
%
Tier 1 Capital (to Risk Weighted Assets):
  
   
   
   
   
   
   
   
 
Consolidated
 $
647,262
   
13.66
% $
 373,115
   
7.875
% $
 402,727
   
8.50
%  
N/A
   
N/A
 
Tri Counties Bank
 $
645,467
   
13.63
% $
 372,979
   
7.875
% $
 402,581
   
8.50
% $
 378,899
   
8.00
%
Common equity Tier 1 Capital (to Risk Weighted Assets):
  
   
   
   
   
   
   
 
Consolidated
 $
591,933
   
12.49
% $
 302,045
   
6.375
% $
 331,658
   
7.00
%  
N/A
   
N/A
 
Tri Counties Bank
 $
645,467
   
13.63
% $
 301,935
   
6.375
% $
 331,537
   
7.00
% $
 307,856
   
6.50
%
Tier 1 Capital (to Average Assets):
  
   
   
   
   
   
   
   
 
Consolidated
 $
647,262
   
10.68
% $
 242,452
   
4.000
% $
 242,452
   
4.00
%  
N/A
   
N/A
 
Tri Counties Bank
 $
645,467
   
10.65
% $
 242,447
   
4.000
% $
 242,447
   
4.00
% $
 303,059
   
5.00
%
 
 
 
 
 
 
 
As of June 30, 2019 and December 31, 2018, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules. Also, at June 30, 2019 and December 31, 2018, the Bank’s capital levels exceeded the minimum amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action.
The Basel III Capital Rules require for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the risk-based capital ratios but not the leverage ratio. At June 30, 2019, the Company and the Bank are in compliance with the capital conservation buffer requirement.
 
38
 
 
Table of Contents
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD-LOOKING STATEMENTS
Cautionary Statements Regarding Forward-Looking Information
Certain statements contained in this Form
10-Q
that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There can be no assurance that future developments affecting us will be the same as those anticipated by management. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of changes in financial services policies, laws and regulations; technological changes; mergers and acquisitions (including costs or difficulties related to integration of acquired companies); changes in the level of our nonperforming assets and charge-offs; any deterioration in values of California real estate, both residential and commercial; the effect of changes in accounting standards and practices; possible other-than-temporary impairment of securities held by us; changes in consumer spending, borrowing and savings habits; our ability to attract deposits and other sources of liquidity; changes in the financial performance and/or condition of our borrowers; the impact of competition from other financial service providers; the possibility that any of the anticipated benefits of our recent merger with FNB Bancorp (“FNBB”) will not be realized or will not be realized within the expected time period, or that integration of FNBB’s operations will be more costly or difficult than expected; the challenges of integrating and retaining key employees; unanticipated regulatory or judicial proceedings; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and our ability to manage the risks involved in the foregoing. Additional factors that could cause results to differ materially from those described above can be found in in Part II Item 1A of this report and our Annual Report on Form
10-K
for the year ended December 31, 2018, which is on file with the Securities and Exchange Commission (the “SEC”) and available in the “Investor Relations” section of our website, https://www.tcbk.com/investor-relations and in other documents we file with the SEC.
General
As TriCo Bancshares (referred to in this report as “we”, “our” or the “Company”) has not commenced any business operations independent of Tri Counties Bank (the “Bank”), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully
tax-equivalent
(“FTE”) basis. The Company believes the use of these
non-generally
accepted accounting principles
(non-GAAP)
measures provides additional clarity in assessing its results, and the presentation of these measures on a FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a
non-FTE
basis in the Part I – Financial Information section of this Form
10-Q,
and a reconciliation of the FTE and
non-FTE
presentations is provided below in the discussion of net interest income.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an
on-going
basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 of the financial statements included in the Company’s annual report of Form
10-K
for the year ended December 31, 2018.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.
 
39
 
 
Table of Contents
 
Financial Highlights
Performance highlights and other developments for the Company included the following:
 •For the three and six months ended June 30, 2019, the Company’s return on average assets was 1.44% and 1.43%, respectively, and the return on average equity was 10.65% and 10.71%, respectively.
 
 •As of June 30, 2019, the Company reported total loans, total assets and total deposits of $4.10 billion, $6.40 billion and $5.34 billion, respectively.
 
 •The loan to deposit ratio was 76.8% as of June 30, 2019 as compared to 74.3% at March 31, 2019 and 77.2% at June 30, 2018.
 
 •Net interest margin grew 34 basis points to 4.48% on a tax equivalent basis as compared to 4.14% in the quarter ended June 30, 2018 and increased 2 basis points from the trailing quarter.
 
 •
Non-interest
bearing deposits as a percentage of total deposits were 33.3% at June 30, 2019, as compared to 32.4% at March 31, 2019 and 33.6% at June 30, 2018.
 
 •The average rate of interest paid on deposits, including noninterest-bearing deposits, remained low but increased slightly to 0.22% for the second quarter of 2019 as compared with 0.20% for the trailing quarter, and an increase of 10 basis points from the average rate paid during the same quarter of the prior year.
 
 •
Non-performing
assets to total assets were 0.35% at June 30, 2019 as compared to 0.34% as of March 31, 2019 and 0.47% at December 31, 2018.
 
 •The balance of nonperforming loans increased by $1.0 million, however recoveries on previously
charged-off
loans were $0.3 million and loans past due thirty days or more decreased by $2.18 million during the quarter.
 
 •The efficiency ratio remained flat at 60.15% as compared to the trailing quarter, which had an efficiency ratio of 60.10%.
 
 
40
 
 
Table of Contents
 
TRICO BANCSHARES
Financial Summary
(In thousands, except per share amounts; unaudited)
                 
 
Three months ended
June 30,
  
Six months ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Net interest income
 $
64,315
  $
45,869
  $
128,185
  $
90,855
 
(Provision for) benefit from reversal of loan losses
  
(537
)  
638
   
1,063
   
874
 
Noninterest income
  
13,578
   
12,174
   
25,442
   
24,464
 
Noninterest expense
  
(46,852
)  
(37,870
)  
(92,365
)  
(76,032
)
Provision for income taxes
  
(7,443
)  
(5,782
)  
(16,538
)  
(11,222
)
                 
Net income
 $
23,061
  $
15,029
  $
45,787
  $
28,939
 
                 
Per Share Data:
  
   
   
   
 
Basic earnings per share
 $
0.76
  $
0.65
  $
1.50
  $
1.26
 
Diluted earnings per share
 $
0.75
  $
0.65
  $
1.49
  $
1.24
 
Dividends paid
 $
0.19
  $
0.17
  $
0.38
  $
0.34
 
Book value at period end
  
   
  $
28.71
  $
22.27
 
                 
Average common shares outstanding
  
30,458
   
22,983
   
30,441
   
22,970
 
Average diluted common shares outstanding
  
30,643
   
23,276
   
30,650
   
23,280
 
Shares outstanding at period end
  
   
   
30,503
   
23,004
 
                 
At period end:
  
   
   
   
 
Loans, net
  
   
   
4,070,819
   
3,116,789
 
Total investment securities
  
   
   
1,566,720
   
1,251,776
 
Total assets
  
   
   
6,395,172
   
4,863,153
 
Total deposits
  
   
   
5,342,173
   
4,077,222
 
Other borrowings
  
   
   
13,292
   
152,839
 
Shareholders’ equity
  
   
   
875,886
   
512,344
 
                 
Financial Ratios:
  
   
   
