UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

~~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~~September 30, ~~2019~~

2019

☐
☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from

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~~

☐

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~~

☐

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.

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~~

☒

~~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~~

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

___________________


CA						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

The NASDAQ Stock Market

☒

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

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: 30,520,725 shares outstanding as of November 4, 2019.

Table of Contents

TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS

Table of Contents

PART I – FINANCIAL INFORMATION

~~Item 1.~~

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

unaudited


	September 30, 2019		December 31, 2018
Assets:
Cash and due from banks	$	118,960	$	119,781
Cash at Federal Reserve and other banks	140,087		107,752
Cash and cash equivalents	259,047		227,533
Investment securities:
Marketable equity securities	2,974		2,874
Available for sale debt securities	984,080		1,115,036
Held to maturity debt securities	393,449		444,936
Restricted equity securities	17,250		17,250
Loans held for sale	7,604		3,687
Loans	4,182,348		4,022,014
Allowance for loan losses	(31,537)		(32,582)
Total loans, net	4,150,811		3,989,432
Premises and equipment, net	87,424		89,347
Cash value of life insurance	117,088		117,318
Accrued interest receivable	18,205		19,412
Goodwill	220,872		220,972
Other intangible assets, net	24,988		29,280
Operating leases, right-of-use	28,957		—
Other assets	72,134		75,364
Total assets	$	6,384,883	$	6,352,441
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand	$	1,777,357	$	1,760,580
Interest-bearing	3,518,050		3,605,886
Total deposits	5,295,407		5,366,466
Accrued interest payable	2,847		1,997
Operating lease liability	28,494		—
Other liabilities	87,867		83,724
Other borrowings	16,423		15,839
Junior subordinated debt	57,180		57,042
Total liabilities	5,488,218		5,525,068
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred stock, no par value: 1,000,000 shares authorized, 0 issued and outstanding at September 30, 2019 and December 31, 2018	—		—
Common stock, no par value: 50,000,000 shares authorized; 30,512,187 and 30,417,223 issued and outstanding at September 30, 2019 and December 31, 2018, respectively	543,415		541,762
Retained earnings	351,751		303,490
Accumulated other comprehensive income (loss), net of tax	1,499		(17,879)
Total shareholders’ equity	896,665		827,373
Total liabilities and shareholders’ equity	$	6,384,883	$	6,352,441

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2019		2018		2019		2018
Interest and dividend income:
Loans, including fees	$	56,999	$	53,102	$	166,888	$	130,455
Investments:
Taxable securities	9,864		9,189		30,876		23,949
Tax exempt securities	961		1,189		3,095		3,272
Dividends	308		459		973		1,093
Interest bearing cash at Federal Reserve and other banks	757		615		2,694		1,384
Total interest and dividend income	68,889		64,554		204,526		160,153
Interest expense:
Deposits	3,050		2,072		8,768		4,402
Other borrowings	334		1,178		384		2,106
Junior subordinated debt	817		815		2,501		2,301
Total interest expense	4,201		4,065		11,653		8,809
Net interest income	64,688		60,489		192,873		151,344
Provision for (benefit from reversal of) loan losses	(329)		2,651		(1,392)		1,777
Net interest income after provision for (benefit from reversal of) loan losses	65,017		57,838		194,265		149,567
Non-interest income:
Service charges and fees	10,590		9,743		29,788		28,327
Gain on sale of loans	1,236		539		2,223		1,831
Gain on sale of investment securities	107		207		107		207
Asset management and commission income	721		728		2,102		2,414
Increase in cash value of life insurance	773		732		2,294		1,996
Other	681		387		2,820		1,691
Total non-interest income	14,108		12,336		39,334		36,466
Non-interest expense:
Salaries and related benefits	26,899		25,823		78,746		68,928
Other	19,445		21,705		59,747		54,298
Total non-interest expense	46,344		47,528		138,493		123,226
Income before provision for income taxes	32,781		22,646		95,106		62,807
Provision for income taxes	9,386		6,476		25,924		17,698
Net income	$	23,395	$	16,170	$	69,182	$	45,109
Earnings per share:
Basic	$	0.77	$	0.54	$	2.27	$	1.78
Diluted	$	0.76	$	0.53	$	2.25	$	1.76

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.

Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2019		2018		2019		2018
Net income	$	23,395	$	16,170	$	69,182	$	45,109
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period	3,697		(5,917)		19,378		(20,941)
Change in minimum pension liability	—		81		—		241
Other comprehensive income (loss)	3,697		(5,836)		19,378		(20,700)
Comprehensive income	$	27,092	$	10,334	$	88,560	$	24,409

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.

Table of Contents

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				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
Balance at June 30, 2019																Balance at June 30, 2019	30,502,757	$	542,939	$	335,145	$	(2,198)	$	875,886
Net income								23,061						23,061		Net income				23,395				23,395
Other comprehensive income											6,729			6,729		Other comprehensive income						3,697		3,697
Stock option vesting														—		Stock option vesting								—
Stock options exercised		116,000			1,853									1,853		Stock options exercised	9,000	146						146
RSU vesting					289									289		RSU vesting		296						296
PSU vesting					129									129		PSU vesting		102						102
RSUs released		25,856												—		RSUs released	4,250							—
PSUs released		22,237												—		PSUs released	—							—
Repurchase of common stock		(93,755	)		(1,672	)		(1,988	)					(3,660	)	Repurchase of common stock	(3,820)	(68)		(79)				(147)
Dividends paid ($ 0.19 per share)								(5,793	)					(5,793	)
Dividends paid ($0.22 per share)																Dividends paid ($0.22 per share)				(6,710)				(6,710)
Three months ended September 30, 2019																Three months ended September 30, 2019	30,512,187	$	543,415	$	351,751	$	1,499	$	896,665

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		Balance at January 1, 2019	30,417,223	$	541,762	$	303,490	$	(17,879)	$	827,373
Net income								45,787						45,787		Net income				69,182				69,182
Other comprehensive income											15,681			15,681		Other comprehensive income						19,378		19,378
Stock option vesting														—		Stock option vesting								—
Stock options exercised		157,000			2,500									2,500		Stock options exercised	166,000	2,646						2,646
RSU vesting					567									567		RSU vesting		863						863
PSU vesting					248									248		PSU vesting		350						350
RSUs released		26,211												—		RSUs released	30,461							—
PSUs released		22,237												—		PSUs released	22,237							—
Repurchase of common stock		(119,914	)		(2,138	)		(2,557	)					(4,695	)	Repurchase of common stock	(123,734)	(2,206)		(2,636)				(4,842)
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

Dividends paid ($0.60 per share)																Dividends paid ($0.60 per share)				(18,285)				(18,285)
Nine months ended September 30, 2019																Nine months ended September 30, 2019	30,512,187	$	543,415	$	351,751	$	1,499	$	896,665

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

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				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
Balance at June 30, 2018																Balance at June 30, 2018	23,004,153	$	256,590	$	276,877	$	(21,123)	$	512,344
Net income								15,029						15,029		Net income				16,170				16,170
Adoption ASU 2016-01
Adoption ASU 2018-02
Adoption ASU2016-01																Adoption ASU2016-01				—		—		—
Adoption ASU2018-02																Adoption ASU2018-02				—		—		—
Other comprehensive loss											(3,918	)		(3,918	)	Other comprehensive loss						(5,836)		(5,836)
Stock option vesting					17									17		Stock option vesting		21						21
Stock options exercised		14,500			223									223		Stock options exercised	12,900	252						252
RSU vesting					233									233		RSU vesting		274						274
PSU vesting					81									81		PSU vesting		77						77
RSUs released		24,904												—		RSUs released	7,118							—
PSUs released		25,512												—		PSUs released	—							—
Issuance of common stock																Issuance of common stock	7,405,277	284,437						284,437
Repurchase of common stock		(17,086	)		(190	)		(477	)					(667	)	Repurchase of common stock	(11,630)	(132)		(321)				(453)
Dividends paid ($ 0.17 per share)								(3,910	)					(3,910	)
Dividends paid ($0.17 per share)																Dividends paid ($0.17 per share)				(5,171)				(5,171)
Three months ended September 30, 2018																Three months ended September 30, 2018	30,417,818	$	541,519	$	287,555	$	(26,959)	$	802,115

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		Balance at January 1, 2018	22,955,963	$	255,836	$	255,200	$	(5,228)	$	505,808
Net income								28,939						28,939		Net income				45,109				45,109
Adoption ASU 2016-01								(62	)		62			—		Adoption ASU 2016-01				(62)		62		—
Adoption ASU 2018-02								1,093			(1,093	)		—		Adoption ASU 2018-02				1,093		(1,093)		—
Other comprehensive loss											(14,864	)		(14,864	)	Other comprehensive loss						(20,700)		(20,700)
Stock option vesting					54									54		Stock option vesting		75						75
Stock options exercised		14,500			223									223		Stock options exercised	27,400	475						475
RSU vesting					471									471		RSU vesting		1,019						1,019
PSU vesting					197									197		PSU vesting		—						—
RSUs released		25,398												—		RSUs released	58,028							—
PSUs released		25,512												—		PSUs released	—							—
Issuance of common stock																Issuance of common stock	7,405,277	284,437						284,437
Repurchase of common stock		(17,220	)		(191	)		(480	)					(671	)	Repurchase of common stock	(28,850)	(323)		(801)				(1,124)
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

Dividends paid ($0.51 per share)																Dividends paid ($0.51 per share)				(12,984)				(12,984)
Nine months ended September 30, 2018																Nine months ended September 30, 2018	30,417,818	$	541,519	$	287,555	$	(26,959)	$	802,115

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)


	For the six months ended June 30,							For the nine months ended September 30,
	2019			2018				2019		2018
Operating activities:							Operating activities:
Net income	$	45,787		$	28,939		Net income	$	69,182	$	45,109
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization		3,582			3,229		Depreciation of premises and equipment, and amortization	5,273		4,914
Amortization of intangible assets		2,862			678		Amortization of intangible assets	4,293		2,068
Reversal of provision for loan losses		(1,063	)		(874	)
(Reversal of) provision for loan losses							(Reversal of) provision for loan losses	(1,392)		1,777
Amortization of investment securities premium, net		1,186			1,340		Amortization of investment securities premium, net	2,050		1,953
Gain on sale of investment securities							Gain on sale of investment securities	(107)		(207)
Originations of loans for resale		(46,936	)		(43,389	)	Originations of loans for resale	(92,002)		(63,912)
Proceeds from sale of loans originated for resale		45,407			45,437		Proceeds from sale of loans originated for resale	89,506		66,138
Gain on sale of loans		(987	)		(1,292	)	Gain on sale of loans	(2,223)		(1,831)
Change in market value of mortgage servicing rights		1,197			(75	)	Change in market value of mortgage servicing rights	1,652		(38)
Provision for losses on foreclosed assets		62			90		Provision for losses on foreclosed assets	56		89
Gain on transfer of loans to foreclosed assets		(97	)		—		Gain on transfer of loans to foreclosed assets	(151)		—
Gain on sale of foreclosed assets		(199	)		(388	)	Gain on sale of foreclosed assets	(246)		(390)
Loss on disposal of fixed assets		80			54		Loss on disposal of fixed assets	82		206
Increase in cash value of life insurance		(1,521	)		(1,264	)	Increase in cash value of life insurance	(2,294)		(1,996)
Gain on life insurance death benefit		(728	)		—		Gain on life insurance death benefit	(831)		—
(Gain) loss on marketable equity securities		(78	)		70		(Gain) loss on marketable equity securities	(100)		92
Equity compensation vesting expense		815			722		Equity compensation vesting expense	1,213		1,094
Change in:							Change in:
Interest receivable		(1,578	)		(481	)	Interest receivable	1,207		(5,820)
Interest payable		668			245		Interest payable	850		799
Amortization of operating lease ROUA							Amortization of operating lease ROUA	(463)		—
Other assets and liabilities, net		(14,592	)		(97	)	Other assets and liabilities, net	711		9,860

Net cash from operating activities		33,867			32,944		Net cash from operating activities	76,266		59,905

Investing activities:							Investing activities:
Cash acquired in acquisition, net of consideration paid							Cash acquired in acquisition, net of consideration paid	—		30,613
Proceeds from maturities of securities available for sale		39,845			32,906		Proceeds from maturities of securities available for sale	69,278		54,510
Proceeds from maturities of securities held to maturity		31,938			36,587		Proceeds from maturities of securities held to maturity	50,738		54,203
Proceeds from sale of available for sale securities							Proceeds from sale of available for sale securities	125,247		293,279
Purchases of securities available for sale		(37,253	)		(81,300	)	Purchases of securities available for sale	(37,253)		(370,843)
Net redemption of restricted equity securities							Net redemption of restricted equity securities	—		7,429
Loan origination and principal collections, net		(80,440	)		(131,073	)	Loan origination and principal collections, net	(159,991)		(178,596)
Proceeds from sale of other real estate owned		1,082			2,150		Proceeds from sale of other real estate owned	1,255		2,206
Proceeds from sale of premises and equipment		11			36		Proceeds from sale of premises and equipment	—		62
Purchases of premises and equipment		(2,586	)		(4,119	)	Purchases of premises and equipment	(3,070)		(5,736)

Net cash from investing activities		(47,403	)		(144,813	)

Net cash from (used by) investing activities							Net cash from (used by) investing activities	46,204		(112,873)
Financing activities:							Financing activities:
Net change in deposits		(24,293	)		68,091		Net change in deposits	(71,059)		92,051
Net change in other borrowings		(2,547	)		30,673		Net change in other borrowings	584		(4,335)
Repurchase of common stock, net		—			(448	)
Repurchase of common stock							Repurchase of common stock	(2,196)		(834)
Dividends paid		(11,575	)		(7,813	)	Dividends paid	(18,285)		(12,984)

Net cash used by financing activities		(38,415	)		90,503

Exercise of stock options							Exercise of stock options	—		185
Net cash used by (from) financing activities							Net cash used by (from) financing activities	(90,956)		74,083
Net change in cash and cash equivalents		(51,951	)		(21,366	)	Net change in cash and cash equivalents	31,514		21,115

Cash and cash equivalents and beginning of year		227,533			205,428

Cash and cash equivalents at end of year	$	175,582		$	184,062

Cash and cash equivalents, beginning of period							Cash and cash equivalents, beginning of period	227,533		205,428
Cash and cash equivalents, end of period							Cash and cash equivalents, end of period	$	259,047	$	226,543
Supplemental disclosure of noncash activities:							Supplemental disclosure of noncash activities:
Unrealized gain (loss) on securities available for sale	$	22,263		$	(21,304	)	Unrealized gain (loss) on securities available for sale	$	27,511	$	(29,704)
Loans transferred to foreclosed assets		116			—		Loans transferred to foreclosed assets	331		511
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes		4,695			671		Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes	4,842		1,124
Obligations incurred in conjunction with leased assets		156			—		Obligations incurred in conjunction with leased assets	156		—
Supplemental disclosure of cash flow activity:							Supplemental disclosure of cash flow activity:
Cash paid for interest expense		6,982			4,499		Cash paid for interest expense	10,803		8,010
Cash paid for income taxes		22,000			8,525		Cash paid for income taxes	25,950		11,625
Assets acquired in acquisition							Assets acquired in acquisition	—		1,456,505
Liabilities assumed in acquisition							Liabilities assumed in acquisition	—		1,172,068

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 ~~–Summary~~-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~~

5 capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including

~~two~~

2 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~~$1,717,000 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~~consolidated 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~~information 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~~

1 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.

Reclassification

Some items in the prior year consolidated financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

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.

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Accounting Standards Adopted in 2019

The Financial Accounting Standards Board (“FASB”) issued ASU No.

~~2016-02,~~

2016-2, Leases (Topic 842)

. ASU

~~2016-02,~~

2016-2, 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.~~

2019-1. 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

~~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~~

2016-2 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.~~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~~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~~ 2017-4, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment

~~(Topic~~(Topic 350):

ASU

~~2017-04~~

2017-4 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~~

2017-4 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.~~

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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~~

$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. Subsequently, the Company revised its estimate of other liabilities acquired in connection with the business combination and reduced the amount of goodwill by $100,000 to $156,561,000. 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~~nine months ended ~~June~~

September 30,

~~2018~~

. 2018. There have been

0 acquisition costs incurred during the ~~six~~nine months ended ~~June~~ September 30, 2019.

~~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	15,033
Short-term borrowings - Federal Home Loan Bank	165,000
Total liabilities assumed	1,171,968
Total net assets acquired	134,571
Goodwill recognized	$	156,561

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

~~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):

Table of Contents


						FNB Bancorp
		July 6, 2018
Value of stock consideration paid to FNB Bancorp Shareholders			$	$284,437	~~284,437~~
Cash consideration			6,695			~~6,695~~
Less:
~~Less:~~
Cost basis net assets acquired	114,030			~~114,030~~
Fair value adjustments:
Investments			(1,081)			~~(1,081~~	)
Loans			(22,390)			~~(22,390~~	)
Premises and equipment			21,590			~~21,590~~
Core deposit intangible			27,327			~~27,327~~
Deferred income taxes			(6,394)			~~(6,394~~	)
Other			1,489			~~1,389~~
Goodwill			$	156,561
~~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.

