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TRICO BANCSHARES / - Quarter Report: 2019 September (Form 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, 2019
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from                to              
Commission File Number: 000-10661
___________________
TriCo Bancshares
(Exact Name of Registrant as Specified in Its Charter)
___________________
CA94-2792841
(State or Other Jurisdiction of
Incorporation or Organization)		(I.R.S. Employer
Identification Number)
63 Constitution Drive
Chico, California 95973
(Address of Principal Executive Offices)(Zip Code)
(530) 898-0300
(Registrant’s Telephone Number, Including Area Code)
___________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)		Name of each exchange
on which registered
Common StockTCBKThe NASDAQ Stock Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒Large accelerated filer☐Accelerated filer
☐Non-accelerated filer☐Smaller reporting company
☐Emerging growth company​​​​​​​
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:
Common stock, no par value: 30,520,725 shares outstanding as of November 4, 2019.


Table of Contents
TriCo Bancshares
FORM 10-Q
TABLE OF CONTENTS
Page
Exhibits


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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)

TRICO BANCSHARES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited
September 30, 2019December 31, 2018
Assets:
Cash and due from banks$118,960  $119,781  
Cash at Federal Reserve and other banks140,087  107,752  
Cash and cash equivalents259,047  227,533  
Investment securities:
Marketable equity securities2,974  2,874  
Available for sale debt securities984,080  1,115,036  
Held to maturity debt securities393,449  444,936  
Restricted equity securities17,250  17,250  
Loans held for sale7,604  3,687  
Loans4,182,348  4,022,014  
Allowance for loan losses(31,537) (32,582) 
Total loans, net4,150,811  3,989,432  
Premises and equipment, net87,424  89,347  
Cash value of life insurance117,088  117,318  
Accrued interest receivable18,205  19,412  
Goodwill220,872  220,972  
Other intangible assets, net24,988  29,280  
Operating leases, right-of-use
28,957  —  
Other assets72,134  75,364  
Total assets$6,384,883  $6,352,441  
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand$1,777,357  $1,760,580  
Interest-bearing3,518,050  3,605,886  
Total deposits5,295,407  5,366,466  
Accrued interest payable2,847  1,997  
Operating lease liability28,494  —  
Other liabilities87,867  83,724  
Other borrowings16,423  15,839  
Junior subordinated debt57,180  57,042  
Total liabilities5,488,218  5,525,068  
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at September 30, 2019 and December 31, 2018
—  —  
Common stock, no par value: 50,000,000 shares authorized; 30,512,187 and 30,417,223 issued and outstanding at September 30, 2019 and December 31, 2018, respectively
543,415  541,762  
Retained earnings351,751  303,490  
Accumulated other comprehensive income (loss), net of tax1,499  (17,879) 
Total shareholders’ equity896,665  827,373  
Total liabilities and shareholders’ equity$6,384,883  $6,352,441  

See accompanying notes to unaudited condensed consolidated financial statements.
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TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data; unaudited)
Three months ended
September 30,		Nine months ended
September 30,
2019201820192018
Interest and dividend income:
Loans, including fees$56,999  $53,102  $166,888  $130,455  
Investments:
Taxable securities9,864  9,189  30,876  23,949  
Tax exempt securities961  1,189  3,095  3,272  
Dividends308  459  973  1,093  
Interest bearing cash at Federal Reserve and other banks757  615  2,694  1,384  
Total interest and dividend income68,889  64,554  204,526  160,153  
Interest expense:
Deposits3,050  2,072  8,768  4,402  
Other borrowings334  1,178  384  2,106  
Junior subordinated debt817  815  2,501  2,301  
Total interest expense4,201  4,065  11,653  8,809  
Net interest income64,688  60,489  192,873  151,344  
Provision for (benefit from reversal of) loan losses(329) 2,651  (1,392) 1,777  
Net interest income after provision for (benefit from reversal of) loan losses65,017  57,838  194,265  149,567  
Non-interest income:
Service charges and fees10,590  9,743  29,788  28,327  
Gain on sale of loans1,236  539  2,223  1,831  
Gain on sale of investment securities107  207  107  207  
Asset management and commission income721  728  2,102  2,414  
Increase in cash value of life insurance773  732  2,294  1,996  
Other681  387  2,820  1,691  
Total non-interest income14,108  12,336  39,334  36,466  
Non-interest expense:
Salaries and related benefits26,899  25,823  78,746  68,928  
Other19,445  21,705  59,747  54,298  
Total non-interest expense46,344  47,528  138,493  123,226  
Income before provision for income taxes32,781  22,646  95,106  62,807  
Provision for income taxes9,386  6,476  25,924  17,698  
Net income$23,395  $16,170  $69,182  $45,109  
Earnings per share:
Basic$0.77  $0.54  $2.27  $1.78  
Diluted$0.76  $0.53  $2.25  $1.76  

See accompanying notes to unaudited condensed consolidated financial statements.
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TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands; unaudited)
Three months ended
September 30,		Nine months ended
September 30,
2019201820192018
Net income$23,395  $16,170  $69,182  $45,109  
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period3,697  (5,917) 19,378  (20,941) 
Change in minimum pension liability—  81  —  241  
Other comprehensive income (loss)3,697  (5,836) 19,378  (20,700) 
Comprehensive income$27,092  $10,334  $88,560  $24,409  

See accompanying notes to unaudited condensed consolidated financial statements.
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TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data; unaudited)
Shares of
Common
Stock		Common
Stock		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Balance at June 30, 201930,502,757  $542,939  $335,145  $(2,198) $875,886  
Net income23,395  23,395  
Other comprehensive income3,697  3,697  
Stock option vesting—  
Stock options exercised9,000  146  146  
RSU vesting296  296  
PSU vesting102  102  
RSUs released4,250  —  
PSUs released—  —  
Repurchase of common stock(3,820) (68) (79) (147) 
Dividends paid ($0.22 per share)
(6,710) (6,710) 
Three months ended September 30, 201930,512,187  $543,415  $351,751  $1,499  $896,665  
Balance at January 1, 201930,417,223  $541,762  $303,490  $(17,879) $827,373  
Net income69,182  69,182  
Other comprehensive income19,378  19,378  
Stock option vesting—  
Stock options exercised166,000  2,646  2,646  
RSU vesting863  863  
PSU vesting350  350  
RSUs released30,461  —  
PSUs released22,237  —  
Repurchase of common stock(123,734) (2,206) (2,636) (4,842) 
Dividends paid ($0.60 per share)
(18,285) (18,285) 
Nine months ended September 30, 201930,512,187  $543,415  $351,751  $1,499  $896,665  

See accompanying notes to unaudited condensed consolidated financial statements.
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TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data; unaudited)
Shares of
Common
Stock		Common
Stock		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Balance at June 30, 201823,004,153  $256,590  $276,877  $(21,123) $512,344  
Net income16,170  16,170  
Adoption ASU2016-01—  —  —  
Adoption ASU2018-02—  —  —  
Other comprehensive loss(5,836) (5,836) 
Stock option vesting21  21  
Stock options exercised12,900  252  252  
RSU vesting274  274  
PSU vesting77  77  
RSUs released7,118  —  
PSUs released—  —  
Issuance of common stock7,405,277  284,437  284,437  
Repurchase of common stock(11,630) (132) (321) (453) 
Dividends paid ($0.17 per share)
(5,171) (5,171) 
Three months ended September 30, 201830,417,818  $541,519  $287,555  $(26,959) $802,115  
Balance at January 1, 201822,955,963  $255,836  $255,200  $(5,228) $505,808  
Net income45,109  45,109  
Adoption ASU 2016-01(62) 62  —  
Adoption ASU 2018-021,093  (1,093) —  
Other comprehensive loss(20,700) (20,700) 
Stock option vesting75  75  
Stock options exercised27,400  475  475  
RSU vesting1,019  1,019  
PSU vesting—  —  
RSUs released58,028  —  
PSUs released—  —  
Issuance of common stock7,405,277  284,437  284,437  
Repurchase of common stock(28,850) (323) (801) (1,124) 
Dividends paid ($0.51 per share)
(12,984) (12,984) 
Nine months ended September 30, 201830,417,818  $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,
20192018
Operating activities:
Net income$69,182  $45,109  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization5,273  4,914  
Amortization of intangible assets4,293  2,068  
(Reversal of) provision for loan losses(1,392) 1,777  
Amortization of investment securities premium, net2,050  1,953  
Gain on sale of investment securities(107) (207) 
Originations of loans for resale(92,002) (63,912) 
Proceeds from sale of loans originated for resale89,506  66,138  
Gain on sale of loans(2,223) (1,831) 
Change in market value of mortgage servicing rights1,652  (38) 
Provision for losses on foreclosed assets56  89  
Gain on transfer of loans to foreclosed assets(151) —  
Gain on sale of foreclosed assets(246) (390) 
Loss on disposal of fixed assets82  206  
Increase in cash value of life insurance(2,294) (1,996) 
Gain on life insurance death benefit(831) —  
(Gain) loss on marketable equity securities(100) 92  
Equity compensation vesting expense1,213  1,094  
Change in:
Interest receivable1,207  (5,820) 
Interest payable850  799  
Amortization of operating lease ROUA(463) —  
Other assets and liabilities, net711  9,860  
Net cash from operating activities76,266  59,905  
Investing activities:
Cash acquired in acquisition, net of consideration paid —  30,613  
Proceeds from maturities of securities available for sale69,278  54,510  
Proceeds from maturities of securities held to maturity50,738  54,203  
Proceeds from sale of available for sale securities125,247  293,279  
Purchases of securities available for sale(37,253) (370,843) 
Net redemption of restricted equity securities —  7,429  
Loan origination and principal collections, net(159,991) (178,596) 
Proceeds from sale of other real estate owned1,255  2,206  
Proceeds from sale of premises and equipment—  62  
Purchases of premises and equipment(3,070) (5,736) 
Net cash from (used by) investing activities46,204  (112,873) 
Financing activities:
Net change in deposits(71,059) 92,051  
Net change in other borrowings584  (4,335) 
Repurchase of common stock(2,196) (834) 
Dividends paid(18,285) (12,984) 
Exercise of stock options—  185  
Net cash used by (from) financing activities(90,956) 74,083  
Net change in cash and cash equivalents31,514  21,115  
Cash and cash equivalents, beginning of period227,533  205,428  
Cash and cash equivalents, end of period$259,047  $226,543  
Supplemental disclosure of noncash activities:
Unrealized gain (loss) on securities available for sale$27,511  $(29,704) 
Loans transferred to foreclosed assets331  511  
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes4,842  1,124  
Obligations incurred in conjunction with leased assets156  —  
Supplemental disclosure of cash flow activity:
Cash paid for interest expense10,803  8,010  
Cash paid for income taxes25,950  11,625  
Assets acquired in acquisition—  1,456,505  
Liabilities assumed in acquisition—  1,172,068  


See accompanying notes to unaudited condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 29 California counties. The Company has five capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by the Company and three acquired with the acquisition of North Valley Bancorp.
The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,717,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”). The Company believes that the disclosures made are adequate to make the information not misleading.
Segment and Significant Group Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout northern and central California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into one business segment that it denotes as community banking.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.

Reclassification
Some items in the prior year consolidated financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
Cash and Cash Equivalents
Net cash flows are reported for loan and deposit transactions and other borrowings. For purposes of the consolidated statement of cash flows, cash, due from banks with original maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents.
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Accounting Standards Adopted in 2019
The Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-2, Leases (Topic 842). ASU 2016-2, which among other things, requires lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. The FASB has issued incremental guidance to Topic 842 standard through ASU No. 2018-11, 2018-20, and 2019-1. The Company has elected to use the transition relief approach as provided in ASU 2018-11, which permits the Company to use January 1, 2019 as both the application date and the adoption date, rather than the modified retrospective approach which would have required an application date of January 1, 2017 and adoption date of January 1, 2019. The Company also elected certain relief options offered within the new standard, which include the package of practical expedients, the option not to recognize a right-of-use asset (ROUA) and lease liability that arise from short-term leases (i.e. leases with terms of 12 months or less), and the option of hindsight when determining lease term. Substantially all of the Company’s lease agreements are considered operating leases and were not previously recognized on the Company’s balance sheets. As of January 1, 2019, the Company recorded a ROUA and corresponding lease liability for all applicable operating leases. While the guidance increased the Company’s gross assets and liabilities, the adoption of ASU 2016-2 did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 6 for more information.
Accounting Standards Pending Adoption
The FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 is the final guidance on the new current expected credit loss (‘‘CECL’’) model. ASU 2016-13, among other things, requires the incurred loss impairment methodology in current GAAP be replaced with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (‘‘HTM’’) debt securities. ASU 2016-13 amends the accounting for credit losses on available-for-sale securities (‘‘AFS’’), whereby credit losses will be presented as an allowance as opposed to a write- down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, ASU 2016-13 requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. ASU 2016-13 allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). ASU 2016-13 will be effective for the Company on January 1, 2020, and early adoption is permitted. While the Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. While detailed modeling efforts are ongoing, the validation of expected credit loss estimates will likely not be available until late in 2019. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one- time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.
FASB issued ASU No. 2017-4, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350): ASU 2017-4 eliminates step two of the goodwill impairment test (the hypothetical purchase price allocation used to determine the implied fair value of goodwill) when step one (determining if the carrying value of a reporting unit exceeds its fair value) is failed. Instead, entities simply will compare the fair value of a reporting unit to its carrying amount and record goodwill impairment for the amount by which the reporting unit’s carrying amount exceeds its fair value. ASU 2017-4 will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a significant impact on the Company’s consolidated financial statements.