   
 
During the period (annualized):
  
   
   
   
 
Return on average assets
  
1.44
%  
1.25
%  
1.43
%  
1.21
%
Return on average equity
  
10.65
%  
11.78
%  
10.71
%  
11.39
%
Net interest margin
1
  
4.48
%  
4.14
%  
4.47
%  
4.14
%
Efficiency ratio
  
60.1
%  
65.2
%  
60.1
%  
65.9
%
Average equity to average assets
  
13.6
%  
10.6
%  
13.3
%  
10.6
%
At end of period:
  
   
   
   
 
Equity to assets
  
   
   
13.70
%  
10.54
%
Total capital to risk-sdjusted assets
  
   
   
14.93
%  
13.91
%
 
1
Fully taxable equivalent (FTE)
 
 
41
 
 
Table of Contents
 
Results of Operations
Overview
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report.
                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Net interest income (FTE)
 $
64,613
  $
46,182
  $
128,804
  $
91,480
 
(Provision for) Benefit from reversal of loan losses
  
(537
)  
638
   
1,063
   
874
 
Noninterest income
  
13,578
   
12,174
   
25,442
   
24,464
 
Noninterest expense
  
(46,852
)  
(37,870
)  
(92,365
)  
(76,032
)
Provision for income taxes (FTE)
  
(7,741
)  
(6,095
)  
(17,157
)  
(11,847
)
                 
Net income
 $
23,061
  $
15,029
  $
45,787
  $
28,939
 
                 
 
The Company reported net income of $23,061,000 and $45,787,000 for the quarter and six months ended June 30, 2019, compared to $15,029,000 and $28,939,000 for the quarter and six months ended June 30, 2018, respectively. Diluted earnings per share were $0.75 and $1.49 for the quarter and six months ended June 30, 2019, compared to $0.65 and $1.24 for the quarter and six months ended June 30, 2018.
Net Interest Income
The Company’s primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Following is a summary of the components of FTE net income for the periods indicated (dollars in thousands):
                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Interest income
 $
68,180
  $
48,478
  $
135,637
  $
95,599
 
Interest expense
  
(3,865
)  
(2,609
)  
(7,452
)  
(4,744
)
FTE adjustment
  
298
   
313
   
619
   
625
 
                 
Net interest income (FTE)
 $
64,613
  $
46,182
  $
128,804
  $
91,480
 
                 
Net interest margin (FTE)
  
4.48
%  
4.14
%  
4.47
%  
4.14
%
                 
Acquired loans discount accretion, net:
  
   
   
   
 
Amount (included in interest income)
 $
1,904
  $
559
  $
3,559
  $
1,191
 
Effect on average loan yield
  
0.19
%  
0.07
%  
0.18
%  
0.08
%
Effect on net interest margin (FTE)
  
0.13
%  
0.05
%  
0.12
%  
0.05
%
 
Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income. During the three and six months ended June 30, 2019, purchased loan discount accretion was $1,904,000 and $3,599,000, respectively. During the three and six months ended June 30, 2018, purchased loan discount accretion was $559,000 and $1,191,000, respectively. The increase in discount accretion is directly attributable to the acquisition of FNB Bancorp in July 2018.
 
42
 
 
Table of Contents
 
Summary of Average Balances, Yields/Rates and Interest Differential
The following table presents, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
                         
 
For the three months ended
 
 
June 30, 2019
  
June 30, 2018
 
 
Average
Balance
  
Interest
Income/
Expense
  
Rates
Earned
/Paid
  
Average
Balance
  
Interest
Income/
Expense
  
Rates
Earned
/Paid
 
Assets:
  
   
   
   
   
   
 
Loans
 $
 4,044,044
  $
55,492
   
5.49
%  $
 3,104,126
  $
39,304
   
5.06
%
Investment securities - taxable
  
1,432,550
   
10,762
   
3.00
%   
1,122,534
   
7,736
   
2.76
%
Investment securities - nontaxable
(1)
  
140,562
   
1,358
   
3.86
%   
136,126
   
1,355
   
3.98
%
                         
Total investments
  
1,573,112
   
12,120
   
3.08
%   
1,258,660
   
9,091
   
2.89
%
Cash at Federal Reserve and other banks
  
147,810
   
866
   
2.34
%   
94,874
   
396
   
1.67
%
                         
Total interest-earning assets
  
5,764,966
   
68,478
   
4.75
%   
4,457,660
   
48,791
   
4.38
%
Other assets
  
620,923
   
   
   
356,863
   
   
 
                         
Total assets
 $
 6,385,889
   
   
  $
 4,814,523
   
   
 
                         
Liabilities and shareholders’ equity:
  
   
   
   
   
   
 
Interest-bearing demand deposits
 $
 1,276,388
  $
289
   
0.09
%  $
995,528
  $
214
   
0.09
%
Savings deposits
  
1,888,234
   
1,306
   
0.28
%   
1,393,121
   
427
   
0.12
%
Time deposits
  
441,116
   
1,404
   
1.27
%   
313,556
   
593
   
0.76
%
                         
Total interest-bearing deposits
  
3,605,738
   
2,999
   
0.33
%   
2,702,205
   
1,234
   
0.18
%
Other borrowings
  
17,963
   
37
   
0.82
%   
139,307
   
586
   
1.68
%
Junior subordinated debt
  
57,222
   
829
   
5.79
%   
56,928
   
789
   
5.54
%
                         
Total interest-bearing liabilities
  
3,680,923
   
3,865
   
0.42
%   
2,898,440
   
2,609
   
0.36
%
Noninterest-bearing deposits
  
1,765,141
   
   
   
1,339,905
   
   
 
Other liabilities
  
73,541
   
   
   
65,745
   
   
 
Shareholders’ equity
  
866,284
   
   
   
510,433
   
   
 
                         
Total liabilities and shareholders’ equity
 $
6,385,889
   
   
  $
4,814,523
   
   
 
                         
Net interest spread
(2)
  
   
   
4.33
%   
   
   
4.02
%
Net interest income and interest margin
(3)
  
  $
64,613
   
4.48
%   
  $
46,182
   
4.14
%
                         
 
(1)
Fully taxable equivalent (FTE)
 
(2)
Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
 
(3)
Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.
 
In general, the change in average balances of assets and liabilities were significantly impacted by the July 6, 2018 acquisition of FNB Bancorp. For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. Organic growth, inclusive of seasonal fluctuation, also contributed to the year-over-year balance sheet changes. In addition to the balance sheet changes which resulted from the acquisition of FNB Bancorp, total assets grew by $68,819,000 (1.4%) between June 2018 and June 2019. This growth was led by $122,691,000 (3.9%) of organic loan growth which was funded by $273,016,000 (6.7%) in organic deposit growth. The following is a comparison of the year over year change in certain assets and liabilities:
                         
 
As of June 30,
  
  
Acquired
  
Organic
  
Organic 
 
($‘s in thousands)
 
2019
  
2018
  
$ Change
  
Balances
  
$ Change
  
% Change
 
Ending balances
  
   
   
   
   
   
 
Total assets
 $
6,395,172
  $
4,863,153
  $
1,532,019
  $
1,463,200
  $
68,819
   
1.4
%
Total loans
  
4,103,687
   
3,146,313
   
957,374
   
834,683
   
122,691
   
3.9
%
Total investments
  
1,566,720
   
1,251,776
   
314,944
   
335,667
   
(20,723
)  
(1.7
%)
Total deposits
 $
5,342,173
  $
4,077,222
  $
1,264,951
  $
991,935
  $
273,016
   
