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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

for the quarterly period ended: June 30, 2014

Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

for the transition period from                      to                     .

Commission File Number: 000-10661

 

 

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

CALIFORNIA   94-2792841

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  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: 16,133,414 shares outstanding as of August 1, 2014

 

 

 


Table of Contents

TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS

 

     Page  

Forward-Looking Statements

     1   

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

     46   

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

     68   

Item 4 – Controls and Procedures

     68   

PART II – OTHER INFORMATION

     69   

Item 1 – Legal Proceedings

     69   

Item 1A – Risk Factors

     69   

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

     69   

Item 6 – Exhibits

     69   

Signatures

     71   

Exhibits

     71   

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the “Company”) that are subject to the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current knowledge and belief of the Company’s management (“Management”) and include information concerning the Company’s possible or assumed future financial condition and results of operations. When you see any of the words “believes”, “expects”, “anticipates”, “estimates”, or similar expressions, it may mean the Company is making forward-looking statements. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. The reader is directed to the Company’s annual report on Form 10-K for the year ended December 31, 2013, and Part II, Item 1A of this report for further discussion of factors which could affect the Company’s business and cause actual results to differ materially from those suggested by any forward-looking statement made in this report. Such Form 10-K and this report should be read to put any forward-looking statements in context and to gain a more complete understanding of the risks and uncertainties involved in the Company’s business. Any forward-looking statement may turn out to be wrong and cannot be guaranteed. The Company does not intend to update any forward-looking statement after the date of this report.

 

1


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)

 

     At June 30,     At December 31,  
     2014     2013  

Assets:

    

Cash and due from banks

   $ 76,104      $ 76,915   

Cash at Federal Reserve and other banks

     268,279        521,453   
  

 

 

   

 

 

 

Cash and cash equivalents

     344,383        598,368   

Investment securities:

    

Available for sale

     91,514        104,647   

Held to maturity

     422,502        240,504   

Restricted equity securities

     11,582        9,163   

Loans held for sale

     1,671        2,270   

Loans

     1,738,586        1,672,007   

Allowance for loan losses

     (39,968     (38,245
  

 

 

   

 

 

 

Total loans, net

     1,698,618        1,633,762   

Foreclosed assets, net

     5,785        6,262   

Premises and equipment, net

     31,880        31,612   

Cash value of life insurance

     53,106        52,309   

Accrued interest receivable

     7,008        6,516   

Goodwill

     15,519        15,519   

Other intangible assets, net

     779        883   

Mortgage servicing rights

     5,909        6,165   

Other assets

     34,225        36,086   
  

 

 

   

 

 

 

Total assets

   $ 2,724,481      $ 2,744,066   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 720,743      $ 789,458   

Interest-bearing

     1,664,453        1,621,025   
  

 

 

   

 

 

 

Total deposits

     2,385,196        2,410,483   

Accrued interest payable

     849        938   

Reserve for unfunded commitments

     2,045        2,415   

Other liabilities

     28,135        31,711   

Other borrowings

     6,075        6,335   

Junior subordinated debt

     41,238        41,238   
  

 

 

   

 

 

 

Total liabilities

     2,463,538        2,493,120   
  

 

 

   

 

 

 

Commitments and contingencies (Note 18)

    

Shareholders’ equity:

    

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

    

16,133,414 at June 30, 2014

     92,322     

16,076,662 at December 31, 2013

       89,356   

Retained earnings

     166,433        159,733   

Accumulated other comprehensive income, net of tax

     2,188        1,857   
  

 

 

   

 

 

 

Total shareholders’ equity

     260,943        250,946   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,724,481      $ 2,744,066   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)

 

     Three months ended      Six months ended  
     June 30,      June 30,  
     2014      2013      2014      2013  

Interest and dividend income:

           

Loans, including fees

   $ 24,433       $ 23,883       $ 48,171       $ 47,955   

Investment securities:

           

Taxable

     3,440         1,149         6,262         2,280   

Tax exempt

     117         150         253         251   

Dividends

     154         80         308         136   

Interest bearing cash at

           

Federal Reserve and other banks

     274         494         583         940   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     28,418         25,756         55,577         51,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     768         855         1,550         1,780   

Other borrowings

     1         1         2         2   

Junior subordinated debt

     306         311         610         622   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     1,075         1,167         2,162         2,404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     27,343         24,589         53,415         49,158   

Provision for (benefit from) loan losses

     1,708         614         353         (494
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     25,635         23,975         53,062         49,652   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges and fees

     5,519         6,693         10,981         12,622   

Gain on sale of loans

     514         1,590         978         3,884   

Commissions on sale of non-deposit investment products

     843         841         1,614         1,602   

Increase in cash value of life insurance

     400         380         797         806   

Other

     601         627         1,802         1,435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     7,877         10,131         16,172         20,349   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries and related benefits

     13,317         12,890         26,620         25,851   

Other

     11,799         10,619         21,813         19,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     25,116         23,509         48,433         45,110   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     8,396         10,597         20,801         24,891   
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision for income taxes

     3,537         4,272         8,577         10,089   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 4,859       $ 6,325       $ 12,224       $ 14,802   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.30       $ 0.39       $ 0.76       $ 0.92   

Diluted

   $ 0.30       $ 0.39       $ 0.75       $ 0.92   

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2014      2013     2014      2013  

Net income

   $ 4,859       $ 6,325      $ 12,224       $ 14,802   

Other comprehensive income (loss), net of tax:

          

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

     381         (1,489     321         (2,110

Change in minimum pension liability

     5         —          10         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     386         (1,489     331         (2,110
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 5,245       $ 4,836      $ 12,555       $ 12,692   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

 

                       Accumulated        
     Shares of                 Other        
     Common     Common     Retained     Comprehensive        
     Stock     Stock     Earnings     Income     Total  

Balance at December 31, 2012

     16,000,838      $ 85,561      $ 141,639      $ 2,159      $ 229,359   

Net income

         14,802          14,802   

Other comprehensive loss

           (2,110     (2,110

Stock option vesting

       540            540   

Stock options exercised

     230,765        2,937            2,937   

Tax benefit of stock options exercised

       342            342   

Repurchase of common stock

     (166,134     (892     (2,445       (3,337

Dividends paid ($0.20 per share)

         (3,207       (3,207
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

     16,065,469      $ 88,488      $ 150,789      $ 49      $ 239,326   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     16,076,662      $ 89,356      $ 159,733      $ 1,857      $ 250,946   

Net income

         12,224          12,224   

Other comprehensive loss

           331        331   

Stock option vesting

       534            534   

Stock options exercised

     160,020        2,786            2,786   

Tax benefit of stock options exercised

       220            220   

Repurchase of common stock

     (103,268     (574     (1,977       (2,551

Dividends paid ($0.22 per share)

         (3,547       (3,547
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     16,133,414      $ 92,322      $ 166,433      $ 2,188      $ 260,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

 

     For the six months ended
June 30,
 
     2014     2013  

Operating activities:

    

Net income

   $ 12,224      $ 14,802   

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

    

Depreciation of premises and equipment, and amortization

     2,704        1,962   

Amortization of intangible assets

     104        105   

Provision for (benefit from) loan losses

     353        (494

Amortization of investment securities premium, net

     349        411   

Originations of loans for resale

     (31,032     (94,623

Proceeds from sale of loans originated for resale

     32,333        103,089   

Gain on sale of loans

     (978     (3,884

Change in market value of mortgage servicing rights

     532        (130

Provision for losses on foreclosed assets

     40        573   

Gain on sale of foreclosed assets

     (1,468     (1,166

(Gain) loss on disposal of fixed assets

     (70     14   

Increase in cash value of life insurance

     (797     (806

Stock option vesting expense

     534        540   

Stock option excess tax benefits

     (220     (342

Change in:

    

Reserve for unfunded commitments

     (370     (405

Interest receivable

     (492     (703

Interest payable

     (89     (92

Other assets and liabilities, net

     (2,256     (1,277
  

 

 

   

 

 

 

Net cash from operating activities

     11,401        17,574   
  

 

 

   

 

 

 

Investing activities:

    

Proceeds from maturities of securities available for sale

     13,464        31,471   

Proceeds from maturities of securities held to maturity

     9,548        218   

Purchases of securities held to maturity

     (191,673     (85,877

(Purchase) redemption of restricted equity securities

     (2,419     484   

Loan origination and principal collections, net

     (49,635     (34,239

Loans purchased

     (19,690     (62,698

Improvement of foreclosed assets

     (462     —     

Proceeds from sale of other real estate owned

     6,483        10,202   

Proceeds from sale of premises and equipment

     120        2   

Purchases of premises and equipment

     (2,483     (5,700

Life insurance proceeds

     —          706   
  

 

 

   

 

 

 

Net cash (used) provided by investing activities

     (236,747     (145,431
  

 

 

   

 

 

 

Financing activities:

    

Net decrease in deposits

     (25,287     (23,000

Net change in other borrowings

     (260     (2,622

Stock option excess tax benefits

     220        342   

Repurchase of common stock

     (292     (501

Dividends paid

     (3,547     (3,207

Exercise of stock options

     527        101   
  

 

 

   

 

 

 

Net cash used by financing activities

     (28,639     (28,887
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (253,985     (156,744
  

 

 

   

 

 

 

Cash and cash equivalents and beginning of year

     598,368        748,899   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 344,383      $ 592,155   
  

 

 

   

 

 

 

Supplemental disclosure of noncash activities:

    

Unrealized gain (loss) on securities available for sale

   $ 553      $ (3,642

Loans transferred to foreclosed assets

   $ 4,116      $ 7,164   

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

   $ 2,259      $ 2,836   

Supplemental disclosure of cash flow activity:

    

Cash paid for interest expense

   $ 2,251      $ 2,496   

Cash paid for income taxes

   $ 11,500      $ 12,900   

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 is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Bank is a state-chartered financial institution that is engaged in the general commercial banking business in the California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Napa, Nevada, Placer, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo and Yuba. Tri Counties Bank currently operates from 41 traditional branches and 19 in-store branches. The Company also formed two subsidiary business trusts, TriCo Capital Trust I and TriCo Capital Trust II (collectively, the Trusts), to issue trust preferred securities.

The following unaudited condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of Management, all adjustments, consisting solely of normal recurring adjustments, considered necessary for a fair presentation of results for the interim periods presented have been included. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2014.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned financial subsidiary, Tri Counties Bank. All significant intercompany balances and transactions have been eliminated. TriCo Capital Trust I and TriCo Capital Trust II, which were formed solely for the purpose of issuing trust preferred securities, are unconsolidated subsidiaries as the Company is not the primary beneficiary of the trusts and they are not considered variable interest entities. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Certain amounts in the consolidated financial statements for the year ended December 31, 2013 and for the three and six months ended June 30, 2014 may have been reclassified to conform to the presentation of the condensed consolidated financial statements in 2014.

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. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. 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. The allowance for loan losses, indemnification asset, foreclosed assets, goodwill and other intangible assets, income taxes, fair value of assets acquired and liabilities assumed in business combinations, the valuation of securities available-for-sale, and the valuation of mortgage servicing rights are the only accounting estimates that materially affect the Company’s consolidated financial statements.

During each of 2011 and 2010, the Bank assumed the banking operations of a failed financial institution from the FDIC under whole bank purchase agreement. The acquired assets and assumed liabilities were measured at estimated fair value values under the acquisition method of accounting. The Company made significant estimates and exercised significant judgment in accounting for the acquisitions. The Company determined loan fair values based on loan file reviews, loan risk ratings, appraised collateral values, expected cash flows and historical loss factors. Foreclosed assets were primarily valued based on appraised values of the repossessed loan collateral. An identifiable intangible was also recorded representing the fair value of the core deposit customer base based on an evaluation of the cost of such deposits relative to alternative funding sources. The fair value of time deposits and borrowings were determined based on the present value of estimated future cash flows using current rates as of the acquisition date.

Significant Group Concentration of Credit Risk

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

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Net cash flows are reported for loan and deposit transactions and other borrowings.

Investment Securities

The Company classifies its debt and marketable equity securities into one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives. All other securities not included in trading or held to maturity are classified as available for sale. Available for sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale securities are reported as a separate component of other accumulated comprehensive income in

 

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shareholders’ equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are derived from the amortized cost of the security sold. During the six months ended June 30, 2014 and the year ended December 31, 2013, the Company did not have any securities classified as trading. During the three months ended March 31, 2013, the Company did not have any securities classified as held to maturity.

The Company assesses other-than-temporary impairment (“OTTI”) based on whether it intends to sell a security or if it is likely that the Company would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if the Company intends to sell the security or it is likely that it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that it will be required to sell the security but it does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. The accretion of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above. No OTTI losses were recognized during the six months ended June 30, 2014 or the year ended December 31, 2013.

Restricted Equity Securities

Restricted equity securities represent the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”) and are carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. The Company may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors of current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to noninterest income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. Gains or losses on the sale of loans that are held for sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights.

Loans and Allowance for Loan Losses

Loans originated by the Company, i.e., not purchased or acquired in a business combination, are referred to as originated loans. Originated loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield over the actual life of the loan. Originated loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.

Originated loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal, or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the process of collection. When an originated loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loan is estimated to be fully collectible as to both principal and interest.

An allowance for loan losses for originated loans is established through a provision for loan losses charged to expense. The allowance is maintained at a level which, in Management’s judgment, is adequate to absorb probable incurred credit losses inherent in the loan portfolio as of the balance sheet date. Originated loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectability of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable incurred losses inherent in existing loans and leases, based on evaluations of the collectability, impairment and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. The Company defines an originated loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

 

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Impaired originated loans are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

In situations related to originated loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that result in the loan being classified as a TDR, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with respect to their restructured principal balance.

Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb probable incurred losses inherent in the Company’s originated loan portfolio. This is maintained through periodic charges to earnings. These charges are included in the Consolidated Statements of Income as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company’s allowance for originated loan losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio.

The Company formally assesses the adequacy of the allowance for originated loan losses on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding originated loan portfolio, and to a lesser extent the Company’s originated loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.

The Company’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for impaired originated loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools were based on historical loss experience by product type and prior risk rating.

During the three months ended March 31, 2013, the Company changed the method it uses to estimate net sale proceeds from real estate collateral sales when calculating the allowance for loan losses associated with impaired real estate collateral dependent loans. Previously, the Company used the greater of fifteen percent or actual estimated selling costs. Currently, the Company uses the actual estimated selling costs, and an adjustment to appraised value based on the age of the appraisal. These changes are intended to more accurately reflect the estimated net sale proceeds from the sale of impaired collateral dependent real estate loans. This change in methodology resulted in the allowance for loan losses as of March 31, 2013 being $494,000 more than it would have been without this change in methodology.

