10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

for the quarterly period ended: September 30, 2018

 

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

for the transition period from                  to                 .

Commission File Number: 000-10661

 

 

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

CALIFORNIA   94-2792841

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices) (Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:

Common stock, no par value: 30,417,818 shares outstanding as of November 6, 2018

 

 

 


Table of Contents

TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS

 

     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

     38  

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

     55  

Item 4 – Controls and Procedures

     55  

PART II – OTHER INFORMATION

     56  

Item 1 – Legal Proceedings

     56  

Item 1A – Risk Factors

     56  

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     56  

Item 6 – Exhibits

     57  

Signatures

     58  

Exhibits

  

 

1


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)

 

     At September 30,
2018
    At December 31,
2017
 

Assets:

    

Cash and due from banks

   $ 109,363     $ 105,968  

Cash at Federal Reserve and other banks

     117,180       99,460  
  

 

 

   

 

 

 

Cash and cash equivalents

     226,543       205,428  

Investment securities:

    

Marketable equity securities

     2,846       2,938  

Available for sale debt securities

     1,055,960       727,945  

Held to maturity debt securities

     459,897       514,844  

Restricted equity securities

     17,250       16,956  

Loans held for sale

     3,824       4,616  

Loans

     4,027,436       3,015,165  

Allowance for loan losses

     (31,603     (30,323
  

 

 

   

 

 

 

Total loans, net

     3,995,833       2,984,842  

Foreclosed assets, net

     1,832       3,226  

Premises and equipment, net

     89,290       57,742  

Cash value of life insurance

     116,596       97,783  

Accrued interest receivable

     19,592       13,772  

Goodwill

     220,972       64,311  

Other intangible assets, net

     30,711       5,174  

Mortgage servicing rights

     7,122       6,687  

Other assets

     70,597       55,051  
  

 

 

   

 

 

 

Total assets

   $ 6,318,865     $ 4,761,315  
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 1,710,505     $ 1,368,218  

Interest-bearing

     3,382,612       2,640,913  
  

 

 

   

 

 

 

Total deposits

     5,093,117       4,009,131  

Accrued interest payable

     1,729       930  

Other liabilities

     82,077       66,422  

Other borrowings

     282,831       122,166  

Junior subordinated debt

     56,996       56,858  
  

 

 

   

 

 

 

Total liabilities

     5,516,750       4,255,507  
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Shareholders’ equity:

    

Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at September 30, 2018 and December 31, 2017

     —         —    

Common stock, no par value: 50,000,000 shares authorized; issued and outstanding:

    

30,417,818 at September 30, 2018

    

22,955,963 at December 31, 2017

     541,519       255,836  

Retained earnings

     287,555       255,200  

Accumulated other comprehensive loss, net of tax

     (26,959     (5,228
  

 

 

   

 

 

 

Total shareholders’ equity

     802,115       505,808  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 6,318,865     $ 4,761,315  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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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,
 
     2018      2017      2018      2017  

Interest and dividend income:

           

Loans, including fees

   $ 53,102      $ 37,268      $ 130,455      $ 108,600  

Investments:

           

Taxable securities

     9,189        7,011        23,949        20,617  

Tax exempt securities

     1,189        1,041        3,272        3,124  

Dividends

     459        301        1,093        1,020  

Interest bearing cash at Federal Reserve and other banks

     615        292        1,384        1,080  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     64,554        45,913        160,153        134,441  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     2,072        1,028        4,402        2,896  

Other borrowings

     1,178        149        2,106        164  

Junior subordinated debt

     815        652        2,301        1,870  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,065        1,829        8,809        4,930  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     60,489        44,084        151,344        129,511  

Provision for (benefit from) loan losses

     2,651        765        1,777        (1,588
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for (benefit from) loan losses

     57,838        43,319        149,567        131,099  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges and fees

     9,743        9,475        28,327        27,861  

Commissions on sale of non-deposit investment products

     728        672        2,414        1,984  

Increase in cash value of life insurance

     732        732        1,996        2,043  

Gain on sale of loans

     539        606        1,831        2,293  

Gain on sale of investment securities

     207        961        207        961  

Other

     237        484        1,875        2,401  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     12,186        12,930        36,650        37,543  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries and related benefits

     25,823        20,933        68,928        62,320  

Other

     21,555        16,289        54,482        46,628  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     47,378        37,222        123,410        108,948  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     22,646        19,027        62,807        59,694  

Provision for income taxes

     6,476        7,130        17,698        22,129  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 16,170      $ 11,897      $ 45,109      $ 37,565  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.54      $ 0.52      $ 1.78      $ 1.64  

Diluted

   $ 0.53      $ 0.51      $ 1.76      $ 1.62  

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2018     2017     2018     2017  

Net income

   $ 16,170     $ 11,897     $ 45,109     $ 37,565  

Other comprehensive income (loss), net of tax:

        

Unrealized gains (losses) on available for sale securities arising during the period, after reclassifications

     (5,917     (166     (20,941     3,137  

Change in minimum pension liability, after reclassifications

     81       55       241       164  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (5,836     (111     (20,700     3,301  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 10,334     $ 11,786     $ 24,409     $ 40,866  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data; unaudited)

 

                       Accumulated        
     Shares of                 Other        
     Common     Common     Retained     Comprehensive        
     Stock     Stock     Earnings     Income (loss)     Total  

Balance at December 31, 2016

     22,867,802     $ 252,820     $ 232,440     $ (7,913   $ 477,347  

Net income

         37,565         37,565  

Other comprehensive income

           3,301       3,301  

Stock option vesting

       211           211  

Service condition RSU vesting

       657           657  

Market plus service condition RSU vesting

       316           316  

Stock options exercised

     133,850       2,418           2,418  

Service condition RSUs released

     28,397             —    

Market plus service condition RSUs released

     18,805             —    

Repurchase of common stock

     (107,390     (1,191     (2,663       (3,854

Dividends paid ($ 0.49 per share)

         (11,228       (11,228
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

     22,941,464     $ 255,231     $ 256,114     $ (4,612   $ 506,733  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

     22,955,963     $ 255,836     $ 255,200     $ (5,228   $ 505,808  

Net income

         45,109         45,109  

Adoption ASU 2016-01

         (62     62       —    

Adoption ASU 2018-02

         1,093       (1,093     —    

Other comprehensive loss

           (20,700     (20,700

Stock option vesting

       75           75  

Service condition RSU vesting

       745           745  

Market plus service condition RSU vesting

       274           274  

Service condition RSUs released

     32,516             —    

Market plus service condition RSUs released

     25,512             —    

Stock options exercised

     27,400       475           475  

Issuance of common stock

     7,405,277       284,437           284,437  

Repurchase of common stock

     (28,850     (323     (801       (1,124

Dividends paid ($ 0.51 per share)

         (12,984       (12,984
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

     30,417,818     $ 541,519     $ 287,555     $ (26,959   $ 802,115  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

 

     For the nine months ended September 30,  
     2018     2017  

Operating activities:

    

Net income

   $ 45,109     $ 37,565  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation of premises and equipment, and amortization

     4,914       5,089  

Amortization of intangible assets

     2,068       1,050  

Provision for (benefit from) loan losses

     1,777       (1,588

Amortization of investment securities premium, net

     1,953       2,431  

Gain on sale of investment securities

     (207     (961

Originations of loans for resale

     (63,912     (83,907

Proceeds from sale of loans originated for resale

     66,138       85,846  

Gain on sale of loans

     (1,831     (2,293

Change in market value of mortgage servicing rights

     (38)       795  

Provision for losses on foreclosed assets

     89       162  

Gain on sale of foreclosed assets

     (390)       (308

Loss on disposal of fixed assets

     206       61  

Gain on sale of premises held for sale

     —         (3

Increase in cash value of life insurance

     (1,996)       (2,043

Life insurance proceeds in excess of cash value

     —         (108

Loss on marketable equity securities

     92       —    

Equity compensation vesting expense

     1,094       1,184  

Change in:

    

Reserve for unfunded commitments

     (864)       270  

Interest receivable

     (5,820)       (629

Interest payable

     799       49  

Other assets and liabilities, net

     10,724       3,155  
  

 

 

   

 

 

 

Net cash from operating activities

     59,905       45,817  
  

 

 

   

 

 

 

Investing activities:

    

Cash acquired in acquisition, net of consideration paid

     30,613       —    

Proceeds from maturities of securities available for sale

     54,510       20,889  

Proceeds from maturities of securities held to maturity

     54,203       64,969  

Proceeds from sale of available for sale securities

     293,279       25,757  

Purchases of securities available for sale

     (370,843)       (195,465

Net redemption of restricted equity securities

     7,429       —    

Loan origination and principal collections, net

     (178,596     (174,914

Proceeds from sale of foreclosed assets

     2,206       1,787  

Proceeds from sale of premises held for sale

     —         3,338  

Proceeds from sale of premises and equipment

     62       —    

Purchases of premises and equipment

     (5,736     (10,874

Life insurance proceeds

     —         649  
  

 

 

   

 

 

 

Net cash from investing activities

     (112,873     (263,864
  

 

 

   

 

 

 

Financing activities:

    

Net change in deposits

     92,051       31,896  

Net change in other borrowings

     (4,335)       81,237  

Repurchase of common stock

     (834)       (1,629

Dividends paid

     (12,984)       (11,228

Exercise of stock options

     185       193  
  

 

 

   

 

 

 

Net cash from financing activities

     74,083       100,469  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     21,115       (117,578
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of year

     205,428       305,612  
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 226,543     $ 188,034  
  

 

 

   

 

 

 

Supplemental disclosure of noncash activities:

    

Unrealized (loss) gain on securities available for sale

   $ (29,704   $ 5,411  

Loans transferred to foreclosed assets

   $ 511     $ 726  

Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes

   $ 1,124     $ 3,854  

Supplemental disclosure of cash flow activity:

    

Cash paid for interest expense

   $ 8,010     $ 4,881  

Cash paid for income taxes

   $ 11,625     $ 15,450  

Assets acquired in acquisition plus goodwill recognized, net

   $ 1,456,505     $ —    

Liabilities assumed in acquisition

   $ 1,172,068     $ —    

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 29 California counties. The Bank operates from 69 traditional branches, 9 in-store branches and 2 loan production offices. The Company has five capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by the Company and three acquired with the acquisition of North Valley Bancorp.

The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,741,000 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 regulatinos of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidtated financial statements and notes thereto included in the Company’s Annua Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”).

Significant Group Concentration of Credit Risk

The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout northern and central California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into one business segment that it denotes as community banking.

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that area of California north of, and including, Stockton; central California as that area of the state south of Stockton, to and including, Bakersfield; and southern California as that area of the state south of Bakersfield.

Business Combinations

The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

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 maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents.

Revenue Recognition

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.

Most of our revenue-generating transactions are not subject to Topic 606, including revenue generated from financial instruments, such as our loans and investment securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2018 and December 31, 2017, the Company did not have any significant contract balances. The Company has evaluated the nature of its revenue streams and determined that further disaggregation of revenue into more granular categories beyond what is presented in the Note 15 was not necessary.

 

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Accounting Standards Adopted in 2018

FASB Accounting Standards Update (ASU) No. 2014- 09, Revenue from Contracts with Customers (Topic 606): ASU 2014-09 is intended to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15, 2016. ASU 2014-09 does not apply to revenue associated with financial instruments such as loans and investments, which are accounted for under other provisions of GAAP. The Company adopted ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (1) above, the Company recorded a reclassification of cumulative unrealized losses of its marketable equity securities from accumulated other comprehensive income (loss) to retained earnings as of January 1, 2018. Additionally, the Company recognized changes in the fair value of its marketable equity securities in the condensed consolidated statements of net income for the three and nine months ended September 30, 2018. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of September 30, 2018 using an exit price notion (see Note 18 Fair Value Measurement).

FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2017-01, Business Combinations - Clarifying the Definition of a Business (Topic 805). ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. ASU 2017-07 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award’s fair value, (ii) the award’s vesting conditions and (iii) the award’s classification as an equity or liability instrument. ASU 2017-09 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). ASU 2018-02 allows, but does not require, entities to reclassify certain income tax effects in accumulated other comprehensive income (AOCI) to retained earnings that resulted from the Tax Cuts and Jobs Act (Tax Act) that was enacted on December 22, 2017. The Tax Act included a reduction to the Federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the income tax effects in

 

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AOCI calculated using the historical Federal corporate income tax rate of 35 percent and the income tax effects in AOCI calculated using the newly enacted 21 percent Federal corporate income tax rate. The amendments in ASU 2018-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2018-02 on January 1, 2018, and elected to reclassify certain income tax effects in AOCI to retained earnings. This change in accounting principle was accounted for as a cumulative-effect adjustment to the balance sheet resulting in a $1,093,000 increase to retained earnings and a corresponding decrease to AOCI on January 1, 2018.

Accounting Standards Pending Adoption

FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-2, 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. ASU 2016-02 will be effective for the Company on January 1, 2019, utilizing the modified retrospective transition approach. FASB has issued incremental guidance to the new leasing standard through ASU No. 2018-10 and 2018-11. Based on current leases, subject to change, the Company estimates that the adoption of this standard will result in an increase in assets of approximately $30 million to recognize the present value of the lease obligations with a corresponding increase in liabilities of approximately $30 million. This amount is subject to change as the Company continues to evaluate the provisions of ASU No. 2016-02, 2018-10 and 2018-11. The Company does not expect this to have a material impact on the Company’s results of operations or cash flows.

FASB issued ASU No. 2016-13, Financial InstrumentsCredit Losses (Topic 326). ASU 2016-13 is the final guidance on the new current expected credit loss (‘‘CECL’’) model. ASU 2016-13, among other things, requires the incurred loss impairment methodology in current GAAP be replaced with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (‘‘HTM’’) debt securities. ASU 2016-13 amends the accounting for credit losses on available-for-sale securities (‘‘AFS’’), whereby credit losses will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, ASU 2016-13 requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. ASU 2016-13 allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). ASU 2016-13 will be effective for the Company on January 1, 2020, and early adoption is permitted. While the Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.

FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350): ASU 2017-04 eliminates step two of the goodwill impairment test (the hypothetical purchase price allocation used to determine the implied fair value of goodwill) when step one (determining if the carrying value of a reporting unit exceeds its fair value) is failed. Instead, entities simply will compare the fair value of a reporting unit to its carrying amount and record goodwill impairment for the amount by which the reporting unit’s carrying amount exceeds its fair value. ASU 2017-04 will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.

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 will be effective for the Company on January 1, 2019, 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 material 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 material 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 million to settle and retire all FNBB stock options outstanding as of the acquisition date. Upon the consummation of the merger, the Company added 12 branches within San Mateo, San Francisco, and Santa Clara counties.

In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core deposit intangibles on the acquisition date. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase prices accounting adjustments including goodwill are all non-taxable and /or non-deductible. Acquisition related costs of $4,150,000 and $5,227,000 are included in the income statement for the three and nine months ended September 30, 2018. During the nine months ended September 30, 2017, there were no acquisition costs incurred.

The acquisition was consistent with the Company’s strategy to expand into the Bay Area market. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of the estimated cost savings resulting from the combined operations.

The following table summarizes the consideration paid for FNBB and the amounts of assets acquired and liabilities assumed that were recorded at the acquisition date (in thousands).

 

     FNB Bancorp
July 6, 2018
 

Fair value of consideration transferred:

  

Fair value of shares issued

   $ 284,437  

Cash consideration

     6,695  
  

 

 

 

Total fair value of consideration transferred

     291,132  
  

 

 

 

Assets acquired:

  

Cash and cash equivalents

     37,308  

Securities available for sale

     335,667  

Restricted equity securities

     7,723  

Loans

     834,683  

Premises and equipment

     30,522  

Cash value of life insurance

     16,817  

Core deposit intangible

     27,605  

Other assets

     16,214  
  

 

 

 

Total assets acquired

     1,306,539  
  

 

 

 

Liabilities assumed:

  

Deposits

     991,935  

Other liabilities

     15,133  

Short-term borrowings - Federal Home Loan Bank

     165,000  
  

 

 

 

Total liabilities assumed

     1,172,068  
  

 

 

 

Total net assets acquired

     134,471  
  

 

 

 

Goodwill recognized

   $ 156,661  
  

 

 

 

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.