~~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			September 30, 2019
	Cost		Gains		Losses			Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)												(in thousands)
Debt Securities Available for Sale										Debt Securities Available for Sale
Obligations of U.S. government agencies	$	627,996	$	5,193	$	(2,278	)	$	630,911	Obligations of U.S. government agencies	$	488,080	$	8,004	$	(447)	$	495,637
Obligations of states and political subdivisions		123,626		2,462		(108	)		125,980	Obligations of states and political subdivisions	108,360		3,550		—		111,910
Corporate bonds		4,407		114		—			4,521	Corporate bonds	4,420		108		—		4,528
Asset backed securities		376,676		252		(4,346	)		372,582	Asset backed securities	376,683		192		(4,870)		372,005

Total debt securities available for sale	$	1,132,705	$	8,021	$	(6,732	)	$	1,133,994	Total debt securities available for sale	$	977,543	$	11,854	$	(5,317)	$	984,080

Debt Securities Held to Maturity										Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	398,714	$	3,661	$	(1,199	)	$	401,176	Obligations of U.S. government agencies	$	379,634	$	6,382	$	(482)	$	385,534
Obligations of states and political subdivisions		13,810		290		—			14,100	Obligations of states and political subdivisions	13,815		350		—		14,165

Total debt securities held to maturity	$	412,524	$	3,951	$	(1,199	)	$	415,276	Total debt securities held to maturity	$	393,449	$	6,732	$	(482)	$	399,699


	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

Table of Contents


	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair 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

Proceeds from the sales of investment securities totaled $125,247,000 and $293,279,000 during the nine months ended September 30, 2019 and 2018, respectively. Gross realized gains from the sale of investment securities totaled $335,000 and $207,000 during the three and nine months ended September 30, 2019 and 2018, respectively. Gross realized losses from the sale of investment securities totaled $228,000 during the three and nine months ended September 30, 2019. There were ~~no sales~~0 realized losses from the sale of investment securities during the ~~six~~three and nine months ended ~~June~~September 30, ~~2019 and~~ 2018. Investment securities with an aggregate carrying value of ~~$569,296,000~~$504,475,000 and $597,591,000 at ~~June~~September 30, 2019 and December 31, 2018, respectively, were pledged as collateral for specific borrowings, lines of credit or local agency deposits.

~~Table of Contents~~

The amortized cost and estimated fair value of debt securities at ~~June~~September 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~~September 30, 2019, obligations of U.S. government corporations and agencies with a cost basis totaling ~~$1,026,710,000~~$867,714,000 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~~September 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~~4.7 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 Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Due in one year	$	2,607	$	2,613	$	1,263	$	1,274
Due after one year through five years	14,986		15,401		—		—
Due after five years through ten years	46,263		47,273		20,747		21,035
Due after ten years	913,687		918,793		371,439		377,390
Totals	$	977,543	$	984,080	$	393,449	$	399,699

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
)

Table of Contents


	Less than 12 months						12 months or more						Total
September 30, 2019:	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
					(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	38,295	$	(374)	$	25,171	$	(73)	$	63,466	$	(447)


Asset backed securities	293,500		(4,432)		45,981		(438)		339,481		(4,870)
Total debt securities available for sale	$	331,795	$	(4,806)	$	71,152	$	(511)	$	402,947	$	(5,317)
Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	19,749	$	(94)	$	78,604	$	(388)	$	98,353	$	(482)


	Less than 12 months						12 months or more						Total
December 31, 2018:	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
					(in thousands)
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~~September 30, 2019, 4619 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of ~~(1.0%)~~0.59% from the Company’s amortized cost basis.

~~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~~September 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~~September 30, 2019, 2825 asset backed securities had unrealized losses with aggregate depreciation of ~~(1.3%)~~1.49% 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.~~

Table of Contents

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
)

follows:


	September 30, 2019
(in thousands)	Originated		PNCI		PCI		Total
Mortgage loans on real estate:
Residential 1-4 family	$	355,646	$	148,731	$	1,417	$	505,794
Commercial	2,109,309		626,924		5,129		2,741,362
Total mortgage loans on real estate	2,464,955		775,655		6,546		3,247,156
Consumer:
Home equity lines of credit	294,411		36,635		826		331,872
Home equity loans	27,034		2,915		421		30,370
Other	64,153		16,142		2		80,297
Total consumer loans	385,598		55,692		1,249		442,539
Commercial	256,379		19,569		2,510		278,458
Construction:
Residential	158,907		10,127		—		169,034
Commercial	44,704		457		—		45,161
Total construction loans	203,611		10,584		—		214,195
Total loans, net of deferred loan fees and discounts	$	3,310,543	$	861,500	$	10,305	$	4,182,348
Total principal balance of loans owed, net of charge-offs	$	3,319,052	$	892,608	$	16,274	$	4,227,934
Unamortized net deferred loan fees	(8,509)		—		—		(8,509)
Discounts to principal balance of loans owed, net of charge-offs	—		(31,108)		(5,969)		(37,077)
Total loans, net of unamortized deferred loan fees and discounts	$	3,310,543	$	861,500	$	10,305	$	4,182,348
Allowance for loan losses	$	(31,112)	$	(419)	$	(6)	$	(31,537)


	December 31, 2018
(in thousands)	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 loans 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 loans	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)

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,							Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018				2019		2018		2019		2018
Change in accretable yield:													Change in accretable yield:
Balance at beginning of period	$	5,747		$	6,022		$	6,059		$	6,137		Balance at beginning of period	$	5,318	$	5,871	$	6,059	$	6,137
Accretion to interest income		(109	)		(261	)		(410	)		(516	)	Accretion to interest income	(292)		(253)		(702)		(769)
Reclassification (to) from nonaccretable difference		(320	)		110			(331	)		250

Reclassification from (to) nonaccretable difference													Reclassification from (to) nonaccretable difference	71		(47)		(260)		203
Balance at end of period	$	5,318		$	5,871		$	5,318		$	5,871		Balance at end of period	$	5,097	$	5,571	$	5,097	$	5,571

~~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													Allowance for Loan Losses – Three Months Ended September 30, 2019
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance		(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Mortgage loans on real estate:													Mortgage loans on real estate:
Residential 1-4 family	$	2,500	$	(2	)	$	3	$	75		$	2,576	Residential 1-4 family	$	2,576	$	—	$	48	$	(218)	$	2,406
Commercial		12,330		—			10		(241	)		12,099	Commercial	12,099		(746)		126		462		11,941

Total mortgage loans on real estate		14,830		(2	)		13		(166	)		14,675	Total mortgage loans on real estate	14,675		(746)		174		244		14,347
Consumer:													Consumer:
Home equity lines of credit		6,015		—			183		(339	)		5,859	Home equity lines of credit	5,859		—		27		(152)		5,734
Home equity loans		1,286		—			171		(215	)		1,242	Home equity loans	1,242		(3)		156		(133)		1,262
Other		1,040		(153	)		108		456			1,451	Other	1,451		(188)		79		211		1,553

Total consumer loans		8,341		(153	)		462		(98	)		8,552	Total consumer loans	8,552		(191)		262		(74)		8,549
Commercial		6,078		(138	)		85		720			6,745	Commercial	6,745		(585)		84		(557)		5,687
Construction:													Construction:
Residential		2,408		—			—		130			2,538	Residential	2,538		—		—		119		2,657
Commercial		407		—			—		(49	)		358	Commercial	358		—		—		(61)		297

Total construction		2,815		—			—		81			2,896

Total construction loans													Total construction loans	2,896		—		—		58		2,954
Total	$	32,064	$	(293	)	$	560	$	537		$	32,868	Total	$	32,868	$	(1,522)	$	520	$	(329)	$	31,537


	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

Table of Contents


	Allowance for Loan Losses – Nine months ended September 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)	$	53	$	(321)	$	2,406
Commercial	12,944		(746)		1,517		(1,774)		11,941
Total mortgage loans on real estate	15,620		(748)		1,570		(2,095)		14,347
Consumer:
Home equity lines of credit	6,042		—		305		(613)		5,734
Home equity loans	1,540		(3)		414		(689)		1,262
Other	793		(548)		262		1,046		1,553
Total consumer loans	8,375		(551)		981		(256)		8,549
Commercial	6,090		(1,242)		337		502		5,687
Construction:
Residential	1,834		—		—		823		2,657
Commercial	663		—		—		(366)		297
Total construction loans	2,497		—		—		457		2,954
Total	$	32,582	$	(2,541)	$	2,888	$	(1,392)	$	31,537

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 – As of September 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	$	2,315	$	91	$	—	$	2,406
Commercial	11,915		26		—		11,941
Total mortgage loans on real estate	14,230		117		—		14,347
Consumer:
Home equity lines of credit	5,644		84		6		5,734
Home equity loans	1,216		46		—		1,262
Other	1,535		18		—		1,553
Total consumer loans	8,395		148		6		8,549
Commercial	4,428		1,259		—		5,687
Construction:
Residential	2,657		—		—		2,657
Commercial	297		—		—		297
Total construction loans	2,954		—		—		2,954
Total	$	30,007	$	1,524	$	6	$	31,537

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

Table of Contents


	Loans, Net of Unearned fees – As of September 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	$	499,620	$	4,757	$	1,417	$	505,794
Commercial	2,727,228		9,005		5,129		2,741,362
Total mortgage loans on real estate	3,226,848		13,762		6,546		3,247,156
Consumer:
Home equity lines of credit	329,129		1,917		826		331,872
Home equity loans	27,793		2,156		421		30,370
Other	80,146		149		2		80,297
Total consumer loans	437,068		4,222		1,249		442,539
Commercial	271,447		4,501		2,510		278,458
Construction:
Residential	169,034		—		—		169,034
Commercial	45,161		—		—		45,161
Total construction loans	214,195		—		—		214,195
Total	$	4,149,558	$	22,485	$	10,305	$	4,182,348

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 Loses – 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 loans	1,826		—		—		671		2,497
Total	$	30,323	$	(2,364)	$	2,040	$	2,583	$	32,582

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

Table of Contents


	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 loans	2,497		—		—		2,497
Total	$	30,266	$	2,194	$	122	$	32,582


	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 loans	183,384		—		—		183,384
Total	$	3,979,744	$	28,047	$	14,223	$	4,022,014

Table of Contents


	Allowance for Loan Losses – As of June 30, 2018									Allowance for Loan Losses – Three Months Ended September 30, 2018
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total allowance for loan losses		(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Mortgage loans on real estate:									Mortgage loans on real estate:
Residential 1-4 family	$	1,794	$	147	$	50	$	1,991	Residential 1-4 family	$	1,991	$	(25)	$	—	$	434	$	2,400
Commercial		11,466		82		59		11,607	Commercial	11,607		—		15		1,257		12,879

Total mortgage loans on real estate		13,260		229		109		13,598	Total mortgage loans on real estate	13,598		(25)		15		1,691		15,279
Consumer:									Consumer:
Home equity lines of credit		4,754		287		7		5,048	Home equity lines of credit	5,048		(172)		151		194		5,221
Home equity loans		1,340		192		—		1,532	Home equity loans	1,532		(23)		139		(55)		1,593
Other		503		54		—		557	Other	557		(229)		63		309		700

Total consumer loans		6,597		533		7		7,137	Total consumer loans	7,137		(424)		353		448		7,514
Commercial		4,228		2,127		23		6,378	Commercial	6,378		(693)		202		337		6,224
Construction:									Construction:
Residential		1,434		—		—		1,434	Residential	1,434		—		—		192		1,626
Commercial		977		—		—		977	Commercial	977		—		—		(17)		960

Total construction		2,411		—		—		2,411

Total construction loans									Total construction loans	2,411		—		—		175		2,586
Total	$	26,496	$	2,889	$	139	$	29,524	Total	$	29,524	$	(1,142)	$	570	$	2,651	$	31,603


	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


	Allowance for Loan Losses – Nine months ended September 30, 2018
(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,317	$	(77)	$	—	$	160	$	2,400
Commercial	11,441		(15)		51		1,402		12,879
Total mortgage loans on real estate	13,758		(92)		51		1,562		15,279
Consumer:
Home equity lines of credit	5,800		(276)		677		(980)		5,221
Home equity loans	1,841		(23)		176		(401)		1,593
Other	586		(597)		208		503		700
Total consumer loans	8,227		(896)		1,061		(878)		7,514
Commercial	6,512		(952)		331		333		6,224
Construction:
Residential	1,184		—		—		442		1,626
Commercial	642		—		—		318		960
Total construction loans	1,826		—		—		760		2,586
Total	$	30,323	$	(1,940)	$	1,443	$	1,777	$	31,603

Table of Contents


	Allowance for Loan Losses – As of September 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	$	2,313	$	57	$	30	$	2,400
Commercial	12,552		268		59		12,879
Total mortgage loans on real estate	14,865		325		89		15,279
Consumer:
Home equity lines of credit	5,046		168		7		5,221
Home equity loans	1,418		175		—		1,593
Other	597		103		—		700
Total consumer loans	7,061		446		7		7,514
Commercial	4,353		1,857		14		6,224
Construction:
Residential	1,626		—		—		1,626
Commercial	960		—		—		960
Total construction loans	2,586		—		—		2,586
Total	$	28,865	$	2,628	$	110	$	31,603


	Loans, Net of Unearned fees – As of September 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	$	517,935	$	4,781	$	1,698	$	524,414
Commercial	2,586,659		13,244		7,885		2,607,788
Total mortgage loans on real estate	3,104,594		18,025		9,583		3,132,202
Consumer:
Home equity lines of credit	327,649		2,188		1,299		331,136
Home equity loans	37,840		2,406		447		40,693
Other	49,171		243		42		49,456
Total consumer loans	414,660		4,837		1,788		421,285
Commercial	282,588		4,632		2,427		289,647
Construction:
Residential	114,574		—		—		114,574
Commercial	69,728		—		—		69,728
Total construction loans	184,302		—		—		184,302
Total	$	3,986,144	$	27,494	$	13,798	$	4,027,436

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.

Table of Contents

•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.

~~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											Credit Quality Indicators Originated Loans – As of September 30, 2019
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total Originated Loans		(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total Originated Loans
Mortgage loans on real estate:											Mortgage loans on real estate:
Residential 1-4 family	$	342,847	$	1,048	$	4,842	$	—	$	348,737	Residential 1-4 family	$	348,668	$	2,743	$	4,235	$	—	$	355,646
Commercial		1,964,292		32,562		9,131		—		2,005,985	Commercial	2,063,991		38,150		7,168		—		2,109,309

Total mortgage loans on real estate		2,307,139		33,610		13,973		—		2,354,722	Total mortgage loans on real estate	2,412,659		40,893		11,403		—		2,464,955
Consumer:											Consumer:
Home equity lines of credit		290,524		1,673		2,344		—		294,541	Home equity lines of credit	288,554		3,378		2,479		—		294,411
Home equity loans		26,265		564		2,212		—		29,041	Home equity loans	23,819		1,184		2,031		—		27,034
Other		53,044		189		107		—		53,340	Other	63,648		452		53		—		64,153

Total consumer loans		369,833		2,426		4,663		—		376,922	Total consumer loans	376,021		5,014		4,563		—		385,598
Commercial		237,025		5,194		5,993		311		248,523	Commercial	242,308		8,968		5,103				256,379
Construction:											Construction:
Residential		148,178		—		254		—		148,432	Residential	158,657		—		250		—		158,907
Commercial		55,958		331		—		—		56,289	Commercial	44,380		324		—		—		44,704

Total construction		204,136		331		254		—		204,721

Total construction loans											Total construction loans	203,037		324		250		—		203,611
Total loans	$	3,118,133	$	41,561	$	24,883	$	311	$	3,184,888	Total loans	$	3,234,025	$	55,199	$	21,319	$	—	$	3,310,543


	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

Table of Contents


	Credit Quality Indicators PNCI Loans – As of September 30, 2019
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total PNCI Loans
Mortgage loans on real estate:
Residential 1-4 family	$	145,141	$	1,617	$	1,973	$	—	$	148,731
Commercial	618,372		2,674		5,878		—		626,924
Total mortgage loans on real estate	763,513		4,291		7,851		—		775,655
Consumer:
Home equity lines of credit	34,660		891		1,084		—		36,635
Home equity loans	2,841		—		74		—		2,915
Other	15,792		341		9		—		16,142
Total consumer loans	53,293		1,232		1,167		—		55,692
Commercial	19,399		1		169				19,569
Construction:
Residential	5,980		4,147		—		—		10,127
Commercial	457		—		—		—		457
Total construction loans	6,437		4,147		—		—		10,584
Total loans	$	842,642	$	9,671	$	9,187	$	—	$	861,500


	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 loans	146,275		377		259		—		146,911
Total loans	$	2,904,603	$	45,415	$	31,438	$	—	$	2,981,456

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

Table of Contents


	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 loans	36,473		—		—		—		36,473
Total	$	1,014,950	$	5,863	$	5,522	$	—	$	1,026,335

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

Table of Contents

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.