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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. Subsequently, the Company revised its estimate of other liabilities acquired in connection with the business combination and reduced the amount of goodwill by $100,000 to $156,561,000. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase price accounting adjustments including goodwill are all non-taxable and /or non-deductible. Acquisition related costs of $601,000 and $1,077,000 are included in the consolidated statements of income for the three and nine months ended September 30, 2018. There have been no acquisition costs incurred during the nine months ended September 30, 2019.
The acquisition was consistent with the Company’s strategy to expand into the Bay Area market. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of the estimated cost savings resulting from the combined operations.
The following table summarizes the consideration paid for FNBB and the amounts of assets acquired and liabilities assumed that were recorded at the acquisition date (in thousands).
FNB Bancorp
July 6, 2018
Fair value of consideration transferred:
Fair value of shares issued$284,437  
Cash consideration6,695  
Total fair value of consideration transferred291,132  
Assets acquired:
Cash and cash equivalents37,308  
Securities available for sale335,667  
Restricted equity securities7,723  
Loans834,683  
Premises and equipment30,522  
Cash value of life insurance16,817  
Core deposit intangible27,605  
Other assets16,214  
Total assets acquired1,306,539  
Liabilities assumed:
Deposits991,935  
Other liabilities15,033  
Short-term borrowings - Federal Home Loan Bank165,000  
Total liabilities assumed1,171,968  
Total net assets acquired134,571  
Goodwill recognized$156,561  
A summary of the estimated fair value adjustments resulting in the goodwill recorded in the FNB Bancorp acquisition are presented below (in thousands):
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FNB Bancorp
July 6, 2018
Value of stock consideration paid to FNB Bancorp Shareholders$284,437  
Cash consideration6,695  
Less:
Cost basis net assets acquired114,030  
Fair value adjustments:
Investments(1,081) 
Loans(22,390) 
Premises and equipment21,590  
Core deposit intangible27,327  
Deferred income taxes(6,394) 
Other1,489  
Goodwill$156,561  
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired (PNCI loans) as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans (PCI loans), which have shown evidence of credit deterioration since origination. The gross contractual amounts receivable and fair value for PNCI loans as of the acquisition date was $866,189,000 and $833,381,000, respectively. The gross contractual amounts receivable and fair value for PCI loans as of the acquisition date was $1,683,000 and $1,302,000, respectively. At the acquisition date, the Company was unable to estimate the expected contractual cash flows to be collected from the purchased credit impaired loans.
Note 3 - Investment Securities
The amortized cost and estimated fair values of investments in debt securities are summarized in the following tables:
September 30, 2019
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies$488,080  $8,004  $(447) $495,637  
Obligations of states and political subdivisions108,360  3,550  —  111,910  
Corporate bonds4,420  108  —  4,528  
Asset backed securities376,683  192  (4,870) 372,005  
Total debt securities available for sale$977,543  $11,854  $(5,317) $984,080  
Debt Securities Held to Maturity
Obligations of U.S. government agencies$379,634  $6,382  $(482) $385,534  
Obligations of states and political subdivisions13,815  350  —  14,165  
Total debt securities held to maturity$393,449  $6,732  $(482) $399,699  

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December 31, 2018
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies$647,288  $771  $(18,078) $629,981  
Obligations of states and political subdivisions128,890  294  (3,112) 126,072  
Corporate bonds4,381  97  —  4,478  
Asset backed securities355,451  73  (1,019) 354,505  
Total debt securities available for sale$1,136,010  $1,235  $(22,209) $1,115,036  
Debt Securities Held to Maturity
Obligations of U.S. government agencies430,343  327  (7,745) 422,925  
Obligations of states and political subdivisions14,593  82  (230) 14,445  
Total debt securities held to maturity$444,936  $409  $(7,975) $437,370  
Proceeds from the sales of investment securities totaled $125,247,000 and $293,279,000 during the nine months ended September 30, 2019 and 2018, respectively. Gross realized gains from the sale of investment securities totaled $335,000 and $207,000 during the three and nine months ended September 30, 2019 and 2018, respectively. Gross realized losses from the sale of investment securities totaled $228,000 during the three and nine months ended September 30, 2019. There were no realized losses from the sale of investment securities during the three and nine months ended September 30, 2018. Investment securities with an aggregate carrying value of $504,475,000 and $597,591,000 at September 30, 2019 and December 31, 2018, respectively, were pledged as collateral for specific borrowings, lines of credit or local agency deposits.
The amortized cost and estimated fair value of debt securities at September 30, 2019 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2019, obligations of U.S. government corporations and agencies with a cost basis totaling $867,714,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At September 30, 2019, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 4.7 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.
Debt SecuritiesAvailable for SaleHeld to Maturity
(in thousands)Amortized
Cost		Estimated
Fair Value		Amortized
Cost		Estimated
Fair Value
Due in one year$2,607  $2,613  $1,263  $1,274  
Due after one year through five years14,986  15,401  —  —  
Due after five years through ten years46,263  47,273  20,747  21,035  
Due after ten years913,687  918,793  371,439  377,390  
Totals$977,543  $984,080  $393,449  $399,699  
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:
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Less than 12 months12 months or moreTotal
September 30, 2019:Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies$38,295  $(374) $25,171  $(73) $63,466  $(447) 
Asset backed securities293,500  (4,432) 45,981  (438) 339,481  (4,870) 
Total debt securities available for sale$331,795  $(4,806) $71,152  $(511) $402,947  $(5,317) 
Debt Securities Held to Maturity
Obligations of U.S. government agencies$19,749  $(94) $78,604  $(388) $98,353  $(482) 

Less than 12 months12 months or moreTotal
December 31, 2018:Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies$171,309  $(3,588) $394,630  $(14,490) $565,939  $(18,078) 
Obligations of states and political subdivisions63,738  (1,541) 20,719  (1,571) 84,457  (3,112) 
Asset backed securities101,386  (1,019) —  —  101,386  (1,019) 
Total debt securities available for sale$336,433  $(6,148) $415,349  $(16,061) $751,782  $(22,209) 
Debt Securities Held to Maturity
Obligations of U.S. government agencies223,810  (2,619) 158,648  (5,126) 382,458  (7,745) 
Obligations of states and political subdivisions5,786  (114) 4,042  (116) 9,828  (230) 
Total debt securities held to maturity$229,596  $(2,733) $162,690  $(5,242) $392,286  $(7,975) 
Obligations of U.S. government agencies: Unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At September 30, 2019, 19 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of 0.59% from the Company’s amortized cost basis.
Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors in these types of securities. At the time of purchase, each of these securities was rated AA or AAA and through September 30, 2019 has not experienced any deterioration in credit rating. The Company continues to monitor these securities for changes in credit rating or other indications of credit deterioration. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At September 30, 2019, 25 asset backed securities had unrealized losses with aggregate depreciation of 1.49% from the Company’s amortized cost basis.

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Note 4 – Loans
A summary of loan balances follows:
September 30, 2019
(in thousands)OriginatedPNCIPCITotal
Mortgage loans on real estate:
Residential 1-4 family
$355,646  $148,731  $1,417  $505,794  
Commercial2,109,309  626,924  5,129  2,741,362  
Total mortgage loans on real estate2,464,955  775,655  6,546  3,247,156  
Consumer:
Home equity lines of credit294,411  36,635  826  331,872  
Home equity loans27,034  2,915  421  30,370  
Other64,153  16,142  2  80,297  
Total consumer loans385,598  55,692  1,249  442,539  
Commercial256,379  19,569  2,510  278,458  
Construction:
Residential158,907  10,127  —  169,034  
Commercial44,704  457  —  45,161  
Total construction loans203,611  10,584  —  214,195  
Total loans, net of deferred loan fees and discounts$3,310,543  $861,500  $10,305  $4,182,348  
Total principal balance of loans owed, net of charge-offs$3,319,052  $892,608  $16,274  $4,227,934  
Unamortized net deferred loan fees(8,509) —  —  (8,509) 
Discounts to principal balance of loans owed, net of charge-offs—  (31,108) (5,969) (37,077) 
Total loans, net of unamortized deferred loan fees and discounts$3,310,543  $861,500  $10,305  $4,182,348  
Allowance for loan losses$(31,112) $(419) $(6) $(31,537) 

December 31, 2018
(in thousands)OriginatedPNCIPCITotal
Mortgage loans on real estate:
Residential 1-4 family
$343,796  $169,792  $1,674  $515,262  
Commercial1,910,981  708,401  8,456  2,627,838  
Total mortgage loans on real estate2,254,777  878,193  10,130  3,143,100  
Consumer:
Home equity lines of credit284,453  40,957  1,167  326,577  
Home equity loans32,660  3,585  439  36,684  
Other34,020  21,659  42  55,721  
Total consumer loans351,133  66,201  1,648  418,982  
Commercial228,635  45,468  2,445  276,548  
Construction:
Residential90,703  30,593  —  121,296  
Commercial56,208  5,880  —  62,088  
Total construction loans146,911  36,473  —  183,384  
Total loans, net of deferred loan fees and discounts$2,981,456  $1,026,335  $14,223  $4,022,014  
Total principal balance of loans owed, net of charge-offs$2,991,324  $1,062,655  $21,265  $4,075,244  
Unamortized net deferred loan fees(9,868) —  —  (9,868) 
Discounts to principal balance of loans owed, net of charge-offs—  (36,320) (7,042) (43,362) 
Total loans, net of unamortized deferred loan fees and discounts$2,981,456  $1,026,335  $14,223  $4,022,014  
Allowance for loan losses$(31,793) $(667) $(122) $(32,582) 

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The following is a summary of the change in accretable yield for PCI during the periods indicated (in thousands):
Three months ended September 30,Nine months ended September 30,
2019201820192018
Change in accretable yield:
Balance at beginning of period$5,318  $5,871  $6,059  $6,137  
Accretion to interest income(292) (253) (702) (769) 
Reclassification from (to) nonaccretable difference71  (47) (260) 203  
Balance at end of period$5,097  $5,571  $5,097  $5,571  

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, 2019
(in thousands)Beginning
Balance		Charge-offsRecoveriesProvision
(benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family
$2,576  $—  $48  $(218) $2,406  
Commercial12,099  (746) 126  462  11,941  
Total mortgage loans on real estate14,675  (746) 174  244  14,347  
Consumer:
Home equity lines of credit5,859  —  27  (152) 5,734  
Home equity loans1,242  (3) 156  (133) 1,262  
Other1,451  (188) 79  211  1,553  
Total consumer loans8,552  (191) 262  (74) 8,549  
Commercial6,745  (585) 84  (557) 5,687  
Construction:
Residential2,538  —  —  119  2,657  
Commercial358  —  —  (61) 297  
Total construction loans2,896  —  —  58  2,954  
Total$32,868  $(1,522) $520  $(329) $31,537  

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Allowance for Loan Losses – Nine months ended September 30, 2019
(in thousands)Beginning
Balance		Charge-offsRecoveriesProvision
(benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family
$2,676  $(2) $53  $(321) $2,406  
Commercial12,944  (746) 1,517  (1,774) 11,941  
Total mortgage loans on real estate15,620  (748) 1,570  (2,095) 14,347  
Consumer:
Home equity lines of credit6,042  —  305  (613) 5,734  
Home equity loans1,540  (3) 414  (689) 1,262  
Other793  (548) 262  1,046  1,553  
Total consumer loans8,375  (551) 981  (256) 8,549  
Commercial6,090  (1,242) 337  502  5,687  
Construction:
Residential1,834  —  —  823  2,657  
Commercial663  —  —  (366) 297  
Total construction loans2,497  —  —  457  2,954  
Total$32,582  $(2,541) $2,888  $(1,392) $31,537  

Allowance for Loan Losses – As of September 30, 2019
(in thousands)Loans pooled
for evaluation		Individually
evaluated for
impairment		Loans acquired
with deteriorated
credit quality		Total allowance
for loan losses
Mortgage loans on real estate:
Residential 1-4 family
$2,315  $91  $—  $2,406  
Commercial11,915  26  —  11,941  
Total mortgage loans on real estate14,230  117  —  14,347  
Consumer:
Home equity lines of credit5,644  84  6  5,734  
Home equity loans1,216  46  —  1,262  
Other1,535  18  —  1,553  
Total consumer loans8,395  148  6  8,549  
Commercial4,428  1,259  —  5,687  
Construction:
Residential2,657  —  —  2,657  
Commercial297  —  —  297  
Total construction loans2,954  —  —  2,954  
Total$30,007  $1,524  $6  $31,537  

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Loans, Net of Unearned fees – As of September 30, 2019
(in thousands)Loans pooled
for evaluation		Individually
evaluated for
impairment		Loans acquired
with deteriorated
credit quality		Total loans, net
of unearned fees
Mortgage loans on real estate:
Residential 1-4 family
$499,620  $4,757  $1,417  $505,794  
Commercial2,727,228  9,005  5,129  2,741,362  
Total mortgage loans on real estate3,226,848  13,762  6,546  3,247,156  
Consumer:
Home equity lines of credit329,129  1,917  826  331,872  
Home equity loans27,793  2,156  421  30,370  
Other80,146  149  2  80,297  
Total consumer loans437,068  4,222  1,249  442,539  
Commercial271,447  4,501  2,510  278,458  
Construction:
Residential169,034  —  —  169,034  
Commercial45,161  —  —  45,161  
Total construction loans214,195  —  —  214,195  
Total$4,149,558  $22,485  $10,305  $4,182,348  

Allowance for Loan Loses – Year Ended December 31, 2018
(in thousands)Beginning
Balance		Charge-offsRecoveriesProvision
(benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family
$2,317  $(77) $—  $436  $2,676  
Commercial11,441  (15) 68  1,450  12,944  
Total mortgage loans on real estate13,758  (92) 68  1,886  15,620  
Consumer:
Home equity lines of credit5,800  (277) 846  (327) 6,042  
Home equity loans1,841  (24) 297  (574) 1,540  
Other586  (783) 288  702  793  
Total consumer loans8,227  (1,084) 1,431  (199) 8,375  
Commercial6,512  (1,188) 541  225  6,090  
Construction:
Residential1,184  —  —  650  1,834  
Commercial642  —  —  21  663  
Total construction loans1,826  —  —  671  2,497  
Total$30,323  $(2,364) $2,040  $2,583  $32,582  

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Allowance for Loan Losses – As of December 31, 2018
(in thousands)Loans pooled
for evaluation		Individually
evaluated for
impairment		Loans acquired
with deteriorated
credit quality		Total allowance
for loan losses
Mortgage loans on real estate:
Residential 1-4 family$2,620  $56  $—  $2,676  
Commercial12,737  91  116  12,944  
Total mortgage loans on real estate15,357  147  116  15,620  
Consumer:
Home equity lines of credit5,838  198  6  6,042  
Home equity loans1,486  54  —  1,540  
Other779  14  —  793  
Total consumer loans8,103  266  6  8,375  
Commercial4,309  1,781  —  6,090  
Construction:
Residential1,834  —  —  1,834  
Commercial663  —  —  663  
Total construction loans2,497  —  —  2,497  
Total$30,266  $2,194  $122  $32,582  

Loans , Net of Unearned fees - As of December 31, 2018
(in thousands)Loans pooled
for evaluation		Individually
evaluated for
impairment		Loans acquired
with deteriorated
credit quality		Total loans, net
of unearned fees
Mortgage loans on real estate:
Residential 1-4 family
$509,267  $4,321  $1,674  $515,262  
Commercial2,606,819  12,563  8,456  2,627,838  
Total mortgage loans on real estate3,116,086  16,884  10,130  3,143,100  
Consumer:
Home equity lines of credit322,764  2,646  1,167  326,577  
Home equity loans33,142  3,103  439  36,684  
Other55,483  196  42  55,721  
Total consumer loans411,389  5,945  1,648  418,982  
Commercial268,885  5,218  2,445  276,548  
Construction:
Residential121,296  —  —  121,296  
Commercial62,088  —  —  62,088  
Total construction loans183,384  —  —  183,384  
Total$3,979,744  $28,047  $14,223  $4,022,014  

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Allowance for Loan Losses – Three Months Ended September 30, 2018
(in thousands)Beginning
Balance		Charge-offsRecoveriesProvision
(benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family
$1,991  $(25) $—  $434  $2,400  
Commercial11,607  —  15  1,257  12,879  
Total mortgage loans on real estate13,598  (25) 15  1,691  15,279  
Consumer:
Home equity lines of credit5,048  (172) 151  194  5,221  
Home equity loans1,532  (23) 139  (55) 1,593  
Other557  (229) 63  309  700  
Total consumer loans7,137  (424) 353  448  7,514  
Commercial6,378  (693) 202  337  6,224  
Construction:
Residential1,434  —  —  192  1,626  
Commercial977  —  —  (17) 960  
Total construction loans2,411  —  —  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-offsRecoveriesProvision
(benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family
$2,317  $(77) $—  $160  $2,400  
Commercial11,441  (15) 51  1,402  12,879  
Total mortgage loans on real estate13,758  (92) 51  1,562  15,279  
Consumer:
Home equity lines of credit5,800  (276) 677  (980) 5,221  
Home equity loans1,841  (23) 176  (401) 1,593  
Other586  (597) 208  503  700  
Total consumer loans8,227  (896) 1,061  (878) 7,514  
Commercial6,512  (952) 331  333  6,224  
Construction:
Residential1,184  —  —  442  1,626  
Commercial642  —  —  318  960  
Total construction loans1,826  —  —  760  2,586  
Total$30,323  $(1,940) $1,443  $1,777  $31,603  