 

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The accompanying condensed consolidated financial statements include the accounts of FNB Bancorp since July 6, 2018. The table below presents the unaudited pro forma information as if the acquisition of FNB Bancorp had occurred on January 1, 2017 after giving effect to certain acquisition accounting adjustments. The pro forma information for the three and nine months ended September 30, 2018 and 2017 includes acquisition adjustments for the amortization/accretion on loans, core deposit intangibles, and related income tax effects. The pro forma financial information also includes one-time costs associated with the acquisition but does not include expected costs savings synergies that we expect to achieve. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

 

     Three months ended      Nine months ended  
     September 30,
2018
     September 30,
2017
     September 30,
2018
     September 30,
2017
 
     ( in thousands, except per share data)  

Summarized proforma income statement data:

           

Net interest income

   $ 61,259      $ 57,329      $ 178,434      $ 168,363  

Provision for (benefit from) loan losses

     2,651        765        1,374        (1,728

Noninterest income

     12,288        13,902        38,517        40,537  

Noninterest expense

     (40,850      (45,983      (135,048      (135,218
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     30,046        24,483        80,529        75,410  

Income taxes

     8,384        9,055        22,996        27,436  

Net income

   $ 21,662      $ 15,428      $ 57,533      $ 47,974  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.72      $ 0.51      $ 1.76      $ 1.58  

Diluted earnings per share

   $ 0.71      $ 0.50      $ 1.74      $ 1.56  

It is impracticable to separately provide information regarding the revenue and earnings of FNB Bancorp included in the Company’s consolidated income statement from the July 6, 2018 acquisition date to September 30, 2018 because the operations of FNB Bancorp were substantially comingled with the operations of the Company as of the system conversion date of July 22, 2018.

 

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Note 3 - Investment Securities

The amortized cost and estimated fair values of investments in debt securities are summarized in the following tables:

 

     September 30, 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

   $ 666,021        163        (27,308    $ 638,876  

Obligations of states and political subdivisions

     129,072        107        (5,759      123,420  

Corporate bonds

     4,368        65        (2      4,431  

Asset backed securities

     289,550        181        (498      289,233  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities available for sale

   $  1,089,011      $ 516      $  (33,567 )    $  1,055,960  
  

 

 

    

 

 

    

 

 

    

 

 

 

Debt Securities Held to Maturity

           

Obligations of U.S. government agencies

   $ 445,309      $ 88      $  (13,361    $ 432,036  

Obligations of states and political subdivisions

     14,588        58        (395      14,251  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities held to maturity

   $ 459,897      $ 146      $  (13,756    $ 446,287  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated Fair
Value
 
     (in thousands)  

Debt Securities Available for Sale

           

Obligations of U.S. government agencies

   $ 609,695      $ 695      $  (5,601    $ 604,789  

Obligations of states and political subdivisions

     121,597        1,888        (329      123,156  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities available for sale

   $ 731,292      $ 2,583      $  (5,930 )    $ 727,945  
  

 

 

    

 

 

    

 

 

    

 

 

 

Debt Securities Held to Maturity

           

Obligations of U.S. government agencies

   $ 500,271      $  5,101      $  (1,889 )    $ 503,483  

Obligations of states and political subdivisions

     14,573        146        (37      14,682  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities held to maturity

   $ 514,844      $ 5,247      $  (1,926    $ 518,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from sales of available for sale debt securities of $293,279,000 and $25,757,000 were received during the three months ended September 30, 2018 and 2017, respectively. Gross realized gains during the three months ended September 30, 2018 and 2017 were $207,000 and $961,000, respectively. There were no sales of investment securities during the first six months of 2018 or 2017. Investment securities with an aggregate carrying value of $548,123,000 and $285,596,000 at September 30, 2018 and December 31, 2017, respectively, were pledged as collateral for specific borrowings, lines of credit and local agency deposits.

The amortized cost and estimated fair value of debt securities at September 30, 2018 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 September 30, 2018, obligations of U.S. government corporations and agencies with a cost basis totaling $1,111,330,000 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 September 30, 2018, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 6.1 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

 

Debt Securities

   Available for Sale      Held to Maturity  
(In thousands)    Amortized
Cost
     Estimated Fair
Value
     Amortized
Cost
     Estimated Fair
Value
 

Due in one year

   $ 2,435      $ 2,434      $ —        $ —    

Due after one year through five years

     12,486        12,501        1,231        1,240  

Due after five years through ten years

     17,764        17,740        25,955        25,210  

Due after ten years

     1,056,326        1,023,285        432,711        419,837  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $  1,089,011      $  1,055,960      $  459,897      $  446,287  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
 
September 30, 2018                 (in thousands)               

Debt Securities Available for Sale

               

Obligations of U.S. government agencies

   $  323,972      $  (10,839   $  311,035      $  (16,469   $  635,007      $  (27,308

Obligations of states and political subdivisions

     85,668        (3,659     18,323        (2,100     103,991        (5,759

Corporate bonds

     1,969        (2     —          —         1,969        (2

Asset backed securities

     79,943        (498     —          —         79,943        (498
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities available for sale

   $ 491,552      $  (14,998   $ 329,358      $  (18,569   $ 820,910      $  (33,567
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Debt Securities Held to Maturity

               

Obligations of U.S. government agencies

   $ 307,432      $ (7,693   $ 109,312      $ (5,668   $ 416,744      $  (13,361

Obligations of states and political subdivisions

     8,971        (230     3,076        (165     12,047        (395
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities held to maturity

   $ 316,403      $ (7,923   $ 112,388      $ (5,833   $ 428,791      $  (13,756
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 months     12 months or more     Total  
     Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
 
December 31, 2017                 (in thousands)               

Debt Securities Available for Sale

               

Obligations of U.S. government agencies

   $ 284,367      $  (2,176 )   $ 166,338      $ (3,425   $ 450,705      $ (5,601

Obligations of states and political subdivisions

     4,904        (35     17,085        (294     21,989        (329
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available for sale

   $ 289,271      $ (2,211   $ 183,423      $ (3,719   $ 472,694      $ (5,930
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Debt Securities Held to Maturity

               

Obligations of U.S. government agencies

   $ 93,017      $ (567   $ 95,367      $ (1,322   $ 188,384      $ (1,889

Obligations of states and political subdivisions

     1,488        (7     2,637        (30     4,125        (37
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities held to maturity

   $ 94,505      $ (574   $ 98,004      $ (1,352   $ 192,509      $ (1,926
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 September, 2018, 171 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of (3.7%) from the Company’s amortized cost basis.

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 September 30, 2018, 132 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of (5.0%) from the Company’s amortized cost basis.

Corporate bonds: The unrealized losses on investments in corporate bonds 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 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 September 30, 2018, one corporate bond had unrealized losses with aggregate depreciation of (0.1%) 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 were rated AA or AAA and through September 30, 2018 have 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 September 30, 2018, 6asset backed securities had unrealized losses with aggregate depreciation of (0.6%) 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 September 30, 2018.

 

12


Table of Contents

Note 4 – Loans

A summary of loan balances follows (in thousands):

 

     September 30, 2018  
     Originated      PNCI      PCI      Total  

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 340,515      $ 182,201      $ 1,698      $ 524,414  

Commercial

     1,863,604        736,299        7,885        2,607,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     2,204,119        918,500        9,583        3,132,202  

Consumer:

           

Home equity lines of credit

     284,956        44,881        1,299        331,136  

Home equity loans

     35,556        4,690        447        40,693  

Other

     26,294        23,120        42        49,456  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     346,806        72,691        1,788        421,285  

Commercial

     234,741        52,479        2,427        289,647  

Construction:

           

Residential

     81,533        33,041        —          114,574  

Commercial

     63,508        6,220        —          69,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     145,041        39,261        —          184,302  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of deferred loan fees and discounts

   $ 2,930,707      $ 1,082,931      $ 13,798      $ 4,027,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total principal balance of loans owed, net of charge-offs

   $ 2,940,897      $ 1,120,654      $ 21,007      $ 4,082,558  

Unamortized net deferred loan fees

     (10,190      —          —          (10,190

Discounts to principal balance of loans owed, net of charge-offs

     —          (37,723      (7,209      (44,932
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $ 2,930,707      $  1,082,931      $ 13,798      $ 4,027,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses

   $ (30,927    $ (566    $ (110    $ (31,603
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Originated      PNCI      PCI      Total  

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 320,522      $ 63,519      $ 1,385      $ 385,426  

Commercial

     1,690,510        215,823        8,563        1,914,896  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loan on real estate

     2,011,032        279,342        9,948        2,300,322  

Consumer:

           

Home equity lines of credit

     269,942        16,248        2,498        288,688  

Home equity loans

     39,848        2,698        485        43,031  

Other

     22,859        2,251        45        25,155  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     332,649        21,197        3,028        356,874  

Commercial

     209,437        8,391        2,584        220,412  

Construction:

           

Residential

     67,920        10        —          67,930  

Commercial

     69,364        263        —          69,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     137,284        273        —          137,557  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of deferred loan fees and discounts

   $ 2,690,402      $ 309,203      $ 15,560      $ 3,015,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total principal balance of loans owed, net of charge-offs

   $ 2,699,053      $ 316,238      $ 23,181      $ 3,038,472  

Unamortized net deferred loan fees

     (8,651      —          —          (8,651

Discounts to principal balance of loans owed, net of charge-offs

     —          (7,035      (7,621      (14,656
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $  2,690,402      $ 309,203      $  15,560      $  3,015,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses

   $ (29,122    $ (929    $ (272    $ (30,323
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of the change in accretable yield for PCI loans during the periods indicated (in thousands):

 

     Three months ended September 30,      Nine months ended September 30,  
     2018      2017      2018      2017  

Change in accretable yield:

           

Balance at beginning of period

   $  3,996      $ 7,956      $  4,262      $  10,348  

Accretion to interest income

     (253      (594      (769      (2,554

Reclassification (to) from nonaccretable difference

     (47      (2,893      203        (3,325
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 3,696      $ 4,469      $ 3,696      $ 4,469  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


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 September 30, 2018  
(in thousands)    Beginning
Balance
     Charge-offs     Recoveries      Provision
(benefit)
    Ending Balance  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 1,991      $  (25   $ —        $ 434     $ 2,400  

Commercial

     11,607        —         15        1,257       12,879  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total mortgage loans on real estate

     13,598        (25     15        1,691       15,279  

Consumer:

            

Home equity lines of credit

     5,048        (172     151        194       5,221  

Home equity loans

     1,532        (23     139        (55     1,593  

Other

     557        (229     63        309       700  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer loans

     7,137        (424     353        448       7,514  

Commercial

     6,378        (693     202        337       6,224  

Construction:

            

Residential

     1,434        —         —          192       1,626  

Commercial

     977        —         —          (17     960  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total construction

     2,411        —         —          175       2,586  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $  29,524      $  (1,142   $ 570      $  2,651     $  31,603  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     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

     1,826        —         —          760       2,586  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 30,323      $  (1,940   $  1,443      $ 1,777     $ 31,603  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses – As of September 30, 2018  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total allowance
for loan losses
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 57      $ 2,313      $ 30      $ 2,400  

Commercial

     268        12,552        59        12,879  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     325        14,865        89        15,279  

Consumer:

           

Home equity lines of credit

     168        5,046        7        5,221  

Home equity loans

     175        1,418        —          1,593  

Other

     103        597        —          700  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     446        7,061        7        7,514  

Commercial

     1,857        4,353        14        6,224  

Construction:

           

Residential

     —          1,626        —          1,626  

Commercial

     —          960        —          960  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          2,586        —          2,586  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  2,628      $  28,865      $  110      $  31,603  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents
     Loans, Net of Unearned fees – As of September 30, 2018  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total loans, net
of unearned fees
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 4,781      $ 517,935      $ 1,698      $ 524,414  

Commercial

     13,244        2,586,659        7,885        2,607,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     18,025        3,104,594        9,583        3,132,202  

Consumer:

           

Home equity lines of credit

     2,188        327,649        1,299        331,136  

Home equity loans

     2,406        37,840        447        40,693  

Other

     243        49,171        42        49,456  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     4,837        414,660        1,788        421,285  

Commercial

     4,632        282,588        2,427        289,647  

Construction:

           

Residential

     —          114,574        —          114,574  

Commercial

     —          69,728        —          69,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          184,302        —          184,302  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  27,494      $  3,986,144      $  13,798      $  4,027,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Allowance for Loan Losses – Year Ended December 31, 2017  
(in thousands)    Beginning
Balance
     Charge-offs     Recoveries      Provision
(benefit)
    Ending
Balance
 

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 2,748      $ (60   $ —        $ (371   $ 2,317  

Commercial

     11,517        (186     397        (287     11,441  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total mortgage loans on real estate

     14,265        (246     397        (658     13,758  

Consumer:

            

Home equity lines of credit

     7,044        (98     698        (1,844     5,800  

Home equity loans

     2,644        (332     242        (713     1,841  

Other

     622        (1,186     375        775       586  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer loans

     10,310        (1,616     1,315        (1,782     8,227  

Commercial

     5,831        (1,444     428        1,697       6,512  

Construction:

            

Residential

     1,417        (1,104     —          871       1,184  

Commercial

     680        —         1        (39     642  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total construction

     2,097        (1,104     1        832       1,826  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $  32,503      $  (4,410   $  2,141      $ 89     $  30,323  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses – As of December 31, 2017  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total allowance
for loan losses
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 230      $ 1,932      $ 155      $ 2,317  

Commercial

     30        11,351        60        11,441  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     260        13,283        215        13,758  

Consumer:

           

Home equity lines of credit

     427        5,356        17        5,800  

Home equity loans

     107        1,734        —          1,841  

Other

     57        529        —          586  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     591        7,619        17        8,227  

Commercial

     1,848        4,624        40        6,512  

Construction:

           

Residential

     —          1,184        —          1,184  

Commercial

     —          642        —          642  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          1,826        —          1,826  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  2,699      $  27,352      $  272      $  30,323  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     Loans, Net of Unearned fees – As of December 31, 2017  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total loans, net
of unearned fees
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 5,298      $ 378,743      $ 1,385      $ 385,426  

Commercial

     13,911        1,892,422        8,563        1,914,896  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     19,209        2,271,165        9,948        2,300,322  

Consumer:

           

Home equity lines of credit

     2,688        283,502        2,498        288,688  

Home equity loans

     1,470        41,076        485        43,031  

Other

     257        24,853        45        25,155  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     4,415        349,431        3,028        356,874  

Commercial

     4,470        213,358        2,584        220,412  

Construction:

           

Residential

     140        67,790        —          67,930  

Commercial

     —          69,627        —          69,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     140        137,417        —          137,557  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,234      $ 2,971,371      $ 15,560      $ 3,015,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Allowance for Loan Losses – Three Months Ended September 30, 2017  
(in thousands)    Beginning
Balance
     Charge-
offs
     Recoveries      Provision
(benefit)
     Ending Balance  

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 2,495      $ (60    $ —        $ (217    $ 2,218  

Commercial

     10,119        (20      238        1,033        11,370  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     12,614        (80      238        816        13,588  

Consumer:

              

Home equity lines of credit

     6,156        (14      189        (610      5,721  

Home equity loans

     2,354        (94      121        (390      1,991  

Other

     645        (349      91        203        590  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     9,155        (457      401        (797      8,302  

Commercial

     4,729        (291      61        303        4,802  

Construction:

              

Residential

     1,179        (33      —          284        1,430  

Commercial

     466        —          —          159        625  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     1,645        (33      —          443        2,055  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,143      $ (861    $
 
 
700
 
 
   $ 765      $ 28,747  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Allowance for Loan Losses – Nine Months Ended September 30, 2017  
(in thousands)    Beginning
Balance
     Charge-offs     Recoveries      Provision
(benefit)
    Ending Balance  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 2,748      $ (60   $        $ (470   $ 2,218  

Commercial

     11,517        (170     365        (342     11,370  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total mortgage loans on real estate

     14,265        (230     365        (812     13,588  

Consumer:

            

Home equity lines of credit

     7,044        (98     487        (1,712     5,721  

Home equity loans

     2,644        (331     146        (468     1,991  

Other

     622        (831     300        499       590  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer loans

     10,310        (1,260     933        (1,681     8,302  

Commercial

     5,831        (1,188     315        (156     4,802  

Construction:

            

Residential

     1,417        (1,104     —          1,117       1,430  

Commercial

     680        —         1        (56     625  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total construction

     2,097        (1,104     1        1,061       2,055  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $  32,503      $  (3,782   $  1,614      $  (1,588   $  28,747  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

16


Table of Contents
     Allowance for Loan Losses – As of September 30, 2017  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total allowance
for loan losses
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 240      $ 1,978      $ —        $ 2,218  

Commercial

     73        11,022        275        11,370  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     313        13,000        275        13,588  

Consumer:

           

Home equity lines of credit

     363        5,346        12        5,721  

Home equity loans

     111        1,880        —          1,991  

Other

     77        513        —          590  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     551        7,739        12        8,302  

Commercial

     1,276        3,526        —          4,802  

Construction:

           

Residential

     —          1,430        —          1,430  

Commercial

     —          625        —          625  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          2,055        —          2,055  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,140      $ 26,320      $ 287      $ 28,747  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Loans, Net of Unearned fees – As of September 30, 2017  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total Loans  

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 5,027      $ 384,640      $ 1,405      $ 391,072  

Commercial

     19,788        1,775,843        8,171        1,803,802  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     24,815        2,160,483        9,576        2,194,874  

Consumer:

           

Home equity lines of credit

     2,219        284,335        2,952        289,506  

Home equity loans

     1,842        42,454        737        45,033  

Other

     267        26,470        44        26,781  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     4,328        353,259        3,733        361,320  

Commercial

     2,938        221,846        2,695        227,479  

Construction:

           

Residential

     144        74,976        —          75,120  

Commercial

     —          72,820        —          72,820  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     144        147,796        —          147,940  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,225      $ 2,883,384      $ 16,004      $ 2,931,613  
  

 

 

    

 

 

    

 

 

    

 

 

 

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans, and (iv) delinquency within the portfolio.

