UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the quarterly period ended: June 30, 2019​​​​​​​

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

for the transition period from                     to                     .

Commission File Number: 000-10661

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

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

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

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

☒	Large accelerated filer​​​​​​​	☐	Accelerated filer
☐	Non-accelerated filer	☐	Smaller reporting company
☐	Emerging growth company​​​​​​​

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

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

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

Common stock, no par value: 30,509,637 shares outstanding as of August 5, 2019

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		39
Item 3 – Quantitative and Qualitative Disclosures about Market Risk		58
Item 4 – Controls and Procedures		58
PART II – OTHER INFORMATION		58
Item 1 – Legal Proceedings		58
Item 1A – Risk Factors		58
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		58
Item 6 – Exhibits		59
Signatures		60
Exhibits

1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)

	At June 30, 2019			At December 31, 2018
Assets:
Cash and due from banks	$	106,939		$	119,781
Cash at Federal Reserve and other banks		68,643			107,752
Cash and cash equivalents		175,582			227,533
Investment securities:
Marketable equity securities		2,952			2,874
Available for sale debt securities		1,133,994			1,115,036
Held to maturity debt securities		412,524			444,936
Restricted equity securities		17,250			17,250
Loans held for sale		5,875			3,687
Loans		4,103,687			4,022,014
Allowance for loan losses		(32,868	)		(32,582	)
Total loans, net		4,070,819			3,989,432
Premises and equipment, net		88,534			89,347
Cash value of life insurance		116,606			117,318
Accrued interest receivable		20,990			19,412
Goodwill		220,972			220,972
Other intangible assets, net		26,418			29,280
Operating leases, right-of-use		30,030			—
Other assets		72,626			75,364
Total assets	$	6,395,172		$	6,352,441
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand	$	1,780,339		$	1,760,580
Interest-bearing		3,561,834			3,605,886
Total deposits		5,342,173			5,366,466
Accrued interest payable		2,665			1,997
Operating lease liability		29,434			—
Other liabilities		74,590			83,724
Other borrowings		13,292			15,839
Junior subordinated debt		57,132			57,042
Total liabilities		5,519,286			5,525,068
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at June 30, 2019 and December 31, 2018		—			—
Common stock, no par value: 50,000,000 shares authorized; 30,502,757 and 30,417,223 issued and outstanding at June 30, 2019 and December 31, 2018, respectively		542,939			541,762
Retained earnings		335,145			303,490
Accumulated other comprehensive loss, net of tax		(2,198	)		(17,879	)
Total shareholders’ equity		875,886			827,373
Total liabilities and shareholders’ equity	$	6,395,172		$	6,352,441

See accompanying notes to unaudited condensed consolidated financial statements.
 

2

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)

	Three months ended June 30,					Six months ended June 30,
	2019		2018			2019			2018
Interest and dividend income:
Loans, including fees	$	55,491	$	39,304		$	109,889		$	77,353
Investments:
Taxable securities		10,457		7,438			21,012			14,760
Tax exempt securities		1,061		1,042			2,134			2,083
Dividends		305		298			665			634
Interest bearing cash at Federal Reserve and other banks		866		396			1,937			769
Total interest and dividend income		68,180		48,478			135,637			95,599
Interest expense:
Deposits		2,999		1,234			5,718			2,330
Other borrowings		37		586			50			928
Junior subordinated debt		829		789			1,684			1,486
Total interest expense		3,865		2,609			7,452			4,744
Net interest income		64,315		45,869			128,185			90,855
Provision for (reversal of) loan losses		537		(638	)		(1,063	)		(874	)
Net interest income after provision for (benefit from reversal of) loan losses		63,778		46,507			129,248			91,729
Noninterest income:
Service charges and fees		10,128		9,228			19,198			18,584
Gain on sale of loans		575		666			987			1,292
Asset management and commission income		739		810			1,381			1,686
Increase in cash value of life insurance		746		656			1,521			1,264
Other		1,390		814			2,355			1,638
Total noninterest income		13,578		12,174			25,442			24,464
Noninterest expense:
Salaries and related benefits		26,719		21,453			51,847			43,105
Other		20,133		16,417			40,518			32,927
Total noninterest expense		46,852		37,870			92,365			76,032
Income before provision for income taxes		30,504		20,811			62,325			40,161
Provision for income taxes		7,443		5,782			16,538			11,222
Net income	$	23,061	$	15,029		$	45,787		$	28,939
Earnings per share:
Basic	$	0.76	$	0.65		$	1.50		$	1.26
Diluted	$	0.75	$	0.65		$	1.49		$	1.24

See accompanying notes to unaudited condensed consolidated financial statements.

3

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)

	Three months ended June 30,					Six months ended June 30,
	2019		2018			2019		2018
Net income	$	23,061	$	15,029		$	45,787	$	28,939
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period		6,729		(3,998	)		15,681		(15,024	)
Change in minimum pension liability		—		80			—		160
Other comprehensive income (loss)		6,729		(3,918	)		15,681		(14,864	)
Comprehensive income	$	29,790	$	11,111		$	61,468	$	14,075

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

	Shares of Common Stock			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at March 31, 2019		30,432,419		$	542,340		$	319,865		$	(8,927	)	$	853,278
Net income								23,061						23,061
Other comprehensive income											6,729			6,729
Stock option vesting														—
Stock options exercised		116,000			1,853									1,853
RSU vesting					289									289
PSU vesting					129									129
RSUs released		25,856												—
PSUs released		22,237												—
Repurchase of common stock		(93,755	)		(1,672	)		(1,988	)					(3,660	)
Dividends paid ($ 0.19 per share)								(5,793	)					(5,793	)
Three months ending June 30, 2019		30,502,757		$	542,939		$	335,145		$	(2,198	)	$	875,886
Balance at January 1, 2019		30,417,223		$	541,762		$	303,490		$	(17,879	)	$	827,373
Net income								45,787						45,787
Other comprehensive income											15,681			15,681
Stock option vesting														—
Stock options exercised		157,000			2,500									2,500
RSU vesting					567									567
PSU vesting					248									248
RSUs released		26,211												—
PSUs released		22,237												—
Repurchase of common stock		(119,914	)		(2,138	)		(2,557	)					(4,695	)
Dividends paid ($ 0.38 per share)								(11,575	)					(11,575	)
Six months ending June 30, 2019		30,502,757		$	542,939		$	335,145		$	(2,198	)	$	875,886

See accompanying notes to unaudited condensed consolidated financial statements.

4

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

	Shares of Common Stock			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at March 31, 2018		22,956,323		$	256,226		$	266,235		$	(17,205	)	$	505,256
Net income								15,029						15,029
Adoption ASU 2016-01
Adoption ASU 2018-02
Other comprehensive loss											(3,918	)		(3,918	)
Stock option vesting					17									17
Stock options exercised		14,500			223									223
RSU vesting					233									233
PSU vesting					81									81
RSUs released		24,904												—
PSUs released		25,512												—
Repurchase of common stock		(17,086	)		(190	)		(477	)					(667	)
Dividends paid ($ 0.17 per share)								(3,910	)					(3,910	)
Three months ending June 30, 2018		23,004,153		$	256,590		$	276,877		$	(21,123	)	$	512,344
Balance at January 1, 2018		22,955,963		$	255,836		$	255,200		$	(5,228	)	$	505,808
Net income								28,939						28,939
Adoption ASU 2016-01								(62	)		62			—
Adoption ASU 2018-02								1,093			(1,093	)		—
Other comprehensive loss											(14,864	)		(14,864	)
Stock option vesting					54									54
Stock options exercised		14,500			223									223
RSU vesting					471									471
PSU vesting					197									197
RSUs released		25,398												—
PSUs released		25,512												—
Repurchase of common stock		(17,220	)		(191	)		(480	)					(671	)
Dividends paid ($ 0.34 per share)								(7,813	)					(7,813	)
Six months ending June 30, 2018		23,004,153		$	256,590		$	276,877		$	(21,123	)	$	512,344

See accompanying notes to unaudited condensed consolidated financial statements.

5

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited) 

	For the six months ended June 30,
	2019			2018
Operating activities:
Net income	$	45,787		$	28,939
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization		3,582			3,229
Amortization of intangible assets		2,862			678
Reversal of provision for loan losses		(1,063	)		(874	)
Amortization of investment securities premium, net		1,186			1,340
Originations of loans for resale		(46,936	)		(43,389	)
Proceeds from sale of loans originated for resale		45,407			45,437
Gain on sale of loans		(987	)		(1,292	)
Change in market value of mortgage servicing rights		1,197			(75	)
Provision for losses on foreclosed assets		62​​​​​​​			90
Gain on transfer of loans to foreclosed assets		(97	)		—
Gain on sale of foreclosed assets		(199	)		(388	)
Loss on disposal of fixed assets		80			54
Increase in cash value of life insurance		(1,521	)		(1,264	)
Gain on life insurance death benefit		(728	)		—
(Gain) loss on marketable equity securities		(78	)		70
Equity compensation vesting expense		815			722
Change in:
Interest receivable		(1,578	)		(481	)
Interest payable		668			245
Other assets and liabilities, net		(14,592	)		(97	)
Net cash from operating activities		33,867			32,944
Investing activities:
Proceeds from maturities of securities available for sale		39,845			32,906
Proceeds from maturities of securities held to maturity		31,938			36,587
Purchases of securities available for sale		(37,253	)		(81,300	)
Loan origination and principal collections, net		(80,440	)		(131,073	)
Proceeds from sale of other real estate owned		1,082			2,150
Proceeds from sale of premises and equipment		11			36
Purchases of premises and equipment		(2,586	)		(4,119	)
Net cash from investing activities		(47,403	)		(144,813	)
Financing activities:
Net change in deposits		(24,293	)		68,091
Net change in other borrowings		(2,547	)		30,673
Repurchase of common stock, net		—			(448	)
Dividends paid		(11,575	)		(7,813	)
Net cash used by financing activities		(38,415	)		90,503
Net change in cash and cash equivalents		(51,951	)		(21,366	)
Cash and cash equivalents and beginning of year		227,533			205,428
Cash and cash equivalents at end of year	$	175,582		$	184,062
Supplemental disclosure of noncash activities:
Unrealized gain (loss) on securities available for sale	$	22,263		$	(21,304	)
Loans transferred to foreclosed assets		116			—
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes		4,695			671
Obligations incurred in conjunction with leased assets		156			—​​​​​​​
Supplemental disclosure of cash flow activity:
Cash paid for interest expense		6,982			4,499
Cash paid for income taxes		22,000			8,525

See accompanying notes to unaudited condensed consolidated financial statements.

6

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 –Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

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

The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,716,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidtated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”). The Company believes that the disclosures made are adequate to make the inforamtion not misleading.

Segment and Significant Group Concentration of Credit Risk

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

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.

Cash and Cash Equivalents

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

Accounting Standards Adopted in 2019

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

7

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

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

Accounting Standards Pending Adoption

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

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

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

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

8

Note 2 - Business Combinations

Merger with FNB Bancorp

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

In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core deposit intangibles on the acquisition date. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase price accounting adjustments including goodwill are all non-taxable and /or non-deductible. Acquisition related costs of $601,000 and $1,077,000 are included in the consolidated statements of income for the three and six months ended June 30, 2018. There have been no acquisition costs incurred during the six months ended June 30, 2019. 

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

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

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

9

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

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

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

10

Note 3 - Investment Securities

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

	June 30, 2019
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	627,996	$	5,193	$	(2,278	)	$	630,911
Obligations of states and political subdivisions		123,626		2,462		(108	)		125,980
Corporate bonds		4,407		114		—			4,521
Asset backed securities		376,676		252		(4,346	)		372,582
Total debt securities available for sale	$	1,132,705	$	8,021	$	(6,732	)	$	1,133,994
Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	398,714	$	3,661	$	(1,199	)	$	401,176
Obligations of states and political subdivisions		13,810		290		—			14,100
Total debt securities held to maturity	$	412,524	$	3,951	$	(1,199	)	$	415,276
	December 31, 2018
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	647,288	$	771	$	(18,078	)	$	629,981
Obligations of states and political subdivisions		128,890		294		(3,112	)		126,072
Corporate bonds		4,381		97		—			4,478
Asset backed securities		355,451		73		(1,019	)		354,505
Total debt securities available for sale	$	1,136,010	$	1,235	$	(22,209	)	$	1,115,036
Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	430,343	$	327	$	(7,745	)	$	422,925
Obligations of states and political subdivisions		14,593		82		(230	)		14,445
Total debt securities held to maturity	$	444,936	$	409	$	(7,975	)	$	437,370

There were no sales of investment securities during the six months ended June 30, 2019 and 2018. Investment securities with an aggregate carrying value of $569,296,000 and $597,591,000 at June 30, 2019 and December 31, 2018, respectively, were pledged as collateral for specific borrowings, lines of credit or local agency deposits.