During the three months ended June 30, 2013, the Company modified its loss migration analysis methodology used to determine the formula allowance factors. When the Company originally established its loss migration analysis methodology during the quarter ended March 31, 2012, it reviewed the loss experience of each rolling twelve month period over the previous three years in order to calculate an annualized loss rate by loan category and risk rating. The use of three years of loss experience data was originally used because that was the extent of the detailed loss data by loan category and risk rating that was available at the time. This three year historical look-back period was used through the quarter ended March 31, 2013. Starting with the quarter ended June 30, 2013, the Company reviews all available detailed loss experience data, going back to, and including, the twelve month period ended June 30, 2009, and does not limit the look-back period to the most recent three years of historical loss data. Using this data, the Company calculates loss factors for each quarter from the quarter ended June 30, 2009 to the most recent quarter. The Company then calculates a weighted average formula allowance factor for each loan category and risk rating with the most recent quarterly loss factor being weighted 125%, the quarter ended June 30, 2009 loss factor being weighted 75%, and the loss factors for all the quarters between the most recent quarter and the quarter ended June 30, 2009, being weighted on a linear scale from 75% to 125%. This change is intended to more accurately reflect the risk inherent in the loan portfolio by considering historical loss data for all years as the data for new periods becomes available. This change in methodology resulted in the allowance for loan losses as of June 30, 2013 being $1,314,000 more than it would have been without this change in methodology.

During the three months ended September 30, 2013, the Company modified its methodology used to determine the allowance for changing environmental factors. Previously, the Company compared the current value of each environmental factor to a fixed baseline value. The deviation of the current value from the baseline value was then multiplied by a conversion factor to determine the required allowance related to each environmental factor. As of September 30, 2013, the Company replaced the fixed baseline values with average baseline values derived from historical averages, and adjusted the conversion factors. This change is intended to more accurately reflect the risk inherent in the portfolio by recognizing that baseline, or normal, levels for environmental factors may change over time. This change in methodology resulted in the allowance for loan losses as of September 30, 2013 being $1,665,000 more than it would have been without this change in methodology.

 

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During the three months ended March 31, 2014, the Company modified its methodology used to determine the allowance for changing environmental factors by adding a new environmental factor based on the California Home Affordability Index (“CHAI”). The CHAI measures the percentage of households in California that can afford to purchase the median priced home in California based on current home prices and mortgage interest rates. The use of the CHAI environmental factor consists of comparing the current CHAI to its historical baseline, and allows management to consider the adverse impact that a lower than historical CHAI may have on general economic activity and the performance of our borrowers. Based on an analysis of historical data, management believes this environmental factor gives a better estimate of current economic activity compared to other environmental factors that may lag current economic activity to some extent. This change in methodology resulted in no change to the allowance for loan losses as of March 31, 2014 compared to what it would have been without this change in methodology.

During the three months ended June 30, 2014, the Company refined the method it uses to evaluate historical losses for the purpose of estimating the pool allowance for unimpaired loans. In the third quarter of 2010, the Company moved from a six point grading system (Grades A-F) to a nine point risk rating system (Risk Ratings 1-9), primarily to allow for more distinction within the “Pass” risk rating. Initially, there was not sufficient loss experience within the nine point scale to complete a migration analysis for all nine risk ratings, all loans risk rated Pass or 2-5 were grouped together, a loss rate was calculated for that group, and that loss rate was established as the loss rate for risk rating 4. The reserve ratios for risk ratings 2, 3 and 5 were then interpolated from that figure. As of June 30, 2014, the Company was able to compile twelve quarters of historical loss information for all risk ratings and use that information to calculate the loss rates for each of the nine risk ratings without interpolation. This refinement led to an increase of $1,438,000 in the reserve requirement for unimpaired loans, driven primarily by home equity lines of credit with a risk rating of 5 or “Pass-Watch.”

Loans purchased or acquired in a business combination are referred to as acquired loans. Acquired loans are valued as of the acquisition date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805, Business Combinations. Loans acquired with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI) loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. Default rates, loss severity, and prepayment speed assumptions are periodically reassessed and our estimate of future payments is adjusted accordingly. The difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The difference between estimated future payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable yield represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be more than originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining estimated life of the loan. If, after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be less than previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous present value however, the discount rate may not be lowered below its original level at acquisition. If the discount rate has been lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans on nonaccrual status are accounted for using the cost recovery method or cash basis method of income recognition. PCI loans are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan. The Company elected to use the “pooled” method of ASC 310-30 for PCI – other loans in the acquisition of certain assets and liabilities of Granite Community Bank, N.A. (“Granite”) during 2010 and Citizens Bank of Northern California (“Citizens”) during 2011.

Acquired loans that are not PCI loans are referred to as purchased not credit impaired (PNCI) loans. PNCI loans are accounted for under FASB ASC Topic 310-20, Receivables – Nonrefundable Fees and Other Costs, in which interest income is accrued on a level-yield basis for performing loans. For income recognition purposes, this method assumes that all contractual cash flows will be collected, and no allowance for loan losses is established at the time of acquisition. Post-acquisition date, an allowance for loan losses may need to be established for acquired loans through a provision charged to earnings for credit losses incurred subsequent to acquisition. Under ASC 310-20, the loss would be measured based on the probable shortfall in relation to the contractual note requirements, consistent with our allowance for loan loss policy for similar loans.

Throughout these financial statements, and in particular in Note 4 and Note 5, when we refer to “Loans” or “Allowance for loan losses” we mean all categories of loans, including Originated, PNCI, PCI – cash basis, and PCI—other. When we are not referring to all categories of loans, we will indicate which we are referring to – Originated, PNCI, PCI – cash basis, or PCI—other.

When referring to PNCI and PCI loans we will use the terms “nonaccretable difference”, “accretable yield”, or “purchase discount”. Nonaccretable difference is the difference between undiscounted contractual cash flows due and undiscounted cash flows we expect to collect, or put another way, it is the undiscounted contractual cash flows we do not expect to collect. Accretable yield is the difference between undiscounted cash flows we expect to collect and the value at which we have recorded the loan on our financial statements. On the

 

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date of acquisition, all purchased loans are recorded on our consolidated financial statements at estimated fair value. Purchase discount is the difference between the estimated fair value of loans on the date of acquisition and the principal amount owed by the borrower, net of charge offs, on the date of acquisition. We may also refer to “discounts to principal balance of loans owed, net of charge-offs”. Discounts to principal balance of loans owed, net of charge-offs is the difference between principal balance of loans owed, net of charge-offs, and loans as recorded on our financial statements. Discounts to principal balance of loans owed, net of charge-offs arise from purchase discounts, and equal the purchase discount on the acquisition date.

Loans are also categorized as “covered” or “noncovered”. Covered loans refer to loans covered by a Federal Deposit Insurance Corporation (“FDIC”) loss sharing agreement. Noncovered loans refer to loans not covered by a FDIC loss sharing agreement.

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 less estimated costs to sell 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. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Gain or loss on sale of foreclosed assets is included in noninterest income. Foreclosed assets that are not subject to a FDIC loss-share agreement are referred to as noncovered foreclosed assets.

Foreclosed assets acquired through FDIC-assisted acquisitions that are subject to a FDIC loss-share agreement, and all assets acquired via foreclosure of covered loans are referred to as covered foreclosed assets. Covered foreclosed assets are reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered foreclosed assets at the loan’s carrying value, inclusive of the acquisition date fair value discount.

