TRICO BANCSHARES / - Quarter Report: 2019 March (Form 10-Q)

 

 

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: March 31, 2019

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

for the transition period from                  to                 .

Commission File Number: 000-10661

 

 

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

CALIFORNIA		94-2792841
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		TCBK		NASDAQ Global Select

Indicate 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: 30,451,030 shares outstanding as of May 6, 2019

 

 

 

TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS

 

				Page
PART I – FINANCIAL INFORMATION					2
		Item 1 – Financial Statements (Unaudited)			2
		Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
		Item 3 – Quantitative and Qualitative Disclosures about Market Risk			50
		Item 4 – Controls and Procedures			50
PART II – OTHER INFORMATION					50
		Item 1 – Legal Proceedings			50
		Item 1A – Risk Factors			50
		Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			50
		Item 6 – Exhibits			51
		Signatures			52
		Exhibits			53

 

1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)

 

		At March 31,				At December 31,
		2019				2018
Assets:
Cash and due from banks		$	105,103			$	119,781
Cash at Federal Reserve and other banks			213,605				107,752
Cash and cash equivalents			318,708				227,533
Investment securities:
Marketable equity securities			2,910				2,874
Available for sale debt securities			1,113,516				1,115,036
Held to maturity debt securities			431,016				444,936
Restricted equity securities			17,250				17,250
Loans held for sale			5,410				3,687
Loans			4,034,331				4,022,014
Allowance for loan losses			(32,064	)			(32,582	)
Total loans, net			4,002,267				3,989,432
Premises and equipment, net			89,275				89,347
Cash value of life insurance			117,841				117,318
Accrued interest receivable			20,431				19,412
Goodwill			220,972				220,972
Other intangible assets, net			27,849				29,280
Operating leases, right-of-use			30,942				—
Other assets			73,465				75,364
Total assets		$	6,471,852			$	6,352,441
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand		$	1,761,559			$	1,760,580
Interest-bearing			3,668,703				3,605,886
Total deposits			5,430,262				5,366,466
Accrued interest payable			2,195				1,997
Operating lease liability			30,204				—
Other liabilities			86,362				83,724
Other borrowings			12,466				15,839
Junior subordinated debt			57,085				57,042
Total liabilities			5,618,574				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 March 31, 2019 and December 31, 2018			—				—
Common stock, no par value: 50,000,000 shares authorized; 30,432,419 and 30,417,223 issued and outstanding at March 31, 2019 and December 31, 2018, respectively			542,340				541,762
Retained earnings			319,865				303,490
Accumulated other comprehensive loss, net of tax			(8,927	)			(17,879	)
Total shareholders’ equity			853,278				827,373
Total liabilities and shareholders’ equity		$	6,471,852			$	6,352,441

See accompanying notes to unaudited condensed consolidated financial statements.

 

2

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)

 

		Three months ended
		March 31,
		2019				2018
Interest and dividend income:
Loans, including fees		$	54,398			$	38,049
Investments:
Taxable securities			10,555				7,322
Tax exempt securities			1,073				1,041
Dividends			360				336
Interest bearing cash at Federal Reserve and other banks			1,071				373
Total interest and dividend income			67,457				47,121
Interest expense:
Deposits			2,719				1,096
Other borrowings			13				342
Junior subordinated debt			855				697
Total interest expense			3,587				2,135
Net interest income			63,870				44,986
Benefit from reversal of provision for loan losses			(1,600	)			(236	)
Net interest income after benefit from reversal of provision for loan losses			65,470				45,222
Noninterest income:
Service charges and fees			9,070				9,356
Gain on sale of loans			412				626
Asset management and commission income			642				876
Increase in cash value of life insurance			775				608
Other			965				824
Total noninterest income			11,864				12,290
Noninterest expense:
Salaries and related benefits			25,128				21,652
Other			20,385				16,510
Total noninterest expense			45,513				38,162
Income before provision for income taxes			31,821				19,350
Provision for income taxes			9,095				5,440
Net income		$	22,726			$	13,910
Earnings per share:
Basic		$	0.75			$	0.61
Diluted		$	0.74			$	0.60