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Allowance for Loan Losses – As of September 30, 2018
(in thousands)Loans pooled
for evaluation		Individually
evaluated for
impairment		Loans acquired
with deteriorated
credit quality		Total allowance
for loan losses
Mortgage loans on real estate:
Residential 1-4 family
$2,313  $57  $30  $2,400  
Commercial12,552  268  59  12,879  
Total mortgage loans on real estate14,865  325  89  15,279  
Consumer:
Home equity lines of credit5,046  168  7  5,221  
Home equity loans1,418  175  —  1,593  
Other597  103  —  700  
Total consumer loans7,061  446  7  7,514  
Commercial4,353  1,857  14  6,224  
Construction:
Residential1,626  —  —  1,626  
Commercial960  —  —  960  
Total construction loans2,586  —  —  2,586  
Total$28,865  $2,628  $110  $31,603  

Loans, Net of Unearned fees – As of September 30, 2018
(in thousands)Loans pooled
for evaluation		Individually
evaluated for
impairment		Loans acquired
with deteriorated
credit quality		Total loans, net
of unearned fees
Mortgage loans on real estate:
Residential 1-4 family
$517,935  $4,781  $1,698  $524,414  
Commercial2,586,659  13,244  7,885  2,607,788  
Total mortgage loans on real estate3,104,594  18,025  9,583  3,132,202  
Consumer:
Home equity lines of credit327,649  2,188  1,299  331,136  
Home equity loans37,840  2,406  447  40,693  
Other49,171  243  42  49,456  
Total consumer loans414,660  4,837  1,788  421,285  
Commercial282,588  4,632  2,427  289,647  
Construction:
Residential114,574  —  —  114,574  
Commercial69,728  —  —  69,728  
Total construction loans184,302  —  —  184,302  
Total$3,986,144  $27,494  $13,798  $4,027,436  
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans, and (iv) delinquency within the portfolio.
The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows:
•Pass– This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital.
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•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.
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, 2019
(in thousands)PassSpecial
Mention		SubstandardDoubtful / LossTotal Originated
Loans
Mortgage loans on real estate:
Residential 1-4 family
$348,668  $2,743  $4,235  $—  $355,646  
Commercial2,063,991  38,150  7,168  —  2,109,309  
Total mortgage loans on real estate2,412,659  40,893  11,403  —  2,464,955  
Consumer:
Home equity lines of credit288,554  3,378  2,479  —  294,411  
Home equity loans23,819  1,184  2,031  —  27,034  
Other63,648  452  53  —  64,153  
Total consumer loans376,021  5,014  4,563  —  385,598  
Commercial242,308  8,968  5,103  256,379  
Construction:
Residential158,657  —  250  —  158,907  
Commercial44,380  324  —  —  44,704  
Total construction loans203,037  324  250  —  203,611  
Total loans$3,234,025  $55,199  $21,319  $—  $3,310,543  

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Credit Quality Indicators PNCI Loans – As of September 30, 2019
(in thousands)PassSpecial
Mention		SubstandardDoubtful / LossTotal PNCI
Loans
Mortgage loans on real estate:
Residential 1-4 family
$145,141  $1,617  $1,973  $—  $148,731  
Commercial618,372  2,674  5,878  —  626,924  
Total mortgage loans on real estate763,513  4,291  7,851  —  775,655  
Consumer:
Home equity lines of credit34,660  891  1,084  —  36,635  
Home equity loans2,841  —  74  —  2,915  
Other15,792  341  9  —  16,142  
Total consumer loans53,293  1,232  1,167  —  55,692  
Commercial19,399  1  169  19,569  
Construction:
Residential5,980  4,147  —  —  10,127  
Commercial457  —  —  —  457  
Total construction loans6,437  4,147  —  —  10,584  
Total loans$842,642  $9,671  $9,187  $—  $861,500  

Credit Quality Indicators Originated Loans – As of December 31, 2018
(in thousands)PassSpecial
Mention		SubstandardDoubtful / LossTotal Originated
Loans
Mortgage loans on real estate:
Residential 1-4 family
$337,189  $1,724  $4,883  $—  $343,796  
Commercial1,861,627  33,483  15,871  —  1,910,981  
Total mortgage loans on real estate2,198,816  35,207  20,754  —  2,254,777  
Consumer:
Home equity lines of credit279,491  2,309  2,653  —  284,453  
Home equity loans29,289  1,054  2,317  —  32,660  
Other33,606  341  73  —  34,020  
Total consumer loans342,386  3,704  5,043  —  351,133  
Commercial217,126  6,127  5,382  —  228,635  
Construction:
Residential90,412  32  259  —  90,703  
Commercial55,863  345  —  —  56,208  
Total construction loans146,275  377  259  —  146,911  
Total loans$2,904,603  $45,415  $31,438  $—  $2,981,456  

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Credit Quality Indicators PNCI Loans – As of December 31, 2018
(in thousands)PassSpecial
Mention		SubstandardDoubtful / LossTotal PNCI
Loans
Mortgage loans on real estate:
Residential 1-4 family
$167,908  $1,086  $798  $—  $169,792  
Commercial701,868  3,085  3,448  —  708,401  
Total mortgage loans on real estate869,776  4,171  4,246  —  878,193  
Consumer:
Home equity lines of credit38,780  1,124  1,053  —  40,957  
Home equity loans3,413  74  98  —  3,585  
Other21,481  173  5  —  21,659  
Total consumer loans63,674  1,371  1,156  —  66,201  
Commercial45,027  321  120  —  45,468  
Construction:
Residential30,593  —  —  —  30,593  
Commercial5,880  —  —  —  5,880  
Total construction loans36,473  —  —  —  36,473  
Total$1,014,950  $5,863  $5,522  $—  $1,026,335  
Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value. Typically, payment performance will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate; non-payment is likely due to loss of employment. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of the two. Problem consumer loans are generally identified by payment history and current performance of the borrower (delinquency). The Bank manages its consumer loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggesting modifications if appropriate, and, when continued scheduled payments become unrealistic, initiating repossession or foreclosure through appropriate channels.
Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner occupied real estate are primarily susceptible to changes in the business conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual fortunes of the business owner, and general economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by equipment or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often these shifts are a result of changes in general economic or market conditions or overbuilding and resultant over-supply. Losses are dependent on value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.
Construction loans, whether owner occupied or non-owner occupied commercial real estate loans or residential development loans, are not only susceptible to the related risks described above but the added risks of construction itself including cost over-runs, mismanagement of the project, or lack of demand or market changes experienced at time of completion. Again, losses are primarily related to underlying collateral value and changes therein as described above.
Problem commercial loans are generally identified by periodic review of financial information which may include financial statements, tax returns, rent rolls and payment history of the borrower (delinquency). Based on this information the Bank may decide to take any of several courses of action including demand for repayment, additional collateral or guarantors, and, when repayment becomes unlikely through borrower’s income and cash flow, repossession or foreclosure of the underlying collateral.
Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate
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valuations or revaluations are obtained at initiation of the credit and periodically, but not less than every twelve months depending on collateral type, once repayment is questionable and the loan has been classified.
Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to the estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue the underlying collateral and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued through lawsuit and attachment of wages or judgment liens on borrower’s other assets.
The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:
Analysis of Originated Past Due Loans - As of September 30, 2019
(in thousands)30-59 days60-89 days> 90 daysTotal Past
Due Loans		CurrentTotal> 90 Days and
Still Accruing
Mortgage loans on real estate:
Residential 1-4 family
$289  $66  $1,187  $1,542  $354,104  $355,646  $—  
Commercial117  48  —  165  2,109,144  2,109,309  —  
Total mortgage loans on real estate406  114  1,187  1,707  2,463,248  2,464,955  —  
Consumer:
Home equity lines of credit890  282  624  1,796  292,615  294,411  —  
Home equity loans253  105  137  495  26,539  27,034  6  
Other134  138  4  276  63,877  64,153  —  
Total consumer loans1,277  525  765  2,567  383,031  385,598  6  
Commercial955  227  272  1,454  254,925  256,379  30  
Construction:
Residential—  —  —  —  158,907  158,907  —  
Commercial—  —  —  —  44,704  44,704  —  
Total construction loans—  —  —  —  203,611  203,611  —  
Total originated loans$2,638  $866  $2,224  $5,728  $3,304,815  $3,310,543  $36  
The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated:
Analysis of PNCI Past Due Loans - As of September 30, 2019
(in thousands)30-59 days60-89 days> 90 daysTotal Past
Due Loans		CurrentTotal> 90 Days and
Still Accruing
Mortgage loans on real estate:
Residential 1-4 family
$—  $52  $243  $295  $148,436  $148,731  $—  
Commercial—  —  949  949  625,975  626,924  —  
Total mortgage loans on real estate—  52  1,192  1,244  774,411  775,655  —  
Consumer:
Home equity lines of credit182  122  —  304  36,331  36,635  —  
Home equity loans—  14  232  246  2,669  2,915  —  
Other54  7  —  61  16,081  16,142  —  
Total consumer loans236  143  232  611  55,081  55,692  —  
Commercial—  —  174  174  19,395  19,569  —  
Construction:
Residential—  —  —  —  10,127  10,127  —  
Commercial—  —  —  —  457  457  —  
Total construction loans—  —  —  —  10,584  10,584  —  
Total PNCI loans$236  $195  $1,598  $2,029  $859,471  $861,500  $—  
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The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:
Analysis of Originated Past Due Loans - As of December 31, 2018
(in thousands)30-59 days60-89 days> 90 daysTotal Past
Due Loans		CurrentTotal> 90 Days and
Still Accruing
Mortgage loans on real estate:
Residential 1-4 family
$1,675  $132  $478  $2,285  $341,511  $343,796  $—  
Commercial431  1,200  296  1,927  1,909,054  1,910,981  —  
Total mortgage loans on real estate2,106  1,332  774  4,212  2,250,565  2,254,777  —  
Consumer:
Home equity lines of credit908  47  609  1,564  282,889  284,453  —  
Home equity loans1,043  24  214  1,281  31,379  32,660  —  
Other298  17  —  315  33,705  34,020  —  
Total consumer loans2,249  88  823  3,160  347,973  351,133  —  
Commercial1,053  579  1,247  2,879  225,756  228,635  —  
Construction:
Residential209  —  —  209  90,494  90,703  —  
Commercial—  —  —  —  56,208  56,208  —  
Total construction loans209  —  —  209  146,702  146,911  —  
Total loans$5,617  $1,999  $2,844  $10,460  $2,970,996  $2,981,456  $—  
The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated:
Analysis of PNCI Past Due Loans - As of December 31, 2018
(in thousands)30-59 days60-89 days> 90 daysTotal Past
Due Loans		CurrentTotal> 90 Days and
Still Accruing
Mortgage loans on real estate:
Residential 1-4 family
$1,009  $133  $156  $1,298  $168,494  $169,792  $—  
 Commercial1,646  1,136  1,082  3,864  704,537  708,401  —  
Total mortgage loans on real estate2,655  1,269  1,238  5,162  873,031  878,193  —  
Consumer:
Home equity lines of credit304  35  237  576  40,381  40,957  —  
Home equity loans74  —  —  74  3,511  3,585  —  
Other160  —  —  160  21,499  21,659  —  
Total consumer loans538  35  237  810  65,391  66,201  —  
Commercial678  145  113  936  44,532  45,468  —  
Construction:
Residential—  —  —  —  30,593  30,593  —  
Commercial—  —  —  —  5,880  5,880  —  
Total construction loans—  —  —  —  36,473  36,473  —  
Total loans$3,871  $1,449  $1,588  $6,908  $1,019,427  $1,026,335  $—  
Interest income on originated nonaccrual loans that would have been recognized during the three months ended September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $124,000 and $338,000, respectively. Interest income actually recognized on these originated loans during the three months ended September 30, 2019 and 2018 was $59,000 and $59,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the three months ended September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $201,000 and $39,000, respectively. Interest income actually recognized on these PNCI loans during the three months ended September 30, 2019 and 2018 was $92,000 and $12,000.
Interest income on originated nonaccrual loans that would have been recognized during the nine months ended September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $692,000 and $964,000, respectively. Interest income actually recognized on these originated loans during the nine months ended September 30, 2019 and 2018 was $145,000 and $133,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the nine months ended September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $322,000 and $93,000, respectively. Interest income actually recognized on these PNCI loans during the nine months ended September 30, 2019 and 2018 was $152,000 and $23,000.
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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, 2019As of December 31, 2018
(in thousands)OriginatedPNCITotalOriginatedPNCITotal
Mortgage loans on real estate:
Residential 1-4 family
$2,820  $908  $3,728  $3,244  $334  $3,578  
Commercial2,532  3,253  5,785  9,263  1,468  10,731  
Total mortgage loans on real estate5,352  4,161  9,513  12,507  1,802  14,309  
Consumer:
Home equity lines of credit1,188  426  1,614  1,429  885  2,314  
Home equity loans1,405  263  1,668  1,722  47  1,769  
Other90  3  93  3  4  7  
Total consumer loans2,683  692  3,375  3,154  936  4,090  
Commercial3,225  174  3,399  3,755  120  3,875  
Construction:
Residential—  —  —  —  —  —  
Commercial—  —  —  —  —  —  
Total construction—  —  —  —  —  —  
Total non accrual loans$11,260  $5,027  $16,287  $19,416  $2,858  $22,274  
Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due in accordance with the original contractual terms of the loan agreement. The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated. The average recorded investment in impaired loans and interest income recognized on impaired loans during the three months ended September 30, 2019 and 2018 was not considered significant for financial reporting purposes.
Impaired Originated Loans – As of, or for the Nine months ended September 30, 2019
(in thousands)Unpaid
principal
balance		Recorded
investment with
no related
allowance		Recorded
investment with
related
allowance		Total recorded
investment		Related
Allowance		Average
recorded
investment		Interest income
recognized
Mortgage loans on real estate:
Residential 1-4 family
$4,461  $3,053  $796  $3,849  $91  $4,214  $32  
Commercial6,006  4,423  1,329  5,752  26  9,096  59  
Total mortgage loans on real estate10,467  7,476  2,125  9,601  117  13,310  91  
Consumer:
Home equity lines of credit1,279  1,232  —  1,232  —  1,662  26  
Home equity loans2,157  1,542  238  1,780  46  1,973  5  
Other74  3  51  54  14  46  1  
Total consumer loans3,510  2,777  289  3,066  60  3,681  32  
Commercial4,760  611  3,716  4,327  1,199  4,769  22  
Construction:
Residential—  —  —  —  —  —  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  —  —  
Total$18,737  $10,864  $6,130  $16,994  $1,376  $21,760  $145  

