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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

for the quarterly period ended:    March 31, 2018

 

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

for the transition period from                  to                 .

Commission File Number: 000-10661

 

 

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

CALIFORNIA   94-2792841

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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).    ☒  Yes    ☐  No

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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

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

Common stock, no par value: 22,969,792 shares outstanding as of May 4, 2018

 

 

 


TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS

 

     Page  

Forward-Looking Statements

     1  

PART I – FINANCIAL INFORMATION

     3  

Item 1 – Financial Statements (Unaudited)

     3  

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

     44  

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

     62  

Item 4 – Controls and Procedures

     62  

PART II – OTHER INFORMATION

     63  

Item 1 – Legal Proceedings

     63  

Item 1A – Risk Factors

     63  

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

     63  

Item 6 – Exhibits

     64  

Signatures

     65  

Exhibits

     66  

FORWARD-LOOKING INFORMATION

Important Additional Information about the Merger

TriCo Bancshares (the “Company”) has filed a registration statement on Form S-4 with the SEC (filed on March 21, 2018 and subsequently amended on April 18, 2018), which includes a joint proxy statement of the Company and FNB Bancorp (“FNBB”) and a prospectus of the Company, and each party will file other documents with the SEC regarding the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) pursuant to which FNBB will be merged with and into the Company, with the Company as the surviving corporation (the “Merger”). The Merger is subject to a number of conditions, including regulatory and shareholder approval. A definitive joint proxy statement/prospectus will also be sent to the Company and FNBB shareholders seeking required shareholder approvals.

Before making any voting or investment decision, investors and security holders of the Company and FNBB are urged to carefully read the entire registration statement and joint proxy statement/prospectus, when they become available, as well as any amendments or supplements to these documents, because they will contain important information about the proposed transaction.

The documents filed by the Company and FNBB with the SEC may be obtained free of charge at the SEC’s website at www.sec.gov. In addition, the documents filed by the Company may be obtained free of charge at the Company’s website at https://www.tcbk.com/investor-relations and the documents filed by FNBB may be obtained free of charge at FNBB’s website at https://www.fnbnorcal.com/investor-relations-overview. Alternatively, these documents, when available, can be obtained free of charge from the Company upon written request to TriCo Bancshares, Attention: Craig Compton, Secretary, 63 Constitution Drive, Chico, CA 95973 or by calling (800) 922-8742 or from FNBB upon written request to FNB Bancorp, 975 El Camino Real, South San Francisco, CA, 94080, Attention: Corporate Secretary, or by calling (650) 588-6800.

This communication shall not constitute an offer to sell or the solicitation of an offer to buy securities nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. This communication is also not a solicitation of any vote in any jurisdiction pursuant to the proposed transactions or otherwise. No offer of securities or solicitation will be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended. The communication is not a substitute for the joint proxy statement/prospectus that the Company and FNBB will file with the SEC.

 

1


Cautionary Statements Regarding Forward-Looking Information

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, 2017 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 in their entirety 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.

Statements concerning the potential merger of the Company and FNBB may also be forward-looking statements. Please refer to each of the Company’s and FNBB’s Annual Report on Form 10-K for the year ended December 31, 2017, as well as their other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

In addition to factors previously disclosed in reports filed by the Company and FNBB with the SEC, risks and uncertainties for the Company, FNBB and the combined company include, but are not limited to: the possibility that any of the anticipated benefits of the proposed merger will not be realized or will not be realized within the expected time period; the risk that integration of FNBB’s operations with those of the Company will be materially delayed or will be more costly or difficult than expected; the inability to close the merger in a timely manner; the inability to complete the merger due to the failure of the Company’s or FNBB’s shareholders to adopt the merger agreement; diversion of management’s attention from ongoing business operations and opportunities; the failure to satisfy other conditions to completion of the merger, including receipt of required regulatory and other approvals; the failure of the proposed merger to close for any other reason; the challenges of integrating and retaining key employees; the effect of the announcement of the merger on the Company’s, FNBB’s or the combined company’s respective customer relationships and operating results; the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; and general competitive, economic, political and market conditions and fluctuations. All forward-looking statements included in this filing are made as of the date hereof and are based on information available at the time of the filing. Except as required by law, neither the Company nor FNBB assumes any obligation to update any forward-looking statement.

 

2


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)

 

     At March 31,
2018
    At December 31,
2017
 

Assets:

    

Cash and due from banks

   $ 87,138     $ 105,968  

Cash at Federal Reserve and other banks

     95,841       99,460  
  

 

 

   

 

 

 

Cash and cash equivalents

     182,979       205,428  

Investment securities:

    

Marketable equity securities

     2,890       2,938  

Available for sale debt securities

     735,895       727,945  

Held to maturity debt securities

     496,035       514,844  

Restricted equity securities

     16,956       16,956  

Loans held for sale

     2,149       4,616  

Loans

     3,069,733       3,015,165  

Allowance for loan losses

     (29,973     (30,323
  

 

 

   

 

 

 

Total loans, net

     3,039,760       2,984,842  

Foreclosed assets, net

     1,564       3,226  

Premises and equipment, net

     58,558       57,742  

Cash value of life insurance

     98,391       97,783  

Accrued interest receivable

     12,407       13,772  

Goodwill

     64,311       64,311  

Other intangible assets, net

     4,835       5,174  

Mortgage servicing rights

     6,953       6,687  

Other assets

     56,274       55,051  
  

 

 

   

 

 

 

Total assets

   $ 4,779,957     $ 4,761,315  
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 1,359,996     $ 1,368,218  

Interest-bearing

     2,724,408       2,640,913  
  

 

 

   

 

 

 

Total deposits

     4,084,404       4,009,131  

Accrued interest payable

     958       930  

Reserve for unfunded commitments

     3,864       3,164  

Other liabilities

     63,529       63,258  

Other borrowings

     65,041       122,166  

Junior subordinated debt

     56,905       56,858  
  

 

 

   

 

 

 

Total liabilities

     4,274,701       4,255,507  
  

 

 

   

 

 

 

Commitments and contingencies (Note 18)

    

Shareholders’ equity:

    

Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at March 31, 2018 and December 31, 2017

     —         —    

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

    