6.7
%
 
 
43
 
 
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The following table presents, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
                         
 
For the six months ended
 
 
June 30, 2019
  
June 30, 2018
 
 
Average
Balance
  
Interest
Income/
Expense
  
Rates
Earned
/Paid
  
Average
Balance
  
Interest
Income/
Expense
  
Rates
Earned
/Paid
 
Assets:
  
   
   
   
   
   
 
Loans
 $
 4,033,954
  $
 109,889
   
5.45
% $
 3,066,152
  $
 77,353
   
5.05
%
Investment securities - taxable
  
1,428,951
   
21,677
   
3.03
%  
1,123,964
   
15,394
   
2.74
%
Investment securities - nontaxable
(1)
  
141,397
   
2,753
   
3.89
%  
136,143
   
2,708
   
3.98
%
                         
Total investments
  
1,570,348
   
24,430
   
3.11
%  
1,260,107
   
18,102
   
2.87
%
Cash at Federal Reserve and other banks
  
158,164
   
1,937
   
2.45
%  
92,869
   
769
   
1.66
%
                         
Total interest-earning assets
  
5,762,466
   
136,256
   
4.73
%  
4,419,128
   
96,224
   
4.35
%
Other assets
  
643,592
   
   
   
358,747
   
   
 
                         
Total assets
 $
 6,406,058
   
   
  $
 4,777,875
   
   
 
                         
Liabilities and shareholders’ equity:
  
   
   
   
   
   
 
Interest-bearing demand deposits
 $
 1,274,882
  $
 576
   
0.09
% $
994,867
  $
 425
   
0.09
%
Savings deposits
  
1,907,677
   
2,439
   
0.26
%  
1,382,249
   
838
   
0.12
%
Time deposits
  
441,447
   
2,703
   
1.22
%  
310,035
   
1,067
   
0.69
%
                         
Total interest-bearing deposits
  
3,624,006
   
5,718
   
0.32
%  
2,687,151
   
2,330
   
0.17
%
Other borrowings
  
16,736
   
50
   
0.60
%  
123,544
   
928
   
1.50
%
Junior subordinated debt
  
57,086
   
1,684
   
5.90
%  
56,905
   
1,486
   
5.22
%
                         
Total interest-bearing liabilities
  
3,697,828
   
7,452
   
0.40
%  
2,867,600
   
4,744
   
0.33
%
Noninterest-bearing deposits
  
1,754,973
   
   
   
1,336,070
   
   
 
Other liabilities
  
98,570
   
   
   
65,982
   
   
 
Shareholders’ equity
  
854,687
   
   
   
508,223
   
   
 
                         
Total liabilities and shareholders’ equity
 $
 6,406,058
   
   
  $
 4,777,875
   
   
 
                         
Net interest spread
(2)
  
   
   
4.33
%  
   
   
4.02
%
Net interest income and interest margin
(3)
  
  $
 128,804
   
4.47
%  
  $
 91,480
   
4.14
%
                         
 
 
(1)
Fully taxable equivalent (FTE)
 
 
(2)
Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
 
 
(3)
Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.
 
 
As noted above, the change in average balances of assets and liabilities were significantly impacted by the July 6, 2018 acquisition of FNB Bancorp. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable
six-month
periods from 154% to 156%, which contributed to the growth in net interest income and net interest margin of $37,324,000 and 33 basis points, respectively.
Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth, for the period identified, a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (in thousands).
 
44
 
 
Table of Contents
 
             
 
Three months ended June 30, 2019
compared with three months 
ended June 30, 2018
 
 
Volume
  
Rate
  
Total
 
Increase in interest income:
  
   
   
 
Loans
 $
 12,681
  $
 3,507
  $
 16,188
 
Investment securities
(1)
 
  
2,391
   
638
   
3,029
 
Cash at Federal Reserve and other banks
  
273
   
197
   
470
 
             
Total interest-earning assets
  
15,345
   
4,342
   
19,687
 
             
Increase (decrease) in interest expense:
  
   
   
 
Interest-bearing demand deposits
  
63
   
12
   
75
 
Savings deposits
  
194
   
685
   
879
 
Time deposits
  
303
   
508
   
811
 
Other borrowings
  
(346
)  
(203
)  
(549
)
Junior subordinated debt
  
4
   
36
   
40
 
             
Total interest-bearing liabilities
  
218
   
1,038
   
1,256
 
             
Increase in net interest income
 $
 15,127
  $
 3,304
  $
 18,431
 
             
 
 
(1)
Fully taxable equivalent (FTE)
 
 
             
 
Six months ended June 30, 2019
compared with six months 
ended June 30, 2018
 
 
Volume
  
Rate
  
Total
 
Increase in interest income:
  
   
   
 
Loans
 $
 25,971
  $
 6,565
  $
 32,536
 
Investment securities
(1)
 
  
4,733
   
1,595
   
6,328
 
Cash at Federal Reserve and other banks
  
695
   
473
   
1,168
 
             
Total interest-earning assets
  
31,399
   
8,633
   
40,032
 
             
Increase (decrease) in interest expense:
  
   
   
 
Interest-bearing demand deposits
  
126
   
25
   
151
 
Savings deposits
  
408
   
1,193
   
1,601
 
Time deposits
  
576
   
1,060
   
1,636
 
Other borrowings
  
(518
)  
(360
)  
(878
)
Junior subordinated debt
  
4
   
194
   
198
 
             
Total interest-bearing liabilities
  
596
   
2,112
   
2,708
 
             
Increase in net interest income
 $
 30,803
  $
 6,521
  $
 37,324
 
             
 
 
(1)
Fully taxable equivalent (FTE)
 
 
The following commentary regarding net interest income, interest income and interest expense may be best understood while referencing the
Summary of Average Balances, Yields/Rates and Interest Differential
and the
Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid
shown above.
Net interest income (FTE) during the three months ended June 30, 2019 increased $18,431,000 or 39.9% to $64,613,000 compared to $46,182,000 during the three months ended June 30, 2018. The increase in net interest income (FTE) was due primarily to an increase in the average balance of loans, which contributed an additional $12,681,000 in interest income. As discussed above, increases in average balances were primarily the result of the FNB Bancorp acquisition. Increases in market rates and purchase discount accretion added $3,304,000 to net interest income, due to increases in rates earned on interest-earnings assets outpacing increases paid in interest-bearing liabilities.
 