The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows:

 

   

Pass – This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital.

 

   

Special Mention – This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention.

 

   

Substandard – This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well-defined workout/rehabilitation program.

 

   

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.

 

17


Table of Contents

The following tables present ending loan balances by loan category and risk grade for the periods indicated:

 

     Credit Quality Indicators Originated Loans – As of September 30, 2018  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful / Loss      Total Originated
Loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 334,902      $ 1,690      $ 3,923      $  —        $ 340,515  

Commercial

     1,821,995        28,747        12,862        —          1,863,604  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     2,156,897        30,437        16,785        —          2,204,119  

Consumer:

              

Home equity lines of credit

     281,480        1,747        1,729        —          284,956  

Home equity loans

     32,242        1,006        2,308        —          35,556  

Other

     25,885        334        75        —          26,294  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     339,607        3,087        4,112        —          346,806  

Commercial

     220,328        9,942        4,471        —          234,741  

Construction:

              

Residential

     81,235        32        266        —          81,533  

Commercial

     62,660        848               —          63,508  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     143,895        880        266        —          145,041  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 2,860,727      $ 44,346      $ 25,634      $ —        $ 2,930,707  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Quality Indicators PNCI Loans – As of September 30, 2018  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful / Loss      Total PNCI
Loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 179,634      $ 880      $ 1,687      $ —        $ 182,201  

Commercial

     729,261        3,478        3,560        —          736,299  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     908,895        4,358        5,247        —          918,500  

Consumer:

              

Home equity lines of credit

     43,406        826        649        —          44,881  

Home equity loans

     4,471        116        103        —          4,690  

Other

     23,083        32        5        —          23,120  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     70,960        974        757        —          72,691  

Commercial

     51,633        734        112        —          52,479  

Construction:

              

Residential

     33,041        —          —          —          33,041  

Commercial

     6,220        —          —          —          6,220  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     39,261        —          —          —          39,261  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,070,749      $ 6,066      $ 6,116      $ —        $ 1,082,931  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Quality Indicators Originated Loans – As of December 31, 2017  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful / Loss      Total Originated
Loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 315,120      $ 2,234      $ 3,168      $ —        $ 320,522  

Commercial

     1,649,333        18,434        22,743        —          1,690,510  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     1,964,453        20,668        25,911        —          2,011,032  

Consumer:

              

Home equity lines of credit

     265,345        2,558        2,039        —          269,942  

Home equity loans

     37,428        800        1,620        —          39,848  

Other

     22,432        272        155        —          22,859  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     325,205        3,630        3,814        —          332,649  

Commercial

     195,208        9,492        4,737        —          209,437  

Construction:

              

Residential

     67,813        —          107        —          67,920  

Commercial

     64,492        4,872        —          —          69,364  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     132,305        4,872        107        —          137,284  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 2,617,171      $ 38,662      $ 34,569      $ —        $ 2,690,402  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents
     Credit Quality Indicators PNCI Loans – As of December 31, 2017  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful / Loss      Total PNCI
Loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 61,411      $ 218      $ 1,890      $ —        $ 63,519  

Commercial

     203,751        11,513        559        —          215,823  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     265,162        11,731        2,449        —          279,342  

Consumer:

              

Home equity lines of credit

     14,866        450        932        —          16,248  

Home equity loans

     2,433        188        77        —          2,698  

Other

     2,207        38        6        —          2,251  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     19,506        676        1,015        —          21,197  

Commercial

     8,390        1        —          —          8,391  

Construction:

              

Residential

     10        —          —          —          10  

Commercial

     263        —          —          —          263  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     273        —          —          —          273  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 293,331      $ 12,408      $ 3,464      $ —        $ 309,203  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, suggest modifications if appropriate, and, when continued scheduled payments become unrealistic, initiate repossession or foreclosure through appropriate channels.    

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner occupied real estate are primarily susceptible to changes in the business conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual fortunes of the business owner, and general economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by equipment or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often these shifts are a result of changes in general economic or market conditions or overbuilding and resultant over-supply. Losses are dependent on value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.

Construction loans, whether owner occupied or non-owner occupied commercial real estate loans or residential development loans, are not only susceptible to the related risks described above but the added risks of construction itself including cost over-runs, mismanagement of the project, or lack of demand or market changes experienced at time of completion. Again, losses are primarily related to underlying collateral value and changes therein as described above.

Problem commercial loans are generally identified by periodic review of financial information which may include financial statements, tax returns, rent rolls and payment history of the borrower (delinquency). Based on this information the Bank may decide to take any of several courses of action including demand for repayment, additional collateral or guarantors, and, when repayment becomes unlikely through borrower’s income and cash flow, repossession or foreclosure of the underlying collateral.

Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations or revaluations are obtained at initiation of the credit and periodically, but not less than every twelve months depending on collateral type, once repayment is questionable and the loan has been classified.

Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to the estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue the underlying collateral and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued through lawsuit and attachment of wages or judgment liens on borrower’s other assets.

 

19


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 September 30, 2018      ³ 90
Days
and Still
Accruing
 
(in thousands)    30-59 days      60-89 days      > 90 days      Total Past
Due Loans
     Current      Total  

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 275      $ 749      $ 738      $ 1,762      $ 338,753      $ 340,515      $ —    

Commercial

     499        150        117        766        1,862,838        1,863,604        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     774        899        855        2,528        2,201,591        2,204,119        —    

Consumer:

                    

Home equity lines of credit

     1,450        97        112        1,659        283,297        284,956        —    

Home equity loans

     527        293        411        1,231        34,325        35,556        —    

Other

     262        24        —          286        26,008        26,294        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,239        414        523        3,176        343,630        346,806        —    

Commercial

     1,010        134        1,309        2,453        232,288        234,741        —    

Construction:

                    

Residential

     488        —          —          488        81,045        81,533        —    

Commercial

     —          —          —          —          63,508        63,508        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     488        —          —          488        144,553        145,041        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans

   $ 4,511      $ 1,447      $ 2,687      $ 8,645      $ 2,922,062      $ 2,930,707      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2018      ³ 90
Days
and Still
Accruing
 
(in thousands)    30-59 days      60-89 days      > 90 days      Total Past
Due Loans
     Current      Total  

Mortgage loans on real estate:

                    

Residential 1-4 family

   $        $ 397      $ 163      $ 560      $ 181,641      $ 182,201      $ —    

Commercial

     992        18        949        1,959        734,340        736,299        949  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     992        415        1,112        2,519        915,981        918,500        949  

Consumer:

                    

Home equity lines of credit

     613        192        227        1,032        43,849        44,881        99  

Home equity loans

     262        —          16        278        4,412        4,690        —    

Other

     242        —          —          242        22,878        23,120        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,117        192        243        1,552        71,139        72,691        99  

Commercial

     30        472        —          502        51,977        52,479        —    

Construction:

                    

Residential

     —          —          —          —          33,041        33,041        —    

Commercial

     —          —          —          —          6,220        6,220        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          39,261        39,261        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 2,139      $ 1,079      $ 1,355      $ 4,573      $ 1,078,358      $ 1,082,931      $ 1,048  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2017      ³ 90
Days
and Still
Accruing
 
(in thousands)    30-59 days      60-89 days      > 90 days      Total Past
Due Loans
     Current      Total  

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 1,740      $ 510      $ 243      $ 2,493      $ 318,029      $ 320,522      $ —    

Commercial

     158        987        —          1,145        1,689,365        1,690,510        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     1,898        1,497        243        3,638        2,007,394        2,011,032        —    

Consumer:

                    

Home equity lines of credit

     528        48        372        948        268,994        269,942        —    

Home equity loans

     511        107        373        991        38,857        39,848        —    

Other

     56        36        3        95        22,764        22,859        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,095        191        748        2,034        330,615        332,649        —    

Commercial

     956        738        1,527        3,221        206,216        209,437        —    

Construction:

                    

Residential

     34        —          —          34        67,886        67,920        —    

Commercial

     —          —          —          —          69,364        69,364        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     34        —          —          34        137,250        137,284        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 3,983      $ 2,426      $ 2,518      $ 8,927      $ 2,681,475      $ 2,690,402      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


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, 2017      > 90 Days
and Still
Accruing
 
(in thousands)    30-59 days      60-89 days      > 90 days      Total Past
Due Loans
     Current      Total  

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 1,495      $ 90      $ 109      $ 1,694      $ 61,825      $ 63,519      $ 81  

Commercial

     70        —          —          70        215,753        215,823        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     1,565        90        109        1,764        277,578        279,342        81  

Consumer:

                    

Home equity lines of credit

     298        228        330        856        15,392        16,248        200  

Home equity loans

     30        —          —          30        2,668        2,698        —    

Other

     6        26        —          32        2,219        2,251        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     334        254        330        918        20,279        21,197        200  

Commercial

     —          —          —          —          8,391        8,391        —    

Construction:

                    

Residential

     —          —          —          —          10        10        —    

Commercial

     —          —          —          —          263        263        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          273        273        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,899      $ 344      $ 439      $ 2,682      $ 306,521      $ 309,203      $ 281  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income on originated nonaccrual loans that would have been recognized during the three months ended September 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $338,000 and $244,000, respectively. Interest income actually recognized on these originated loans during the three months ended September 30, 2018 and 2017 was $59,000 and $33,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the three months ended September 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $39,000 and $90,000, respectively. Interest income actually recognized on these PNCI loans during the three months ended September 30, 2018 and 2017 was $12,000 and $2,000.

Interest income on originated nonaccrual loans that would have been recognized during the nine months ended September 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $964,000 and $617,000, respectively. Interest income actually recognized on these originated loans during the nine months ended September 30, 2018 and 2017 was $133,000 and $49,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the nine months ended September 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $93,000 and $188,000. Interest income actually recognized on these PNCI loans during the nine months ended September 30, 2018 and 2017 was $23,000 and $14,000.

The following table shows the ending balance of nonaccrual originated and PNCI loans by loan category as of the date indicated:

 

     Non Accrual Loans  
     As of September 30, 2018      As of December 31, 2017  
(in thousands)    Originated      PNCI      Total      Originated      PNCI      Total  

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 2,813      $ 1,219      $ 4,032      $ 1,725      $ 1,012      $ 2,737  

Commercial

     7,876        305        8,181        8,144        —          8,144  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     10,689        1,524        12,213        9,869        1,012        10,881  

Consumer:

                 

Home equity lines of credit

     725        568        1,293        811        402        1,213  

Home equity loans

     1,933        50        1,983        1,106        44        1,150  

Other

     3        5        8        7        5        12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,661        623        3,284        1,924        451        2,375  

Commercial

     3,737        —          3,737        3,669        —          3,669  

Construction:

                 

Residential

     —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non accrual loans

   $ 17,087      $ 2,147      $ 19,234      $ 15,462      $ 1,463      $ 16,925  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 and interest income recognized for the three month periods ended September 30, 2018 and 2017 has not been separately presented as the amounts are not considered significant for disclosure.

 

21


Table of Contents
     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

     —          —          —          —          —          68        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,607      $ 18,311      $ 5,397      $ 23,708      $ 2,234      $ 23,292      $ 409  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,945      $ 3,149      $ 637      $ 3,786      $ 394      $ 3,355      $ 87  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2017  
(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

   $ 4,023      $ 2,058      $ 1,881      $ 3,939      $ 230      $ 3,501      $ 143  

Commercial

     14,186        13,101        810        13,911        30        13,851        645  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     18,209        15,159        2,691        17,850        260        17,352        788  

Consumer:

                    

Home equity lines of credit

     1,581        1,093        401        1,494        111        1,702        47  

Home equity loans

     1,627        1,107        198        1,305        10        1,193        24  

Other

     52        4        3        7        3        20        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     3,260        2,204        602        2,806        124        2,915        71  

Commercial

     4,566        575        3,895        4,470        1,848        4,283        184  

Construction:

                    

Residential

     140        140        —          140        —          76        9  

Commercial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     140        140        —          140        —          76        9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,175      $ 18,078      $ 7,188      $ 25,266      $ 2,232      $ 24,626      $ 1,052  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents
     Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2017  
(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

   $ 1,404      $ 1,359      $ —        $ 1,359      $ —        $ 1,041      $ 24  

Commercial

     —          —          —          —          —          979        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     1,404        1,359        —          1,359        —          2,020        24  

Consumer:

                    

Home equity lines of credit

     1,216        591        603        1,194        316        1,240        48  

Home equity loans

     178        44        121        165        97        117        6  

Other

     250        —          250        250        54        186        11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,644        635        974        1,609        467        1,543        65  

Commercial

     —          —          —          —          —          —          —    

Construction:

                    

Residential

     —          —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,048      $ 1,994      $ 974      $ 2,968      $ 467      $ 3,563      $ 89  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired Originated Loans – As of, or for the Nine Months Ended, September 30, 2017  
(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

   $ 3,489      $ 1,777      $ 1,644      $ 3,421      $ 167      $ 3,242      $ 90  

Commercial

     18,643        17,039        1,150        18,189        73        15,990        514  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     22,132        18,816        2,794        21,610        240        19,232        604  

Consumer:

                    

Home equity lines of credit

     1,324        1,108        110        1,218        33        1,564        25  

Home equity loans

     2,091        1,470        199        1,669        13        1,376        32  

Other

     59        3        11        14        7        23        (25
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     3,474        2,581        320        2,901        53        2,963        32  

Commercial

     3,262        884        2,048        2,932        1,270        3,514        69  

Construction:

                    

Residential

     144        144        —          144        —          78        7  

Commercial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     144        144        —          144        —          78        7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,012      $ 22,425      $ 5,162      $ 27,587      $ 1,563      $ 25,787      $ 712  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired PNCI Loans – As of, or for the Nine Months Ended, September 30, 2017  
(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

   $ 1,634      $ 1,356      $ 250      $ 1,606      $ 73      $ 1,165      $ 24  

Commercial

     1,869        1,599        —          1,599        —          1,778        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     3,503        2,955        250        3,205        73        2,943        24  

Consumer:

                    

Home equity lines of credit

     1,020        394        607        1,001        328        1,143        28  

Home equity loans

     185        50        123        173        99        121        5  

Other

     253        —          253        253        71        187        8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,458        444        983        1,427        498        1,451        41  

Commercial

     6        —          —          —          6        3        —    

Construction:

                    

Residential

     —          —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,967      $ 3,399      $ 1,233      $ 4,632      $ 577      $ 4,397      $ 65  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2018, $8,845,000 of originated loans were Troubled Debt Restructurings (TDRs) and classified as impaired. The Company had no obligations to lend additional funds on these TDRs as of September 30, 2018. At September 30, 2018, $840,000 of PNCI loans were TDRs and classified as impaired. The Company had no obligations to lend additional funds on these TDRs as of September 30, 2018.

At December 31, 2017, $12,517,000 of originated loans were TDRs and classified as impaired. The Company had obligations to lend $1,000 of additional funds on these TDRs as of December 31, 2017. At December 31, 2017, $1,352,000 of PNCI loans were TDRs and classified as impaired. The Company had no obligations to lend additional funds on these TDRs as of December 31, 2017.

At September 30, 2017, $13,352,000 of originated loans were TDRs and classified as impaired. The Company had obligations to lend $209,000 of additional funds on these TDRs as of September 30, 2017. At September 30, 2017, $1,611,000 of PNCI loans were TDRs and classified as impaired. The Company had obligations to lend $3,000 of additional funds on these TDRs as of September 30, 2017.

