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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

___________________


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

for the quarterly period ended: September 30, 2019


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

for the transition period from to

Commission File Number: 000-10661

___________________

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

___________________


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

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

___________________

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

Title of each class

Trading
Symbol(s)

Name of each exchange
on which registered

Common Stock

TCBK

The NASDAQ Stock Market

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

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

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

☒

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

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

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

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

Common stock, no par value: 30,520,725 shares outstanding as of November 4, 2019.

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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			44
Item 3 – Quantitative and Qualitative Disclosures about Market Risk			63
Item 4 – Controls and Procedures			63
PART II – OTHER INFORMATION			64
Item 1 – Legal Proceedings			64
Item 1A – Risk Factors			64
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			64
Item 6 – Exhibits			65
Signatures			66
Exhibits

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited


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

See accompanying notes to unaudited condensed consolidated financial statements.

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)


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

See accompanying notes to unaudited condensed consolidated financial statements.

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)


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

See accompanying notes to unaudited condensed consolidated financial statements.

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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


	Shares of Common Stock	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at June 30, 2019	30,502,757	$	542,939	$	335,145	$	(2,198)	$	875,886
Net income				23,395				23,395
Other comprehensive income						3,697		3,697
Stock option vesting								—
Stock options exercised	9,000	146						146
RSU vesting		296						296
PSU vesting		102						102
RSUs released	4,250							—
PSUs released	—							—
Repurchase of common stock	(3,820)	(68)		(79)				(147)
Dividends paid ($0.22 per share)				(6,710)				(6,710)
Three months ended September 30, 2019	30,512,187	$	543,415	$	351,751	$	1,499	$	896,665


Balance at January 1, 2019	30,417,223	$	541,762	$	303,490	$	(17,879)	$	827,373
Net income				69,182				69,182
Other comprehensive income						19,378		19,378
Stock option vesting								—
Stock options exercised	166,000	2,646						2,646
RSU vesting		863						863
PSU vesting		350						350
RSUs released	30,461							—
PSUs released	22,237							—
Repurchase of common stock	(123,734)	(2,206)		(2,636)				(4,842)
Dividends paid ($0.60 per share)				(18,285)				(18,285)
Nine months ended September 30, 2019	30,512,187	$	543,415	$	351,751	$	1,499	$	896,665

See accompanying notes to unaudited condensed consolidated financial statements.

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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


	Shares of Common Stock	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at June 30, 2018	23,004,153	$	256,590	$	276,877	$	(21,123)	$	512,344
Net income				16,170				16,170
Adoption ASU2016-01				—		—		—
Adoption ASU2018-02				—		—		—
Other comprehensive loss						(5,836)		(5,836)
Stock option vesting		21						21
Stock options exercised	12,900	252						252
RSU vesting		274						274
PSU vesting		77						77
RSUs released	7,118							—
PSUs released	—							—
Issuance of common stock	7,405,277	284,437						284,437
Repurchase of common stock	(11,630)	(132)		(321)				(453)
Dividends paid ($0.17 per share)				(5,171)				(5,171)
Three months ended September 30, 2018	30,417,818	$	541,519	$	287,555	$	(26,959)	$	802,115


Balance at January 1, 2018	22,955,963	$	255,836	$	255,200	$	(5,228)	$	505,808
Net income				45,109				45,109
Adoption ASU 2016-01				(62)		62		—
Adoption ASU 2018-02				1,093		(1,093)		—
Other comprehensive loss						(20,700)		(20,700)
Stock option vesting		75						75
Stock options exercised	27,400	475						475
RSU vesting		1,019						1,019
PSU vesting		—						—
RSUs released	58,028							—
PSUs released	—							—
Issuance of common stock	7,405,277	284,437						284,437
Repurchase of common stock	(28,850)	(323)		(801)				(1,124)
Dividends paid ($0.51 per share)				(12,984)				(12,984)
Nine months ended September 30, 2018	30,417,818	$	541,519	$	287,555	$	(26,959)	$	802,115

See accompanying notes to unaudited condensed consolidated financial statements.

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)


	For the nine months ended September 30,
	2019		2018
Operating activities:
Net income	$	69,182	$	45,109
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization	5,273		4,914
Amortization of intangible assets	4,293		2,068
(Reversal of) provision for loan losses	(1,392)		1,777
Amortization of investment securities premium, net	2,050		1,953
Gain on sale of investment securities	(107)		(207)
Originations of loans for resale	(92,002)		(63,912)
Proceeds from sale of loans originated for resale	89,506		66,138
Gain on sale of loans	(2,223)		(1,831)
Change in market value of mortgage servicing rights	1,652		(38)
Provision for losses on foreclosed assets	56		89
Gain on transfer of loans to foreclosed assets	(151)		—
Gain on sale of foreclosed assets	(246)		(390)
Loss on disposal of fixed assets	82		206
Increase in cash value of life insurance	(2,294)		(1,996)
Gain on life insurance death benefit	(831)		—
(Gain) loss on marketable equity securities	(100)		92
Equity compensation vesting expense	1,213		1,094
Change in:
Interest receivable	1,207		(5,820)
Interest payable	850		799
Amortization of operating lease ROUA	(463)		—
Other assets and liabilities, net	711		9,860
Net cash from operating activities	76,266		59,905
Investing activities:
Cash acquired in acquisition, net of consideration paid	—		30,613
Proceeds from maturities of securities available for sale	69,278		54,510
Proceeds from maturities of securities held to maturity	50,738		54,203
Proceeds from sale of available for sale securities	125,247		293,279
Purchases of securities available for sale	(37,253)		(370,843)
Net redemption of restricted equity securities	—		7,429
Loan origination and principal collections, net	(159,991)		(178,596)
Proceeds from sale of other real estate owned	1,255		2,206
Proceeds from sale of premises and equipment	—		62
Purchases of premises and equipment	(3,070)		(5,736)
Net cash from (used by) investing activities	46,204		(112,873)
Financing activities:
Net change in deposits	(71,059)		92,051
Net change in other borrowings	584		(4,335)
Repurchase of common stock	(2,196)		(834)
Dividends paid	(18,285)		(12,984)
Exercise of stock options	—		185
Net cash used by (from) financing activities	(90,956)		74,083
Net change in cash and cash equivalents	31,514		21,115
Cash and cash equivalents, beginning of period	227,533		205,428
Cash and cash equivalents, end of period	$	259,047	$	226,543
Supplemental disclosure of noncash activities:
Unrealized gain (loss) on securities available for sale	$	27,511	$	(29,704)
Loans transferred to foreclosed assets	331		511
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes	4,842		1,124
Obligations incurred in conjunction with leased assets	156		—
Supplemental disclosure of cash flow activity:
Cash paid for interest expense	10,803		8,010
Cash paid for income taxes	25,950		11,625
Assets acquired in acquisition	—		1,456,505
Liabilities assumed in acquisition	—		1,172,068

See accompanying notes to unaudited condensed consolidated financial statements.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

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

The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,717,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.

Use of Estimates in the Preparation of Financial Statements

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

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

Segment and Significant Group Concentration of Credit Risk

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

Geographical Descriptions

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

Reclassification

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

Cash and Cash Equivalents

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

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Accounting Standards Adopted in 2019

The Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-2, Leases (Topic 842). ASU 2016-2, which among other things, requires lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. The FASB has issued incremental guidance to Topic 842 standard through ASU No. 2018-11, 2018-20, and 2019-1. The Company has elected to use the transition relief approach as provided in ASU 2018-11, which permits the Company to use January 1, 2019 as both the application date and the adoption date, rather than the modified retrospective approach which would have required an application date of January 1, 2017 and adoption date of January 1, 2019. The Company also elected certain relief options offered within the new standard, which include the package of practical expedients, the option not to recognize a right-of-use asset (ROUA) and lease liability that arise from short-term leases (i.e. leases with terms of 12 months or less), and the option of hindsight when determining lease term. Substantially all of the Company’s lease agreements are considered operating leases and were not previously recognized on the Company’s balance sheets. As of January 1, 2019, the Company recorded a ROUA and corresponding lease liability for all applicable operating leases. While the guidance increased the Company’s gross assets and liabilities, the adoption of ASU 2016-2 did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 6 for more information.

Accounting Standards Pending Adoption

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

FASB issued ASU No. 2017-4, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350): ASU 2017-4 eliminates step two of the goodwill impairment test (the hypothetical purchase price allocation used to determine the implied fair value of goodwill) when step one (determining if the carrying value of a reporting unit exceeds its fair value) is failed. Instead, entities simply will compare the fair value of a reporting unit to its carrying amount and record goodwill impairment for the amount by which the reporting unit’s carrying amount exceeds its fair value. ASU 2017-4 will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.