45
 
 
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The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, has increased by 0.50% to 5.50% at June 30, 2019 as compared to 5.00% at June 30, 2018. As compared to the same quarter in the prior year, average loan yields increased 43 basis points from 5.06% during the three months ended June 30, 2018 to 5.49% during the three months ended June 30, 2019. Of the 43 basis point increase in yields on loans, 31 basis points was attributable to increases in market rates while 12 basis points was from increased accretion of purchased loans.
As of June 30, 2019, the Bank’s $4,152,540,000 principal balance of loans, net of charge-offs, and not including deferred loan fees and purchase discounts, was made up of loans with principal balances totaling $1,352,921,000 that have fixed interest rates, and $2,799,619,000 of loans with interest rates that are variable.
The organic growth in deposits was driven primarily by normal and expected seasonal trends as well as the impact of deposit customer’s receipt of insurance proceeds from the property and casualty losses incurred in connection with the wildfires in Northern California. This growth in deposits allowed for the repayment of overnight borrowings resulting in a reduction in interest expense of $549,000 which was partially offset by the changes in volumes and rates associated with deposit products. During the twelve months ended June 30, 2019, the Federal Funds Target Rate was increased two times in 25 basis point increments from 2.00% to 2.50%. The Company’s cost of interest-bearing deposits increased from 33 basis points during the six months ended June 30, 2018 to 40 basis points during the six months ended June 30, 2019.
Net interest income (FTE) during the six months ended June 30, 2019 increased $37,324,000 or 40.8% to $128,804,000 compared to $91,480,000 during the six months ended June 30, 2018. The increase in net interest income (FTE) was due primarily to an increase in the average balance of loans, which was partially offset by an increase in the average balance of interest-bearing liabilities and a 7 basis point increase in the average rate paid on interest-bearing liabilities.
During the six months ended June 30, 2019, the average balance of loans increased by $967,802,000 or 31.6% to $4,033,954,000. The increase in net interest income was further benefited by an increase in the
year-to-date
purchased loan discount accretion from $1,191,000 during the six months ended June 30, 2018 to $3,559,000 during the six months ended June 30, 2019. This increase in purchased loan discount accretion benefited loan yields by 8 basis points, and net interest margin by 5 basis points. The 7 basis point increase in the average rate paid on interest-bearing liabilities was primarily due to increases in market rates that increased the rates the Company pays on its time deposits. However, the growth in total average deposits during the comparable
six-month
periods allowed for the repayment of overnight borrowings which, combined with changes in related rates, contributed to a decrease in interest expense of $878,000.
Asset Quality and Loan Loss Provisioning
The Company continued to experience improvement in the overall credit quality of its loan portfolio. At June 30, 2019, total nonperforming loans decreased to $21,690,000 or 0.53% of total loans from $27,494,000 or 0.68% of total loans as of December 31, 2018.
The Company recorded provision for loan losses of $537,000 during the three months ended June 30, 2019 as compared to a benefit from the reversal of provision of $638,000 in the same quarter of the prior year. The provision was necessitated in part by loan growth of $69,356,000 during the quarter and partially offset by $267,000 in net recoveries on previously
charged-off
loans during the second quarter of 2019 as compared to net recoveries of $189,000 in the second quarter of 2018. Additionally, while the Company remains cautious about the risks associated with trends in California real estate prices, the duration of economic trends and concentrations of credit, the qualitative factors associated with these measures reduced the level of calculated required reserves by approximately $632,000 during the quarter ended June 30, 2019, therefore, changes in those risks could result in additional levels of provisioning being required in the future.
 
46
 
 
Table of Contents
 
Noninterest Income
The following table summarizes the Company’s noninterest income for the periods indicated (in thousands):
                 
 
Three months ended June 30,
  
  
 
(dollars in thousands)
 
2019
  
2018
  
$ Change
  
% Change
 
ATM and interchange fees
 $
5,404
  $
4,510
  $
894
   
19.8
%
Service charges on deposit accounts
  
4,182
   
3,613
   
569
   
15.7
%
Other service fees
  
619
   
630
   
(11
)  
(1.7
%)
Mortgage banking service fees
  
475
   
511
   
(36
)  
(7.0
%)
Change in value of mortgage servicing rights
  
(552
)  
(36
)  
(516
)  
1433.3
%
                 
Total service charges and fees
  
10,128
   
9,228
   
900
   
9.8
%
                 
Increase in cash value of life insurance
  
746
   
656
   
90
   
13.7
%
Asset management and commission income
  
739
   
810
   
(71
)  
(8.8
%)
Gain on sale of loans
  
575
   
666
   
(91
)  
(13.7
%)
Lease brokerage income
  
239
   
200
   
39
   
19.5
%
Sale of customer checks
  
135
   
138
   
(3
)  
(2.2
%)
Gain on sale of foreclosed assets
  
197
   
17
   
180
   
1058.8
%
Gain (loss) on marketable equity securities
  
42
   
(23
)  
65
   
(282.6
%)
Loss on disposal of fixed assets
  
(42
)  
(41
)  
(1
)  
2.4
%
Other
  
819
   
523
   
296
   
56.6
%
                 
Total other noninterest income
  
3,450
   
2,946
   
504
   
17.1
%
                 
Total noninterest income
 $
 13,578
  $
 12,174
  $
 1,404
   
11.5
%
                 
          
 
Six months ended June 30,
  
  
 
(dollars in thousands)
 
2019
  
2018
  
$ Change
  
% Change
 
ATM and interchange fees
 $
9,985
  $
8,745
  $
1,240
   
14.2
%
Service charges on deposit accounts
  
8,062
   
7,392
   
670
   
9.1
%
Other service fees
  
1,390
   
1,344
   
46
   
3.4
%
Mortgage banking service fees
  
958
   
1,028
   
(70
)  
(6.8
%)
Change in value of mortgage servicing rights
  
(1,197
)  
75
   
(1,272
)  
(1696.0
%)
                 
Total service charges and fees
  
19,198
   
18,584
   
614
   
3.3
%
                 
Increase in cash value of life insurance
  
1,521
   
1,264
   
257
   
20.3
%
Asset management and commission income
  
1,381
   
1,686
   
(305
)  
(18.1
%)
Gain on sale of loans
  
987
   
1,292
   
(305
)  
(23.6
%)
Lease brokerage income
  
459
   
328
   
131
   
39.9
%
Sale of customer checks
  
275
   
239
   
36
   
15.1
%
Gain on sale of foreclosed assets
  
199
   
388
   
(189
)  
(48.7
%)
Gain (loss) on marketable equity securities
  
78
   
(70
)  
148
   
(211.4
%)
Loss on disposal of fixed assets
  
(80
)  
(54
)  
(26
)  
48.1
%
Other
  
1,424
   
807
   
617
   
76.5
%
                 
Total other noninterest income
  
6,244
   
5,880
   
364
   
6.2
%
                 
Total noninterest income
 $
 25,442
  $
 24,464
  $
978
   
4.0
%
                 
 
 
Noninterest income increased $1,404,000 (11.5%) and $978,000 (4.0%) during the three and six month periods ended June 30, 2019 as compared to the three and six month periods ended June 30, 2018, respectively. The increase was primarily driven by growth in usage and, due largely in part to the acquisition of FNB Bancorp, an increase in customers and accounts that generate fee revenues. In addition, during the three and six month periods ended June 30, 2019 the company recorded other noninterest income associated with death benefit insurance proceeds of $696,000 and $728,000, respectively. These increases were offset by valuation changes in the Company’s mortgage servicing right asset of $516,000 and $1,272,000, respectively and declines in gains on sale of loans caused by less volume of mortgage loans sold of $91,000 and $305,000, respectively for the three and six month periods ended June 30, 2019 as compared to the three and six month periods ended June 30, 2018. Additional partial offsets to the overall increase were due to declines in asset management and commission income of $71,000 and $305,000, respectively during the three and six month periods ended June 30, 2019 as compared to the three and six month periods ended June 30, 2018.
 