22,956,323 at March 31, 2018

     256,226    

22,955,963 at December 31, 2017

       255,836  

Retained earnings

     266,235       255,200  

Accumulated other comprehensive loss, net of tax

     (17,205     (5,228
  

 

 

   

 

 

 

Total shareholders’ equity

     505,256       505,808  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 4,779,957     $ 4,761,315  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)

 

     Three months ended
March 31,
 
     2018     2017  

Interest and dividend income:

    

Loans, including fees

   $ 38,049     $ 34,914  

Investments:

    

Taxable securities

     7,322       6,703  

Tax exempt securities

     1,041       1,041  

Dividends

     336       391  

Interest bearing cash at

    

Federal Reserve and other banks

     373       435  
  

 

 

   

 

 

 

Total interest and dividend income

     47,121       43,484  
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     1,096       894  

Other borrowings

     342       2  

Junior subordinated debt

     697       595  
  

 

 

   

 

 

 

Total interest expense

     2,135       1,491  
  

 

 

   

 

 

 

Net interest income

     44,986       41,993  

Benefit from reversal of provision for loan losses

     (236     (1,557
  

 

 

   

 

 

 

Net interest income after benefit from reversal of provision for loan losses

     45,222       43,550  
  

 

 

   

 

 

 

Noninterest income:

    

Service charges and fees

     9,356       8,907  

Gain on sale of loans

     626       910  

Commissions on sale of non-deposit investment products

     876       607  

Increase in cash value of life insurance

     608       685  

Other

     824       594  
  

 

 

   

 

 

 

Total noninterest income

     12,290       11,703  
  

 

 

   

 

 

 

Noninterest expense:

    

Salaries and related benefits

     21,652       20,893  

Other

     16,510       14,929  
  

 

 

   

 

 

 

Total noninterest expense

     38,162       35,822  
  

 

 

   

 

 

 

Income before income taxes

     19,350       19,431  

Provision for income taxes

     5,440       7,352  
  

 

 

   

 

 

 

Net income

   $ 13,910     $ 12,079  
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.61     $ 0.53  

Diluted

   $ 0.60     $ 0.52  

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)

 

     Three months ended  
     March 31,  
     2018     2017  

Net income

   $ 13,910     $ 12,079  

Other comprehensive income (loss), net of tax:

    

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

     (11,026     457  

Change in minimum pension liability

     80       54  
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (10,946     511  
  

 

 

   

 

 

 

Comprehensive income

   $ 2,964     $ 12,590  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

 

                       Accumulated        
     Shares of                 Other        
     Common     Common     Retained     Comprehensive        
     Stock     Stock     Earnings     Income (loss)     Total  

Balance at December 31, 2016

     22,867,802     $ 252,820     $ 232,440     $ (7,913   $ 477,347  

Net income

         12,079         12,079  

Other comprehensive income

           511       511  

Stock option vesting

       88           88  

RSU vesting

       204           204  

PSU vesting

       89           89  

Stock options exercised

     21,450       435           435  

RSUs released

     304          

Repurchase of common stock

     (16,251     (180     (424       (604

Dividends paid ($ 0.15 per share)

         (3,431       (3,431
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

     22,873,305     $ 253,456     $ 240,664     $ (7,402   $ 486,718  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

     22,955,963     $ 255,836     $ 255,200     $ (5,228   $ 505,808  

Net income

         13,910         13,910  

Adoption ASU 2016-01

         (62     62       —    

Adoption ASU 2018-02

         1,093       (1,093     —    

Other comprehensive loss

           (10,946     (10,946

Stock option vesting

       37           37  

RSU vesting

       238           238  

PSU vesting

       116           116  

RSUs released

     494          

Repurchase of common stock

     (134     (1     (3       (4

Dividends paid ($ 0.17 per share)

         (3,903       (3,903
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     22,956,323     $ 256,226     $ 266,235     $ (17,205   $ 505,256  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

 

     For the three months ended March 31,  
     2018     2017  

Operating activities:

    

Net income

   $ 13,910     $ 12,079  

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

    

Depreciation of premises and equipment, and amortization

     1,613       1,604  

Amortization of intangible assets

     339       359  

Reversal of provision for loan losses

     (236     (1,557

Amortization of investment securities premium, net

     700       798  

Originations of loans for resale

     (20,332     (34,317

Proceeds from sale of loans originated for resale

     23,270       36,771  

Gain on sale of loans

     (626     (910

Change in market value of mortgage servicing rights

     (111     13  

Provision for (reversal of) losses on foreclosed assets

     90       (66

Gain on sale of foreclosed assets

     (371     (118

Loss on disposal of fixed assets

     13       —    

Gain on sale of premises held for sale

     —         (3

Increase in cash value of life insurance

     (608     (685

Gain on life insurance death benefit

     —         (107

Equity compensation vesting expense

     391       381  

Loss on marketable equity securities

     48       —    

Change in:

    

Reserve for unfunded commitments

     700       15  

Interest receivable

     1,365       791  

Interest payable

     28       (48

Other assets and liabilities, net

     3,531       4,444  
  

 

 

   

 

 

 

Net cash from operating activities

     23,714       19,444  
  

 

 

   

 

 

 

Investing activities:

    

Proceeds from maturities of securities available for sale

     15,643       14,069  

Proceeds from maturities of securities held to maturity

     18,535       22,074  

Purchases of securities available for sale

     (39,647     (35,241

Loan origination and principal collections, net

     (54,682     (1,613

Proceeds from sale of other real estate owned

     1,943       726  

Proceeds from sale of premises held for sale

     —         3,338  

Purchases of premises and equipment

     (2,200     (2,413

Life insurance proceeds

     —         282  
  

 

 

   

 

 

 

Net cash provided by investing activities

     (60,408     1,222  
  

 

 

   

 

 

 

Financing activities:

    

Net increase in deposits

     75,273       3,324  

Net change in other borrowings

     (57,125     (2,296

Repurchase of common stock

     —         (169

Dividends paid

     (3,903     (3,431
  

 

 

   

 

 

 

Net cash used by financing activities

     14,245       (2,572
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (22,449     18,094  
  

 

 

   

 

 

 

Cash and cash equivalents and beginning of year

     205,428       305,612  
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 182,979     $ 323,706  
  

 

 

   

 

 

 

Supplemental disclosure of noncash activities:

    

Unrealized (loss) gain on securities available for sale

   $ (15,628   $ 787  

Loans transferred to foreclosed assets

     —         85  

Deferred gain on sale of premises held for sale

     —         438  

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

     4       604  

Supplemental disclosure of cash flow activity:

    

Cash paid for interest expense

     2,107       1,539  

Cash paid for income taxes

     —         —    

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 26 California counties. The Bank operates from 57 traditional branches and 9 in-store branches. The Company has five capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by TriCo and three acquired with the acquisition of North Valley Bancorp. See Note 17 – Junior Subordinated Debt.