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

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Note 2 - Business Combinations

Merger with FNB Bancorp

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

In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core deposit intangibles on the acquisition date. Subsequently, the Company revised its estimate of other liabilities acquired in connection with the business combination and reduced the amount of goodwill by $100,000 to $156,561,000. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase price accounting adjustments including goodwill are all non-taxable and /or non-deductible. Acquisition related costs of $601,000 and $1,077,000 are included in the consolidated statements of income for the three and nine months ended September 30, 2018. There have been no acquisition costs incurred during the nine months ended September 30, 2019.

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

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


	FNB Bancorp July 6, 2018
Fair value of consideration transferred:
Fair value of shares issued	$	284,437
Cash consideration	6,695
Total fair value of consideration transferred	291,132
Assets acquired:
Cash and cash equivalents	37,308
Securities available for sale	335,667
Restricted equity securities	7,723
Loans	834,683
Premises and equipment	30,522
Cash value of life insurance	16,817
Core deposit intangible	27,605
Other assets	16,214
Total assets acquired	1,306,539
Liabilities assumed:
Deposits	991,935
Other liabilities	15,033
Short-term borrowings - Federal Home Loan Bank	165,000
Total liabilities assumed	1,171,968
Total net assets acquired	134,571
Goodwill recognized	$	156,561

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

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	FNB Bancorp July 6, 2018
Value of stock consideration paid to FNB Bancorp Shareholders	$	284,437
Cash 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	1,489
Goodwill	$	156,561

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

Note 3 - Investment Securities

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


	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
			(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	488,080	$	8,004	$	(447)	$	495,637
Obligations of states and political subdivisions	108,360		3,550		—		111,910
Corporate bonds	4,420		108		—		4,528
Asset backed securities	376,683		192		(4,870)		372,005
Total debt securities available for sale	$	977,543	$	11,854	$	(5,317)	$	984,080
Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	379,634	$	6,382	$	(482)	$	385,534
Obligations of states and political subdivisions	13,815		350		—		14,165
Total debt securities held to maturity	$	393,449	$	6,732	$	(482)	$	399,699

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

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

The amortized cost and estimated fair value of debt securities at September 30, 2019 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2019, obligations of U.S. government corporations and agencies with a cost basis totaling $867,714,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At September 30, 2019, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 4.7 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.


Debt Securities	Available for Sale						Held to Maturity
(in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

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

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

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


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


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

Obligations of U.S. government agencies: Unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At September 30, 2019, 19 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of 0.59% from the Company’s amortized cost basis.

Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors in these types of securities. At the time of purchase, each of these securities was rated AA or AAA and through September 30, 2019 has not experienced any deterioration in credit rating. The Company continues to monitor these securities for changes in credit rating or other indications of credit deterioration. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At September 30, 2019, 25 asset backed securities had unrealized losses with aggregate depreciation of 1.49% from the Company’s amortized cost basis.

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Note 4 – Loans

A summary of loan balances follows:


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


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

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


	Three months ended September 30,						Nine months ended September 30,
	2019		2018		2019		2018
Change in accretable yield:
Balance at beginning of period	$	5,318	$	5,871	$	6,059	$	6,137
Accretion to interest income	(292)		(253)		(702)		(769)
Reclassification from (to) nonaccretable difference	71		(47)		(260)		203
Balance at end of period	$	5,097	$	5,571	$	5,097	$	5,571

Note 5 – Allowance for Loan Losses

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


	Allowance for Loan Losses – Three Months Ended September 30, 2019
(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,576	$	—	$	48	$	(218)	$	2,406
Commercial	12,099		(746)		126		462		11,941
Total mortgage loans on real estate	14,675		(746)		174		244		14,347
Consumer:
Home equity lines of credit	5,859		—		27		(152)		5,734
Home equity loans	1,242		(3)		156		(133)		1,262
Other	1,451		(188)		79		211		1,553
Total consumer loans	8,552		(191)		262		(74)		8,549
Commercial	6,745		(585)		84		(557)		5,687
Construction:
Residential	2,538		—		—		119		2,657
Commercial	358		—		—		(61)		297
Total construction loans	2,896		—		—		58		2,954
Total	$	32,868	$	(1,522)	$	520	$	(329)	$	31,537

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	Allowance for Loan Losses – Nine months ended September 30, 2019
(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,676	$	(2)	$	53	$	(321)	$	2,406
Commercial	12,944		(746)		1,517		(1,774)		11,941
Total mortgage loans on real estate	15,620		(748)		1,570		(2,095)		14,347
Consumer:
Home equity lines of credit	6,042		—		305		(613)		5,734
Home equity loans	1,540		(3)		414		(689)		1,262
Other	793		(548)		262		1,046		1,553
Total consumer loans	8,375		(551)		981		(256)		8,549
Commercial	6,090		(1,242)		337		502		5,687
Construction:
Residential	1,834		—		—		823		2,657
Commercial	663		—		—		(366)		297
Total construction loans	2,497		—		—		457		2,954
Total	$	32,582	$	(2,541)	$	2,888	$	(1,392)	$	31,537


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

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	Loans, Net of Unearned fees – As of September 30, 2019
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total loans, net of unearned fees
Mortgage loans on real estate:
Residential 1-4 family	$	499,620	$	4,757	$	1,417	$	505,794
Commercial	2,727,228		9,005		5,129		2,741,362
Total mortgage loans on real estate	3,226,848		13,762		6,546		3,247,156
Consumer:
Home equity lines of credit	329,129		1,917		826		331,872
Home equity loans	27,793		2,156		421		30,370
Other	80,146		149		2		80,297
Total consumer loans	437,068		4,222		1,249		442,539
Commercial	271,447		4,501		2,510		278,458
Construction:
Residential	169,034		—		—		169,034
Commercial	45,161		—		—		45,161
Total construction loans	214,195		—		—		214,195
Total	$	4,149,558	$	22,485	$	10,305	$	4,182,348


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

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


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

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	Allowance for Loan Losses – Three Months Ended September 30, 2018
(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	1,991	$	(25)	$	—	$	434	$	2,400
Commercial	11,607		—		15		1,257		12,879
Total mortgage loans on real estate	13,598		(25)		15		1,691		15,279
Consumer:
Home equity lines of credit	5,048		(172)		151		194		5,221
Home equity loans	1,532		(23)		139		(55)		1,593
Other	557		(229)		63		309		700
Total consumer loans	7,137		(424)		353		448		7,514
Commercial	6,378		(693)		202		337		6,224
Construction:
Residential	1,434		—		—		192		1,626
Commercial	977		—		—		(17)		960
Total construction loans	2,411		—		—		175		2,586
Total	$	29,524	$	(1,142)	$	570	$	2,651	$	31,603


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

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	Allowance for Loan Losses – As of September 30, 2018
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total allowance for loan losses
Mortgage loans on real estate:
Residential 1-4 family	$	2,313	$	57	$	30	$	2,400
Commercial	12,552		268		59		12,879
Total mortgage loans on real estate	14,865		325		89		15,279
Consumer:
Home equity lines of credit	5,046		168		7		5,221
Home equity loans	1,418		175		—		1,593
Other	597		103		—		700
Total consumer loans	7,061		446		7		7,514
Commercial	4,353		1,857		14		6,224
Construction:
Residential	1,626		—		—		1,626
Commercial	960		—		—		960
Total construction loans	2,586		—		—		2,586
Total	$	28,865	$	2,628	$	110	$	31,603


	Loans, Net of Unearned fees – As of September 30, 2018
(in thousands)	Loans pooled for evaluation		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Total loans, net of unearned fees
Mortgage loans on real estate:
Residential 1-4 family	$	517,935	$	4,781	$	1,698	$	524,414
Commercial	2,586,659		13,244		7,885		2,607,788
Total mortgage loans on real estate	3,104,594		18,025		9,583		3,132,202
Consumer:
Home equity lines of credit	327,649		2,188		1,299		331,136
Home equity loans	37,840		2,406		447		40,693
Other	49,171		243		42		49,456
Total consumer loans	414,660		4,837		1,788		421,285
Commercial	282,588		4,632		2,427		289,647
Construction:
Residential	114,574		—		—		114,574
Commercial	69,728		—		—		69,728
Total construction loans	184,302		—		—		184,302
Total	$	3,986,144	$	27,494	$	13,798	$	4,027,436

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

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

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

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

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

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

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

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


	Credit Quality Indicators Originated Loans – As of September 30, 2019
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total Originated Loans
Mortgage loans on real estate:
Residential 1-4 family	$	348,668	$	2,743	$	4,235	$	—	$	355,646
Commercial	2,063,991		38,150		7,168		—		2,109,309
Total mortgage loans on real estate	2,412,659		40,893		11,403		—		2,464,955
Consumer:
Home equity lines of credit	288,554		3,378		2,479		—		294,411
Home equity loans	23,819		1,184		2,031		—		27,034
Other	63,648		452		53		—		64,153
Total consumer loans	376,021		5,014		4,563		—		385,598
Commercial	242,308		8,968		5,103				256,379
Construction:
Residential	158,657		—		250		—		158,907
Commercial	44,380		324		—		—		44,704
Total construction loans	203,037		324		250		—		203,611
Total loans	$	3,234,025	$	55,199	$	21,319	$	—	$	3,310,543