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Impaired PNCI Loans – As of, or for the Nine months ended September 30, 2019
(in thousands)Unpaid
principal
balance		Recorded
investment with
no related
allowance		Recorded
investment with
related
allowance		Total recorded
investment		Related
Allowance		Average
recorded
investment		Interest income
recognized
Mortgage loans on real estate:
Residential 1-4 family
$959  $908  $—  $908  $—  $621  $9  
Commercial3,255  3,253  —  3,253  —  2,360  134  
Total mortgage loans on real estate4,214  4,161  —  4,161  —  2,981  143  
Consumer:
Home equity lines of credit741  444  241  685  84  844  —  
Home equity loans395  376  —  376  —  308  9  
Other95  72  23  95  4  103  —  
Total consumer loans1,231  892  264  1,156  88  1,255  9  
Commercial181  113  60  173  60  147  
Construction:
Residential—  —  —  —  —  —  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  —  —  
Total$5,626  $5,166  $324  $5,490  $148  $4,383  $152  

Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2018
(in thousands)Unpaid
principal
balance		Recorded
investment with
no related
allowance		Recorded
investment with
related
allowance		Total recorded
investment		Related
Allowance		Average
recorded
investment		Interest income
recognized
Mortgage loans on real estate:
Residential 1-4 family
$4,594  $3,663  $308  $3,971  $56  $3,517  $90  
Commercial13,081  10,676  1,765  12,441  42  13,115  137  
Total mortgage loans on real estate17,675  14,339  2,073  16,412  98  16,632  227  
Consumer:
Home equity lines of credit1,900  1,749  111  1,860  71  1,885  43  
Home equity loans2,374  1,892  65  1,957  2  1,520  23  
Other3  —  3  3  3  17  2  
Total consumer loans4,277  3,641  179  3,820  76  3,422  68  
Commercial5,433  2,924  2,287  5,211  1,774  4,654  91  
Construction:
Residential—  —  —  —  —  5  —  
Commercial—  —  —  —  —  —  —  
Total construction loans —  —  —  —  —  5  —  
Total$27,385  $20,904  $4,539  $25,443  $1,948  $24,713  $386  

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Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2018
(in thousands)Unpaid
principal
balance		Recorded
investment with
no related
allowance		Recorded
investment with
related
allowance		Total recorded
investment		Related
Allowance		Average
recorded
investment		Interest income
recognized
Mortgage loans on real estate:
Residential 1-4 family
$375  $334  $—  $334  $—  $529  $5  
Commercial3,110  1,468  —  1,468  —  1,713  183  
Total mortgage loans on real estate3,485  1,802  —  1,802  —  2,242  188  
Consumer:
Home equity lines of credit1,027  587  367  954  127  1,120  18  
Home equity loans252  47  197  244  101  155  —  
Other106  21  85  106  11  114  —  
Total consumer loans1,385  655  649  1,304  239  1,389  18  
Commercial120  113  7  120  7  60  1  
Construction:
Residential—  —  —  —  —  —  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  —  —  
Total$4,990  $2,570  $656  $3,226  $246  $3,691  $207  

Impaired Originated Loans – As of, or for the Nine months ended September 30, 2018
(in thousands)Unpaid
principal
balance		Recorded
investment with
no related
allowance		Recorded
investment with
related
allowance		Total recorded
investment		Related
Allowance		Average
recorded
investment		Interest income
recognized
Mortgage loans on real estate:
Residential 1-4 family
$4,185  $3,251  $311  $3,562  $57  $3,883  $67  
Commercial12,553  9,619  2,370  11,989  268  11,549  208  
Total mortgage loans on real estate16,738  12,870  2,681  15,551  325  15,432  275  
Consumer:
Home equity lines of credit1,444  1,346  59  1,405  19  1,410  32  
Home equity loans2,554  1,960  157  2,117  30  1,753  24  
Other3  —  3  3  3  3  —  
Total consumer loans4,001  3,306  219  3,525  52  3,166  56  
Commercial4,868  2,135  2,497  4,632  1,857  4,626  78  
Construction:
Residential—  —  —  —  —  68  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  68  —  
Total$25,607  $18,311  $5,397  $23,708  $2,234  $23,292  $409  

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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  $—  
Commercial1,255  1,255  —  1,255  —  627  58  
Total mortgage loans on real estate2,557  2,474  —  2,474  —  1,902  58  
Consumer:
Home equity lines of credit852  625  158  783  149  909  13  
Home equity loans296  50  239  289  145  287  9  
Other240  —  240  240  100  257  7  
Total consumer loans1,388  675  637  1,312  394  1,453  29  
Commercial—  —  —  —  —  —  —  
Construction:
Residential—  —  —  —  —  —  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  —  —  
Total$3,945  $3,149  $637  $3,786  $394  $3,355  $87  
Originated loans classified as TDRs and impaired were $8,556,000, $10,253,000, and $8,845,000 at September 30, 2019, December 31, 2018, and September 30, 2018, respectively. PNCI loans classified as TDRs and impaired were $738,000, $615,000, and $840,000 at September 30, 2019, December 31, 2018 and September 30, 2018, respectively. The Company had no significant obligations to lend additional funds on Originated or PNCI TDRs as of September 30, 2019, December 31, 2018, or September 30, 2018.

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

TDR Information for the three months ended September 30, 2019
(dollars in thousands)NumberPre-mod
outstanding
principal
balance		Post-mod
outstanding
principal
balance		Financial
impact due to
TDR taken as
additional
provision		Number that
defaulted during
the period		Recorded
investment of
TDRs that
defaulted during
the period		Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
Mortgage loans on real estate:
Residential 1-4 family
2  $496  $500  $30  —  $—  $—  
Commercial2  60  67  —  —  —  —  
Total mortgage loans on real estate4  556  567  30  —  —  —  
Consumer:
Home equity lines of credit—  —  —  —  —  —  —  
Home equity loans—  —  —  —  —  —  —  
Other—  —  —  —  —  —  —  
Total consumer loans—  —  —  —  —  —  —  
Commercial4  150  148  (2) —  —  —  
Construction:
Residential—  —  —  —  —  —  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  —  —  
Total4  $706  $715  $28  —  $—  $—  

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TDR Information for the nine months ended September 30, 2019
(dollars in thousands)NumberPre-mod
outstanding
principal
balance		Post-mod
outstanding
principal
balance		Financial
impact due to
TDR taken as
additional
provision		Number that
defaulted during
the period		Recorded
investment of
TDRs that
defaulted during
the period		Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
Mortgage loans on real estate:
Residential 1-4 family
3  $659  $662  $30  $—  $—  $—  
Commercial2  60  67  —  —  —  —  
Total mortgage loans on real estate5  719  729  30  —  —  —  
Consumer:
Home equity lines of credit1  65  68  —  —  —  —  
Home equity loans2  149  147  29  —  —  —  
Other—  —  —  —  —  —  —  
Total consumer loans3  214  215  29  —  —  —  
Commercial10  1,918  1,885  —  1  7  —  
Construction:
Residential—  —  —  —  —  —  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  —  —  
Total18  $2,851  $2,829  $59  $1  $7  $—  

TDR Information for the three months ended September 30, 2018
(dollars in thousands)NumberPre-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
—  $—  $—  $—  $—  $—  $—  
Commercial4  1,326  1,324  (308) —  —  —  
Total mortgage loans on real estate4  1,326  1,324  (308) —  —  —  
Consumer:
Home equity lines of credit—  —  —  —  1  128  —  
Home equity loans1478478—  —  —  —  
Other—  —  —  —  —  —  —  
Total consumer loans1  478  478  —  1  128  —  
Commercial2  203  203  —  —  —  —  
Construction:
Residential—  —  —  —  —  —  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  —  —  
Total7  $2,007  $2,005  $(308) $1  $128  $—  

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TDR Information for the nine months ended September 30, 2018
(dollars in thousands)NumberPre-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
—  $—  $—  $—  $—  $—  $—  
Commercial6  1,743  1,741  (262) 1  169  —  
Total mortgage loans on real estate6  1,743  1,741  (262) 1  169  —  
Consumer:
Home equity lines of credit1  133  138  —  1  128  —  
Home equity loans2  599  599  —  —  —  —  
Other—  —  —  —  —  —  —  
Total consumer loans3  732  737  —  1  128  —  
Commercial4  619  623  (3) 4  340  (2) 
Construction:
Residential—  —  —  —  —  —  —  
Commercial—  —  —  —  —  —  —  
Total construction loans—  —  —  —  —  —  —  
Total13  $3,094  $3,101  $(265) $6  $637  $(2) 
Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions.
For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above.
Typically if a TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting from default of previously modified TDR’s are noted above. Loans that defaulted within the twelve month period subsequent to modification were not considered significant for financial reporting purposes.

Note 6 - Leases
The Company adopted ASU 2016-2 “Leases” (Topic 842) as of January 1, 2019, which requires the Company to record a right-of-use asset (“ROUA”) on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company is also required to record a lease liability on the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is lessee of real estate property for branches, ATM locations, and general administration and operations. The Company elected not to include short-term leases (i.e. leases with initial terms of twelve months or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance were unknown and not determinable at lease commencement and therefore, were not included in the determination of the Company’s ROUA or lease liability.
The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the
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ROU asset and lease liability. Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a
collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the amount of lease liability and adjusted for prepaid or accrued lease payments, remaining lease incentives, unamortized direct costs (if any), and impairment (if any).
The following table presents the components of lease expense for the three and nine months ended September 30, 2019:
(in thousands)Three months ended
September 30, 2019		Nine months ended
September 30, 2019
Operating lease cost$1,306  $3,924  
Short-term lease cost65  194  
Variable lease cost(13) (33) 
Sublease income(32) (98) 
Total lease cost$1,326  $3,987  
Prior to the adoption of ASU 2016-2, rent expense under operating leases was $1,161,000 and $2,937,000 during the three and nine months ended September 30, 2018, respectively. Rent expense was offset by rent income of $10,000 and $31,000 during the three and nine months ended September 30, 2018, respectively.
The following table presents supplemental cash flow information related to leases for the nine months ended September 30, 2019:
(in thousands)Three months ended
September 30, 2019		Nine months ended
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$1,236  $3,683  
ROUA obtained in exchange for operating lease liabilities$—  $32,162  
The following table presents the weighted average operating lease term and discount rate at September 30, 2019:
Weighted-average remaining lease term9.4 years
Weighted-average discount rate3.19 %
At September 30, 2019, future expected operating lease payments are as follows:
(in thousands)
Periods ending December 31,
2019$1,180  
20204,389  
20214,235  
20223,896  
20233,216  
Thereafter16,682  
33,598  
Discount for present value of expected cash flows(5,104) 
Lease liability at September 30, 2019$28,494  




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Note 7 - Deposits
A summary of the balances of deposits follows (in thousands):
September 30,
2019		December 31,
2018
Noninterest-bearing demand$1,777,357  $1,760,580  
Interest-bearing demand1,222,955  1,252,366  
Savings1,843,873  1,921,324  
Time certificates, $250,000 or more148,449  132,429  
Other time certificates302,773  299,767  
Total deposits$5,295,407  $5,366,466  
Certificate of deposit balances of $50,000,000 and $60,000,000 from the State of California were included in time certificates, over $250,000, at September 30, 2019 and December 31, 2018, respectively. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company. Overdrawn deposit balances of $1,431,000 and $1,469,000 were classified as consumer loans at September 30, 2019 and December 31, 2018, respectively
Note 8 - Commitments and Contingencies
The following table presents a summary of the Bank’s commitments and contingent liabilities:
(in thousands)September 30,
2019		December 31,
2018
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans$325,681  $306,191  
Consumer loans512,345  496,575  
Real estate mortgage loans189,700  140,292  
Real estate construction loans182,701  248,996  
Standby letters of credit12,368  11,346  
Deposit account overdraft privilege111,187  111,956  

Note 9 - Shareholders’ Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of $7,011,000 and $13,507,000 during the three months ended September 30, 2019 and 2018, respectively and $25,361,000 and $22,649,000 during the nine months ended September 30, 2019 and 2018, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California Department of Business Oversight (DBO). Absent approval from the Commissioner of the DBO, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period.
Stock Repurchase Plan
On August 21, 2007, the Board of Directors adopted a plan to repurchase, as conditions warrant, up to 500,000 shares of the Company’s common stock on the open market. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. This stock repurchase plan has no expiration date. As of September 30, 2019, the Company had repurchased 196,566 shares under this plan. During the nine month periods ended September 30, 2019 and 2018, there were no shares of common stock repurchased under this plan.


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Stock Repurchased Under Equity Compensation Plans
During the three months ended September 30, 2019 and 2018, employees tendered 3,820 and 11,630 shares, respectively, of the Company’s common stock with market value of $147,000, and $453,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. During the nine months ended September 30, 2019 and 2018, employees tendered 123,734 and 28,850 shares, respectively, of the Company’s common stock with market value of $4,842,000, and $1,124,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. The tendered shares were retired. The market value of tendered shares is based on the last market trade price at closing on the day an option is exercised. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.
Note 10 - Stock Options and Other Equity-Based Incentive Instruments
The Company’s 2009 Equity Incentive Plan (2009 Plan) expired on March 26, 2019. While no new awards can be granted under the 2009 Plan, existing grants continue to be governed by the terms, conditions and procedures set forth in any applicable award agreement. On April 16, 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (2019 Plan) which was approved by shareholders on May 21, 2019. The 2019 Plan allows for up to 1,500,000 shares to be issued in connection with equity-based incentives. All grants of equity awards made during the nine months ended September 30, 2019 were made from the 2019 Plan.
Stock option activity during the nine months ended September 30, 2019 is summarized in the following table:
Number
of Shares		Option Price
per Share		Weighted
Average
Exercise Price
Outstanding at December 31, 2018343,000  
$12.63 to $23.21
$16.67  
Options granted—  
— to —
—  
Options exercised(166,000) 
$12.63 to $19.46
15.93  
Options forfeited—  
— to —
—  
Outstanding at September 30, 2019177,000  
$14.54 to $23.21
$17.52  
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, 2019:
Currently
Exercisable		Currently Not
Exercisable		Total
Outstanding
Number of options176,625  375  177,000  
Weighted average exercise price$17.50  $23.21  $17.52  
Intrinsic value (in thousands)$3,321  $5  $3,326  
Weighted average remaining contractual term (yrs.)2.95.02.9
The 375 options that are currently not exercisable as of September 30, 2019 are expected to vest, on a weighted-average basis, over the next three months. The Company did not modify any option grants during 2018 or the nine months ended September 30, 2019.
Service
Condition
Vesting RSUs		Market Plus
Service
Condition
Vesting RSUs
Outstanding at December 31, 201866,947  45,536  
RSUs granted35,272  22,898  
RSUs added through dividend and performance credits946  7,414  
RSUs released(30,461) (22,237) 
RSUs forfeited/expired(1,876) (2,299) 
Outstanding at September 30, 201970,828  51,312  
The 70,828 of service condition vesting RSUs outstanding as of September 30, 2019 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of
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RSUs outstanding under the original grant. The dividend credits follow the same vesting requirements as the RSU awards and are not considered participating securities. The 70,828 of service condition vesting RSUs outstanding as of September 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next 1.2 years. The Company expects to recognize $2,135,210 of pre-tax compensation costs related to these service condition vesting RSUs between September 30, 2019 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2018 or during the nine months ended September 30, 2019.
The 51,312 of market plus service condition vesting RSUs outstanding as of September 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next 1.9 years. The Company expects to recognize $1,045,845 of pre-tax compensation costs related to these RSUs between September 30, 2019 and their vesting dates. As of September 30, 2019, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 76,968 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 2018 or during the nine months ended September 30, 2019.
Note 11 - Non-interest Income and Expense
The following table summarizes the Company’s non-interest income for the periods indicated:
Three months ended
September 30,		Nine months ended September 30,
(dollars in thousands)2019201820192018
ATM and interchange fees$5,427  $4,590  $15,412  $13,335  
Service charges on deposit accounts4,327  4,015  12,389  11,407  
Other service fees808  676  2,198  2,020  
Mortgage banking service fees483  499  1,441  1,527  
Change in value of mortgage servicing rights(455) (37) (1,652) 38  
Total service charges and fees10,590  9,743  29,788  28,327  
Increase in cash value of life insurance773  732  2,294  1,996  
Asset management and commission income721  728  2,102  2,414  
Gain on sale of loans1,236  539  2,223  1,831  
Lease brokerage income172  186  631  514  
Sale of customer checks126  88  401  327  
Gain on sale of investment securities107  207  107  207  
Gain (loss) on marketable equity securities22  (22) 100  (92) 
Other361  135  1,688  942  
Total other non-interest income3,518  2,593  9,546  8,139  
Total non-interest income$14,108  $12,336  $39,334  $36,466  
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The components of non-interest expense were as follows (in thousands):
Three months ended
September 30,		Nine months ended September 30,
2019201820192018
Base salaries, net of deferred loan origination costs$17,656  $15,685  $51,624  $44,076  
Incentive compensation3,791  4,515  10,064  9,126  
Benefits and other compensation costs5,452  5,623  17,058  15,726  
Total salaries and benefits expense26,899  25,823  78,746  68,928  
Occupancy3,711  3,173  11,223  8,574  
Data processing and software3,411  2,786  10,114  7,979  
Equipment1,679  1,750  5,298  4,938  
Intangible amortization1,431  1,390  4,293  2,068  
Advertising1,358  1,341  4,222  3,214  
ATM and POS network charges1,343  1,197  3,936  3,860  
Professional fees999  1,352  2,895  2,898  
Telecommunications867  819  2,437  2,201  
Regulatory assessments and insurance94  537  1,095  1,384  
Merger and acquisition expense—  4,150  —  5,227  
Postage438  275  1,063  934  
Operational losses228  217  679  763  
Courier service357  278  1,039  769  
Gain on sale of foreclosed assets(50) (2) (246) (390) 
Loss on disposal of fixed assets2  152  82  206  
Other miscellaneous expense3,577  2,290  11,617  9,673  
Total other non-interest expense19,445  21,705  59,747  54,298  
Total non-interest expense$46,344  $47,528  $138,493  $123,226  