 

23


Table of Contents

The following tables show certain information regarding TDRs that occurred during the periods indicated:

 

     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

     —          —          —          —         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     7      $ 2,007      $ 2,005      $ (308     1      $ 128      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     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

     —          —          —          —         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     13      $ 3,094      $ 3,101      $ (265     6      $ 637      $ (2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

The following tables show certain information regarding TDRs that occurred during the periods indicated:

 

     TDR Information for the Three Months Ended September 30, 2017  
(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      $ 939      $ 939      $ 169       1      $ 99      $ —    

Commercial

     4        2,886        2,886        14       1        219        —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     5        3,825        3,825        183       2        318        —    

Consumer:

                   

Home equity lines of credit

     —          —          —          —         —          —          —    

Home equity loans

     1        252        252        —         —          —          —    

Other

     —          —          —          —         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total consumer loans

     1        252        252        —         —          —          —    

Commercial

     8        1,109        1,109        28          —       

Construction:

                   

Residential

     1        144        144        —         —          —          —    

Commercial

     —          —          —          —         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total construction

     1        144        144        —         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     15      $ 5,330      $ 5,330      $ 211       2      $ 318      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     TDR Information for the Nine Months Ended September 30, 2017  
(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      $ 939      $ 939      $ 169       2      $ 223      $ —    

Commercial

     7        3,509        3,482        (111     1        219        —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     8        4,448        4,421        58       3        442        —    

Consumer:

                   

Home equity lines of credit

     3        187        187        27       —          —          —    

Home equity loans

     1        252        252        —         —          —          —    

Other

     1        14        14        11       —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total consumer loans

     5        453        453        38       —          —          —    

Commercial

     11        1,854        1,748        37          —       

Construction:

                   

Residential

     1        144        144        —         —          —          —    

Commercial

     —          —          —          —         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total construction

     1        144        144        —         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     25      $ 6,899      $ 6,766      $ 133       3      $ 442      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

Note 6 – Foreclosed Assets

A summary of the activity in the balance of foreclosed assets follows (in thousands):

 

     Nine months ended September 30,  
     2018      2017  

Beginning balance, net

   $ 3,226      $ 3,986  

Additions/transfers from loans

     536        726  

Dispositions/sales

     (1,841      (1,479

Valuation adjustments

     (89      (162
  

 

 

    

 

 

 

Ending balance, net

   $ 1,832      $ 3,071  
  

 

 

    

 

 

 

Ending valuation allowance

   $ (143    $ (248

Ending number of foreclosed assets

     11        11  

Proceeds from sale of foreclosed assets

   $ 2,206      $ 1,787  

Gain on sale of foreclosed assets

   $ 390      $ 308  

As of September 30, 2018, $1,269,000 of foreclosed residential real estate properties, all of which the Company has obtained physical possession of, are included in foreclosed assets. At September 30, 2018, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are underway is $477,000.

Note 7 - Premises and Equipment

Premises and equipment were comprised of:

 

     September 30,      December 31,  
     2018      2017  
     (In thousands)  

Land & land improvements

   $ 28,958      $ 9,959  

Buildings

     64,178        50,340  

Furniture and equipment

     44,271        35,939  
  

 

 

    

 

 

 
     137,407        96,238  

Less: Accumulated depreciation

     (49,073      (40,644
  

 

 

    

 

 

 
     88,334        55,594  

Construction in progress

     956        2,148  
  

 

 

    

 

 

 

Total premises and equipment

   $ 89,290      $ 57,742  
  

 

 

    

 

 

 

Depreciation expense for premises and equipment amounted to $1,685,000 and $1,520,000 for the three months ended September 30, 2018 and 2017, respectively, and $4,442,000 and $4,224,000 for the nine months ended September 30, 2018 and 2017, respectively.

Note 8 - Goodwill and Other Intangible Assets

The following table summarizes the Company’s goodwill intangible as of the dates indicated:

 

     September 30,                    December 31,  
(in thousands)    2018      Additions      Reductions      2017  

Goodwill

   $ 220,972        156,661        —        $ 64,311  

The following table summarizes the Company’s core deposit intangibles (CDI) as of the dates indicated:

 

     September 30,             Reductions/      December 31,  
(in thousands)    2018      Additions      Amortization      2017  

Core deposit intangibles

   $ 37,163        27,605        —        $ 9,558  

Accumulated amortization

     (6,452      —        $ (2,068      (4,384
  

 

 

    

 

 

    

 

 

    

 

 

 

Core deposit intangibles, net

   $ 30,711        27,605      $ (2,068    $ 5,174  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company recorded additions to its CDI of $27,605,000 in conjunction with the acquisition of FNB Bancorp as of July 6, 2018.    The following table summarizes the Company’s remaining estimated core deposit intangible amortization at September 30, 2018 (in thousands):

 

     Estimated Core Deposit  
Years Ended    Intangible Amortization  

2018

   $ 1,431  

2019

     5,723  

2020

     5,723  

2021

     5,465  

2022

     4,776  

Thereafter

     7,593  

 

26


Table of Contents

Note 9 – Other Assets

Other assets were comprised of (in thousands):

 

     September 30,
2018
     December 31,
2017
 

Deferred tax asset, net

   $ 31,963      $ 21,697  

Investment in low income housing tax credit funds

     23,572        16,854  

Prepaid expense

     3,420        4,111  

Tax refund receivable

     2,836        4,754  

Capital trusts

     1,712        1,706  

Software

     762        1,126  

Life insurance proceeds receivable

     —          2,242  

Miscellaneous other assets

     6,332        2,561  
  

 

 

    

 

 

 

Total other assets

   $ 70,597      $ 55,051  
  

 

 

    

 

 

 

Note 10 - Deposits

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

 

     September 30,
2018
     December 31,
2017
 

Noninterest-bearing demand

   $ 1,710,505      $ 1,368,218  

Interest-bearing demand

     1,152,705        971,459  

Savings

     1,801,087        1,364,518  

Time certificates, over $250,000

     140,805        73,596  

Other time certificates

     288,015        231,340  
  

 

 

    

 

 

 

Total deposits

   $ 5,093,117      $ 4,009,131  
  

 

 

    

 

 

 

Certificate of deposit balances of $69,000,000 and $50,000,000 from the State of California were included in time certificates, over $250,000, at September 30, 2018 and December 31, 2017, respectively. The Bank participates in a deposit program offered by the State of California whereby the State may make deposits at the Bank’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 Bank. Overdrawn deposit balances of $1,375,000 and $1,366,000 were classified as consumer loans at September 30, 2018 and December 31, 2017, respectively.

Note 11 – Other Liabilities

Other liabilities were comprised of (in thousands):

 

     September 30,
2018
     December 31,
2017
 

Pension liability

   $ 37,789      $ 28,472  

Low income housing tax credit fund commitments

     9,146        8,554  

Deferred compensation

     9,450        6,605  

Accrued salaries and benefits expense

     8,990        6,619  

Joint beneficiary agreements

     3,558        3,365  

Loan escrow and servicing payable

     2,821        1,958  

Deferred revenue

     1,978        1,228  

Litigation contingency

     —          1,450  

Miscellaneous other liabilities

     8,345        8,171  
  

 

 

    

 

 

 

Total other liabilities

   $ 82,077      $ 66,422  
  

 

 

    

 

 

 

 

27


Table of Contents

Note 12 - Commitments and Contingencies

At September 30, 2018, future minimum commitments under non-cancelable operating leases with initial or remaining terms of one year or more are as follows:

 

     Operating Leases  
     (in thousands)  

2018

   $ 1,179  

2019

     4,478  

2020

     3,774  

2021

     3,372  

2022

     2,549  

Thereafter

     4,097  
  

 

 

 

Future minimum lease payments

   $ 19,449  
  

 

 

 

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

 

(in thousands)    September 30,
2018
     December 31,
2017
 

Financial instruments whose amounts represent risk:

     

Commitments to extend credit:

     

Commercial loans

   $ 310,844      $ 257,220  

Consumer loans

     481,837        422,958  

Real estate mortgage loans

     149,003        66,267  

Real estate construction loans

     283,858        187,097  

Standby letters of credit

     11,277        13,075  

Deposit account overdraft privilege

     107,956        98,260  

Note 13 – Shareholders’ Equity

Dividends Paid

The Bank paid to the Company cash dividends in the aggregate amounts of $13,507,000 and $5,185,000 during the three months ended September 30, 2018 and 2017, respectively, and $22,649,000 and $14,394,000 during the nine months ended September 30, 2018 and 2017, 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. Under this law, at December 31, 2017, the Bank could have paid dividends of $85,254,000 to the Company without the approval of the Commissioner of the DBO.

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. The 500,000 shares authorized for repurchase under this stock repurchase plan represented approximately 3.2% of the Company’s 15,814,662 outstanding common shares as of August 21, 2007. This stock repurchase plan has no expiration date. As of September 30, 2018, the Company had repurchased 166,600 shares under this plan.

Stock Repurchased Under Equity Compensation Plans

During the three months ended September 30, 2018 and 2017, employees tendered 11,630 and 21,738 shares, respectively, of the Company’s common stock with market value of $453,000, and $762,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is exercised. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.

During the nine months ended September 30, 2018 and 2017 employees tendered 28,850 and 107,390 shares, respectively, of the Company’s common stock with market value of $1,124,000 and $3,854,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to satisfy tax withholding requirements related to such exercises and the release of restricted stock units (RSUs) as permitted by the Company’s shareholder-approved equity compensation plans. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is exercised. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.

 

28


Table of Contents

Note 14 - Stock Options and Other Equity-Based Incentive Instruments

Stock option activity during the nine months ended September 30, 2018 is summarized in the following table:

 

     Number
of Shares
     Option Price
per Share
     Weighted
Average
Exercise
Price
 

Outstanding at December 31, 2017

     446,400      $ 12.63 to $23.21      $ 16.84  

Options granted

     —          —  to —          —    

Options exercised

     (27,400    $ 15.34 to $23.21      $ 17.33  

Options forfeited

     (3,000    $ 23.21 to $23.21      $ 23.21  
  

 

 

       

Outstanding at September 30, 2018

     416,000      $ 12.63 to $23.21      $ 16.77  
  

 

 

       

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 September 30, 2018:

 

     Currently
Exercisable
     Currently Not
Exercisable
     Total
Outstanding
 

Number of options

     413,000        3,000        416,000  

Weighted average exercise price

   $ 16.72      $ 23.21      $ 16.77  

Intrinsic value (in thousands)

   $ 9,045      $ 46      $ 9,091  

Weighted average remaining contractual term (yrs.)

     3.2        6.0        3.2  

The 3,000 options that are currently not exercisable as of September 30, 2018 are expected to vest, on a weighted-average basis, over the next year. The Company did not modify any option grants during 2017 or the nine months ended September 30, 2018.

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
 
     Number
of RSUs
     Weighted
Average Fair
Value on
Date of Grant
     Number
of RSUs
     Weighted
Average Fair
Value on
Date of Grant
 

Outstanding at December 31, 2017

     68,457           52,829     

RSUs granted

     38,605      $ 39.08        16,939      $ 36.40  

Additional market plus service condition RSUs vested

     —             8,506     

RSUs added through dividend credits

     806           —       

RSUs released through vesting

     (32,516         (25,512   

RSUs forfeited/expired

     (4,744         (5,478   
  

 

 

       

 

 

    

Outstanding at September 30, 2018

     70,608           47,284     
  

 

 

       

 

 

    

The 70,608 of service condition vesting RSUs outstanding as of September 30, 2018 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of RSUs outstanding under the original grant. The 70,608 of service condition vesting RSUs outstanding as of September 30, 2018 are expected to vest, and be released, on a weighted-average basis, over the next 1.6 years. The Company expects to recognize $2,063,000 of pre-tax compensation costs related to these service condition vesting RSUs between September 30, 2018 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2017 or during the nine months ended September 30, 2018.

The 47,284 of market plus service condition vesting RSUs outstanding as of September 30, 2018 are expected to vest, and be released, on a weighted-average basis, over the next 1.7 years. The Company expects to recognize $902,000 of pre-tax compensation costs related to these RSUs between September 30, 2018 and their vesting dates. As of September 30, 2018, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 70,926 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 2017 or during the nine months ended September 30, 2018.

 

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Note 15 - Noninterest Income and Expense

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

 

     Three months ended September 30,      Nine months ended September 30,  
     2018      2017      2018      2017  

ATM and interchange fees

   $ 4,590      $ 4,209      $ 13,335      $ 12,472  

Service charges on deposit accounts

     4,015        4,160        11,407        12,102  

Other service fees

     676        917        2,020        2,521  

Mortgage banking service fees

     499        514        1,527        1,561  

Change in value of mortgage servicing rights

     (37      (325      38        (795
  

 

 

    

 

 

    

 

 

    

 

 

 

Total service charges and fees

     9,743        9,475        28,327        27,861  
  

 

 

    

 

 

    

 

 

    

 

 

 

Commissions on sale of non-deposit investment products

     728        672        2,414        1,984  

Increase in cash value of life insurance

     732        732        1,996        2,043  

Gain on sale of loans

     539        606        1,831        2,293  

Lease brokerage income

     186        234        514        601  

Gain on sale of foreclosed assets

     2        37        390        308  

Sale of customer checks

     88        89        327        287  

Gain on sale of investment securities

     207        961        207        961  

Loss on disposal of fixed assets

     (152      (33      (206      (61

Loss on marketable equity securities

     (22      —          (92      —    

Other

     135        157        942        1,266  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest income

     2,443        3,455        8,323        9,682  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 12,186      $ 12,930      $ 36,650      $ 37,543  
  

 

 

    

 

 

    

 

 

    

 

 

 

The components of noninterest expense were as follows (in thousands):

 

     Three months ended September 30,      Nine months ended September 30,  
     2018      2017      2018      2017  

Base salaries, net of deferred loan origination costs

   $ 17,051      $ 13,600      $ 45,442      $ 40,647  

Incentive compensation

     3,223        2,609        7,834        6,980  

Benefits and other compensation costs

     5,549        4,724        15,652        14,693  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total salaries and benefits expense

     25,823        20,933        68,928        62,320  
  

 

 

    

 

 

    

 

 

    

 

 

 

Occupancy

     3,173        2,799        8,574        8,196  

Data processing and software

     2,786        2,495        7,979        7,332  

Merger and acquisition expense

     4,150        —          5,227        —    

Equipment

     1,750        1,816        4,938        5,344  

ATM and POS network charges

     1,195        1,425        3,858        3,353  

Advertising

     1,341        1,039        3,214        3,173  

Professional fees

     929        901        2,475        2,357  

Telecommunications

     819        716        2,201        2,027  

Regulatory assessments and insurance

     537        427        1,384        1,252  

Intangible amortization

     1,390        339        2,068        1,050  

Postage

     275        325        934        1,058  

Courier service

     278        235        769        752  

Operational losses

     217        301        763        1,166  

Foreclosed assets expense

     93        41        297        117  

Provision for (reversal of) foreclosed asset losses

     (1      134        89        162  

Other miscellaneous expense

     2,623        3,296        9,712        9,289  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest expense

     21,555        16,289        54,482        46,628  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $ 47,378      $ 37,222      $ 123,410      $ 108,948  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 16 – 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 solely from outstanding stock options, and are determined using the treasury stock method. Earnings per share have been computed based on the following:

 

     Three months ended September 30,      Nine months ended September 30,  
(in thousands)    2018      2017      2018      2017  

Net income

   $ 16,170      $ 11,897      $ 45,109      $ 37,565  

Average number of common shares outstanding

     30,011        22,932        25,317        22,901  

Effect of dilutive stock options and restricted stock

     280        312        300        338  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average number of common shares outstanding used to calculate diluted earnings per share

     30,291        23,244        25,617        23,239  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     10,000        —          10,000        —    

Note 17 – 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 comprehensive income.

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

 

     September 30,      December 31,  
(in thousands)    2018      2017  

Net unrealized loss on available for sale securities

   $ (33,051      (3,409

Tax effect

     9,771        1,433  
  

 

 

    

 

 

 

Unrealized holding loss on available for sale securities, net of tax

     (23,280      (1,976
  

 

 

    

 

 

 

Unfunded status of the supplemental retirement plans

     (5,010      (5,352

Tax effect

     1,481        2,250  
  

 

 

    

 

 

 

Unfunded status of the supplemental retirement plans, net of tax

     (3,529      (3,102
  

 

 

    

 

 

 

Joint beneficiary agreement liability

     (150      (150

Tax effect

     —          —    
  

 

 

    

 

 

 

Joint beneficiary agreement liability, net of tax

     (150      (150
  

 

 

    

 

 

 

Accumulated other comprehensive loss

   $ (26,959    $ (5,228
  

 

 

    

 

 

 

 

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Table of Contents

The components of other comprehensive income (loss) and related tax effects are as follows:

 

    Three months ended September 30,     Nine months ended September 30,  
(in thousands)   2018     2017     2018     2017  

Unrealized holding gains (losses) on available for sale securities before reclassifications

  $ (8,193   $ 674     $ (29,134   $ 6,372  

Amounts reclassified out of accumulated other comprehensive income:

       

Realized gains on debt securities

    (207     (961     (207     (961

Adoption ASU 2016-01

    —         —         62       —    

Adoption ASU 2018-02

    —         —         (425     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total amounts reclassified out of accumulated other comprehensive income

    (207     (961     (570     (961
 

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized holding gains (losses) on available for sale securities after reclassifications

    (8,400     (287     (29,704     5,411  

Tax effect

    2,483       121       8,763       (2,274
 

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized holding gains (losses) on available for sale securities, net of tax

    (5,917     (166     (20,941     3,137  
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in unfunded status of the supplemental retirement
plans before reclassifications

    —         —         668       —    

Amounts reclassified out of accumulated other comprehensive income:

       

Amortization of prior service cost

    (13     (1     (40     (5

Amortization of actuarial losses

    128       96       382       288  

Adoption ASU 2018-02

    —         —         (668     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total amounts reclassified out of accumulated other comprehensive income

    115       95       (326     283  
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in unfunded status of the supplemental retirement plans after reclassifications

    115       95       342       283  

Tax effect

    (34     (40     (101     (119
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in unfunded status of the supplemental retirement plans, net of tax

    81       55       241       164  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

  $ (5,836   $ (111   $ (20,700   $ 3,301  
 

 

 

   

 

 

   

 

 

   

 

 

 

Note 18 - 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. Securities available-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 as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or impairment write-downs of individual assets.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observable nature of the assumptions used to determine fair value. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Marketable equity securities and debt securities available for sale – Marketable equity securities and debt securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities classified as Level 3 during any of the periods covered in these financial statements.