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)

 

		Three months ended
		March 31,
		2019				2018
Net income		$	22,726			$	13,910
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period			8,952				(11,026	)
Change in minimum pension liability			—				80
Other comprehensive income (loss)			8,952				(10,946	)
Comprehensive income		$	31,678			$	2,964

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

 

														Accumulated
		Shares of												Other
		Common				Common				Retained				Comprehensive
		Stock				Stock				Earnings				Income (Loss)				Total
Balance at January 1, 2018			22,955,963			$	255,836			$	255,200			$	(5,228	)		$	505,808
Net income											13,910								13,910
Adoption ASU 2016-01											(62	)			62				—
Adoption ASU 2018-02											1,093				(1,093	)			—
Other comprehensive loss															(10,946	)			(10,946	)
Stock option vesting							37												37
RSU vesting							238												238
PSU vesting							116												116
RSUs released			494																—
Repurchase of common stock			(134	)			(1	)			(3	)							(4	)
Dividends paid ($ 0.17 per share)											(3,903	)							(3,903	)
Balance at March 31, 2018			22,956,323			$	256,226			$	266,235			$	(17,205	)		$	505,256
Balance at January 1, 2019			30,417,223			$	541,762			$	303,490			$	(17,879	)		$	827,373
Net income											22,726								22,726
Other comprehensive income															8,952				8,952
Stock options exercised			41,000				647												647
RSU vesting							278												278
PSU vesting							119												119
RSUs released			355
Repurchase of common stock			(26,159	)			(466	)			(569	)							(1,035	)
Dividends paid ($ 0.19 per share)											(5,782	)							(5,782	)
Balance at March 31, 2019			30,432,419			$	542,340			$	319,865			$	(8,927	)		$	853,278

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

 

		For the three months ended March 31,
		2019				2018
Operating activities:
Net income		$	22,726			$	13,910
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization			1,838				1,613
Amortization of intangible assets			1,431				339
Reversal of provision for loan losses			(1,600	)			(236	)
Amortization of investment securities premium, net			571				700
Originations of loans for resale			(18,119	)			(20,332	)
Proceeds from sale of loans originated for resale			16,689				23,270
Gain on sale of loans			(412	)			(626	)
Change in market value of mortgage servicing rights			645				(111	)
Provision for losses on foreclosed assets			—				90
Gain on transfer of loans to foreclosed assets			(98	)			—
Gain on sale of foreclosed assets			(99	)			(371	)
Loss on disposal of fixed assets			38				13
Increase in cash value of life insurance			(775	)			(608	)
Gain on life insurance death benefit			(32	)			—
(Gain) loss on marketable equity securities			(36	)			48
Equity compensation vesting expense			397				391
Change in:
Interest receivable			(1,019	)			1,365
Interest payable			198				28
Other assets and liabilities, net			(288	)			4,231
Net cash from operating activities			22,055				23,714
Investing activities:
Proceeds from maturities of securities available for sale			15,133				15,643
Proceeds from maturities of securities held to maturity			13,684				18,535
Purchases of securities available for sale			(1,238	)			(39,647	)
Loan origination and principal collections, net			(11,351	)			(54,682	)
Proceeds from sale of other real estate owned			278				1,943
Proceeds from sale of premises and equipment			11				—
Purchases of premises and equipment			(1,650	)			(2,200	)
Net cash from investing activities			14,867				(60,408	)
Financing activities:
Net increase in deposits			63,796				75,273
Net change in other borrowings			(3,373	)			(57,125	)
Repurchase of common stock, net			(388	)			—
Dividends paid			(5,782	)			(3,903	)
Net cash used by financing activities			54,253				14,245
Net change in cash and cash equivalents			91,175				(22,449	)
Cash and cash equivalents and beginning of year			227,533				205,428
Cash and cash equivalents at end of year		$	318,708			$	182,979
Supplemental disclosure of noncash activities:
Unrealized gain (loss) on securities available for sale		$	12,710			$	(15,628	)
Loans transferred to foreclosed assets			116				—
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes			647				4
Supplemental disclosure of cash flow activity:
Cash paid for interest expense			3,389				2,107
Cash paid for income taxes			—				—

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

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 $1,714,000 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.