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


	Credit Quality Indicators Originated Loans – As of December 31, 2018
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total Originated Loans
Mortgage loans on real estate:
Residential 1-4 family	$	337,189	$	1,724	$	4,883	$	—	$	343,796
Commercial	1,861,627		33,483		15,871		—		1,910,981
Total mortgage loans on real estate	2,198,816		35,207		20,754		—		2,254,777
Consumer:
Home equity lines of credit	279,491		2,309		2,653		—		284,453
Home equity loans	29,289		1,054		2,317		—		32,660
Other	33,606		341		73		—		34,020
Total consumer loans	342,386		3,704		5,043		—		351,133
Commercial	217,126		6,127		5,382		—		228,635
Construction:
Residential	90,412		32		259		—		90,703
Commercial	55,863		345		—		—		56,208
Total construction loans	146,275		377		259		—		146,911
Total loans	$	2,904,603	$	45,415	$	31,438	$	—	$	2,981,456

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	Credit Quality Indicators PNCI Loans – As of December 31, 2018
(in thousands)	Pass		Special Mention		Substandard		Doubtful / Loss		Total PNCI Loans
Mortgage loans on real estate:
Residential 1-4 family	$	167,908	$	1,086	$	798	$	—	$	169,792
Commercial	701,868		3,085		3,448		—		708,401
Total mortgage loans on real estate	869,776		4,171		4,246		—		878,193
Consumer:
Home equity lines of credit	38,780		1,124		1,053		—		40,957
Home equity loans	3,413		74		98		—		3,585
Other	21,481		173		5		—		21,659
Total consumer loans	63,674		1,371		1,156		—		66,201
Commercial	45,027		321		120		—		45,468
Construction:
Residential	30,593		—		—		—		30,593
Commercial	5,880		—		—		—		5,880
Total construction loans	36,473		—		—		—		36,473
Total	$	1,014,950	$	5,863	$	5,522	$	—	$	1,026,335

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

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

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

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

Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate

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valuations or revaluations are obtained at initiation of the credit and periodically, but not less than every twelve months depending on collateral type, once repayment is questionable and the loan has been classified.

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

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


	Analysis of Originated Past Due Loans - As of September 30, 2019
(in thousands)	30-59 days		60-89 days		> 90 days		Total Past Due Loans		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	289	$	66	$	1,187	$	1,542	$	354,104	$	355,646	$	—
Commercial	117		48		—		165		2,109,144		2,109,309		—
Total mortgage loans on real estate	406		114		1,187		1,707		2,463,248		2,464,955		—
Consumer:
Home equity lines of credit	890		282		624		1,796		292,615		294,411		—
Home equity loans	253		105		137		495		26,539		27,034		6
Other	134		138		4		276		63,877		64,153		—
Total consumer loans	1,277		525		765		2,567		383,031		385,598		6
Commercial	955		227		272		1,454		254,925		256,379		30
Construction:
Residential	—		—		—		—		158,907		158,907		—
Commercial	—		—		—		—		44,704		44,704		—
Total construction loans	—		—		—		—		203,611		203,611		—
Total originated loans	$	2,638	$	866	$	2,224	$	5,728	$	3,304,815	$	3,310,543	$	36

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


	Analysis of PNCI Past Due Loans - As of September 30, 2019
(in thousands)	30-59 days		60-89 days		> 90 days		Total Past Due Loans		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	—	$	52	$	243	$	295	$	148,436	$	148,731	$	—
Commercial	—		—		949		949		625,975		626,924		—
Total mortgage loans on real estate	—		52		1,192		1,244		774,411		775,655		—
Consumer:
Home equity lines of credit	182		122		—		304		36,331		36,635		—
Home equity loans	—		14		232		246		2,669		2,915		—
Other	54		7		—		61		16,081		16,142		—
Total consumer loans	236		143		232		611		55,081		55,692		—
Commercial	—		—		174		174		19,395		19,569		—
Construction:
Residential	—		—		—		—		10,127		10,127		—
Commercial	—		—		—		—		457		457		—
Total construction loans	—		—		—		—		10,584		10,584		—
Total PNCI loans	$	236	$	195	$	1,598	$	2,029	$	859,471	$	861,500	$	—

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


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

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


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

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

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

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


	Non Accrual Loans
	As of September 30, 2019										As of December 31, 2018
(in thousands)	Originated		PNCI		Total		Originated		PNCI		Total
Mortgage loans on real estate:
Residential 1-4 family	$	2,820	$	908	$	3,728	$	3,244	$	334	$	3,578
Commercial	2,532		3,253		5,785		9,263		1,468		10,731
Total mortgage loans on real estate	5,352		4,161		9,513		12,507		1,802		14,309
Consumer:
Home equity lines of credit	1,188		426		1,614		1,429		885		2,314
Home equity loans	1,405		263		1,668		1,722		47		1,769
Other	90		3		93		3		4		7
Total consumer loans	2,683		692		3,375		3,154		936		4,090
Commercial	3,225		174		3,399		3,755		120		3,875
Construction:
Residential	—		—		—		—		—		—
Commercial	—		—		—		—		—		—
Total construction	—		—		—		—		—		—
Total non accrual loans	$	11,260	$	5,027	$	16,287	$	19,416	$	2,858	$	22,274

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


	Impaired Originated Loans – As of, or for the Nine months ended September 30, 2019
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	4,461	$	3,053	$	796	$	3,849	$	91	$	4,214	$	32
Commercial	6,006		4,423		1,329		5,752		26		9,096		59
Total mortgage loans on real estate	10,467		7,476		2,125		9,601		117		13,310		91
Consumer:
Home equity lines of credit	1,279		1,232		—		1,232		—		1,662		26
Home equity loans	2,157		1,542		238		1,780		46		1,973		5
Other	74		3		51		54		14		46		1
Total consumer loans	3,510		2,777		289		3,066		60		3,681		32
Commercial	4,760		611		3,716		4,327		1,199		4,769		22
Construction:
Residential	—		—		—		—		—		—		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		—		—
Total	$	18,737	$	10,864	$	6,130	$	16,994	$	1,376	$	21,760	$	145

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	Impaired PNCI Loans – As of, or for the Nine months ended September 30, 2019
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	959	$	908	$	—	$	908	$	—	$	621	$	9
Commercial	3,255		3,253		—		3,253		—		2,360		134
Total mortgage loans on real estate	4,214		4,161		—		4,161		—		2,981		143
Consumer:
Home equity lines of credit	741		444		241		685		84		844		—
Home equity loans	395		376		—		376		—		308		9
Other	95		72		23		95		4		103		—
Total consumer loans	1,231		892		264		1,156		88		1,255		9
Commercial	181		113		60		173		60		147
Construction:
Residential	—		—		—		—		—		—		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		—		—
Total	$	5,626	$	5,166	$	324	$	5,490	$	148	$	4,383	$	152


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

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	Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	375	$	334	$	—	$	334	$	—	$	529	$	5
Commercial	3,110		1,468		—		1,468		—		1,713		183
Total mortgage loans on real estate	3,485		1,802		—		1,802		—		2,242		188
Consumer:
Home equity lines of credit	1,027		587		367		954		127		1,120		18
Home equity loans	252		47		197		244		101		155		—
Other	106		21		85		106		11		114		—
Total consumer loans	1,385		655		649		1,304		239		1,389		18
Commercial	120		113		7		120		7		60		1
Construction:
Residential	—		—		—		—		—		—		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		—		—
Total	$	4,990	$	2,570	$	656	$	3,226	$	246	$	3,691	$	207


	Impaired Originated Loans – As of, or for the Nine months ended September 30, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	4,185	$	3,251	$	311	$	3,562	$	57	$	3,883	$	67
Commercial	12,553		9,619		2,370		11,989		268		11,549		208
Total mortgage loans on real estate	16,738		12,870		2,681		15,551		325		15,432		275
Consumer:
Home equity lines of credit	1,444		1,346		59		1,405		19		1,410		32
Home equity loans	2,554		1,960		157		2,117		30		1,753		24
Other	3		—		3		3		3		3		—
Total consumer loans	4,001		3,306		219		3,525		52		3,166		56
Commercial	4,868		2,135		2,497		4,632		1,857		4,626		78
Construction:
Residential	—		—		—		—		—		68		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		68		—
Total	$	25,607	$	18,311	$	5,397	$	23,708	$	2,234	$	23,292	$	409