Loans held for sale – Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to recurring fair value adjustments as Level 2.

 

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Table of Contents

Impaired originated and PNCI loans – Originated and PNCI loans are not recorded at fair value on a recurring basis. However, from time to time, an originated or PNCI loan is considered impaired and an allowance for loan losses is established. Originated and PNCI loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are considered impaired. The fair value of an impaired originated or PNCI loan is estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired originated and PNCI loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired originated and PNCI loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated or PNCI loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the impaired originated or PNCI loan as nonrecurring Level 3.

Foreclosed assets - Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense.

Mortgage servicing rights - Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value 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):

 

     Total      Level 1      Level 2      Level 3  

Fair value at September 30, 2018

           

Marketable equity securities

   $ 2,846      $ 2,846      $ —        $ —    

Debt securities available for sale:

           

Obligations of U.S. government agencies

     638,876        —          638,876        —    

Obligations of states and political subdivisions

     123,420        —          123,420        —    

Corporate bonds

     4,431        —          4,431        —    

Asset backed securities

     289,233        —          289,233        —    

Loans held for sale

     3,824        —          3,824        —    

Mortgage servicing rights

     7,122        —          —          7,122  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 1,069,752      $ 2,846      $ 1,059,784      $ 7,122  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Total      Level 1      Level 2      Level 3  

Fair value at December 31, 2017

           

Marketable equity securities

   $ 2,938      $ 2,938      $ —        $ —    

Debt securities available for sale:

           

Obligations of U.S. government agencies

     604,789        —          604,789        —    

Obligations of states and political subdivisions

     123,156        —          123,156        —    

Loans held for sale

     4,616        —          4,616        —    

Mortgage servicing rights

     6,687        —          —          6,687  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 742,186      $ 2,938      $ 732,561      $ 6,687  
  

 

 

    

 

 

    

 

 

    

 

 

 

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between any levels during the nine months ended September 30, 2018 or the year ended December 31, 2017.

 

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Table of Contents

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):

 

     Beginning
Balance
     Transfers
into (out of)
Level 3
     Change
Included
in Earnings
    Issuances      Ending
Balance
 

Three months ended September 30,

             

2018: Mortgage servicing rights

   $ 7,021        —        $ (37   $ 138      $ 7,122  

2017: Mortgage servicing rights

   $ 6,596        —        $ (325   $ 148      $ 6,419  
     Beginning
Balance
     Transfers
into (out of)
Level 3
     Change
Included
in Earnings
    Issuances      Ending
Balance
 

Nine months ended September 30,

             

2018: Mortgage servicing rights

   $ 6,687        —        $ 38     $ 397      $ 7,122  

2017: Mortgage servicing rights

   $ 6,595        —        $ (795   $ 619      $ 6,419  

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).

The following table presents quantitative information about recurring Level 3 fair value measurements at September 30, 2018:

 

     Fair Value      Valuation    Unobservable    Range,
Weighted
   (in thousands)      Technique    Inputs    Average

Mortgage Servicing Rights

   $ 7,122      Discounted
cash flow
   Constant
prepayment rate
   4.8%-33%, 7.3%
         Discount rate    12%, 12%

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2017:

 

     Fair Value      Valuation    Unobservable    Range,
Weighted
   (in thousands)      Technique    Inputs    Average

Mortgage Servicing Rights

   $ 6,687      Discounted
cash flow
   Constant
prepayment rate
   6.2%-22.0%, 8.9%
         Discount rate    13.0%-15.0%, 13.0%

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      Level 1      Level 2      Level 3      Total Gains
(Losses)
 

Nine months ended September 30, 2018

              

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
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Total      Level 1      Level 2      Level 3      Total Gains
(Losses)
 

Year ended December 31, 2017

              

Fair value:

              

Impaired Originated & PNCI loans

   $ 2,767        —          —        $ 2,767      $ (1,452

Foreclosed assets

     2,217        —          —          2,217        (135
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 4,984        —          —        $ 4,984      $ (1,587
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Total      Level 1      Level 2      Level 3      Total Gains
(Losses)
 

Nine months ended September 30, 2017

              

Fair value:

              

Impaired Originated & PNCI loans

   $ 1,026        —          —        $ 1,026      $ (892

Foreclosed assets

     2,062        —          —          2,062        (157
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 3,088        —          —        $ 3,088      $ (1,049
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The impaired originated and PNCI loan amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure 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 we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero. The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Bank 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 non-covered other 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.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2018:

 

     Fair Value      Valuation             Range,
     (in thousands)      Technique      Unobservable Inputs     

Weighted Average

September 30, 2018

           

Impaired Originated & PNCI loans

   $ 445       
Sales comparison
approach
 
 
    
Adjustment for differences
between comparable sales;
 
 
   (55.8%) - 60%; (28%)
        Income approach        Capitalization rate      N/A

Foreclosed assets (Residential real estate)

   $ 744       
Sales comparison
approach
 
 
    
Adjustment for differences
between comparable sales
 
 
   (47%) - 52%; 0.9%

Foreclosed assets (Commercial real estate)

   $ 92       
Sales comparison
approach
 
 
    
Adjustment for differences
between comparable sales
 
 
   (65%) - 20%; (45%)

Foreclosed assets (Land and construction)

   $ 27       
Sales comparison
approach
 
 
    
Adjustment for differences
between comparable sales
 
 
   Information 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, 2017:

 

     Fair Value      Valuation             Range,
     (in thousands)      Technique      Unobservable Inputs     

Weighted Average

December 31, 2017

           

Impaired Originated & PNCI loans

   $ 2,767       
Sales comparison
approach
 
 
    
Adjustment for differences
between comparable sales
 
 
   (74%) - 23%; (19.76%)
        Income approach        Capitalization rate      N/A

Foreclosed assets (Land & construction)

   $  1,341       
Sales comparison
approach
 
 
    
Adjustment for differences
between comparable sales
 
 
   (53%) - 283%; 167%

Foreclosed assets (Residential real estate)

   $ 622       
Sales comparison
approach
 
 
    
Adjustment for differences
between comparable sales
 
 
   (47%) - 39%; (3.13%)

Foreclosed assets (Commercial real estate)

   $ 254       
Sales comparison
approach
 
 
    
Adjustment for differences
between comparable sales
 
 
   (84%) - 19%; (84%)

In addition to the methods and assumptions used to estimate the fair value of each class of financial instrument noted above, the following methods and assumptions were used to estimate the fair value of other classes of financial instruments for which it is practical to estimate the fair value.

Short-term Instruments - Cash and due from banks, fed funds purchased and sold, interest receivable and payable, and short-term borrowings are considered short-term instruments. For these short-term instruments their carrying amount approximates their fair value.

Securities held to maturity – The fair value of securities held to maturity is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities held to maturity classified as Level 3 during any of the periods covered in these financial statements.

Restricted Equity Securities - It is not practical to determine the fair value of restricted equity securities due to restrictions placed on their transferability.

 

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Originated and PNCI loans - The fair value of variable rate originated and PNCI loans is the current carrying value. The interest rates on these originated and PNCI loans are regularly adjusted to market rates. The fair value of other types of fixed rate originated and PNCI loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The allowance for loan losses is a reasonable estimate of the valuation allowance needed to adjust computed fair values for credit quality of certain originated and PNCI loans in the portfolio.

PCI Loans - PCI loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value.

Deposit Liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. These values do not consider the estimated fair value of the Company’s core deposit intangible, which is a significant unrecognized asset of the Company. The fair value of time deposits and other borrowings is based on the discounted value of contractual cash flows.

Other Borrowings - The fair value of other borrowings is calculated based on the discounted value of the contractual cash flows using current rates at which such borrowings can currently be obtained.

Junior Subordinated Debentures - The fair value of junior subordinated debentures is estimated using a discounted cash flow model. The future cash flows of these instruments are extended to the next available redemption date or maturity date as appropriate based upon the spreads of recent issuances or quotes from brokers for comparable bank holding companies compared to the contractual spread of each junior subordinated debenture measured at fair value.

Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counter parties at the reporting date.

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. 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.

In January 2018, the Company adopted the provisions of Accounting Standard Update 2016-01Recognition and Measurement of Financial Assets and Financial Liabilities”, which requires the Company to use the exit price notion when measuring the fair value of financial instruments. The Company used the exit price notion for valuing financial instruments in 2018 and the entry price notion for valuing financial instruments in 2017. The estimated fair values of financial instruments that are reported at amortized cost in the Company’s condensed consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in thousands):

 

     September 30, 2018      December 31, 2017  
     Carrying      Fair      Carrying      Fair  
   Amount      Value      Amount      Value  

Financial assets:

           

Level 1 inputs:

           

Cash and due from banks

   $ 109,363      $ 109,363      $ 105,968      $ 105,968  

Cash at Federal Reserve and other banks

     117,180        117,180        99,460        99,460  

Level 2 inputs:

           

Securities held to maturity

     459,897        446,287        514,844        518,165  

Restricted equity securities

     17,250        N/A        16,956        N/A  

Level 3 inputs:

           

Loans, net

     3,995,833        3,987,841        2,984,842        2,992,225  

Financial liabilities:

           

Level 2 inputs:

           

Deposits

     5,093,117        5,088,024        4,009,131        4,006,620  

Other borrowings

     282,831        282,831        122,166        122,166  

Level 3 inputs:

           

Junior subordinated debt

     56,996        58,930        56,858        58,466  
     Contract      Fair      Contract      Fair  
   Amount      Value      Amount      Value  

Off-balance sheet:

           

Level 3 inputs:

           

Commitments

   $ 1,225,542      $ 12,255      $ 933,542      $ 9,335  

Standby letters of credit

     11,277        113        13,075        131  

Overdraft privilege commitments

     107,956        1,080        98,260        983  

 

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Note 19 - 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 September 30, 2018 and December 31, 2017 for the Company and the Bank under Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of September 30, 2018 and December 31, 2017 based on the then phased-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when 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.

 

                  Minimum Capital     Minimum Capital     Required to be  
                  Required – Basel III     Required – Basel III     Considered Well  
     Actual     Phase-in Schedule     Fully Phased In     Capitalized  
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

As of September 30, 2018:

                    

Total Capital (to Risk Weighted Assets):

 

                 

Consolidated

   $ 664,197        13.90   $ 471,956        9.875   $ 501,826        10.50     N/A        N/A  

Tri Counties Bank

   $ 658,075        13.77   $ 471,784        9.875   $ 501,643        10.50   $ 477,756        10.00

Tier 1 Capital (to Risk Weighted Assets):

 

                 

Consolidated

   $ 630,294        13.19   $ 376,370        7.875   $ 406,240        8.50     N/A        N/A  

Tri Counties Bank

   $ 624,172        13.06   $ 376,233        7.875   $ 406,092        8.50   $ 382,205        8.00

Common equity Tier 1 Capital (to Risk Weighted Assets):

 

              

Consolidated

   $ 575,010        12.03   $ 304,680        6.375   $ 334,551        7.00     N/A        N/A  

Tri Counties Bank

   $ 624,172        13.06   $ 304,569        6.375   $ 334,429        7.00   $ 310,541        6.50

Tier 1 Capital (to Average Assets):

                    

Consolidated

   $ 630,294        10.66   $ 236,503        4.000   $ 236,503        4.00     N/A        N/A  

Tri Counties Bank

   $ 624,172        10.56   $ 236,496        4.000   $ 236,496        4.00   $ 295,620        5.00
                  Minimum Capital     Minimum Capital     Required to be  
                  Required – Basel III     Required – Basel III     Considered Well  
     Actual     Phase-in Schedule     Fully Phased In     Capitalized  
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

As of December 31, 2017:

                    

Total Capital (to Risk Weighted Assets):

                    

Consolidated

   $ 528,805        14.07   $ 347,694        9.250   $ 394,679        10.50     N/A        N/A  

Tri Counties Bank

   $ 525,384        13.98   $ 347,535        9.250   $ 394,499        10.50   $ 375,713        10.00

Tier 1 Capital (to Risk Weighted Assets):

                    

Consolidated

   $ 495,318        13.18   $ 272,517        7.250   $ 319,502        8.50     N/A        N/A  

Tri Counties Bank

   $ 491,897        13.09   $ 272,392        7.250   $ 319,356        8.50   $ 300,570        8.00

Common equity Tier 1 Capital (to Risk Weighted Assets):

                    

Consolidated

   $ 440,643        11.72   $ 216,134        5.750   $ 263,120        7.00     N/A        N/A  

Tri Counties Bank

   $ 491,897        13.09   $ 216,035        5.750   $ 262,999        7.00   $ 244,214        6.50

Tier 1 Capital (to Average Assets):

                    

Consolidated

   $ 495,318        10.80   $ 183,400        4.000   $ 183,400        4.00     N/A        N/A  

Tri Counties Bank

   $ 491,897        10.73   $ 183,394        4.000   $ 183,394        4.00   $ 229,243        5.00

As of September 30, 2018, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis. Also, at September 30, 2018 and December 31, 2017, the Bank’s capital levels exceeded the minimum amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action.

Beginning January 1, 2016, the Basel III Capital Rules implemented a requirement 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 September 30, 2018, the Company and the Bank are in compliance with the capital conservation buffer requirement. The three risk-based capital ratios will increase by 0.625% each year through 2019, at which point, the common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratio minimums will be 7.0%, 8.5% and 10.5%, respectively.

 

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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 Part II Item 1A of this report and our Annual Report on Form 10-K for the year ended December 31, 2017, which is on file with the Securities and Exchange Commission (the “SEC”) and available in the “Investor Relations” section of our website, https://www.tcbk.com/investor-relations and in other documents we file with the SEC.

General

As TriCo Bancshares (referred to in this report as “we”, “our” or the “Company”) has not commenced any business operations independent of Tri Counties Bank (the “Bank”), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (“FTE”) basis. The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results, and the presentation of these measures on a FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a non-FTE basis in the Part I – Financial Information section of this Form 10-Q, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 of the financial statements included in the Company’s annual report of Form 10-K for the period ended December 31, 2017.

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that area of California north of, and including, Stockton; central California as that area of the State south of Stockton, to and including, Bakersfield; and southern California as that area of the State south of Bakersfield.

 

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Financial Highlights

Performance highlights and other developments for the Company included the following:

 

   

For the three and nine months ended September 30, 2018, the Company’s return on average assets was 1.05% and 1.15% and the return on average equity was 9.11% and 10.44%.

 

   

The Company completed the merger of FNBB effective July 6, 2018 with the systems integration being achieved just two weeks later.

 

   

As of September 30, 2018, the Company reached record levels of total assets, total loans and total deposits which were $6.32 billion, $4.03 billion and $5.09 billion, respectively.

 

   

The loan to deposit ratio increased to 79.1% at September 30, 2018 as compared to 77.2% at June 30, 2018 and 75.2% at December 31, 2017.

 

   

Net interest margin grew 18 basis points to 4.32% on a tax equivalent basis as compared to 4.14% in the trailing quarter.

 

   

Annualized organic loan and deposit growth during the nine months ended September 30, 2018 was 7.9% and 3.1%. During the current quarter, organic loan and deposit growth was 5.9% and 2.4% on an annualized basis.

 

   

Non-interest bearing deposits as a percentage of total deposits were 33.6% at September 30, 2018 and June 30, 2018 as compared to 34.1% at December 31, 2017.

 

   

The average rate of interest paid on deposits, including noninterest-bearing deposits, remained low and stable at 0.16%. This incorporates the impact of the FNBB deposit portfolio which had a 0.24% average cost of total deposits on the day of acquisition.

 

   

Non-performing assets to total assets were 0.46% as of September 30, 2018 as compared to 0.55% and 0.58% at June 30, 2018 and December 31, 2017, respectively.

TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)

 

     Three months ended     Nine months ended  
   September 30,     September 30,  
     2018     2017     2018     2017  

Net interest income

   $ 60,489     $ 44,084     $ 151,344     $ 129,511  

Provision for (benefit from) loan losses

     2,651       765       1,777       (1,588

Noninterest income

     12,186       12,930       36,650       37,543  

Noninterest expense

     (47,378     (37,222     (123,410     (108,948

Provision for income taxes

     (6,476     (7,130     (17,698     (22,129
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 16,170     $ 11,897     $ 45,109     $ 37,565  
  

 

 

   

 

 

   

 

 

   

 

 

 

Share Data

        

Earnings per share:

        

Basic

   $ 0.54     $ 0.52     $ 1.78     $ 1.64  

Diluted

   $ 0.53     $ 0.51     $ 1.76     $ 1.62  

Per share:

        

Dividends paid

   $ 0.17     $ 0.17     $ 0.51     $ 0.49  

Book value at period end

   $ 26.37     $ 22.09      

Average common shares outstanding

     30,011       22,932       25,317       22,901  

Average diluted common shares outstanding

     30,291       23,244       25,617       23,239  

Shares outstanding at period end

     30,418       22,941      

Financial Ratios

        

During the period (annualized):

        

Return on average assets

     1.05     1.02     1.15     1.14

Return on average equity

     9.11     9.38     10.44     10.09

Net interest margin1

     4.32     4.26     4.21     4.19

Efficiency ratio

     65.2     65.3     65.6     65.2

Average equity to average assets

     11.5     11.1     11.0     10.9

 

1 

Fully taxable equivalent (FTE)

 

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     September 30,      June 30,      March 31,      December 31,      September 30,  
Balance Sheet Data    2018      2018      2018      2017      2017  

Total assets

   $ 6,318,865      $ 4,863,153      $ 4,779,957      $ 4,761,315      $ 4,656,435  

Total investments

     1,535,953        1,251,776        1,251,776        1,262,683        1,231,759  

Total loans

     4,027,436        3,116,789        3,069,733        3,015,165        2,931,613  

Total non-interest bearing deposits

     1,710,505        1,369,834        1,359,996        1,368,218        1,283,949  

Total deposits

     5,093,117        4,077,222        4,084,404        4,009,131        3,927,456  

Total other borrowings

     282,831        153,839        65,041        122,166        98,730  

Total junior subordinated debt

     56,996        56,950        56,905        56,858        56,810  

Total shareholders’ equity

     802,115        512,344        505,256        505,808        506,733  

Total tangible equity (1)

   $ 550,432      $ 443,537      $ 436,110      $ 436,323      $ 436,909  

NOTE:

(1) 

Tangible equity is calculated by subtracting Goodwill and Other intangible assets from Total shareholders’ equity.

 

Ending balances    As of September 30,      $ Change      Acquired      Organic     Organic  
($’s in thousands)    2018      2017      Balances      $ Change     % Change  

Total assets

   $ 6,318,865      $ 4,656,435      $ 1,662,430      $ 1,463,199      $ 199,231       4.28

Total loans

     4,027,436        2,931,613        1,095,823        834,683        261,140       8.91

Total investments

     1,535,953        1,231,759        304,194        335,667        (31,473     (2.56 %) 

Total deposits

   $ 5,093,117      $ 3,927,456      $ 1,165,661      $ 991,935      $ 173,726       4.42

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.

The Company reported net income of $16,170,000 for the quarter ended September 30, 2018, compared to $15,029,000 and $11,897,000 for the trailing quarter and the three months ended September 30, 2017, respectively. Diluted earnings per share were $0.53 for the quarter ended September 30, 2018, compared to $0.65 and $0.51 for the trailing quarter and three months ended September 30, 2017. Overall results for the three and nine months ended September 30, 2018 were primarily benefited by the acquisition of First National Bank of Northern California, the wholly owned subsidiary of FNB Bancorp, effective July 6, 2018. In connection with the acquisition and subsequent integration and restructuring, the Company incurred a variety of expenses. During the three and nine month periods ended September 30, 2018 total non-interest expenses increased by $10,156,000 and $14,462,000 as compared to the same periods in 2017. The non-recurring costs included in those increases were $4,150,000 and $5,227,000 for the three and nine months ended September 30, 2018. The Company continued to benefit from the reduction in Federal income tax rate which declined to 21% effective January 1, 2018 as compared to 35% in prior periods.

In addition to the $834,683,000 in loans acquired, recorded net of a $33,417,000 discount, organic loan growth totaled $177,588,000 or an annualized rate of 7.9% during the first nine months of 2018. In addition to the $991,935,000 in acquired deposits, organic deposit growth for the first nine months of 2018 was $92,051,000 or 3.1% on an annualized basis. Total assets acquired from FNB Bancorp totaled $1,306,539,000, inclusive of the core deposit intangible. Goodwill associated with the acquisition of FNB Bancorp was $156,661,000 and the core deposit intangible, which will be amortized over an estimated weighted average life of 6.2 years, was $27,605,000.

Following is a summary of the components of FTE net income for the periods indicated (dollars in thousands):

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2018      2017      2018      2017  

Net interest income (FTE)

   $ 60,846      $ 44,708      $ 152,326      $ 131,385  

Provision for (benefit from) loan losses

     2,651        765        1,777        (1,588

Noninterest income

     12,186        12,930        36,650        37,543  

Noninterest expense

     (47,378      (37,222      (123,410      (108,948

Provision for income taxes (FTE)

     (6,833      (7,754      (18,680      (24,003
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 16,170      $ 11,897      $ 45,109      $ 37,565  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 net interest income for the periods indicated (dollars in thousands):

 

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     Three months ended               
     September 30,               
     2018     2017     $ Change      % Change  

Interest income

   $ 64,554     $ 45,913     $ 18,641        40.6

Interest expense

     (4,065     (1,829     (2,236      122.3
  

 

 

   

 

 

   

 

 

    

Net interest income (not FTE)

     60,489       44,084       16,405        37.2

FTE adjustment

     357       624       (267      (42.8 %) 
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income (FTE)

   $ 60,846     $ 44,708     $ 16,138        36.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest margin (FTE)

     4.32     4.24     
  

 

 

   

 

 

      

Acquired loans discount accretion:

         

Purchased loan discount accretion

   $ 2,098     $ 1,364       

Effect on average loan yield

     0.21     0.19     

Effect of purchased loan discount accretion on net interest margin (FTE)

     0.15     0.13     
     Three months ended               
     September 30,
2018
    June 30,
2018
    $ Change      % Change  

Interest income

   $ 64,554     $ 48,478     $ 16,076        33.2

Interest expense

     (4,065     (2,609     (1,456      55.8
  

 

 

   

 

 

   

 

 

    

Net interest income (not FTE)

     60,489       45,869       14,620        31.9

FTE adjustment

     357       313       44        14.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income (FTE)

   $ 60,846     $ 46,182     $ 14,664        31.8

Net interest margin (FTE)

     4.32     4.14     

Acquired loans discount accretion:

         

Purchased loan discount accretion

   $ 2,098     $ 559       

Effect on average loan yield

     0.21     0.07     

Effect of purchased loan discount accretion on net interest margin (FTE)

     0.15     0.05     
     Nine months ended
September 30,
              
     2018     2017     $ Change      % Change  

Interest income

   $ 160,153     $ 134,441     $ 25,712        19.1

Interest expense

     (8,809     (4,930     (3,879      78.7
  

 

 

   

 

 

   

 

 

    

Net interest income (not FTE)

     151,344       129,511       21,833        16.9

FTE adjustment

     982       1,874       (892      (47.6 %) 
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income (FTE)

   $ 152,326     $ 131,385     $ 20,941        15.9
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest margin (FTE)

     4.21     4.21     
  

 

 

   

 

 

      

Acquired loans discount accretion:

         

Purchased loan discount accretion

   $ 3,289     $ 5,075       

Effect on average loan yield

     0.13     0.24     

Effect of purchased loan discount accretion on net interest margin (FTE)

     0.09     0.16     

 

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Summary of Average Balances, Yields/Rates and Interest Differential

The following table presents, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).

 

     For the three months ended  
     September 30, 2018     September 30, 2017  
            Interest      Rates            Interest      Rates  
     Average      Income/      Earned     Average      Income/      Earned  
     Balance      Expense      /Paid     Balance      Expense      /Paid  

Assets:

                

Loans

   $  4,028,462      $  53,102        5.27   $  2,878,944      $  37,268        5.18

Investment securities - taxable

     1,336,361        9,648        2.89     1,114,112        7,312        2.63

Investment securities - nontaxable (1)

     153,704        1,546        4.02     136,095        1,665        4.89
  

 

 

    

 

 

      

 

 

    

 

 

    

Total investments

     1,490,065        11,194        3.00     1,250,207        8,977        2.87

Cash at Federal Reserve and other banks

     119,635        615        2.06     85,337        292        1.37
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     5,638,162        64,911        4.61     4,214,488        46,537        4.42

Other assets

     530,182             357,936        
  

 

 

         

 

 

       

Total assets

   $ 6,168,344           $ 4,572,424        
  

 

 

         

 

 

       

Liabilities and shareholders’ equity:

                

Interest-bearing demand deposits

   $ 1,125,159        248        0.09   $ 949,348        206        0.09

Savings deposits

     1,803,022        833        0.18     1,365,249        419        0.12

Time deposits

     430,286        991        0.92     310,325        403        0.52
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     3,358,467        2,072        0.25     2,624,922        1,028        0.16

Other borrowings

     246,637        1,178        1.91     65,234        149        0.91

Junior subordinated debt

     56,973        815        5.72     56,784        652        4.59
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     3,662,077        4,065        0.44     2,746,940        1,829        0.27

Noninterest-bearing deposits

     1,710,374             1,253,261        

Other liabilities

     86,131             64,834        

Shareholders’ equity

     709,762             507,389        
  

 

 

         

 

 

       

Total liabilities and shareholders’ equity

   $ 6,168,344           $ 4,572,424        
  

 

 

         

 

 

       

Net interest spread (2)

           4.17           4.15

Net interest income and interest margin (3)

      $ 60,846        4.32      $ 44,708        4.24
     

 

 

    

 

 

      

 

 

    

 

 

 

 

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     For the nine months ended  
     September 30, 2018     September 30, 2017  
            Interest      Rates            Interest      Rates  
     Average      Income/      Earned     Average      Income/      Earned  
     Balance      Expense      /Paid     Balance      Expense      /Paid  

Assets:

                

Loans

   $  3,390,447      $  130,455        5.13   $ 2,807,453      $ 108,600        5.16

Investment securities - taxable

     1,195,541        25,042        2.79     1,076,887        21,637        2.68

Investment securities - nontaxable (1)

     142,061        4,254        3.99     136,213        4,998        4.89
  

 

 

    

 

 

      

 

 

    

 

 

    

Total investments

     1,337,602        29,296        2.92     1,213,100        26,635        2.93

Cash at Federal Reserve and other banks

     101,889        1,384        1.81     139,739        1,080        1.03
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     4,829,938        161,135        4.45     4,160,292        136,315        4.37

Other assets

     416,520             359,489        
  

 

 

         

 

 

       

Total assets

   $ 5,246,458           $  4,519,781        
  

 

 

         

 

 

       

Liabilities and shareholders’ equity:

                

Interest-bearing demand deposits

   $ 1,038,775        673        0.09   $ 931,079        534        0.08

Savings deposits

     1,524,048        1,671        0.15     1,364,812        1,253        0.12

Time deposits

     350,559        2,058        0.78     321,150        1,109        0.46
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

Total interest-bearing deposits

     2,913,382        4,402        0.20     2,617,041        2,896        0.15

Other borrowings

     165,026        2,106        1.70     34,413        164        0.64

Junior subordinated debt

     56,928        2,301        5.39     56,737        1,870        4.39
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     3,135,336        8,809        0.37     2,708,191        4,930        0.24

Noninterest-bearing deposits

     1,462,209             1,247,201        

Other liabilities

     72,772             67,854        

Shareholders’ equity

     576,141             496,535        
  

 

 

         

 

 

       

Total liabilities and shareholders’ equity

   $ 5,246,458           $ 4,519,781        
  

 

 

         

 

 

       

Net interest spread (2)

           4.08           4.13

Net interest income and interest margin (3)

      $ 152,326        4.21      $  131,385        4.21
     

 

 

    

 

 

      

 

 

    

 

 

 

 

(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.

 

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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 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).

 

     Three months ended September 30, 2018  
     compared with three months  
     ended September 30, 2017  
     Volume      Rate      Total  

Increase in interest income:

        

Loans

   $  14,886      $ 948      $  15,834  

Investment securities

     1,676        541        2,217  

Cash at Federal Reserve and other banks

     117        206        323  
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     16,679        1,695        18,374  
  

 

 

    

 

 

    

 

 

 

Increase in interest expense:

        

Interest-bearing demand deposits

     40        2        42  

Savings deposits

     131        283        414  

Time deposits

     156        432        588  

Other borrowings

     413        616        1,029  

Junior subordinated debt

     2        161        163  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     742        1,494        2,236  
  

 

 

    

 

 

    

 

 

 

Increase in net interest income

   $ 15,937      $ 201      $ 16,138  
  

 

 

    

 

 

    

 

 

 
     Nine months ended September 30, 2018  
     compared with nine months  
     ended September 30, 2017  
     Volume      Rate      Total  

Increase (decrease) in interest income:

        

Loans

   $  22,562      $  (707    $  21,855  

Investment securities

     2,599        62        2,661  

Cash at Federal Reserve and other banks

     (292      596        304  
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     24,869        (49      24,820  
  

 

 

    

 

 

    

 

 

 

Increase in interest expense:

        

Interest-bearing demand deposits

     65        74        139  

Savings deposits

     143        275        418  

Time deposits

     101        848        949  

Other borrowings

     627        1,315        1,942  

Junior subordinated debt

     6        425        431  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     942        2,937        3,879  
  

 

 

    

 

 

    

 

 

 

Increase (decrease) in net interest income

   $ 23,927      $  (2,986    $ 20,941  
  

 

 

    

 

 

    

 

 

 

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 September 30, 2018 increased $16,138,000 or 36.1% to $60,846,000 compared to $44,708,000 during the three months ended September 30, 2017. The increase in net interest income (FTE) was due primarily to an increase in the average balance of loans and a 9 basis point increase in yield on loans, which was partially offset due to an increase in the average balance of interest-bearing liabilities and a 17 basis point increase in the average rate paid on interest-bearing liabilities.

 

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The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, has increased by 1.00% to 5.25% at September 30, 2018 as compared to 4.25% at September 30, 2017. The 9 basis point increase in loan yields from 5.18% during the three months ended September 30, 2017 to 5.27% during the three months ended September 30, 2018 was primarily due to increases in market rates. More specifically, increases in purchased loan discount accretion between the three months ended September 30, 2018 and 2017 contributed to an increase net interest margin by only 2 basis points.    More importantly, yields on loans increased 21 basis points as compared to the prior quarter from 5.06% for the three months ended June 30, 2018 of which 14 basis points were contributed by increases in loan discount accretion and the remaining 7 basis points were contributed by changes in the coupon rate associated with loans. On their acquisition date, the weighted average coupon rate was 4.88% for loans acquired during the three month period ended September 30, 2018.

The increase in the average rate paid on interest-bearing liabilities for the trailing and comparable quarters of 8 basis points and 17 basis points, respectively, was due in part to differences in market rates associated with deposits acquired from First National Bank of Northern California and to increases in the variable rates paid on other borrowings and subordinated debt. The weighted average rate associated with interest bearing acquired deposits was 0.29% for non-time deposits and 0.92% for time deposits on the day of acquisition. The rate paid on other borrowings was 2.31% at September 30, 2018 as compared to 2.05% and 1.11% as of the trailing quarter and the same quarter in the prior year, respectively.

Net interest income (FTE) during the nine months ended September 30, 2018 increased $20,941,000 or 15.9% to $152,326,000 compared to $131,385,000 during the nine months ended September 30, 2017. The increase in net interest income (FTE) was due primarily to an increase in the average balance of loans, which was partially offset by an increase in the average balance of interest-bearing liabilities and a 13 basis point increase in the average rate paid on interest-bearing liabilities.

During the nine months ended September 30, 2018, the average balance of loans increased by $582,994,000 or 20.8% to $3,390,447,000. The increase in net interest income was partially offset by a decrease in the year-to-date purchased loan discount accretion from $5,075,000 during the nine months ended September 30, 2017 to $3,289,000 during the nine months ended September 30, 2018. This decrease in purchased loan discount accretion reduced loan yields by 11 basis points, and net interest margin by 7 basis points. The 13 basis point increase in the average rate paid on interest-bearing liabilities was primarily due to increases in market rates that increased the rates the Company pays on its time deposits, overnight borrowings, and junior subordinated debt.

Also affecting net interest margin during the three and nine months ended September 30, 2018, was the decrease in the Federal tax rate from 35% to 21%. This decrease in the Federal tax rate caused the fully tax-equivalent (FTE) yield on the Company’s nontaxable investments to decrease from 4.89% during the nine months ended September 30, 2017 to 3.99% during the nine months ended September 30, 2018.