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 September 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	$	289	$	66	$	1,187	$	1,542	$	354,104	$	355,646	$	—
Commercial	117		48		—		165		2,109,144		2,109,309		—
Total mortgage loans on real estate	406		114		1,187		1,707		2,463,248		2,464,955		—
Consumer:
Home equity lines of credit	890		282		624		1,796		292,615		294,411		—
Home equity loans	253		105		137		495		26,539		27,034		6
Other	134		138		4		276		63,877		64,153		—
Total consumer loans	1,277		525		765		2,567		383,031		385,598		6
Commercial	955		227		272		1,454		254,925		256,379		30
Construction:
Residential	—		—		—		—		158,907		158,907		—
Commercial	—		—		—		—		44,704		44,704		—
Total construction loans	—		—		—		—		203,611		203,611		—
Total originated loans	$	2,638	$	866	$	2,224	$	5,728	$	3,304,815	$	3,310,543	$	36

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 September 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	$	—	$	52	$	243	$	295	$	148,436	$	148,731	$	—
Commercial	—		—		949		949		625,975		626,924		—
Total mortgage loans on real estate	—		52		1,192		1,244		774,411		775,655		—
Consumer:
Home equity lines of credit	182		122		—		304		36,331		36,635		—
Home equity loans	—		14		232		246		2,669		2,915		—
Other	54		7		—		61		16,081		16,142		—
Total consumer loans	236		143		232		611		55,081		55,692		—
Commercial	—		—		174		174		19,395		19,569		—
Construction:
Residential	—		—		—		—		10,127		10,127		—
Commercial	—		—		—		—		457		457		—
Total construction loans	—		—		—		—		10,584		10,584		—
Total PNCI loans	$	236	$	195	$	1,598	$	2,029	$	859,471	$	861,500	$	—

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 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 loans	209		—		—		209		146,702		146,911		—
Total loans	$	5,617	$	1,999	$	2,844	$	10,460	$	2,970,996	$	2,981,456	$	—

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 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 loans	—		—		—		—		36,473		36,473		—
Total loans	$	3,871	$	1,449	$	1,588	$	6,908	$	1,019,427	$	1,026,335	$	—

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
$
—

~~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~~September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled ~~$289,000~~$124,000 and ~~$341,000,~~$338,000, respectively. Interest income actually recognized on these originated loans during the three months ended ~~June~~September 30, 2019 and 2018 was ~~$53,000~~$59,000 and ~~$53,000,~~$59,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the three months ended ~~June~~September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled ~~$160,000~~$201,000 and ~~$26,000,~~$39,000, respectively. Interest income actually recognized on these PNCI loans during the three months ended ~~June~~September 30, 2019 and 2018 was ~~$111,000~~$92,000 and $12,000.

Interest income on originated nonaccrual loans that would have been recognized during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled ~~$568,000~~$692,000 and ~~$626,000,~~$964,000, respectively. Interest income actually recognized on these originated loans during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 was ~~$86,000~~$145,000 and ~~$75,000,~~$133,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled ~~$281,000~~$322,000 and ~~$54,000,~~$93,000, respectively. Interest income actually recognized on these PNCI loans during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 was ~~$171,000~~$152,000 and ~~$11,000.~~$23,000.

Table of Contents

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


	Non Accrual Loans
	As of September 30, 2019										As of December 31, 2018
(in thousands)	Originated		PNCI		Total		Originated		PNCI		Total
Mortgage loans on real estate:
Residential 1-4 family	$	2,820	$	908	$	3,728	$	3,244	$	334	$	3,578
Commercial	2,532		3,253		5,785		9,263		1,468		10,731
Total mortgage loans on real estate	5,352		4,161		9,513		12,507		1,802		14,309
Consumer:
Home equity lines of credit	1,188		426		1,614		1,429		885		2,314
Home equity loans	1,405		263		1,668		1,722		47		1,769
Other	90		3		93		3		4		7
Total consumer loans	2,683		692		3,375		3,154		936		4,090
Commercial	3,225		174		3,399		3,755		120		3,875
Construction:
Residential	—		—		—		—		—		—
Commercial	—		—		—		—		—		—
Total construction	—		—		—		—		—		—
Total non accrual loans	$	11,260	$	5,027	$	16,287	$	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~~September 30, 2019 and 2018 was not considered significant for financial reporting purposes.


	Impaired Originated Loans – As of, or for the Nine months ended September 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	$	4,461	$	3,053	$	796	$	3,849	$	91	$	4,214	$	32
Commercial	6,006		4,423		1,329		5,752		26		9,096		59
Total mortgage loans on real estate	10,467		7,476		2,125		9,601		117		13,310		91
Consumer:
Home equity lines of credit	1,279		1,232		—		1,232		—		1,662		26
Home equity loans	2,157		1,542		238		1,780		46		1,973		5
Other	74		3		51		54		14		46		1
Total consumer loans	3,510		2,777		289		3,066		60		3,681		32
Commercial	4,760		611		3,716		4,327		1,199		4,769		22
Construction:
Residential	—		—		—		—		—		—		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		—		—
Total	$	18,737	$	10,864	$	6,130	$	16,994	$	1,376	$	21,760	$	145

Table of Contents


	Impaired PNCI Loans – As of, or for the Nine months ended September 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	$	959	$	908	$	—	$	908	$	—	$	621	$	9
Commercial	3,255		3,253		—		3,253		—		2,360		134
Total mortgage loans on real estate	4,214		4,161		—		4,161		—		2,981		143
Consumer:
Home equity lines of credit	741		444		241		685		84		844		—
Home equity loans	395		376		—		376		—		308		9
Other	95		72		23		95		4		103		—
Total consumer loans	1,231		892		264		1,156		88		1,255		9
Commercial	181		113		60		173		60		147
Construction:
Residential	—		—		—		—		—		—		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		—		—
Total	$	5,626	$	5,166	$	324	$	5,490	$	148	$	4,383	$	152

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


	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 loans	—		—		—		—		—		5		—
Total	$	27,385	$	20,904	$	4,539	$	25,443	$	1,948	$	24,713	$	386

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 loans	—		—		—		—		—		—		—
Total	$	4,990	$	2,570	$	656	$	3,226	$	246	$	3,691	$	207


	Impaired Originated Loans – As of, or for the Nine months ended September 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	$	4,185	$	3,251	$	311	$	3,562	$	57	$	3,883	$	67
Commercial	12,553		9,619		2,370		11,989		268		11,549		208
Total mortgage loans on real estate	16,738		12,870		2,681		15,551		325		15,432		275
Consumer:
Home equity lines of credit	1,444		1,346		59		1,405		19		1,410		32
Home equity loans	2,554		1,960		157		2,117		30		1,753		24
Other	3		—		3		3		3		3		—
Total consumer loans	4,001		3,306		219		3,525		52		3,166		56
Commercial	4,868		2,135		2,497		4,632		1,857		4,626		78
Construction:
Residential	—		—		—		—		—		68		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		68		—
Total	$	25,607	$	18,311	$	5,397	$	23,708	$	2,234	$	23,292	$	409

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

Table of Contents


	Impaired PNCI Loans – As of, or for the Nine months ended September 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	$	1,302	$	1,219	$	—	$	1,219	$	—	$	1,275	$	—
Commercial	1,255		1,255		—		1,255		—		627		58
Total mortgage loans on real estate	2,557		2,474		—		2,474		—		1,902		58
Consumer:
Home equity lines of credit	852		625		158		783		149		909		13
Home equity loans	296		50		239		289		145		287		9
Other	240		—		240		240		100		257		7
Total consumer loans	1,388		675		637		1,312		394		1,453		29
Commercial	—		—		—		—		—		—		—
Construction:
Residential	—		—		—		—		—		—		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		—		—
Total	$	3,945	$	3,149	$	637	$	3,786	$	394	$	3,355	$	87

Originated loans classified as TDRs and impaired were ~~$10,998,000,~~$8,556,000, $10,253,000, and ~~$9,450,000~~$8,845,000 at ~~June~~September 30, 2019, December 31, 2018, and ~~June~~September 30, 2018, respectively. PNCI loans classified as TDRs and impaired were ~~$811,000,~~$738,000, $615,000, and ~~$1,459,000~~$840,000 at ~~June~~September 30, 2019, December 31, 2018 and ~~June~~September 30, 2018, respectively. The Company had no significant obligations to lend additional funds on Originated or PNCI TDRs as of ~~June~~September 30, 2019, December 31, 2018, or ~~June~~September 30, 2018.

~~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
)


	TDR Information for the three months ended September 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	2	$	496	$	500	$	30	—	$	—	$	—
Commercial	2	60		67		—		—	—		—
Total mortgage loans on real estate	4	556		567		30		—	—		—
Consumer:
Home equity lines of credit	—	—		—		—		—	—		—
Home equity loans	—	—		—		—		—	—		—
Other	—	—		—		—		—	—		—
Total consumer loans	—	—		—		—		—	—		—
Commercial	4	150		148		(2)		—	—		—
Construction:
Residential	—	—		—		—		—	—		—
Commercial	—	—		—		—		—	—		—
Total construction loans	—	—		—		—		—	—		—
Total	4	$	706	$	715	$	28	—	$	—	$	—

Table of Contents


	TDR Information for the nine months ended September 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	3	$	659	$	662	$	30	$	—	$	—	$	—
Commercial	2	60		67		—		—		—		—
Total mortgage loans on real estate	5	719		729		30		—		—		—
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	10	1,918		1,885		—		1		7		—
Construction:
Residential	—	—		—		—		—		—		—
Commercial	—	—		—		—		—		—		—
Total construction loans	—	—		—		—		—		—		—
Total	18	$	2,851	$	2,829	$	59	$	1	$	7	$	—


	TDR Information for the three months ended September 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	4	1,326		1,324		(308)		—		—		—
Total mortgage loans on real estate	4	1,326		1,324		(308)		—		—		—
Consumer:
Home equity lines of credit	—	—		—		—		1		128		—
Home equity loans	1	478		478		—		—		—		—
Other	—	—		—		—		—		—		—
Total consumer loans	1	478		478		—		1		128		—
Commercial	2	203		203		—		—		—		—
Construction:
Residential	—	—		—		—		—		—		—
Commercial	—	—		—		—		—		—		—
Total construction loans	—	—		—		—		—		—		—
Total	7	$	2,007	$	2,005	$	(308)	$	1	$	128	$	—

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
)

Table of Contents


	TDR Information for the nine months ended September 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	6	1,743		1,741		(262)		1		169		—
Total mortgage loans on real estate	6	1,743		1,741		(262)		1		169		—
Consumer:
Home equity lines of credit	1	133		138		—		1		128		—
Home equity loans	2	599		599		—		—		—		—
Other	—	—		—		—		—		—		—
Total consumer loans	3	732		737		—		1		128		—
Commercial	4	619		623		(3)		4		340		(2)
Construction:
Residential	—	—		—		—		—		—		—
Commercial	—	—		—		—		—		—		—
Total construction loans	—	—		—		—		—		—		—
Total	13	$	3,094	$	3,101	$	(265)	$	6	$	637	$	(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.

~~Table of Contents~~

Note 6 –- Leases

The Company adopted ASU

~~2016-02~~

~~“Leases”~~ 2016-2 “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

Table of Contents

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~~nine months ended ~~June~~September 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


(in thousands)	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease cost	$	1,306	$	3,924
Short-term lease cost	65		194
Variable lease cost	(13)		(33)
Sublease income	(32)		(98)
Total lease cost	$	1,326	$	3,987

Prior to the adoption of ASU

~~2016-02,~~

2016-2, rent expense under operating leases was ~~$892,000~~$1,161,000 and ~~$1,776,000~~$2,937,000 during the three and ~~six~~nine months ended ~~June~~September 30, ~~2018.~~2018, respectively. Rent expense was offset by rent income of $10,000 and ~~$21,000~~$31,000 during the three and ~~six~~nine months ended ~~June~~September 30, ~~2018.~~2018, respectively.

The following table presents supplemental cash flow information related to leases for the ~~six~~nine months ended ~~June~~September 30, 2019:


(in thousands)	Three months ended September 30, 2019		Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	1,236	$	3,683
ROUA obtained in exchange for operating lease liabilities	$	—	$	32,162

(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~~September 30, 2019:



Weighted-average remaining lease term			~~9.5~~9.4 years
Weighted-average discount rate	3.19	~~3.18~~	%

~~Table of Contents~~

At ~~June~~September 30, 2019, future expected operating lease payments are as follows:


(in thousands)
Periods ending December 31,
2019	$	1,180
2020	4,389
2021	4,235
2022	3,896
2023	3,216
Thereafter	16,682
	33,598
Discount for present value of expected cash flows	(5,104)
Lease liability at September 30, 2019	$	28,494

(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

Table of Contents

Note 7 - Deposits

A summary of the balances of deposits follows (in thousands):


	September 30, 2019		December 31, 2018
Noninterest-bearing demand	$	1,777,357	$	1,760,580
Interest-bearing demand	1,222,955		1,252,366
Savings	1,843,873		1,921,324
Time certificates, $250,000 or more	148,449		132,429
Other time certificates	302,773		299,767
Total deposits	$	5,295,407	$	5,366,466

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~~September 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~~$1,431,000 and $1,469,000 were classified as consumer loans at ~~June~~September 30, 2019 and December 31, 2018, ~~respectively.~~

respectively

Note 8 - Commitments and Contingencies

The following table presents a summary of the Bank’s commitments and contingent liabilities:


(in thousands)	September 30, 2019		December 31, 2018
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans	$	325,681	$	306,191
Consumer loans	512,345		496,575
Real estate mortgage loans	189,700		140,292
Real estate construction loans	182,701		248,996
Standby letters of credit	12,368		11,346
Deposit account overdraft privilege	111,187		111,956

(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

~~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~~$7,011,000 and ~~$4,770,000~~$13,507,000 during the three months ended ~~June~~September 30, 2019 and 2018, respectively and ~~$18,350,000~~$25,361,000 and ~~$9,142,000~~$22,649,000 during the ~~six~~nine months ended ~~June~~September 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~~September 30, 2019, the Company had repurchased 196,566 shares under this plan. During the ~~six~~nine month periods ended ~~June~~September 30, 2019 and 2018, there were no0 shares of common stock repurchased under this plan.

Table of Contents

Stock Repurchased Under Equity Compensation Plans

During the three months ended ~~June~~September 30, 2019 and 2018, employees tendered ~~93,755~~3,820 and ~~17,086~~11,630 shares, respectively, of the Company’s common stock with market value of ~~$3,659,000,~~$147,000, and ~~$667,000,~~$453,000, 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~~nine months ended ~~June~~September 30, 2019 and 2018, employees tendered ~~119,914~~123,734 and ~~17,220~~28,850 shares, respectively, of the Company’s common stock with market value of ~~$4,695,000,~~$4,842,000, and ~~$671,000,~~$1,124,000, 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 based on 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~~approved 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~~nine months ended ~~June~~September 30, 2019 were made from the 2019 Plan.

Stock option activity during the ~~six~~nine months

ended ~~June~~September 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	(166,000)	$12.63 to $19.46	15.93
Options forfeited	—	— to —	—
Outstanding at September 30, 2019	177,000	$14.54 to $23.21	$	17.52

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~~September 30, 2019:


	Currently Exercisable		Currently Not Exercisable		Total Outstanding
Number of options	176,625		375		177,000
Weighted average exercise price	$	17.50	$	23.21	$	17.52
Intrinsic value (in thousands)	$	3,321	$	5	$	3,326
Weighted average remaining contractual term (yrs.)	2.9		5.0		2.9

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~~375 options that are currently not exercisable as of ~~June~~September 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~~nine months ended ~~June~~September 30, 2019.

~~Table of Contents~~

~~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


	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	946	7,414
RSUs released	(30,461)	(22,237)
RSUs forfeited/expired	(1,876)	(2,299)
Outstanding at September 30, 2019	70,828	51,312

The ~~76,527~~70,828 of service condition vesting RSUs outstanding as of ~~June~~September 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

Table of Contents

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~~70,828 of service condition vesting RSUs outstanding as of ~~June~~September 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next ~~1.4~~1.2 years. The Company expects to recognize ~~$2,495,000~~$2,135,210 of

pre-tax

compensation costs related to these service condition vesting RSUs between ~~June~~September 30, 2019 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2018 or during the ~~six~~nine months ended ~~June~~September 30, 2019.