47
 
 
Table of Contents
 
Noninterest Expense
The following table summarizes the Company’s noninterest expense for the periods indicated (dollars in thousands):
                 
 
Three months ended June 30,
  
  
 
 
2019
  
2018
  
$ Change
  
% Change
 
Base salaries, net of deferred loan origination costs
 $
 17,211
  $
 14,429
  $
2,782
   
19.3
%
Incentive compensation
  
3,706
   
2,159
   
1,547
   
71.7
%
Benefits and other compensation costs
  
5,802
   
4,865
   
937
   
19.3
%
                 
Total salaries and benefits expense
  
26,719
   
21,453
   
5,266
   
24.5
%
                 
Occupancy
  
3,738
   
2,720
   
1,018
   
37.4
%
Data processing and software
  
3,354
   
2,679
   
675
   
25.2
%
Equipment
  
1,752
   
1,637
   
115
   
7.0
%
Intangible amortization
  
1,431
   
339
   
1,092
   
322.1
%
Advertising
  
1,533
   
1,035
   
498
   
48.1
%
ATM and POS network charges
  
1,270
   
1,437
   
(167
)  
(11.6
%)
Professional fees
  
1,057
   
774
   
283
   
36.6
%
Telecommunications
  
773
   
681
   
92
   
13.5
%
Regulatory assessments and insurance
  
490
   
417
   
73
   
17.5
%
Merger and acquisition expense
  
—  
   
601
   
(601
)  
(100.0
%)
Postage
  
315
   
301
   
14
   
4.7
%
Operational losses
  
226
   
252
   
(26
)  
(10.3
%)
Courier service
  
412
   
224
   
188
   
83.9
%
Other miscellaneous expense
  
3,782
   
3,320
   
462
   
13.9
%
                 
Total other noninterest expense
  
20,133
   
16,417
   
3,716
   
22.6
%
                 
Total noninterest expense
 $
 46,852
  $
 37,870
  $
8,982
   
23.7
%
                 
Average full time equivalent staff
  
1,138
   
1,001
   
137
   
13.7
%
          
 
Six months ended June 30,
  
  
 
 
2019
  
2018
  
$ Change
  
% Change
 
Base salaries, net of deferred loan origination costs
 $
 33,968
  $
 28,391
  $
5,577
   
19.6
%
Incentive compensation
  
6,273
   
4,611
   
1,662
   
36.0
%
Benefits and other compensation costs
  
11,606
   
10,103
   
1,503
   
14.9
%
                 
Total salaries and benefits expense
  
51,847
   
43,105
   
8,742
   
20.3
%
                 
Occupancy
  
7,512
   
5,401
   
2,111
   
39.1
%
Data processing and software
  
6,703
   
5,193
   
1,510
   
29.1
%
Equipment
  
3,619
   
3,188
   
431
   
13.5
%
Intangible amortization
  
2,862
   
678
   
2,184
   
322.1
%
Advertising
  
2,864
   
1,873
   
991
   
52.9
%
ATM and POS network charges
  
2,593
   
2,663
   
(70
)  
(2.6
%)
Professional fees
  
1,896
   
1,546
   
350
   
22.6
%
Telecommunications
  
1,570
   
1,382
   
188
   
13.6
%
Regulatory assessments and insurance
  
1,001
   
847
   
154
   
18.2
%
Merger and acquisition expense
  
—  
   
1,077
   
(1,077
)  
(100.0
%)
Postage
  
625
   
659
   
(34
)  
(5.2
%)
Operational losses
  
451
   
546
   
(95
)  
(17.4
%)
Courier service
  
682
   
491
   
191
   
38.9
%
Other miscellaneous expense
  
8,140
   
7,383
   
757
   
10.3
%
                 
Total other noninterest expense
  
40,518
   
32,927
   
7,591
   
23.1
%
                 
Total noninterest expense
 $
 92,365
  $
 76,032
  $
 16,333
   
21.5
%
                 
Average full time equivalent staff
  
1,137
   
1,001
   
136
   
13.6
%
 
 
 
48
 
 
Table of Contents
 
Salary and benefit expenses increased $5,266,000 (24.5%) to $26,719,000 during the three months ended June 30, 2019 compared to $21,453,000 during the three months ended June 30, 2018. Base salaries, net of deferred loan origination costs increased $2,782,000 (19.3%) to $17,211,000. The increase in base salaries was due primarily to a 13.7% increase in average full time equivalent employees, largely attributable to the acquisition of FNB Bancorp, to 1,138 from 1,001 in the
year-ago
quarter. In addition, annual merit increases impacted the quarter over quarter comparison but contributed to less than 3.0% of the annual increase.
Total other noninterest expense increased $3,716,000 (22.6%) to $20,133,000 during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase in other noninterest expense was due primarily to increased overhead operating costs related to the additional branches as a result of the prior year acquisition of FNB Bancorp. Highlighting those increases were intangible amortization, occupancy, data processing and software, and advertising expenses, which increased by $1,092,000, $1,018,000, $675,000 and $498,000, respectively, as compared to the prior year quarter. The increases in noninterest expenses were partially offset by decreased merger & acquisition expenses of $601,000 during the comparable quarterly periods.
The increase in total noninterest expense of $16,333,000 (21.5%) to $92,365,000 for the six month period ended June 30, 2019 compared to $76,032,000 for the same period in 2018 was also primarily attributable to the acquisition of FNB Bancorp, including the growth in full time equivalent staff and the expanded volume of operational activities.
Income Taxes
The Company’s effective tax rate was 24.4% for the quarter ended June 30, 2019 as compared to 27.8% for the same quarter in the prior year. The Company’s effective tax rate was 26.5% for the six months ended June 30, 2019 as compared to 27.9% for the six months ended June 30, 2018. The decrease in effective tax rates for the 2019 periods is primarily attributable to the increase in nontaxable income related to death benefit insurance proceeds of $696,000 and $728,000 during the three and six month periods ended June 30, 2019, respectively.
 
49
 
 
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Financial Condition
Investment Securities
Investment securities available for sale increased $18,958,000 to $1,133,994,000 as of June 30, 2019, compared to December 31, 2018. This increase is primarily attributable to an increase in fair value of $22,263,000. There were no sales or transfers of
available-for-sale
investment securities during the six month periods ended June 30, 2019 and 2018.
The following table presents the available for sale debt securities portfolio by major type as of June 30, 2019 and December 31, 2018:
                 
(dollars in thousands)
 
June 30, 2019
  
December 31, 2018
 
 
Fair Value
  
%
  
Fair Value
  
%
 
Debt securities available for sale:
  
   
   
   
 
Obligations of U.S. government agencies
 $
 630,911
   
55.6
% $
 629,981
   
56.5
%
Obligations of states and political subdivisions
  
125,980
   
11.1
%  
126,072
   
11.3
%
Corporate bonds
  
4,521
   
0.4
%  
4,478
   
0.4
%
Asset backed securities
  
372,582
   
32.9
%  
354,505
   
31.8
%
                 
Total debt securities available for sale
 $
 1,133,994
   
100.0
% $
 1,115,036
   
100.0
%
                 
 
 
Investment securities held to maturity decreased $32,412,000 to $412,524,000 as of June 30, 2019, as compared to December 31, 2018. This decrease is attributable to principal repayments of $31,938,000, and amortization of net purchase price premiums of $474,000.
The following table presents the held to maturity investment securities portfolio by major type as of June 30, 2019 and December 31, 2018:
                 
(dollars in thousands)
 
June 30, 2019
  
December 31, 2018
 
 
Amortized
Cost
  
%
  
Amortized
Cost
  
%
 
Debt securities held to maturity:
  
   
   
   
 