11

The amortized cost and estimated fair value of debt securities at June 30, 2019 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2019, obligations of U.S. government corporations and agencies with a cost basis totaling $1,026,710,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At June 30, 2019, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 5.1 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

Debt Securities	Available for Sale				Held to Maturity
(In thousands)	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year	$	2,415	$	2,421	$	—	$	—
Due after one year through five years		14,287		14,636		1,254		1,269
Due after five years through ten years		44,325		45,235		21,922		22,166
Due after ten years		1,071,678		1,071,702		389,348		391,841
Totals	$	1,132,705	$	1,133,994	$	412,524	$	415,276

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

	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(in thousands)
June 30, 2019
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	—	$	—		$	247,286	$	(2,278	)	$	247,286	$	(2,278	)
Obligations of states and political subdivisions		5,208		(108	)		—		—			5,208		(108	)
Corporate Bonds		—		—			—		—			—		—
Asset backed securities		340,012		(4,346	)		—		—			340,012		(4,346	)
Total debt securities available for sale	$	345,220	$	(4,454	)	$	247,286	$	(2,278	)	$	592,506	$	(6,732	)
Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	—	$	—		$	110,702	$	(1,199	)	$	110,702	$	(1,199	)
Obligations of states and political subdivisions		—		—			—		—			—		—
Total debt securities held to maturity	$	—	$	—		$	110,702	$	(1,199	)	$	110,702	$	(1,199	)
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(in thousands)
December 31, 2018
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	171,309	$	(3,588	)	$	394,630	$	(14,490	)	$	565,939	$	(18,078	)
Obligations of states and political subdivisions		63,738		(1,541	)		20,719		(1,571	)		84,457		(3,112	)
Asset backed securities		101,386		(1,019	)		—		—			101,386		(1,019	)
Total debt securities available for sale	$	336,433	$	(6,148	)	$	415,349	$	(16,061	)	$	751,782	$	(22,209	)
Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	223,810	$	(2,619	)	$	158,648	$	(5,126	)	$	382,458	$	(7,745	)
Obligations of states and political subdivisions		5,786		(114	)		4,042		(116	)		9,828		(230	)
Total debt securities held to maturity	$	229,596	$	(2,733	)	$	162,690	$	(5,242	)	$	392,286	$	(7,975	)

Obligations of U.S. government agencies: Unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2019, 46 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of (1.0%) from the Company’s amortized cost basis.

12

Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2019, 13 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of (2.0%) from the Company’s amortized cost basis.

Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors in these types of securities. At the time of purchase, each of these securities was rated AA or AAA and through June 30, 2019 has not experienced any deterioration in credit rating. The Company continues to monitor these securities for changes in credit rating or other indications of credit deterioration. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2019, 28 asset backed securities had unrealized losses with aggregate depreciation of (1.3%) from the Company’s amortized cost basis.

Marketable equity securities: All unrealized losses recognized during the reporting period were for equity securities still held at June 30, 2019.

Note 4 – Loans

A summary of loan balances follows (in thousands):

	June 30, 2019
	Originated			PNCI			PCI			Total
Mortgage loans on real estate:
Residential 1-4 family	$	348,737		$	155,872		$	1,440		$	506,049
Commercial		2,005,985			660,737			5,959			2,672,681
Total mortgage loan on real estate		2,354,722			816,609			7,399			3,178,730
Consumer:
Home equity lines of credit		294,541			35,231			1,128			330,900
Home equity loans		29,041			2,875			429			32,345
Other		53,340			17,802			1			71,143
Total consumer loans		376,922			55,908			1,558			434,388
Commercial		248,523			24,984			2,538			276,045
Construction:
Residential		148,432			9,083			—			157,515
Commercial		56,289			720			—			57,009
Total construction		204,721			9,803			—			214,524
Total loans, net of deferred loan fees and discounts	$	3,184,888		$	907,304		$	11,495		$	4,103,687
Total principal balance of loans owed, net of charge-offs	$	3,193,938		$	940,627		$	17,975		$	4,152,540
Unamortized net deferred loan fees		(9,050	)		—			—			(9,050	)
Discounts to principal balance of loans owed, net of charge-offs		—			(33,323	)		(6,480	)		(39,803	)
Total loans, net of unamortized deferred loan fees and discounts	$	3,184,888		$	907,304		$	11,495		$	4,103,687
Allowance for loan losses	$	(32,273	)	$	(585	)	$	(10	)	$	(32,868	)

13

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

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

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

14

Note 5 – Allowance for Loan Losses

The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the periods indicated.

	Allowance for Loan Losses – Three Months Ended June 30, 2019
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,500	$	(2	)	$	3	$	75		$	2,576
Commercial		12,330		—			10		(241	)		12,099
Total mortgage loans on real estate		14,830		(2	)		13		(166	)		14,675
Consumer:
Home equity lines of credit		6,015		—			183		(339	)		5,859
Home equity loans		1,286		—			171		(215	)		1,242
Other		1,040		(153	)		108		456			1,451
Total consumer loans		8,341		(153	)		462		(98	)		8,552
Commercial		6,078		(138	)		85		720			6,745
Construction:
Residential		2,408		—			—		130			2,538
Commercial		407		—			—		(49	)		358
Total construction		2,815		—			—		81			2,896
Total	$	32,064	$	(293	)	$	560	$	537		$	32,868
	Allowance for Loan Losses – Six Months Ended June 30, 2019
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,676	$	(2	)	$	5	$	(103	)	$	2,576
Commercial		12,944		—			1,391		(2,236	)		12,099
Total mortgage loans on real estate		15,620		(2	)		1,396		(2,339	)		14,675
Consumer:
Home equity lines of credit		6,042		—			278		(461	)		5,859
Home equity loans		1,540		—			258		(556	)		1,242
Other		793		(360	)		183		835			1,451
Total consumer loans		8,375		(360	)		719		(182	)		8,552
Commercial		6,090		(657	)		253		1,059			6,745
Construction:
Residential		1,834		—			—		704			2,538
Commercial		663		—			—		(305	)		358
Total construction		2,497		—			—		399			2,896
Total	$	32,582	$	(1,019	)	$	2,368	$	(1,063	)	$	32,868

	Allowance for Loan Losses – As of June 30, 2019
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total allowance for loan losses
Mortgage loans on real estate:
Residential 1-4 family	$	2,522	$	54	$	—	$	2,576
Commercial		12,015		84		—		12,099
Total mortgage loans on real estate		14,537		138		—		14,675
Consumer:
Home equity lines of credit		5,764		85		10		5,859
Home equity loans		1,181		61		—		1,242
Other		1,433		18		—		1,451
Total consumer loans		8,378		164		10		8,552
Commercial		4,605		2,140		—		6,745
Construction:
Residential		2,538		—		—		2,538
Commercial		358		—		—		358
Total construction		2,896		—		—		2,896
Total	$	30,416	$	2,442	$	10	$	32,868

15

	Loans, Net of Unearned fees – As of June 30, 2019
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total loans, net of unearned fees
Mortgage loans on real estate:
Residential 1-4 family	$	500,304	$	4,305	$	1,440	$	506,049
Commercial		2,655,692		11,030		5,959		2,672,681
Total mortgage loans on real estate		3,155,996		15,335		7,399		3,178,730
Consumer:
Home equity lines of credit		327,726		2,046		1,128		330,900
Home equity loans		29,860		2,056		429		32,345
Other		70,986		156		1		71,143
Total consumer loans		428,572		4,258		1,558		434,388
Commercial		268,405		5,102		2,538		276,045
Construction:
Residential		157,515		—		—		157,515
Commercial		57,009		—		—		57,009
Total construction		214,524		—		—		214,524
Total	$	4,067,497	$	24,695	$	11,495	$	4,103,687

	Allowance for Loan Losses – Year Ended December 31, 2018
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,317	$	(77	)	$	—	$	436		$	2,676
Commercial		11,441		(15	)		68		1,450			12,944
Total mortgage loans on real estate		13,758		(92	)		68		1,886			15,620
Consumer:
Home equity lines of credit		5,800		(277	)		846		(327	)		6,042
Home equity loans		1,841		(24	)		297		(574	)		1,540
Other		586		(783	)		288		702			793
Total consumer loans		8,227		(1,084	)		1,431		(199	)		8,375
Commercial		6,512		(1,188	)		541		225			6,090
Construction:
Residential		1,184		—			—		650			1,834
Commercial		642		—			—		21			663
Total construction		1,826		—			—		671			2,497
Total	$	30,323	$	(2,364	)	$	2,040	$	2,583		$	32,582

	Allowance for Loan Losses – As of December 31, 2018
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total allowance for loan losses
Mortgage loans on real estate:
Residential 1-4 family	$	2,620	$	56	$	—	$	2,676
Commercial		12,737		91		116		12,944
Total mortgage loans on real estate		15,357		147		116		15,620
Consumer:
Home equity lines of credit		5,838		198		6		6,042
Home equity loans		1,486		54		—		1,540
Other		779		14		—		793
Total consumer loans		8,103		266		6		8,375
Commercial		4,309		1,781		—		6,090
Construction:
Residential		1,834		—		—		1,834
Commercial		663		—		—		663
Total construction		2,497		—		—		2,497
Total	$	30,266	$	2,194	$	122	$	32,582

16

	Loans, Net of Unearned fees – As of December 31, 2018
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total loans, net of unearned fees
Mortgage loans on real estate:
Residential 1-4 family	$	509,267	$	4,321	$	1,674	$	515,262
Commercial		2,606,819		12,563		8,456		2,627,838
Total mortgage loans on real estate		3,116,086		16,884		10,130		3,143,100
Consumer:
Home equity lines of credit		322,764		2,646		1,167		326,577
Home equity loans		33,142		3,103		439		36,684
Other		55,483		196		42		55,721
Total consumer loans		411,389		5,945		1,648		418,982
Commercial		268,885		5,218		2,445		276,548
Construction:
Residential		121,296		—		—		121,296
Commercial		62,088		—		—		62,088
Total construction		183,384		—		—		183,384
Total	$	3,979,744	$	28,047	$	14,223	$	4,022,014

	Allowance for Loan Losses – Three Months Ended June 30, 2018
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,170	$	(51	)	$	—	$	(128	)	$	1,991
Commercial		11,495		(15	)		21		106			11,607
Total mortgage loans on real estate		13,665		(66	)		21		(22	)		13,598
Consumer:
Home equity lines of credit		5,412		(24	)		317		(657	)		5,048
Home equity loans		1,736		—			23		(227	)		1,532
Other		570		(174	)		66		95			557
Total consumer loans		7,718		(198	)		406		(789	)		7,137
Commercial		6,392		(54	)		80		(40	)		6,378
Construction:
Residential		1,351		—			—		83			1,434
Commercial		847		—			—		130			977
Total construction		2,198		—			—		213			2,411
Total	$	29,973	$	(318	)	$	507	$	(638	)	$	29,524
	Allowance for Loan Losses – Six Months Ended June 30, 2018
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,317	$	(52	)	$	—	$	(274	)	$	1,991
Commercial		11,441		(15	)		36		145			11,607
Total mortgage loans on real estate		13,758		(67	)		36		(129	)		13,598
Consumer:
Home equity lines of credit		5,800		(104	)		526		(1,174	)		5,048
Home equity loans		1,841		—			37		(346	)		1,532
Other		586		(368	)		144		195			557
Total consumer loans		8,227		(472	)		707		(1,325	)		7,137
Commercial		6,512		(259	)		130		(5	)		6,378
Construction:
Residential		1,184		—			—		250			1,434
Commercial		642		—			—		335			977
Total construction		1,826		—			—		585			2,411
Total	$	30,323	$	(798	)	$	873	$	(874	)	$	29,524

17

	Allowance for Loan Losses – As of June 30, 2018
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total allowance for loan losses
Mortgage loans on real estate:
Residential 1-4 family	$	1,794	$	147	$	50	$	1,991
Commercial		11,466		82		59		11,607
Total mortgage loans on real estate		13,260		229		109		13,598
Consumer:
Home equity lines of credit		4,754		287		7		5,048
Home equity loans		1,340		192		—		1,532
Other		503		54		—		557
Total consumer loans		6,597		533		7		7,137
Commercial		4,228		2,127		23		6,378
Construction:
Residential		1,434		—		—		1,434
Commercial		977		—		—		977
Total construction		2,411		—		—		2,411
Total	$	26,496	$	2,889	$	139	$	29,524
	Loans, Net of Unearned fees – As of June 30, 2018
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total loans, net of unearned fees
Mortgage loans on real estate:
Residential 1-4 family	$	376,628	$	6,344	$	1,720	$	384,692
Commercial		1,997,591		11,162		7,595		2,016,348
Total mortgage loans on real estate		2,374,219		17,506		9,315		2,401,040
Consumer:
Home equity lines of credit		282,611		2,250		1,575		286,436
Home equity loans		38,074		2,457		455		40,986
Other		23,213		247		43		23,503
Total consumer loans		343,898		4,954		2,073		350,925
Commercial		230,395		4,751		2,473		237,619
Construction:
Residential		73,578		—		—		73,578
Commercial		83,151		—		—		83,151
Total construction		156,729		—		—		156,729
Total	$	3,105,241	$	27,211	$	13,861	$	3,146,313

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

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

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

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

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

18

• Doubtful – This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans.

• Loss – This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the quarter in which the loss is identified.