The ~~53,611~~51,312 of market plus service condition vesting RSUs outstanding as of ~~June~~September 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next ~~2.1~~1.9 years. The Company expects to recognize ~~$1,227,000~~$1,045,845 of

pre-tax

compensation costs related to these RSUs between ~~June~~September 30, 2019 and their vesting dates. As of ~~June~~September 30, 2019, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to ~~zero~~0 or increased to ~~80,417~~76,968 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~~nine months ended ~~June~~September 30, 2019.

Note 11 - ~~Noninterest~~Non-interest Income and Expense

The following table summarizes the Company’s ~~noninterest~~non-interest 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


	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2019		2018		2019		2018
ATM and interchange fees	$	5,427	$	4,590	$	15,412	$	13,335
Service charges on deposit accounts	4,327		4,015		12,389		11,407
Other service fees	808		676		2,198		2,020
Mortgage banking service fees	483		499		1,441		1,527
Change in value of mortgage servicing rights	(455)		(37)		(1,652)		38
Total service charges and fees	10,590		9,743		29,788		28,327
Increase in cash value of life insurance	773		732		2,294		1,996
Asset management and commission income	721		728		2,102		2,414
Gain on sale of loans	1,236		539		2,223		1,831
Lease brokerage income	172		186		631		514
Sale of customer checks	126		88		401		327
Gain on sale of investment securities	107		207		107		207
Gain (loss) on marketable equity securities	22		(22)		100		(92)
Other	361		135		1,688		942
Total other non-interest income	3,518		2,593		9,546		8,139
Total non-interest income	$	14,108	$	12,336	$	39,334	$	36,466

Table of Contents

The components of ~~noninterest~~non-interest expense were as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,					Three months ended September 30,						Nine months ended September 30,
	2019		2018		2019		2018			2019		2018		2019		2018
Base salaries, net of deferred loan origination costs	$	17,211	$	14,429	$	33,968	$	28,391	Base salaries, net of deferred loan origination costs	$	17,656	$	15,685	$	51,624	$	44,076
Incentive compensation		3,706		2,159		6,273		4,611	Incentive compensation	3,791		4,515		10,064		9,126
Benefits and other compensation costs		5,802		4,865		11,606		10,103	Benefits and other compensation costs	5,452		5,623		17,058		15,726

Total salaries and benefits expense		26,719		21,453		51,847		43,105	Total salaries and benefits expense	26,899		25,823		78,746		68,928

Occupancy		3,738		2,720		7,512		5,401	Occupancy	3,711		3,173		11,223		8,574
Data processing and software		3,354		2,679		6,703		5,193	Data processing and software	3,411		2,786		10,114		7,979
Equipment		1,752		1,637		3,619		3,188	Equipment	1,679		1,750		5,298		4,938
Intangible amortization		1,431		339		2,862		678	Intangible amortization	1,431		1,390		4,293		2,068
Advertising		1,533		1,035		2,864		1,873	Advertising	1,358		1,341		4,222		3,214
ATM and POS network charges		1,270		1,437		2,593		2,663	ATM and POS network charges	1,343		1,197		3,936		3,860
Professional fees		1,057		774		1,896		1,546	Professional fees	999		1,352		2,895		2,898
Telecommunications		773		681		1,570		1,382	Telecommunications	867		819		2,437		2,201
Regulatory assessments and insurance		490		417		1,001		847	Regulatory assessments and insurance	94		537		1,095		1,384
Merger and acquisition expense		—		601		—		1,077	Merger and acquisition expense	—		4,150		—		5,227
Postage		315		301		625		659	Postage	438		275		1,063		934
Operational losses		226		252		451		546	Operational losses	228		217		679		763
Courier service		412		224		682		491	Courier service	357		278		1,039		769
Gain on sale of foreclosed assets									Gain on sale of foreclosed assets	(50)		(2)		(246)		(390)
Loss on disposal of fixed assets									Loss on disposal of fixed assets	2		152		82		206
Other miscellaneous expense		3,782		3,320		8,140		7,383	Other miscellaneous expense	3,577		2,290		11,617		9,673

Total other noninterest expense		20,133		16,417		40,518		32,927

Total noninterest expense	$	46,852	$	37,870	$	92,365	$	76,032

Total other non-interest expense									Total other non-interest expense	19,445		21,705		59,747		54,298
Total non-interest expense									Total non-interest expense	$	46,344	$	47,528	$	138,493	$	123,226

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~~to 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,					Three months ended September 30,
(in thousands)	2019		2018		(in thousands)	2019		2018
Net income	$	23,061	$	15,029	Net income	$	23,395	$	16,170
Average number of common shares outstanding		30,458		22,983	Average number of common shares outstanding	30,509		30,011
Effect of dilutive stock options and restricted stock		185		293	Effect of dilutive stock options and restricted stock	120		280

Average number of common shares outstanding used to calculate diluted earnings per share		30,643		23,276	Average number of common shares outstanding used to calculate diluted earnings per share	30,629		30,291

Options excluded from diluted earnings per share because the effect of these options was antidilutive		—		—	Options excluded from diluted earnings per share because the effect of these options was antidilutive	42		10

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

—

—

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	Nine months ended September 30, 2019
(in thousands)	2019		2018
Net income	$	69,182	$	45,109
Average number of common shares outstanding	30,464		25,317
Effect of dilutive stock options and restricted stock	179		300
Average number of common shares outstanding used to calculate diluted earnings per share	30,643		25,617
Options excluded from diluted earnings per share because the effect of these options was antidilutive	42		10

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,							Three months ended September 30,						Nine months ended September 30,
(in thousands)	2019			2018			2019			2018			(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	)	Unrealized holding gains (losses) on available for sale securities before reclassifications	$	5,355	$	(8,193)	$	27,618	$	(29,134)
Amounts reclassified out of accumulated other comprehensive income:													Amounts reclassified out of accumulated other comprehensive income:
Realized (gain) loss on debt securities													Realized (gain) loss on debt securities	(107)		(207)		(107)		(207)
Adoption ASU 2016-01		—			—			—			62		Adoption ASU 2016-01	—		—		—		62
Adoption ASU 2018-02		—			—			—			(425	)	Adoption ASU 2018-02	—		—		—		(425)

Total amounts reclassified out of accumulated other comprehensive income		—			—			—			(363	)

Total amounts reclassified out of accumulated other comprehensive income (loss)													Total amounts reclassified out of accumulated other comprehensive income (loss)	(107)		(207)		(107)		(570)
Unrealized holding gains (losses) on available for sale securities after reclassifications		9,553			(5,676	)		22,263			(21,304	)	Unrealized holding gains (losses) on available for sale securities after reclassifications	5,248		(8,400)		27,511		(29,704)
Tax effect		(2,824	)		1,678			(6,582	)		6,280		Tax effect	(1,551)		2,483		(8,133)		8,763

Unrealized holding gains (losses) on available for sale securities, net of tax		6,729			(3,998	)		15,681			(15,024	)	Unrealized holding gains (losses) on available for sale securities, net of tax	3,697		(5,917)		19,378		(20,941)

Change in unfunded status of the supplemental retirement plans before reclassifications		(89	)		—			(177	)		668		Change in unfunded status of the supplemental retirement plans before reclassifications	(89)		—		(266)		668
Amounts reclassified out of accumulated other comprehensive income:
Amounts reclassified out of accumulated other comprehensive income (loss):													Amounts reclassified out of accumulated other comprehensive income (loss):
Amortization of prior service cost		(13	)		(13	)		(27	)		(27	)	Amortization of prior service cost	(13)		(13)		(40)		(40)
Amortization of actuarial losses		102			127			204			254		Amortization of actuarial losses	102		128		306		382
Adoption ASU 2018-02		—			—			—			(668	)	Adoption ASU 2018-02	—		—		—		(668)

Total amounts reclassified out of accumulated other comprehensive income		89			114			177			(441	)

Total amounts reclassified out of accumulated other comprehensive income (loss)													Total amounts reclassified out of accumulated other comprehensive income (loss)	89		115		266		(326)
Change in unfunded status of the supplemental retirement plans after reclassifications		—			114			—			227		Change in unfunded status of the supplemental retirement plans after reclassifications	—		115		—		342
Tax effect		—			(34	)		—			(67	)	Tax effect	—		(34)		—		(101)

Change in unfunded status of the supplemental retirement plans, net of tax		—			80			—			160		Change in unfunded status of the supplemental retirement plans, net of tax	—		81		—		241

Total other comprehensive income (loss)	$	6,729		$	(3,918	)	$	15,681		$	(14,864	)	Total other comprehensive income (loss)	$	3,697	$	(5,836)	$	19,378	$	(20,700)

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The components of accumulated other comprehensive ~~loss,~~income (loss), included in shareholders’ equity, are as follows:


	June 30,			December 31,
(in thousands)	2019			2018			(in thousands)	September 30, 2019		December 31, 2018
Net unrealized loss on available for sale securities	$	1,289		$	(20,974	)
Net unrealized gain (loss) on available for sale securities							Net unrealized gain (loss) on available for sale securities	$	6,537	$	(20,974)
Tax effect		(381	)		6,201		Tax effect	(1,932)		6,201

Unrealized holding loss on available for sale securities, net of tax		908			(14,773	)

Unrealized holding gain (loss) on available for sale securities, net of tax							Unrealized holding gain (loss) on available for sale securities, net of tax	4,605		(14,773)
Unfunded status of the supplemental retirement plans		(4,802	)		(4,802	)	Unfunded status of the supplemental retirement plans	(4,802)		(4,802)
Tax effect		1,420			1,420		Tax effect	1,420		1,420

Unfunded status of the supplemental retirement plans, net of tax		(3,382	)		(3,382	)	Unfunded status of the supplemental retirement plans, net of tax	(3,382)		(3,382)

Joint beneficiary agreement liability		276			276		Joint beneficiary agreement liability	276		276
Tax effect		—			—		Tax effect	—		—

Joint beneficiary agreement liability, net of tax		276			276		Joint beneficiary agreement liability, net of tax	276		276

Accumulated other comprehensive loss	$	(2,198	)	$	(17,879	)

Accumulated other comprehensive gain (loss)							Accumulated other comprehensive gain (loss)	$	1,499	$	(17,879)

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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

0 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

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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~~non-interest 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

~~Table of Contents~~

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
Fair value at September 30, 2019									Fair value at September 30, 2019	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,952	$	2,952	$	—	$	—	Marketable equity securities	$	2,974	$	2,974	$	—	$	—
Debt securities available for sale:									Debt securities available for sale:
Obligations of U.S. government corporations and agencies		630,911		—		630,911		—	Obligations of U.S. government corporations and agencies	495,637		—		495,637		—
Obligations of states and political subdivisions		125,980		—		125,980		—	Obligations of states and political subdivisions	111,910		—		111,910		—
Corporate bonds		4,521		—		4,521		—	Corporate bonds	4,528		—		4,528		—
Asset backed securities		372,582		—		372,582		—	Asset backed securities	372,005		—		372,005		—
Loans held for sale		5,875		—		5,875		—	Loans held for sale	7,604		—		7,604		—
Mortgage servicing rights		6,229		—		—		6,229	Mortgage servicing rights	6,072		—		—		6,072

Total assets measured at fair value	$	1,149,050	$	2,952	$	1,139,869	$	6,229	Total assets measured at fair value	$	1,000,730	$	2,974	$	991,684	$	6,072


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


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

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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

0 transfers between any levels during the ~~six~~nine months ended ~~June~~September 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
Three months ended September 30,												Three months ended September 30,	Beginning Balance		Transfers into (out of) Level 3	Change Included in Earnings		Issuances		Ending Balance
2019: Mortgage servicing rights	$	6,572		—	$	(552	)	$	209	$	6,229	2019: Mortgage servicing rights	$	6,229	—	$	(455)	$	298	$	6,072
2018: Mortgage servicing rights	$	6,953		—	$	(36	)	$	104	$	7,021	2018: Mortgage servicing rights	$	7,021	—	$	(37)	$	138	$	7,122


Nine months ended September 30,	Beginning Balance		Transfers into (out of) Level 3	Change Included in Earnings		Issuances		Ending Balance
2019: Mortgage servicing rights	$	7,098	—	$	(1,652)	$	626	$	6,072
2018: Mortgage servicing rights	$	6,687	—	$	38	$	397	$	7,122

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).

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The following table presents quantitative information about recurring Level 3 fair value measurements at ~~June~~September 30, 2019 and December 31, 2018:

As of September 30, 2019:

Fair Value
(in thousands)

Valuation
Technique

Unobservable
Inputs

Range,
Weighted
Average

Mortgage Servicing Rights

6,072

Discounted cash flow

Constant prepayment rate

7% - 42%; 11%

Discount rate

10% - 14%; 12%

As of December 31, 2018:

Mortgage Servicing Rights

7,098

Discounted cash flow

Constant prepayment rate

5% - 27.3%; 7.6%

Discount rate

12% - 13%; 12%

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)
September 30, 2019												September 30, 2019	Total		Level 1	Level 2	Level 3		Total Gains (Losses)
Fair value:												Fair value:
Impaired Originated & PNCI loans	$	1,164		—		—	$	1,164	$	(808	)	Impaired Originated & PNCI loans	$	1,055	—	—	$	1,055	$	(652)
Foreclosed assets		454		—		—		454		(63	)	Foreclosed assets	417		—	—	417		(27)

Total assets measured at fair value	$	1,618		—		—	$	1,618	$	(871	)	Total assets measured at fair value	$	1,472	—	—	$	1,472	$	(679)


									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	)


December 31, 2018	Total		Level 1	Level 2	Level 3		Total Gains (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)

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September 30, 2018	Total		Level 1	Level 2	Level 3		Total Gains (Losses)
Fair value:
Impaired Originated & PNCI loans	$	445	—	—	$	445	$	(808)
Foreclosed assets	863		—	—	863		(23)
Total assets measured at fair value	$	1,308	—	—	$	1,308	$	(831)

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 0.

~~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.

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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~~September 30, 2019:

~~June~~September 30, 2019

Fair Value
(in thousands)

Valuation
Technique

~~Valuation~~

~~Technique~~

Unobservable Inputs

Range,
Weighted Average

Impaired Originated & PNCI loans

$1,055

—

Sales comparison
approach

Income approach

Adjustment for differences between
comparable sales

Capitalization rate

Not meaningful
N/A

Foreclosed assets (Residential real estate)

$417

—

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%)

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

(16.30)% - 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)%

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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					September 30, 2019						December 31, 2018
(in thouands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
(in thousands)									(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:									Financial assets:
Level 1 inputs:									Level 1 inputs:
Cash and due from banks	$	106,939	$	106,939	$	119,781	$	119,781	Cash and due from banks	$	118,960	$	118,960	$	119,781	$	119,781
Cash at Federal Reserve and other banks		68,643		68,643		107,752		107,752	Cash at Federal Reserve and other banks	140,087		140,087		107,752		107,752
Level 2 inputs:									Level 2 inputs:
Securities held to maturity		412,524		415,276		444,936		437,370	Securities held to maturity	393,449		399,699		444,936		437,370
Restricted equity securities		17,250		N/A		17,250		N/A	Restricted equity securities	17,250		N/A		17,250		N/A
Loans held for sale		5,875		5,875		3,687		4,616	Loans held for sale	7,604		7,604		3,687		4,616
Level 3 inputs:									Level 3 inputs:
Loans, net		4,070,819		4,057,792		3,989,432		4,006,986	Loans, net	4,150,811		4,137,528		3,989,432		4,006,986
Financial liabilities:									Financial liabilities:
Level 2 inputs:									Level 2 inputs:
Deposits		5,342,173		5,341,105		5,366,466		5,362,173	Deposits	5,295,407		5,294,348		5,366,466		5,362,173
Other borrowings		13,292		13,292		15,839		15,839	Other borrowings	16,423		16,423		15,839		15,839
Level 3 inputs:									Level 3 inputs:
Junior subordinated debt		57,132		56,209		57,042		62,610	Junior subordinated debt	57,180		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


(in thouands)	Contract Amount		Fair Value		Contract Amount		Fair Value
Off-balance sheet:
Level 3 inputs:
Commitments	$	1,210,427	$	12,104	$	1,192,054	$	11,921
Standby letters of credit	12,368		124		11,346		113
Overdraft privilege commitments	111,187		1,112		111,956		1,120

~~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~~September 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~~September 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
%

Table of Contents


	Actual						Minimum Capital Required – Basel III Fully Phased In						Required to be Considered Well Capitalized
As of September 30, 2019:	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated	$	735,884	15.23	%	$	507,335	10.50	%	N/A		N/A
Tri Counties Bank	$	731,359	15.14	%	$	507,152	10.50	%	$	483,002	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	701,703	14.52	%	$	410,700	8.50	%	N/A		N/A
Tri Counties Bank	$	697,178	14.43	%	$	410,551	8.50	%	$	386,401	8.00	%
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	646,240	13.37	%	$	338,224	7.00	%	N/A		N/A
Tri Counties Bank	$	697,178	14.43	%	$	338,101	7.00	%	$	313,951	6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	701,703	11.31	%	$	248,073	4.00	%	N/A		N/A
Tri Counties Bank	$	697,178	11.24	%	$	248,068	4.00	%	$	310,085	5.00	%


	Actual						Minimum Capital Required – Basel III Phase-inSchedule						Minimum Capital Required – Basel III Fully Phased In				Required to be Considered Well Capitalized
As of December 31, 2018:	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
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	%

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~~September 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~~September 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~~September 30, 2019, the Company and the Bank are in compliance with the capital conservation buffer requirement.