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	Impaired PNCI Loans – As of, or for the Nine months ended September 30, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	1,302	$	1,219	$	—	$	1,219	$	—	$	1,275	$	—
Commercial	1,255		1,255		—		1,255		—		627		58
Total mortgage loans on real estate	2,557		2,474		—		2,474		—		1,902		58
Consumer:
Home equity lines of credit	852		625		158		783		149		909		13
Home equity loans	296		50		239		289		145		287		9
Other	240		—		240		240		100		257		7
Total consumer loans	1,388		675		637		1,312		394		1,453		29
Commercial	—		—		—		—		—		—		—
Construction:
Residential	—		—		—		—		—		—		—
Commercial	—		—		—		—		—		—		—
Total construction loans	—		—		—		—		—		—		—
Total	$	3,945	$	3,149	$	637	$	3,786	$	394	$	3,355	$	87

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

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


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

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	TDR Information for the nine months ended September 30, 2019
(dollars in thousands)	Number	Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision		Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family	3	$	659	$	662	$	30	$	—	$	—	$	—
Commercial	2	60		67		—		—		—		—
Total mortgage loans on real estate	5	719		729		30		—		—		—
Consumer:
Home equity lines of credit	1	65		68		—		—		—		—
Home equity loans	2	149		147		29		—		—		—
Other	—	—		—		—		—		—		—
Total consumer loans	3	214		215		29		—		—		—
Commercial	10	1,918		1,885		—		1		7		—
Construction:
Residential	—	—		—		—		—		—		—
Commercial	—	—		—		—		—		—		—
Total construction loans	—	—		—		—		—		—		—
Total	18	$	2,851	$	2,829	$	59	$	1	$	7	$	—


	TDR Information for the three months ended September 30, 2018
(dollars in thousands)	Number	Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision		Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial	4	1,326		1,324		(308)		—		—		—
Total mortgage loans on real estate	4	1,326		1,324		(308)		—		—		—
Consumer:
Home equity lines of credit	—	—		—		—		1		128		—
Home equity loans	1	478		478		—		—		—		—
Other	—	—		—		—		—		—		—
Total consumer loans	1	478		478		—		1		128		—
Commercial	2	203		203		—		—		—		—
Construction:
Residential	—	—		—		—		—		—		—
Commercial	—	—		—		—		—		—		—
Total construction loans	—	—		—		—		—		—		—
Total	7	$	2,007	$	2,005	$	(308)	$	1	$	128	$	—

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	TDR Information for the nine months ended September 30, 2018
(dollars in thousands)	Number	Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision		Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial	6	1,743		1,741		(262)		1		169		—
Total mortgage loans on real estate	6	1,743		1,741		(262)		1		169		—
Consumer:
Home equity lines of credit	1	133		138		—		1		128		—
Home equity loans	2	599		599		—		—		—		—
Other	—	—		—		—		—		—		—
Total consumer loans	3	732		737		—		1		128		—
Commercial	4	619		623		(3)		4		340		(2)
Construction:
Residential	—	—		—		—		—		—		—
Commercial	—	—		—		—		—		—		—
Total construction loans	—	—		—		—		—		—		—
Total	13	$	3,094	$	3,101	$	(265)	$	6	$	637	$	(2)

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

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

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

Note 6 - Leases

The Company adopted ASU 2016-2 “Leases” (Topic 842) as of January 1, 2019, which requires the Company to record a right-of-use asset (“ROUA”) on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company is also required to record a lease liability on the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is lessee of real estate property for branches, ATM locations, and general administration and operations. The Company elected not to include short-term leases (i.e. leases with initial terms of twelve months or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance were unknown and not determinable at lease commencement and therefore, were not included in the determination of the Company’s ROUA or lease liability.

The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the

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ROU asset and lease liability. Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a

collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the amount of lease liability and adjusted for prepaid or accrued lease payments, remaining lease incentives, unamortized direct costs (if any), and impairment (if any).

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


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

Prior to the adoption of ASU 2016-2, rent expense under operating leases was $1,161,000 and $2,937,000 during the three and nine months ended September 30, 2018, respectively. Rent expense was offset by rent income of $10,000 and $31,000 during the three and nine months ended September 30, 2018, respectively.

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


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

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



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

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


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

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Note 7 - Deposits

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


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

Certificate of deposit balances of $50,000,000 and $60,000,000 from the State of California were included in time certificates, over $250,000, at September 30, 2019 and December 31, 2018, respectively. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company. Overdrawn deposit balances of $1,431,000 and $1,469,000 were classified as consumer loans at September 30, 2019 and December 31, 2018, respectively

Note 8 - Commitments and Contingencies

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


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

Note 9 - Shareholders’ Equity

Dividends Paid

The Bank paid to the Company cash dividends in the aggregate amounts of $7,011,000 and $13,507,000 during the three months ended September 30, 2019 and 2018, respectively and $25,361,000 and $22,649,000 during the nine months ended September 30, 2019 and 2018, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California Department of Business Oversight (DBO). Absent approval from the Commissioner of the DBO, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period.

Stock Repurchase Plan

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

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Stock Repurchased Under Equity Compensation Plans

During the three months ended September 30, 2019 and 2018, employees tendered 3,820 and 11,630 shares, respectively, of the Company’s common stock with market value of $147,000, and $453,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. During the nine months ended September 30, 2019 and 2018, employees tendered 123,734 and 28,850 shares, respectively, of the Company’s common stock with market value of $4,842,000, and $1,124,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. The tendered shares were retired. The market value of tendered shares is based on the last market trade price at closing on the day an option is exercised. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.

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

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

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


	Number of Shares	Option Price per Share	Weighted Average Exercise Price
Outstanding at December 31, 2018	343,000	$12.63 to $23.21	$	16.67
Options granted	—	— to —	—
Options exercised	(166,000)	$12.63 to $19.46	15.93
Options forfeited	—	— to —	—
Outstanding at September 30, 2019	177,000	$14.54 to $23.21	$	17.52

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


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

The 375 options that are currently not exercisable as of September 30, 2019 are expected to vest, on a weighted-average basis, over the next three months. The Company did not modify any option grants during 2018 or the nine months ended September 30, 2019.


	Service Condition Vesting RSUs	Market Plus Service Condition Vesting RSUs
Outstanding at December 31, 2018	66,947	45,536
RSUs granted	35,272	22,898
RSUs added through dividend and performance credits	946	7,414
RSUs released	(30,461)	(22,237)
RSUs forfeited/expired	(1,876)	(2,299)
Outstanding at September 30, 2019	70,828	51,312

The 70,828 of service condition vesting RSUs outstanding as of September 30, 2019 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of

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RSUs outstanding under the original grant. The dividend credits follow the same vesting requirements as the RSU awards and are not considered participating securities. The 70,828 of service condition vesting RSUs outstanding as of September 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next 1.2 years. The Company expects to recognize $2,135,210 of pre-tax compensation costs related to these service condition vesting RSUs between September 30, 2019 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2018 or during the nine months ended September 30, 2019.

The 51,312 of market plus service condition vesting RSUs outstanding as of September 30, 2019 are expected to vest, and be released, on a weighted-average basis, over the next 1.9 years. The Company expects to recognize $1,045,845 of pre-tax compensation costs related to these RSUs between September 30, 2019 and their vesting dates. As of September 30, 2019, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 76,968 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 2018 or during the nine months ended September 30, 2019.

Note 11 - Non-interest Income and Expense

The following table summarizes the Company’s non-interest income for the periods indicated:


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

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


	Three months ended September 30,						Nine months ended September 30,
	2019		2018		2019		2018
Base salaries, net of deferred loan origination costs	$	17,656	$	15,685	$	51,624	$	44,076
Incentive compensation	3,791		4,515		10,064		9,126
Benefits and other compensation costs	5,452		5,623		17,058		15,726
Total salaries and benefits expense	26,899		25,823		78,746		68,928
Occupancy	3,711		3,173		11,223		8,574
Data processing and software	3,411		2,786		10,114		7,979
Equipment	1,679		1,750		5,298		4,938
Intangible amortization	1,431		1,390		4,293		2,068
Advertising	1,358		1,341		4,222		3,214
ATM and POS network charges	1,343		1,197		3,936		3,860
Professional fees	999		1,352		2,895		2,898
Telecommunications	867		819		2,437		2,201
Regulatory assessments and insurance	94		537		1,095		1,384
Merger and acquisition expense	—		4,150		—		5,227
Postage	438		275		1,063		934
Operational losses	228		217		679		763
Courier service	357		278		1,039		769
Gain on sale of foreclosed assets	(50)		(2)		(246)		(390)
Loss on disposal of fixed assets	2		152		82		206
Other miscellaneous expense	3,577		2,290		11,617		9,673
Total other non-interest expense	19,445		21,705		59,747		54,298
Total non-interest expense	$	46,344	$	47,528	$	138,493	$	123,226