The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. The consolidated financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,703,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.

Use of Estimates in the Preparation of Financial Statements

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

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 operation 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.

Marketable Equity Securities

As of December 31, 2017, marketable equity securities with a fair value of $2,938,000 were recorded within investment securities available for sale on the consolidated balance sheets with changes in the fair value recorded through other comprehensive income and accumulated other comprehensive income (loss). As of January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) 2016-01 using a prospective transition approach and reclassified its marketable equity securities from investments available for sale into a separate component of investment securities. The ASU requires marketable equity securities to be reported at fair value with changes in the fair value recorded through earnings. As of January 1, 2018, unrealized losses of $62,000 were reclassified from accumulated other comprehensive loss to retained earnings and the deferred tax asset was reduced by $18,000. During the three months ended March 31, 2018, the Company recognized $48,000 of unrealized losses in the condensed consolidated statements of income.

Debt Securities

The Company classifies its debt 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 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 three months ended March 31, 2018 and throughout 2017, the Company did not have any debt securities classified as trading.

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 we intend to sell the security or it is more likely than not that we 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 we do not intend to sell the security and it is not likely that we will be required to sell the security but we do 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 three months ended March 31, 2018 or the year ended December 31, 2017.

 

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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 Bank 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 Bank 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, based on evaluations of the collectability, impairment and prior loss experience of loans. 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 original contractual terms of the loan agreement. 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 specific reserve allocation within the allowance for loan losses.    

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 probable incurred losses inherent in the portfolio.

 

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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, 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.

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, thereafter, the Company determines that the estimated future cash flows of a PCI loan are expected to be less than previously estimated, 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. The Company refers to PCI loans on nonaccrual status that are accounted for using the cash basis method of income recognition as “PCI – cash basis” loans; and the Company refers to all other PCI loans as “PCI – other” loans 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 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 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.

 

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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. On May 9, 2017, the Company and the FDIC terminated their loss sharing agreements.

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. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Any write-downs based on the asset’s fair value less costs to sell at the date of acquisition are charged to the allowance for loan and lease losses. Any recoveries based on the asset’s fair value less estimated costs to sell in excess of the recorded value of the loan at the date of acquisition are recorded to the allowance for loan and lease losses. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. 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 shorter of 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, 2017 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 and commercial 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/Liability

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 or pay to 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.

Low Income Housing Tax Credits

The Company accounts for low income housing tax credits and the related qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Upon entering into a qualified affordable housing project, the Company records, in other liabilities, the entire amount that it has agreed to invest in the project, and an equal amount, in other assets, representing its investment in the project. As the Company disburses cash to satisfy its investment obligation, other liabilities are reduced. Over time, as the tax credits and other tax benefits of the project are realized by the Company, the investment recorded in other assets is reduced using the proportional amortization method.    

Revenue Recognition

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Most of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans and investment securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2018 and December 31, 2017, the Company did not have any significant contract balances. The Company has evaluated the nature of its revenue streams and determined that further disaggregation of revenue into more granular categories beyond what is presented in the Note 21 was not necessary.

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

 

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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.

Reclassifications

During the three months ended September 30, 2017, the Company changed its classification of 1st lien and 2nd lien non-owner occupied 1-4 residential real estate mortgage loans from commercial real estate mortgage loans to residential real estate mortgage loans and consumer home equity loans, respectively. This change in loan category classification was made to better align the Company’s financial reporting classifications with regulatory reporting classifications, and to properly classify these loans for regulatory risk-based capital ratio calculations.

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

Recent Accounting Pronouncements

FASB Accounting Standards Update (ASU) No.2014-09, Revenue from Contracts with Customers (Topic 606): ASU 2014-09 is intended to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle 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. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15, 2016. ASU 2014-09 does not apply to revenue associated with financial instruments such as loans and investments, which are accounted for under other provisions of GAAP. The Company adopted ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (1) above, the Company recorded a reclassification of cumulative unrealized losses of its marketable equity securities from accumulated other comprehensive income (loss) to retained earnings as of January 1, 2018. Additionally, the Company recognized changes in the fair value of its marketable equity securities in the condensed consolidated statements of net income for the three months ended March 31, 2018. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of March 31, 2018 using an exit price notion (see Note 27 Fair Value Measurement).

FASB issued Accounting Standard Update (ASU) No. 2016-02, Leases (Topic 842). ASU 2016-2, among other things, requires lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 will be effective for the Company on January 1, 2019, utilizing the modified retrospective transition approach. The Company is currently evaluating the provisions of ASU No. 2016-02 and has determined that the adoption of this standard will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, the Company does not expect this to have a material impact on the Company’s results of operations or cash flows.

FASB issued Accounting Standard Update (ASU) No. 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09, among other things, requires: (i) that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement, (ii) the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur, (iii) an entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period, (iv) excess tax benefits should be classified along with other income tax cash flows as an operating activity, (v) an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur, (vi) the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions, and (vii) cash paid by an employer when directly

 

12


withholding shares for tax withholding purposes should be classified as a financing activity. ASU 2016-09 was effective for the Company on January 1, 2017 and due to the options exercised during the three months ended March 31, 2017, resulted in the recognition of $90,000 in excess tax benefits.

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

FASB issued ASU No. 2016-18, Statement of Cash Flows—Restricted Cash (Topic 230). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2017-01, Business Combinations—Clarifying the Definition of a Business (Topic 805). ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 was effective for us on January 1, 2018 and did not have a significant impact on our financial statements.