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

	Credit Quality Indicators Originated Loans – As of June 30, 2019
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total Originated Loans
Mortgage loans on real estate:
Residential 1-4 family	$	342,847	$	1,048	$	4,842	$	—	$	348,737
Commercial		1,964,292		32,562		9,131		—		2,005,985
Total mortgage loans on real estate		2,307,139		33,610		13,973		—		2,354,722
Consumer:
Home equity lines of credit		290,524		1,673		2,344		—		294,541
Home equity loans		26,265		564		2,212		—		29,041
Other		53,044		189		107		—		53,340
Total consumer loans		369,833		2,426		4,663		—		376,922
Commercial		237,025		5,194		5,993		311		248,523
Construction:
Residential		148,178		—		254		—		148,432
Commercial		55,958		331		—		—		56,289
Total construction		204,136		331		254		—		204,721
Total loans	$	3,118,133	$	41,561	$	24,883	$	311	$	3,184,888
	Credit Quality Indicators PNCI Loans – As of June 30, 2019
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total PNCI Loans
Mortgage loans on real estate:
Residential 1-4 family	$	154,238	$	864	$	770	$	—	$	155,872
Commercial		650,821		3,141		6,775		—		660,737
Total mortgage loans on real estate		805,059		4,005		7,545		—		816,609
Consumer:
Home equity lines of credit		33,345		795		1,091		—		35,231
Home equity loans		2,727		69		79		—		2,875
Other		17,545		254		3		—		17,802
Total consumer loans		53,617		1,118		1,173		—		55,908
Commercial		24,650		1		333		—		24,984
Construction:
Residential		9,083		—		—		—		9,083
Commercial		475		—		245		—		720
Total construction		9,558		—		245		—		9,803
Total loans	$	892,884	$	5,124	$	9,296	$	—	$	907,304

19

	Credit Quality Indicators Originated Loans – As of December 31, 2018
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total Originated Loans
Mortgage loans on real estate:
Residential 1-4 family	$	337,189	$	1,724	$	4,883	$	—	$	343,796
Commercial		1,861,627		33,483		15,871		—		1,910,981
Total mortgage loans on real estate		2,198,816		35,207		20,754		—		2,254,777
Consumer:
Home equity lines of credit		279,491		2,309		2,653		—		284,453
Home equity loans		29,289		1,054		2,317		—		32,660
Other		33,606		341		73		—		34,020
Total consumer loans		342,386		3,704		5,043		—		351,133
Commercial		217,126		6,127		5,382		—		228,635
Construction:
Residential		90,412		32		259		—		90,703
Commercial		55,863		345		—		—		56,208
Total construction		146,275		377		259		—		146,911
Total loans	$	2,904,603	$	45,415	$	31,438	$	—	$	2,981,456
	Credit Quality Indicators PNCI Loans – As of December 31, 2018
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total PNCI Loans
Mortgage loans on real estate:
Residential 1-4 family	$	167,908	$	1,086	$	798	$	—	$	169,792
Commercial		701,868		3,085		3,448		—		708,401
Total mortgage loans on real estate		869,776		4,171		4,246		—		878,193
Consumer:
Home equity lines of credit		38,780		1,124		1,053		—		40,957
Home equity loans		3,413		74		98		—		3,585
Other		21,481		173		5		—		21,659
Total consumer loans		63,674		1,371		1,156		—		66,201
Commercial		45,027		321		120		—		45,468
Construction:
Residential		30,593		—		—		—		30,593
Commercial		5,880		—		—		—		5,880
Total construction		36,473		—		—		—		36,473
Total	$	1,014,950	$	5,863	$	5,522	$	—	$	1,026,335

20

Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value. Typically, payment performance will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate; non-payment is likely due to loss of employment. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of the two. Problem consumer loans are generally identified by payment history and current performance of the borrower (delinquency). The Bank manages its consumer loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggesting modifications if appropriate, and, when continued scheduled payments become unrealistic, initiating repossession or foreclosure through appropriate channels.

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

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

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

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

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

21

The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:

	Analysis of Originated Past Due Loans - As of June 30, 2019
(in thousands)	30-59 days		60-89 days		> 90 days		Total Past Due Loans		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	635	$	1,132	$	758	$	2,525	$	346,212	$	348,737	$	—
Commercial		1,022		174		901		2,097		2,003,888		2,005,985		—
Total mortgage loans on real estate		1,657		1,306		1,659		4,622		2,350,100		2,354,722		—
Consumer:
Home equity lines of credit		1,197		557		157		1,911		292,630		294,541		—
Home equity loans		565		89		217		871		28,170		29,041
Other		44		13		7		64		53,276		53,340		12
Total consumer loans		1,806		659		381		2,846		374,076		376,922		12
Commercial		1,154		1,560		333		3,047		245,476		248,523		10
Construction:
Residential		151		—		—		151		148,281		148,432		—
Commercial		—		—		—		—		56,289		56,289		—
Total construction		151		—		—		151		204,570		204,721		—
Total originated loans	$	4,768	$	3,525	$	2,373	$	10,666	$	3,174,222	$	3,184,888	$	22

The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated:

	Analysis of PNCI Past Due Loans - As of June 30, 2019
(in thousands)	30-59 days		60-89 days		> 90 days		Total Past Due Loans		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	—	$	682	$	—	$	682	$	155,190	$	155,872	$	—
Commercial		—		195		950		1,145		659,592		660,737		—
Total mortgage loans on real estate		—		877		950		1,827		814,782		816,609		—
Consumer:
Home equity lines of credit		101		73		24		198		35,033		35,231		—
Home equity loans		62		—		—		62		2,813		2,875		—
Other		119		—		—		119		17,683		17,802		—
Total consumer loans		282		73		24		379		55,529		55,908		—
Commercial		820		150		113		1,083		23,901		24,984		—
Construction:
Residential		—		—		—		—		9,083		9,083		—
Commercial		245		—		—		245		475		720		—
Total construction		245		—		—		245		9,558		9,803		—
Total PNCI loans	$	1,347	$	1,100	$	1,087	$	3,534	$	903,770	$	907,304	$	—

The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:

	Analysis of Originated Past Due Loans - As of December 31, 2018
(in thousands)	30-59 days		60-89 days		> 90 days		Total Past Due Loans		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	1,675	$	132	$	478	$	2,285	$	341,511	$	343,796	$	—
Commercial		431		1,200		296		1,927		1,909,054		1,910,981		—
Total mortgage loans on real estate		2,106		1,332		774		4,212		2,250,565		2,254,777		—
Consumer:
Home equity lines of credit		908		47		609		1,564		282,889		284,453		—
Home equity loans		1,043		24		214		1,281		31,379		32,660		—
Other		298		17		—		315		33,705		34,020		—
Total consumer loans		2,249		88		823		3,160		347,973		351,133		—
Commercial		1,053		579		1,247		2,879		225,756		228,635		—
Construction:
Residential		209		—		—		209		90,494		90,703		—
Commercial		—		—		—		—		56,208		56,208		—
Total construction		209		—		—		209		146,702		146,911		—
Total loans	$	5,617	$	1,999	$	2,844	$	10,460	$	2,970,996	$	2,981,456	$	—

22

The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated:

	Analysis of PNCI Past Due Loans - As of December 31, 2018
(in thousands)	30-59 days		60-89 days		> 90 days		Total Past Due Loans		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	1,009	$	133	$	156	$	1,298	$	168,494	$	169,792	$	—
Commercial		1,646		1,136		1,082		3,864		704,537		708,401		—
Total mortgage loans on real estate		2,655		1,269		1,238		5,162		873,031		878,193		—
Consumer:
Home equity lines of credit		304		35		237		576		40,381		40,957		—
Home equity loans		74		—		—		74		3,511		3,585		—
Other		160		—		—		160		21,499		21,659		—
Total consumer loans		538		35		237		810		65,391		66,201		—
Commercial		678		145		113		936		44,532		45,468		—
Construction:
Residential		—		—		—		—		30,593		30,593		—
Commercial		—		—		—		—		5,880		5,880		—
Total construction		—		—		—		—		36,473		36,473		—
Total loans	$	3,871	$	1,449	$	1,588	$	6,908	$	1,019,427	$	1,026,335	$	—

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

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

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

	Non Accrual Loans
	As of June 30, 2019						As of December 31, 2018
(in thousands)	Originated		PNCI		Total		Originated		PNCI		Total
Mortgage loans on real estate:
Residential 1-4 family	$	3,357	$	300	$	3,657	$	3,244	$	334	$	3,578
Commercial		4,354		3,461		7,815		9,263		1,468		10,731
Total mortgage loans on real estate		7,711		3,761		11,472		12,507		1,802		14,309
Consumer:
Home equity lines of credit		880		516		1,396		1,429		885		2,314
Home equity loans		1,610		34		1,644		1,722		47		1,769
Other		58		3		61		3		4		7
Total consumer loans		2,548		553		3,101		3,154		936		4,090
Commercial		3,873		183		4,056		3,755		120		3,875
Construction:
Residential		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Total construction		—		—		—		—		—		—
Total non accrual loans	$	14,132	$	4,497	$	18,629	$	19,416	$	2,858	$	22,274

Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due in accordance with the original contractual terms of the loan agreement. The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated. The average recorded investment in impaired loans and interest income recognized on impaired loans during the three months ended June 30, 2019 and 2018 was not considered significant for financial reporting purposes.

23

	Impaired Originated Loans – As of, or for the Six Months Ended, June 30, 2019
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	4,739	$	3,705	$	300	$	4,005	$	54	$	4,291	$	18
Commercial		7,906		5,103		2,465		7,568		808		10,004		40
Total mortgage loans on real estate		12,645		8,808		2,765		11,573		862		14,295		58
Consumer:
Home equity lines of credit		1,333		1,271		—		1,271		—		1,510		8
Home equity loans		2,373		1,571		268		1,839		61		2,003		4
Other		76		3		54		57		13		48		1
Total consumer loans		3,782		2,845		322		3,167		74		3,561		13
Commercial		5,150		1,884		3,035		4,919		1,301		5,065		15
Construction:
Residential		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—
Total construction		—		—		—		—		—		—		—
Total	$	21,577	$	13,537	$	6,122	$	19,659	$	2,237	$	22,921	$	86
	Impaired PNCI Loans – As of, or for the Six Months Ended, June 30, 2019
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	339	$	300	$	—	$	300	$	—	$	317	$	—
Commercial		5,079		3,462		—		3,462		—		2,465		171
Total mortgage loans on real estate		5,418		3,762		—		3,762		—		2,782		171
Consumer:
Home equity lines of credit		612		534		241		775		85		889		—
Home equity loans		167		148		69		217		44		229		—
Other		62		62		37		99		6		105		—
Total consumer loans		841		744		347		1,091		135		1,223		—
Commercial		113		113		70		183		70		151
Construction:
Residential		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—
Total construction		—		—		—		—		—		—		—
Total	$	6,372	$	4,619	$	417	$	5,036	$	205	$	4,156	$	171
	Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	4,594	$	3,663	$	308	$	3,971	$	56	$	3,517	$	90
Commercial		13,081		10,676		1,765		12,441		42		13,115		137
Total mortgage loans on real estate		17,675		14,339		2,073		16,412		98		16,632		227
Consumer:
Home equity lines of credit		1,900		1,749		111		1,860		71		1,885		43
Home equity loans		2,374		1,892		65		1,957		2		1,520		23
Other		3		—		3		3		3		17		2
Total consumer loans		4,277		3,641		179		3,820		76		3,422		68
Commercial		5,433		2,924		2,287		5,211		1,774		4,654		91
Construction:
Residential		—		—		—		—		—		5		—
Commercial		—		—		—		—		—		—		—
Total construction		—		—		—		—		—		5		—
Total	$	27,385	$	20,904	$	4,539	$	25,443	$	1,948	$	24,713	$	386

24

	Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	375	$	334	$	—	$	334	$	—	$	529	$	5
Commercial		3,110		1,468		—		1,468		—		1,713		183
Total mortgage loans on real estate		3,485		1,802		—		1,802		—		2,242		188
Consumer:
Home equity lines of credit		1,027		587		367		954		127		1,120		18
Home equity loans		252		47		197		244		101		155		—
Other		106		21		85		106		11		114		—
Total consumer loans		1,385		655		649		1,304		239		1,389		18
Commercial		120		113		7		120		7		60		1
Construction:
Residential		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—
Total construction		—		—		—		—		—		—		—
Total	$	4,990	$	2,570	$	656	$	3,226	$	246	$	3,691	$	207
	Impaired Originated Loans – As of, or for the Six Months Ended, June 30, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	5,656	$	3,947	$	1,050	$	4,997	$	147	$	4,600	$	28
Commercial		11,280		9,763		1,076		10,839		82		10,975		9
Total mortgage loans on real estate		16,936		13,710		2,126		15,836		229		15,575		37
Consumer:
Home equity lines of credit		1,244		1,108		106		1,214		29		1,315		3
Home equity loans		2,558		1,828		351		2,179		38		1,784		15
Other		3		—		3		3		3		3		—
Total consumer loans		3,805		2,936		460		3,396		70		3,102		18
Commercial		4,952		809		3,942		4,751		2,127		4,686		20
Construction:
Residential		—		—		—		—		—		68		—
Commercial		—		—		—		—		—		—		—
Total construction		—		—		—		—		—		68		—
Total	$	25,693	$	17,455	$	6,528	$	23,983	$	2,426	$	23,431	$	75
	Impaired PNCI Loans – As of, or for the Six Months Ended, June 30, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	1,417	$	1,348	$	—	$	1,348	$	—	$	1,339	$	—
Commercial		323		323		—		323		—		161		9
Total mortgage loans on real estate		1,740		1,671		—		1,671		—		1,500		9
Consumer:
Home equity lines of credit		1,098		529		506		1,035		258		1,035		2
Home equity loans		293		36		242		278		154		281		—
Other		244		—		244		244		51		259		—
Total consumer loans		1,635		565		992		1,557		463		1,575		2
Commercial		—		—		—		—		—				—
Construction:
Residential		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—
Total construction		—		—		—		—		—		—		—
Total	$	3,375	$	2,236	$	992	$	3,228	$	463	$	3,075	$	11