Covered foreclosed assets are initially recorded at estimated fair value less estimated costs to sell on the acquisition date based on similar market comparable valuations less estimated selling costs. Any subsequent valuation adjustments due to declines in fair value will be charged to noninterest expense, and will be mostly offset by noninterest income representing the corresponding increase to the FDIC indemnification asset for the offsetting loss reimbursement amount. Any recoveries of previous valuation adjustments will be credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to the FDIC.

Premises and Equipment

Land is carried at cost. Land improvements, buildings and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 years for land improvements and buildings.

Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.

The Company has an identifiable intangible asset consisting of core deposit intangibles (CDI). CDI are amortized over their respective estimated useful lives, and reviewed for impairment.

Impairment of Long-Lived Assets and Goodwill

Long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.

As of December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level. The Company may choose to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then goodwill is deemed not to be impaired. However, if the Company concludes otherwise, or if the Company elected not to first assess qualitative factors, then the Company performs the first step of a two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Currently, and historically, the Company is comprised of only one reporting unit that operates within the business segment it has identified as “community banking”. Goodwill was not impaired as of December 31, 2013 because the fair value of the reporting unit exceeded its carrying value.

 

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Mortgage Servicing Rights

Mortgage servicing rights (MSR) represent the Company’s right to a future stream of cash flows based upon the contractual servicing fee associated with servicing mortgage loans. Our MSR arise from residential mortgage loans that we originate and sell, but retain the right to service the loans. The net gain from the retention of the servicing right is included in gain on sale of loans in noninterest income when the loan is sold. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing fees are recorded in noninterest income when earned.

The Company accounts for MSR at fair value. The determination of fair value of our MSR requires management judgment because they are not actively traded. The determination of fair value for MSR requires valuation processes which combine the use of discounted cash flow models and extensive analysis of current market data to arrive at an estimate of fair value. The cash flow and prepayment assumptions used in our discounted cash flow model are based on empirical data drawn from the historical performance of our MSR, which we believe are consistent with assumptions used by market participants valuing similar MSR, and from data obtained on the performance of similar MSR. The key assumptions used in the valuation of MSR include mortgage prepayment speeds and the discount rate. These variables can, and generally will, change from quarter to quarter as market conditions and projected interest rates change. The key risks inherent with MSR are prepayment speed and changes in interest rates. The Company uses an independent third party to determine fair value of MSR.

Indemnification Asset

The Company accounts for amounts receivable or payable under its loss-share agreements entered into with the FDIC in connection with its purchase and assumption of certain assets and liabilities of Granite as indemnification assets in accordance with FASB ASC Topic 805, Business Combinations. FDIC indemnification assets are initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the fair value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted into noninterest income over the life of the FDIC indemnification asset. FDIC indemnification assets are reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolios. These adjustments are measured on the same basis as the related covered loans and covered other real estate owned. Any increases in cash flow of the covered assets over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is established through a provision for losses – unfunded commitments charged to noninterest expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits, and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectability, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower’s or depositor’s ability to pay.

During the three months ended June 30, 2013, the Company modified the methodology employed to estimate potential losses on unfunded commitments. Similar to the Allowance for Loan Losses, the Company performs a migration analysis of historical loss experience. Prior to this quarter, the loss experience of each quarter over the previous three years was reviewed in order to calculate an annualized loss rate by loan category. Going forward, the Company has chosen to review all loss experience available since the conversion to a loss migration analysis. This change is intended to more accurately reflect the risk inherent in the unfunded commitments and appropriately consider all losses incurred in prior years. This change in methodology resulted in the reserve for unfunded commitments as of June 30, 2013 being $335,000 more than it would have been without this change in methodology.

Income Taxes

The Company’s accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. Interest and/or penalties related to income taxes are reported as a component of noninterest income.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Geographical Descriptions

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

 

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Reclassifications

Certain amounts reported in previous consolidated financial statements have been reclassified to conform to the presentation in this report. These reclassifications did not affect previously reported net income or total shareholders’ equity.

Recent Accounting Pronouncements

FASB issued ASU No. 2014-04, Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. ASU 2014-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 improves the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 requires expanded disclosures for discontinued operations that provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations. ASU 2014-08 also requires an entity to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting, and provide users with information about the financial effects of significant disposals that do not qualify for discontinued operations reporting. The amendments in ASU 2014-08 include several changes to the Accounting Standards Codification to improve the organization and readability of Subtopic 205-20 and Subtopic 360-10, Property, Plant, and Equipment—Overall. ASU 2014-08 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. ASU 2014-08 is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance under ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for a public entity for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. ASU 2014-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 is effective for public business entities for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. ASU 2014-11 is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects the vesting of a share-based payment award and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. ASU 2014-12 provides explicit guidance for those awards. For all entities, ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.

 

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Note 2 – Business Combinations

On January 21, 2014, TriCo announced that it had entered into an Agreement and Plan of Merger and Reorganization under which it would acquire North Valley Bancorp. North Valley Bancorp shareholders will receive a fixed exchange ratio of 0.9433 shares of TriCo common stock for each share of North Valley Bancorp common stock, which would provide North Valley Bancorp shareholders with aggregate ownership, on a pro forma basis, of approximately 28.6% of the common stock of the combined company. Based on TriCo’s closing stock price of $27.66 on January 17, 2014, North Valley Bancorp shareholders would have received consideration valued at approximately $26.09 per share.

The merger will not be completed unless a number of customary closing conditions are met, including, among others, approval of the merger by shareholders of both companies, the registration of the offering of the TriCo common stock to the North Valley Bancorp shareholders under the Securities Act of 1933, receipt of required regulatory and other approvals and the expiration of applicable statutory waiting periods, the accuracy of specified representations and warranties of each party, the receipt of tax opinions confirming certain tax aspects of the merger, North Valley Bancorp’s satisfaction of certain financial measures shortly prior to closing, and the absence of any injunctions or other legal restraints. If the Merger Agreement is terminated, under certain circumstances, TriCo could be required to pay a termination fee to North Valley Bancorp equal to $3,800,000.

TriCo has agreed to appoint three North Valley Bancorp directors to TriCo’s board upon closing of the merger. The merger is expected to be completed in the third quarter of 2014, subject to approval of the merger by shareholders of both companies, receipt of required regulatory and other approvals and satisfaction of customary closing conditions.

North Valley Bancorp, headquartered in Redding, California, is the parent of North Valley Bank and had approximately $935 million in assets and 22 commercial banking offices in Shasta, Humboldt, Del Norte, Mendocino, Yolo, Sonoma, Placer and Trinity Counties in Northern California at June 30, 2014. In connection with the acquisition, North Valley Bank will merge into Tri Counties Bank.