As of September 30, 2018, the Bank’s $4,082,558,000 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 $1,297,815,000 that have fixed interest rates, and $2,784,743,000 of loans with interest rates that are variable. Included in the balance of variable rate loans as of September 30, 2018 were loans with principal balances of approximately $687,114,000 that had adjustable interest rates tied to the prime lending rate that adjust on or near the date of any prime rate change.

Asset Quality and Loan Loss Provisioning

The Company recorded provisions for loan losses of $2,651,000 and $765,000 during the three months ended September 30, 2018 and 2017, respectively. While the Company did record net charge-offs of $572,000 during the third quarter of 2018 as compared to net charge-offs of $161,000 in the 2017 quarter, the primary cause for the increase in provision for loan losses was due to changes in the Company’s analysis of qualitative factors associated with the California economy. More specifically, the Company has become more cautious about the risks associated with trends in California real estate prices and the decrease in affordability of housing in the markets served by the Company. Loan growth, excluding acquired loans, also contributed to the need for additional provisioning.

During the nine months ended September 30, 2018 the Company recorded a loan loss provision of $1,777,000 as compared to a reversal of provision for loan losses of $1,588,000 during the nine months ended September 30, 2017. Nonperforming loans were $27,148,000, or 0.67% of loans outstanding as of September 30, 2018, compared to $25,420,000, or 0.81% of loans outstanding as of June 30, 2018 and $24,394,000 or 0.81% of loans outstanding as of December 31, 2017. The fair value of loans acquired with deteriorated credit quality during the current quarter totaled $1,302,000.

The Company continued to experience improvement in the overall credit quality of its loan portfolio. At September 30, 2018 loans past due greater than thirty days totaled $13,218,000 or 0.33% of loans outstanding, as compared to $11,626,000 or 0.37% at June 30, 2018 and $11,609,000 or 0.39% at December 31, 2017. At September 30, 2018, classified loans, which includes loans graded substandard or worse plus PCI loans, totaled $45,548,000 (1.13% of total loans) compared to $44,202,000 (1.40%) and $53,593,000 (1.78%) at June 30, 2018 and December 31, 2017, respectively.

 

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Noninterest Income

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

 

     Three months ended September 30,  
     2018      2017      $ Change      % Change  

ATM and interchange fees

   $ 4,590      $ 4,209      $ 381        9.1

Service charges on deposit accounts

     4,015        4,160        (145      (3.5 %) 

Other service fees

     676        917        (241      (26.3 %) 

Mortgage banking service fees

     499        514        (15      (2.9 %) 

Change in value of mortgage servicing rights

     (37      (325      288        (88.6 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total service charges and fees

     9,743        9,475        268        2.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Commissions on sale of non-deposit investment products

     728        672        56        8.3

Increase in cash value of life insurance

     732        732        —          0.0

Gain on sale of loans

     539        606        (67      (11.1 %) 

Lease brokerage income

     186        234        (48      (20.5 %) 

Gain on sale of foreclosed assets

     2        37        (35      (94.6 %) 

Sale of customer checks

     88        89        (1      (1.1 %) 

Gain on sale of investment securities

     207        961        (754      (78.5 %) 

Loss on disposal of fixed assets

     (152      (33      (119      360.6

Loss on marketable equity securities

     (22      —          (22      —    

Other

     135        157        (22      (14.0 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest income

     2,443        3,455        (1,012      (29.3 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $  12,186      $  12,930      $  (744      (5.8 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income decreased $744,000 (5.8%) to $12,186,000 during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The decrease in noninterest income was due to the changes noted in the table above. The decrease of $241,000 (26.3%) in other service fees was caused primarily by a decrease in merchant residual income due to the lagging effect of transitioning to a new processor, decreasing from $362,000 during the three months ended September 30, 2017 to $161,000 during the three months ended September 30, 2018. Gains from sales of investments securities decreased by $754,000 (78.5%) due to less sales activity during the three month period ending September 30, 2018. Offsetting the decreases in non-interest income was an increase of $288,000 (88.6%) in change in value of mortgage servicing rights (MSRs) due to slight decreases in estimated prepayment speeds during the three months ended September 30, 2018.

 

     Nine months ended September 30,  
     2018      2017      $ Change      % Change  

ATM and interchange fees

   $ 13,335      $ 12,472      $ 863        6.9

Service charges on deposit accounts

     11,407        12,102        (695      (5.7 %) 

Other service fees

     2,020        2,521        (501      (19.9 %) 

Mortgage banking service fees

     1,527        1,561        (34      (2.2 %) 

Change in value of mortgage servicing rights

     38        (795      833        (104.8 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total service charges and fees

     28,327        27,861        466        1.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Commissions on sale of non-deposit investment products

     2,414        1,984        430        21.7

Increase in cash value of life insurance

     1,996        2,043        (47      (2.3 %) 

Gain on sale of loans

     1,831        2,293        (462      (20.1 %) 

Lease brokerage income

     514        601        (87      (14.5 %) 

Gain on sale of foreclosed assets

     390        308        82        26.6

Sale of customer checks

     327        287        40        13.9

Gain on sale of investment securities

     207        961        (754      (78.5 %) 

Loss on disposal of fixed assets

     (206      (61      (145      237.7

Loss on marketable equity securities

     (92      —          (92      —    

Other

     942        1,266        (324      (25.6 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest income

     8,323        9,682        (1,359      (14.0 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $  36,650      $  37,543      $  (893      (2.4 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Noninterest income decreased $893,000 (2.4%) to $36,650,000 during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease in noninterest income was due to the changes noted in the table above. The $695,000 (5.7%) decrease in service charges on deposit accounts was made up of a $688,000 (10%) decrease in nonsufficient fund (NSF) fees to $6,220,000, and a $7,000 (0.1%) decrease in other deposit account service charges to $5,188,000. The decrease in NSF fees was due primarily to continued growth in customer adoption of the Company’s digital services that improves the ability of customers to manage funds and avoid overdrafts. The decrease in other deposit service charges was due primarily to the rapid growth of customer adoption of e-Statements that reduces statement fees. While both of these revenue generating activities decreased, the Company has a net benefit through a reduction in actual operational costs. The decrease of $467,000 (18.5%) in other service fees was caused primarily by a decrease in merchant residual income due to the lagging effect of transitioning to a new processor, decreasing from $890,000 during the prior nine month period to $471,000 during the nine months ended September 30, 2018. Gains from sales of investments securities decreased by $754,000 (78.5%) due to less sales activity during the nine month period ending September 30, 2018. The $833,000 (104.8%) increase in change in value of mortgage servicing rights (MSRs) was due to slight decreases in prepayment speeds during the nine months ended September 30, 2018. During the nine months ended September 30, 2017, the Company recorded other non-interest income of $490,000 related to the termination of a loss sharing agreement with the FDIC.

Noninterest Expense

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

 

     Three months ended September 30,  
     2018      2017      $ Change      % Change  

Base salaries, net of deferred loan origination costs

   $ 17,051      $ 13,600      $ 3,451        25.4

Incentive compensation

     3,223        2,609        614        23.5

Benefits and other compensation costs

     5,549        4,724        825        17.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total salaries and benefits expense

     25,823        20,933        4,890        23.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Occupancy

     3,173        2,799        374        13.4

Data processing and software

     2,786        2,495        291        11.7

Merger and acquisition expense

     4,150        —          4,150        —    

Equipment

     1,750        1,816        (66      (3.6 %) 

Intangible amortization

     1,390        339        1,051        310.0

Advertising

     1,341        1,039        302        29.1

ATM and POS network charges

     1,195        1,425        (230      (16.1 %) 

Professional fees

     929        901        28        3.1

Telecommunications

     819        716        103        14.4

Regulatory assessments and insurance

     537        427        110        25.8

Courier service

     278        235        43        18.3

Postage

     275        325        (50      (15.4 %) 

Operational losses

     217        301        (84      (27.9 %) 

Foreclosed assets expense

     93        41        52        126.8

Provision for (reversal of) foreclosed asset losses

     (1      134        (135      (100.7 %) 

Other miscellaneous expense

     2,623        3,296        (673      (20.4 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest expense

     21,555        16,289        5,266        32.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $  47,378      $ 37,222      $  10,156        27.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Average full-time equivalent staff

     1,146        993        153        15.4

Salary and benefit expenses increased $4,890,000 (23.4%) to $25,823,000 during the three months ended September 30, 2018 compared to $20,933,000 during the three months ended September 30, 2017. Base salaries, net of deferred loan origination costs increased $3,451,000 (25.4%) to $17,051,000. The increase in base salaries was primarily due to the additional full-time equivalent employees acquired with the FNBB merger. Average full-time equivalent employees increased by 153 or 15.4% during the comparable quarters. In addition, increases in base salaries due to annual merit increases and the addition of employees with base salaries above the average base salary also contributed to the increase. Commissions and incentive compensation increased $614,000 (23.5%) to $3,223,000 during the three months ended September 30, 2018 compared to the year-ago quarter. Benefits & other compensation expense increased $825,000 (17.5%) to $5,549,000 during the three months ended September 30, 2018 due primarily to the increase in full time equivalent employees and to a lesser extent an increase in health insurance expense. Severance and other merger related non-recurring compensation costs are included with “merger and acquisition expense” in the table above.

Other noninterest expense increased $5,266,000 (32.3%) to $21,555,000 during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase in other noninterest expense was due to the changes noted in the table above. During the three months ended September 30, 2018, the Company incurred $4,150,000 of merger related expense associated with the merger with FNB Bancorp.

 

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Table of Contents
     Nine months ended September 30,  
     2018      2017      $ Change      % Change  

Base salaries, net of deferred loan origination costs

   $ 45,442      $ 40,647      $ 4,795        11.8

Incentive compensation

     7,834        6,980        854        12.2

Benefits and other compensation costs

     15,652        14,693        959        6.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total salaries and benefits expense

     68,928        62,320        6,608        10.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Occupancy

     8,574        8,196        378        4.6

Data processing and software

     7,979        7,332        647        8.8

Merger and acquisition expense

     5,227        —          5,227        —    

Equipment

     4,938        5,344        (406      (7.6 %) 

ATM and POS network charges

     3,858        3,353        505        15.1

Advertising

     3,214        3,173        41        1.3

Professional fees

     2,475        2,357        118        5.0

Telecommunications

     2,201        2,027        174        8.6

Regulatory assessments and insurance

     1,384        1,252        132        10.5

Intangible amortization

     2,068        1,050        1,018        97.0

Postage

     934        1,058        (124      (11.7 %) 

Courier service

     769        752        17        2.3

Operational losses

     763        1,166        (403      (34.6 %) 

Foreclosed assets expense

     297        117        180        153.8

Provision for (reversal of) foreclosed asset losses

     89        162        (73      (45.1 %) 

Other miscellaneous expense

     9,712        9,289        423        4.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest expense

     54,482        46,628        7,854        16.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $  123,410      $ 108,948      $  14,462        13.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Average full-time equivalent staff

     1,050        1,005        45        4.5

Salary and benefit expenses increased $6,608,000 (10.6%) to $68,928,000 during the nine months ended September 30, 2018 compared to $62,320,000 during the nine months ended September 30, 2017. Base salaries, net of deferred loan origination costs increased $4,795,000 (11.8%) to $45,442,000. The increase in base salaries was primarily due to the additional full-time equivalent employees acquired with the FNBB merger. Average full-time equivalent employees increased by 45 or 4.5% during the comparable nine month periods. In addition, increases in base salaries due to annual merit increases and the addition of employees with base salaries above the average base salary also contributed to the increase. Commissions and incentive compensation increased $854,000 (12.2%) to $7,834,000 during the nine months ended September 30, 2018 compared to the prior year-to-date period. Benefits & other compensation expense increased $959,000 (6.5%) to $15,652,000 during the nine months ended September 30, 2018 due primarily to the increase in full time equivalent employees and to a lesser extent an increase in health insurance expense.

Other noninterest expense increased $7,854,000 (16.8%) to $54,482,000 during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase in other noninterest expense was due to the changes noted in the table above. During the nine months ended September 30, 2018, the Company incurred $5,227,000 of merger related expense associated with the merger with FNB Bancorp.

Income Taxes

The effective combined Federal and State income tax rate on income was 28.6% and 28.2% for the three and nine months ended September 30, 2018, and 37.5% and 37.1% for the three and nine months ending September 30, 2017. This decrease in effective combined Federal and State income tax rate was due primarily to a decrease in the Federal tax rate from 35% to 21% effective January 1, 2018.

 

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Financial Condition

Investment Securities

Debt securities available for sale increased $361,066,000 to $1,089,011,000 as of September 30, 2018, compared to December 31, 2017. This increase is attributable to purchases of $370,843,000 that were primarily funded with proceeds from sales of securities of $293,279,000 from the FNBB merger, maturities and principal repayments of $54,510,000, a decrease in fair value of investments securities available for sale of $29,704,000 and amortization of net purchase price premiums of $1,209,000.

The following table presents the available for sale debt securities portfolio by major type as of June 30, 2018 and December 31, 2017:

 

(dollars in thousands)    September 30, 2018     December 31, 2017  
     Fair Value      %     Fair Value      %  

Debt securities available for sale:

          

Obligations of U.S. government and agencies

   $ 638,876        60.5   $  604,789        83.1

Obligations of states and political subdivisions

     123,420        11.7     123,156        16.9

Corporate bonds

     4,431        0.4     —          0.0

Asset backed securities

     289,233        27.4     —          0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities available for sale

   $  1,055,960        100.0   $ 727,945        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity decreased $54,857,000 to $459,897,000 as of September 30, 2018, as compared to December 31, 2017. This decrease is attributable to principal repayments of $54,203,000, and amortization of net purchase price premiums of $744,000.

The following table presents the held to maturity investment securities portfolio by major type as of June 30, 2018 and December 31, 2017:

 

(dollars in thousands)    September 30, 2018     December 31, 2017  
     Cost Basis      %     Cost Basis      %  

Securities held to maturity:

          

Obligations of U.S. government agencies

   $  445,309        96.8   $  500,271        97.2

Obligations of states and political subdivisions

     14,588        3.20     14,573        2.80
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities held to maturity

   $ 459,897        100   $ 514,844        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, including net deferred loan costs, as of the dates indicated:

 

(dollars in thousands)    September 30, 2018     December 31, 2017  

Real estate mortgage

   $  3,132,202        77.8   $  2,300,322        76.3

Consumer

     421,285        10.5     356,874        11.8

Commercial

     289,647        7.1     220,412        7.3

Real estate construction

     184,302        4.6     137,557        4.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 4,027,436        100   $ 3,015,165        100
  

 

 

    

 

 

   

 

 

    

 

 

 

At September 30, 2018 loans, including net deferred loan costs, totaled $4,027,436,000 which was a $1,012,271,000 (33.6%) increase over the balances at December 31, 2017. In addition to the $834,683,000 in loans acquired from FNBB, which were recorded net of a $33,417,000 discount, organic loan growth totaled $177,588,000 or an annualized rate of 7.9% during the first nine months of 2018.