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

25

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

	TDR Information for the Three Months Ended June 30, 2019
(dollars in thousands)	Number		Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision			Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family			$		$		$	—			—	$	—	$	—
Commercial		—		—		—		—			—		—		—
Total mortgage loans on real estate		—		—		—		—			—		—		—
Consumer:
Home equity lines of credit		1		65		68		—			—		—		—
Home equity loans		1		28		27		27			—		—		—
Other		—		—		—		—			—		—		—
Total consumer loans		2		93		95		27			—		—		—
Commercial		4		1,754		1,722		2							—
Construction:
Residential		—		—		—		—			—		—		—
Commercial		—		—		—		—			—		—		—
Total construction		—		—		—		—			—		—		—
Total		6	$	1,847	$	1,817	$	29			—	$	—	$	—
	TDR Information for the Six Months Ended June 30, 2019
(dollars in thousands)	Number		Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision			Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family		1	$	163	$	162	$	—			—	$	—	$	—
Commercial		—		—		—		—			—		—		—
Total mortgage loans on real estate		1		163		162		—			—		—		—
Consumer:
Home equity lines of credit		1		65		68		—			—		—		—
Home equity loans		2		149		147		29			—		—		—
Other		—		—		—		—			—		—		—
Total consumer loans		3		214		215		29			—		—		—
Commercial		6		1,768		1,737		2			1		7		—
Construction:
Residential		—		—		—		—			—		—		—
Commercial		—		—		—		—			—		—		—
Total construction		—		—		—		—			—		—		—
Total		10	$	2,145	$	2,114	$	31			1	$	7	$	—
	TDR Information for the Three Months Ended June 30, 2018
(dollars in thousands)	Number		Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision			Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family		—	$	—	$	—	$	—			—	$	—	$	—
Commercial		1		34		34		34			—		—		—
Total mortgage loans on real estate		1		34		34		34			—		—		—
Consumer:
Home equity lines of credit								—			—		—		—
Home equity loans								—			—		—		—
Other		—		—		—		—			—		—		—
Total consumer loans		—		—		—		—			—		—		—
Commercial		2		416		421		(2	)		4		340		(2	)
Construction:
Residential		—		—		—		—			—		—		—
Commercial		—		—		—		—			—		—		—
Total construction		—		—		—		—			—		—		—
Total		3	$	450	$	455	$	32			4	$	340	$	(2	)

26

	TDR Information for the Six Months Ended June 30, 2018
(dollars in thousands)	Number		Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision			Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family		—	$	—	$	—	$	—			—	$	—	$	—
Commercial		2		417		417		46			1		169		—
Total mortgage loans on real estate		2		417		417		46			1		169		—
Consumer:
Home equity lines of credit		1		133		138		—			—		—		—
Home equity loans		1		121		121		—			—		—		—
Other		—		—		—		—			—		—		—
Total consumer loans		2		254		259		—			—		—		—
Commercial		2		416		421		(2	)		4		340		(2	)
Construction:
Residential		—		—		—		—			—		—		—
Commercial		—		—		—		—			—		—		—
Total construction		—		—		—		—			—		—		—
Total		6	$	1,087	$	1,097	$	44			5	$	509	$	(2	)

Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions.

For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above.

Typically if a TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting from default of previously modified TDR’s are noted above. Loans that defaulted within the twelve month period subsequent to modification were not considered significant for financial reporting purposes.

27

Note 6 – Leases

The Company adopted ASU 2016-02 “Leases” (Topic 842) as of January 1, 2019, which requires the Company to record a right-of-use asset (“ROUA”) on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company is also required to record a lease liability on the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is lessee of real estate property for branches, ATM locations, and general administration and operations. The Company elected not to include short-term leases (i.e. leases with initial terms of twelve months or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance were unknown and not determinable at lease commencement and therefore, were not included in the determination of the Company’s ROUA or lease liability.

The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the amount of lease liability and adjusted for prepaid or accrued lease payments, remaining lease incentives, unamortized direct costs (if any), and impairment (if any).

The following table presents the components of lease expense for the three and six months ended June 30, 2019:

(in thousands)	Three months ended June 30, 2019			Six months ended June 30, 2019
Operating lease cost	$	1,310		$	2,621
Short-term lease cost		58			129
Variable lease cost		(17	)		(22	)
Sublease income		(32	)		(66	)
Total lease cost	$	1,319		$	2,662

Prior to the adoption of ASU 2016-02, rent expense under operating leases was $892,000 and $1,776,000 during the three and six months ended June 30, 2018. Rent expense was offset by rent income of $10,000 and $21,000 during the three and six months ended June 30, 2018.

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

(in thousands)	Three months ended June 30, 2019		Six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	1,229	$	2,447
ROUA obtained in exchange for operating lease liabilities	$	156	$	32,162

The following table presents the weighted average operating lease term and discount rate at June 30, 2019:

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

28

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

(in thousands)
Periods ending December 31,
2019	$	2,352
2020		4,387
2021		4,235
2022		3,896
2023		3,216
Thereafter		16,682
		34,768
Discount for present value of expected cash flows		(5,334	)
Lease liability at June 30, 2019	$	29,434

Note 7 - Deposits

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

	June 30, 2019		December 31, 2018
Noninterest-bearing demand	$	1,780,339	$	1,760,580
Interest-bearing demand		1,263,635		1,252,366
Savings		1,856,749		1,921,324
Time certificates, $250,000 or more		130,061		132,429
Other time certificates		311,389		299,767
Total deposits	$	5,342,173	$	5,366,466

Certificate of deposit balances of $50,000,000 and $60,000,000 from the State of California were included in time certificates, over $250,000, at June 30, 2019 and December 31, 2018, respectively. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company. Overdrawn deposit balances of $1,242,000 and $1,469,000 were classified as consumer loans at June 30, 2019 and December 31, 2018, respectively.

Note 8 - Commitments and Contingencies

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

(in thousands)	June 30, 2019		December 31, 2018
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans	$	311,850	$	306,191
Consumer loans		506,448		496,575
Real estate mortgage loans		173,451		140,292
Real estate construction loans		210,143		248,996
Standby letters of credit		11,338		11,346
Deposit account overdraft privilege		108,941		111,956

29

Note 9 – Shareholders’ Equity

Dividends Paid

The Bank paid to the Company cash dividends in the aggregate amounts of $10,236,000 and $4,770,000 during the three months ended June 30, 2019 and 2018, respectively and $18,350,000 and $9,142,000 during the six months ended June 30, 2019 and 2018, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California Department of Business Oversight (DBO). Absent approval from the Commissioner of the DBO, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period.

Stock Repurchase Plan

On August 21, 2007, the Board of Directors adopted a plan to repurchase, as conditions warrant, up to 500,000 shares of the Company’s common stock on the open market. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. This stock repurchase plan has no expiration date. As of June 30, 2019, the Company had repurchased 196,566 shares under this plan. During the six month periods ended June 30, 2019 and 2018, there were no shares of common stock repurchased under this plan.

Stock Repurchased Under Equity Compensation Plans

During the three months ended June 30, 2019 and 2018, employees tendered 93,755 and 17,086 shares, respectively, of the Company’s common stock with market value of $3,659,000, and $667,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. During the six months ended June 30, 2019 and 2018, employees tendered 119,914 and 17,220 shares, respectively, of the Company’s common stock with market value of $4,695,000, and $671,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is exercised. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.

Note 10 - Stock Options and Other Equity-Based Incentive Instruments

The Company’s 2009 Equity Incentive Plan (2009 Plan) expired on March 26, 2019. While no new awards can be granted under the 2009 Plan, existing grants continue to be governed by the terms, conditions and procedures set forth in any applicable award agreement. On April 16, 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (2019 Plan) which was ratified by shareholders on May 21, 2019. The 2019 Plan allows for up to 1,500,000 shares to be issued in connection with equity-based incentives. All grants of equity awards made during the six months ended June 30, 2019 were made from the 2019 Plan.

Stock option activity during the six months ended June 30, 2019 is summarized in the following table:

	Number of Shares			Option Price per Share		Weighted Average Exercise Price
Outstanding at December 31, 2018		343,000			$12.63 to $23.21	$	16.67
Options granted		—			— to —		—
Options exercised		(157,000	)		$12.63 to $19.46		15.92
Options forfeited		—			— to —		—
Outstanding at June 30, 2019		186,000			$14.54 to $23.21	$	17.45

The following table shows the number, weighted-average exercise price, intrinsic value, and weighted average remaining contractual life of options exercisable, options not yet exercisable and total options outstanding as of June 30, 2019:

	Currently Exercisable		Currently Not Exercisable		Total Outstanding
Number of options		185,250		750		186,000
Weighted average exercise price	$	17.43	$	23.21	$	17.45
Intrinsic value (in thousands)	$	3,774	$	11	$	3,785
Weighted average remaining contractual term (yrs.)		3.1		5.3		3.1

The 750 options that are currently not exercisable as of June 30, 2019 are expected to vest, on a weighted-average basis, over the next three months. The Company did not modify any option grants during 2018 or the six months ended June 30, 2019.

30

Restricted stock unit (RSU) activity is summarized in the following table for the dates indicated:

	Service Condition Vesting RSUs			Market Plus Service Condition Vesting RSUs
Outstanding at December 31, 2018		66,947			45,536
RSUs granted		35,272			22,898
RSUs added through dividend and performance credits		519			7,414
RSUs released		(26,211	)		(22,237	)
RSUs forfeited/expired		—			—
Outstanding at June 30, 2019		76,527			53,611

The 76,527 of service condition vesting RSUs outstanding as of June 30, 2019 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of RSUs outstanding under the original grant. The dividend credits follow the same vesting requirements as the RSU awards and are not considered participating securities. The 76,527 of service condition vesting RSUs outstanding as of June 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next 1.4 years. The Company expects to recognize $2,495,000 of pre-tax compensation costs related to these service condition vesting RSUs between June 30, 2019 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2018 or during the six months ended June 30, 2019.

The 53,611 of market plus service condition vesting RSUs outstanding as of June 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next 2.1 years. The Company expects to recognize $1,227,000 of pre-tax compensation costs related to these RSUs between June 30, 2019 and their vesting dates. As of June 30, 2019, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 80,417 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 2018 or during the six months ended June 30, 2019.

Note 11 - Noninterest Income and Expense

The following table summarizes the Company’s noninterest income for the periods indicated:

	Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	2019			2018			2019			2018
ATM and interchange fees	$	5,404		$	4,510		$	9,985		$	8,745
Service charges on deposit accounts		4,182			3,613			8,062			7,392
Other service fees		619			630			1,390			1,344
Mortgage banking service fees		475			511			958			1,028
Change in value of mortgage servicing rights		(552	)		(36	)		(1,197	)		75
Total service charges and fees		10,128			9,228			19,198			18,584
Increase in cash value of life insurance		746			656			1,521			1,264
Asset management and commission income		739			810			1,381			1,686
Gain on sale of loans		575			666			987			1,292
Lease brokerage income		239			200			459			328
Sale of customer checks		135			138			275			239
Gain on sale of foreclosed assets		197			17			296			388
Gain (loss) on marketable equity securities		42			(23	)		78			(70	)
Loss on disposal of fixed assets		(42	)		(41	)		(80	)		(54	)
Other		819			523			1,327			807
Total other noninterest income		3,450			2,946			6,244			5,880
Total noninterest income	$	13,578		$	12,174		$	25,442		$	24,464

31

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

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Base salaries, net of deferred loan origination costs	$	17,211	$	14,429	$	33,968	$	28,391
Incentive compensation		3,706		2,159		6,273		4,611
Benefits and other compensation costs		5,802		4,865		11,606		10,103
Total salaries and benefits expense		26,719		21,453		51,847		43,105
Occupancy		3,738		2,720		7,512		5,401
Data processing and software		3,354		2,679		6,703		5,193
Equipment		1,752		1,637		3,619		3,188
Intangible amortization		1,431		339		2,862		678
Advertising		1,533		1,035		2,864		1,873
ATM and POS network charges		1,270		1,437		2,593		2,663
Professional fees		1,057		774		1,896		1,546
Telecommunications		773		681		1,570		1,382
Regulatory assessments and insurance		490		417		1,001		847
Merger and acquisition expense		—		601		—		1,077
Postage		315		301		625		659
Operational losses		226		252		451		546
Courier service		412		224		682		491
Other miscellaneous expense		3,782		3,320		8,140		7,383
Total other noninterest expense		20,133		16,417		40,518		32,927
Total noninterest expense	$	46,852	$	37,870	$	92,365	$	76,032

Note 12 – Earnings Per Share

Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate from outstanding stock options and restricted stock units (RSUs), and are determined using the treasury stock method. Earnings per share have been computed based on the following:

	Three months ended June 30,
(in thousands)	2019		2018
Net income	$	23,061	$	15,029
Average number of common shares outstanding		30,458		22,983
Effect of dilutive stock options and restricted stock		185		293
Average number of common shares outstanding used to calculate diluted earnings per share		30,643		23,276
Options excluded from diluted earnings per share because the effect of these options was antidilutive		—		—

	Six months ended June 30,
(in thousands)	2019		2018
Net income	$	45,787	$	28,939
Average number of common shares outstanding		30,441		22,970
Effect of dilutive stock options and restricted stock		209		310
Average number of common shares outstanding used to calculate diluted earnings per share		30,650		23,280
Options excluded from diluted earnings per share because the effect of these options was antidilutive		—		—

32

Note 13 – Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of other comprehensive income.