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

FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. ASU 2017-07 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

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

FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award’s fair value, (ii) the award’s vesting conditions and (iii) the award’s classification as an equity or liability instrument. ASU 2017-09 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). ASU 2018-02 allows, but does not require, entities to reclassify certain income tax effects in accumulated other comprehensive income (AOCI) to retained earnings that resulted from the Tax Cuts and Jobs Act (Tax Act) that was enacted on December 22, 2017. The Tax Act included a reduction to the Federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the income tax effects in AOCI calculated using the historical Federal corporate income tax rate of 35 percent and the income tax effects in AOCI calculated using the newly enacted 21 percent Federal corporate income tax rate. The amendments in ASU 2018-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2018-02 on January 1, 2018, and elected to reclassify certain income tax effects in AOCI to retained earnings. This change in accounting principle was accounted for as a cumulative-effect adjustment to the balance sheet resulting in a $1,093,000 increase to retained earnings and a corresponding decrease to AOCI on January 1, 2018.

 

13


Note 2—Business Combinations

Proposed Merger with FNB Bancorp

On December 11, 2017, the Company and FNB Bancorp, a California corporation (“FNBB”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) pursuant to which FNBB will be merged with and into the Company, with the Company as the surviving corporation (the “Merger”). Management expects the acquisition to close in the second quarter of 2018, subject to the satisfaction of customary closing conditions, including regulatory and shareholder approvals. The Merger Agreement provides that immediately after the Merger, FNBB’s bank subsidiary, First National Bank of Northern California (“First National Bank”), will merge with and into the Company’s bank subsidiary, Tri Counties Bank, with Tri Counties Bank as the surviving bank (the “Bank Merger”). The Merger and Bank Merger are collectively referred to as the “Proposed Transaction.”

The Merger Agreement provides that each share of FNBB common stock issued and outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive 0.98 shares of the Company’s common stock (the “Exchange Ratio”), with cash paid in lieu of fractional shares of the Company’s common stock.

Based on the closing price of the Company’s common stock of $41.64 on December 8, 2017, the consideration value was $40.81 per share of FNBB common stock or approximately $315.3 million in aggregate. The value of the merger consideration will fluctuate until closing based on the value of the Company’s stock and subject to a trading collar in certain circumstances. Upon consummation of the Merger, the shareholders of FNBB will own approximately 24% of the combined company.

The Merger Agreement includes a trading collar that could result in termination of the Merger Agreement or a change to the Exchange Ratio. First, the Company can elect to terminate the Merger Agreement if both (i) the average share price of the Company’s common stock for the 20 day period up to and including the fifth day prior to the closing date (the “Average Closing Share Price”) is greater than $49.78, which equals 120% of the average share price of the Company’s stock for the 20 trading-day period up to and including December 8, 2017, which was $41.48 (the “Initial Price”) and (ii) the Company’s common stock outperforms the KBW Regional Banking Index by more than 20%, unless FNBB agrees that the Exchange Ratio will be reduced and fewer shares of the Company’s common stock will be issued to FNBB shareholders on a per share basis. Conversely, FNBB can terminate the Merger Agreement if both (i) the Average Closing Share Price is less than $33.18, which is equivalent to 80% of the Initial Price, and (ii) the Company’s common stock underperforms the KBW Regional Banking Index by more than 20%, unless the Company agrees that the Exchange Ratio will be increased and more shares of the Company common stock will be issued to FNBB shareholders on a per share basis.

Upon consummation of the Merger, each outstanding and unexercised option to acquire shares of FNBB common stock held by FNBB’s employees and directors will be canceled and, in exchange, the holder of the option will be entitled to receive, whether or not the option is fully vested, a lump sum cash payment equal to the product of (1) the number of shares of FNBB common stock remaining under the option multiplied by (2) the Exchange Ratio multiplied by (3) the amount, if any, by which the Average Closing Share Price exceeds the exercise price of the option.

The consummation of the Merger is subject to a number of conditions, which include: (i) the approval of the Merger Agreement by FNBB’s shareholders and the approval of the Merger Agreement and the issuance of shares of the Company common stock by the Company’s shareholders; (ii) as of the closing of the Merger, FNBB shall have tangible common equity of not less than $119.0 million, subject to credit for certain merger-related expenses and certain assumptions and adjustments that are set forth in the Merger Agreement; (iii) the receipt of all necessary regulatory approvals for the Proposed Transaction, without the imposition of conditions or requirements that the Company’s Board of Directors reasonably determines in good faith would, individually or in the aggregate, materially reduce the economic benefits of the Proposed Transaction; (iv) the absence of any regulation, judgment, decree, injunction or other order of a governmental authority which prohibits the consummation of the Proposed Transaction or which prohibits or makes illegal the consummation of the Proposed Transaction; (v) the effective registration of the shares of the Company’s Common Stock to be issued to FNBB’s shareholders with the Securities and Exchange Commission (the “SEC”) and the approval of such shares for listing on the Nasdaq Global Select Market; (vi) all representations and warranties made by the Company and FNBB in the Merger Agreement must remain true and correct, except for certain inaccuracies that would not have, or would not reasonably be expected to have, a material adverse effect; and (vii) the Company and FNBB must have performed their respective obligations under the Merger Agreement in all material respects.

On March 21, 2018, the Company filed a registration statement on Form S-4 that included historical and pro forma information required in connection with the Merger. The registration statement on Form S-4 was subsequently amended on April 18, 2018.