Note 12 - Earnings Per Share
Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock units (RSUs), and are determined using the treasury stock method. Earnings per share have been computed based on the following:
Three months ended
September 30,
(in thousands)20192018
Net income$23,395  $16,170  
Average number of common shares outstanding30,509  30,011  
Effect of dilutive stock options and restricted stock120  280  
Average number of common shares outstanding used to calculate diluted earnings
per share		30,629  30,291  
Options excluded from diluted earnings per share because the effect of these
options was antidilutive		42  10  

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Nine months ended
September 30, 2019
(in thousands)20192018
Net income$69,182  $45,109  
Average number of common shares outstanding30,464  25,317  
Effect of dilutive stock options and restricted stock179  300  
Average number of common shares outstanding used to calculate diluted earnings
per share		30,643  25,617  
Options excluded from diluted earnings per share because the effect of these
options was antidilutive		42  10  

Note 13 – Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of other comprehensive income.
The components of other comprehensive income (loss) and related tax effects are as follows:
Three months ended September 30,Nine months ended September 30,
(in thousands)2019201820192018
Unrealized holding gains (losses) on available for sale securities before reclassifications$5,355  $(8,193) $27,618  $(29,134) 
Amounts reclassified out of accumulated other comprehensive income:
Realized (gain) loss on debt securities(107) (207) (107) (207) 
Adoption ASU 2016-01—  —  —  62  
Adoption ASU 2018-02—  —  —  (425) 
Total amounts reclassified out of accumulated other comprehensive income (loss)(107) (207) (107) (570) 
Unrealized holding gains (losses) on available for sale securities after reclassifications5,248  (8,400) 27,511  (29,704) 
Tax effect(1,551) 2,483  (8,133) 8,763  
Unrealized holding gains (losses) on available for sale securities, net of tax3,697  (5,917) 19,378  (20,941) 
Change in unfunded status of the supplemental retirement plans before reclassifications(89) —  (266) 668  
Amounts reclassified out of accumulated other comprehensive income (loss):
Amortization of prior service cost(13) (13) (40) (40) 
Amortization of actuarial losses102  128  306  382  
Adoption ASU 2018-02—  —  —  (668) 
Total amounts reclassified out of accumulated other comprehensive income (loss)89  115  266  (326) 
Change in unfunded status of the supplemental retirement plans after reclassifications—  115  —  342  
Tax effect—  (34) —  (101) 
Change in unfunded status of the supplemental retirement plans, net of tax—  81  —  241  
Total other comprehensive income (loss)$3,697  $(5,836) $19,378  $(20,700) 
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The components of accumulated other comprehensive income (loss), included in shareholders’ equity, are as follows:
(in thousands)September 30,
2019		December 31,
2018
Net unrealized gain (loss) on available for sale securities$6,537  $(20,974) 
Tax effect(1,932) 6,201  
Unrealized holding gain (loss) on available for sale securities, net of tax4,605  (14,773) 
Unfunded status of the supplemental retirement plans(4,802) (4,802) 
Tax effect1,420  1,420  
Unfunded status of the supplemental retirement plans, net of tax(3,382) (3,382) 
Joint beneficiary agreement liability276  276  
Tax effect—  —  
Joint beneficiary agreement liability, net of tax276  276  
Accumulated other comprehensive gain (loss)$1,499  $(17,879) 

Note 14 - Fair Value Measurement
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Marketable equity securities, debt securities available-for-sale, loans held for sale, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application impairment write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observable nature of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Marketable equity securities and debt securities available for sale - Marketable equity securities and debt securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities classified as Level 3 during any of the periods covered in these financial statements.
Loans held for sale - Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to recurring fair value adjustments as Level 2.
Impaired originated and PNCI loans - Originated and PNCI loans are not recorded at fair value on a recurring basis. However, from time to time, an originated or PNCI loan is considered impaired and an allowance for loan losses is established. Originated
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and PNCI loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are considered impaired. The fair value of an impaired originated or PNCI loan is estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired originated and PNCI loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired originated and PNCI loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated or PNCI loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the impaired originated or PNCI loan as nonrecurring Level 3.
Foreclosed assets - Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.
Mortgage servicing rights - Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3.
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):
Fair value at September 30, 2019TotalLevel 1Level 2Level 3
Marketable equity securities$2,974  $2,974  $—  $—  
Debt securities available for sale:
Obligations of U.S. government corporations and agencies495,637  —  495,637  —  
Obligations of states and political subdivisions111,910  —  111,910  —  
Corporate bonds4,528  —  4,528  —  
Asset backed securities372,005  —  372,005  —  
Loans held for sale7,604  —  7,604  —  
Mortgage servicing rights6,072  —  —  6,072  
Total assets measured at fair value$1,000,730  $2,974  $991,684  $6,072  

Fair value at December 31, 2018TotalLevel 1Level 2Level 3
Marketable equity securities$2,874  $2,874  $—  $—  
Debt securities available for sale:
Obligations of U.S. government corporations and agencies629,981  —  629,981  —  
Obligations of states and political subdivisions126,072  —  126,072  —  
Corporate bonds4,478  —  4,478  —  
Asset backed securities354,505  —  354,505  —  
Loans held for sale3,687  —  3,687  —  
Mortgage servicing rights7,098  —  —  7,098  
Total assets measured at fair value$1,128,695  $2,874  $1,118,723  $7,098  

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Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between any levels during the nine months ended September 30, 2019 or the year ended December 31, 2018.
The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the time periods indicated. Had there been any transfer into or out of Level 3 during the time periods indicated, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands):
Three months ended September 30,Beginning
Balance		Transfers
into (out of)
Level 3		Change
Included
in Earnings		IssuancesEnding
Balance
2019: Mortgage servicing rights$6,229  —  $(455) $298  $6,072  
2018: Mortgage servicing rights$7,021  —  $(37) $138  $7,122  

Nine months ended September 30,Beginning
Balance		Transfers
into (out of)
Level 3		Change
Included
in Earnings		IssuancesEnding
Balance
2019: Mortgage servicing rights$7,098  —  $(1,652) $626  $6,072  
2018: Mortgage servicing rights$6,687  —  $38  $397  $7,122  
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, 2019 and December 31, 2018:
As of September 30, 2019:Fair Value
(in thousands)		Valuation
Technique		Unobservable
Inputs		Range,
Weighted
Average
Mortgage Servicing Rights$6,072  Discounted cash flowConstant prepayment rate
7% - 42%; 11%
Discount rate
10% - 14%; 12%
As of December 31, 2018:
Mortgage Servicing Rights$7,098  Discounted cash flowConstant prepayment rate
5% - 27.3%; 7.6%
Discount rate
12% - 13%; 12%
The tables below present the recorded investment in assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated (in thousands):
September 30, 2019TotalLevel 1Level 2Level 3Total Gains
(Losses)
Fair value:
Impaired Originated & PNCI loans$1,055  —  —  $1,055  $(652) 
Foreclosed assets417  —  —  417  (27) 
Total assets measured at fair value$1,472  —  —  $1,472  $(679) 

December 31, 2018TotalLevel 1Level 2Level 3Total Gains
(Losses)
Fair value:
Impaired Originated & PNCI loans$281  —  —  $281  $(294) 
Foreclosed assets1,311  —  —  1,311  (8) 
Total assets measured at fair value$1,592  —  —  $1,592  $(302) 

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September 30, 2018TotalLevel 1Level 2Level 3Total Gains
(Losses)
Fair value:
Impaired Originated & PNCI loans$445  —  —  $445  $(808) 
Foreclosed assets863  —  —  863  (23) 
Total assets measured at fair value$1,308  —  —  $1,308  $(831) 
The impaired originated and PNCI loan amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When the Company identifies a collateral dependent loan as impaired, the Company measures the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If the Company determines that the value of the impaired loan is less than the recorded investment in the loan, the Company recognizes this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.
The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on real estate owned for fair value adjustments based on the fair value of the real estate.
The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.
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, 2019:
September 30, 2019Fair Value
(in thousands)		Valuation
Technique		Unobservable InputsRange,
Weighted Average
Impaired Originated & PNCI loans$1,055  Sales comparison
approach
Income approach		Adjustment for differences between
comparable sales
Capitalization rate		Not meaningful
N/A 		 
Foreclosed assets (Residential real estate)$417  Sales comparison
approach		Adjustment for differences between
comparable sales		Not meaningful  
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2018:
December 31, 2018Fair Value
(in thousands)		Valuation
Technique		Unobservable InputsRange,
Weighted Average
Impaired Originated & PNCI loans$281  Sales comparison
approach
Income approach		Adjustment for differences between
comparable sales
Capitalization rate
(16.30)% - 35.14%; 10.45% N/A
Foreclosed assets (Residential real estate)$693  Sales comparison
approach		Adjustment for differences between
comparable sales
(21.83)% - 7.25%; (3.75)%
Foreclosed assets (Commercial real estate)$618  Sales comparison
approach		Adjustment for differences between
comparable sales
(65)% - 20%; (45)%

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Fair values for financial instruments are management’s estimates of the values at which the instruments could be exchanged in a transaction between willing parties. The Company uses the exit price notion when measuring the fair value of financial instruments. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates.
September 30, 2019December 31, 2018
(in thousands)Carrying
Amount		Fair
Value		Carrying
Amount		Fair
Value
Financial assets:
Level 1 inputs:
Cash and due from banks$118,960  $118,960  $119,781  $119,781  
Cash at Federal Reserve and other banks140,087  140,087  107,752  107,752  
Level 2 inputs:
Securities held to maturity393,449  399,699  444,936  437,370  
Restricted equity securities17,250   N/A 17,250  N/A
Loans held for sale7,604  7,604  3,687  4,616  
Level 3 inputs:
Loans, net4,150,811  4,137,528  3,989,432  4,006,986  
Financial liabilities:
Level 2 inputs:
Deposits5,295,407  5,294,348  5,366,466  5,362,173  
Other borrowings16,423  16,423  15,839  15,839  
Level 3 inputs:
Junior subordinated debt57,180  56,209  57,042  62,610  

(in thouands)Contract
Amount		Fair
Value		Contract
Amount		Fair
Value
Off-balance sheet:
Level 3 inputs:
Commitments$1,210,427  $12,104  $1,192,054  $11,921  
Standby letters of credit12,368  124  11,346  113  
Overdraft privilege commitments111,187  1,112  111,956  1,120  

Note 15 - Regulatory Matters
The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. The following tables present actual and required capital ratios as of September 30, 2019 and December 31, 2018 for the Company and the Bank under applicable Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of September 30, 2019 and December 31, 2018 based on the then phased-in provisions of the Basel III Capital Rules. As of January 1, 2019, the minimum required capital levels of the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
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ActualMinimum Capital
Required – Basel III
Fully Phased In		Required to be
Considered Well
Capitalized
As of September 30, 2019:AmountRatioAmountRatioAmountRatio
(dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated$735,884  15.23 %$507,335  10.50 %N/AN/A
Tri Counties Bank$731,359  15.14 %$507,152  10.50 %$483,002  10.00 %
Tier 1 Capital (to Risk Weighted Assets):
Consolidated$701,703  14.52 %$410,700  8.50 %N/AN/A
Tri Counties Bank$697,178  14.43 %$410,551  8.50 %$386,401  8.00 %
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated$646,240  13.37 %$338,224  7.00 %N/AN/A
Tri Counties Bank$697,178  14.43 %$338,101  7.00 %$313,951  6.50 %
Tier 1 Capital (to Average Assets):
Consolidated$701,703  11.31 %$248,073  4.00 %N/AN/A
Tri Counties Bank$697,178  11.24 %$248,068  4.00 %$310,085  5.00 %

ActualMinimum Capital
Required – Basel III
Phase-inSchedule		Minimum Capital
Required – Basel III
Fully Phased In		Required to be
Considered Well
Capitalized
As of December 31, 2018:AmountRatioAmountRatioAmountRatioAmountRatio
(dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated$682,419  14.40 %$467,874  9.875 %$497,486  10.50 %N/AN/A
Tri Counties Bank$680,624  14.37 %$467,704  9.875 %$497,305  10.50 %$473,624  10.00 %
Tier 1 Capital (to Risk Weighted Assets):
Consolidated$647,262  13.66 %$373,115  7.875 %$402,727  8.50 %N/AN/A
Tri Counties Bank$645,467  13.63 %$372,979  7.875 %$402,581  8.50 %$378,899  8.00 %
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated$591,933  12.49 %$302,045  6.375 %$331,658  7.00 %N/AN/A
Tri Counties Bank$645,467  13.63 %$301,935  6.375 %$331,537  7.00 %$307,856  6.50 %
Tier 1 Capital (to Average Assets):
Consolidated$647,262  10.68 %$242,452  4.000 %$242,452  4.00 %N/AN/A
Tri Counties Bank$645,467  10.65 %$242,447  4.000 %$242,447  4.00 %$303,059  5.00 %
As of September 30, 2019 and December 31, 2018, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules. Also, at September 30, 2019 and December 31, 2018, the Bank’s capital levels exceeded the minimum amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action.
The Basel III Capital Rules require for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the risk-based capital ratios but not the leverage ratio. At September 30, 2019, the Company and the Bank are in compliance with the capital conservation buffer requirement.