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

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2019			2018			2019			2018
Unrealized holding gains (losses) on available for sale securities before reclassifications	$	9,553		$	(5,676	)	$	22,263		$	(20,941	)
Amounts reclassified out of accumulated other comprehensive income:
Adoption ASU 2016-01		—			—			—			62
Adoption ASU 2018-02		—			—			—			(425	)
Total amounts reclassified out of accumulated other comprehensive income		—			—			—			(363	)
Unrealized holding gains (losses) on available for sale securities after reclassifications		9,553			(5,676	)		22,263			(21,304	)
Tax effect		(2,824	)		1,678			(6,582	)		6,280
Unrealized holding gains (losses) on available for sale securities, net of tax		6,729			(3,998	)		15,681			(15,024	)
Change in unfunded status of the supplemental retirement plans before reclassifications		(89	)		—			(177	)		668
Amounts reclassified out of accumulated other comprehensive income:
Amortization of prior service cost		(13	)		(13	)		(27	)		(27	)
Amortization of actuarial losses		102			127			204			254
Adoption ASU 2018-02		—			—			—			(668	)
Total amounts reclassified out of accumulated other comprehensive income		89			114			177			(441	)
Change in unfunded status of the supplemental retirement plans after reclassifications		—			114			—			227
Tax effect		—			(34	)		—			(67	)
Change in unfunded status of the supplemental retirement plans, net of tax		—			80			—			160
Total other comprehensive income (loss)	$	6,729		$	(3,918	)	$	15,681		$	(14,864	)

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

	June 30,			December 31,
(in thousands)	2019			2018
Net unrealized loss on available for sale securities	$	1,289		$	(20,974	)
Tax effect		(381	)		6,201
Unrealized holding loss on available for sale securities, net of tax		908			(14,773	)
Unfunded status of the supplemental retirement plans		(4,802	)		(4,802	)
Tax effect		1,420			1,420
Unfunded status of the supplemental retirement plans, net of tax		(3,382	)		(3,382	)
Joint beneficiary agreement liability		276			276
Tax effect		—			—
Joint beneficiary agreement liability, net of tax		276			276
Accumulated other comprehensive loss	$	(2,198	)	$	(17,879	)

33

Note 14 - Fair Value Measurement

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Marketable equity securities, debt securities available-for-sale, loans held for sale, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application impairment write-downs of individual assets.

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

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

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

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

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

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

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

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

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

34

measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3.

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):

Fair value at June 30, 2019	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,952	$	2,952	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government corporations and agencies		630,911		—		630,911		—
Obligations of states and political subdivisions		125,980		—		125,980		—
Corporate bonds		4,521		—		4,521		—
Asset backed securities		372,582		—		372,582		—
Loans held for sale		5,875		—		5,875		—
Mortgage servicing rights		6,229		—		—		6,229
Total assets measured at fair value	$	1,149,050	$	2,952	$	1,139,869	$	6,229
Fair value at December 31, 2018	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,874	$	2,874	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government corporations and agencies		629,981		—		629,981		—
Obligations of states and political subdivisions		126,072		—		126,072		—
Corporate bonds		4,478		—		4,478		—
Asset backed securities		354,505		—		354,505		—
Loans held for sale		3,687		—		3,687		—
Mortgage servicing rights		7,098		—		—		7,098
Total assets measured at fair value	$	1,128,695	$	2,874	$	1,118,723	$	7,098

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between any levels during the six months ended June 30, 2019 or the year ended December 31, 2018.

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the time periods indicated. Had there been any transfer into or out of Level 3 during the time periods indicated, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands):

			Transfers		Change
	Beginning		into (out of)		Included					Ending
Three months ended June 30,	Balance		Level 3		in Earnings			Issuances		Balance
2019: Mortgage servicing rights	$	6,572		—	$	(552	)	$	209	$	6,229
2018: Mortgage servicing rights	$	6,953		—	$	(36	)	$	104	$	7,021

Six months ended June 30,	Beginning Balance		Transfers into (out of) Level 3		Change Included in Earnings			Issuances		Ending Balance
2019: Mortgage servicing rights	$	7,098		—	$	(1,197	)	$	328	$	6,229
2018: Mortgage servicing rights	$	6,687		—	$	75		$	259	$	7,021

The key unobservable inputs used in determining the fair value of mortgage servicing rights are mortgage prepayment speeds and the discount rate used to discount cash projected cash flows. Generally, any significant increases in the mortgage prepayment speed and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the mortgage prepayment speed and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement).

35

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

	Fair Value		Valuation		Unobservable		Range, Weighted
As of June 30, 2019:	(in thousands)		Technique		Inputs		Average
Mortgage Servicing Rights	$	6,229		Discounted cash flow		Constant prepayment rate		6.9% - 39.0%; 10.5	%
						Discount rate		10% - 14%;12	%
As of December 31, 2018:
Mortgage Servicing Rights	$	7,098		Discounted cash flow		Constant prepayment rate		5.0% - 27.3%; 7.6	%
						Discount rate		12% - 13%;12	%

The tables below present the recorded investment in assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated (in thousands):

									Total Gains
June 30, 2019	Total		Level 1		Level 2		Level 3		(Losses)
Fair value:
Impaired Originated & PNCI loans	$	1,164		—		—	$	1,164	$	(808	)
Foreclosed assets		454		—		—		454		(63	)
Total assets measured at fair value	$	1,618		—		—	$	1,618	$	(871	)
									Total Gains
December 31, 2018	Total		Level 1		Level 2		Level 3		(Losses)
Fair value:
Impaired Originated & PNCI loans	$	281		—		—	$	281	$	(294	)
Foreclosed assets		1,311		—		—		1,311		(8	)
Total assets measured at fair value	$	1,592		—		—	$	1,592	$	(302	)
									Total Gains
June 30, 2018	Total		Level 1		Level 2		Level 3		(Losses)
Fair value:
Impaired Originated & PNCI loans	$	1,647		—		—	$	1,647	$	(505	)
Foreclosed assets		584		—		—		584		(90	)
Total assets measured at fair value	$	2,231		—		—	$	2,231	$	(595	)

The impaired originated and PNCI loan amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When the Company identifies a collateral dependent loan as impaired, the Company measures the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If the Company determines that the value of the impaired loan is less than the recorded investment in the loan, the Company recognizes this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.

The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on real estate owned for fair value adjustments based on the fair value of the real estate.

The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.

36

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2019:

June 30, 2019	Fair Value (in thousands)		Valuation Technique		Unobservable Inputs		Range, Weighted Average
Impaired Originated & PNCI loans	$	—		Sales comparison approach Income approach		Adjustment for differences between comparable sales Capitalization rate		Not meaningful N/A
Foreclosed assets (Residential real estate)	$	—		Sales comparison approach		Adjustment for differences between comparable sales		Not meaningful

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2018:

December 31, 2018	Fair Value (in thousands)		Valuation Technique		Unobservable Inputs		Range, Weighted Average
Impaired Originated & PNCI loans	$	281		Sales comparison approach Income approach		Adjustment for differences between comparable sales Capitalization rate		(16.3%) - 35.14%; 10.45% N/A
Foreclosed assets (Residential real estate)	$	693		Sales comparison approach		Adjustment for differences between comparable sales		(21.83%) - 7.25%; (3.75%)
Foreclosed assets (Commercial real estate)	$	618		Sales comparison approach		Adjustment for differences between comparable sales		(65%) - 20%; (45%)

Fair values for financial instruments are management’s estimates of the values at which the instruments could be exchanged in a transaction between willing parties. The Company uses the exit price notion when measuring the fair value of financial instruments. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates.

	June 30, 2019				December 31, 2018
(in thouands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Level 1 inputs:
Cash and due from banks	$	106,939	$	106,939	$	119,781	$	119,781
Cash at Federal Reserve and other banks		68,643		68,643		107,752		107,752
Level 2 inputs:
Securities held to maturity		412,524		415,276		444,936		437,370
Restricted equity securities		17,250		N/A		17,250		N/A
Loans held for sale		5,875		5,875		3,687		4,616
Level 3 inputs:
Loans, net		4,070,819		4,057,792		3,989,432		4,006,986
Financial liabilities:
Level 2 inputs:
Deposits		5,342,173		5,341,105		5,366,466		5,362,173
Other borrowings		13,292		13,292		15,839		15,839
Level 3 inputs:
Junior subordinated debt		57,132		56,209		57,042		62,610
(in thouands)	Contract Amount		Fair Value		Contract Amount		Fair Value
Off-balance sheet:
Level 3 inputs:
Commitments	$	1,201,892	$	12,019	$	1,192,054	$	11,921
Standby letters of credit		11,338		113		11,346		113
Overdraft privilege commitments		108,941		1,089		111,956		1,120

37

Note 15 - Regulatory Matters

The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. The following tables present actual and required capital ratios as of June 30, 2019 and December 31, 2018 for the Company and the Bank under applicable Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of June 30, 2019 and December 31, 2018 based on the then phased-in provisions of the Basel III Capital Rules. As of January 1, 2019, the minimum required capital levels of the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

	Actual					Minimum Capital Required – Basel III Fully Phased In					Required to be Considered Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
As of June 30, 2019:
Total Capital (to Risk Weighted Assets):
Consolidated	$	718,901		14.93	%	$	505,569		10.50	%		N/A		N/A
Tri Counties Bank	$	714,018		14.83	%	$	505,385		10.50	%	$	481,320		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	683,043		14.19	%	$	409,270		8.50	%		N/A		N/A
Tri Counties Bank	$	678,160		14.09	%	$	409,122		8.50	%	$	385,056		8.00	%
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	627,627		13.03	%	$	337,046		7.00	%		N/A		N/A
Tri Counties Bank	$	678,160		14.09	%	$	336,924		7.00	%	$	312,858		6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	683,043		11.08	%	$	246,599		4.00	%		N/A		N/A
Tri Counties Bank	$	678,160		11.00	%	$	246,594		4.00	%	$	308,242		5.00	%

	Actual					Minimum Capital Required – Basel III Phase-in Schedule					Minimum Capital Required – Basel III Fully Phased In					Required to be Considered Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
As of December 31, 2018:
Total Capital (to Risk Weighted Assets):
Consolidated	$	682,419		14.40	%	$	467,874		9.875	%	$	497,486		10.50	%		N/A		N/A
Tri Counties Bank	$	680,624		14.37	%	$	467,704		9.875	%	$	497,305		10.50	%	$	473,624		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	647,262		13.66	%	$	373,115		7.875	%	$	402,727		8.50	%		N/A		N/A
Tri Counties Bank	$	645,467		13.63	%	$	372,979		7.875	%	$	402,581		8.50	%	$	378,899		8.00	%
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	591,933		12.49	%	$	302,045		6.375	%	$	331,658		7.00	%		N/A		N/A
Tri Counties Bank	$	645,467		13.63	%	$	301,935		6.375	%	$	331,537		7.00	%	$	307,856		6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	647,262		10.68	%	$	242,452		4.000	%	$	242,452		4.00	%		N/A		N/A
Tri Counties Bank	$	645,467		10.65	%	$	242,447		4.000	%	$	242,447		4.00	%	$	303,059		5.00	%

As of June 30, 2019 and December 31, 2018, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules. Also, at June 30, 2019 and December 31, 2018, the Bank’s capital levels exceeded the minimum amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action.

The Basel III Capital Rules require for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the risk-based capital ratios but not the leverage ratio. At June 30, 2019, the Company and the Bank are in compliance with the capital conservation buffer requirement.

38

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Cautionary Statements Regarding Forward-Looking Information

Certain statements contained in this Form 10-Q that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There can be no assurance that future developments affecting us will be the same as those anticipated by management. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of changes in financial services policies, laws and regulations; technological changes; mergers and acquisitions (including costs or difficulties related to integration of acquired companies); changes in the level of our nonperforming assets and charge-offs; any deterioration in values of California real estate, both residential and commercial; the effect of changes in accounting standards and practices; possible other-than-temporary impairment of securities held by us; changes in consumer spending, borrowing and savings habits; our ability to attract deposits and other sources of liquidity; changes in the financial performance and/or condition of our borrowers; the impact of competition from other financial service providers; the possibility that any of the anticipated benefits of our recent merger with FNB Bancorp (“FNBB”) will not be realized or will not be realized within the expected time period, or that integration of FNBB’s operations will be more costly or difficult than expected; the challenges of integrating and retaining key employees; unanticipated regulatory or judicial proceedings; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and our ability to manage the risks involved in the foregoing. Additional factors that could cause results to differ materially from those described above can be found in in Part II Item 1A of this report and our Annual Report on Form 10-K for the year ended December 31, 2018, which is on file with the Securities and Exchange Commission (the “SEC”) and available in the “Investor Relations” section of our website, https://www.tcbk.com/investor-relations and in other documents we file with the SEC.

General

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

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 of the financial statements included in the Company’s annual report of Form 10-K for the year ended December 31, 2018.

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.

39

Financial Highlights

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

• For the three and six months ended June 30, 2019, the Company’s return on average assets was 1.44% and 1.43%, respectively, and the return on average equity was 10.65% and 10.71%, respectively.

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

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

• Net interest margin grew 34 basis points to 4.48% on a tax equivalent basis as compared to 4.14% in the quarter ended June 30, 2018 and increased 2 basis points from the trailing quarter.

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

• The average rate of interest paid on deposits, including noninterest-bearing deposits, remained low but increased slightly to 0.22% for the second quarter of 2019 as compared with 0.20% for the trailing quarter, and an increase of 10 basis points from the average rate paid during the same quarter of the prior year.

• Non-performing assets to total assets were 0.35% at June 30, 2019 as compared to 0.34% as of March 31, 2019 and 0.47% at December 31, 2018.

• The balance of nonperforming loans increased by $1.0 million, however recoveries on previously charged-off loans were $0.3 million and loans past due thirty days or more decreased by $2.18 million during the quarter.

• The efficiency ratio remained flat at 60.15% as compared to the trailing quarter, which had an efficiency ratio of 60.10%.