 

14


Note 3—Investment Securities

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

 

     March 31, 2018  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 
     (in thousands)  

Debt Securities Available for Sale

  

Obligations of U.S. government corporations and agencies

   $ 633,310      $ 317      $ (16,970    $ 616,657  

Obligations of states and political subdivisions

     121,560        466        (2,788      119,238  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities available for sale

   $ 754,870      $ 783      $ (19,758    $ 735,895  
  

 

 

    

 

 

    

 

 

    

 

 

 

Debt Securities Held to Maturity

           

Obligations of U.S. government corporations and agencies

   $ 481,457      $ 533      $ (7,737    $ 474,253  

Obligations of states and political subdivisions

     14,578        39        (231      14,386  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities held to maturity

   $ 496,035      $ 572      $ (7,968    $ 488,639  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 
     (in thousands)  

Debt Securities Available for Sale

  

Obligations of U.S. government corporations and agencies

   $ 609,695      $ 695      $ (5,601    $ 604,789  

Obligations of states and political subdivisions

     121,597        1,888        (329      123,156  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities available for sale

   $ 731,292      $ 2,583      $ (5,930    $ 727,945  
  

 

 

    

 

 

    

 

 

    

 

 

 

Debt Securities Held to Maturity

           

Obligations of U.S. government corporations and agencies

   $ 500,271      $ 5,101      $ (1,889    $ 503,483  

Obligations of states and political subdivisions

     14,573        146        (37      14,682  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities held to maturity

   $ 514,844      $ 5,247      $ (1,926    $ 518,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

No investment securities were sold during the three months ended March 31, 2018 or the three months ended March 31, 2017. Investment securities with an aggregate carrying value of $415,542,000 and $285,596,000 at March 31, 2018 and December 31, 2017, 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 March 31, 2018 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2018, obligations of U.S. government corporations and agencies with a cost basis totaling $1,114,767,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At March 31, 2018, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 6.1 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

 

Debt Securities

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

Due in one year

   $ 2      $ 2      $ —        $ —    

Due after one year through five years

     235        236        1,215        1,228  

Due after five years through ten years

     3,324        3,452        20,631        20,291  

Due after ten years

     751,309        732,205        474,189        467,120  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 754,870      $ 735,895      $ 496,035      $ 488,639  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Note 3—Investment Securities (continued)

 

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

 

     Less than 12 months     12 months or more     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 
                  (in thousands)               

March 31, 2018

               

Debt Securities Available for Sale

               

Obligations of U.S. government corporations and agencies

   $ 434,302      $ (10,345   $ 158,324      $ (6,625   $ 592,626      $ (16,970

Obligations of states and political subdivisions

     65,047        (1,456     16,042        (1,332     81,089        (2,788
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities available for sale

   $ 499,349      $ (11,801   $ 174,366      $ (7,957   $ 673,715      $ (19,758
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Debt Securities Held to Maturity

               

Obligations of U.S. government corporations and agencies

   $ 299,575      $ (4,551   $ 89,809      $ (3,186   $ 389,384      $ (7,737

Obligations of states and political subdivisions

     8,901        (144     2,579        (87     11,480        (231
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities held to maturity

   $ 308,476      $ (4,695   $ 92,388      $ (3,273   $ 400,864      $ (7,968
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 months     12 months or more     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 
                  (in thousands)               

December 31, 2017

               

Debt Securities Available for Sale

               

Obligations of U.S. government corporations and agencies

   $ 284,367      $ (2,176   $ 166,338      $ (3,425   $ 450,705      $ (5,601

Obligations of states and political subdivisions

     4,904        (35     17,085        (294     21,989        (329
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available for sale

   $ 289,271      $ (2,211   $ 183,423      $ (3,719   $ 472,694      $ (5,930
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Debt Securities Held to Maturity

               

Obligations of U.S. government corporations and agencies

   $ 93,017      $ (567   $ 95,367      $ (1,322   $ 188,384      $ (1,889

Obligations of states and political subdivisions

     1,488        (7     2,637        (30     4,125        (37
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities held to maturity

   $ 94,505      $ (574   $ 98,004      $ (1,352   $ 192,509      $ (1,926
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 March 31, 2018, 128 debt securities representing obligations of U.S. government corporations and agencies had unrealized losses with aggregate depreciation of (2.45%) 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 March 31, 2018, 94 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of (3.16%) from the Company’s amortized cost basis.

Marketable equity securities: All unrealized losses recognized during the reporting period were for equity securities still held at March 31, 2018.

 

16


Note 4 — Loans

A summary of loan balances follows (in thousands):

 

     March 31, 2018  
     Originated     PNCI     PCI -
Cash basis
    PCI -
Other
    Total  

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 323,161     $ 61,206     $ —       $ 1,744     $ 386,111  

Commercial

     1,754,062       211,168       —         8,038       1,973,268  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loan on real estate

     2,077,223       272,374       —         9,782       2,359,379  

Consumer:

          

Home equity lines of credit

     266,651       14,939       1,619       42       283,251  

Home equity loans

     38,889       2,558       —         485       41,932  

Other

     21,422       2,141       —         43       23,606  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

     326,962       19,638       1,619       570       348,789  

Commercial

     205,673       7,837       —         2,505       216,015  

Construction:

          

Residential

     71,589       9       —         —         71,598  

Commercial

     73,701       251       —         —         73,952  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction

     145,290       260       —         —         145,550  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of deferred loan fees and discounts

   $ 2,755,148     $ 300,109     $ 1,619     $ 12,857     $ 3,069,733  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 2,764,819     $ 306,924     $ 5,167     $ 16,654     $ 3,093,564  

Unamortized net deferred loan fees

     (9,671     —         —         —         (9,671

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

     —         (6,815     (3,548     (3,797     (14,160
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $ 2,755,148     $ 300,109     $ 1,619     $ 12,857     $ 3,069,733  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses

   $ (29,057   $ (748   $ (8   $ (160   $ (29,973
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     December 31, 2017  
     Originated     PNCI     PCI -
Cash basis
    PCI -
Other
    Total  

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 320,522     $ 63,519     $ —       $ 1,385     $ 385,426  

Commercial

     1,690,510       215,823       —         8,563       1,914,896  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loan on real estate

     2,011,032       279,342       —         9,948       2,300,322  

Consumer:

          

Home equity lines of credit

     269,942       16,248       2,069       429       288,688  

Home equity loans

     39,848       2,698       —         485       43,031  

Other

     22,859       2,251       —         45       25,155  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

     332,649       21,197       2,069       959       356,874  

Commercial

     209,437       8,391       —         2,584       220,412  

Construction:

          

Residential

     67,920       10       —         —         67,930  

Commercial

     69,364       263       —         —         69,627  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction

     137,284       273       —         —         137,557  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of deferred loan fees and discounts

   $ 2,690,402     $ 309,203     $ 2,069     $ 13,491     $ 3,015,165  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 2,699,053     $ 316,238     $ 5,863     $ 17,318     $ 3,038,472  

Unamortized net deferred loan fees

     (8,651     —         —         —         (8,651

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

     —         (7,035     (3,794     (3,827     (14,656
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $ 2,690,402     $ 309,203     $ 2,069     $ 13,491     $ 3,015,165  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses

   $ (29,122   $ (929   $ (17   $ (255   $ (30,323
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended March 31,  
     2018      2017  

Change in accretable yield:

     

Balance at beginning of period

   $ 4,262      $ 10,348  

Accretion to interest income

     (255      (902

Reclassification (to) from nonaccretable difference

     140        114  
  

 

 

    

 

 

 

Balance at end of period

   $ 4,147      $ 9,560  
  

 

 

    

 

 

 

 

17


Note 5 – Allowance for Loan Losses

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

 

     Allowance for Loan Losses – Three Months Ended March 31, 2018  
     RE Mortgage     Home Equity     Other           Construction        
(in thousands)    Resid.     Comm.     Lines     Loans     Consum.     C&I     Resid.     Comm.     Total  

Beginning balance

   $ 2,317     $ 11,441     $ 5,800     $ 1,841     $ 586     $ 6,512     $ 1,184     $ 642     $ 30,323  

Charge-offs

     (1     —         (80     —         (194     (205     —         —         (480

Recoveries

     —         15       209       14       78       50       —         —         366  

(Benefit) provision

     (146     39       (517     (119     100       35       167       205       (236
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,170     $ 11,495     $ 5,412     $ 1,736     $ 570     $ 6,392     $ 1,351     $ 847     $ 29,973  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

                  

Individ. evaluated for impairment

   $ 190     $ 154     $ 448     $ 130     $ 56     $ 2,113       —         —       $ 3,091  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

   $ 1,910     $ 11,281     $ 4,956     $ 1,606     $ 514     $ 4,249     $ 1,351     $ 847     $ 26,714  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

   $ 70     $ 60     $ 8       —         —       $ 30       —         —       $ 168  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Loans, net of unearned fees – As of March 31, 2018  
     RE Mortgage     Home Equity     Other           Construction        
(in thousands)    Resid.     Comm.     Lines     Loans     Consum.     C&I     Resid.     Comm.     Total  

Ending balance:

                  

Total loans

   $ 386,111     $ 1,973,268     $ 283,251     $ 41,932     $ 23,606     $ 216,015     $ 71,598     $ 73,952     $ 3,069,733  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individ. evaluated for impairment

   $ 5,535     $ 11,110     $ 2,450     $ 1,673     $ 278     $ 4,621     $ 136       —       $ 25,803  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

   $ 378,832     $ 1,954,120     $ 279,140     $ 39,774     $ 23,285     $ 208,889     $ 71,462     $ 73,952     $ 3,029,454  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

   $ 1,744     $ 8,038     $ 1,661     $ 485     $ 43     $ 2,505       —         —       $ 14,476  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Allowance for Loan Losses—Year Ended December 31, 2017    

 

 
     RE Mortgage     Home Equity     Other           Construction        
(in thousands)    Resid.     Comm.     Lines     Loans     Consum.     C&I     Resid.     Comm.     Total  

Beginning balance

   $ 2,748     $ 11,517     $ 7,044     $ 2,644     $ 622     $ 5,831     $ 1,417     $ 680     $ 32,503  

Charge-offs

     (60     (186     (98     (332     (1,186     (1,444     (1,104     —         (4,410

Recoveries

     —         397       698       242       375       428       —         1       2,141  

(Benefit) provision

     (371     (287     (1,844     (713     775       1,697       871       (39     89  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,317     $ 11,441     $ 5,800     $ 1,841     $ 586     $ 6,512     $ 1,184     $ 642     $ 30,323  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

                  

Individ. evaluated for impairment

   $ 230     $ 30     $ 427     $ 107     $ 57     $ 1,848       —         —       $ 2,699  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

   $ 1,932     $ 11,351     $ 5,356     $ 1,734     $ 529     $ 4,624     $ 1,184     $ 642     $ 27,352  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

   $ 155     $ 60     $ 17       —         —       $ 40       —         —       $ 272  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Loans, net of unearned fees – As of December 31, 2017  
     RE Mortgage     Home Equity     Other           Construction        
(in thousands)    Resid.     Comm.     Lines     Loans     Consum.     C&I     Resid.     Comm.     Total  

Ending balance:

                  

Total loans

   $ 385,426     $ 1,914,896     $ 288,688     $ 43,031     $ 25,155     $ 220,412     $ 67,930     $ 69,627     $ 3,015,165  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individ. evaluated for impairment

   $ 5,298     $ 13,911     $ 2,688     $ 1,470     $ 257     $ 4,470     $ 140       —       $ 28,234  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

   $ 378,743     $ 1,892,422     $ 283,502     $ 41,076     $ 24,853     $ 213,358     $ 67,790     $ 69,627     $ 2,971,371  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

   $ 1,385     $ 8,563     $ 2,498     $ 485     $ 45     $ 2,584       —         —       $ 15,560  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Allowance for Loan Losses – Three Months Ended March 31, 2017  
     RE Mortgage     Home Equity     Other           Construction        
(in thousands)    Resid.     Comm.     Lines     Loans     Consum.     C&I     Resid.     Comm.     Total  

Beginning balance

   $ 2,748     $ 11,517     $ 7,044     $ 2,644     $ 622     $ 5,831     $ 1,417     $ 680     $ 32,503  

Charge-offs

     —         —         (71     (31     (174     (133     —         —         (409

Recoveries

     —         110       46       12       141       170       —         1       480  

(Benefit) provision

     (86     (85     (489     (174     6       (542     (78     (109     (1,557
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,662     $ 11,542     $ 6,530     $ 2,451     $ 595     $ 5,326     $ 1,339     $ 572     $ 31,017  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

                  

Individ. evaluated for impairment

   $ 249     $ 124     $ 400     $ 57     $ 31     $ 811     $ 14       —       $ 1,686  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

   $ 2,188     $ 9,971     $ 6,122     $ 2,328     $ 564     $ 3,873     $ 1,282     $ 572     $ 26,900  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

   $ 225     $ 1,447     $ 8     $ 66       —       $ 642     $ 43       —       $ 2,431  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Loans, net of unearned fees – As of March 31, 2017  
     RE Mortgage     Home Equity     Other           Construction        
(in thousands)    Resid.     Comm.     Lines     Loans     Consum.     C&I     Resid.     Comm.     Total  