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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 in Part II Item 1A of this report and our Annual Report on Form 10-K for the year ended December 31, 2018, which is on file with the Securities and Exchange Commission (the “SEC”) and available in the “Investor Relations” section of our website, https://www.tcbk.com/investor-relations and in other documents we file with the SEC.
General
As TriCo Bancshares (referred to in this report as “we”, “our” or the “Company”) has not commenced any business operations independent of Tri Counties Bank (the “Bank”), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (“FTE”) basis. The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results, and the presentation of these measures on a FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a non-FTE basis in the Part I - Financial Information section of this Form 10-Q, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 of the consolidated financial statements included in the Company’s annual report of Form 10-K for the year ended December 31, 2018.

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Geographical Descriptions
For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.
Financial Highlights
Following the acquisition of FNB Bancorp on July 7, 2018, the period ended September 30, 2019 represents the first year over year comparable period end of the combined entity. Performance highlights and other developments for the Company included the following:
•For the three and nine months ended September 30, 2019, the Company’s return on average assets was 1.44% and 1.44%, respectively, and the return on average equity was 10.42% and 10.67%, respectively.
•For the three and nine months ended September 30, 2019, the Company's diluted earnings per share was $0.76 and $2.25, respectively, as compared to $0.53 and $1.76 for the same periods ended 2018.
•As of September 30, 2019, the Company reported total loans, total assets and total deposits of $4.18 billion, $6.38 billion and $5.30 billion, respectively.
•The loan to deposit ratio was 79.0% as of September 30, 2019 as compared to 76.8% at June 30, 2019 and 79.0% at September 30, 2018.
•For the current quarter, net interest margin was 4.44% on a tax equivalent basis as compared to 4.29% in the quarter ended September 30, 2018 and decreased 6 basis points from the trailing quarter.
•Non-interest bearing deposits as a percentage of total deposits were 33.6% at September 30, 2019, as compared to 33.3% at June 30, 2019 and 33.6% at September 30, 2018.
•The average rate of interest paid on deposits, including non-interest-bearing deposits, remained low but increased slightly to 0.23% for the third quarter of 2019 as compared with 0.22% for the trailing quarter, and an increase of 7 basis points from the average rate paid during the same quarter of the prior year.
•Non-performing assets to total assets were 0.31% at September 30, 2019, as compared to 0.35% as of June 30, 2019, and 0.47% at December 31, 2018.
•The balance of nonperforming loans decreased by $2.0 million, and was facilitated by the sale of loans and charge-offs. Net charge-offs (recoveries) for the quarter ended September 30, 2019 and 2018 were $1.0 million and ($0.2) million, respectively, while net charge-offs (recoveries) for the nine months ended September 30, 2019 were ($0.3) million and $0.5 million, respectively.
•For the three months ended September 30, 2019, the efficiency ratio declined to 58.8%, as compared to 60.1%, in the trailing quarter and 65.3% in the same quarter of the 2018 year. Excluding merger and acquisition costs from the 2018 year results in an efficiency ratio of 59.56%.
•Non-interest income associated with service charges and fees increased by 4.6% over the trailing quarter and 8.7% over the same quarter in the prior year.
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TRICO BANCSHARES
Financial Summary
(In thousands, except per share amounts; unaudited)
Three months ended
September 30,		Nine months ended
September 30,
2019201820192018
Net interest income64,688  $60,489  $192,873  $151,344  
Reversal of (provision for) loan losses329  (2,651) 1,392  (1,777) 
Non-interest income14,108  12,336  39,334  36,466  
Non-interest expense(46,344) (47,528) (138,493) (123,226) 
Provision for income taxes(9,386) (6,476) (25,924) (17,698) 
Net income$23,395  $16,170  $69,182  $45,109  
Per Share Data:
Basic earnings per share$0.77  $0.54  $2.27  $1.78  
Diluted earnings per share$0.76  $0.53  $2.25  $1.76  
Dividends paid$0.22  $0.17  $0.60  $0.51  
Book value at period end$29.39  $26.37  
Average common shares outstanding30,509  30,011  30,464  25,317  
Average diluted common shares outstanding30,629  30,291  30,643  25,617  
Shares outstanding at period end30,512  30,418  
At period end:
Loans, net4,150,811  3,995,833  
Total investment securities1,397,753  1,535,953  
Total assets6,384,883  6,318,865  
Total deposits5,295,407  5,093,117  
Other borrowings16,423  282,831  
Shareholders’ equity896,665  802,115  
Financial Ratios:
During the period:
Return on average assets (annualized)1.44 %1.05 %1.44 %1.15 %
Return on average equity (annualized)10.42 %9.11 %10.67 %10.44 %
Net interest margin(1) (annualized)
4.44 %4.29 %4.48 %4.22 %
Efficiency ratio58.82 %65.26 %59.64 %65.61 %
Average equity to average assets13.80 %12.74 %13.50 %11.48 %
At end of period:
Equity to assets14.04 %12.69 %
Total capital to risk-adjusted assets15.23 %13.90 %
(1) Fully taxable equivalent (FTE)
The financial results above were primarily benefited by an increase in interest-earning assets during both the three and nine month periods ended September 30, 2019 as compared to the same 2018 periods. While the growth in interest-earning assets was funded by increases in interest-bearing liabilities, net interest income was benefited by reductions in both the rates paid and average balance of other borrowings which were paid down as the balance of average deposits increased.



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Results of Operations
Overview
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report.
Three months ended
September 30,		Nine months ended
September 30,
2019201820192018
Net interest income$64,688  $60,489  $192,873  $151,344  
Reversal of (provision for) loan losses329  (2,651) 1,392  (1,777) 
Non-interest income14,108  12,336  39,334  36,466  
Non-interest expense(46,344) (47,528) (138,493) (123,226) 
Provision for income taxes(9,386) (6,476) (25,924) (17,698) 
Net income$23,395  $16,170  $69,182  $45,109  
The Company reported net income of $23,395,000 and $69,182,000 for the quarter and nine months ended September 30, 2019, respectively, compared to $16,170,000 and $45,109,000 for the quarter and nine months ended September 30, 2018, respectively. Diluted earnings per share were $0.76 and $2.25 for the quarter and nine months ended September 30, 2019, respectively, compared to $0.53 and $1.76 for the quarter and nine months ended September 30, 2018, respectively.
Net Interest Income
The Company’s primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Following is a summary of the components of FTE net income for the periods indicated (dollars in thousands):
Three months ended
September 30,		Nine months ended
September 30,
2019201820192018
Interest income68,889  64,554  204,526  160,153  
Interest expense(4,201) (4,065) (11,653) (8,809) 
FTE adjustment289  357  929  982  
Net interest income (FTE)$64,977  $60,846  $193,802  $152,326  
Net interest margin (FTE)4.44 %4.29 %4.48 %4.22 %
Acquired loans discount accretion, net:
Amount (included in interest income)$2,360  $2,098  $5,919  $3,289  
Effect on average loan yield0.23 %0.21 %0.19 %0.13 %
Effect on net interest margin (FTE)0.16 %0.14 %0.08 %0.05 %
Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income. During the three and nine months ended September 30, 2019, purchased loan discount accretion was $2,360,000 and $5,919,000, respectively. During the three and nine months ended September 30, 2018, purchased loan discount accretion was $2,098,000 and $3,289,000, respectively. On a year over year basis, the increase in discount accretion is directly attributable to the acquisition of FNB Bancorp in July 2018. Quarter over quarter, the increase in accretion is attributed to an increased level of pay-off activity resulting from the declining rate environment.

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Summary of Average Balances, Yields/Rates and Interest Differential
The following table presents, for the three month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest- bearing 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, 2019September 30, 2018
Average
Balance		Interest
Income/
Expense		Rates
Earned
/Paid		Average
Balance		Interest
Income/
Expense		Rates
Earned
/Paid
Assets:
Loans$4,142,602  $56,999  5.46 %$4,019,391  $53,102  5.24 %
Investment securities - taxable1,403,653  10,172  2.88 %1,326,756  9,648  2.89 %
Investment securities - nontaxable(1)
133,038  1,250  3.73 %163,309  1,546  3.76 %
Total investments1,536,691  11,422  2.95 %1,490,065  11,194  2.98 %
Cash at Federal Reserve and other banks130,955  757  2.29 %119,635  615  2.04 %
Total interest-earning assets5,810,248  69,178  4.72 %5,629,091  64,911  4.57 %
Other assets642,222  626,622  
Total assets$6,452,470  $6,255,713  
Liabilities and shareholders’ equity:
Interest-bearing demand deposits$1,240,548  $284  0.09 %$1,125,159  $248  0.09 %
Savings deposits1,861,166  1,192  0.25 %1,803,022  833  0.18 %
Time deposits447,669  1,574  1.39 %430,286  991  0.91 %
Total interest-bearing deposits3,549,383  3,050  0.34 %3,358,467  2,072  0.24 %
Other borrowings73,350  334  1.81 %246,637  1,178  1.89 %
Junior subordinated debt57,156  817  5.67 %56,973  815  5.68 %
Total interest-bearing liabilities3,679,889  4,201  0.45 %3,662,077  4,065  0.44 %
Noninterest-bearing deposits1,777,852  1,710,374  
Other liabilities104,062  86,131  
Shareholders’ equity890,667  797,131  
Total liabilities and shareholders’ equity$6,452,470  $6,255,713  
Net interest spread(2)
4.27 %4.13 %
Net interest income and interest margin(3)
$64,977  4.44 %$60,846  4.29 %
(1)Fully taxable equivalent (FTE)
(2)Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.
During the comparable three month periods above, net interest income and net interest margin were benefited by both the increases in average volume and rates earned on loans. These benefits were partially offset by the increases in rates paid on savings and time deposits. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable nine-month periods increased from 154% to 158%, which contributed to the growth in net interest income and net interest margin of $4,131,000 and 15 basis points, respectively. See the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid, below for additional information.
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The following table presents, for the nine month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest- bearing 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 nine months ended
September 30, 2019September 30, 2018
Average
Balance		Interest
Income/
Expense		Rates
Earned
/Paid		Average
Balance		Interest
Income/
Expense		Rates
Earned
/Paid
Assets:
Loans$4,070,568  $166,888  5.48 %$3,387,390  $130,455  5.15 %
Investment securities - taxable1,420,426  31,849  3.00 %1,192,304  25,042  2.81 %
Investment securities - nontaxable(1)
138,580  4,024  3.88 %145,298  4,254  3.91 %
Total investments1,559,006  35,873  3.08 %1,337,602  29,296  2.93 %
Cash at Federal Reserve and other banks148,995  2,694  2.42 %101,889  1,384  1.82 %
Total interest-earning assets5,778,569  205,455  4.75 %4,826,881  161,135  4.46 %
Other assets643,130  449,020  
Total assets$6,421,699  $5,275,901  
Liabilities and shareholders’ equity:
Interest-bearing demand deposits$1,263,312  $860  0.09 %$1,038,775  $673  0.09 %
Savings deposits1,892,122  3,631  0.26 %1,524,048  1,671  0.15 %
Time deposits443,546  4,277  1.29 %350,559  2,058  0.78 %
Total interest-bearing deposits3,598,980  8,768  0.33 %2,913,382  4,402  0.20 %
Other borrowings35,814  384  1.43 %165,026  2,106  1.71 %
Junior subordinated debt57,109  2,501  5.86 %56,928  2,301  5.39 %
Total interest-bearing liabilities3,691,903  11,653  0.42 %3,135,336  8,809  0.38 %
Noninterest-bearing deposits1,761,037  1,462,209  
Other liabilities101,947  72,772  
Shareholders’ equity866,812  605,584  
Total liabilities and shareholders’ equity$6,421,699  $5,275,901  
Net interest spread(2)
4.33 %4.08 %
Net interest income and interest margin(3)
$193,802  4.48 %$152,326  4.22 %
(1)Fully taxable equivalent (FTE)
(2)Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.
The change in average balances of assets and liabilities were significantly impacted by the July 6, 2018 acquisition of FNB Bancorp. During the comparable nine month periods above, net interest income and net interest margin were benefited by both the increases in average volume and rates earned on loans. These benefits were partially offset by the increases in rates paid on savings and time deposits. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable nine-month periods increased from 154% to 156%, which contributed to the growth in net interest income and net interest margin of $41,476,000 and 26 basis points, respectively. See the "Summary of changes in interest income and expense due to changes in average asset and liability balances and yields earned and rates paid", below for additional information.

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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, for the period identified, a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components.
(in thousands)Three months ended September 30, 2019
compared with three months ended September 30, 2018
VolumeRateTotal
Increase in interest income:
Loans$1,657  $2,240  $3,897  
Investment securities(1) 
345  (117) 228  
Cash at Federal Reserve and other banks61  81  142  
Total interest-earning assets2,063  2,204  4,267  
Increase (decrease) in interest expense:
Interest-bearing demand deposits26  10  36  
Savings deposits28  331  359  
Time deposits42  541  583  
Other borrowings(792) (52) (844) 
Junior subordinated debt3  (1) 2  
Total interest-bearing liabilities(693) 829  136  
Increase in net interest income$2,756  $1,375  $4,131  
(1)Fully taxable equivalent (FTE)
(in thousands)Nine months ended September 30, 2019 compared with nine months ended September 30, 2018
VolumeRateTotal
Increase in interest income:
Loans$27,597  $8,836  $36,433  
Investment securities(1) 
4,834  1,743  6,577  
Cash at Federal Reserve and other banks1,058  252  1,310  
Total interest-earning assets33,489  10,831  44,320  
Increase (decrease) in interest expense:
Interest-bearing demand deposits152  35  187  
Savings deposits478  1,482  1,960  
Time deposits648  1,571  2,219  
Other borrowings(1,430) (292) (1,722) 
Junior subordinated debt7  193  200  
Total interest-bearing liabilities(145) 2,989  2,844  
Increase in net interest income$33,634  $7,842  $41,476  
(1)Fully taxable equivalent (FTE)
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, 2019 increased $4,131,000 or 6.8% to $64,977,000 compared to $60,846,000 during the three months ended September 30, 2018. The increase in net interest income (FTE) was primarily due to both an increase in the average balances, and increase in market rates, on loans. Increases in average balance of loans added $1,657,000 to net interest income. Increases in market rates and purchase discount accretion added $1,375,000 to net interest income, due to increases in rates earned on interest-earnings assets outpacing increases in rates 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 decreased during the quarter by 0.50% to 5.00% at September 30, 2019, consistent with the rate at September 30, 2018. As compared to the same quarter in the prior year, average loan yields increased 22 basis points to 5.46% during the three months ended September 30, 2019 from 5.24% during the three months ended September 30, 2018. Of the 22 basis point increase in yields on loans, 20 basis points was attributable to increases in market rates while 2 basis points was from increased accretion of purchased loans.
The organic growth in deposits was driven primarily by normal and expected seasonal trends as well as the impact of deposit customer’s receipt of insurance proceeds from the property and casualty losses incurred in connection with the wildfires in Northern California. This growth in deposits allowed for the repayment of overnight borrowings resulting in a reduction in interest expense of $792,000, however, the increases in rates paid on deposit products increased interest expense by $882,000 for the three month period ended September 30, 2019 as compared with the same period in 2018. The Company’s cost of interest-bearing deposits increased from 24 basis points during the three months ended September 30, 2018 to 34 basis points during the three months ended September 30, 2019.
Net interest income (FTE) during the nine months ended September 30, 2019 increased $41,476,000 or 27.2% to $193,802,000 compared to $152,326,000 during the nine months ended September 30, 2018. The increase in net interest income (FTE) was primarily due to an increase both in the average balance and rate on loans and investment securities, which were partially offset by an increase in the average rates paid on interest-bearing deposits which increased by 13 basis points to 0.33% for the nine months ended September 30, 2019 as compared to the 0.20% for the nine months ended September 30, 2018. The 13 basis point increase in the average rate paid on interest-bearing deposits was due to increases in competitive pressures related to the rates which the Company pays on its savings and time deposits. However, the growth in total average deposits during the comparable nine-month periods allowed for the repayment of overnight borrowings which, combined with changes in related rates, contributed to a decrease in related interest expense of $1,722,000.
During the nine months ended September 30, 2019, the average balance of loans increased by $683,178,000 or 20.2% to$4,070,568,000. This increase in loan volume combined with the 33 basis point increase in loan yields resulted in an increase in interest income of $36,433,000 for the nine months ended September 30, 2019 as compared to the same period in 2018. The increase in net interest income and net interest margin was benefited by an increase in the year-to-date purchased loan discount accretion from $3,289,000 during the nine months ended September 30, 2018 to $5,919,000 during the nine months ended September 30, 2019. This increase in purchased loan discount accretion benefited loan yields by 6 basis points, and net interest margin by 3 basis points.
Asset Quality and Loan Loss Provisioning
The Company continued to experience improvement in the overall credit quality of its loan portfolio. At September 30, 2019, total nonperforming loans decreased to $18,565,000 or 0.44% of total loans from $27,494,000 or 0.68% of total loans as of December 31, 2018.