40

TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Net interest income	$	64,315		$	45,869		$	128,185		$	90,855
(Provision for) benefit from reversal of loan losses		(537	)		638			1,063			874
Noninterest income		13,578			12,174			25,442			24,464
Noninterest expense		(46,852	)		(37,870	)		(92,365	)		(76,032	)
Provision for income taxes		(7,443	)		(5,782	)		(16,538	)		(11,222	)
Net income	$	23,061		$	15,029		$	45,787		$	28,939
Per Share Data:
Basic earnings per share	$	0.76		$	0.65		$	1.50		$	1.26
Diluted earnings per share	$	0.75		$	0.65		$	1.49		$	1.24
Dividends paid	$	0.19		$	0.17		$	0.38		$	0.34
Book value at period end							$	28.71		$	22.27
Average common shares outstanding		30,458			22,983			30,441			22,970
Average diluted common shares outstanding		30,643			23,276			30,650			23,280
Shares outstanding at period end								30,503			23,004
At period end:
Loans, net								4,070,819			3,116,789
Total investment securities								1,566,720			1,251,776
Total assets								6,395,172			4,863,153
Total deposits								5,342,173			4,077,222
Other borrowings								13,292			152,839
Shareholders’ equity								875,886			512,344
Financial Ratios:
During the period (annualized):
Return on average assets		1.44	%		1.25	%		1.43	%		1.21	%
Return on average equity		10.65	%		11.78	%		10.71	%		11.39	%
Net interest margin1		4.48	%		4.14	%		4.47	%		4.14	%
Efficiency ratio		60.1	%		65.2	%		60.1	%		65.9	%
Average equity to average assets		13.6	%		10.6	%		13.3	%		10.6	%
At end of period:
Equity to assets								13.70	%		10.54	%
Total capital to risk-sdjusted assets								14.93	%		13.91	%

1 Fully taxable equivalent (FTE)

41

Results of Operations

Overview

The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report.

	Three months ended						Six months ended
	June 30,						June 30,
	2019			2018			2019			2018
Net interest income (FTE)	$	64,613		$	46,182		$	128,804		$	91,480
(Provision for) Benefit from reversal of loan losses		(537	)		638			1,063			874
Noninterest income		13,578			12,174			25,442			24,464
Noninterest expense		(46,852	)		(37,870	)		(92,365	)		(76,032	)
Provision for income taxes (FTE)		(7,741	)		(6,095	)		(17,157	)		(11,847	)
Net income	$	23,061		$	15,029		$	45,787		$	28,939

The Company reported net income of $23,061,000 and $45,787,000 for the quarter and six months ended June 30, 2019, compared to $15,029,000 and $28,939,000 for the quarter and six months ended June 30, 2018, respectively. Diluted earnings per share were $0.75 and $1.49 for the quarter and six months ended June 30, 2019, compared to $0.65 and $1.24 for the quarter and six months ended June 30, 2018.

Net Interest Income

The Company’s primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Following is a summary of the components of FTE net income for the periods indicated (dollars in thousands):

	Three months ended						Six months ended
	June 30,						June 30,
	2019			2018			2019			2018
Interest income	$	68,180		$	48,478		$	135,637		$	95,599
Interest expense		(3,865	)		(2,609	)		(7,452	)		(4,744	)
FTE adjustment		298			313			619			625
Net interest income (FTE)	$	64,613		$	46,182		$	128,804		$	91,480
Net interest margin (FTE)		4.48	%		4.14	%		4.47	%		4.14	%
Acquired loans discount accretion, net:
Amount (included in interest income)	$	1,904		$	559		$	3,559		$	1,191
Effect on average loan yield		0.19	%		0.07	%		0.18	%		0.08	%
Effect on net interest margin (FTE)		0.13	%		0.05	%		0.12	%		0.05	%

Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income. During the three and six months ended June 30, 2019, purchased loan discount accretion was $1,904,000 and $3,599,000, respectively. During the three and six months ended June 30, 2018, purchased loan discount accretion was $559,000 and $1,191,000, respectively. The increase in discount accretion is directly attributable to the acquisition of FNB Bancorp in July 2018.

42

Summary of Average Balances, Yields/Rates and Interest Differential

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

	For the three months ended
	June 30, 2019							June 30, 2018
	Average Balance		Interest Income/ Expense		Rates Earned /Paid			Average Balance		Interest Income/ Expense		Rates Earned /Paid
Assets:
Loans	$	4,044,044	$	55,492		5.49	%	$	3,104,126	$	39,304		5.06	%
Investment securities - taxable		1,432,550		10,762		3.00	%		1,122,534		7,736		2.76	%
Investment securities - nontaxable(1)		140,562		1,358		3.86	%		136,126		1,355		3.98	%
Total investments		1,573,112		12,120		3.08	%		1,258,660		9,091		2.89	%
Cash at Federal Reserve and other banks		147,810		866		2.34	%		94,874		396		1.67	%
Total interest-earning assets		5,764,966		68,478		4.75	%		4,457,660		48,791		4.38	%
Other assets		620,923							356,863
Total assets	$	6,385,889						$	4,814,523
Liabilities and shareholders’ equity:
Interest-bearing demand deposits	$	1,276,388	$	289		0.09	%	$	995,528	$	214		0.09	%
Savings deposits		1,888,234		1,306		0.28	%		1,393,121		427		0.12	%
Time deposits		441,116		1,404		1.27	%		313,556		593		0.76	%
Total interest-bearing deposits		3,605,738		2,999		0.33	%		2,702,205		1,234		0.18	%
Other borrowings		17,963		37		0.82	%		139,307		586		1.68	%
Junior subordinated debt		57,222		829		5.79	%		56,928		789		5.54	%
Total interest-bearing liabilities		3,680,923		3,865		0.42	%		2,898,440		2,609		0.36	%
Noninterest-bearing deposits		1,765,141							1,339,905
Other liabilities		73,541							65,745
Shareholders’ equity		866,284							510,433
Total liabilities and shareholders’ equity	$	6,385,889						$	4,814,523
Net interest spread(2)						4.33	%						4.02	%
Net interest income and interest margin(3)			$	64,613		4.48	%			$	46,182		4.14	%

(1) Fully taxable equivalent (FTE)

(2) Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

(3) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

In general, the change in average balances of assets and liabilities were significantly impacted by the July 6, 2018 acquisition of FNB Bancorp. For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. Organic growth, inclusive of seasonal fluctuation, also contributed to the year-over-year balance sheet changes. In addition to the balance sheet changes which resulted from the acquisition of FNB Bancorp, total assets grew by $68,819,000 (1.4%) between June 2018 and June 2019. This growth was led by $122,691,000 (3.9%) of organic loan growth which was funded by $273,016,000 (6.7%) in organic deposit growth. The following is a comparison of the year over year change in certain assets and liabilities:

	As of June 30,						Acquired		Organic			Organic
($‘s in thousands)	2019		2018		$ Change		Balances		$ Change			% Change
Ending balances
Total assets	$	6,395,172	$	4,863,153	$	1,532,019	$	1,463,200	$	68,819			1.4	%
Total loans		4,103,687		3,146,313		957,374		834,683		122,691			3.9	%
Total investments		1,566,720		1,251,776		314,944		335,667		(20,723	)		(1.7	%)
Total deposits	$	5,342,173	$	4,077,222	$	1,264,951	$	991,935	$	273,016			6.7	%

43

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

	For the six months ended
	June 30, 2019							June 30, 2018
	Average Balance		Interest Income/ Expense		Rates Earned /Paid			Average Balance		Interest Income/ Expense		Rates Earned /Paid
Assets:
Loans	$	4,033,954	$	109,889		5.45	%	$	3,066,152	$	77,353		5.05	%
Investment securities - taxable		1,428,951		21,677		3.03	%		1,123,964		15,394		2.74	%
Investment securities - nontaxable(1)		141,397		2,753		3.89	%		136,143		2,708		3.98	%
Total investments		1,570,348		24,430		3.11	%		1,260,107		18,102		2.87	%
Cash at Federal Reserve and other banks		158,164		1,937		2.45	%		92,869		769		1.66	%
Total interest-earning assets		5,762,466		136,256		4.73	%		4,419,128		96,224		4.35	%
Other assets		643,592							358,747
Total assets	$	6,406,058						$	4,777,875
Liabilities and shareholders’ equity:
Interest-bearing demand deposits	$	1,274,882	$	576		0.09	%	$	994,867	$	425		0.09	%
Savings deposits		1,907,677		2,439		0.26	%		1,382,249		838		0.12	%
Time deposits		441,447		2,703		1.22	%		310,035		1,067		0.69	%
Total interest-bearing deposits		3,624,006		5,718		0.32	%		2,687,151		2,330		0.17	%
Other borrowings		16,736		50		0.60	%		123,544		928		1.50	%
Junior subordinated debt		57,086		1,684		5.90	%		56,905		1,486		5.22	%
Total interest-bearing liabilities		3,697,828		7,452		0.40	%		2,867,600		4,744		0.33	%
Noninterest-bearing deposits		1,754,973							1,336,070
Other liabilities		98,570							65,982
Shareholders’ equity		854,687							508,223
Total liabilities and shareholders’ equity	$	6,406,058						$	4,777,875
Net interest spread(2)						4.33	%						4.02	%
Net interest income and interest margin(3)			$	128,804		4.47	%			$	91,480		4.14	%

(1) Fully taxable equivalent (FTE)

(2) Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

(3) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

As noted above, the change in average balances of assets and liabilities were significantly impacted by the July 6, 2018 acquisition of FNB Bancorp. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable six-month periods from 154% to 156%, which contributed to the growth in net interest income and net interest margin of $37,324,000 and 33 basis points, respectively.

Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid

The following table sets forth, for the period identified, a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (in thousands).

44

	Three months ended June 30, 2019 compared with three months  ended June 30, 2018
	Volume			Rate			Total
Increase in interest income:
Loans	$	12,681		$	3,507		$	16,188
Investment securities (1)		2,391			638			3,029
Cash at Federal Reserve and other banks		273			197			470
Total interest-earning assets		15,345			4,342			19,687
Increase (decrease) in interest expense:
Interest-bearing demand deposits		63			12			75
Savings deposits		194			685			879
Time deposits		303			508			811
Other borrowings		(346	)		(203	)		(549	)
Junior subordinated debt		4			36			40
Total interest-bearing liabilities		218			1,038			1,256
Increase in net interest income	$	15,127		$	3,304		$	18,431

(1) Fully taxable equivalent (FTE)

	Six months ended June 30, 2019 compared with six months  ended June 30, 2018
	Volume			Rate			Total
Increase in interest income:
Loans	$	25,971		$	6,565		$	32,536
Investment securities (1)		4,733			1,595			6,328
Cash at Federal Reserve and other banks		695			473			1,168
Total interest-earning assets		31,399			8,633			40,032
Increase (decrease) in interest expense:
Interest-bearing demand deposits		126			25			151
Savings deposits		408			1,193			1,601
Time deposits		576			1,060			1,636
Other borrowings		(518	)		(360	)		(878	)
Junior subordinated debt		4			194			198
Total interest-bearing liabilities		596			2,112			2,708
Increase in net interest income	$	30,803		$	6,521		$	37,324

(1) Fully taxable equivalent (FTE)

The following commentary regarding net interest income, interest income and interest expense may be best understood while referencing the Summary of Average Balances, Yields/Rates and Interest Differential and the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid shown above.

Net interest income (FTE) during the three months ended June 30, 2019 increased $18,431,000 or 39.9% to $64,613,000 compared to $46,182,000 during the three months ended June 30, 2018. The increase in net interest income (FTE) was due primarily to an increase in the average balance of loans, which contributed an additional $12,681,000 in interest income. As discussed above, increases in average balances were primarily the result of the FNB Bancorp acquisition. Increases in market rates and purchase discount accretion added $3,304,000 to net interest income, due to increases in rates earned on interest-earnings assets outpacing increases paid in interest-bearing liabilities.

45

The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, has increased by 0.50% to 5.50% at June 30, 2019 as compared to 5.00% at June 30, 2018. As compared to the same quarter in the prior year, average loan yields increased 43 basis points from 5.06% during the three months ended June 30, 2018 to 5.49% during the three months ended June 30, 2019. Of the 43 basis point increase in yields on loans, 31 basis points was attributable to increases in market rates while 12 basis points was from increased accretion of purchased loans.

As of June 30, 2019, the Bank’s $4,152,540,000 principal balance of loans, net of charge-offs, and not including deferred loan fees and purchase discounts, was made up of loans with principal balances totaling $1,352,921,000 that have fixed interest rates, and $2,799,619,000 of loans with interest rates that are variable.

The organic growth in deposits was driven primarily by normal and expected seasonal trends as well as the impact of deposit customer’s receipt of insurance proceeds from the property and casualty losses incurred in connection with the wildfires in Northern California. This growth in deposits allowed for the repayment of overnight borrowings resulting in a reduction in interest expense of $549,000 which was partially offset by the changes in volumes and rates associated with deposit products. During the twelve months ended June 30, 2019, the Federal Funds Target Rate was increased two times in 25 basis point increments from 2.00% to 2.50%. The Company’s cost of interest-bearing deposits increased from 33 basis points during the six months ended June 30, 2018 to 40 basis points during the six months ended June 30, 2019.

Net interest income (FTE) during the six months ended June 30, 2019 increased $37,324,000 or 40.8% to $128,804,000 compared to $91,480,000 during the six months ended June 30, 2018. The increase in net interest income (FTE) was due primarily to an increase in the average balance of loans, which was partially offset by an increase in the average balance of interest-bearing liabilities and a 7 basis point increase in the average rate paid on interest-bearing liabilities.

During the six months ended June 30, 2019, the average balance of loans increased by $967,802,000 or 31.6% to $4,033,954,000. The increase in net interest income was further benefited by an increase in the year-to-date purchased loan discount accretion from $1,191,000 during the six months ended June 30, 2018 to $3,559,000 during the six months ended June 30, 2019. This increase in purchased loan discount accretion benefited loan yields by 8 basis points, and net interest margin by 5 basis points. The 7 basis point increase in the average rate paid on interest-bearing liabilities was primarily due to increases in market rates that increased the rates the Company pays on its time deposits. However, the growth in total average deposits during the comparable six-month periods allowed for the repayment of overnight borrowings which, combined with changes in related rates, contributed to a decrease in interest expense of $878,000.