 

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Note 3 – Investment Securities

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

 

     June 30, 2014  
            Gross      Gross     Estimated  
     Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value  
     (in thousands)  

Securities Available for Sale

          

Obligations of U.S. government corporations and agencies

   $ 81,392       $ 4,711       $ (63   $ 86,040   

Obligations of states and political subdivisions

     3,484         76         —          3,560   

Corporate debt securities

     1,883         31         —          1,914   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 86,759       $ 4,818       $ (63   $ 91,514   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

Obligations of U.S. government corporations and agencies

   $ 409,881       $ 6,983       $ (1,175   $ 415,689   

Obligations of states and political subdivisions

     12,621         —           (355     12,266   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities held to maturity

   $ 422,502       $ 6,983       $ (1,530   $ 427,955   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2013  
            Gross      Gross     Estimated  
     Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value  
     (in thousands)  

Securities Available for Sale

          

Obligations of U.S. government corporations and agencies

   $ 93,055       $ 4,445       $ (357   $ 97,143   

Obligations of states and political subdivisions

     5,513         77         (1     5,589   

Corporate debt securities

     1,877         38         —          1,915   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 100,445       $ 4,560       $ (358   $ 104,647   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

Obligations of U.S. government corporations and agencies

   $ 227,864       $ 298       $ (5,540   $ 222,622   

Obligations of states and political subdivisions

     12,640         —           (1,455     11,185   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities held to maturity

   $ 240,504       $ 298       $ (6,995   $ 233,807   
  

 

 

    

 

 

    

 

 

   

 

 

 

No investment securities were sold during the six months ended June 30, 2014 or the year ended December 31, 2013. Investment securities with an aggregate carrying value of $56,583,000 and $62,064,000 at June 30, 2014 and December 31, 2013, respectively, were pledged as collateral for specific borrowings, lines of credit and local agency deposits.

The amortized cost and estimated fair value of debt securities at June 30, 2014 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2014, obligations of U.S. government corporations and agencies with a cost basis totaling $491,273,000 consist almost entirely of mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages.

For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At June 30, 2014, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 5.7 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

 

Investment Securities

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

Due in one year

   $ 286       $ 304         —           —     

Due after one year through five years

     3,187         3,280         —           —     

Due after five years through ten years

     27,371         28,467         —           —     

Due after ten years

     55,915         59,463       $ 422,502       $ 427,955   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 86,759       $ 91,514       $ 422,502       $ 427,955   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Less than 12 months     12 months or more     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
June 30, 2014    Value      Loss     Value      Loss     Value      Loss  
     (in thousands)  

Securities available for sale:

               

Obligations of U.S. government corporations and agencies

     —           —        $ 10,068       $ (63   $ 10,068       $ (63

Obligations of states and political subdivisions

     —           —          —           —          —           —     

Corporate debt securities

     —           —          —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available for sale

     —           —        $ 10,068       $ (63   $ 10,068       $ (63
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Securities held to maturity:

               

Obligations of U.S. government corporations and agencies

   $ 3,384       $ (14   $ 57,938       $ (1,161   $ 61,322       $ (1,175

Obligations of states and political subdivisions

     477         (31     11,789         (324     12,266         (355
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities held to maturity

   $ 3,861       $ (45   $ 69,727       $ (1,485   $ 73,588       $ (1,530
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 months     12 months or more     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
December 31, 2013    Value      Loss     Value      Loss     Value      Loss  
     (in thousands)  

Securities available for sale:

               

Obligations of U.S. government corporations and agencies

   $ 10,287       $ (357     —           —        $ 10,287       $ (357

Obligations of states and political subdivisions

     199         (1     —           —          199         (1

Corporate debt securities

     —           —          —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available for sale

   $ 10,486       $ (358     —           —        $ 10,486       $ (358
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Securities held to maturity:

               

Obligations of U.S. government corporations and agencies

   $ 188,218       $ (5,540     —           —        $ 188,218       $ (5,540

Obligations of states and political subdivisions

     11,185         (1,455     —           —          11,185         (1,455
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities held to maturity

   $ 199,403       $ (6,995     —           —        $ 199,403       $ (6,995
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Obligations of U.S. government corporations and agencies: Unrealized losses on investments in obligations of U.S. government corporations and agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2014, 9 debt securities representing obligations of U.S. government corporations and agencies had unrealized losses with aggregate depreciation of 1.71% from the Company’s amortized cost basis.

Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2014, 14 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of 2.81% from the Company’s amortized cost basis.

Corporate debt securities: At June 30, 2014, no corporate debt securities had unrealized losses.

 

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Table of Contents

Note 4 – Loans

A summary of loan balances follows (in thousands):

 

     June 30, 2014  
                 PCI -     PCI -        
     Originated     PNCI     Cash basis     Other     Total  

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 136,690      $ 72,387        —        $ 3,843      $ 212,920   

Commercial

     872,125        52,844        —          29,967        954,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loan on real estate

     1,008,815        125,231        —          33,810        1,167,856   

Consumer:

          

Home equity lines of credit

     307,964        12,866      $ 5,712        3,645        330,187   

Home equity loans

     17,129        154        126        486        17,895   

Auto Indirect

     385        —          —          —          385   

Other

     26,745        1,861        —          70        28,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

     352,223        14,881        5,838        4,201        377,143   

Commercial

     130,848        518        11        5,964        137,341   

Construction:

          

Residential

     40,595        —          —          1,502        42,097   

Commercial

     14,084        —          —          65        14,149   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction

     54,679        —          —          1,567        56,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of deferred loan fees and discounts

   $ 1,546,565      $ 140,630      $ 5,849      $ 45,542      $ 1,738,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,550,887      $ 147,076      $ 15,456      $ 53,192      $ 1,766,611   

Unamortized net deferred loan fees

     (4,322     —          —          —          (4,322

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

     —          (6,446     (9,607     (7,650     (23,703
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $ 1,546,565      $ 140,630      $ 5,849      $ 45,542      $ 1,738,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncovered loans

   $ 1,546,565      $ 140,630      $ 5,849      $ 20,137      $ 1,713,181   

Covered loans

     —          —          —          25,405        25,405   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $ 1,546,565      $ 140,630      $ 5,849      $ 45,542      $ 1,738,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses

   $ 32,457      $ 3,235      $ 398      $ 3,878      $ 39,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Note 4 – Loans (continued)

 

A summary of loan balances follows (in thousands):

 

     December 31, 2013  
                 PCI -     PCI -        
     Originated     PNCI     Cash basis     Other     Total  

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 129,882      $ 60,475        —        $ 4,656      $ 195,013   

Commercial

     824,912        57,678        —          30,260        912,850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loan on real estate

     954,794        118,153        —          34,916        1,107,863   

Consumer:

          

Home equity lines of credit

     316,207        13,576      $ 6,200        3,883        339,866   

Home equity loans

     13,849        253        —          486        14,588   

Auto Indirect

     946        —          —          —          946   

Other

     25,608        2,074        —          81        27,763   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

     356,610        15,903        6,200        4,450        383,163   

Commercial

     124,650        693        19        6,516        131,878   

Construction:

          

Residential

     30,367        —          —          1,566        31,933   

Commercial

     17,125        —          —          45        17,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction

     47,492        —          —          1,611        49,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of deferred loan fees and discounts

   $ 1,483,546      $ 134,749      $ 6,219      $ 47,493      $ 1,672,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,487,240      $ 142,786      $ 16,475      $ 56,879      $ 1,703,380   

Unamortized net deferred loan fees

     (3,694     —          —          —          (3,694

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

     —          (8,037     (10,256     (9,386     (27,679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $ 1,483,546      $ 134,749      $ 6,219      $ 47,493      $ 1,672,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncovered loans

   $ 1,483,546      $ 134,749      $ 6,219      $ 19,581      $ 1,644,095   

Covered loans

     —          —          —          27,912        27,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $ 1,483,546      $ 134,749      $ 6,219      $ 47,493      $ 1,672,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses

   $ (31,354   $ (2,850   $ (385   $ (3,656   $ (38,245
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Change in accretable yield:

        

Balance at beginning of period

   $ 17,438      $ 20,691      $ 18,232      $ 22,337   

Accretion to interest income

     (1,382     (1,568     (3,013     (3,191

Reclassification from nonaccretable difference

     242        604        1,079        581   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 16,298      $ 19,727      $ 16,298      $ 19,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Throughout these consolidated financial statements, and in particular in this Note 4 and Note 5, when we refer to “Loans” or “Allowance for loan losses” we mean all categories of loans, including Originated, PNCI, PCI – cash basis, and PCI—other. When we are not referring to all categories of loans, we will indicate which we are referring to – Originated, PNCI, PCI – cash basis, or PCI—other.