 

 

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Table of Contents

Asset Quality and Nonperforming Assets

Nonperforming Assets

The following table sets forth the amount of the Company’s nonperforming assets as of the dates indicated. For purposes of the following table, PCI loans that are 90 days past due and still accruing are not considered nonperforming loans. “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)    September 30,
2018
    December 31,
2017
 

Performing nonaccrual loans

   $  22,429     $  20,937  

Nonperforming nonaccrual loans

     3,671       3,176  
  

 

 

   

 

 

 

Total nonaccrual loans

     26,100       24,113  

Originated and PNCI loans 90 days past due and still accruing

     1,048       281  
  

 

 

   

 

 

 

Total nonperforming loans

     27,148       24,394  

Foreclosed assets

     1,832       3,226  
  

 

 

   

 

 

 

Total nonperforming assets

   $ 28,980     $ 27,620  
  

 

 

   

 

 

 

Nonperforming assets to total assets

     0.46     0.58

Nonperforming loans to total loans

     0.67     0.81

Allowance for loan losses to nonperforming loans

     116     124

Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed

     2.12     1.77

The following table set forth the amount of the Company’s nonperforming assets as of the dates indicated. For purposes of the following table, PCI loans that are 90 days past due and still accruing are not considered nonperforming loans. “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:

 

     September 30, 2018  
(dollars in thousands)    Originated     PNCI     PCI     Total  

Performing nonaccrual loans

   $  14,401     $  1,840     $  6,188     $  22,429  

Nonperforming nonaccrual loans

     2,686       307       678       3,671  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     17,087       2,147       6,866       26,100  

Originated and PNCI loans 90 days past due and still accruing

     —         1,048       —         1,048  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     17,087       3,195       6,866       27,148  

Foreclosed assets

     1,042       —         790       1,832  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 18,129     $ 3,195     $ 7,656     $ 28,980  
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans

   $ 301       —         —       $ 301  

Nonperforming assets to total assets

     0.29     0.05     0.12     0.46

Nonperforming loans to total loans

     0.42     0.08     0.17     0.67

Allowance for loan losses to nonperforming loans

     170     23     0.12     116.41

Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed

     1.35     2.44     68.91     2.12

 

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Table of Contents
     December 31, 2017  
(dollars in thousands)    Originated     PNCI     PCI     Total  

Performing nonaccrual loans

   $  12,942     $  1,305     $  6,690     $  20,937  

Nonperforming nonaccrual loans

     2,520       158       498       3,176  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     15,462       1,463       7,188       24,113  

Originated loans 90 days past due and still accruing

     —         281       —         281  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     15,462       1,744       7,188       24,394  

Foreclosed assets

     1,836       —         1,390       3,226  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 17,298     $ 1,744     $ 8,578     $ 27,620  
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans

   $ 358         $ 358  

Nonperforming assets to total assets

     0.36     0.04     0.18     0.58

Nonperforming loans to total loans

     0.57     0.56     46.20     0.81

Allowance for loan losses to nonperforming loans

     188     53     4     124

Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed

     1.32     2.22     34.05     1.77

Changes in nonperforming assets during the three months ended September 30, 2018

 

(in thousands):    Balance at
September 30,
2018
     Additions     

Advances/

Paydowns, net

   

Charge-offs/

Write-downs

   

Transfers to

Foreclosed

Assets

    Category
Changes
    Balance at
June 30,
2018
 

Real estate mortgage:

                

Residential

   $ 3,038      $ 116      $ (73   $ —       $ —       $ (1,212   $ 4,207  

Commercial

     15,129        2,688        (418     —         —         974       11,885  

Consumer

                

Home equity lines

     2,133        549        (1,053     —         —         —         2,637  

Home equity loans

     3,089        762        (76     (49     (511     238       2,725  

Other consumer

     8        1        (1           8  

Commercial

     3,751        513        (236     (484     —         —         3,958  

Construction:

                

Residential

     —          —          —         —         —         —         —    

Commercial

     —          —          —         —         —         —         —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     27,148        4,629        (1,857     (533     (511     —         25,420  

Foreclosed assets

     1,832        25        (79     1       511       —         1,374  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $  28,980      $  4,654      $  (1,936   $  (532   $ —       $ —       $  26,794  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Nonperforming assets increased during the third quarter of 2018 by $2,186,000 (8.2%) to $28,980,000 at September 30, 2018 compared to $26,794,000 at June 30, 2018. The increase in nonperforming assets during the third quarter of 2018 was primarily the result of acquired FNBB loans with credit deterioration of $1,300,000, new nonperforming loans totaling $3,354,000 and advances on nonperforming loans of $294,000, that were partially offset by sales or upgrades of nonperforming loans of $2,151,000, dispositions of foreclosed assets totaling $79,000, and loan charge-offs of $532,000.

The $4,629,000 in new nonperforming loans during the third quarter of 2018 was comprised of increases of $116,000 on one residential real estate loans, $2,688,000 on six commercial real estate loans, $1,311,000 on 10 home equity lines and loans, and $513,000 on 7 C&I loans. Related charge-offs are discussed below.

Loan charge-offs during the three months ended September 30, 2018

In the third quarter of 2018, the Company recorded $1,014,000 in loan charge-offs and $128,000 in deposit overdraft charge-offs less $519,000 in loan recoveries and $51,000 in deposit overdraft recoveries resulting in $570,000 of net charge-offs. Primary causes of the loan charges taken in the third quarter of 2018 were gross charge-offs of $25,000 on 2 residential real estate loans, $195,000 on 3 home equity lines and loans, $229,000 on 23 other consumer loans, and $693,000 on 18 C&I loans.

Total charge-offs were generally comprised of individual charges of less than $250,000 each. Generally losses are triggered by non-performance by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying collateral less any estimated costs associated with the disposition of the collateral.

 

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Changes in nonperforming assets during the nine months ended September 30, 2018

 

(in thousands):    Balance at
September 30,
2018
     Additions      Advances/
Paydowns, net
    Charge-offs/
Write-downs
    Transfers to
Foreclosed
Assets
    Category
Changes
    Balance at
December 31,
2017
 

Real estate mortgage:

                

Residential

   $ 3,038      $ 903      $ (505   $ (51   $ —       $ (1,048   $ 3,739  

Commercial

     15,129        4,257        (2,005     (15     —         1,072       11,820  

Consumer

        —          —         —         —         —      

Home equity lines

     2,133        2,153        (3,171     (104     —         (227     3,482  

Home equity loans

     3,089        1,973        (260     (50     (511     301       1,636  

Other consumer

     8        114        (30     (87     —         —         11  

Commercial

     3,751        1,871        (985     (743     —         (98     3,706  

Construction:

        —          —         —         —         —      

Residential

     —          —          —         —         —         —         —    

Commercial

     —          —          —         —         —         —         —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     27,148        11,271        (6,956     (1,050     (511     —         24,394  

Foreclosed assets

     1,832        25        (1,841     (89     511       —         3,226  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 28,980      $ 11,296      $ (8,797   $ (1,139)     $ —       $ —       $ 27,620  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Nonperforming assets increased during the nine month period ending September 30, 2018 by $1,360,000 (4.9%) to $28,980,000 at September 30, 2018 compared to $27,620,000 at December 31, 2017. The increase in nonperforming assets during 2018 was primarily the result of additions of $11,296,000 of nonperforming assets outpacing net paydowns of $8,797,000 and charge-offs/write-downs of $1,139,000.

Loan charge-offs during the nine months ended September 30, 2018

During the first nine months of 2018, the Company recorded $1,594,000 in loan charge-offs and $346,000 in deposit overdraft charge-offs less $1,263,000 in loan recoveries and $180,000 in deposit overdraft recoveries resulting in $497,000 of net charge-offs. Primary causes of the loan charges taken during the nine month period during 2018 were gross charge-offs of $77,000 on 3 residential real estate loans, $150,000 on one commercial real estate loan, $299,000 on 9 home equity lines and loans, $597,000 on 61 other consumer loans, and $952,000 on 26 C&I loans.

Total charge-offs were generally comprised of individual charges of less than $250,000 each. Generally losses are triggered by non-performance by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying collateral less any estimated costs associated with the disposition of the collateral.

Allowance for Loan Losses

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)    September 30,
2018
    December 31,
2017
 

Allowance for originated and PNCI loan losses:

    

Environmental factors allowance

   $ 13,122     $ 10,252  

Formula allowance

     15,743       17,100  
  

 

 

   

 

 

 

Total allowance for originated and PNCI loan losses

     28,865       27,352  

Allowance for impaired loans

     2,628       2,699  

Allowance for PCI loan losses

     110       272  
  

 

 

   

 

 

 

Total allowance for loan losses

   $ 31,603     $ 30,323  
  

 

 

   

 

 

 

Allowance for loan losses to loans

     0.78     1.01

For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Provision for Loan Losses” at “Results of Operations” and “Allowance for Loan Losses” above. Based on the current conditions of the loan portfolio, management believes that the $31,603,000 allowance for loan losses at September 30, 2018 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.

 

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The following table summarizes the allocation of the allowance for loan losses between loan types and by percentage of the total allowance for loan losses as of the dates indicated:

 

(in thousands)    September 30, 2018     December 31, 2017  

Real estate mortgage

   $ 15,353        48.6   $ 13,758        45.4

Consumer

     7,440        23.5     8,227        27.1

Commercial

     6,224        19.7     6,512        21.5

Real estate construction

     2,586        8.2     1,826        6.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance for loan losses

   $ 31,603        100.0   $ 30,323        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following tables summarize 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,  
     2018     2017     2018     2017  

Allowance for loan losses:

        

Balance at beginning of period

   $ 29,524     $ 31,017     $ 30,323     $ 32,503  

Provision for loan losses

     2,651       (796     1,777       (2,353

Loans charged off:

        

Real estate mortgage:

        

Residential

     (25     —         (77     —    

Commercial

     —         (150     (15     (150

Consumer:

        

Home equity lines

     (172     (13     (276     (84

Home equity loans

     (23     (206     (23     (237

Other consumer

     (229     (308     (597     (482

Commercial

     (693     (764     (952     (897

Construction:

        

Residential

     —         (1,071     —         (1,071

Commercial

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans charged off

     (1,142     (2,512     (1,940     (2,921

Recoveries of previously charged-off loans:

        

Real estate mortgage:

        

Residential

     —         —         —         —    

Commercial

     15       17       51       127  

Consumer:

        

Home equity lines

     151       252       677       298  

Home equity loans

     139       13       176       25  

Other consumer

     63       68       208       209  

Commercial

     202       84       331       254  

Construction:

        

Residential

     —         —         —         —    

Commercial

     —         —         —         1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries of previously charged off loans

     570       434       1,443       914  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     (572     (2,078     (497     (2,007
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 31,603     $ 28,143     $ 31,603     $ 28,143  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average total loans

   $ 4,028,462     $ 2,878,944     $ 3,390,447     $ 2,807,453  

Ratios (annualized):

        

Net charge-offs (recoveries) during period to average loans outstanding during period

     0.06     0.29     0.02     0.10

Provision for (benefit from) loan losses to average loans outstanding during period

     0.26     (0.11 )%      0.07     (0.11 )% 

 

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Foreclosed Assets, Net of Allowance for Losses

The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the period indicated (dollars in thousands):

 

     Balance at
September 30,
2018
     Additions      Advances/
Capitalized
Costs/Other
     Sales     Valuation
Adjustments
    Balance at
December 31,
2017
 

Land & Construction

   $ 445      $ —        $ —        $ (1,341   $ —       $ 1,786  

Residential real estate

     1,294        536        —          (356     (72     1,186  

Commercial real estate

     93        —          —          (144     (17     254  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total foreclosed assets

   $ 1,832      $ 536      $ —        $ (1,841   $ (89   $ 3,226  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Premises and Equipment

Premises and equipment were comprised of:

 

     September 30,
2018
     December 31,
2017
 
     (In thousands)  

Land & land improvements

   $ 28,958      $ 9,959  

Buildings

     64,178        50,340  

Furniture and equipment

     44,271        35,939  
  

 

 

    

 

 

 
     137,407        96,238  

Less: Accumulated depreciation

     (49,073      (40,644
  

 

 

    

 

 

 
     88,334        55,594  

Construction in progress

     956        2,148  
  

 

 

    

 

 

 

Total premises and equipment

   $ 89,290      $ 57,742  
  

 

 

    

 

 

 

During the nine months ended September 30, 2018, premises and equipment increased $31,548,000 due to acquired assets with a fair value of $30,522,000, purchases of $5,736,000, that were partially offset by depreciation of $4,442,000 and disposals of premises and equipment with net book value of $268,000.

Intangible Assets

Intangible assets at were comprised of the following as of the dates indicated:

 

     September 30,
2018
     December 31,
2017
 
     (In thousands)  

Core-deposit intangible

   $ 30,711      $ 5,174  

Goodwill

     220,972        64,311  
  

 

 

    

 

 

 

Total intangible assets

   $ 251,683      $ 69,485  
  

 

 

    

 

 

 

The core-deposit intangible assets resulted from the Bank’s acquisition of FNB Bancorp (FNBB) on July 6, 2018, three bank branches from Bank of America on March 18, 2016, North Valley Bancorp in 2014, and Citizens Bank of Northern California in 2011. The goodwill intangible asset includes $156,661,000 from the acquisition of FNBB, $849,000 from the acquisition of three bank branches from Bank of America on March 18, 2016, $47,943,000 from the North Valley Bancorp acquisition in 2014, and $15,519,000 from the North State National Bank acquisition in 2003.

Amortization of core deposit intangible assets amounting to $1,390,000 and $339,000 was recorded during the three months ended September 30, 2018 and 2017, respectively. Amortization of core deposit intangible assets amounting to $2,068,000 and $1,050,000 was recorded during the nine months ended September 30, 2018 and 2017, respectively.

Investment in Low Income Housing Tax Credit Funds

During the nine months ended September 30, 2018, the Company’s investment in low income housing tax credit funds, recorded in other assets, increased $6,718,000 to $23,572,000 due to capital contributions and the acquisition of $2,794,000 in low income housing tax credit funds from FNBB. During the nine months ended September 30, 2018, the Company also made capital contributions to several of its existing low income housing tax credit fund investments reducing its commitment for future capital contributions to $6,725,000 at September 30, 2018.    This commitment for low income housing tax credit funds is recorded in other liabilities.

Deposits

During the nine months ended September 30, 2018, the Company’s deposits increased $1,083,986,000 to $5,093,117,000.    In addition to the $991,935,000 in acquired deposits, organic deposit growth for the first nine months of 2018 was $92,051,000 or 3.1% on an annualized basis. Included in the September 30, 2018 and December 31, 2017 certificate of deposit balances are $69,000,000 and $50,000,000, 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..

 

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Off-Balance Sheet Arrangements

See Note 12 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 nine months ended September 30, 2018, the Company did not repurchase any shares under this plan. This plan has no stated expiration date for the repurchases. As of September 30, 2018, the Company had repurchased 166,600 shares under this plan, which left 333,400 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 $802,115,000 at September 30, 2018. This amount represents an increase of $296,307,000 (59%) from December 31, 2017, the net result of issued stock of $284,437,000, comprehensive income for the period of $24,409,000, the effect of equity compensation vesting of $1,044,000, and the exercise of stock options of $475,000, that were partially offset by dividends paid of $12,984,000, and repurchase of common stock of $1,124,000. The Company’s ratio of equity to total assets was 12.7% and 10.6% as of September 30, 2018 and December 31, 2017, 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 September 30, 2018. The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:

 

     September 30, 2018     December 31, 2017  
     Ratio     Minimum
Regulatory
Requirement
    Ratio     Minimum
Regulatory
Requirement
 

Total capital

     13.90     9.875     14.07     9.25

Tier I capital

     13.19     7.875     13.18     7.25

Common equity Tier 1 capital

     12.03     6.375     11.72     5.75

Leverage

     10.66     4.00     10.80     4.00

See Note 13 and Note 19 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.

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 September 30, 2018, cash at Federal Reserve and other banks in excess of reserve requirements and investment securities available for sale totaled $1,163,349,000, or 18.4% of total assets, representing an increase of $312,044,000 from $851,305,000, or 17.3% of total assets at December 31, 2017. This increase in cash and securities available for sale is due mainly to deposit growth and net cash and available for sale investment securities received in the acquisition of FNBB that was partially offset by new loan originations being in excess of cash received from the maturity and principal repayment of investment securities during the nine months ended September 30, 2018. The Company’s profitability during the first nine months of 2018 generated cash flows from operations of $59,905,000 compared to $45,817,000 during the first nine months of 2017. Net cash used by investing activities of $112,873,000 during the nine months ended September 30, 2018, compared to net cash used by investing activities of $263,864,000 during the nine months ended September 30, 2017. Financing activities provided net cash of $74,083,000 during the nine months ended September 30, 2018, compared to net provided by financing activities of $100,469,000 during the nine months ended September 30, 2017. Deposit balance increases accounted for $92,051,000 and $31,896,000 of financing sources of funds during the nine months ended September 30, 2018 and 2017, respectively. Dividends paid used $12,984,000 and $11,228,000 of cash during the nine months ended September 30, 2018 and 2017, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of September 30, 2018 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, 2017.

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 September 30, 2018. 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 September 30, 2018.

During the nine months ended September 30, 2018, 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.

 

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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 Factors” in our Form 10-K for the year ended December 31, 2017 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 three months ended September 30, 2018:

 

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
shares that may yet
be purchased under the
plans or programs (2)
 

July 1-31, 2018

   49,996    $ 37.72        —          333,400  

August 1-31, 2018

   41,485    $ 38.95        —          333,400  

September 1-30, 2018

   11,211    $ 39.15        —          333,400  
  

 

  

 

 

    

 

 

    

 

 

 

Total

   102,692    $ 38.37        —          333,400  

 

(1)

Includes shares purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans. See Note 14 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.

 

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Table of Contents

Item 6 – Exhibits

EXHIBIT INDEX

 

Exhibit No.

    

Exhibit

31.1      Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2      Rule 13a-14(a)/15d-14(a) Certification of CFO
32.1      Section 1350 Certification of CEO
32.2      Section 1350 Certification of CFO
101.INS      XBRL Instance Document
101.SCH      XBRL Taxonomy Extension Schema Document
101.CAL      XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB      XBRL Taxonomy Extension Label Linkbase Document
101.PRE      XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF      XBRL Taxonomy Extension Definition Linkbase Document

 

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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: November 9, 2018      

/s/ Peter G. Wiese

      Peter G. Wiese
      Executive Vice President and Chief Financial Officer
      (Duly authorized officer and principal financial and chief accounting officer)

 

58