Ending balance:

                  

Total loans

   $ 309,701     $ 1,761,114     $ 283,596     $ 40,241     $ 29,313     $ 212,685     $ 59,699     $ 64,843     $ 2,761,192  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individ. evaluated for impairment

   $ 3,849     $ 16,979     $ 2,204     $ 1,241     $ 280     $ 3,072     $ 25       —       $ 27,650  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

   $ 304,493     $ 1,731,785     $ 277,388     $ 37,867     $ 28,967     $ 205,832     $ 58,830     $ 64,843     $ 2,710,005  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

   $ 1,359     $ 12,350     $ 4,004     $ 1,133     $ 66     $ 3,781     $ 844       —       $ 23,537  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


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 March 31, 2018  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

Originated loans:

                          

Pass

   $ 317,799      $ 1,716,599      $ 263,270      $ 35,730      $ 21,067      $ 193,829      $ 71,482      $ 68,846      $ 2,688,622  

Special mention

     2,274        23,679        1,628        1,532        238        7,263        —          4,855        41,469  

Substandard

     3,088        13,784        1,753        1,627        117        4,581        107        —          25,057  

Loss

     —          —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated

   $ 323,161      $ 1,754,062      $ 266,651      $ 38,889      $ 21,422      $ 205,673      $ 71,589      $ 73,701      $ 2,755,148  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PNCI loans:

                          

Pass

   $ 59,184      $ 201,641      $ 13,686      $ 2,301      $ 2,067      $ 7,837      $ 9      $ 251      $ 286,976  

Special mention

     214        8,977        282        184        37        —          —          —          9,694  

Substandard

     1,808        550        971        73        37        —          —          —          3,439  

Loss

     —          —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI

   $ 61,206      $ 211,168      $ 14,939      $ 2,558      $ 2,141      $ 7,837      $ 9      $ 251      $ 300,109  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PCI loans

   $ 1,744      $ 8,038      $ 1,661      $ 485      $ 43      $ 2,505        —          —        $ 14,476  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 386,111      $ 1,973,268      $ 283,251      $ 41,932      $ 23,606      $ 216,015      $ 71,598      $ 73,952      $ 3,069,733  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Quality Indicators – As of December 31, 2017  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

Originated loans:

                          

Pass

   $ 315,120      $ 1,649,333      $ 265,345      $ 37,428      $ 22,432      $ 195,208      $ 67,813      $ 64,492      $ 2,617,171  

Special mention

     2,234        18,434        2,558        800        272        9,492        —          4,872        38,662  

Substandard

     3,168        22,743        2,039        1,620        155        4,737        107        —          34,569  

Loss

     —          —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated

   $ 320,522      $ 1,690,510      $ 269,942      $ 39,848      $ 22,859      $ 209,437      $ 67,920      $ 69,364      $ 2,690,402  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PNCI loans:

                          

Pass

   $ 61,411      $ 203,751      $ 14,866      $ 2,433      $ 2,207      $ 8,390      $ 10      $ 263      $ 293,331  

Special mention

     218        11,513        450        188        38        1        —          —          12,408  

Substandard

     1,890        559        932        77        6        —          —          —          3,464  

Loss

     —          —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI

   $ 63,519      $ 215,823      $ 16,248      $ 2,698      $ 2,251      $ 8,391      $ 10      $ 263      $ 309,203  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PCI loans

   $ 1,385      $ 8,563      $ 2,498      $ 485      $ 45      $ 2,584        —          —        $ 15,560  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 385,426      $ 1,914,896      $ 288,688      $ 43,031        25,155      $ 220,412      $ 67,930      $ 69,627      $ 3,015,165  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


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 March 31, 2018  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

Originated loan balance:

                          

Past due:

                          

30-59 Days

   $ 2,217      $ 5,531      $ 938      $ 1,490      $ 63      $ 915      $ 298      $ —        $ 11,452  

60-89 Days

     —          —          26        18        18        534        —          1,249        1,845  

> 90 Days

     846        1,162        320        154        —          1,557        —          —          4,039  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     3,063        6,693        1,284        1,662        81        3,006        298        1,249        17,336  

Current

     320,098        1,747,369        265,367        37,227        21,341        202,667        71,291        72,452        2,737,812  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans

   $ 323,161      $ 1,754,062      $ 266,651      $ 38,889      $ 21,422      $ 205,673      $ 71,589      $ 73,701      $ 2,755,148  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —          —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 2,235      $ 7,925      $ 733      $ 1,193      $ 4      $ 3,990        —          —        $ 16,080  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


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 March 31, 2018  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

PNCI loan balance:

                          

Past due:

                          

30-59 Days

   $ 2,537        —        $ 362      $ 2        —        $ 1        —          —        $ 2,902  

60-89 Days

     —          —          —          —          4        —          —          —          4  

> 90 Days

     —          —          146        —          28        —          —          —          174  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     2,537        —          508        2        32        1        —          —          3,080  

Current

     58,669        211,168        14,431        2,556        2,109        7,836        9        251        297,029  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 61,206      $ 211,168      $ 14,939      $ 2,558      $ 2,141      $ 7,837      $ 9      $ 251      $ 300,109  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —          —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 1,067        —        $ 571      $ 40      $ 33        —          —          —        $ 1,711  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2017  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

Originated loan balance:

                          

Past due:

                          

30-59 Days

   $ 1,740      $ 158      $ 528      $ 511      $ 56      $ 956      $ 34        —        $ 3,983  

60-89 Days

     510        987        48        107        36        738        —          —          2,426  

> 90 Days

     243        —          372        373        3        1,527        —          —          2,518  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

   $ 2,493      $ 1,145      $ 948      $ 991      $ 95      $ 3,221      $ 34        —        $ 8,927  

Current

     318,029        1,689,365        268,994        38,857        22,764        206,216        67,886      $ 69,364        2,681,475  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans

   $ 320,522      $ 1,690,510      $ 269,942      $ 39,848      $ 22,859      $ 209,437      $ 67,920      $ 69,364      $ 2,690,402  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —          —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 1,725      $ 8,144      $ 811      $ 1,106      $ 7      $ 3,669        —          —        $ 15,462  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2017  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