 

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Table of Contents

Note 5 – Allowance for Loan Losses

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

 

    Allowance for Loan Losses – Three Months Ended June 30, 2014  
    RE Mortgage     Home Equity     Auto     Other           Construction        
(in thousands)   Resid.     Comm.     Lines     Loans     Indirect     Consum.     C&I     Resid.     Comm.     Total  

Beginning balance

  $ 2,980      $ 9,875      $ 16,366      $ 1,291      $ 45      $ 590      $ 4,136      $ 1,501      $ 1,538      $ 38,322   

Charge-offs

    (1     (45     (677     (11     —          (144     (151     —          —          (1,029

Recoveries

    —          299        180        25        39        119        188        97        20        967   

(Benefit) provision

    (147     (298     2,186        106        (56     (9     234        (87     (221     1,708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,832      $ 9,831      $ 18,055      $ 1,411      $ 28      $ 556      $ 4,407      $ 1,511      $ 1,337      $ 39,968   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Allowance for Loan Losses – Six Months Ended June 30, 2014  
    RE Mortgage     Home Equity     Auto     Other           Construction        
(in thousands)   Resid.     Comm.     Lines     Loans     Indirect     Consum.     C&I     Resid.     Comm.     Total  

Beginning balance

  $ 3,154      $ 9,700      $ 16,375      $ 1,208      $ 66      $ 589      $ 4,331      $ 1,559      $ 1,263      $ 38,245   

Charge-offs

    (136     (58     (855     (11     —          (271     (390     (4     (69     (1,794

Recoveries

    —          471        509        27        51        302        1,061        608        135        3,164   

(Benefit) provision

    (186     (282     2,026        187        (89     (64     (595     (652     8        353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,832      $ 9,831      $ 18,055      $ 1,411      $ 28      $ 556      $ 4,407      $ 1,511      $ 1,337      $ 39,968   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

                   

Individ. evaluated for impairment

  $ 780      $ 392      $ 2,088      $ 211        —        $ 3      $ 405      $ 61        —        $ 3,940   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

  $ 1,869      $ 8,605      $ 15,466      $ 1,199      $ 27      $ 553      $ 2,534      $ 720      $ 779      $ 31,752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 185      $ 835      $ 499        —          —          —        $ 1,469      $ 730      $ 558      $ 4,276   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Loans, net of unearned fees – As of June 30, 2014  
    RE Mortgage     Home Equity     Auto     Other           Construction        
(in thousands)   Resid.     Comm.     Lines     Loans     Indirect     Consum.     C&I     Resid.     Comm.     Total  

Ending balance:

                   

Total loans

  $ 212,920      $ 954,936      $ 330,187      $ 17,895      $ 385      $ 28,676      $ 137,341      $ 42,097      $ 14,149      $ 1,738,586   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individ. evaluated for impairment

  $ 7,397      $ 52,570      $ 6,987      $ 871      $ 40      $ 77      $ 2,159      $ 2,751      $ 16      $ 72,868   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

  $ 201,680      $ 872,399      $ 313,843      $ 16,412      $ 345      $ 28,529      $ 129,207      $ 37,844      $ 14,068      $ 1,614,327   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 3,843      $ 29,967      $ 9,357      $ 612        —        $ 70      $ 5,975      $ 1,502      $ 65      $ 51,391   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Allowance for Loan Losses – Year Ended December 31, 2013  
    RE Mortgage     Home Equity     Auto     Other           Construction        
(in thousands)   Resid.     Comm.     Lines     Loans     Indirect     Consum.     C&I     Resid.     Comm.     Total  

Beginning balance

  $ 3,523      $ 8,782      $ 21,367      $ 1,155      $ 243      $ 696      $ 4,703      $ 1,400      $ 779      $ 42,648   

Charge-offs

    (46     (2,038     (2,651     (94     (68     (887     (1,599     (20     (140     (7,543

Recoveries

    345        994        1,053        41        195        759        340        63        65        3,855   

(Benefit) provision

    (668     1,962        (3,394     106        (304     21        887        116        559        (715
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 3,154      $ 9,700      $ 16,375      $ 1,208      $ 66      $ 589      $ 4,331      $ 1,559      $ 1,263      $ 38,245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

                   

Individ. evaluated for impairment

  $ 775      $ 1,198      $ 1,140      $ 169      $ 1      $ 8      $ 585      $ 91      $ 8      $ 3,975   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

  $ 2,039      $ 7,815      $ 14,749      $ 1,039      $ 65      $ 581      $ 2,402      $ 751      $ 789      $ 30,230   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 340      $ 687      $ 486        —          —          —        $ 1,344      $ 717      $ 466      $ 4,040   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Note 5 – Allowance for Loan Losses (continued)

 

    Loans, net of unearned fees – As of December 31, 2013  
    RE Mortgage     Home Equity     Auto     Other           Construction        
(in thousands)   Resid.     Comm.     Lines     Loans     Indirect     Consum.     C&I     Resid.     Comm.     Total  

Ending balance:

                   

Total loans

  $ 195,013      $ 912,850      $ 339,866      $ 14,588      $ 946      $ 27,763      $ 131,878      $ 31,933      $ 17,170      $ 1,672,007   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individ. evaluated for impairment

  $ 7,342      $ 59,936      $ 6,918      $ 778      $ 60      $ 90      $ 3,177      $ 2,756      $ 178      $ 81,235   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

  $ 183,015      $ 822,654      $ 322,865      $ 13,324      $ 886      $ 27,592      $ 122,166      $ 27,611      $ 16,947      $ 1,537,060   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 4,656      $ 30,260      $ 10,083      $ 486        —        $ 81      $ 6,535      $ 1,566      $ 45      $ 53,712   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Allowance for Loan Losses – Three months ended June 30, 2013  
    RE Mortgage     Home Equity     Auto     Other           Construction        
(In thousands)   Resid.     Comm.     Lines     Loans     Indirect     Consum.     C&I     Resid.     Comm.     Total  

Beginning balance

  $ 3,343      $ 9,410      $ 19,323      $ 1,137      $ 148      $ 563      $ 4,235      $ 1,336      $ 372      $ 39,867   

Charge-offs

    (35     (886     (746     —          (33     (212     (35     —          —          (1,947

Recoveries

    191        317        215        17        61        178        66        —          20        1,065   

(Benefit) provision

    (268     (77     (82     (45     (62     38        663        (48     495        614   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 3,231      $ 8,764      $ 18,710      $ 1,109      $ 114      $ 567      $ 4,929      $ 1,288      $ 887      $ 39,599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Allowance for Loan Losses – As of and six months ended June 30, 2013  
    RE Mortgage     Home Equity     Auto     Other           Construction        
(In thousands)   Resid.     Comm.     Lines     Loans     Indirect     Consum.     C&I     Resid.     Comm.     Total  