Obligations of U.S. government and agencies
 $
 398,714
   
96.7
% $
 430,343
   
96.7
%
Obligations of states and political subdivisions
  
13,810
   
3.3
%  
14,593
   
3.3
%
                 
Total debt securities held to maturity
 $
 412,524
   
100
% $
 444,936
   
100.0
%
                 
 
 
Loans
The Company concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial loans), consumer loans, commercial loans (including agricultural loans), and real estate construction loans. The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Company and prevailing money market rates indicative of the Company’s cost of funds.
The majority of the Company’s loans are direct loans made to individuals, farmers and local businesses. The Company relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.
The following table shows the Company’s loan balances, net deferred loan costs and discounts, as of the dates indicated:
                 
(dollars in thousands)
 
June 30,
2019
  
December 31,
2018
 
Real estate mortgage
 $
 3,178,730
   
77.5
% $
 3,143,100
   
78.1
%
Consumer
  
434,388
   
10.6
%  
418,982
   
10.4
%
Commercial
  
276,045
   
6.7
%  
276,548
   
6.9
%
Real estate construction
  
214,524
   
5.2
%  
183,384
   
4.6
%
                 
Total loans
 $
 4,103,687
   
100
% $
 4,022,014
   
100
%
                 
 
 
At June 30, 2019 loans, including net deferred loan costs and discounts, totaled $4,103,687,000 which was a $81,673,000 (2.0%) increase over the balances at December 31, 2018.
 
50
 
 
Table of Contents
 
Asset Quality and Nonperforming Assets
Nonperforming Assets
The following tables set forth the amount of the Company’s nonperforming assets as of the dates indicated. “Performing nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:
         
(dollars in thousands)
 
June 30,
2019
  
December 31,
2018
 
Performing nonaccrual loans
 $
17,825
  $
22,689
 
Nonperforming nonaccrual loans
  
3,844
   
4,805
 
         
Total nonaccrual loans
  
21,669
   
27,494
 
Loans 90 days past due and still accruing
  
22
   
—  
 
         
Total nonperforming loans
  
21,691
   
27,494
 
Foreclosed assets
  
1,548
   
2,280
 
         
Total nonperforming assets
 $
23,239
  $
29,774
 
         
Nonperforming assets to total assets
  
0.36
%  
0.47
%
Nonperforming loans to total loans
  
0.53
%  
0.68
%
Allowance for loan losses to nonperforming loans
  
152
%  
119
%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed
  
1.97
%  
2.11
%
                 
 
June 30, 2019
 
(dollars in thousands)
 
Originated
  
PNCI
  
PCI
  
Total
 
Performing nonaccrual loans
 $
11,773
  $
3,410
  $
2,642
  $
17,825
 
Nonperforming nonaccrual loans
  
2,360
   
1,087
   
397
   
3,844
 
                 
Total nonaccrual loans
  
14,133
   
4,497
   
3,039
   
21,669
 
Loans 90 days past due and still accruing
  
22
   
—  
   
—  
   
22
 
                 
Total nonperforming loans
  
14,155
   
4,497
   
3,039
   
21,691
 
Foreclosed assets
  
1,103
   
—  
   
445
   
1,548
 
                 
Total nonperforming assets
 $
15,258
  $
4,497
  $
3,484
  $
23,239
 
                 
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans
 $
790
  $
—  
  $
294
  $
1,084
 
Nonperforming assets to total assets
  
0.24
%  
0.07
%  
0.05
%  
0.36
%
Nonperforming loans to total loans
  
0.35
%  
0.11
%  
0.07
%  
0.53
%
Allowance for loan losses to nonperforming loans
  
228
%  
13
%  
0.33
%  
152
%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed
  
1.29
%  
3.60
%  
36.11
%  
1.97
%
 
51
 
 
Table of Contents
 
                 
 
December 31, 2018
 
(dollars in thousands)
 
Originated
  
PNCI
  
PCI
  
Total
 
Performing nonaccrual loans
 $
16,573
  $
1,269
  $
4,847
  $
22,689
 
Nonperforming nonaccrual loans
  
2,843
   
1,589
   
373
   
4,805
 
                 
Total nonaccrual loans
  
19,416
   
2,858
   
5,220
   
27,494
 
Loans 90 days past due and still accruing
  
—  
   
—  
   
—  
   
—  
 
                 
Total nonperforming loans
  
19,416
   
2,858
   
5,220
   
27,494
 
Foreclosed assets
  
1,490
   
—  
   
790
   
2,280
 
                 
Total nonperforming assets
 $
20,906
  $
2,858
  $
6,010
  $
29,774
 
                 
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans
 $
800
  $
—  
  $
—  
  $
800
 
Nonperforming assets to total assets
  
0.33
%  
0.04
%  
0.09
%  
0.47
%
Nonperforming loans to total loans
  
0.48
%  
0.07
%  
0.13
%  
0.68
%
Allowance for loan losses to nonperforming loans
  
164
%  
23.3
%  
2.34
%  
119
%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed
  
1.39
%  
3.48
%  
33.69
%  
2.11
%
Changes in nonperforming assets during the three months ended June 30, 2019
                         
(in thousands):
 
Balance at
June 30,
2019
  
New NPA /
Valuation
Adjustments
  
Pay-downs
/Sales
/Upgrades
  
Charge-offs/
Write-downs
  
Transfers to
Foreclosed
Assets
  
Balance at
March 31,
2019
 
Real estate mortgage:
  
   
   
   
   
   
 
Residential
 $
4,350
  $
2,187
  $
(503
) $
(2
) $
—  
  $
2,668
 
Commercial
  
8,678
   
579
   
(207
)  
—  
   
—  
   
8,306
 
Consumer
  
   
   
   
   
   
 
Home equity lines
  
2,476
   
67
   
(25
)  
—  
   
—  
   
2,434
 
Home equity loans
  
2,047
   
168
   
(708
)  
—  
   
—  
   
2,587
 
Other consumer
  
74
   
81
   
(40
)  
(37
)  
—  
   
70
 
Commercial
  
4,066
   
1,126
   
(422
)  
(138
)  
—  
   
3,500
 
Construction:
  
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                         
Total nonperforming loans
  
21,691
   
4,208
   
(1,905
)  
(177
)  
—  
   
19,565
 
Foreclosed assets
  
1,548
   
(63
)  
(704
)  
—  
   
—  
   
2,315
 
                         
Total nonperforming assets
 $
23,239
  $
4,145
  $
(2,609
) $
(177
) $
—  
  $
21,880
 
                         
The table above does not include deposit overdraft charge-offs.
Nonperforming assets increased during the second quarter of 2019 by $1,359,000 (6.2%) to $23,239,000 at June 30, 2019 compared to $21,880,000 March 31, 2019. The increase in nonperforming assets during the second quarter of 2019 was primarily the result of
pay-downs
and upgrades of nonperforming loans of $1,905,000, write-downs of $177,000 on nonperforming loans, and sales of foreclosed assets of $704,000, that were offset by new nonperforming loans of $4,208,000 and an increase in the valuation of $63,000 in foreclosed property.
The $4,208,000 of new nonperforming loans added during the second quarter of 2019 was mainly comprised of 4 loans totaling $3,746,000, of which $2,765,000 consisted of 3 real estate loans which management believes are sufficiently secured by collateral and $981,000 related to a loan secured by commercial vehicles. Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the specific loan loss reserves associated with these loans is sufficient as of June 30, 2019.
Loan charge-offs during the three months ended June 30, 2019
In the second quarter of 2019, the Company recorded $177,000 in loan charge-offs and $116,000 in deposit overdraft charge-offs less $514,000 in loan recoveries and $46,000 in deposit overdraft recoveries resulting in $267,000 of net recoveries.
Total charge-offs were generally comprised of individual charges of less than $250,000 each. Generally, losses are triggered by
non-performance
by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying collateral less any estimated costs associated with the disposition of the collateral.
 