Note 12 - Earnings Per Share

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


	Three months ended September 30,
(in thousands)	2019		2018
Net income	$	23,395	$	16,170
Average number of common shares outstanding	30,509		30,011
Effect of dilutive stock options and restricted stock	120		280
Average number of common shares outstanding used to calculate diluted earnings per share	30,629		30,291
Options excluded from diluted earnings per share because the effect of these options was antidilutive	42		10

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

Note 13 – Comprehensive Income

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

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


	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2019		2018		2019		2018
Unrealized holding gains (losses) on available for sale securities before reclassifications	$	5,355	$	(8,193)	$	27,618	$	(29,134)
Amounts reclassified out of accumulated other comprehensive income:
Realized (gain) loss on debt securities	(107)		(207)		(107)		(207)
Adoption ASU 2016-01	—		—		—		62
Adoption ASU 2018-02	—		—		—		(425)
Total amounts reclassified out of accumulated other comprehensive income (loss)	(107)		(207)		(107)		(570)
Unrealized holding gains (losses) on available for sale securities after reclassifications	5,248		(8,400)		27,511		(29,704)
Tax effect	(1,551)		2,483		(8,133)		8,763
Unrealized holding gains (losses) on available for sale securities, net of tax	3,697		(5,917)		19,378		(20,941)
Change in unfunded status of the supplemental retirement plans before reclassifications	(89)		—		(266)		668
Amounts reclassified out of accumulated other comprehensive income (loss):
Amortization of prior service cost	(13)		(13)		(40)		(40)
Amortization of actuarial losses	102		128		306		382
Adoption ASU 2018-02	—		—		—		(668)
Total amounts reclassified out of accumulated other comprehensive income (loss)	89		115		266		(326)
Change in unfunded status of the supplemental retirement plans after reclassifications	—		115		—		342
Tax effect	—		(34)		—		(101)
Change in unfunded status of the supplemental retirement plans, net of tax	—		81		—		241
Total other comprehensive income (loss)	$	3,697	$	(5,836)	$	19,378	$	(20,700)

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


(in thousands)	September 30, 2019		December 31, 2018
Net unrealized gain (loss) on available for sale securities	$	6,537	$	(20,974)
Tax effect	(1,932)		6,201
Unrealized holding gain (loss) on available for sale securities, net of tax	4,605		(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 gain (loss)	$	1,499	$	(17,879)

Note 14 - Fair Value Measurement

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

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

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

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

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

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

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

Impaired originated and PNCI loans - Originated and PNCI loans are not recorded at fair value on a recurring basis. However, from time to time, an originated or PNCI loan is considered impaired and an allowance for loan losses is established. Originated

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

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

Mortgage servicing rights - Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3.

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


Fair value at September 30, 2019	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,974	$	2,974	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government corporations and agencies	495,637		—		495,637		—
Obligations of states and political subdivisions	111,910		—		111,910		—
Corporate bonds	4,528		—		4,528		—
Asset backed securities	372,005		—		372,005		—
Loans held for sale	7,604		—		7,604		—
Mortgage servicing rights	6,072		—		—		6,072
Total assets measured at fair value	$	1,000,730	$	2,974	$	991,684	$	6,072


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

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

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


Three months ended September 30,	Beginning Balance		Transfers into (out of) Level 3	Change Included in Earnings		Issuances		Ending Balance
2019: Mortgage servicing rights	$	6,229	—	$	(455)	$	298	$	6,072
2018: Mortgage servicing rights	$	7,021	—	$	(37)	$	138	$	7,122


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

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

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

As of September 30, 2019:

Fair Value
(in thousands)

Valuation
Technique

Unobservable
Inputs

Range,
Weighted
Average

Mortgage Servicing Rights

6,072

Discounted cash flow

Constant prepayment rate

7% - 42%; 11%

Discount rate

10% - 14%; 12%

As of December 31, 2018:

Mortgage Servicing Rights

7,098

Discounted cash flow

Constant prepayment rate

5% - 27.3%; 7.6%

Discount rate

12% - 13%; 12%

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


September 30, 2019	Total		Level 1	Level 2	Level 3		Total Gains (Losses)
Fair value:
Impaired Originated & PNCI loans	$	1,055	—	—	$	1,055	$	(652)
Foreclosed assets	417		—	—	417		(27)
Total assets measured at fair value	$	1,472	—	—	$	1,472	$	(679)


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

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

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

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

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

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

September 30, 2019

Fair Value
(in thousands)

Valuation
Technique

Unobservable Inputs

Range,
Weighted Average

Impaired Originated & PNCI loans

1,055

Sales comparison
approach
Income approach

Adjustment for differences between
comparable sales
Capitalization rate

Not meaningful
N/A

Foreclosed assets (Residential real estate)

417

Sales comparison
approach

Adjustment for differences between
comparable sales

Not meaningful

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

December 31, 2018

Fair Value
(in thousands)

Valuation
Technique

Unobservable Inputs

Range,
Weighted Average

Impaired Originated & PNCI loans

281

Sales comparison
approach
Income approach

Adjustment for differences between
comparable sales
Capitalization rate

(16.30)% - 35.14%; 10.45% N/A

Foreclosed assets (Residential real estate)

693

Sales comparison
approach

Adjustment for differences between
comparable sales

(21.83)% - 7.25%; (3.75)%

Foreclosed assets (Commercial real estate)

618

Sales comparison
approach

Adjustment for differences between
comparable sales

(65)% - 20%; (45)%

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


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


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

Note 15 - Regulatory Matters

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

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

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


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

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

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

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

FORWARD-LOOKING STATEMENTS

Cautionary Statements Regarding Forward-Looking Information

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

General

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

Critical Accounting Policies and Estimates

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

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Geographical Descriptions

Financial Highlights

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

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

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

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

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

•For the current quarter, net interest margin was 4.44% on a tax equivalent basis as compared to 4.29% in the quarter ended September 30, 2018 and decreased 6 basis points from the trailing quarter.

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

•The average rate of interest paid on deposits, including non-interest-bearing deposits, remained low but increased slightly to 0.23% for the third quarter of 2019 as compared with 0.22% for the trailing quarter, and an increase of 7 basis points from the average rate paid during the same quarter of the prior year.

•Non-performing assets to total assets were 0.31% at September 30, 2019, as compared to 0.35% as of June 30, 2019, and 0.47% at December 31, 2018.

•The balance of nonperforming loans decreased by $2.0 million, and was facilitated by the sale of loans and charge-offs. Net charge-offs (recoveries) for the quarter ended September 30, 2019 and 2018 were $1.0 million and ($0.2) million, respectively, while net charge-offs (recoveries) for the nine months ended September 30, 2019 were ($0.3) million and $0.5 million, respectively.

•For the three months ended September 30, 2019, the efficiency ratio declined to 58.8%, as compared to 60.1%, in the trailing quarter and 65.3% in the same quarter of the 2018 year. Excluding merger and acquisition costs from the 2018 year results in an efficiency ratio of 59.56%.

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

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TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)


	Three months ended September 30,									Nine months ended September 30,
	2019			2018			2019			2018
Net interest income	64,688			$	60,489		$	192,873		$	151,344
Reversal of (provision for) loan losses	329			(2,651)			1,392			(1,777)
Non-interest income	14,108			12,336			39,334			36,466
Non-interest expense	(46,344)			(47,528)			(138,493)			(123,226)
Provision for income taxes	(9,386)			(6,476)			(25,924)			(17,698)
Net income	$	23,395		$	16,170		$	69,182		$	45,109
Per Share Data:
Basic earnings per share	$	0.77		$	0.54		$	2.27		$	1.78
Diluted earnings per share	$	0.76		$	0.53		$	2.25		$	1.76
Dividends paid	$	0.22		$	0.17		$	0.60		$	0.51
Book value at period end							$	29.39		$	26.37
Average common shares outstanding	30,509			30,011			30,464			25,317
Average diluted common shares outstanding	30,629			30,291			30,643			25,617
Shares outstanding at period end							30,512			30,418
At period end:
Loans, net							4,150,811			3,995,833
Total investment securities							1,397,753			1,535,953
Total assets							6,384,883			6,318,865
Total deposits							5,295,407			5,093,117
Other borrowings							16,423			282,831
Shareholders’ equity							896,665			802,115
Financial Ratios:
During the period:
Return on average assets (annualized)	1.44		%	1.05		%	1.44		%	1.15		%
Return on average equity (annualized)	10.42		%	9.11		%	10.67		%	10.44		%
Net interest margin⁽¹⁾(annualized)	4.44		%	4.29		%	4.48		%	4.22		%
Efficiency ratio	58.82		%	65.26		%	59.64		%	65.61		%
Average equity to average assets	13.80		%	12.74		%	13.50		%	11.48		%
At end of period:
Equity to assets							14.04		%	12.69		%
Total capital to risk-adjusted assets							15.23		%	13.90		%

⁽¹⁾Fully taxable equivalent (FTE)

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

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Results of Operations

Overview

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


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

The Company reported net income of $23,395,000 and $69,182,000 for the quarter and nine months ended September 30, 2019, respectively, compared to $16,170,000 and $45,109,000 for the quarter and nine months ended September 30, 2018, respectively. Diluted earnings per share were $0.76 and $2.25 for the quarter and nine months ended September 30, 2019, respectively, compared to $0.53 and $1.76 for the quarter and nine months ended September 30, 2018, respectively.