Beginning balance

  $ 3,523      $ 8,782      $ 21,367      $ 1,155      $ 243      $ 696      $ 4,703      $ 1,400      $ 779      $ 42,648   

Charge-offs

    (42     (1,689     (1,512     (26     (58     (485     (825     (20     (61     (4,718

Recoveries

    191        670        505        26        146        402        136        61        26        2,163   

(Benefit) provision

    (441     1,001        (1,650     (46     (217     (46     915        (153     143        (494
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 3,231      $ 8,764      $ 18,710      $ 1,109      $ 114      $ 567      $ 4,929      $ 1,288      $ 887      $ 39,599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

                   

Individ. evaluated for impairment

  $ 519      $ 1,521      $ 1,768      $ 50      $ 3      $ 7      $ 880      $ 98      $ 45      $ 4,891   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

  $ 2,412      $ 6,965      $ 15,809      $ 992      $ 111      $ 551      $ 2,592      $ 521      $ 543      $ 30,496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 300      $ 278      $ 1,133      $ 67        —        $ 9      $ 1,457      $ 669      $ 299      $ 4,212   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Loans, net of unearned fees – As of June 30, 2013  
    RE Mortgage     Home Equity     Auto     Other           Construction        
(In thousands)   Resid.     Comm.     Lines     Loans     Indirect     Consum.     C&I     Resid.     Comm.     Total  

Ending balance:

                   

Total loans

  $ 196,910      $ 900,536      $ 342,813      $ 13,452      $ 1,965      $ 28,987      $ 128,410      $ 24,063      $ 14,904      $ 1,652,040   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individ. evaluated for impairment

  $ 6,124      $ 68,027      $ 8,574      $ 510      $ 116      $ 86      $ 3,533      $ 3,223      $ 310      $ 90,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

  $ 186,253      $ 798,979      $ 322,983      $ 12,340      $ 1,849      $ 28,818      $ 117,595      $ 18,217      $ 13,534      $ 1,500,568   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 4,533      $ 33,530      $ 11,256      $ 602        —        $ 83      $ 7,282      $ 2,623      $ 1,060      $ 60,969   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Note 5 – Allowance for Loan Losses (continued)

 

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

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

 

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

 

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

 

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

 

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

 

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

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

 

     Credit Quality Indicators – As of June 30, 2014  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

Originated loans:

                             

Pass

   $ 128,003       $ 821,814       $ 293,127       $ 15,419       $ 275       $ 26,037       $ 128,062       $ 36,055       $ 13,900       $ 1,462,692   

Special mention

     1,019         14,440         4,698         407         43         528         1,154         94         140         22,523   

Substandard

     7,668         35,871         10,137         1,303         67         180         1,632         4,446         44         61,348   

Loss

     —           —           2         —           —           —           —           —           —           2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated

   $ 136,690       $ 872,125       $ 307,964       $ 17,129       $ 385       $ 26,745       $ 130,848       $ 40,595       $ 14,084       $ 1,546,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PNCI loans:

                             

Pass

   $ 71,787       $ 44,229       $ 11,797       $ 154         —         $ 1,823       $ 226         —           —         $ 130,016   

Special mention

     —           5,825         269         —           —           5         292         —           —           6,391   

Substandard

     600         2,790         800         —           —           33         —           —           —           4,223   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI

   $ 72,387       $ 52,844       $ 12,866       $ 154         —         $ 1,861       $ 518         —           —         $ 140,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PCI loans

   $ 3,843       $ 29,967       $ 9,357       $ 612         —         $ 70       $ 5,975       $ 1,502       $ 65       $ 51,391   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 212,920       $ 954,936       $ 330,187       $ 17,895       $ 385       $ 28,676       $ 137,341       $ 42,097       $ 14,149       $ 1,738,586   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Quality Indicators – As of December 31, 2013  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

Originated loans:

                             

Pass

   $ 121,969       $ 768,596       $ 203,232       $ 12,284       $ 717       $ 24,653       $ 121,580       $ 25,836       $ 16,571       $ 1,394,438   

Special mention

     1,265         15,862         4,529         504         118         756         938         96         343         24,411   

Substandard

     6,648         40,454         9,446         1,061         111         196         2,122         4,435         211         64,684   

Loss

     —           —           —           —           —           3         10         —           —           13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated

   $ 129,882       $ 824,912       $ 316,207       $ 13,849       $ 946       $ 25,608       $ 124,650       $ 30,367       $ 17,125       $ 1,483,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PNCI loans:

                             

Pass

   $ 59,798       $ 48,548       $ 12,716       $ 253         —         $ 2,020       $ 380         —           —         $ 123,715   

Special mention

     —           5,810         195         —           —           18         313         —           —           6,336   

Substandard

     677         3,320         665         —           —           36         —           —           —           4,698   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI

   $ 60,475       $ 57,678       $ 13,576       $ 253         —         $ 2,074       $ 693         —           —         $ 134,749   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PCI loans

   $ 4,656       $ 30,260       $ 10,083       $ 486         —         $ 81       $ 6,535       $ 1,566       $ 45       $ 53,712   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 195,013       $ 912,850       $ 339,866       $ 14,588       $ 946       $ 27,763       $ 131,878       $ 31,933       $ 17,170       $ 1,672,007   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

Note 5 – Allowance for Loan Losses (continued)

 

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 non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. 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 of the borrower (delinquency). The Bank manages its consumer loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggest modifications if appropriate, and, when continued scheduled payments become unrealistic, initiate repossession or foreclosure through appropriate channels. Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable and the loan has been classified.

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

Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at initiation of the credit and periodically (every 3-12 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, past due, and nonaccrual originated loans by loan category as of the date indicated:

 

     Analysis of Past Due and Nonaccrual Originated Loans – As of June 30, 2014  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

Originated loan balance:

                             

Past due:

                             

30-59 Days

   $ 14       $ 1,328       $ 1,928       $ 518       $ 2       $ 56       $ 140         —           —         $ 3,986   

60-89 Days

     349         —           767         46         —           2         6         —         $ 106         1,276   

> 90 Days

     903         1,731         535         138         23         6         60         —           —           3,396   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

   $ 1,266       $ 3,059       $ 3,230       $ 702       $ 25       $ 64       $ 206         —         $ 106       $ 8,658   

Current

     135,424         869,066         304,734         16,427         360         26,681         130,642       $ 40,595         13,978         1,537,907   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total orig. loans

   $ 136,690       $ 872,125       $ 307,964       $ 17,129       $ 385       $ 26,745       $ 130,848       $ 40,595       $ 14,084       $ 1,546,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 4,563       $ 24,308       $ 4,512       $ 813       $ 36       $ 16       $ 433       $ 2,468       $ 16       $ 37,165   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

Note 5 – Allowance for Loan Losses (continued)

 

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

 

     Analysis of Past Due and Nonaccrual PNCI Loans – As of June 30, 2014  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

PNCI loan balance:

                             

Past due:

                             

30-59 Days

     —           —           —           —           —           —         $ 10         —           —         $ 10   

60-89 Days

   $ 2,297         —           —           —           —         $ 36         —           —           —           2,333   

> 90 Days

     —           —         $ 36         —           —           —           —           —           —           36   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

   $ 2,297         —         $ 36         —           —         $ 36       $ 10         —           —         $ 2,379   

Current

   $ 70,090         52,844         12,830       $ 154         —           1,825         508         —           —           138,251   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 72,387       $ 52,844       $ 12,866       $ 154         —         $ 1,861       $ 518         —           —         $ 140,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 193       $ 478       $ 484         —           —         $ 33         —           —           —         $ 1,188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2013  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