Cash and Cash Equivalents

Net cash flows are reported for loan and deposit transactions and other borrowings. For purposes of the consolidated statement of cash flows, cash, due from banks with original maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents.

Accounting Standards Adopted in 2019

The Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02, which among other things, requires lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. The FASB has issued incremental guidance to Topic 842 standard through ASU No. 2018-11, 2018-20, and 2019-01. The Company has elected to use the transition relief approach as provided in ASU 2018-11, which permits the Company to use January 1, 2019 as both the application date and the adoption date, rather than the modified retrospective approach which would have required an application date of January 1, 2017 and adoption date of January 1, 2019. The Company also elected certain relief options offered within the new standard, which include the package of practical expedients, the option not to recognize a right-of-use asset (ROUA) and lease liability that arise from short-term leases (i.e. leases with terms of 12 months or less), and the option of hindsight when determining lease term. Substantially all of the Company’s lease agreements are considered operating

 

6

leases and were not previously recognized on the Company’s balance sheets. As of January 1, 2019, the Company recorded a ROUA and corresponding lease liability for all applicable operating leases. While the guidance increased the Company’s gross assets and liabilities, the adoption of ASU 2016-02 did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 6 for more information.

The FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Topic 310). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 was effective for the Company on January 1, 2019, and did not have an impact on the Company’s consolidated financial statements.

Accounting Standards Pending Adoption

The FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 is the final guidance on the new current expected credit loss (‘‘CECL’’) model. ASU 2016-13, among other things, requires the incurred loss impairment methodology in current GAAP be replaced with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (‘‘HTM’’) debt securities. ASU 2016-13 amends the accounting for credit losses on available-for-sale securities (‘‘AFS’’), whereby credit losses will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, ASU 2016-13 requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. ASU 2016-13 allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). ASU 2016-13 will be effective for the Company on January 1, 2020, and early adoption is permitted. While the Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. While detailed modeling efforts are ongoing, the validation of expected credit loss estimates will likely not be available until late in 2019. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.

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

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a significant impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, “Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020; early adoption is permitted. As ASU 2018-14 only revises disclosure requirements, it will not have a significant impact on the Company’s consolidated financial statements.

 

7

Note 2—Business Combinations

Merger with FNB Bancorp

On July 6, 2018, the Company completed the acquisition of FNB Bancorp (“FNBB”) for an aggregate transaction value of $291,132,000. FNBB was merged into the Company, and the Company issued 7,405,277 shares of common stock to the former shareholders of FNBB. FNBB’s subsidiary, First National Bank of Northern California, merged into the Bank on the same day. The Company also paid $6.7 million to settle and retire all FNBB stock options outstanding as of the acquisition date. Upon the consummation of the merger, the Company added 12 branches within San Mateo, San Francisco, and Santa Clara counties.

In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core deposit intangibles on the acquisition date. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase prices accounting adjustments including goodwill are all non-taxable and /or non-deductible. Acquisition related costs of $476,000 are included in the consolidated statements of income for the three months ended March 31, 2018. There have been no acquisition costs incurred during the three months ended March 31, 2019.