~~Table of Contents~~

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

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 consolidated financial statements included in the Company’s annual report of Form

10-K

for the year ended December 31, 2018.

Table of Contents

Geographical Descriptions

~~Table of Contents~~

Financial Highlights

Following the acquisition of FNB Bancorp on July 7, 2018, the period ended September 30, 2019 represents the first year over year comparable period end of the combined entity. Performance highlights and other developments for the Company included the following:

•For the three and ~~six~~nine months ended ~~June~~September 30, 2019, the Company’s return on average assets was 1.44% and ~~1.43%~~1.44%, respectively, and the return on average equity was 10.42% and 10.67%, respectively.

•For the three and nine months ended September 30, 2019, the Company's diluted earnings per share was ~~10.65%~~$0.76 and ~~10.71%, respectively.~~$2.25, respectively, as compared to $0.53 and $1.76 for the same periods ended 2018.

•As of ~~June~~September 30, 2019, the Company reported total loans, total assets and total deposits of ~~$4.10~~$4.18 billion, ~~$6.40~~$6.38 billion and ~~$5.34~~$5.30 billion, respectively.

•The loan to deposit ratio was ~~76.8%~~79.0% as of ~~June~~September 30, 2019 as compared to ~~74.3% at March 31, 2019 and 77.2%~~76.8% at June 30, 2019 and 79.0% at September 30, 2018.

~~Net interest~~•For the current quarter, net interest margin ~~grew 34 basis points to 4.48%~~was 4.44% on a ~~tax~~tax equivalent basis as compared to ~~4.14%~~4.29% in the ~~quarter~~quarter ended ~~June~~September 30, 2018 ~~and increased 2~~and decreased 6 basis points ~~from~~from the trailing quarter.

•Non-interest

bearing deposits as a percentage of total deposits were 33.6% at September 30, 2019, as compared to 33.3% at June 30, 2019 ~~as compared to 32.4% at March 31, 2019~~ and 33.6% at ~~June~~September 30, 2018.

•The average rate of interest paid on deposits, ~~including noninterest-bearing~~including non-interest-bearing deposits, remained low but increased slightly to ~~0.22%~~0.23% for the ~~second~~third quarter of 2019 as compared with ~~0.20%~~0.22% for the trailing quarter, and an increase of 107 basis points from the average rate paid during the same quarter of the prior year.

•Non-performing

assets to total assets were ~~0.35%~~0.31% at ~~June~~September 30, 2019, as compared to ~~0.34%~~0.35% as of ~~March 31,~~June 30, 2019, and 0.47% at December 31, 2018.

•The balance of nonperforming loans ~~increased~~decreased by $2.0 million, and was facilitated by the sale of loans and charge-offs. Net charge-offs (recoveries) for the quarter ended September 30, 2019 and 2018 were $1.0 million ~~however recoveries on previously~~

~~charged-off~~

~~loans~~and ($0.2) million, respectively, while net charge-offs (recoveries) for the nine months ended September 30, 2019 were ~~$0.3~~($0.3) million and ~~loans past due thirty days or more decreased by $2.18~~$0.5 million, ~~during~~respectively.

•For the ~~quarter.~~

~~The~~three months ended September 30, 2019, the efficiency ratio ~~remained flat at 60.15%~~declined to 58.8%, as compared to 60.1%, in the trailing quarter ~~which had~~and 65.3% in the same quarter of the 2018 year. Excluding merger and acquisition costs from the 2018 year results in an efficiency ratio of ~~60.10%~~59.56%.

•Non-interest income associated with service charges and fees increased by 4.6% over the trailing quarter and 8.7% over the same quarter in the prior year.

Table of Contents

TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)


	Three months ended June 30,						Six months ended June 30,							Three months ended September 30,									Nine months ended September 30,
	2019			2018			2019			2018				2019			2018			2019			2018
Net interest income	$	64,315		$	45,869		$	128,185		$	90,855		Net interest income	64,688			$	60,489		$	192,873		$	151,344
(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	)
Reversal of (provision for) loan losses													Reversal of (provision for) loan losses	329			(2,651)			1,392			(1,777)
Non-interest income													Non-interest income	14,108			12,336			39,334			36,466
Non-interest expense													Non-interest expense	(46,344)			(47,528)			(138,493)			(123,226)
Provision for income taxes		(7,443	)		(5,782	)		(16,538	)		(11,222	)	Provision for income taxes	(9,386)			(6,476)			(25,924)			(17,698)

Net income	$	23,061		$	15,029		$	45,787		$	28,939		Net income	$	23,395		$	16,170		$	69,182		$	45,109

Per Share Data:													Per Share Data:
Basic earnings per share	$	0.76		$	0.65		$	1.50		$	1.26		Basic earnings per share	$	0.77		$	0.54		$	2.27		$	1.78
Diluted earnings per share	$	0.75		$	0.65		$	1.49		$	1.24		Diluted earnings per share	$	0.76		$	0.53		$	2.25		$	1.76
Dividends paid	$	0.19		$	0.17		$	0.38		$	0.34		Dividends paid	$	0.22		$	0.17		$	0.60		$	0.51
Book value at period end							$	28.71		$	22.27		Book value at period end							$	29.39		$	26.37

Average common shares outstanding		30,458			22,983			30,441			22,970		Average common shares outstanding	30,509			30,011			30,464			25,317
Average diluted common shares outstanding		30,643			23,276			30,650			23,280		Average diluted common shares outstanding	30,629			30,291			30,643			25,617
Shares outstanding at period end								30,503			23,004		Shares outstanding at period end							30,512			30,418

At period end:													At period end:
Loans, net								4,070,819			3,116,789		Loans, net							4,150,811			3,995,833
Total investment securities								1,566,720			1,251,776		Total investment securities							1,397,753			1,535,953
Total assets								6,395,172			4,863,153		Total assets							6,384,883			6,318,865
Total deposits								5,342,173			4,077,222		Total deposits							5,295,407			5,093,117
Other borrowings								13,292			152,839		Other borrowings							16,423			282,831
Shareholders’ equity								875,886			512,344		Shareholders’ equity							896,665			802,115

Financial Ratios:													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	%
During the period:													During the period:
Return on average assets (annualized)													Return on average assets (annualized)	1.44		%	1.05		%	1.44		%	1.15		%
Return on average equity (annualized)													Return on average equity (annualized)	10.42		%	9.11		%	10.67		%	10.44		%
Net interest margin⁽¹⁾(annualized)													Net interest margin⁽¹⁾(annualized)	4.44		%	4.29		%	4.48		%	4.22		%
Efficiency ratio		60.1	%		65.2	%		60.1	%		65.9	%	Efficiency ratio	58.82		%	65.26		%	59.64		%	65.61		%
Average equity to average assets		13.6	%		10.6	%		13.3	%		10.6	%	Average equity to average assets	13.80		%	12.74		%	13.50		%	11.48		%
At end of period:													At end of period:
Equity to assets								13.70	%		10.54	%	Equity to assets							14.04		%	12.69		%
Total capital to risk-sdjusted assets								14.93	%		13.91	%
Total capital to risk-adjusted assets													Total capital to risk-adjusted assets							15.23		%	13.90		%

⁽¹⁾Fully taxable equivalent (FTE)

The financial results above were primarily benefited by an increase in interest-earning assets during both the three and nine month periods ended September 30, 2019 as compared to the same 2018 periods. While the growth in interest-earning assets was funded by increases in interest-bearing liabilities, net interest income was benefited by reductions in both the rates paid and average balance of other borrowings which were paid down as the balance of average deposits increased.

1	~~Fully taxable equivalent (FTE)~~

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 September 30,						Nine months ended September 30,
	2019		2018		2019		2018
Net interest income	$	64,688	$	60,489	$	192,873	$	151,344
Reversal of (provision for) loan losses	329		(2,651)		1,392		(1,777)
Non-interest income	14,108		12,336		39,334		36,466
Non-interest expense	(46,344)		(47,528)		(138,493)		(123,226)
Provision for income taxes	(9,386)		(6,476)		(25,924)		(17,698)
Net income	$	23,395	$	16,170	$	69,182	$	45,109

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~~$23,395,000 and ~~$45,787,000~~$69,182,000 for the quarter and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, compared to ~~$15,029,000~~$16,170,000 and ~~$28,939,000~~$45,109,000 for the quarter and ~~six~~nine months ended ~~June~~September 30, 2018, respectively. Diluted earnings per share were ~~$0.75~~$0.76 and ~~$1.49~~$2.25 for the quarter and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, compared to ~~$0.65~~$0.53 and ~~$1.24~~$1.76 for the quarter and ~~six~~nine months ended ~~June~~September 30, ~~2018.~~2018, respectively.

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 September 30,									Nine months ended September 30,
	2019			2018			2019			2018
Interest income	68,889			64,554			204,526			160,153
Interest expense	(4,201)			(4,065)			(11,653)			(8,809)
FTE adjustment	289			357			929			982
Net interest income (FTE)	$	64,977		$	60,846		$	193,802		$	152,326
Net interest margin (FTE)	4.44		%	4.29		%	4.48		%	4.22		%
Acquired loans discount accretion, net:
Amount (included in interest income)	$	2,360		$	2,098		$	5,919		$	3,289
Effect on average loan yield	0.23		%	0.21		%	0.19		%	0.13		%
Effect on net interest margin (FTE)	0.16		%	0.14		%	0.08		%	0.05		%

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~~nine months ended ~~June~~September 30, 2019, purchased loan discount accretion was ~~$1,904,000~~$2,360,000 and ~~$3,599,000,~~$5,919,000, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2018, purchased loan discount accretion was ~~$559,000~~$2,098,000 and ~~$1,191,000,~~$3,289,000, respectively. ~~The~~On a year over year basis, the increase in discount accretion is directly attributable to the acquisition of FNB Bancorp in July 2018.

Quarter over quarter, the increase in accretion is attributed to an increased level of pay-off activity resulting from the declining rate environment.

Table of Contents

Summary of Average Balances, Yields/Rates and Interest Differential

The following table presents, for the three month 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~~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															For the three months ended
	June 30, 2019							June 30, 2018								September 30, 2019										September 30, 2018
	Average Balance		Interest Income/ Expense		Rates Earned /Paid			Average Balance		Interest Income/ Expense		Rates Earned /Paid				Average Balance		Interest Income/ Expense		Rates Earned /Paid		Average Balance		Interest Income/ Expense		Rates Earned /Paid
Assets:															Assets:
Loans	$	4,044,044	$	55,492		5.49	%	$	3,104,126	$	39,304		5.06	%	Loans	$	4,142,602	$	56,999	5.46	%	$	4,019,391	$	53,102	5.24	%
Investment securities - taxable		1,432,550		10,762		3.00	%		1,122,534		7,736		2.76	%	Investment securities - taxable	1,403,653		10,172		2.88	%	1,326,756		9,648		2.89	%
Investment securities - nontaxable (1)		140,562		1,358		3.86	%		136,126		1,355		3.98	%	Investment securities - nontaxable⁽¹⁾	133,038		1,250		3.73	%	163,309		1,546		3.76	%

Total investments		1,573,112		12,120		3.08	%		1,258,660		9,091		2.89	%	Total investments	1,536,691		11,422		2.95	%	1,490,065		11,194		2.98	%
Cash at Federal Reserve and other banks		147,810		866		2.34	%		94,874		396		1.67	%	Cash at Federal Reserve and other banks	130,955		757		2.29	%	119,635		615		2.04	%

Total interest-earning assets		5,764,966		68,478		4.75	%		4,457,660		48,791		4.38	%	Total interest-earning assets	5,810,248		69,178		4.72	%	5,629,091		64,911		4.57	%
Other assets		620,923							356,863						Other assets	642,222						626,622

Total assets	$	6,385,889						$	4,814,523						Total assets	$	6,452,470					$	6,255,713

Liabilities and shareholders’ equity:															Liabilities and shareholders’ equity:
Interest-bearing demand deposits	$	1,276,388	$	289		0.09	%	$	995,528	$	214		0.09	%	Interest-bearing demand deposits	$	1,240,548	$	284	0.09	%	$	1,125,159	$	248	0.09	%
Savings deposits		1,888,234		1,306		0.28	%		1,393,121		427		0.12	%	Savings deposits	1,861,166		1,192		0.25	%	1,803,022		833		0.18	%
Time deposits		441,116		1,404		1.27	%		313,556		593		0.76	%	Time deposits	447,669		1,574		1.39	%	430,286		991		0.91	%

Total interest-bearing deposits		3,605,738		2,999		0.33	%		2,702,205		1,234		0.18	%	Total interest-bearing deposits	3,549,383		3,050		0.34	%	3,358,467		2,072		0.24	%
Other borrowings		17,963		37		0.82	%		139,307		586		1.68	%	Other borrowings	73,350		334		1.81	%	246,637		1,178		1.89	%
Junior subordinated debt		57,222		829		5.79	%		56,928		789		5.54	%	Junior subordinated debt	57,156		817		5.67	%	56,973		815		5.68	%

Total interest-bearing liabilities		3,680,923		3,865		0.42	%		2,898,440		2,609		0.36	%	Total interest-bearing liabilities	3,679,889		4,201		0.45	%	3,662,077		4,065		0.44	%
Noninterest-bearing deposits		1,765,141							1,339,905						Noninterest-bearing deposits	1,777,852						1,710,374
Other liabilities		73,541							65,745						Other liabilities	104,062						86,131
Shareholders’ equity		866,284							510,433						Shareholders’ equity	890,667						797,131

Total liabilities and shareholders’ equity	$	6,385,889						$	4,814,523						Total liabilities and shareholders’ equity	$	6,452,470					$	6,255,713

Net interest spread (2)						4.33	%						4.02	%	Net interest spread⁽²⁾					4.27	%					4.13	%
Net interest income and interest margin (3)			$	64,613		4.48	%			$	46,182		4.14	%	Net interest income and interest margin⁽³⁾			$	64,977	4.44	%			$	60,846	4.29	%

⁽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.

~~(1)~~

~~Fully taxable equivalent (FTE)~~

⁽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, then annualized based on the number of days in the given period.

~~(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,~~During the ~~change~~comparable three month periods above, net interest income and net interest margin were benefited by both the increases in average ~~balances of assets~~volume and ~~liabilities~~rates earned on loans. These benefits were ~~significantly impacted~~partially offset by the ~~July 6, 2018 acquisition~~increases in rates paid on savings and time deposits. Total average interest-earning assets increased as a percent of ~~FNB Bancorp. For financial reporting purposes, the Company does not separately track the changes in assets and~~total average interest-bearing liabilities ~~based on branch location or regional geography. Organic growth, inclusive of seasonal fluctuation, also~~during these comparable nine-month periods increased from 154% to 158%, which contributed to the ~~year-over-year balance sheet changes. In addition~~growth in net interest income and net interest margin of $4,131,000 and 15 basis points, respectively. See the Summary of Changes in Interest Income and Expense due 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~~Changes in Average Asset 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 assetsLiability Balances 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
%

Yields Earned and Rates Paid, below for additional information.