PNCI loan balance:

                          

Past due:

                          

30-59 Days

   $ 1,495      $ 70      $ 298      $ 30      $ 6        —          —          —        $ 1,899  

60-89 Days

     90        —          228        —          26        —          —          —          344  

> 90 Days

     109        —          330        —          —          —          —          —          439  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

   $ 1,694      $ 70      $ 856      $ 30      $ 32        —          —          —        $ 2,682  

Current

     61,825        215,753        15,392        2,668        2,219      $ 8,391      $ 10      $ 263        306,521  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 63,519      $ 215,823      $ 16,248      $ 2,698      $ 2,251      $ 8,391      $ 10      $ 263      $ 309,203  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

   $ 81        —        $ 200        —          —          —          —          —        $ 281  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 1,012        —        $ 402      $ 44      $ 5        —          —          —        $ 1,463  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Note 5 – Allowance for Loan Losses (continued)

 

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 original contractual terms. 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 Three Months Ended, March 31, 2018  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                          

Recorded investment

   $ 2,678      $ 9,848      $ 888      $ 1,193        —        $ 881      $ 136        —        $ 15,624  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 2,829      $ 10,126      $ 944      $ 1,548        —        $ 894      $ 136        —        $ 16,477  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

   $ 2,368      $ 11,474      $ 991      $ 1,150      $ 2      $ 728      $ 138        —        $ 16,851  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

   $ 19      $ 35      $ 6        —          —        $ 9      $ 2        —        $ 71  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                          

Recorded investment

   $ 1,525      $ 1,262      $ 527      $ 196      $ 4      $ 3,740        —          —        $ 7,254  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 1,549      $ 1,281      $ 534      $ 196      $ 4      $ 3,862        —          —        $ 7,426  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 190      $ 154      $ 146      $ 10      $ 4      $ 2,113        —          —        $ 2,617  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

   $ 1,703      $ 1,036      $ 464      $ 197      $ 4      $ 3,817        —          —        $ 7,221  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

   $ 9      $ 9      $ 4      $ 2        —        $ 17        —          —        $ 41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired PNCI Loans – As of, or for the Three Months Ended, March 31, 2018  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                          

Recorded investment

   $ 1,332        —        $ 501      $ 40      $ 28        —          —          —        $ 1,901  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 1,390        —        $ 529      $ 54      $ 28        —          —          —        $ 2,001  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

   $ 1,345        —        $ 546      $ 42      $ 14        —          —          —        $ 1,947  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

   $ 2        —        $ 2           —          —          —          —        $ 4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                          

Recorded investment

     —          —        $ 534      $ 244      $ 246        —          —          —        $ 1,024  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

     —          —        $ 536      $ 244      $ 246        —          —          —        $ 1,026  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

     —          —        $ 302      $ 120      $ 52        —          —          —        $ 474  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

     —          —        $ 568      $ 183      $ 248        —          —          —        $ 999  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

     —          —        $ 3      $ 3      $ 2        —          —          —        $ 8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2017  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                          

Recorded investment

   $ 2,058      $ 13,101      $ 1,093      $ 1,107      $ 4      $ 575      $ 140        —        $ 18,078  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 2,109      $ 13,360      $ 1,175      $ 1,429      $ 52      $ 585      $ 140        —        $ 18,850  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

   $ 1,875      $ 13,123      $ 1,287      $ 852      $ 10      $ 668      $ 76        —        $ 17,891  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

   $ 85      $ 609      $ 39      $ 14        —        $ 18      $ 9        —        $ 774  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                          

Recorded investment

   $ 1,881      $ 810      $ 401      $ 198      $ 3      $ 3,895        —          —        $ 7,188  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 1,914      $ 826      $ 406      $ 198      $ 3      $ 3,981        —          —        $ 7,328  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 230      $ 30      $ 111      $ 10      $ 3      $ 1,848        —          —        $ 2,232  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

   $ 1,626      $ 728      $ 415      $ 341      $ 10      $ 3,615        —          —        $ 6,735  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

   $ 58      $ 36      $ 8      $ 10        —        $ 166        —          —        $ 278  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2017  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                          

Recorded investment

   $ 1,359        —        $ 591      $ 44        —          —          —          —        $ 1,994  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 1,404        —        $ 612      $ 57        —          —          —          —        $ 2,073  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

   $ 911      $ 913      $ 663      $ 56      $ 2        —          —          —        $ 2,545  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

   $ 24        —        $ 22        —          —          —          —          —        $ 46  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                          

Recorded investment

     —          —        $ 603      $ 121      $ 250        —          —          —        $ 974  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

     —          —        $ 604      $ 121      $ 250        —          —          —        $ 975  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

     —          —        $ 316      $ 97      $ 54        —          —          —        $ 467  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

   $ 130      $ 66      $ 577      $ 61      $ 184        —          —          —        $ 1,018  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

     —          —        $ 26      $ 6      $ 11        —          —          —        $ 43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Note 5 – Allowance for Loan Losses (continued)

 

     Impaired Originated Loans – As of, or for the Three Months Ended, March 31, 2017  
     RE Mortgage      Home Equity      Other             Construction         
(in thousands)    Resid.      Comm.      Lines      Loans      Consum.      C&I      Resid.      Comm.      Total  

With no related allowance recorded:

                          

Recorded investment

   $ 1,782      $ 14,431      $ 1,064      $ 743      $ 5      $ 1,289      $ 11        —        $ 19,325  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 1,793      $ 14,881      $ 1,144      $ 1,085      $ 6      $ 1,312      $ 16        —        $ 20,237  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment

   $ 2,834      $ 20,770      $ 2,013      $ 845      $ 12      $ 932      $ 7        —        $ 27,413  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized

   $ 20      $ 98      $ 6      $ 1        —        $ 7        —          —        $ 132  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                          

Recorded investment

   $ 1,378      $ 640      $ 427      $ 440      $ 21      $ 1,783      $ 14        —        $ 4,703  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 1,382      $ 640      $ 440      $ 443      $ 22      $ 1,842      $ 14        —        $ 4,783  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 172      $ 18      $ 106      $ 57      $ 14      $ 811      $ 14        —        $ 1,192