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

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

 

		FNB Bancorp July 6, 2018
Fair value of consideration transferred:
Fair value of shares issued		$	284,437
Cash consideration			6,695
Total fair value of consideration transferred			291,132
Assets acquired:
Cash and cash equivalents			37,308
Securities available for sale			335,667
Restricted equity securities			7,723
Loans			834,683
Premises and equipment			30,522
Cash value of life insurance			16,817
Core deposit intangible			27,605
Other assets			16,214
Total assets acquired			1,306,539
Liabilities assumed:
Deposits			991,935
Other liabilities			15,133
Short-term borrowings—Federal Home Loan Bank			165,000
Total liabilities assumed			1,172,068
Total net assets acquired			134,471
Goodwill recognized		$	156,661

 

8

A summary of the estimated fair value adjustments resulting in the goodwill recorded in the FNB Bancorp acquisition are presented below (in thousands):

 

		FNB Bancorp July 6, 2018
Value of stock consideration paid to FNB Bancorp Shareholders		$	284,437
Cash consideration			6,695
Less:
Cost basis net assets acquired			114,030
Fair value adjustments:
Investments			(1,081	)
Loans			(22,390	)
Premises and Equipment			21,590
Core deposit intangible			27,327
Deferred income taxes			(6,394	)
Other			1,389
Goodwill		$	156,661

The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired (PNCI loans) as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans (PCI loans), which have shown evidence of credit deterioration since origination. The gross contractual amounts receivable and fair value for PNCI loans as of the acquisition date was $866,189,000 and $833,381,000, respectively. The gross contractual amounts receivable and fair value for PCI loans as of the acquisition date was $1,683,000 and $1,302,000, respectively. At the acquisition date, the Company was unable to estimate the expected contractual cash flows to be collected from the purchased credit impaired loans.

 

9

Note 3—Investment Securities

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

 

		March 31, 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		$	631,914			$	1,862			$	(6,676	)		$	627,100
Obligations of states and political subdivisions			128,706				1,242				(599	)			129,349
Corporate bonds			4,394				84				—				4,478
Asset backed securities			356,766				141				(4,318	)			352,589
Total debt securities available for sale		$	1,121,780			$	3,329			$	(11,593	)		$	1,113,516
Debt Securities Held to Maturity
Obligations of U.S. government agencies		$	416,418			$	2,190			$	(2,581	)		$	416,027
Obligations of states and political subdivisions			14,598				173				(25	)			14,746
Total debt securities held to maturity		$	431,016			$	2,363			$	(2,606	)		$	430,773

 

		December 31, 2018
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies		$	647,288			$	771			$	(18,078	)		$	629,981
Obligations of states and political subdivisions			128,890				294				(3,112	)			126,072
Corporate bonds			4,381				97				—				4,478
Asset backed securities			355,451				73				(1,019	)			354,505
Total debt securities available for sale		$	1,136,010			$	1,235			$	(22,209	)		$	1,115,036
Debt Securities Held to Maturity
Obligations of U.S. government agencies		$	430,343			$	327			$	(7,745	)		$	422,925
Obligations of states and political subdivisions			14,593				82				(230	)			14,445
Total debt securities held to maturity		$	444,936			$	409			$	(7,975	)		$	437,370

There were no sales of investment securities during the three months ended March 31, 2019 and 2018. Investment securities with an aggregate carrying value of $587,233,000 and $597,591,000 at March 31, 2019 and December 31, 2018, respectively, were pledged as collateral for specific borrowings, lines of credit or local agency deposits.

 

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The amortized cost and estimated fair value of debt securities at March 31, 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 March 31, 2019, obligations of U.S. government corporations and agencies with a cost basis totaling $1,048,332,000 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 March 31, 2019, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 5.5 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

 

Debt Securities		Available for Sale								Held to Maturity
(In thousands)		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Due in one year		$	2,413			$	2,418			$	—			$	—
Due after one year through five years			10,584				10,798				1,246				1,260
Due after five years through ten years			18,130				18,624				23,944				23,899
Due after ten years			1,090,653				1,081,676				405,826				405,614
Totals		$	1,121,780			$	1,113,516			$	431,016			$	430,773

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

 