Table of Contents

The following table presents, for the nine month 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~~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																For the nine months ended
	June 30, 2019							June 30, 2018									September 30, 2019										September 30, 2018
	Average Balance		Interest Income/ Expense		Rates Earned /Paid			Average Balance			Interest Income/ Expense		Rates Earned /Paid				Average Balance		Interest Income/ Expense		Rates Earned /Paid		Average Balance		Interest Income/ Expense		Rates Earned /Paid
Assets:																Assets:
Loans	$	4,033,954	$	109,889		5.45	%	$	3,066,152		$	77,353		5.05	%	Loans	$	4,070,568	$	166,888	5.48	%	$	3,387,390	$	130,455	5.15	%
Investment securities - taxable		1,428,951		21,677		3.03	%		1,123,964			15,394		2.74	%	Investment securities - taxable	1,420,426		31,849		3.00	%	1,192,304		25,042		2.81	%
Investment securities - nontaxable (1)		141,397		2,753		3.89	%		136,143			2,708		3.98	%	Investment securities - nontaxable⁽¹⁾	138,580		4,024		3.88	%	145,298		4,254		3.91	%

Total investments		1,570,348		24,430		3.11	%		1,260,107			18,102		2.87	%	Total investments	1,559,006		35,873		3.08	%	1,337,602		29,296		2.93	%
Cash at Federal Reserve and other banks		158,164		1,937		2.45	%		92,869			769		1.66	%	Cash at Federal Reserve and other banks	148,995		2,694		2.42	%	101,889		1,384		1.82	%

Total interest-earning assets		5,762,466		136,256		4.73	%		4,419,128			96,224		4.35	%	Total interest-earning assets	5,778,569		205,455		4.75	%	4,826,881		161,135		4.46	%
Other assets		643,592							358,747							Other assets	643,130						449,020

Total assets	$	6,406,058						$	4,777,875							Total assets	$	6,421,699					$	5,275,901

Liabilities and shareholders’ equity:																Liabilities and shareholders’ equity:
Interest-bearing demand deposits	$	1,274,882	$	576		0.09	%	$	994,867		$	425		0.09	%	Interest-bearing demand deposits	$	1,263,312	$	860	0.09	%	$	1,038,775	$	673	0.09	%
Savings deposits		1,907,677		2,439		0.26	%		1,382,249			838		0.12	%	Savings deposits	1,892,122		3,631		0.26	%	1,524,048		1,671		0.15	%
Time deposits		441,447		2,703		1.22	%		310,035			1,067		0.69	%	Time deposits	443,546		4,277		1.29	%	350,559		2,058		0.78	%

Total interest-bearing deposits		3,624,006		5,718		0.32	%		2,687,151			2,330		0.17	%	Total interest-bearing deposits	3,598,980		8,768		0.33	%	2,913,382		4,402		0.20	%
Other borrowings		16,736		50		0.60	%		123,544			928		1.50	%	Other borrowings	35,814		384		1.43	%	165,026		2,106		1.71	%
Junior subordinated debt		57,086		1,684		5.90	%		56,905			1,486		5.22	%	Junior subordinated debt	57,109		2,501		5.86	%	56,928		2,301		5.39	%

Total interest-bearing liabilities		3,697,828		7,452		0.40	%		2,867,600			4,744		0.33	%	Total interest-bearing liabilities	3,691,903		11,653		0.42	%	3,135,336		8,809		0.38	%
Noninterest-bearing deposits		1,754,973							1,336,070							Noninterest-bearing deposits	1,761,037						1,462,209
Other liabilities		98,570							65,982							Other liabilities	101,947						72,772
Shareholders’ equity		854,687							508,223							Shareholders’ equity	866,812						605,584
										��
Total liabilities and shareholders’ equity	$	6,406,058						$	4,777,875							Total liabilities and shareholders’ equity	$	6,421,699					$	5,275,901

Net interest spread (2)						4.33	%							4.02	%	Net interest spread⁽²⁾					4.33	%					4.08	%
Net interest income and interest margin (3)			$	128,804		4.47	%				$	91,480		4.14	%	Net interest income and interest margin⁽³⁾			$	193,802	4.48	%			$	152,326	4.22	%

⁽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.

~~(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~~The change in average balances of assets and liabilities were significantly impacted by the July 6, 2018 acquisition of FNB Bancorp. During the comparable nine month periods above, net interest income and net interest margin were benefited by both the increases in average volume and rates earned on loans. These benefits were partially offset by the increases in rates paid on savings and time deposits. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable

~~six-month~~

nine-month periods increased from 154% to 156%, which contributed to the growth in net interest income and net interest margin of ~~$37,324,000~~$41,476,000 and 3326 basis points, respectively. See the "Summary of changes in interest income and expense due to changes in average asset and liability balances and yields earned and rates paid", below for additional information.

Table of Contents

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).~~

components.


(in thousands)	Three months ended September 30, 2019 compared with three months ended September 30, 2018
	Volume		Rate		Total
Increase in interest income:
Loans	$	1,657	$	2,240	$	3,897
Investment securities⁽¹⁾	345		(117)		228
Cash at Federal Reserve and other banks	61		81		142
Total interest-earning assets	2,063		2,204		4,267
Increase (decrease) in interest expense:
Interest-bearing demand deposits	26		10		36
Savings deposits	28		331		359
Time deposits	42		541		583
Other borrowings	(792)		(52)		(844)
Junior subordinated debt	3		(1)		2
Total interest-bearing liabilities	(693)		829		136
Increase in net interest income	$	2,756	$	1,375	$	4,131

⁽¹⁾Fully taxable equivalent (FTE)


(in thousands)	Nine months ended September 30, 2019 compared with nine months ended September 30, 2018
	Volume		Rate		Total
Increase in interest income:
Loans	$	27,597	$	8,836	$	36,433
Investment securities⁽¹⁾	4,834		1,743		6,577
Cash at Federal Reserve and other banks	1,058		252		1,310
Total interest-earning assets	33,489		10,831		44,320
Increase (decrease) in interest expense:
Interest-bearing demand deposits	152		35		187
Savings deposits	478		1,482		1,960
Time deposits	648		1,571		2,219
Other borrowings	(1,430)		(292)		(1,722)
Junior subordinated debt	7		193		200
Total interest-bearing liabilities	(145)		2,989		2,844
Increase in net interest income	$	33,634	$	7,842	$	41,476

⁽¹⁾Fully taxable equivalent (FTE)

~~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~~September 30, 2019 increased ~~$18,431,000~~$4,131,000 or ~~39.9%~~6.8% to ~~$64,613,000~~$64,977,000 compared to ~~$46,182,000~~$60,846,000 during the three months ended ~~June~~September 30, 2018. The increase in net interest income (FTE) was primarily due ~~primarily~~ to both an increase in the average balances, and increase in market rates, on loans. Increases in average balance of loans ~~which contributed an additional $12,681,000 in~~added $1,657,000 to net 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~~$1,375,000 to net interest income, due to increases in rates earned on interest-earnings assets outpacing increases in rates paid inon interest-bearing liabilities.

Table of Contents

The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, has ~~increased~~decreased during the quarter by 0.50% to ~~5.50%~~5.00% at ~~June~~September 30, 2019, ~~as compared to 5.00%~~consistent with the rate at ~~June~~September 30, ~~2018.~~2018. As compared to the same quarter in the prior year, average loan yields increased 4322 basis points ~~from 5.06%~~to 5.46% during the three months ended ~~June~~September 30, ~~2018 to 5.49%~~2019 from 5.24% during the three months ended ~~June~~September 30, ~~2019.~~2018. Of the 4322 basis point increase in yields on loans, 3120 basis points was attributable to increases in market rates while 122 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~~$792,000, however, the increases in rates paid on deposit products increased interest expense by $882,000 for the ~~changes in volumes and rates associated with deposit products. During the twelve months~~three month period ended ~~June~~September 30, 2019 as compared with the ~~Federal Funds Target Rate was increased two times~~same period in ~~25 basis point increments from 2.00% to 2.50%.~~2018. The Company’s cost of interest-bearing deposits increased from 3324 basis points during the ~~six~~three months ended ~~June~~September 30, 2018 to 4034 basis points during the ~~six~~three months ended ~~June~~September 30, 2019.

Net interest income (FTE) during the ~~six~~nine months ended ~~June~~September 30, 2019 increased ~~$37,324,000~~$41,476,000 or ~~40.8%~~27.2% to ~~$128,804,000~~$193,802,000 compared to ~~$91,480,000~~$152,326,000 during the ~~six~~nine months ended ~~June~~September 30, 2018. The increase in net interest income (FTE) was primarily due ~~primarily~~ to an increase both in the average balance ofand rate on loans and investment securities, which ~~was~~were partially offset by an increase in the average ~~balance of~~rates paid on interest-bearing ~~liabilities and a 7~~deposits which increased by 13 basis points to 0.33% for the nine months ended September 30, 2019 as compared to the 0.20% for the nine months ended September 30, 2018. The 13 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~~deposits 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~~competitive pressures related to the rates ~~that increased the rates~~which the Company pays on its savings and time deposits. However, the growth in total average deposits during the comparable

~~six-month~~

nine-month periods allowed for the repayment of overnight borrowings which, combined with changes in related rates, contributed to a decrease in related interest expense of ~~$878,000.~~$1,722,000.

During the nine months ended September 30, 2019, the average balance of loans increased by $683,178,000 or 20.2% to$4,070,568,000. This increase in loan volume combined with the 33 basis point increase in loan yields resulted in an increase in interest income of $36,433,000 for the nine months ended September 30, 2019 as compared to the same period in 2018. The increase in net interest income and net interest margin was benefited by an increase in the year-to-date purchased loan discount accretion from $3,289,000 during the nine months ended September 30, 2018 to $5,919,000 during the nine months ended September 30, 2019. This increase in purchased loan discount accretion benefited loan yields by 6 basis points, and net interest margin by 3 basis points.

Asset Quality and Loan Loss Provisioning

The Company continued to experience improvement in the overall credit quality of its loan portfolio. At ~~June~~September 30, 2019, total nonperforming loans decreased to ~~$21,690,000~~$18,565,000 or ~~0.53%~~0.44% of total loans from $27,494,000 or 0.68% of total loans as of December 31, 2018.

The Company recorded ~~provision for~~a benefit due to reversal of loan losses of ~~$537,000~~$329,000 during the three months ended ~~June~~September 30, 2019, as compared to a ~~benefit from the reversal of~~ provision of ~~$638,000~~loan losses of $2,651,000 in the same quarter of the prior year. The ~~provision~~benefit from reversal was ~~necessitated in part by~~recorded, despite average loan growth of ~~$69,356,000~~$98,558,000 during the quarter, due to declines in calculated required specific reserves following the sale and ~~partially offset by $267,000~~charge-off of nonperforming loans, and a $250,000 decrease in ~~net recoveries on previously~~

~~charged-off~~

~~loans during the second quarter of 2019 as compared~~reserves attributed to ~~net recoveries of $189,000 in the second quarter of 2018. Additionally, while the Company remains cautious about the risks~~loans associated with ~~trends in California real estate prices, the duration of economic trends~~borrowers and ~~concentrations of credit, the qualitative factors~~collateral associated with ~~these measures reduced~~ the November 2018 Camp Fire. Additionally, the overall level of ~~calculated required reserves by approximately $632,000~~past due loans decreased significantly during the quarter, ~~ended~~from approximately $14,580,000 as of June 30, 2019 ~~therefore, changes~~to approximately $8,089,000 as of September 30, 2019, resulting in ~~those risks could result in additional levels of provisioning being required~~reductions during the quarter in the ~~future.~~calculated qualitative factor by approximately $206,000 associated with 'delinquency' loan volume. Net charge-offs (recoveries) for the nine months ended September 30, 2019 and 2018 were ($347,000) and $497,000, respectively. During the three months ended September 30, 2019 the sale of non-performing loans with carrying values totaling $2,887,000 further contributed to the reduction in required reserves on loans held for investment.

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~~Noninterest Income~~

Non-interest Income

The following table summarizes the Company’s ~~noninterest~~non-interest income for the periods indicated (in thousands):


	Three months ended June 30,													Three months ended September 30,
(dollars in thousands)	2019			2018			$ Change			% Change			(dollars in thousands)	2019		2018		$ Change		% Change
ATM and interchange fees	$	5,404		$	4,510		$	894			19.8	%	ATM and interchange fees	$	5,427	$	4,590	$	837	18.2	%
Service charges on deposit accounts		4,182			3,613			569			15.7	%	Service charges on deposit accounts	4,327		4,015		$	312	7.8	%
Other service fees		619			630			(11	)		(1.7	%)	Other service fees	808		676		$	132	19.5	%
Mortgage banking service fees		475			511			(36	)		(7.0	%)	Mortgage banking service fees	483		499		$	(16)	(3.2)	%
Change in value of mortgage servicing rights		(552	)		(36	)		(516	)		1433.3	%	Change in value of mortgage servicing rights	(455)		(37)		$	(418)	1,129.7	%

Total service charges and fees		10,128			9,228			900			9.8	%	Total service charges and fees	10,590		9,743		847		8.7	%

Increase in cash value of life insurance		746			656			90			13.7	%	Increase in cash value of life insurance	773		732		$	41	5.6	%
Asset management and commission income		739			810			(71	)		(8.8	%)	Asset management and commission income	721		728		$	(7)	(1.0)	%
Gain on sale of loans		575			666			(91	)		(13.7	%)	Gain on sale of loans	1,236		539		$	697	129.3	%
Lease brokerage income		239			200			39			19.5	%	Lease brokerage income	172		186		$	(14)	(7.5)	%
Sale of customer checks		135			138			(3	)		(2.2	%)	Sale of customer checks	126		88		$	38	43.2	%
Gain on sale of foreclosed assets		197			17			180			1058.8	%
Gain on sale of investment securities													Gain on sale of investment securities	107		207		$	(100)	(48.3)	%
Gain (loss) on marketable equity securities		42			(23	)		65			(282.6	%)	Gain (loss) on marketable equity securities	22		(22)		$	44	(200.0)	%
Loss on disposal of fixed assets		(42	)		(41	)		(1	)		2.4	%
Other		819			523			296			56.6	%	Other	361		135		$	226	167.4	%

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	%

Total other non-interest income													Total other non-interest income	3,518		2,593		$	925	35.7	%
Total non-interest income													Total non-interest income	$	14,108	$	12,336	$	1,772	14.4	%


	Nine months ended September 30,
(dollars in thousands)	2019		2018		$ Change		% Change
ATM and interchange fees	$	15,412	$	13,335	$	2,077	15.6	%
Service charges on deposit accounts	12,389		11,407		982		8.6	%
Other service fees	2,198		2,020		178		8.8	%
Mortgage banking service fees	1,441		1,527		(86)		(5.6)	%
Change in value of mortgage servicing rights	(1,652)		38		(1,690)		(4,447.4)	%
Total service charges and fees	29,788		28,327		1,461		5.2	%
Increase in cash value of life insurance	2,294		1,996		298		14.9	%
Asset management and commission income	2,102		2,414		(312)		(12.9)	%
Gain on sale of loans	2,223		1,831		392		21.4	%
Lease brokerage income	631		514		117		22.8	%
Sale of customer checks	401		327		74		22.6	%
Gain on sale of investment securities	107		207		(100)		(48.3)	%
Gain (loss) on marketable equity securities	100		(92)		192		(208.7)	%
Other	1,688		942		746		79.2	%
Total other non-interest income	9,546		8,139		1,407		17.3	%
Total non-interest income	$	39,334	$	36,466	$	2,868	7.9	%

~~Noninterest~~Non-interest income increased ~~$1,404,000 (11.5%~~$1,772,000 (14.4%) and ~~$978,000 (4.0%~~$2,868,000 (7.9%) during the three and ~~six~~nine month periods ended ~~June~~September 30, 2019 as compared to the three and ~~six~~nine month periods ended ~~June~~September 30, 2018, respectively. The increase quarter over quarter was primarily driven by increases in fee charges for interchange and various deposit services. Specifically, growth in ~~usage~~customers, volume of transactions related to customers, and to a lesser extent, an increase in the fees charged for those services. Growth in the nine month period over period is also due largely ~~in part~~ to the acquisition of FNB Bancorp aneffective July 2018, and resulting increase in customers and accounts that generate fee revenues. ~~In addition, during~~During the three and ~~six~~nine month periods ended ~~June~~September 30, 2019, the ~~company~~Company recorded ~~other noninterest income associated with death~~an increase in gain on the sale of loans of $697,000 and $392,000,

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respectively, as compared to the three and nine months ended September 30, 2018. Death benefit insurance proceeds of ~~$696,000 and $728,000, respectively.~~$800,000 were recognized within other income for the nine months ended September 30, 2019, compared to none in 2018. These increases were offset by valuation ~~changes~~declines in the Company’s mortgage servicing right asset of ~~$516,000~~$418,000 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,~~$1,690,000, respectively for the three and ~~six~~nine month periods ended ~~June~~September 30, 2019 as compared to the three and ~~six~~nine month periods ended ~~June~~September 30, 2018. Additional partial offsets to the overall increase were due to declines in asset management and commission income of ~~$71,000~~$7,000 and ~~$305,000,~~$312,000, respectively during the three and ~~six~~nine month periods ended ~~June~~September 30, 2019 as compared to the three and ~~six~~nine month periods ended ~~June~~September 30, 2018.