Net Interest Income

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


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

Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income. During the three and nine months ended September 30, 2019, purchased loan discount accretion was $2,360,000 and $5,919,000, respectively. During the three and nine months ended September 30, 2018, purchased loan discount accretion was $2,098,000 and $3,289,000, respectively. On a year over year basis, the increase in discount accretion is directly attributable to the acquisition of FNB Bancorp in July 2018. Quarter over quarter, the increase in accretion is attributed to an increased level of pay-off activity resulting from the declining rate environment.

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Summary of Average Balances, Yields/Rates and Interest Differential

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


	For the three months ended
	September 30, 2019										September 30, 2018
	Average Balance		Interest Income/ Expense		Rates Earned /Paid		Average Balance		Interest Income/ Expense		Rates Earned /Paid
Assets:
Loans	$	4,142,602	$	56,999	5.46	%	$	4,019,391	$	53,102	5.24	%
Investment securities - taxable	1,403,653		10,172		2.88	%	1,326,756		9,648		2.89	%
Investment securities - nontaxable⁽¹⁾	133,038		1,250		3.73	%	163,309		1,546		3.76	%
Total investments	1,536,691		11,422		2.95	%	1,490,065		11,194		2.98	%
Cash at Federal Reserve and other banks	130,955		757		2.29	%	119,635		615		2.04	%
Total interest-earning assets	5,810,248		69,178		4.72	%	5,629,091		64,911		4.57	%
Other assets	642,222						626,622
Total assets	$	6,452,470					$	6,255,713
Liabilities and shareholders’ equity:
Interest-bearing demand deposits	$	1,240,548	$	284	0.09	%	$	1,125,159	$	248	0.09	%
Savings deposits	1,861,166		1,192		0.25	%	1,803,022		833		0.18	%
Time deposits	447,669		1,574		1.39	%	430,286		991		0.91	%
Total interest-bearing deposits	3,549,383		3,050		0.34	%	3,358,467		2,072		0.24	%
Other borrowings	73,350		334		1.81	%	246,637		1,178		1.89	%
Junior subordinated debt	57,156		817		5.67	%	56,973		815		5.68	%
Total interest-bearing liabilities	3,679,889		4,201		0.45	%	3,662,077		4,065		0.44	%
Noninterest-bearing deposits	1,777,852						1,710,374
Other liabilities	104,062						86,131
Shareholders’ equity	890,667						797,131
Total liabilities and shareholders’ equity	$	6,452,470					$	6,255,713
Net interest spread⁽²⁾					4.27	%					4.13	%
Net interest income and interest margin⁽³⁾			$	64,977	4.44	%			$	60,846	4.29	%

⁽¹⁾Fully taxable equivalent (FTE)

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

⁽³⁾Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.

During the comparable three month periods above, net interest income and net interest margin were benefited by both the increases in average volume and rates earned on loans. These benefits were partially offset by the increases in rates paid on savings and time deposits. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable nine-month periods increased from 154% to 158%, which contributed to the growth in net interest income and net interest margin of $4,131,000 and 15 basis points, respectively. See the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid, below for additional information.

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


	For the nine months ended
	September 30, 2019										September 30, 2018
	Average Balance		Interest Income/ Expense		Rates Earned /Paid		Average Balance		Interest Income/ Expense		Rates Earned /Paid
Assets:
Loans	$	4,070,568	$	166,888	5.48	%	$	3,387,390	$	130,455	5.15	%
Investment securities - taxable	1,420,426		31,849		3.00	%	1,192,304		25,042		2.81	%
Investment securities - nontaxable⁽¹⁾	138,580		4,024		3.88	%	145,298		4,254		3.91	%
Total investments	1,559,006		35,873		3.08	%	1,337,602		29,296		2.93	%
Cash at Federal Reserve and other banks	148,995		2,694		2.42	%	101,889		1,384		1.82	%
Total interest-earning assets	5,778,569		205,455		4.75	%	4,826,881		161,135		4.46	%
Other assets	643,130						449,020
Total assets	$	6,421,699					$	5,275,901
Liabilities and shareholders’ equity:
Interest-bearing demand deposits	$	1,263,312	$	860	0.09	%	$	1,038,775	$	673	0.09	%
Savings deposits	1,892,122		3,631		0.26	%	1,524,048		1,671		0.15	%
Time deposits	443,546		4,277		1.29	%	350,559		2,058		0.78	%
Total interest-bearing deposits	3,598,980		8,768		0.33	%	2,913,382		4,402		0.20	%
Other borrowings	35,814		384		1.43	%	165,026		2,106		1.71	%
Junior subordinated debt	57,109		2,501		5.86	%	56,928		2,301		5.39	%
Total interest-bearing liabilities	3,691,903		11,653		0.42	%	3,135,336		8,809		0.38	%
Noninterest-bearing deposits	1,761,037						1,462,209
Other liabilities	101,947						72,772
Shareholders’ equity	866,812						605,584
Total liabilities and shareholders’ equity	$	6,421,699					$	5,275,901
Net interest spread⁽²⁾					4.33	%					4.08	%
Net interest income and interest margin⁽³⁾			$	193,802	4.48	%			$	152,326	4.22	%

⁽¹⁾Fully taxable equivalent (FTE)

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

The change in average balances of assets and liabilities were significantly impacted by the July 6, 2018 acquisition of FNB Bancorp. During the comparable nine month periods above, net interest income and net interest margin were benefited by both the increases in average volume and rates earned on loans. These benefits were partially offset by the increases in rates paid on savings and time deposits. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable nine-month periods increased from 154% to 156%, which contributed to the growth in net interest income and net interest margin of $41,476,000 and 26 basis points, respectively. See the "Summary of changes in interest income and expense due to changes in average asset and liability balances and yields earned and rates paid", below for additional information.

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

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


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

⁽¹⁾Fully taxable equivalent (FTE)


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

⁽¹⁾Fully taxable equivalent (FTE)

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

Net interest income (FTE) during the three months ended September 30, 2019 increased $4,131,000 or 6.8% to $64,977,000 compared to $60,846,000 during the three months ended September 30, 2018. The increase in net interest income (FTE) was primarily due to both an increase in the average balances, and increase in market rates, on loans. Increases in average balance of loans added $1,657,000 to net interest income. Increases in market rates and purchase discount accretion added $1,375,000 to net interest income, due to increases in rates earned on interest-earnings assets outpacing increases in rates paid on interest-bearing liabilities.

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The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, has decreased during the quarter by 0.50% to 5.00% at September 30, 2019, consistent with the rate at September 30, 2018. As compared to the same quarter in the prior year, average loan yields increased 22 basis points to 5.46% during the three months ended September 30, 2019 from 5.24% during the three months ended September 30, 2018. Of the 22 basis point increase in yields on loans, 20 basis points was attributable to increases in market rates while 2 basis points was from increased accretion of purchased loans.

The organic growth in deposits was driven primarily by normal and expected seasonal trends as well as the impact of deposit customer’s receipt of insurance proceeds from the property and casualty losses incurred in connection with the wildfires in Northern California. This growth in deposits allowed for the repayment of overnight borrowings resulting in a reduction in interest expense of $792,000, however, the increases in rates paid on deposit products increased interest expense by $882,000 for the three month period ended September 30, 2019 as compared with the same period in 2018. The Company’s cost of interest-bearing deposits increased from 24 basis points during the three months ended September 30, 2018 to 34 basis points during the three months ended September 30, 2019.

Net interest income (FTE) during the nine months ended September 30, 2019 increased $41,476,000 or 27.2% to $193,802,000 compared to $152,326,000 during the nine months ended September 30, 2018. The increase in net interest income (FTE) was primarily due to an increase both in the average balance and rate on loans and investment securities, which were partially offset by an increase in the average rates paid on interest-bearing deposits which increased by 13 basis points to 0.33% for the nine months ended September 30, 2019 as compared to the 0.20% for the nine months ended September 30, 2018. The 13 basis point increase in the average rate paid on interest-bearing deposits was due to increases in competitive pressures related to the rates which the Company pays on its savings and time deposits. However, the growth in total average deposits during the comparable nine-month periods allowed for the repayment of overnight borrowings which, combined with changes in related rates, contributed to a decrease in related interest expense of $1,722,000.