The Company recorded a benefit due to reversal of loan losses of $329,000 during the three months ended September 30, 2019, as compared to a provision of loan losses of $2,651,000 in the same quarter of the prior year. The benefit from reversal was recorded, despite average loan growth of $98,558,000 during the quarter, due to declines in calculated required specific reserves following the sale and charge-off of nonperforming loans, and a $250,000 decrease in reserves attributed to loans associated with borrowers and collateral associated with the November 2018 Camp Fire. Additionally, the overall level of past due loans decreased significantly during the quarter, from approximately $14,580,000 as of June 30, 2019 to approximately $8,089,000 as of September 30, 2019, resulting in reductions during the quarter in the calculated qualitative factor by approximately $206,000 associated with 'delinquency' loan volume. Net charge-offs (recoveries) for the nine months ended September 30, 2019 and 2018 were ($347,000) and $497,000, respectively. During the three months ended September 30, 2019 the sale of non-performing loans with carrying values totaling $2,887,000 further contributed to the reduction in required reserves on loans held for investment.


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Non-interest Income
The following table summarizes the Company’s non-interest income for the periods indicated (in thousands):
Three months ended
September 30,
(dollars in thousands)20192018$ Change% Change
ATM and interchange fees$5,427  $4,590  $837  18.2 %
Service charges on deposit accounts4,327  4,015  $312  7.8 %
Other service fees808  676  $132  19.5 %
Mortgage banking service fees483  499  $(16) (3.2)%
Change in value of mortgage servicing rights(455) (37) $(418) 1,129.7 %
Total service charges and fees10,590  9,743  847  8.7 %
Increase in cash value of life insurance773  732  $41  5.6 %
Asset management and commission income721  728  $(7) (1.0)%
Gain on sale of loans1,236  539  $697  129.3 %
Lease brokerage income172  186  $(14) (7.5)%
Sale of customer checks126  88  $38  43.2 %
Gain on sale of investment securities107  207  $(100) (48.3)%
Gain (loss) on marketable equity securities22  (22) $44  (200.0)%
Other361  135  $226  167.4 %
Total other non-interest income3,518  2,593  $925  35.7 %
Total non-interest income$14,108  $12,336  $1,772  14.4 %

Nine months ended September 30,
(dollars in thousands)20192018$ Change% Change
ATM and interchange fees$15,412  $13,335  $2,077  15.6 %
Service charges on deposit accounts12,389  11,407  982  8.6 %
Other service fees2,198  2,020  178  8.8 %
Mortgage banking service fees1,441  1,527  (86) (5.6)%
Change in value of mortgage servicing rights(1,652) 38  (1,690) (4,447.4)%
Total service charges and fees29,788  28,327  1,461  5.2 %
Increase in cash value of life insurance2,294  1,996  298  14.9 %
Asset management and commission income2,102  2,414  (312) (12.9)%
Gain on sale of loans2,223  1,831  392  21.4 %
Lease brokerage income631  514  117  22.8 %
Sale of customer checks401  327  74  22.6 %
Gain on sale of investment securities107  207  (100) (48.3)%
Gain (loss) on marketable equity securities100  (92) 192  (208.7)%
Other1,688  942  746  79.2 %
Total other non-interest income9,546  8,139  1,407  17.3 %
Total non-interest income$39,334  $36,466  $2,868  7.9 %
Non-interest income increased $1,772,000 (14.4%) and $2,868,000 (7.9%) during the three and nine month periods ended September 30, 2019 as compared to the three and nine month periods ended September 30, 2018, respectively. The increase quarter over quarter was primarily driven by increases in fee charges for interchange and various deposit services. Specifically, growth in customers, volume of transactions related to customers, and to a lesser extent, an increase in the fees charged for those services. Growth in the nine month period over period is also due largely to the acquisition of FNB Bancorp effective July 2018, and resulting increase in customers and accounts that generate fee revenues. During the three and nine month periods ended September 30, 2019, the Company recorded an increase in gain on the sale of loans of $697,000 and $392,000,
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respectively, as compared to the three and nine months ended September 30, 2018. Death benefit insurance proceeds of $800,000 were recognized within other income for the nine months ended September 30, 2019, compared to none in 2018. These increases were offset by valuation declines in the Company’s mortgage servicing right asset of $418,000 and $1,690,000, respectively for the three and nine month periods ended September 30, 2019 as compared to the three and nine month periods ended September 30, 2018. Additional partial offsets to the overall increase were due to declines in asset management and commission income of $7,000 and $312,000, respectively during the three and nine month periods ended September 30, 2019 as compared to the three and nine month periods ended September 30, 2018.
Non-interest Expense
The following table summarizes the Company’s non-interest expense for the periods indicated (dollars in thousands):
Three months ended
September 30,
20192018$ Change% Change
Base salaries, net of deferred loan origination costs$17,656  $15,685  $1,971  12.6 %
Incentive compensation3,791  4,515  (724) (16.0)%
Benefits and other compensation costs5,452  5,623  (171) (3.0)%
Total salaries and benefits expense26,899  25,823  1,076  4.2 %
Occupancy3,711  3,173  538  17.0 %
Data processing and software3,411  2,786  625  22.4 %
Equipment1,679  1,750  (71) (4.1)%
Intangible amortization1,431  1,390  41  2.9 %
Advertising1,358  1,341  17  1.3 %
ATM and POS network charges1,343  1,197  146  12.2 %
Professional fees999  1,352  (353) (26.1)%
Telecommunications867  819  48  5.9 %
Regulatory assessments and insurance94  537  (443) (82.5)%
Merger and acquisition expense—  4,150  (4,150) (100.0)%
Postage438  275  163  59.3 %
Operational losses228  217  11  5.1 %
Courier service357  278  79  28.4 %
Gain on sale of foreclosed assets(50) (2) (48) 2,400.0 %
Loss on disposal of fixed assets2  152  (150) (98.7)%
Other miscellaneous expense3,577  2,290  1,287  56.2 %
Total other non-interest expense19,445  21,705  (2,260) (10.4)%
Total non-interest expense$46,344  $47,528  $(1,184) (2.5)%
Average full time equivalent staff1,160  1,146  14  1.2 %

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Nine months ended
September 30,
20192018$ Change% Change
Base salaries, net of deferred loan origination costs$51,624  $44,076  $7,548  17.1 %
Incentive compensation10,064  9,126  938  10.3 %
Benefits and other compensation costs17,058  15,726  1,332  8.5 %
Total salaries and benefits expense78,746  68,928  9,818  14.2 %
Occupancy11,223  8,574  2,649  30.9 %
Data processing and software10,114  7,979  2,135  26.8 %
Equipment5,298  4,938  360  7.3 %
Intangible amortization4,293  2,068  2,225  107.6 %
Advertising4,222  3,214  1,008  31.4 %
ATM and POS network charges3,936  3,860  76  2.0 %
Professional fees2,895  2,898  (3) (0.1)%
Telecommunications2,437  2,201  236  10.7 %
Regulatory assessments and insurance1,095  1,384  (289) (20.9)%
Merger and acquisition expense—  5,227  (5,227) (100.0)%
Postage1,063  934  129  13.8 %
Operational losses679  763  (84) (11.0)%
Courier service1,039  769  270  35.1 %
Gain on sale of foreclosed assets(246) (390) 144  (36.9)%
Loss on disposal of fixed assets82  206  (124) (60.2)%
Other miscellaneous expense11,617  9,673  1,944  20.1 %
Total other non-interest expense59,747  54,298  5,449  10.0 %
Total non-interest expense$138,493  $123,226  $15,267  12.4 %
Average full time equivalent staff1,145  1,050  95  9.0 %
Salary and benefit expenses increased $1,076,000 (4.2%) to $26,899,000 during the three months ended September 30, 2019 compared to $25,823,000 during the three months ended September 30, 2018. Base salaries, net of deferred loan origination costs increased $1,971,000 (12.6%) to $17,656,000. The increase in base salaries and benefits related to compensation was largely due to an increase in average full time equivalent employees, to 1,160 from 1,146 in the year-ago quarter, as well as annual merit increases. Additionally, incentive compensation for retention bonuses related to the FNB Bancorp acquisition totaled $1,292,000 during the three month period ended September 30, 2018.
Total other non-interest expense decreased $2,260,000 (10.4)% to $19,445,000 during the three months ended September 30, 2019, compared to $21,705,000 during the three months ended September 30, 2018. The decrease in other non-interest expense during the three months ended September 30, 2019 was due primarily to the elimination of merger and acquisition expenses totaling $4,150,000 following the transaction with FNB Bancorp effective July 2018, offset partially with increases in other miscellaneous expenses 1,287,000 (56.2%), occupancy expenses 538,000 (17.0%), and data processing and software expenses 625,000 (22.4%), all during the comparative three months ended September 30, 2018.
The increase in total non-interest expense of $15,267,000 (12.4%) to $138,493,000 for the nine months ended September 30, 2019 compared to $123,226,000 for the same period in 2018 was also primarily attributable to the acquisition of FNB Bancorp, including the growth in full time equivalent staff and expanded volume of operational activities, and partially offset by the $5,227,000 reduction in merger and acquisition expenses.
Income Taxes
The Company’s effective tax rate was 27.3% for the nine months ended September 30, 2019, as compared to 28.6% for the same quarter in the prior year. During the three and nine months ended September 30, 2019 as compared to the same periods in the 2018 year, the Company earned a greater percentage of non-taxable income from investment securities and death benefits from life insurance proceeds. These benefits were partially offset by an increase in the estimated level of non-deductible compensation associated with increases in compensation to covered employees.

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Financial Condition
For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. Organic growth, inclusive of seasonal fluctuation, also contributes to the year-over-year balance sheet changes. During the twelve months ended September 30, 2019, organic loan growth of $154,912,000 or 3.8% and the reduction in other borrowings of $266,408,000 or 94.2% was funded by deposit growth of $202,290,000 or 4.0% and the reduction via sale and principal repayment of investment securities of $138,200,000 or 9.0%. Total assets grew by $66,018,000 or 1.0% between September 2018 and September 2019. The following is a comparison of the year over year change in certain assets and liabilities:
As of September 30, 2019$ Change% Change
($‘s in thousands)20192018
Ending balances
Total assets$6,384,883  $6,318,865  $66,018  1.0 %
Total loans4,182,348  4,027,436  154,912  3.8 %
Total investments1,397,753  1,535,953  (138,200) (9.0)%
Total deposits5,295,407  5,093,117  202,290  4.0 %
Total noninterest-bearing deposits1,777,357  1,710,505  66,852  3.9 %
Total other borrowings16,423  282,831  (266,408) (94.2)%
Investment Securities
Investment securities available for sale decreased $130,956,000 to $984,080,000 as of September 30, 2019, compared to December 31, 2018. This decrease is primarily attributable to the sale of investment securities to provide liquidity to support loan growth. Proceeds from the sale of securities and net gains associated totaled $125,247,000 and $107,000, respectively, for the three and nine months periods ended September 30, 2019. There were no transfers of available-for-sale investment securities to held-to-maturity or vice versa during the nine month periods ended September 30, 2019 and 2018.
The following table presents the available for sale debt securities portfolio by major type as of September 30, 2019 and December 31, 2018:
(dollars in thousands)September 30, 2019December 31, 2018
Fair Value%Fair Value%
Debt securities available for sale:
Obligations of U.S. government agencies$495,637  50.3 %$629,981  56.5 %
Obligations of states and political subdivisions111,910  11.4 %126,072  11.3 %
Corporate bonds4,528  0.5 %4,478  0.4 %
Asset backed securities372,005  37.8 %354,505  31.8 %
Total debt securities available for sale$984,080  100.0 %$1,115,036  100.0 %

Investment securities held to maturity decreased $51,487,000 to $393,449,000 as of September 30, 2019, as compared to December 31, 2018. This decrease is attributable to principal repayments of $50,738,000, and amortization of net purchase premiums of $749,000.
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The following table presents the held to maturity investment securities portfolio by major type as of September 30, 2019 and December 31, 2018:
(dollars in thousands)September 30, 2019December 31, 2018
Amortized
Cost		%Amortized
Cost		%
Debt securities held to maturity:
Obligations of U.S. government and agencies$379,634  96.5 %$430,343  96.7 %
Obligations of states and political subdivisions13,815  3.5 %14,593  3.3 %
Total debt securities held to maturity$393,449  100.0 %$444,936  100.0 %

Loans
The Company concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial loans), consumer loans, commercial loans (including agricultural loans), and real estate construction loans. The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Company and prevailing money market rates indicative of the Company’s cost of funds.
The majority of the Company’s loans are direct loans made to individuals, farmers and local businesses. The Company relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.
The following table shows the Company’s loan balances, net deferred loan costs and discounts, as of the dates indicated:
(dollars in thousands)September 30, 2019December 31, 2018
Real estate mortgage$3,247,156  77.6 %$3,143,100  78.1 %
Consumer442,539  10.6 %418,982  10.4 %
Commercial278,458  6.7 %276,548  6.9 %
Real estate construction214,195  5.1 %183,384  4.6 %
Total loans$4,182,348  100.0 %$4,022,014  100.0 %