~~Table of Contents~~

~~Noninterest~~Non-interest Expense

The following table summarizes the Company’s ~~noninterest~~non-interest expense for the periods indicated (dollars in thousands):


	Three months ended June 30,											Three months ended September 30,
	2019		2018		$ Change			% Change				2019		2018		$ Change		% Change
Base salaries, net of deferred loan origination costs	$	17,211	$	14,429	$	2,782			19.3	%	Base salaries, net of deferred loan origination costs	$	17,656	$	15,685	$	1,971	12.6	%
Incentive compensation		3,706		2,159		1,547			71.7	%	Incentive compensation	3,791		4,515		(724)		(16.0)	%
Benefits and other compensation costs		5,802		4,865		937			19.3	%	Benefits and other compensation costs	5,452		5,623		(171)		(3.0)	%

Total salaries and benefits expense		26,719		21,453		5,266			24.5	%	Total salaries and benefits expense	26,899		25,823		1,076		4.2	%

Occupancy		3,738		2,720		1,018			37.4	%	Occupancy	3,711		3,173		538		17.0	%
Data processing and software		3,354		2,679		675			25.2	%	Data processing and software	3,411		2,786		625		22.4	%
Equipment		1,752		1,637		115			7.0	%	Equipment	1,679		1,750		(71)		(4.1)	%
Intangible amortization		1,431		339		1,092			322.1	%	Intangible amortization	1,431		1,390		41		2.9	%
Advertising		1,533		1,035		498			48.1	%	Advertising	1,358		1,341		17		1.3	%
ATM and POS network charges		1,270		1,437		(167	)		(11.6	%)	ATM and POS network charges	1,343		1,197		146		12.2	%
Professional fees		1,057		774		283			36.6	%	Professional fees	999		1,352		(353)		(26.1)	%
Telecommunications		773		681		92			13.5	%	Telecommunications	867		819		48		5.9	%
Regulatory assessments and insurance		490		417		73			17.5	%	Regulatory assessments and insurance	94		537		(443)		(82.5)	%
Merger and acquisition expense		—		601		(601	)		(100.0	%)	Merger and acquisition expense	—		4,150		(4,150)		(100.0)	%
Postage		315		301		14			4.7	%	Postage	438		275		163		59.3	%
Operational losses		226		252		(26	)		(10.3	%)	Operational losses	228		217		11		5.1	%
Courier service		412		224		188			83.9	%	Courier service	357		278		79		28.4	%
Gain on sale of foreclosed assets											Gain on sale of foreclosed assets	(50)		(2)		(48)		2,400.0	%
Loss on disposal of fixed assets											Loss on disposal of fixed assets	2		152		(150)		(98.7)	%
Other miscellaneous expense		3,782		3,320		462			13.9	%	Other miscellaneous expense	3,577		2,290		1,287		56.2	%

Total other noninterest expense		20,133		16,417		3,716			22.6	%

Total noninterest expense	$	46,852	$	37,870	$	8,982			23.7	%

Total other non-interest expense											Total other non-interest expense	19,445		21,705		(2,260)		(10.4)	%
Total non-interest expense											Total non-interest expense	$	46,344	$	47,528	$	(1,184)	(2.5)	%
Average full time equivalent staff		1,138		1,001		137			13.7	%	Average full time equivalent staff	1,160		1,146		14		1.2	%

	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	%

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	Nine months ended September 30,
	2019		2018		$ Change		% Change
Base salaries, net of deferred loan origination costs	$	51,624	$	44,076	$	7,548	17.1	%
Incentive compensation	10,064		9,126		938		10.3	%
Benefits and other compensation costs	17,058		15,726		1,332		8.5	%
Total salaries and benefits expense	78,746		68,928		9,818		14.2	%
Occupancy	11,223		8,574		2,649		30.9	%
Data processing and software	10,114		7,979		2,135		26.8	%
Equipment	5,298		4,938		360		7.3	%
Intangible amortization	4,293		2,068		2,225		107.6	%
Advertising	4,222		3,214		1,008		31.4	%
ATM and POS network charges	3,936		3,860		76		2.0	%
Professional fees	2,895		2,898		(3)		(0.1)	%
Telecommunications	2,437		2,201		236		10.7	%
Regulatory assessments and insurance	1,095		1,384		(289)		(20.9)	%
Merger and acquisition expense	—		5,227		(5,227)		(100.0)	%
Postage	1,063		934		129		13.8	%
Operational losses	679		763		(84)		(11.0)	%
Courier service	1,039		769		270		35.1	%
Gain on sale of foreclosed assets	(246)		(390)		144		(36.9)	%
Loss on disposal of fixed assets	82		206		(124)		(60.2)	%
Other miscellaneous expense	11,617		9,673		1,944		20.1	%
Total other non-interest expense	59,747		54,298		5,449		10.0	%
Total non-interest expense	$	138,493	$	123,226	$	15,267	12.4	%
Average full time equivalent staff	1,145		1,050		95		9.0	%

Salary and benefit expenses increased ~~$5,266,000 (24.5%~~$1,076,000 (4.2%) to ~~$26,719,000~~$26,899,000 during the three months ended ~~June~~September 30, 2019 compared to ~~$21,453,000~~$25,823,000 during the three months ended ~~June~~September 30, 2018. Base salaries, net of deferred loan origination costs increased ~~$2,782,000 (19.3%~~$1,971,000 (12.6%) to ~~$17,211,000.~~$17,656,000. The increase in base salaries and benefits related to compensation was largely due ~~primarily~~ to ~~a 13.7%~~an increase in average full time equivalent employees, ~~largely attributable~~to 1,160 from 1,146 in the year-ago quarter, as well as annual merit increases. Additionally, incentive compensation for retention bonuses related to the ~~acquisition of~~ FNB Bancorp ~~to 1,138 from 1,001 in~~acquisition totaled $1,292,000 during the

~~year-ago~~ three month period ended September 30, 2018.

~~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~~non-interest expense ~~increased $3,716,000 (22.6%)~~decreased $2,260,000 (10.4)% to ~~$20,133,000~~$19,445,000 during the three months ended ~~June~~September 30, 2019, compared to $21,705,000 during the three months ended ~~June~~September 30, 2018. The ~~increase~~decrease in other ~~noninterest~~non-interest expense during the three months ended September 30, 2019 was due primarily to ~~increased overhead operating costs related to~~ the ~~additional branches as a result~~elimination of merger and acquisition expenses totaling $4,150,000 following the ~~prior year acquisition of~~transaction with FNB ~~Bancorp. Highlighting those~~Bancorp effective July 2018, offset partially with increases ~~were intangible amortization,~~in other miscellaneous expenses 1,287,000 (56.2%), occupancy expenses 538,000 (17.0%), and 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 $601,000625,000 (22.4%), all during the ~~comparable quarterly periods.~~comparative three months ended September 30, 2018.

The increase in total ~~noninterest~~non-interest expense of ~~$16,333,000 (21.5%~~$15,267,000 (12.4%) to ~~$92,365,000~~$138,493,000 for the ~~six month period~~nine months ended ~~June~~September 30, 2019 compared to ~~$76,032,000~~$123,226,000 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.~~

activities, and partially offset by the $5,227,000 reduction in merger and acquisition expenses.

Income Taxes

The Company’s effective tax rate was ~~24.4%~~27.3% for the ~~quarter~~nine months ended ~~June~~September 30, 2019, as compared to ~~27.8%~~28.6% for the same quarter in the prior year. ~~The Company’s effective tax rate was 26.5% for~~During the ~~six~~three and nine months ended ~~June~~September 30, 2019 as compared to ~~27.9% for~~ the ~~six months ended June 30, 2018. The decrease~~same periods in ~~effective tax rates for~~ the ~~2019 periods is primarily attributable to~~2018 year, the Company earned a greater percentage of non-taxable income from investment securities and death benefits from life insurance proceeds. These benefits were partially offset by an increase in ~~nontaxable income related~~the estimated level of non-deductible compensation associated with increases in compensation to ~~death benefit insurance proceeds of $696,000 and $728,000 during the three and six month periods ended June 30, 2019, respectively.~~

covered employees.

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Financial Condition

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 contributes to the year-over-year balance sheet changes. During the twelve months ended September 30, 2019, organic loan growth of $154,912,000 or 3.8% and the reduction in other borrowings of $266,408,000 or 94.2% was funded by deposit growth of $202,290,000 or 4.0% and the reduction via sale and principal repayment of investment securities of $138,200,000 or 9.0%. Total assets grew by $66,018,000 or 1.0% between September 2018 and September 2019. The following is a comparison of the year over year change in certain assets and liabilities:


	As of September 30, 2019						$ Change		% Change
($‘s in thousands)	2019		2018
Ending balances
Total assets	$	6,384,883	$	6,318,865	$	66,018	1.0	%
Total loans	4,182,348		4,027,436		154,912		3.8	%
Total investments	1,397,753		1,535,953		(138,200)		(9.0)	%
Total deposits	5,295,407		5,093,117		202,290		4.0	%
Total noninterest-bearing deposits	1,777,357		1,710,505		66,852		3.9	%
Total other borrowings	16,423		282,831		(266,408)		(94.2)	%

Investment Securities

Investment securities available for sale ~~increased $18,958,000~~decreased $130,956,000 to ~~$1,133,994,000~~$984,080,000 as of ~~June~~September 30, 2019, compared to December 31, 2018. This ~~increase~~decrease is primarily attributable to ~~an increase in fair value~~the sale of ~~$22,263,000.~~investment securities to provide liquidity to support loan growth. Proceeds from the sale of securities and net gains associated totaled $125,247,000 and $107,000, respectively, for the three and nine months periods ended September 30, 2019. There were no ~~sales or~~ transfers of

available-for-sale

investment securities to held-to-maturity or vice versa during the ~~six~~nine month periods ended ~~June~~September 30, 2019 and 2018.

The following table presents the available for sale debt securities portfolio by major type as of ~~June~~September 30, 2019 and December 31, 2018:


(dollars in thousands)	June 30, 2019					December 31, 2018					(dollars in thousands)	September 30, 2019						December 31, 2018
	Fair Value		%			Fair Value		%				Fair Value		%		Fair Value		%
Debt securities available for sale:											Debt securities available for sale:
Obligations of U.S. government agencies	$	630,911		55.6	%	$	629,981		56.5	%	Obligations of U.S. government agencies	$	495,637	50.3	%	$	629,981	56.5	%
Obligations of states and political subdivisions		125,980		11.1	%		126,072		11.3	%	Obligations of states and political subdivisions	111,910		11.4	%	126,072		11.3	%
Corporate bonds		4,521		0.4	%		4,478		0.4	%	Corporate bonds	4,528		0.5	%	4,478		0.4	%
Asset backed securities		372,582		32.9	%		354,505		31.8	%	Asset backed securities	372,005		37.8	%	354,505		31.8	%

Total debt securities available for sale	$	1,133,994		100.0	%	$	1,115,036		100.0	%	Total debt securities available for sale	$	984,080	100.0	%	$	1,115,036	100.0	%

Investment securities held to maturity decreased ~~$32,412,000~~$51,487,000 to ~~$412,524,000~~$393,449,000 as of ~~June~~September 30, 2019, as compared to December 31, 2018. This decrease is attributable to principal repayments of ~~$31,938,000,~~$50,738,000, and amortization of net purchase ~~price~~ premiums of ~~$474,000.~~$749,000.

Table of Contents

The following table presents the held to maturity investment securities portfolio by major type as of ~~June~~September 30, 2019 and December 31, 2018:


(dollars in thousands)	June 30, 2019					December 31, 2018					(dollars in thousands)	September 30, 2019						December 31, 2018
	Amortized Cost		%			Amortized Cost		%				Amortized Cost		%		Amortized Cost		%
Debt securities held to maturity:											Debt securities held to maturity:
Obligations of U.S. government and agencies	$	398,714		96.7	%	$	430,343		96.7	%	Obligations of U.S. government and agencies	$	379,634	96.5	%	$	430,343	96.7	%
Obligations of states and political subdivisions		13,810		3.3	%		14,593		3.3	%	Obligations of states and political subdivisions	13,815		3.5	%	14,593		3.3	%

Total debt securities held to maturity	$	412,524		100	%	$	444,936		100.0	%	Total debt securities held to maturity	$	393,449	100.0	%	$	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				(dollars in thousands)	September 30, 2019						December 31, 2018
Real estate mortgage	$	3,178,730	77.5	%	$	3,143,100	78.1	%	Real estate mortgage	$	3,247,156	77.6	%	$	3,143,100	78.1	%
Consumer		434,388	10.6	%		418,982	10.4	%	Consumer	442,539		10.6	%	418,982		10.4	%
Commercial		276,045	6.7	%		276,548	6.9	%	Commercial	278,458		6.7	%	276,548		6.9	%
Real estate construction		214,524	5.2	%		183,384	4.6	%	Real estate construction	214,195		5.1	%	183,384		4.6	%

Total loans	$	4,103,687	100	%	$	4,022,014	100	%	Total loans	$	4,182,348	100.0	%	$	4,022,014	100.0	%

At ~~June~~September 30, 2019 loans, including net deferred loan costs and discounts, totaled ~~$4,103,687,000~~$4,182,348,000 which was a ~~$81,673,000 (2.0%~~$160,334,000 (3.9%) increase over the balances at December 31, 2018.

Table of Contents

Asset Quality and Nonperforming Assets

Nonperforming Assets

The following tables set forth the amount of the Company’s nonperforming assets ("NPA") 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			(dollars in thousands)	September 30, 2019			December 31, 2018
Performing nonaccrual loans	$	17,825		$	22,689		Performing nonaccrual loans	$	14,411		$	22,689
Nonperforming nonaccrual loans		3,844			4,805		Nonperforming nonaccrual loans	4,118			4,805

Total nonaccrual loans		21,669			27,494		Total nonaccrual loans	18,529			27,494
Loans 90 days past due and still accruing		22			—		Loans 90 days past due and still accruing	36			—

Total nonperforming loans		21,691			27,494		Total nonperforming loans	18,565			27,494
Foreclosed assets		1,548			2,280		Foreclosed assets	1,546			2,280

Total nonperforming assets	$	23,239		$	29,774		Total nonperforming assets	$	20,111		$	29,774

Nonperforming assets to total assets		0.36	%		0.47	%	Nonperforming assets to total assets	0.31		%	0.47		%
Nonperforming loans to total loans		0.53	%		0.68	%	Nonperforming loans to total loans	0.44		%	0.68		%
Allowance for loan losses to nonperforming loans		152	%		119	%	Allowance for loan losses to nonperforming loans	170		%	119		%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		1.97	%		2.11	%	Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed	1.82		%	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
%


	September 30, 2019
(dollars in thousands)	Originated			PNCI			PCI			Total
Performing nonaccrual loans	$	9,000		$	3,429		$	1,982		$	14,411
Nonperforming nonaccrual loans	2,224			1,598			296			4,118
Total nonaccrual loans	11,224			5,027			2,278			18,529
Loans 90 days past due and still accruing	36			—			—			36
Total nonperforming loans	11,260			5,027			2,278			18,565
Foreclosed assets	1,129			—			417			1,546
Total nonperforming assets	$	12,389		$	5,027		$	2,695		$	20,111
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans	$	791		$	—		$	255		$	1,046
Nonperforming assets to total assets	0.19		%	0.08		%	0.04		%	0.31		%
Nonperforming loans to total loans	0.27		%	0.12		%	0.05		%	0.44		%
Allowance for loan losses to nonperforming loans	276		%	8		%	0.26		%	170		%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed	1.19		%	3.53		%	36.72		%	1.82		%

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		%

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~~September 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
(in thousands)																(in thousands)	Balance at September 30, 2019		New NPA / Valuation Adjustments		Pay-downs /Sales /Upgrades		Charge-offs/ ⁽¹⁾ Write-downs		Transfers to Foreclosed Assets		Balance at June 30, 2019
Real estate mortgage:																Real estate mortgage:
Residential	$	4,350	$	2,187		$	(503	)	$	(2	)	$	—	$	2,668	Residential	$	4,370	$	1,226	$	(1,206)	$	—	$	—	$	4,350
Commercial		8,678		579			(207	)		—			—		8,306	Commercial	6,040		6		(1,898)		(746)		—		8,678
Consumer																Consumer
Home equity lines		2,476		67			(25	)		—			—		2,434	Home equity lines	2,600		816		(477)		—		(215)		2,476
Home equity loans		2,047		168			(708	)		—			—		2,587	Home equity loans	2,063		235		(216)		(3)		—		2,047
Other consumer		74		81			(40	)		(37	)		—		70	Other consumer	64		59		(10)		(59)		—		74
Commercial		4,066		1,126			(422	)		(138	)		—		3,500	Commercial	3,428		329		(383)		(584)		—		4,066
Construction:
Residential		—		—			—			—			—		—
Commercial		—		—			—			—			—		—


Construction																Construction	—		—		—		—		—		—
Total nonperforming loans		21,691		4,208			(1,905	)		(177	)		—		19,565	Total nonperforming loans	18,565		2,671		(4,190)		(1,392)		(215)		21,691
Foreclosed assets		1,548		(63	)		(704	)		—			—		2,315	Foreclosed assets	1,546				(126)		(91)		215		1,548

Total nonperforming assets	$	23,239	$	4,145		$	(2,609	)	$	(177	)	$	—	$	21,880	Total nonperforming assets	$	20,111	$	2,671	$	(4,316)	$	(1,483)	$	—	$	23,239

⁽¹⁾The table above does not include deposit overdraft charge-offs.