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

Asset Quality and Loan Loss Provisioning

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

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

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Non-interest Income

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


	Three months ended September 30,
(dollars in thousands)	2019		2018		$ Change		% Change
ATM and interchange fees	$	5,427	$	4,590	$	837	18.2	%
Service charges on deposit accounts	4,327		4,015		$	312	7.8	%
Other service fees	808		676		$	132	19.5	%
Mortgage banking service fees	483		499		$	(16)	(3.2)	%
Change in value of mortgage servicing rights	(455)		(37)		$	(418)	1,129.7	%
Total service charges and fees	10,590		9,743		847		8.7	%
Increase in cash value of life insurance	773		732		$	41	5.6	%
Asset management and commission income	721		728		$	(7)	(1.0)	%
Gain on sale of loans	1,236		539		$	697	129.3	%
Lease brokerage income	172		186		$	(14)	(7.5)	%
Sale of customer checks	126		88		$	38	43.2	%
Gain on sale of investment securities	107		207		$	(100)	(48.3)	%
Gain (loss) on marketable equity securities	22		(22)		$	44	(200.0)	%
Other	361		135		$	226	167.4	%
Total other non-interest income	3,518		2,593		$	925	35.7	%
Total non-interest income	$	14,108	$	12,336	$	1,772	14.4	%


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

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

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

Non-interest Expense

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


	Three months ended September 30,
	2019		2018		$ Change		% Change
Base salaries, net of deferred loan origination costs	$	17,656	$	15,685	$	1,971	12.6	%
Incentive compensation	3,791		4,515		(724)		(16.0)	%
Benefits and other compensation costs	5,452		5,623		(171)		(3.0)	%
Total salaries and benefits expense	26,899		25,823		1,076		4.2	%
Occupancy	3,711		3,173		538		17.0	%
Data processing and software	3,411		2,786		625		22.4	%
Equipment	1,679		1,750		(71)		(4.1)	%
Intangible amortization	1,431		1,390		41		2.9	%
Advertising	1,358		1,341		17		1.3	%
ATM and POS network charges	1,343		1,197		146		12.2	%
Professional fees	999		1,352		(353)		(26.1)	%
Telecommunications	867		819		48		5.9	%
Regulatory assessments and insurance	94		537		(443)		(82.5)	%
Merger and acquisition expense	—		4,150		(4,150)		(100.0)	%
Postage	438		275		163		59.3	%
Operational losses	228		217		11		5.1	%
Courier service	357		278		79		28.4	%
Gain on sale of foreclosed assets	(50)		(2)		(48)		2,400.0	%
Loss on disposal of fixed assets	2		152		(150)		(98.7)	%
Other miscellaneous expense	3,577		2,290		1,287		56.2	%
Total other non-interest expense	19,445		21,705		(2,260)		(10.4)	%
Total non-interest expense	$	46,344	$	47,528	$	(1,184)	(2.5)	%
Average full time equivalent staff	1,160		1,146		14		1.2	%

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

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

Total other non-interest expense decreased $2,260,000 (10.4)% to $19,445,000 during the three months ended September 30, 2019, compared to $21,705,000 during the three months ended September 30, 2018. The decrease in other non-interest expense during the three months ended September 30, 2019 was due primarily to the elimination of merger and acquisition expenses totaling $4,150,000 following the transaction with FNB Bancorp effective July 2018, offset partially with increases in other miscellaneous expenses 1,287,000 (56.2%), occupancy expenses 538,000 (17.0%), and data processing and software expenses 625,000 (22.4%), all during the comparative three months ended September 30, 2018.

The increase in total non-interest expense of $15,267,000 (12.4%) to $138,493,000 for the nine months ended September 30, 2019 compared to $123,226,000 for the same period in 2018 was also primarily attributable to the acquisition of FNB Bancorp, including the growth in full time equivalent staff and expanded volume of operational activities, and partially offset by the $5,227,000 reduction in merger and acquisition expenses.

Income Taxes

The Company’s effective tax rate was 27.3% for the nine months ended September 30, 2019, as compared to 28.6% for the same quarter in the prior year. During the three and nine months ended September 30, 2019 as compared to the same periods in the 2018 year, the Company earned a greater percentage of non-taxable income from investment securities and death benefits from life insurance proceeds. These benefits were partially offset by an increase in the estimated level of non-deductible compensation associated with increases in compensation to covered employees.

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Financial Condition

For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. Organic growth, inclusive of seasonal fluctuation, also contributes to the year-over-year balance sheet changes. During the twelve months ended September 30, 2019, organic loan growth of $154,912,000 or 3.8% and the reduction in other borrowings of $266,408,000 or 94.2% was funded by deposit growth of $202,290,000 or 4.0% and the reduction via sale and principal repayment of investment securities of $138,200,000 or 9.0%. Total assets grew by $66,018,000 or 1.0% between September 2018 and September 2019. The following is a comparison of the year over year change in certain assets and liabilities:


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

Investment Securities

Investment securities available for sale decreased $130,956,000 to $984,080,000 as of September 30, 2019, compared to December 31, 2018. This decrease is primarily attributable to the sale of investment securities to provide liquidity to support loan growth. Proceeds from the sale of securities and net gains associated totaled $125,247,000 and $107,000, respectively, for the three and nine months periods ended September 30, 2019. There were no transfers of available-for-sale investment securities to held-to-maturity or vice versa during the nine month periods ended September 30, 2019 and 2018.

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


(dollars in thousands)	September 30, 2019						December 31, 2018
	Fair Value		%		Fair Value		%
Debt securities available for sale:
Obligations of U.S. government agencies	$	495,637	50.3	%	$	629,981	56.5	%
Obligations of states and political subdivisions	111,910		11.4	%	126,072		11.3	%
Corporate bonds	4,528		0.5	%	4,478		0.4	%
Asset backed securities	372,005		37.8	%	354,505		31.8	%
Total debt securities available for sale	$	984,080	100.0	%	$	1,115,036	100.0	%

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

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


(dollars in thousands)	September 30, 2019						December 31, 2018
	Amortized Cost		%		Amortized Cost		%
Debt securities held to maturity:
Obligations of U.S. government and agencies	$	379,634	96.5	%	$	430,343	96.7	%
Obligations of states and political subdivisions	13,815		3.5	%	14,593		3.3	%
Total debt securities held to maturity	$	393,449	100.0	%	$	444,936	100.0	%

Loans

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

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

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


(dollars in thousands)	September 30, 2019						December 31, 2018
Real estate mortgage	$	3,247,156	77.6	%	$	3,143,100	78.1	%
Consumer	442,539		10.6	%	418,982		10.4	%
Commercial	278,458		6.7	%	276,548		6.9	%
Real estate construction	214,195		5.1	%	183,384		4.6	%
Total loans	$	4,182,348	100.0	%	$	4,022,014	100.0	%

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

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Asset Quality and Nonperforming Assets

Nonperforming Assets

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


(dollars in thousands)	September 30, 2019			December 31, 2018
Performing nonaccrual loans	$	14,411		$	22,689
Nonperforming nonaccrual loans	4,118			4,805
Total nonaccrual loans	18,529			27,494
Loans 90 days past due and still accruing	36			—
Total nonperforming loans	18,565			27,494
Foreclosed assets	1,546			2,280
Total nonperforming assets	$	20,111		$	29,774
Nonperforming assets to total assets	0.31		%	0.47		%
Nonperforming loans to total loans	0.44		%	0.68		%
Allowance for loan losses to nonperforming loans	170		%	119		%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed	1.82		%	2.11		%


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

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	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 September 30, 2019


(in thousands)	Balance at September 30, 2019		New NPA / Valuation Adjustments		Pay-downs /Sales /Upgrades		Charge-offs/ ⁽¹⁾ Write-downs		Transfers to Foreclosed Assets		Balance at June 30, 2019
Real estate mortgage:
Residential	$	4,370	$	1,226	$	(1,206)	$	—	$	—	$	4,350
Commercial	6,040		6		(1,898)		(746)		—		8,678
Consumer
Home equity lines	2,600		816		(477)		—		(215)		2,476
Home equity loans	2,063		235		(216)		(3)		—		2,047
Other consumer	64		59		(10)		(59)		—		74
Commercial	3,428		329		(383)		(584)		—		4,066


Construction	—		—		—		—		—		—
Total nonperforming loans	18,565		2,671		(4,190)		(1,392)		(215)		21,691
Foreclosed assets	1,546				(126)		(91)		215		1,548
Total nonperforming assets	$	20,111	$	2,671	$	(4,316)	$	(1,483)	$	—	$	23,239

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

Nonperforming assets decreased during the third quarter of 2019 by $3,128,000 (13.4%) to $20,111,000 at September 30, 2019 compared to $23,239,000 at June 30, 2019. The decrease in nonperforming assets during the third quarter of 2019 was primarily the result of write-downs of $1,392,000 on nonperforming loans, and sales and pay-downs of non-performing loans of $4,190,000, which were partially offset by new nonperforming loans of $2,671,000.