52
 
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Changes in nonperforming assets during the six months ended June 30, 2019
                         
(in thousands):
 
Balance at
June 30,
2019
  
New NPA /
Valuation
Adjustments
  
Pay-downs
/Sales
/Upgrades
  
Charge-offs/
Write-downs
  
Transfers to
Foreclosed
Assets
  
Balance at
December 31,
2018
 
Real estate mortgage:
  
   
   
   
   
   
 
Residential
 $
4,350
  $
2,187
  $
(573
) $
(2
) $
(116
) $
2,854
 
Commercial
  
8,678
   
846
   
(7,214
)  
—  
   
—  
   
15,046
 
Consumer
  
   
   
   
   
   
 
Home equity lines
  
2,476
   
91
   
(364
)  
—  
   
—  
   
2,749
 
Home equity loans
  
2,047
   
200
   
(1,116
)  
—  
   
—  
   
2,963
 
Other consumer
  
74
   
145
   
(41
)  
(37
)  
—  
   
7
 
Commercial
  
4,066
   
1,399
   
(581
)  
(627
)  
—  
   
3,875
 
Construction:
  
   
   
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                         
Total nonperforming loans
  
21,691
   
4,868
   
(9,889
)  
(666
)  
(116
)  
27,494
 
Foreclosed assets
  
1,548
   
35
   
(883
)  
—  
   
116
   
2,280
 
                         
Total nonperforming assets
 $
23,239
  $
4,903
  $
(10,772
) $
(666
) $
—  
  $
29,774
 
                         
The table above does not include deposit overdraft charge-offs.
Nonperforming assets decreased during the first half of 2019 by $6,535,000 (22.0%) to $23,239,000 at June 30, 2019 compared to $29,774,000 at December 31, 2018. The decrease in nonperforming assets during the first half of 2019 was primarily the result of
pay-downs
and upgrades of nonperforming loans of $9,889,000, write-downs of $666,000 on nonperforming loans, and sales of foreclosed assets of $883,000, that were partially offset by new nonperforming assets of $4,902,000.
The $6,535,000 in reduction of nonperforming loans during the first half of 2019 was mainly comprised of decreases within commercial real estate, and included payoffs of three loans to two relationships with a combined balance $6,818,000. The decrease in home equity lines and loans were comprised of decreases of $1,189,000 from 98 home equity lines and loans. These decreases were offset by increases in commercial loans of $191,000 and consumer loans of $66,000.
Loan charge-offs during the six months ended June 30, 2019
In the first half of 2019, the Company recorded $791,000 in loan charge-offs and $228,000 in deposit overdraft charge-offs less $2,266,000 in loan recoveries and $102,000 in deposit overdraft recoveries resulting in $1,349,000 of net recoveries.
The Components of the Allowance for Loan Losses
The following table sets forth the allowance for loan losses as of the dates indicated:
         
(dollars in thousands)
 
2019
  
2018
 
Allowance for originated and PNCI loan losses:
  
   
 
Environmental factors allowance
 $
12,455
  $
11,577
 
Formula allowance
  
17,961
   
18,689
 
         
Total allowance for originated and PNCI loan losses
  
30,416
   
30,266
 
Allowance for impaired loans
  
2,442
   
2,194
 
Allowance for PCI loan losses
  
10
   
122
 
         
Total allowance for loan losses
 $
32,868
  $
32,582
 
         
Allowance for loan losses to loans
  
0.80
%  
0.81
%
For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see
“Asset Quality and Loan Loss Provisioning”
at
“Results of Operations”
, above. Based on the current conditions of the loan portfolio, management believes that the $32,868,000 allowance for loan losses at June 30, 2019 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
 
53
 
 
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The following table summarizes the allocation of the allowance for loan losses between loan types and by percentage of the total allowance for loan losses as of the dates indicated:
                 
Real estate mortgage
 $
14,675
   
44.7
% $
15,620
   
47.9
%
Consumer
  
8,552
   
26.0
%  
8,375
   
25.7
%
Commercial
  
6,745
   
20.5
%  
6,090
   
18.7
%
Real estate construction
  
2,896
   
8.8
%  
2,497
   
7.7
%
                 
Total allowance for loan losses
 $
32,868
   
100.0
% $
32,582
   
100.0
%
                 
The following table summarizes the allocation of the allowance for loan losses as a percentage of the total loans for each loan category as of the dates indicated:
                 
Real estate mortgage
 $
3,178,730
   
0.46
% $
3,143,100
   
0.50
%
Consumer
  
434,388
   
1.97
%  
418,982
   
2.00
%
Commercial
  
276,045
   
2.44
%  
276,548
   
2.20
%
Real estate construction
  
214,524
   
1.35
%  
183,384
   
1.36
%
                 
Total allowance for loan losses
 $
4,103,687
   
0.80
% $
4,022,014
   
0.81
%
                 
 
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Table of Contents
 
The following table summarizes the activity in the allowance for loan losses for the periods indicated (dollars in thousands):
                 
(in thousands)
 
2019
  
2018
  
2019
  
2018
 
Allowance for loan losses:
  
   
   
   
 
Balance at beginning of period
 $
32,064
  $
29,973
  $
32,582
  $
30,323
 
Reversal of provision for loan losses
  
537
   
(638
)  
(1,063
)  
(874
)
Loans charged off:
  
   
   
   
 
Real estate mortgage:
  
   
   
   
 
Residential
  
(2
)  
(51
)  
(2
)  
(52
)
Commercial
  
—  
   
(15
)  
—  
   
(15
)
Consumer:
  
   
   
   
 
Home equity lines
  
—  
   
(24
)  
—  
   
(104
)
Home equity loans
  
—  
   
—  
   
—  
   
—  
 
Other consumer
  
(153
)  
(174
)  
(360
)  
(368
)
Commercial
  
(138
)  
(54
)  
(657
)  
(259
)
Construction:
  
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
 
                 
Total loans charged off
  
(293
)  
(318
)  
(1,019
)  
(798
)
Recoveries of previously
charged-off
loans:
  
   
   
   
 
Real estate mortgage:
  
   
   
   
 
Residential
  
3
   
—  
   
5
   
—  
 
Commercial
  
10
   
21
   
1,391
   
36
 
Consumer:
  
   
   
   
 
Home equity lines
  
183
   
317
   
278
   
526
 
Home equity loans
  
171
   
23
   
258
   
37
 
Other consumer
  
108
   
66
   
183
   
144
 
Commercial
  
85
   
80
   
253
   
130
 
Construction:
  
   
   
   
 
Residential
  
—  
   
—  
   
—  
   
—  
 
Commercial
  
—  
   
—  
   
—  
   
—  
 
                 
Total recoveries of previously charged off loans
  
560
   
507
   
2,368
   
873
 
                 
Net recoveries (charge-offs)
  
267
   
189
   
1,349
   
75
 
                 
Balance at end of period
 $
32,868
  $
29,524
  $
32,868
  $
29,524
 
                 
Average total loans
 $
 4,044,044
  $
 3,104,126
  $
 4,033,954
  $
 3,066,152
 
                 
Ratios (annualized):
  