Nonperforming assets ~~increased~~decreased during the ~~second~~third quarter of 2019 by ~~$1,359,000 (6.2%~~$3,128,000 (13.4%) to $20,111,000 at September 30, 2019 compared to $23,239,000 at June 30, ~~2019 compared to $21,880,000 March 31,~~ 2019. The ~~increase~~decrease in nonperforming assets during the ~~second~~third quarter of 2019 was primarily the result of

~~pay-downs~~

~~and upgrades of nonperforming loans of $1,905,000,~~ write-downs of ~~$177,000~~$1,392,000 on nonperforming loans, and sales and pay-downs of ~~foreclosed assets~~non-performing loans of ~~$704,000, that~~$4,190,000, which were partially offset by new nonperforming loans of ~~$4,208,000 and an increase in the valuation of $63,000 in foreclosed property.~~$2,671,000.

The ~~$4,208,000~~$2,671,000 of new nonperforming loans added during the ~~second~~third quarter of 2019 was mainly comprised of 42 loans to the same borrower totaling ~~$3,746,000, of which $2,765,000 consisted of~~$985,000, and a single loan to a different borrower totaling $407,000. All 3 loans are secured by residential real estate ~~loans~~ which management believes are sufficiently secured by ~~collateral and $981,000 related to a loan secured by commercial vehicles.~~collateral. 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~~September 30, 2019.

Loan charge-offs during the three months ended ~~June~~September 30, 2019

In the ~~second~~third quarter of 2019, the Company recorded ~~$177,000~~$1,392,000 in loan charge-offs and ~~$116,000~~$130,000 in deposit overdraft charge-offs less ~~$514,000~~$476,000 in loan recoveries and ~~$46,000~~$44,000 in deposit overdraft recoveries resulting in ~~$267,000~~$1,002,000 of net ~~recoveries.~~charge-offs. Included in loan charge-offs were two loans with carrying balances of $1,023,000 related to one lending relationship that had long been identified as a fully reserved substandard credit where management determined that the collateral and estimated future cash flows were no longer supportive of the loan.

Table of Contents

~~Total~~Otherwise, charge-offs during the quarter 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.

~~Table of Contents~~

Changes in nonperforming assets during the ~~six~~nine months ended ~~June~~September 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		(in thousands):	Balance at September 30, 2019		New NPA / Valuation Adjustments		Pay-downs /Sales /Upgrades		Charge-offs/ ⁽¹⁾ Write-downs		Transfers to Foreclosed Assets		Balance at December 31, 2018
Real estate mortgage:																Real estate mortgage:
Residential	$	4,350	$	2,187	$	(573	)	$	(2	)	$	(116	)	$	2,854	Residential	$	4,370	$	3,413	$	(1,779)	$	(2)	$	(116)	$	2,854
Commercial		8,678		846		(7,214	)		—			—			15,046	Commercial	6,040		852		(9,112)		(746)		—		15,046
Consumer																Consumer
Home equity lines		2,476		91		(364	)		—			—			2,749	Home equity lines	2,600		907		(841)		—		(215)		2,749
Home equity loans		2,047		200		(1,116	)		—			—			2,963	Home equity loans	2,063		435		(1,332)		(3)		—		2,963
Other consumer		74		145		(41	)		(37	)		—			7	Other consumer	64		204		(51)		(96)		—		7
Commercial		4,066		1,399		(581	)		(627	)		—			3,875	Commercial	3,428		1,728		(964)		(1,211)		—		3,875
Construction:
Residential		—		—		—			—			—			—
Commercial		—		—		—			—			—			—


Construction																Construction	—		—		—		—		—		—
Total nonperforming loans		21,691		4,868		(9,889	)		(666	)		(116	)		27,494	Total nonperforming loans	18,565		7,539		(14,079)		(2,058)		(331)		27,494
Foreclosed assets		1,548		35		(883	)		—			116			2,280	Foreclosed assets	1,546		35		(1,009)		(91)		331		2,280

Total nonperforming assets	$	23,239	$	4,903	$	(10,772	)	$	(666	)	$	—		$	29,774	Total nonperforming assets	$	20,111	$	7,574	$	(15,088)	$	(2,149)	$	—	$	29,774

⁽¹⁾The table above does not include deposit overdraft charge-offs.

Nonperforming assets decreased during the ~~first half of~~nine months ended 2019 by ~~$6,535,000 (22.0%~~$9,663,000 (32.5%) to ~~$23,239,000~~$20,111,000 at ~~June~~September 30, 2019 compared to $29,774,000 at December 31, 2018. The decrease in nonperforming assets during the ~~first half of~~nine months period ended September, 2019 was primarily the result of

pay-downs,

sales and upgrades of nonperforming loans ~~of $9,889,000,~~totaling $14,079,000, and write-downs of ~~$666,000~~$2,058,000 on nonperforming loans, ~~and sales of foreclosed assets of $883,000,~~ that were partially offset by new nonperforming ~~assets~~loans of ~~$4,902,000.~~$7,539,000.

The ~~$6,535,000~~$14,079,000 in reduction of nonperforming loans during the ~~first half of~~nine months ended 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~~$6,818,000 and ~~loans were comprised~~sale 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.~~one relationship totaling $1,782,000.

Table of Contents

Loan charge-offs during the ~~six~~nine months ended ~~June~~September 30, 2019

InDuring the first ~~half~~nine months of 2019, the Company recorded ~~$791,000~~$2,183,000 in loan charge-offs and ~~$228,000~~$358,000 in deposit overdraft charge-offs less ~~$2,266,000~~$2,742,000 in loan recoveries and ~~$102,000~~$146,000 in deposit overdraft recoveries resulting in ~~$1,349,000~~$347,000 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
%

indicated


(dollars in thousands)	September 30, 2019			December 31, 2018
Allowance for originated and PNCI loan losses:
Environmental factors allowance	$	12,675		$	11,577
Formula allowance	17,332			18,689
Total allowance for originated and PNCI loan losses	30,007			30,266
Allowance for impaired loans	1,524			2,194
Allowance for PCI loan losses	6			122
Total allowance for loan losses	$	31,537		$	32,582
Allowance for loan losses to loans	0.75		%	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”

“Results of Operations”

, above. Based on the current conditions of the loan portfolio, management believes that the ~~$32,868,000~~$31,537,000 allowance for loan losses at ~~June~~September 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.

~~Table of Contents~~

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:


	September 30, 2019						December 31, 2018
Real estate mortgage	$	14,347	45.6	%	$	15,620	47.9	%
Consumer	8,549		27.1	%	8,375		25.7	%
Commercial	5,687		18.0	%	6,090		18.7	%
Real estate construction	2,954		9.3	%	2,497		7.7	%
Total allowance for loan losses	$	31,537	100.0	%	$	32,582	100.0	%

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
%


	September 30, 2019						December 31, 2018
Real estate mortgage	$	3,247,156	0.44	%	$	3,143,100	0.50	%
Consumer	442,539		1.93	%	418,982		2.00	%
Commercial	278,458		2.04	%	276,548		2.20	%
Real estate construction	214,195		1.38	%	183,384		1.36	%
Total allowance for loan losses	$	4,182,348	0.75	%	$	4,022,014	0.81	%

Table of Contents

The following table summarizes the activity in the allowance for loan losses for the periods indicated (dollars in thousands):


														Three months ended September 30,									Nine months ended September 30,
(in thousands)	2019			2018			2019			2018			(in thousands)	2019			2018			2019			2018
Allowance for loan losses:													Allowance for loan losses:
Balance at beginning of period	$	32,064		$	29,973		$	32,582		$	30,323		Balance at beginning of period	$	32,868		$	29,524		$	32,582		$	30,323
Reversal of provision for loan losses		537			(638	)		(1,063	)		(874	)
Loans charged off:
Provision for (reversal of) loan losses													Provision for (reversal of) loan losses	(329)			2,651			(1,392)			1,777
Loans charged-off:													Loans charged-off:
Real estate mortgage:													Real estate mortgage:
Residential		(2	)		(51	)		(2	)		(52	)	Residential	—			(25)			(2)			(77)
Commercial		—			(15	)		—			(15	)	Commercial	(746)			—			(746)			(15)
Consumer:													Consumer:
Home equity lines		—			(24	)		—			(104	)	Home equity lines	—			(172)			—			(276)
Home equity loans		—			—			—			—		Home equity loans	(3)			(23)			(3)			(23)
Other consumer		(153	)		(174	)		(360	)		(368	)	Other consumer	(188)			(229)			(548)			(597)
Commercial		(138	)		(54	)		(657	)		(259	)	Commercial	(585)			(693)			(1,242)			(952)
Construction:													Construction:
Residential		—			—			—			—		Residential	—			—			—			—
Commercial		—			—			—			—		Commercial	—			—			—			—

Total loans charged off		(293	)		(318	)		(1,019	)		(798	)
Total loans charged-off													Total loans charged-off	(1,522)			(1,142)			(2,541)			(1,940)
Recoveries of previously charged-off loans:													Recoveries of previously charged-off loans:
Real estate mortgage:													Real estate mortgage:
Residential		3			—			5			—		Residential	48			—			53			—
Commercial		10			21			1,391			36		Commercial	126			15			1,517			51
Consumer:													Consumer:
Home equity lines		183			317			278			526		Home equity lines	27			151			305			677
Home equity loans		171			23			258			37		Home equity loans	156			139			414			176
Other consumer		108			66			183			144		Other consumer	79			63			262			208
Commercial		85			80			253			130		Commercial	84			202			337			331
Construction:													Construction:
Residential		—			—			—			—		Residential	—			—			—			—
Commercial		—			—			—			—		Commercial	—			—			—			—

Total recoveries of previously charged off loans		560			507			2,368			873

Total recoveries of previously charged-off loans													Total recoveries of previously charged-off loans	520			570			2,888			1,443
Net recoveries (charge-offs)		267			189			1,349			75		Net recoveries (charge-offs)	(1,002)			(572)			347			(497)

Balance at end of period	$	32,868		$	29,524		$	32,868		$	29,524		Balance at end of period	$	31,537		$	31,603		$	31,537		$	31,603

Average total loans	$	4,044,044		$	3,104,126		$	4,033,954		$	3,066,152		Average total loans	$	4,142,602		$	4,019,391		$	4,070,568		$	3,387,390

Ratios (annualized):													Ratios (annualized):
Net charge-offs (recoveries) during period to average loans outstanding during period		(0.03	)%		(0.02	)%		(0.13	)%		(0.01	)%	Net charge-offs (recoveries) during period to average loans outstanding during period	0.10		%	0.06		%	(0.03)		%	0.06		%
Benefit from reversal of loan losses to average loans outstanding during period		0.05	%		(0.08	)%		(0.11	)%		(0.11	)%
(Benefit from reversal of) provision for loan losses to average loans outstanding during period													(Benefit from reversal of) provision for loan losses to average loans outstanding during period	(0.03)		%	0.26		%	(0.14)		%	0.21		%

Table of Contents

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		(in thousands)	Balance at September 30, 2019		Sales		Valuation Adjustments		Transfers from Loans		Balance at December 31, 2018
Land & Construction	$	445	$	—		$	—		$	—	$	445	Land & Construction	$	417	$	—	$	(28)	$	—	$	445
Residential real estate		1,015		(883	)		40			116		1,742	Residential real estate	1,129		(981)		37		331		1,742
Commercial real estate		88		—			(5	)		—		93	Commercial real estate	—		(28)		(65)		—		93

Total foreclosed assets	$	1,548	$	(883	)	$	35		$	116	$	2,280	Total foreclosed assets	$	1,546	$	(1,009)	$	(56)	$	331	$	2,280

Deposits

During the three and ~~six~~nine months ended ~~June~~September 30, 2019, the Company’s deposits decreased ~~$88,089,000~~$46,766,000 and ~~$24,293,000~~$71,059,000 respectively to ~~$5,342,173,000.~~$5,295,407,000. Included in the ~~June~~September 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~~nine months ended ~~June~~September 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~~September 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~~$896,665,000 at ~~June~~September 30, 2019. This amount represents an increase of ~~$48,513,000 (5.9%~~$69,292,000 (8.3%) from December 31, 2018, the net result of comprehensive income for the nine month period of ~~$61,468,000,~~$88,560,000, the effect of equity compensation vesting of $815,000, and the exercise of stock options of ~~$2,499,000,~~$2,646,000, that were partially offset by dividends paid of ~~$11,575,000,~~$18,285,000, and repurchase of common stock of ~~$4,694,000.~~$4,842,000. The Company’s ratio of equity to total assets was ~~13.7%~~14.0% and 13.0% as of ~~June~~September 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~~September 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							September 30, 2019						December 31, 2018
	Ratio			Minimum Regulatory Requirement			Ratio			Minimum Regulatory Requirement				Ratio		Minimum Regulatory Requirement		Ratio		Minimum Regulatory Requirement
Total capital		14.93	%		10.50	%		14.40	%		9.25	%	Total capital	15.23	%	10.50	%	14.40	%	9.25	%
Tier I capital		14.19	%		8.50	%		13.66	%		7.25	%	Tier I capital	14.52	%	8.50	%	13.66	%	7.25	%
Common equity Tier 1 capital		13.03	%		7.00	%		12.49	%		5.75	%	Common equity Tier 1 capital	13.37	%	7.00	%	12.49	%	5.75	%
Leverage		11.08	%		4.00	%		10.68	%		4.00	%	Leverage	11.31	%	4.00	%	10.68	%	4.00	%

Table of Contents

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.

~~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~~September 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,~~$1,001,196,000 , or ~~17.8%~~15.7% of total assets. The Company’s profitability during the first ~~six~~nine months of 2019 generated cash flows from operations of ~~$33,867,000~~$76,266,000 compared to ~~$32,944,000~~$59,905,000 during the first ~~six~~nine months of 2018. Net cash ~~used in~~provided by investing activities was ~~$47,403,000 and $144,813,000~~$46,204,000 for the nine months ended September 30, 2019, compared to net cash used by investing activities of $112,873,000 during the ~~six~~nine months ~~ended June 30, 2019 and 2018, respectively.~~ending 2018. Financing activities used ~~$38,415,000~~$90,956,000 during the ~~six~~nine months ended ~~June~~September 30, 2019, compared to net cash provided by financing activities of ~~$90,503,000~~$74,083,000 during the ~~six~~nine months ended ~~June~~September 30, 2018. Deposit balance changes ~~accounted~~reduced available liquidity by $71,059,000 during the nine months ended September 30, 2019, compared to an increase of $92,051,000 for ~~($24,293,000) and $68,091,000 of~~ financing ~~funds~~ activity during the ~~six months ended June 30, 2019 and 2018, respectively.~~the same period in 2018. Dividends paid used ~~$11,575,000~~$18,285,000 and ~~$7,813,000~~$12,984,000 of cash during the ~~six~~nine months ended ~~June~~September 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.

~~Table of Contents~~

~~Item 3.~~

~~Quantitative and Qualitative Disclosures about Market Risk~~

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~~

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~~September 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~~September 30, 2019.

During the three and ~~six~~nine months ended ~~June~~September 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.

Table of Contents

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~~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


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⁾
July 1 - 30, 2019	8,278	$	37.78	—	303,434
August 1 - 30, 2019	38,666	$	36.20	—	303,434
September 1 - 30, 2019	—	—		—	303,434
Total	46,944	$	36.48	—	303,434

⁽¹⁾Includes shares purchased by the Company’s Employee Stock Ownership Plan in open market purchases and tendered by employees 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.

~~(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.~~

⁽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. 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 repurchase plan.

Table of Contents

Item 6 – Exhibits

EXHIBIT INDEX


Exhibit No.				Exhibit

~~Exhibit~~ ~~No.~~ 31.1					~~Exhibit~~

	~~31.1~~		Rule 13a-14(a)/15d-14(a) Certification of CEO

31.2				~~31.2~~			Rule 13a-14(a)/15d-14(a) Certification of CFO

32.1				~~32.1~~			Section 1350 Certification of CEO

32.2				~~32.2~~			Section 1350 Certification of CFO

101.INS		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		~~101.SCH~~				XBRL Taxonomy Extension Schema Document

101.CAL		~~101.CAL~~				XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		~~101.LAB~~				XBRL Taxonomy Extension Label Linkbase Document

101.PRE		~~101.PRE~~				XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		~~101.DEF~~				XBRL Taxonomy Extension Definition Linkbase Document

*	~~Management contract or compensatory plan or arrangement.~~

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,~~November 8, 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)

6066


		Page
PART I – FINANCIAL INFORMATION			2

Item 1 – Financial Statements (Unaudited)			2

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
	44
Item 3 – Quantitative and Qualitative Disclosures about Market Risk			58
	63
Item 4 – Controls and Procedures			58
	63
PART II – OTHER INFORMATION			58
	64
Item 1 – Legal Proceedings			58
	64
Item 1A – Risk Factors			58
	64
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			58
	64
Item 6 – Exhibits			59
	65
Signatures			60	66

Exhibits


	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


	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


	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


(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


	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


	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	%


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	%


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	%


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

~~Large accelerated filer~~

~~Accelerated filer~~

~~Non-accelerated filer~~

~~Smaller reporting company~~

~~Emerging growth company~~