The $2,671,000 of new nonperforming loans added during the third quarter of 2019 was mainly comprised of 2 loans to the same borrower totaling $985,000, and a single loan to a different borrower totaling $407,000. All 3 loans are secured by residential real estate which management believes are sufficiently secured by collateral. Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the specific loan loss reserves associated with these loans is sufficient as of September 30, 2019.

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

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

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

Changes in nonperforming assets during the nine months ended September 30, 2019


(in thousands):	Balance at September 30, 2019		New NPA / Valuation Adjustments		Pay-downs /Sales /Upgrades		Charge-offs/ ⁽¹⁾ Write-downs		Transfers to Foreclosed Assets		Balance at December 31, 2018
Real estate mortgage:
Residential	$	4,370	$	3,413	$	(1,779)	$	(2)	$	(116)	$	2,854
Commercial	6,040		852		(9,112)		(746)		—		15,046
Consumer
Home equity lines	2,600		907		(841)		—		(215)		2,749
Home equity loans	2,063		435		(1,332)		(3)		—		2,963
Other consumer	64		204		(51)		(96)		—		7
Commercial	3,428		1,728		(964)		(1,211)		—		3,875


Construction	—		—		—		—		—		—
Total nonperforming loans	18,565		7,539		(14,079)		(2,058)		(331)		27,494
Foreclosed assets	1,546		35		(1,009)		(91)		331		2,280
Total nonperforming assets	$	20,111	$	7,574	$	(15,088)	$	(2,149)	$	—	$	29,774

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

Nonperforming assets decreased during the nine months ended 2019 by $9,663,000 (32.5%) to $20,111,000 at September 30, 2019 compared to $29,774,000 at December 31, 2018. The decrease in nonperforming assets during the nine months period ended September, 2019 was primarily the result of pay-downs, sales and upgrades of nonperforming loans totaling $14,079,000, and write-downs of $2,058,000 on nonperforming loans, that were partially offset by new nonperforming loans of $7,539,000.

The $14,079,000 in reduction of nonperforming loans during the nine months ended 2019 was mainly comprised of decreases within commercial real estate, and included payoffs of three loans to two relationships with a combined balance $6,818,000 and sale of one relationship totaling $1,782,000.

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

During the first nine months of 2019, the Company recorded $2,183,000 in loan charge-offs and $358,000 in deposit overdraft charge-offs less $2,742,000 in loan recoveries and $146,000 in deposit overdraft recoveries resulting in $347,000 of net recoveries.

The Components of the Allowance for Loan Losses

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


(dollars in thousands)	September 30, 2019			December 31, 2018
Allowance for originated and PNCI loan losses:
Environmental factors allowance	$	12,675		$	11,577
Formula allowance	17,332			18,689
Total allowance for originated and PNCI loan losses	30,007			30,266
Allowance for impaired loans	1,524			2,194
Allowance for PCI loan losses	6			122
Total allowance for loan losses	$	31,537		$	32,582
Allowance for loan losses to loans	0.75		%	0.81		%

For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Asset Quality and Loan Loss Provisioning” at “Results of Operations”, above. Based on the current conditions of the loan portfolio, management believes that the $31,537,000 allowance for loan losses at September 30, 2019 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

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


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

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


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

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


	Three months ended September 30,									Nine months ended September 30,
(in thousands)	2019			2018			2019			2018
Allowance for loan losses:
Balance at beginning of period	$	32,868		$	29,524		$	32,582		$	30,323
Provision for (reversal of) loan losses	(329)			2,651			(1,392)			1,777
Loans charged-off:
Real estate mortgage:
Residential	—			(25)			(2)			(77)
Commercial	(746)			—			(746)			(15)
Consumer:
Home equity lines	—			(172)			—			(276)
Home equity loans	(3)			(23)			(3)			(23)
Other consumer	(188)			(229)			(548)			(597)
Commercial	(585)			(693)			(1,242)			(952)
Construction:
Residential	—			—			—			—
Commercial	—			—			—			—
Total loans charged-off	(1,522)			(1,142)			(2,541)			(1,940)
Recoveries of previously charged-off loans:
Real estate mortgage:
Residential	48			—			53			—
Commercial	126			15			1,517			51
Consumer:
Home equity lines	27			151			305			677
Home equity loans	156			139			414			176
Other consumer	79			63			262			208
Commercial	84			202			337			331
Construction:
Residential	—			—			—			—
Commercial	—			—			—			—
Total recoveries of previously charged-off loans	520			570			2,888			1,443
Net recoveries (charge-offs)	(1,002)			(572)			347			(497)
Balance at end of period	$	31,537		$	31,603		$	31,537		$	31,603
Average total loans	$	4,142,602		$	4,019,391		$	4,070,568		$	3,387,390
Ratios (annualized):
Net charge-offs (recoveries) during period to average loans outstanding during period	0.10		%	0.06		%	(0.03)		%	0.06		%
(Benefit from reversal of) provision for loan losses to average loans outstanding during period	(0.03)		%	0.26		%	(0.14)		%	0.21		%

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Foreclosed Assets, Net of Allowance for Losses

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


(in thousands)	Balance at September 30, 2019		Sales		Valuation Adjustments		Transfers from Loans		Balance at December 31, 2018
Land & Construction	$	417	$	—	$	(28)	$	—	$	445
Residential real estate	1,129		(981)		37		331		1,742
Commercial real estate	—		(28)		(65)		—		93
Total foreclosed assets	$	1,546	$	(1,009)	$	(56)	$	331	$	2,280

Deposits

During the three and nine months ended September 30, 2019, the Company’s deposits decreased $46,766,000 and $71,059,000 respectively to $5,295,407,000. Included in the September 30, 2019 and December 31, 2018 certificate of deposit balances are $50,000,000 and $60,000,000, respectively, from the State of California. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and creditworthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company.

Off-Balance Sheet Arrangements

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

Capital Resources

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

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

The Company’s primary capital resource is shareholders’ equity, which was $896,665,000 at September 30, 2019. This amount represents an increase of $69,292,000 (8.3%) from December 31, 2018, the net result of comprehensive income for the nine month period of $88,560,000, the effect of equity compensation vesting of $815,000, and the exercise of stock options of $2,646,000, that were partially offset by dividends paid of $18,285,000, and repurchase of common stock of $4,842,000. The Company’s ratio of equity to total assets was 14.0% and 13.0% as of September 30, 2019 and December 31, 2018, respectively. We believe that the Company and the Bank were in compliance with applicable minimum capital requirements set forth in the final Basel III Capital rules as of September 30, 2019. The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:


	September 30, 2019						December 31, 2018
	Ratio		Minimum Regulatory Requirement		Ratio		Minimum Regulatory Requirement
Total capital	15.23	%	10.50	%	14.40	%	9.25	%
Tier I capital	14.52	%	8.50	%	13.66	%	7.25	%
Common equity Tier 1 capital	13.37	%	7.00	%	12.49	%	5.75	%
Leverage	11.31	%	4.00	%	10.68	%	4.00	%

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

Liquidity

The Company’s principal source of asset liquidity is cash at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities available for sale. At September 30, 2019, cash at Federal Reserve and other banks in excess of reserve requirements and investment securities available for sale totaled $1,001,196,000 , or 15.7% of total assets. The Company’s profitability during the first nine months of 2019 generated cash flows from operations of $76,266,000 compared to $59,905,000 during the first nine months of 2018. Net cash provided by investing activities was $46,204,000 for the nine months ended September 30, 2019, compared to net cash used by investing activities of $112,873,000 during the nine months ending 2018. Financing activities used $90,956,000 during the nine months ended September 30, 2019, compared to net cash provided by financing activities of $74,083,000 during the nine months ended September 30, 2018. Deposit balance changes reduced available liquidity by $71,059,000 during the nine months ended September 30, 2019, compared to an increase of $92,051,000 for financing activity during the the same period in 2018. Dividends paid used $18,285,000 and $12,984,000 of cash during the nine months ended September 30, 2019 and 2018, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

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

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

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PART II – OTHER INFORMATION

Item 1 - Legal Proceedings

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

Item 1A - Risk Factors

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

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

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


Period	(a) Total number of shares purchased ⁽¹⁾	(b) Average price paid per share		(c) Total number of shares purchased as of part of publicly announced plans or programs	(d) Maximum number of shares that may yet be purchased under the plans or programs ⁽²⁾
July 1 - 30, 2019	8,278	$	37.78	—	303,434
August 1 - 30, 2019	38,666	$	36.20	—	303,434
September 1 - 30, 2019	—	—		—	303,434
Total	46,944	$	36.48	—	303,434

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

⁽²⁾Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans. See Note 9 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchase plan.

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Item 6 – Exhibits

EXHIBIT INDEX


Exhibit No.						Exhibit

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

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

32.1						Section 1350 Certification of CEO

32.2						Section 1350 Certification of CFO

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

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


			TRICO BANCSHARES
			(Registrant)

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