Asset Quality and Loan Loss Provisioning

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

The Company recorded provision for loan losses of $537,000 during the three months ended June 30, 2019 as compared to a benefit from the reversal of provision of $638,000 in the same quarter of the prior year. The provision was necessitated in part by loan growth of $69,356,000 during the quarter and partially offset by $267,000 in net recoveries on previously charged-off loans during the second quarter of 2019 as compared to net recoveries of $189,000 in the second quarter of 2018. Additionally, while the Company remains cautious about the risks associated with trends in California real estate prices, the duration of economic trends and concentrations of credit, the qualitative factors associated with these measures reduced the level of calculated required reserves by approximately $632,000 during the quarter ended June 30, 2019, therefore, changes in those risks could result in additional levels of provisioning being required in the future.

46

Noninterest Income

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

	Three months ended June 30,
(dollars in thousands)	2019			2018			$ Change			% Change
ATM and interchange fees	$	5,404		$	4,510		$	894			19.8	%
Service charges on deposit accounts		4,182			3,613			569			15.7	%
Other service fees		619			630			(11	)		(1.7	%)
Mortgage banking service fees		475			511			(36	)		(7.0	%)
Change in value of mortgage servicing rights		(552	)		(36	)		(516	)		1433.3	%
Total service charges and fees		10,128			9,228			900			9.8	%
Increase in cash value of life insurance		746			656			90			13.7	%
Asset management and commission income		739			810			(71	)		(8.8	%)
Gain on sale of loans		575			666			(91	)		(13.7	%)
Lease brokerage income		239			200			39			19.5	%
Sale of customer checks		135			138			(3	)		(2.2	%)
Gain on sale of foreclosed assets		197			17			180			1058.8	%
Gain (loss) on marketable equity securities		42			(23	)		65			(282.6	%)
Loss on disposal of fixed assets		(42	)		(41	)		(1	)		2.4	%
Other		819			523			296			56.6	%
Total other noninterest income		3,450			2,946			504			17.1	%
Total noninterest income	$	13,578		$	12,174		$	1,404			11.5	%
	Six months ended June 30,
(dollars in thousands)	2019			2018			$ Change			% Change
ATM and interchange fees	$	9,985		$	8,745		$	1,240			14.2	%
Service charges on deposit accounts		8,062			7,392			670			9.1	%
Other service fees		1,390			1,344			46			3.4	%
Mortgage banking service fees		958			1,028			(70	)		(6.8	%)
Change in value of mortgage servicing rights		(1,197	)		75			(1,272	)		(1696.0	%)
Total service charges and fees		19,198			18,584			614			3.3	%
Increase in cash value of life insurance		1,521			1,264			257			20.3	%
Asset management and commission income		1,381			1,686			(305	)		(18.1	%)
Gain on sale of loans		987			1,292			(305	)		(23.6	%)
Lease brokerage income		459			328			131			39.9	%
Sale of customer checks		275			239			36			15.1	%
Gain on sale of foreclosed assets		199			388			(189	)		(48.7	%)
Gain (loss) on marketable equity securities		78			(70	)		148			(211.4	%)
Loss on disposal of fixed assets		(80	)		(54	)		(26	)		48.1	%
Other		1,424			807			617			76.5	%
Total other noninterest income		6,244			5,880			364			6.2	%
Total noninterest income	$	25,442		$	24,464		$	978			4.0	%

Noninterest income increased $1,404,000 (11.5%) and $978,000 (4.0%) during the three and six month periods ended June 30, 2019 as compared to the three and six month periods ended June 30, 2018, respectively. The increase was primarily driven by growth in usage and, due largely in part to the acquisition of FNB Bancorp, an increase in customers and accounts that generate fee revenues. In addition, during the three and six month periods ended June 30, 2019 the company recorded other noninterest income associated with death benefit insurance proceeds of $696,000 and $728,000, respectively. These increases were offset by valuation changes in the Company’s mortgage servicing right asset of $516,000 and $1,272,000, respectively and declines in gains on sale of loans caused by less volume of mortgage loans sold of $91,000 and $305,000, respectively for the three and six month periods ended June 30, 2019 as compared to the three and six month periods ended June 30, 2018. Additional partial offsets to the overall increase were due to declines in asset management and commission income of $71,000 and $305,000, respectively during the three and six month periods ended June 30, 2019 as compared to the three and six month periods ended June 30, 2018.

47

Noninterest Expense

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

	Three months ended June 30,
	2019		2018		$ Change			% Change
Base salaries, net of deferred loan origination costs	$	17,211	$	14,429	$	2,782			19.3	%
Incentive compensation		3,706		2,159		1,547			71.7	%
Benefits and other compensation costs		5,802		4,865		937			19.3	%
Total salaries and benefits expense		26,719		21,453		5,266			24.5	%
Occupancy		3,738		2,720		1,018			37.4	%
Data processing and software		3,354		2,679		675			25.2	%
Equipment		1,752		1,637		115			7.0	%
Intangible amortization		1,431		339		1,092			322.1	%
Advertising		1,533		1,035		498			48.1	%
ATM and POS network charges		1,270		1,437		(167	)		(11.6	%)
Professional fees		1,057		774		283			36.6	%
Telecommunications		773		681		92			13.5	%
Regulatory assessments and insurance		490		417		73			17.5	%
Merger and acquisition expense		—		601		(601	)		(100.0	%)
Postage		315		301		14			4.7	%
Operational losses		226		252		(26	)		(10.3	%)
Courier service		412		224		188			83.9	%
Other miscellaneous expense		3,782		3,320		462			13.9	%
Total other noninterest expense		20,133		16,417		3,716			22.6	%
Total noninterest expense	$	46,852	$	37,870	$	8,982			23.7	%
Average full time equivalent staff		1,138		1,001		137			13.7	%
	Six months ended June 30,
	2019		2018		$ Change			% Change
Base salaries, net of deferred loan origination costs	$	33,968	$	28,391	$	5,577			19.6	%
Incentive compensation		6,273		4,611		1,662			36.0	%
Benefits and other compensation costs		11,606		10,103		1,503			14.9	%
Total salaries and benefits expense		51,847		43,105		8,742			20.3	%
Occupancy		7,512		5,401		2,111			39.1	%
Data processing and software		6,703		5,193		1,510			29.1	%
Equipment		3,619		3,188		431			13.5	%
Intangible amortization		2,862		678		2,184			322.1	%
Advertising		2,864		1,873		991			52.9	%
ATM and POS network charges		2,593		2,663		(70	)		(2.6	%)
Professional fees		1,896		1,546		350			22.6	%
Telecommunications		1,570		1,382		188			13.6	%
Regulatory assessments and insurance		1,001		847		154			18.2	%
Merger and acquisition expense		—		1,077		(1,077	)		(100.0	%)
Postage		625		659		(34	)		(5.2	%)
Operational losses		451		546		(95	)		(17.4	%)
Courier service		682		491		191			38.9	%
Other miscellaneous expense		8,140		7,383		757			10.3	%
Total other noninterest expense		40,518		32,927		7,591			23.1	%
Total noninterest expense	$	92,365	$	76,032	$	16,333			21.5	%
Average full time equivalent staff		1,137		1,001		136			13.6	%

48

Salary and benefit expenses increased $5,266,000 (24.5%) to $26,719,000 during the three months ended June 30, 2019 compared to $21,453,000 during the three months ended June 30, 2018. Base salaries, net of deferred loan origination costs increased $2,782,000 (19.3%) to $17,211,000. The increase in base salaries was due primarily to a 13.7% increase in average full time equivalent employees, largely attributable to the acquisition of FNB Bancorp, to 1,138 from 1,001 in the year-ago quarter. In addition, annual merit increases impacted the quarter over quarter comparison but contributed to less than 3.0% of the annual increase.

Total other noninterest expense increased $3,716,000 (22.6%) to $20,133,000 during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase in other noninterest expense was due primarily to increased overhead operating costs related to the additional branches as a result of the prior year acquisition of FNB Bancorp. Highlighting those increases were intangible amortization, occupancy, data processing and software, and advertising expenses, which increased by $1,092,000, $1,018,000, $675,000 and $498,000, respectively, as compared to the prior year quarter. The increases in noninterest expenses were partially offset by decreased merger & acquisition expenses of $601,000 during the comparable quarterly periods.

The increase in total noninterest expense of $16,333,000 (21.5%) to $92,365,000 for the six month period ended June 30, 2019 compared to $76,032,000 for the same period in 2018 was also primarily attributable to the acquisition of FNB Bancorp, including the growth in full time equivalent staff and the expanded volume of operational activities.

Income Taxes

The Company’s effective tax rate was 24.4% for the quarter ended June 30, 2019 as compared to 27.8% for the same quarter in the prior year. The Company’s effective tax rate was 26.5% for the six months ended June 30, 2019 as compared to 27.9% for the six months ended June 30, 2018. The decrease in effective tax rates for the 2019 periods is primarily attributable to the increase in nontaxable income related to death benefit insurance proceeds of $696,000 and $728,000 during the three and six month periods ended June 30, 2019, respectively.

49

Financial Condition

Investment Securities

Investment securities available for sale increased $18,958,000 to $1,133,994,000 as of June 30, 2019, compared to December 31, 2018. This increase is primarily attributable to an increase in fair value of $22,263,000. There were no sales or transfers of available-for-sale investment securities during the six month periods ended June 30, 2019 and 2018.

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

(dollars in thousands)	June 30, 2019					December 31, 2018
	Fair Value		%			Fair Value		%
Debt securities available for sale:
Obligations of U.S. government agencies	$	630,911		55.6	%	$	629,981		56.5	%
Obligations of states and political subdivisions		125,980		11.1	%		126,072		11.3	%
Corporate bonds		4,521		0.4	%		4,478		0.4	%
Asset backed securities		372,582		32.9	%		354,505		31.8	%
Total debt securities available for sale	$	1,133,994		100.0	%	$	1,115,036		100.0	%

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

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

(dollars in thousands)	June 30, 2019					December 31, 2018
	Amortized Cost		%			Amortized Cost		%
Debt securities held to maturity:
Obligations of U.S. government and agencies	$	398,714		96.7	%	$	430,343		96.7	%
Obligations of states and political subdivisions		13,810		3.3	%		14,593		3.3	%
Total debt securities held to maturity	$	412,524		100	%	$	444,936		100.0	%

Loans

The Company concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial loans), consumer loans, commercial loans (including agricultural loans), and real estate construction loans. The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Company and prevailing money market rates indicative of the Company’s cost of funds.

The majority of the Company’s loans are direct loans made to individuals, farmers and local businesses. The Company relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.

The following table shows the Company’s loan balances, net deferred loan costs and discounts, as of the dates indicated:

(dollars in thousands)	June 30, 2019				December 31, 2018
Real estate mortgage	$	3,178,730	77.5	%	$	3,143,100	78.1	%
Consumer		434,388	10.6	%		418,982	10.4	%
Commercial		276,045	6.7	%		276,548	6.9	%
Real estate construction		214,524	5.2	%		183,384	4.6	%
Total loans	$	4,103,687	100	%	$	4,022,014	100	%

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

50

Asset Quality and Nonperforming Assets

Nonperforming Assets

The following tables set forth the amount of the Company’s nonperforming assets as of the dates indicated. “Performing nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:

(dollars in thousands)	June 30, 2019			December 31, 2018
Performing nonaccrual loans	$	17,825		$	22,689
Nonperforming nonaccrual loans		3,844			4,805
Total nonaccrual loans		21,669			27,494
Loans 90 days past due and still accruing		22			—
Total nonperforming loans		21,691			27,494
Foreclosed assets		1,548			2,280
Total nonperforming assets	$	23,239		$	29,774
Nonperforming assets to total assets		0.36	%		0.47	%
Nonperforming loans to total loans		0.53	%		0.68	%
Allowance for loan losses to nonperforming loans		152	%		119	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		1.97	%		2.11	%

	June 30, 2019
(dollars in thousands)	Originated			PNCI			PCI			Total
Performing nonaccrual loans	$	11,773		$	3,410		$	2,642		$	17,825
Nonperforming nonaccrual loans		2,360			1,087			397			3,844
Total nonaccrual loans		14,133			4,497			3,039			21,669
Loans 90 days past due and still accruing		22			—			—			22
Total nonperforming loans		14,155			4,497			3,039			21,691
Foreclosed assets		1,103			—			445			1,548
Total nonperforming assets	$	15,258		$	4,497		$	3,484		$	23,239
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans	$	790		$	—		$	294		$	1,084
Nonperforming assets to total assets		0.24	%		0.07	%		0.05	%		0.36	%
Nonperforming loans to total loans		0.35	%		0.11	%		0.07	%		0.53	%
Allowance for loan losses to nonperforming loans		228	%		13	%		0.33	%		152	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		1.29	%		3.60	%		36.11	%		1.97	%

51

	December 31, 2018
(dollars in thousands)	Originated			PNCI			PCI			Total
Performing nonaccrual loans	$	16,573		$	1,269		$	4,847		$	22,689
Nonperforming nonaccrual loans		2,843			1,589			373			4,805
Total nonaccrual loans		19,416			2,858			5,220			27,494
Loans 90 days past due and still accruing		—			—			—			—
Total nonperforming loans		19,416			2,858			5,220			27,494
Foreclosed assets		1,490			—			790			2,280
Total nonperforming assets	$	20,906		$	2,858		$	6,010		$	29,774
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans	$	800		$	—		$	—		$	800
Nonperforming assets to total assets		0.33	%		0.04	%		0.09	%		0.47	%
Nonperforming loans to total loans		0.48	%		0.07	%		0.13	%		0.68	%
Allowance for loan losses to nonperforming loans		164	%		23.3	%		2.34	%		119	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		1.39	%		3.48	%		33.69	%		2.11	%

Changes in nonperforming assets during the three months ended June 30, 2019

(in thousands):	Balance at June 30, 2019		New NPA / Valuation Adjustments			Pay-downs /Sales /Upgrades			Charge-offs/ Write-downs			Transfers to Foreclosed Assets		Balance at March 31, 2019
Real estate mortgage:
Residential	$	4,350	$	2,187		$	(503	)	$	(2	)	$	—	$	2,668
Commercial		8,678		579			(207	)		—			—		8,306
Consumer
Home equity lines		2,476		67			(25	)		—			—		2,434
Home equity loans		2,047		168			(708	)		—			—		2,587
Other consumer		74		81			(40	)		(37	)		—		70
Commercial		4,066		1,126			(422	)		(138	)		—		3,500
Construction:
Residential		—		—			—			—			—		—
Commercial		—		—			—			—			—		—
Total nonperforming loans		21,691		4,208			(1,905	)		(177	)		—		19,565
Foreclosed assets		1,548		(63	)		(704	)		—			—		2,315
Total nonperforming assets	$	23,239	$	4,145		$	(2,609	)	$	(177	)	$	—	$	21,880

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

Nonperforming assets increased during the second quarter of 2019 by $1,359,000 (6.2%) to $23,239,000 at June 30, 2019 compared to $21,880,000 March 31, 2019. The increase in nonperforming assets during the second quarter of 2019 was primarily the result of pay-downs and upgrades of nonperforming loans of $1,905,000, write-downs of $177,000 on nonperforming loans, and sales of foreclosed assets of $704,000, that were offset by new nonperforming loans of $4,208,000 and an increase in the valuation of $63,000 in foreclosed property.