		Less than 12 months								12 months or more								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
March 31, 2019		(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies		$	481			$	(2	)		$	496,424			$	(6,674	)		$	496,905			$	(6,676	)
Obligations of states and political subdivisions			24,644				(598	)			566				(1	)			25,210				(599	)
Asset backed securities			330,078				(4,318	)			—				—				330,078				(4,318	)
Total debt securities available for sale		$	355,203			$	(4,918	)		$	496,990			$	(6,675	)		$	852,193			$	(11,593	)
Debt Securities Held to Maturity
Obligations of U.S. government agencies		$	—			$	—			$	224,551			$	(2,581	)		$	224,551			$	(2,581	)
Obligations of states and political subdivisions			—				—				5,891				(25	)			5,891				(25	)
Total debt securities held to maturity		$	—			$	—			$	230,442			$	(2,606	)		$	230,442			$	(2,606	)

 

		Less than 12 months								12 months or more								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
December 31, 2018		(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies		$	171,309			$	(3,588	)		$	394,630			$	(14,490	)		$	565,939			$	(18,078	)
Obligations of states and political subdivisions			63,738				(1,541	)			20,719				(1,571	)			84,457				(3,112	)
Asset backed securities			101,386				(1,019	)			—				—				101,386				(1,019	)
Total debt securities available for sale		$	336,433			$	(6,148	)		$	415,349			$	(16,061	)		$	751,782			$	(22,209	)
Debt Securities Held to Maturity
Obligations of U.S. government agencies		$	223,810			$	(2,619	)		$	158,648			$	(5,126	)		$	382,458			$	(7,745	)
Obligations of states and political subdivisions			5,786				(114	)			4,042				(116	)			9,828				(230	)
Total debt securities held to maturity		$	229,596			$	(2,733	)		$	162,690			$	(5,242	)		$	392,286			$	(7,975	)

Obligations of U.S. government agencies: Unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At March 31, 2019, 93 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of (1.3%) from the Company’s amortized cost basis.

 

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Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At March 31, 2019, 33 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of (2.0%) from the Company’s amortized cost basis.

Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors in these types of securities. At the time of purchase, each of these securities was rated AA or AAA and through March 31, 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 March 31, 2019, 28 asset backed securities had unrealized losses with aggregate depreciation of (1.3%) from the Company’s amortized cost basis.

Marketable equity securities: All unrealized losses recognized during the reporting period were for equity securities still held at March 31, 2019.

Note 4 – Loans

A summary of loan balances follows (in thousands):

 

		March 31, 2019
		Originated				PNCI				PCI				Total
Mortgage loans on real estate:
Residential 1-4 family		$	357,559			$	163,268			$	1,585			$	522,412
Commercial			1,929,508				671,397				6,022				2,606,927
Total mortgage loan on real estate			2,287,067				834,665				7,607				3,129,339
Consumer:
Home equity lines of credit			279,075				38,090				1,088				318,253
Home equity loans			31,245				3,356				436				35,037
Other			45,020				20,001				41				65,062
Total consumer loans			355,340				61,447				1,565				418,352
Commercial			227,314				39,295				2,554				269,163
Construction:
Residential			115,688				30,096				—				145,784
Commercial			64,576				7,117				—				71,693
Total construction			180,264				37,213				—				217,477
Total loans, net of deferred loan fees and discounts		$	3,049,985			$	972,620			$	11,726			$	4,034,331
Total principal balance of loans owed, net of charge-offs		$	3,059,398			$	1,007,678			$	18,376			$	4,085,452
Unamortized net deferred loan fees			(9,413	)			—				—				(9,413	)
Discounts to principal balance of loans owed, net of charge-offs			—				(35,058	)			(6,650	)			(41,708	)
Total loans, net of unamortized deferred loan fees and discounts		$	3,049,985			$	972,620			$	11,726			$	4,034,331
Allowance for loan losses		$	(31,088	)		$	(969	)		$	(7	)		$	(32,064	)

 