At September 30, 2019 loans, including net deferred loan costs and discounts, totaled $4,182,348,000 which was a $160,334,000 (3.9%) increase over the balances at December 31, 2018.
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Asset Quality and Nonperforming Assets
Nonperforming Assets
The following tables set forth the amount of the Company’s nonperforming assets ("NPA") as of the dates indicated. “Performing nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:
(dollars in thousands)September 30,
2019		December 31,
2018
Performing nonaccrual loans$14,411  $22,689  
Nonperforming nonaccrual loans4,118  4,805  
Total nonaccrual loans18,529  27,494  
Loans 90 days past due and still accruing36  —  
Total nonperforming loans18,565  27,494  
Foreclosed assets1,546  2,280  
Total nonperforming assets$20,111  $29,774  
Nonperforming assets to total assets0.31 %0.47 %
Nonperforming loans to total loans0.44 %0.68 %
Allowance for loan losses to nonperforming loans170 %119 %
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed1.82 %2.11 %

September 30, 2019
(dollars in thousands)OriginatedPNCIPCITotal
Performing nonaccrual loans$9,000  $3,429  $1,982  $14,411  
Nonperforming nonaccrual loans2,224  1,598  296  4,118  
Total nonaccrual loans11,224  5,027  2,278  18,529  
Loans 90 days past due and still accruing36  —  —  36  
Total nonperforming loans11,260  5,027  2,278  18,565  
Foreclosed assets1,129  —  417  1,546  
Total nonperforming assets$12,389  $5,027  $2,695  $20,111  
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans$791  $—  $255  $1,046  
Nonperforming assets to total assets0.19 %0.08 %0.04 %0.31 %
Nonperforming loans to total loans0.27 %0.12 %0.05 %0.44 %
Allowance for loan losses to nonperforming loans276 %8 %0.26 %170 %
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed1.19 %3.53 %36.72 %1.82 %

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December 31, 2018
(dollars in thousands)OriginatedPNCIPCITotal
Performing nonaccrual loans$16,573  $1,269  $4,847  $22,689  
Nonperforming nonaccrual loans2,843  1,589  373  4,805  
Total nonaccrual loans19,416  2,858  5,220  27,494  
Loans 90 days past due and still accruing—  —  —  —  
Total nonperforming loans19,416  2,858  5,220  27,494  
Foreclosed assets1,490  —  790  2,280  
Total nonperforming assets$20,906  $2,858  $6,010  $29,774  
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans$800  $—  $—  $800  
Nonperforming assets to total assets0.33 %0.04 %0.09 %0.47 %
Nonperforming loans to total loans0.48 %0.07 %0.13 %0.68 %
Allowance for loan losses to nonperforming loans164 %23.3 %2.34 %119 %
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed1.39 %3.48 %33.69 %2.11 %
Changes in nonperforming assets during the three months ended September 30, 2019
(in thousands)Balance at
September 30, 2019		New NPA /
Valuation
Adjustments		Pay-downs
/Sales
/Upgrades
Charge-offs/ (1)
Write-downs
Transfers to
Foreclosed
Assets		Balance at
June 30, 2019
Real estate mortgage:
Residential$4,370  $1,226  $(1,206) $—  $—  $4,350  
Commercial6,040  6  (1,898) (746) —  8,678  
Consumer
Home equity lines2,600  816  (477) —  (215) 2,476  
Home equity loans2,063  235  (216) (3) —  2,047  
Other consumer64  59  (10) (59) —  74  
Commercial3,428  329  (383) (584) —  4,066  
Construction—  —  —  —  —  —  
Total nonperforming loans18,565  2,671  (4,190) (1,392) (215) 21,691  
Foreclosed assets1,546  (126) (91) 215  1,548  
Total nonperforming assets$20,111  $2,671  $(4,316) $(1,483) $—  $23,239  
(1) The table above does not include deposit overdraft charge-offs.
Nonperforming assets decreased during the third quarter of 2019 by $3,128,000 (13.4%) to $20,111,000 at September 30, 2019 compared to $23,239,000 at June 30, 2019. The decrease in nonperforming assets during the third quarter of 2019 was primarily the result of write-downs of $1,392,000 on nonperforming loans, and sales and pay-downs of non-performing loans of $4,190,000, which were partially offset by new nonperforming loans of $2,671,000.
The $2,671,000 of new nonperforming loans added during the third quarter of 2019 was mainly comprised of 2 loans to the same borrower totaling $985,000, and a single loan to a different borrower totaling $407,000. All 3 loans are secured by residential real estate which management believes are sufficiently secured by collateral. Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the specific loan loss reserves associated with these loans is sufficient as of September 30, 2019.
Loan charge-offs during the three months ended September 30, 2019
In the third quarter of 2019, the Company recorded $1,392,000 in loan charge-offs and $130,000 in deposit overdraft charge-offs less $476,000 in loan recoveries and $44,000 in deposit overdraft recoveries resulting in $1,002,000 of net charge-offs. Included in loan charge-offs were two loans with carrying balances of $1,023,000 related to one lending relationship that had long been identified as a fully reserved substandard credit where management determined that the collateral and estimated future cash flows were no longer supportive of the loan.
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Otherwise, charge-offs during the quarter were generally comprised of individual charges of less than $250,000 each. Generally, losses are triggered by non-performance by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying collateral less any estimated costs associated with the disposition of the collateral.
Changes in nonperforming assets during the nine months ended September 30, 2019
(in thousands):Balance at
September 30, 2019		New NPA /
Valuation
Adjustments		Pay-downs
/Sales
/Upgrades
Charge-offs/ (1)
Write-downs
Transfers to
Foreclosed
Assets		Balance at
December 31,
2018
Real estate mortgage:
Residential$4,370  $3,413  $(1,779) $(2) $(116) $2,854  
Commercial6,040  852  (9,112) (746) —  15,046  
Consumer
Home equity lines2,600  907  (841) —  (215) 2,749  
Home equity loans2,063  435  (1,332) (3) —  2,963  
Other consumer64  204  (51) (96) —  7  
Commercial3,428  1,728  (964) (1,211) —  3,875  
Construction—  —  —  —  —  —  
Total nonperforming loans18,565  7,539  (14,079) (2,058) (331) 27,494  
Foreclosed assets1,546  35  (1,009) (91) 331  2,280  
Total nonperforming assets$20,111  $7,574  $(15,088) $(2,149) $—  $29,774  
(1) The table above does not include deposit overdraft charge-offs.
Nonperforming assets decreased during the nine months ended 2019 by $9,663,000 (32.5%) to $20,111,000 at September 30, 2019 compared to $29,774,000 at December 31, 2018. The decrease in nonperforming assets during the nine months period ended September, 2019 was primarily the result of pay-downs, sales and upgrades of nonperforming loans totaling $14,079,000, and write-downs of $2,058,000 on nonperforming loans, that were partially offset by new nonperforming loans of $7,539,000.
The $14,079,000 in reduction of nonperforming loans during the nine months ended 2019 was mainly comprised of decreases within commercial real estate, and included payoffs of three loans to two relationships with a combined balance $6,818,000 and sale of one relationship totaling $1,782,000.
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Loan charge-offs during the nine months ended September 30, 2019
During the first nine months of 2019, the Company recorded $2,183,000 in loan charge-offs and $358,000 in deposit overdraft charge-offs less $2,742,000 in loan recoveries and $146,000 in deposit overdraft recoveries resulting in $347,000 of net recoveries.
The Components of the Allowance for Loan Losses
The following table sets forth the allowance for loan losses as of the dates indicated
(dollars in thousands)September 30,
2019		December 31,
2018
Allowance for originated and PNCI loan losses:
Environmental factors allowance$12,675  $11,577  
Formula allowance17,332  18,689  
Total allowance for originated and PNCI loan losses30,007  30,266  
Allowance for impaired loans1,524  2,194  
Allowance for PCI loan losses6  122  
Total allowance for loan losses$31,537  $32,582  
Allowance for loan losses to loans0.75 %0.81 %
For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Asset Quality and Loan Loss Provisioning” at “Results of Operations”, above. Based on the current conditions of the loan portfolio, management believes that the $31,537,000 allowance for loan losses at September 30, 2019 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The following table summarizes the allocation of the allowance for loan losses between loan types and by percentage of the total allowance for loan losses as of the dates indicated:
September 30, 2019December 31, 2018
Real estate mortgage$14,347  45.6 %$15,620  47.9 %
Consumer8,549  27.1 %8,375  25.7 %
Commercial5,687  18.0 %6,090  18.7 %
Real estate construction2,954  9.3 %2,497  7.7 %
Total allowance for loan losses$31,537  100.0 %$32,582  100.0 %
The following table summarizes the allocation of the allowance for loan losses as a percentage of the total loans for each loan category as of the dates indicated:
September 30, 2019December 31, 2018
Real estate mortgage$3,247,156  0.44 %$3,143,100  0.50 %
Consumer442,539  1.93 %418,982  2.00 %
Commercial278,458  2.04 %276,548  2.20 %
Real estate construction214,195  1.38 %183,384  1.36 %
Total allowance for loan losses$4,182,348  0.75 %$4,022,014  0.81 %
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The following table summarizes the activity in the allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended
September 30,		Nine months ended
September 30,
(in thousands)2019201820192018
Allowance for loan losses:
Balance at beginning of period$32,868  $29,524  $32,582  $30,323  
Provision for (reversal of) loan losses(329) 2,651  (1,392) 1,777  
Loans charged-off:
Real estate mortgage:
Residential—  (25) (2) (77) 
Commercial(746) —  (746) (15) 
Consumer:
Home equity lines—  (172) —  (276) 
Home equity loans(3) (23) (3) (23) 
Other consumer(188) (229) (548) (597) 
Commercial(585) (693) (1,242) (952) 
Construction:
Residential—  —  —  —  
Commercial—  —  —  —  
Total loans charged-off(1,522) (1,142) (2,541) (1,940) 
Recoveries of previously charged-off loans:
Real estate mortgage:
Residential48  —  53  —  
Commercial126  15  1,517  51  
Consumer:
Home equity lines27  151  305  677  
Home equity loans156  139  414  176  
Other consumer79  63  262  208  
Commercial84  202  337  331  
Construction:
Residential—  —  —  —  
Commercial—  —  —  —  
Total recoveries of previously charged-off loans520  570  2,888  1,443  
Net recoveries (charge-offs)(1,002) (572) 347  (497) 
Balance at end of period$31,537  $31,603  $31,537  $31,603  
Average total loans$4,142,602  $4,019,391  $4,070,568  $3,387,390  
Ratios (annualized):
Net charge-offs (recoveries) during period to average loans outstanding during period0.10 %0.06 %(0.03)%0.06 %
(Benefit from reversal of) provision for loan losses to average loans outstanding during period(0.03)%0.26 %(0.14)%0.21 %

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Foreclosed Assets, Net of Allowance for Losses
The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the period indicated:
(in thousands)Balance at
September 30,
2019		SalesValuation
Adjustments		Transfers
from Loans		Balance at
December 31,
2018
Land & Construction$417  $—  $(28) $—  $445  
Residential real estate1,129  (981) 37  331  1,742  
Commercial real estate—  (28) (65) —  93  
Total foreclosed assets$1,546  $(1,009) $(56) $331  $2,280  

Deposits
During the three and nine months ended September 30, 2019, the Company’s deposits decreased $46,766,000 and $71,059,000 respectively to $5,295,407,000. Included in the September 30, 2019 and December 31, 2018 certificate of deposit balances are $50,000,000 and $60,000,000, respectively, from the State of California. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and creditworthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company.
Off-Balance Sheet Arrangements
See Note 8 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s commitments and contingencies including off-balance-sheet arrangements.
Capital Resources
The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management.
The Company adopted and announced a stock repurchase plan on August 21, 2007 for the repurchase of up to 500,000 shares of the Company’s common stock from time to time as market conditions allow. The 500,000 shares authorized for repurchase under this plan represented approximately 3.2% of the Company’s approximately 15,815,000 common shares outstanding as of August 21, 2007. During the nine months ended September 30, 2019, the Company did not repurchase any shares under this plan. This plan has no stated expiration date for the repurchases. As of September 30, 2019, the Company had repurchased 196,566 shares under this plan, which left 303,434 shares available for repurchase under the plan. Shares that are repurchased in accordance with the provisions of a Company stock option plan or equity compensation plan are not counted against the number of shares repurchased under the repurchase plan adopted on August 21, 2007.
The Company’s primary capital resource is shareholders’ equity, which was $896,665,000 at September 30, 2019. This amount represents an increase of $69,292,000 (8.3%) from December 31, 2018, the net result of comprehensive income for the nine month period of $88,560,000, the effect of equity compensation vesting of $815,000, and the exercise of stock options of $2,646,000, that were partially offset by dividends paid of $18,285,000, and repurchase of common stock of $4,842,000. The Company’s ratio of equity to total assets was 14.0% and 13.0% as of September 30, 2019 and December 31, 2018, respectively. We believe that the Company and the Bank were in compliance with applicable minimum capital requirements set forth in the final Basel III Capital rules as of September 30, 2019. The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:
September 30, 2019December 31, 2018
RatioMinimum
Regulatory
Requirement		RatioMinimum
Regulatory
Requirement
Total capital15.23 %10.50 %14.40 %9.25 %
Tier I capital14.52 %8.50 %13.66 %7.25 %
Common equity Tier 1 capital13.37 %7.00 %12.49 %5.75 %
Leverage11.31 %4.00 %10.68 %4.00 %

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See Note 9 and Note 15 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.
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, 2019, cash at Federal Reserve and other banks in excess of reserve requirements and investment securities available for sale totaled $1,001,196,000 , or 15.7% of total assets. The Company’s profitability during the first nine months of 2019 generated cash flows from operations of $76,266,000 compared to $59,905,000 during the first nine months of 2018. Net cash provided by investing activities was $46,204,000 for the nine months ended September 30, 2019, compared to net cash used by investing activities of $112,873,000 during the nine months ending 2018. Financing activities used $90,956,000 during the nine months ended September 30, 2019, compared to net cash provided by financing activities of $74,083,000 during the nine months ended September 30, 2018. Deposit balance changes reduced available liquidity by $71,059,000 during the nine months ended September 30, 2019, compared to an increase of $92,051,000 for financing activity during the the same period in 2018. Dividends paid used $18,285,000 and $12,984,000 of cash during the nine months ended September 30, 2019 and 2018, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company’s assessment of market risk as of June 30, 2019 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 4. Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2019. Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.
During the three and nine months ended September 30, 2019, there were no changes in our internal controls or in other factors that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
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PART II – OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Item 1A - Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I-Item 1A-Risk Factors” in our Form 10-K for the year ended December 31, 2018 which are incorporated by reference herein. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows the repurchases made by the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the periods indicated:
Period
(a) Total number of
shares purchased (1)
(b) Average price
paid per share		(c) Total number of shares
purchased as of part
of publicly announced
plans or programs
(d) Maximum number
of shares that may
yet be purchased under
the plans or programs (2)
July 1 - 30, 20198,278  $37.78  —  303,434  
August 1 - 30, 201938,666  $36.20  —  303,434  
September 1 - 30, 2019—  —  —  303,434  
Total46,944  $36.48  —  303,434  
(1)Includes shares purchased by the Company’s Employee Stock Ownership Plan in open market purchases and tendered by employees pursuant to various other equity incentive plans. See Note 9 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchased under equity compensation plans.
(2)Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans. See Note 9 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchase plan.
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Item 6 – Exhibits
EXHIBIT INDEX
Exhibit 
No.		Exhibit
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document

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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 8, 2019/s/ Peter G. Wiese
Peter G. Wiese
Executive Vice President and Chief Financial Officer
(Duly authorized officer and principal financial and chief accounting officer)

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