Originated loan balance:

                             

Past due:

                             

30-59 Days

   $ 2,272       $ 2,304       $ 3,121       $ 264       $ 24       $ 40       $ 296         —           —         $ 8,321   

60-89 Days

     284         —           1,070         16         1         16         76         —         $ 198         1,661   

> 90 Days

     447         2,213         1,050         312         33         7         749       $ 13         —           4,824   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

   $ 3,003       $ 4,517       $ 5,241       $ 592       $ 58       $ 63       $ 1,121       $ 13       $ 198       $ 14,806   

Current

     126,879         820,395         310,966         13,257         888         25,545         123,529         30,354         16,927         1,468,740   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total orig. loans

   $ 129,882       $ 824,912       $ 316,207       $ 13,849       $ 946         25,608       $ 124,650       $ 30,367       $ 17,125       $ 1,483,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 4,697       $ 30,732       $ 4,972       $ 719       $ 54       $ 26       $ 1,280       $ 2,473       $ 178       $ 45,131   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Analysis of Past Due and Nonaccrual PNCI Loans – As of December 31, 2013  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

PNCI loan balance:

                             

Past due:

                             

30-59 Days

   $ 799       $ 512       $ 313         —           —         $ 49         —           —           —         $ 1,673   

60-89 Days

     —           352         38         —           —           —           —           —           —           390   

> 90 Days

     —           217         —           —           —           —           —           —           —           217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

   $ 799       $ 1,081       $ 351         —           —         $ 49         —           —           —         $ 2,280   

Current

     59,676         56,597         13,225       $ 253         —           2,025       $ 693         —           —           132,469   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 60,475       $ 57,678       $ 13,576       $ 253         —         $ 2,074       $ 693         —           —         $ 134,749   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 262       $ 1,139       $ 429         —           —         $ 36         —           —           —         $ 1,866   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due under the contractual terms.

 

22


Table of Contents

Note 5 – Allowance for Loan Losses (continued)

 

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.

 

     Impaired Originated Loans – As of, or for the Six Months Ended, June 30, 2014  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines     Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                            

Recorded investment

   $ 4,002       $ 48,781       $ 2,641      $ 626       $ 33       $ 16       $ 1,151       $ 2,468       $ 16       $ 59,734   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 6,227       $ 51,862       $ 5,592      $ 1,032       $ 70       $ 22       $ 1,174       $ 6,689       $ 99       $ 72,767   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 4,228       $ 54,387       $ 3,419      $ 540       $ 49       $ 21       $ 1,266       $ 1,904       $ 43       $ 65,857   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 23       $ 651       $ 5      $ 1         —           —         $ 31         —           —         $ 711   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                            

Recorded investment

   $ 2,821       $ 3,163       $ 3,559      $ 245       $ 7         —         $ 998       $ 283         —         $ 11,076   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 2,893       $ 3,324       $ 4,231      $ 325       $ 10         —         $ 1,041       $ 283         —         $ 12,107   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 625       $ 282       $ 1,810      $ 211         —           —         $ 405       $ 61         —         $ 3,394   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 2,594       $ 5,012       $ 3,196      $ 204       $ 5       $ 6       $ 1,524       $ 890       $ 73       $ 13,504   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 34       $ 76       $ 35      $ 2         —           —         $ 25       $ 9         —         $ 181   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired PNCI Loans – As of, or for the Six Months Ended, June 30, 2014  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines     Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                            

Recorded investment

   $ 144       $ 478       $ 320        —           —         $ 33       $ 10         —           —         $ 985   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 144       $ 2,648       $ 337        —           —         $ 44       $ 10         —           —         $ 3,183   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 94       $ 822       $ 291        —           —         $ 35       $ 12         —           —         $ 1,254   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 6         —         $ (1     —           —           —           —           —           —         $ 5   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                            

Recorded investment

   $ 430       $ 148       $ 467        —           —         $ 28         —           —           —         $ 1,073   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 442       $ 148       $ 476        —           —         $ 28         —           —           —         $ 1,094   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 155       $ 110       $ 278        —           —         $ 3         —           —           —         $ 546   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 352       $ 153       $ 260        —           —         $ 28         —           —           —         $ 793   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 4       $ 4       $ 8        —           —         $ 1         —           —           —         $ 17   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

Note 5 – Allowance for Loan Losses (continued)

 

     Impaired Originated Loans – As of, or for the Year Ended, December 31, 2013  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                             

Recorded investment

   $ 4,366       $ 53,352       $ 3,710       $ 552       $ 55       $ 16       $ 1,648       $ 2,473       $ 69       $ 66,241   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 6,489       $ 58,894       $ 7,299       $ 1,249       $ 123       $ 21       $ 1,665       $ 6,611       $ 138       $ 82,489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 4,123       $ 58,205       $ 4,410       $ 463       $ 93       $ 18       $ 2,154       $ 1,567       $ 83       $ 71,116   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 336       $ 3,361       $ 352       $ 36       $ 12       $ 1       $ 113       $ 108       $ 7       $ 4,326   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                             

Recorded investment

   $ 2,630       $ 5,296       $ 2,779       $ 226       $ 4       $ 10       $ 1,517       $ 284       $ 109       $ 12,855   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 2,689       $ 5,659       $ 3,053       $ 291       $ 6       $ 10       $ 1,616       $ 284       $ 288       $ 13,896   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 648       $ 1,084       $ 968       $ 169       $ 1       $ 5       $ 585       $ 91       $ 7       $ 3,558   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 2,245       $ 6,077       $ 3,064       $ 141       $ 12       $ 7       $ 1,817       $ 1,499       $ 188       $ 15,050   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 124       $ 287       $ 146       $ 18       $ 1       $ 2       $ 95       $ 19       $ 15       $ 707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired PNCI Loans – As of, or for the Year Ended, December 31, 2013  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                             

Recorded investment

   $ 148       $ 1,139       $ 227         —           —         $ 36       $ 12         —           —         $ 1,562   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 158       $ 3,323       $ 287         —           —         $ 45       $ 12         —           —         $ 3,825   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 37       $ 1,005       $ 333         —           —         $ 39       $ 7         —           —         $ 1,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 11       $ 233       $ 21         —           —         $ 5       $ 1         —           —         $ 271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                             

Recorded investment

   $ 198       $ 149       $ 203         —           —         $ 28         —           —           —         $ 578   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 207       $ 149       $ 215         —           —         $ 28         —           —           —         $ 599   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 128       $ 114       $ 172         —           —         $ 3         —           —           —         $ 417   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 275       $ 250       $ 162         —           —         $ 29         —           —           —         $ 716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 12       $ 9       $ 10         —           —         $ 1         —           —           —         $ 32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Impaired Originated Loans – As of, or for the Six Months Ended, June 30, 2013  
     RE Mortgage      Home Equity      Auto      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Indirect      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                             

Recorded investment

   $ 3,913       $ 60,844       $ 4,854       $ 398       $ 104       $ 15       $ 1,567       $ 510         —         $ 72,205   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 6,004       $ 66,568       $ 8,786       $ 1,049       $ 218       $ 27       $ 2,363       $ 1,258         —         $ 86,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 3,817       $ 61,360       $ 4,744       $ 406       $ 139       $ 19       $ 3,348       $ 1,587       $ 160       $ 75,580   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 10       $ 865       $ 14         —         $ 1         —         $ 35         —           —         $ 925   
  </