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		December 31, 2018
		Originated				PNCI				PCI				Total
Mortgage loans on real estate:
Residential 1-4 family		$	343,796			$	169,792			$	1,674			$	515,262
Commercial			1,910,981				708,401				8,456				2,627,838
Total mortgage loan on real estate			2,254,777				878,193				10,130				3,143,100
Consumer:
Home equity lines of credit			284,453				40,957				1,167				326,577
Home equity loans			32,660				3,585				439				36,684
Other			34,020				21,659				42				55,721
Total consumer loans			351,133				66,201				1,648				418,982
Commercial			228,635				45,468				2,445				276,548
Construction:
Residential			90,703				30,593				—				121,296
Commercial			56,208				5,880				—				62,088
Total construction			146,911				36,473				—				183,384
Total loans, net of deferred loan fees and discounts		$	2,981,456			$	1,026,335			$	14,223			$	4,022,014
Total principal balance of loans owed, net of charge-offs		$	2,991,324			$	1,062,655			$	21,265			$	4,075,244
Unamortized net deferred loan fees			(9,868	)			—				—				(9,868	)
Discounts to principal balance of loans owed, net of charge-offs			—				(36,320	)			(7,042	)			(43,362	)
Total loans, net of unamortized deferred loan fees and discounts		$	2,981,456			$	1,026,335			$	14,223			$	4,022,014
Allowance for loan losses		$	(31,793	)		$	(667	)		$	(122	)		$	(32,582	)

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

 

		Three months ended March 31,
		2019				2018
Change in accretable yield:
Balance at beginning of period		$	6,059			$	6,137
Accretion to interest income			(301	)			(255	)
Reclassification (to) from nonaccretable difference			(11	)			140
Balance at end of period		$	5,747			$	6,022

 

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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 March 31, 2019
(in thousands)		Beginning Balance				Charge-offs				Recoveries				Provision (benefit)				Ending Balance
Mortgage loans on real estate:
Residential 1-4 family		$	2,676			$	—			$	2			$	(178	)		$	2,500
Commercial			12,944				—				1,381				(1,995	)			12,330
Total mortgage loans on real estate			15,620				—				1,383				(2,173	)			14,830
Consumer:
Home equity lines of credit			6,042				—				95				(122	)			6,015
Home equity loans			1,540				—				87				(341	)			1,286
Other			793				(207	)			75				379				1,040
Total consumer loans			8,375				(207	)			257				(84	)			8,341
Commercial			6,090				(519	)			168				339				6,078
Construction:
Residential			1,834				—				—				574				2,408
Commercial			663				—				—				(256	)			407
Total construction			2,497				—				—				318				2,815
Total		$	32,582			$	(726	)		$	1,808			$	(1,600	)		$	32,064

 

		Allowance for Loan Losses – As of March 31, 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		$	2,445			$	55			$	—			$	2,500
Commercial			12,293				36				1				12,330
Total mortgage loans on real estate			14,738				91				1				14,830
Consumer:
Home equity lines of credit			5,879				130				6				6,015
Home equity loans			1,216				70				—				1,286
Other			1,023				17				—				1,040
Total consumer loans			8,118				217				6				8,341
Commercial			4,636				1,442				—				6,078
Construction:
Residential			2,408				—				—				2,408
Commercial			407				—				—				407
Total construction			2,815				—				—				2,815
Total		$	30,307			$	1,750			$	7			$	32,064

 

		Loans, Net of Unearned fees – As of March 31, 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		$	517,038			$	3,789			$	1,585			$	522,412
Commercial			2,592,994				7,911				6,022				2,606,927
Total mortgage loans on real estate			3,110,032				11,700				7,607				3,129,339
Consumer:
Home equity lines of credit			314,609				2,556				1,088				318,253
Home equity loans			32,618				1,983				436				35,037
Other			64,891				130				41				65,062
Total consumer loans			412,118				4,669				1,565				418,352
Commercial			261,933				4,676				2,554				269,163
Construction:
Residential			145,784				—				—				145,784
Commercial			71,693				—				—				71,693
Total construction			217,477				—				—				217,477
Total		$	4,001,560			$	21,045			$	11,726			$	4,034,331

 

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