The $4,208,000 of new nonperforming loans added during the second quarter of 2019 was mainly comprised of 4 loans totaling $3,746,000, of which $2,765,000 consisted of 3 real estate loans which management believes are sufficiently secured by collateral and $981,000 related to a loan secured by commercial vehicles. Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the specific loan loss reserves associated with these loans is sufficient as of June 30, 2019.

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

In the second quarter of 2019, the Company recorded $177,000 in loan charge-offs and $116,000 in deposit overdraft charge-offs less $514,000 in loan recoveries and $46,000 in deposit overdraft recoveries resulting in $267,000 of net recoveries.

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

52

Changes in nonperforming assets during the six months ended June 30, 2019

(in thousands):	Balance at June 30, 2019		New NPA / Valuation Adjustments		Pay-downs /Sales /Upgrades			Charge-offs/ Write-downs			Transfers to Foreclosed Assets			Balance at December 31, 2018
Real estate mortgage:
Residential	$	4,350	$	2,187	$	(573	)	$	(2	)	$	(116	)	$	2,854
Commercial		8,678		846		(7,214	)		—			—			15,046
Consumer
Home equity lines		2,476		91		(364	)		—			—			2,749
Home equity loans		2,047		200		(1,116	)		—			—			2,963
Other consumer		74		145		(41	)		(37	)		—			7
Commercial		4,066		1,399		(581	)		(627	)		—			3,875
Construction:
Residential		—		—		—			—			—			—
Commercial		—		—		—			—			—			—
Total nonperforming loans		21,691		4,868		(9,889	)		(666	)		(116	)		27,494
Foreclosed assets		1,548		35		(883	)		—			116			2,280
Total nonperforming assets	$	23,239	$	4,903	$	(10,772	)	$	(666	)	$	—		$	29,774

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

Nonperforming assets decreased during the first half of 2019 by $6,535,000 (22.0%) to $23,239,000 at June 30, 2019 compared to $29,774,000 at December 31, 2018. The decrease in nonperforming assets during the first half of 2019 was primarily the result of pay-downs and upgrades of nonperforming loans of $9,889,000, write-downs of $666,000 on nonperforming loans, and sales of foreclosed assets of $883,000, that were partially offset by new nonperforming assets of $4,902,000.

The $6,535,000 in reduction of nonperforming loans during the first half of 2019 was mainly comprised of decreases within commercial real estate, and included payoffs of three loans to two relationships with a combined balance $6,818,000. The decrease in home equity lines and loans were comprised of decreases of $1,189,000 from 98 home equity lines and loans. These decreases were offset by increases in commercial loans of $191,000 and consumer loans of $66,000.

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

In the first half of 2019, the Company recorded $791,000 in loan charge-offs and $228,000 in deposit overdraft charge-offs less $2,266,000 in loan recoveries and $102,000 in deposit overdraft recoveries resulting in $1,349,000 of net recoveries.

The Components of the Allowance for Loan Losses

The following table sets forth the allowance for loan losses as of the dates indicated:

(dollars in thousands)	2019			2018
Allowance for originated and PNCI loan losses:
Environmental factors allowance	$	12,455		$	11,577
Formula allowance		17,961			18,689
Total allowance for originated and PNCI loan losses		30,416			30,266
Allowance for impaired loans		2,442			2,194
Allowance for PCI loan losses		10			122
Total allowance for loan losses	$	32,868		$	32,582
Allowance for loan losses to loans		0.80	%		0.81	%

For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Asset Quality and Loan Loss Provisioning” at “Results of Operations”, above. Based on the current conditions of the loan portfolio, management believes that the $32,868,000 allowance for loan losses at June 30, 2019 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

53

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

Real estate mortgage	$	14,675	44.7	%	$	15,620	47.9	%
Consumer		8,552	26.0	%		8,375	25.7	%
Commercial		6,745	20.5	%		6,090	18.7	%
Real estate construction		2,896	8.8	%		2,497	7.7	%
Total allowance for loan losses	$	32,868	100.0	%	$	32,582	100.0	%

The following table summarizes the allocation of the allowance for loan losses as a percentage of the total loans for each loan category as of the dates indicated:

Real estate mortgage	$	3,178,730	0.46	%	$	3,143,100	0.50	%
Consumer		434,388	1.97	%		418,982	2.00	%
Commercial		276,045	2.44	%		276,548	2.20	%
Real estate construction		214,524	1.35	%		183,384	1.36	%
Total allowance for loan losses	$	4,103,687	0.80	%	$	4,022,014	0.81	%

54

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

(in thousands)	2019			2018			2019			2018
Allowance for loan losses:
Balance at beginning of period	$	32,064		$	29,973		$	32,582		$	30,323
Reversal of provision for loan losses		537			(638	)		(1,063	)		(874	)
Loans charged off:
Real estate mortgage:
Residential		(2	)		(51	)		(2	)		(52	)
Commercial		—			(15	)		—			(15	)
Consumer:
Home equity lines		—			(24	)		—			(104	)
Home equity loans		—			—			—			—
Other consumer		(153	)		(174	)		(360	)		(368	)
Commercial		(138	)		(54	)		(657	)		(259	)
Construction:
Residential		—			—			—			—
Commercial		—			—			—			—
Total loans charged off		(293	)		(318	)		(1,019	)		(798	)
Recoveries of previously charged-off loans:
Real estate mortgage:
Residential		3			—			5			—
Commercial		10			21			1,391			36
Consumer:
Home equity lines		183			317			278			526
Home equity loans		171			23			258			37
Other consumer		108			66			183			144
Commercial		85			80			253			130
Construction:
Residential		—			—			—			—
Commercial		—			—			—			—
Total recoveries of previously charged off loans		560			507			2,368			873
Net recoveries (charge-offs)		267			189			1,349			75
Balance at end of period	$	32,868		$	29,524		$	32,868		$	29,524
Average total loans	$	4,044,044		$	3,104,126		$	4,033,954		$	3,066,152
Ratios (annualized):
Net charge-offs (recoveries) during period to average loans outstanding during period		(0.03	)%		(0.02	)%		(0.13	)%		(0.01	)%
Benefit from reversal of loan losses to average loans outstanding during period		0.05	%		(0.08	)%		(0.11	)%		(0.11	)%

55

Foreclosed Assets, Net of Allowance for Losses

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

(in thousands)	Balance at June 30, 2019		Sales			Valuation Adjustments			Transfers from Loans		Balance at December 31, 2018
Land & Construction	$	445	$	—		$	—		$	—	$	445
Residential real estate		1,015		(883	)		40			116		1,742
Commercial real estate		88		—			(5	)		—		93
Total foreclosed assets	$	1,548	$	(883	)	$	35		$	116	$	2,280

Deposits

During the three and six months ended June 30, 2019, the Company’s deposits decreased $88,089,000 and $24,293,000 respectively to $5,342,173,000. Included in the June 30, 2019 and December 31, 2018 certificate of deposit balances are $50,000,000 and $60,000,000, respectively, from the State of California. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and creditworthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company.

Off-Balance Sheet Arrangements

See Note 8 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s commitments and contingencies including off-balance-sheet arrangements.

Capital Resources

The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management.

The Company adopted and announced a stock repurchase plan on August 21, 2007 for the repurchase of up to 500,000 shares of the Company’s common stock from time to time as market conditions allow. The 500,000 shares authorized for repurchase under this plan represented approximately 3.2% of the Company’s approximately 15,815,000 common shares outstanding as of August 21, 2007. During the six months ended June 30, 2019, the Company did not repurchase any shares under this plan. This plan has no stated expiration date for the repurchases. As of June 30, 2019, the Company had repurchased 196,566 shares under this plan, which left 303,434 shares available for repurchase under the plan. Shares that are repurchased in accordance with the provisions of a Company stock option plan or equity compensation plan are not counted against the number of shares repurchased under the repurchase plan adopted on August 21, 2007.

The Company’s primary capital resource is shareholders’ equity, which was $875,886,000 at June 30, 2019. This amount represents an increase of $48,513,000 (5.9%) from December 31, 2018, the net result of comprehensive income for the period of $61,468,000, the effect of equity compensation vesting of $815,000, and the exercise of stock options of $2,499,000, that were partially offset by dividends paid of $11,575,000, and repurchase of common stock of $4,694,000. The Company’s ratio of equity to total assets was 13.7% and 13.0% as of June 30, 2019 and December 31, 2018, respectively. We believe that the Company and the Bank were in compliance with applicable minimum capital requirements set forth in the final Basel III Capital rules as of June 30, 2019. The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:

	June 30, 2019						December 31, 2018
	Ratio			Minimum Regulatory Requirement			Ratio			Minimum Regulatory Requirement
Total capital		14.93	%		10.50	%		14.40	%		9.25	%
Tier I capital		14.19	%		8.50	%		13.66	%		7.25	%
Common equity Tier 1 capital		13.03	%		7.00	%		12.49	%		5.75	%
Leverage		11.08	%		4.00	%		10.68	%		4.00	%

See Note 9 and Note 15 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.

56

Liquidity

The Company’s principal source of asset liquidity is cash at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities available for sale. At June 30, 2019, cash at Federal Reserve and other banks in excess of reserve requirements and investment securities available for sale totaled $1,136,946,000, or 17.8% of total assets. The Company’s profitability during the first six months of 2019 generated cash flows from operations of $33,867,000 compared to $32,944,000 during the first six months of 2018. Net cash used in investing activities was $47,403,000 and $144,813,000 during the six months ended June 30, 2019 and 2018, respectively. Financing activities used $38,415,000 during the six months ended June 30, 2019, compared to net cash provided by financing activities of $90,503,000 during the six months ended June 30, 2018. Deposit balance changes accounted for ($24,293,000) and $68,091,000 of financing funds activity during the six months ended June 30, 2019 and 2018, respectively. Dividends paid used $11,575,000 and $7,813,000 of cash during the six months ended June 30, 2019 and 2018, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.

57

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of June 30, 2019 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 4. Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2019. Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2019.

During the three and six months ended June 30, 2019, there were no changes in our internal controls or in other factors that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Item 1A – Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I—Item 1A—Risk Factors” in our Form 10-K for the year ended December 31, 2018 which are incorporated by reference herein. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

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

The following table shows the repurchases made by the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the periods indicated:

Period	(a) Total number of shares purchased (1)		(b) Average price paid per share		(c) Total number of shares purchased as of part of publicly announced plans or programs		(d) Maximum number of shares that may yet be purchased under the plans or programs (2)
April 1-30, 2019		38,087	$	39.91		—		303,434
May 1-31, 2019		12,487	$	39.88		—		303,434
June 1-30, 2019		43,181	$	38.28		—		303,434
Total		93,755	$	39.16		—		303,434

(1) Includes shares purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans. See Note 9 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchased under equity compensation plans.

(2) Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans.

58

Item 6 – Exhibits

EXHIBIT INDEX

Exhibit      No.		Exhibit
	31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO
	31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO
	32.1	Section 1350 Certification of CEO
	32.2	Section 1350 Certification of CFO
	99.1*	Form of Restricted Stock Unit Agreement and Grant Notice for Non-Employee Directors pursuant to TriCo’s 2019 Equity Incentive Plan.
	99.2*	Form of Restricted Stock Unit Agreement and Grant Notice for Employees pursuant to TriCo’s 2019 Equity Incentive Plan.
	99.3*	Form of Performance Award Agreement and Grant Notice pursuant to TriCo’s 2019 Equity Incentive Plan.
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

* Management contract or compensatory plan or arrangement.

59

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	TRICO BANCSHARES
	(Registrant)
Date: August 9, 2019	/s/ Peter G. Wiese
	Peter G. Wiese
	Executive Vice President and Chief Financial Officer
	(Duly authorized officer and principal financial and chief accounting officer)

60