   
   
   
 
Net charge-offs (recoveries) during period to average loans outstanding during period
  
(0.03
)%  
(0.02
)%  
(0.13
)%  
(0.01
)%
Benefit from reversal of loan losses to average loans outstanding during period
  
0.05
%  
(0.08
)%  
(0.11
)%  
(0.11
)%
 
55
 
 
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Foreclosed Assets, Net of Allowance for Losses
The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the period indicated:
                     
(in thousands)
 
Balance at
June 30,
2019
  
Sales
  
Valuation
Adjustments
  
Transfers
from Loans
  
Balance at
December 31,
2018
 
Land & Construction
 $
445
  $
 —  
  $
  —  
  $
  —  
  $
445
 
Residential real estate
  
1,015
   
(883
)  
40
   
116
   
1,742
 
Commercial real estate
  
88
   
—  
   
(5
)  
—  
   
93
 
                     
Total foreclosed assets
 $
 1,548
  $
 (883
) $
35
  $
116
  $
 2,280
 
                     
 
 
Deposits
During the three and six months ended June 30, 2019, the Company’s deposits decreased $88,089,000 and $24,293,000 respectively to $5,342,173,000. Included in the June 30, 2019 and December 31, 2018 certificate of deposit balances are $50,000,000 and $60,000,000, respectively, from the State of California. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and creditworthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company.
Off-Balance
Sheet Arrangements
See Note 8 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s commitments and contingencies
including
off-balance-sheet
arrangements.
Capital Resources
The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management.
The Company adopted and announced a stock repurchase plan on August 21, 2007 for the repurchase of up to 500,000 shares of the Company’s common stock from time to time as market conditions allow. The 500,000 shares authorized for repurchase under this plan represented approximately 3.2% of the Company’s approximately 15,815,000 common shares outstanding as of August 21, 2007. During the six months ended June 30, 2019, the Company did not repurchase any shares under this plan. This plan has no stated expiration date for the repurchases. As of June 30, 2019, the Company had repurchased 196,566 shares under this plan, which left 303,434 shares available for repurchase under the plan. Shares that are repurchased in accordance with the provisions of a Company stock option plan or equity compensation plan are not counted against the number of shares repurchased under the repurchase plan adopted on August 21, 2007.
The Company’s primary capital resource is shareholders’ equity, which was $875,886,000 at June 30, 2019. This amount represents an increase of $48,513,000 (5.9%) from December 31, 2018, the net result of comprehensive income for the period of $61,468,000, the effect of equity compensation vesting of $815,000, and the exercise of stock options of $2,499,000, that were partially offset by dividends paid of $11,575,000, and repurchase of common stock of $4,694,000. The Company’s ratio of equity to total assets was 13.7% and 13.0% as of June 30, 2019 and December 31, 2018, respectively. We believe that the Company and the Bank were in compliance with applicable minimum capital requirements set forth in the final Basel III Capital rules as of June 30, 2019. The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:
                 
 
June 30, 2019
  
December 31, 2018
 
 
Ratio
  
Minimum
Regulatory
Requirement
  
Ratio
  
Minimum
Regulatory
Requirement
 
Total capital
  
14.93
%   
10.50
%   
14.40
%   
9.25
% 
Tier I capital
  
14.19
%   
8.50
%   
13.66
%   
7.25
% 
Common equity Tier 1 capital
  
13.03
%   
7.00
%   
12.49
%   
5.75
% 
Leverage
  
11.08
%   
4.00
%   
10.68
%   
4.00
% 
 
 
See Note 9 and Note 15 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.
 
56
 
 
Table of Contents
 
Liquidity
The Company’s principal source of asset liquidity is cash at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities available for sale. At June 30, 2019, cash at Federal Reserve and other banks in excess of reserve requirements and investment securities available for sale totaled $1,136,946,000, or 17.8% of total assets. The Company’s profitability during the first six months of 2019 generated cash flows from operations of $33,867,000 compared to $32,944,000 during the first six months of 2018. Net cash used in investing activities was $47,403,000 and $144,813,000 during the six months ended June 30, 2019 and 2018, respectively. Financing activities used $38,415,000 during the six months ended June 30, 2019, compared to net cash provided by financing activities of $90,503,000 during the six months ended June 30, 2018. Deposit balance changes accounted for ($24,293,000) and $68,091,000 of financing funds activity during the six months ended June 30, 2019 and 2018, respectively. Dividends paid used $11,575,000 and $7,813,000 of cash during the six months ended June 30, 2019 and 2018, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.
 
57
 
 
Table of Contents
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
The Company’s assessment of market risk as of June 30, 2019 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form
10-K
for the year ended December 31, 2018.
Item 4.
Controls and Procedures
 
 
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2019. Disclosure controls and procedures, as defined in Rule
 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2019.
During the three and six months ended June 30, 2019, there were no changes in our internal controls or in other factors that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Item 1A – Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I—Item 1A—Risk Factors” in our Form
10-K
for the year ended December 31, 2018 which are incorporated by reference herein. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows the repurchases made by the Company or any affiliated purchaser (as defined in Rule
10b-18(a)(3)
under the Exchange Act) during the periods indicated:
                 
Period
 
(a) Total number of
shares purchased 
(1)
  
(b) Average price
paid per share
  
(c) Total number of shares
purchased as of part
of publicly announced
plans or programs
  
(d) Maximum number
of shares that may
yet be purchased under
the plans or programs 
(2)
 
April 1-30, 2019
  
38,087
  $
39.91
   
—  
   
303,434
 
May 1-31, 2019
  
12,487
  $
39.88
   
—  
   
303,434
 
June 1-30, 2019
  
43,181
  $
38.28
   
—  
   
303,434
 
                 
Total
  
93,755
  $
39.16
   
—  
   
303,434
 
 
 
(1)
Includes shares purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans. See Note 9 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchased under equity compensation plans.
 
 
(2)
Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans.
 
 
 
58
 
 
Table of Contents
 
Item 6 – Exhibits
EXHIBIT INDEX
     
Exhibit 
    No.    
  
Exhibit
     
 
  31.1
  
Rule 13a-14(a)/15d-14(a) Certification of CEO
     
 
  31.2
  
Rule 13a-14(a)/15d-14(a) Certification of CFO
     
 
  32.1
  
Section 1350 Certification of CEO
     
 
  32.2
  
Section 1350 Certification of CFO
     
 
  99.1*
  
Form of Restricted Stock Unit Agreement and Grant Notice for Non-Employee Directors pursuant to TriCo’s 2019 Equity Incentive Plan.
     
 
  99.2*
  
Form of Restricted Stock Unit Agreement and Grant Notice for Employees pursuant to TriCo’s 2019 Equity Incentive Plan.
     
 
  99.3*
  
Form of Performance Award Agreement and Grant Notice pursuant to TriCo’s 2019 Equity Incentive Plan.
     
 
101.INS
  
XBRL Instance Document
     
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
     
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
     
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
     
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
     
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
*Management contract or compensatory plan or arrangement.
 
 
 
59
 
 
Table of Contents
 
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
       
 
 
 
TRICO BANCSHARES
 
 
 
(Registrant)
       
Date: August 9, 2019
 
 
 
/s/ Peter G. Wiese
 
 
 
Peter G. Wiese
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Duly authorized officer and principal financial and chief accounting officer)
 
 
 
60

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