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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

for the quarterly period ended: September 30, 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  

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

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

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

Common stock, no par value: 30,417,818 shares outstanding as of November 6, 2018

 

 

 


Table of Contents


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)

 

     At September 30,
2018
    At December 31,
2017
 

Assets:

    

Cash and due from banks

   $ 109,363     $ 105,968  

Cash at Federal Reserve and other banks

     117,180       99,460  
  

 

 

   

 

 

 

Cash and cash equivalents

     226,543       205,428  

Investment securities:

    

Marketable equity securities

     2,846       2,938  

Available for sale debt securities

     1,055,960       727,945  

Held to maturity debt securities

     459,897       514,844  

Restricted equity securities

     17,250       16,956  

Loans held for sale

     3,824       4,616  

Loans

     4,027,436       3,015,165  

Allowance for loan losses

     (31,603     (30,323
  

 

 

   

 

 

 

Total loans, net

     3,995,833       2,984,842  

Foreclosed assets, net

     1,832       3,226  

Premises and equipment, net

     89,290       57,742  

Cash value of life insurance

     116,596       97,783  

Accrued interest receivable

     19,592       13,772  

Goodwill

     220,972       64,311  

Other intangible assets, net

     30,711       5,174  

Mortgage servicing rights

     7,122       6,687  

Other assets

     70,597       55,051  
  

 

 

   

 

 

 

Total assets

   $ 6,318,865     $ 4,761,315  
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 1,710,505     $ 1,368,218  

Interest-bearing

     3,382,612       2,640,913  
  

 

 

   

 

 

 

Total deposits

     5,093,117       4,009,131  

Accrued interest payable

     1,729       930  

Other liabilities

     82,077       66,422  

Other borrowings

     282,831       122,166  

Junior subordinated debt

     56,996       56,858  
  

 

 

   

 

 

 

Total liabilities

     5,516,750       4,255,507  
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Shareholders’ equity:

    

Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at September 30, 2018 and December 31, 2017

     —         —    

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

    

30,417,818 at September 30, 2018

    

22,955,963 at December 31, 2017

     541,519       255,836  

Retained earnings

     287,555       255,200  

Accumulated other comprehensive loss, net of tax

     (26,959     (5,228
  

 

 

   

 

 

 

Total shareholders’ equity

     802,115       505,808  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 6,318,865     $ 4,761,315  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2018      2017      2018      2017  

Interest and dividend income:

           

Loans, including fees

   $ 53,102      $ 37,268      $ 130,455      $ 108,600  

Investments:

           

Taxable securities

     9,189        7,011        23,949        20,617  

Tax exempt securities

     1,189        1,041        3,272        3,124  

Dividends

     459        301        1,093        1,020  

Interest bearing cash at Federal Reserve and other banks

     615        292        1,384        1,080  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     64,554        45,913        160,153        134,441  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     2,072        1,028        4,402        2,896  

Other borrowings

     1,178        149        2,106        164  

Junior subordinated debt

     815        652        2,301        1,870  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,065        1,829        8,809        4,930  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     60,489        44,084        151,344        129,511  

Provision for (benefit from) loan losses

     2,651        765        1,777        (1,588
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     57,838        43,319        149,567        131,099  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges and fees

     9,743        9,475        28,327        27,861  

Commissions on sale of non-deposit investment products

     728        672        2,414        1,984  

Increase in cash value of life insurance

     732        732        1,996        2,043  

Gain on sale of loans

     539        606        1,831        2,293  

Gain on sale of investment securities

     207        961        207        961  

Other

     237        484        1,875        2,401  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     12,186        12,930        36,650        37,543  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries and related benefits

     25,823        20,933        68,928        62,320  

Other

     21,555        16,289        54,482        46,628  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     47,378        37,222        123,410        108,948  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     22,646        19,027        62,807        59,694  

Provision for income taxes

     6,476        7,130        17,698        22,129  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 16,170      $ 11,897      $ 45,109      $ 37,565  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.54      $ 0.52      $ 1.78      $ 1.64  

Diluted

   $ 0.53      $ 0.51      $ 1.76      $ 1.62  

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2018     2017     2018     2017  

Net income

   $ 16,170     $ 11,897     $ 45,109     $ 37,565  

Other comprehensive income (loss), net of tax:

        

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

     (5,917     (166     (20,941     3,137  

Change in minimum pension liability, after reclassifications

     81       55       241       164  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (5,836     (111     (20,700     3,301  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 10,334     $ 11,786     $ 24,409     $ 40,866  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

         37,565         37,565  

Other comprehensive income

           3,301       3,301  

Stock option vesting

       211           211  

Service condition RSU vesting

       657           657  

Market plus service condition RSU vesting

       316           316  

Stock options exercised

     133,850       2,418           2,418  

Service condition RSUs released

     28,397             —    

Market plus service condition RSUs released

     18,805             —    

Repurchase of common stock

     (107,390     (1,191     (2,663       (3,854

Dividends paid ($ 0.49 per share)

         (11,228       (11,228
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

     22,941,464     $ 255,231     $ 256,114     $ (4,612   $ 506,733  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

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

Net income

         45,109         45,109  

Adoption ASU 2016-01

         (62     62       —    

Adoption ASU 2018-02

         1,093       (1,093     —    

Other comprehensive loss

           (20,700     (20,700

Stock option vesting

       75           75  

Service condition RSU vesting

       745           745  

Market plus service condition RSU vesting

       274           274  

Service condition RSUs released

     32,516             —    

Market plus service condition RSUs released

     25,512             —    

Stock options exercised

     27,400       475           475  

Issuance of common stock

     7,405,277       284,437           284,437  

Repurchase of common stock

     (28,850     (323     (801       (1,124

Dividends paid ($ 0.51 per share)

         (12,984       (12,984
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

     30,417,818     $ 541,519     $ 287,555     $ (26,959   $ 802,115  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

 

     For the nine months ended September 30,  
     2018     2017  

Operating activities:

    

Net income

   $ 45,109     $ 37,565  

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

    

Depreciation of premises and equipment, and amortization

     4,914       5,089  

Amortization of intangible assets

     2,068       1,050  

Provision for (benefit from) loan losses

     1,777       (1,588

Amortization of investment securities premium, net

     1,953       2,431  

Gain on sale of investment securities

     (207     (961

Originations of loans for resale

     (63,912     (83,907

Proceeds from sale of loans originated for resale

     66,138       85,846  

Gain on sale of loans

     (1,831     (2,293

Change in market value of mortgage servicing rights

     (38)       795  

Provision for losses on foreclosed assets

     89       162  

Gain on sale of foreclosed assets

     (390)       (308

Loss on disposal of fixed assets

     206       61  

Gain on sale of premises held for sale

     —         (3

Increase in cash value of life insurance

     (1,996)       (2,043

Life insurance proceeds in excess of cash value

     —         (108

Loss on marketable equity securities

     92       —    

Equity compensation vesting expense

     1,094       1,184  

Change in:

    

Reserve for unfunded commitments

     (864)       270  

Interest receivable

     (5,820)       (629

Interest payable

     799       49  

Other assets and liabilities, net

     10,724       3,155  
  

 

 

   

 

 

 

Net cash from operating activities

     59,905       45,817  
  

 

 

   

 

 

 

Investing activities:

    

Cash acquired in acquisition, net of consideration paid

     30,613       —    

Proceeds from maturities of securities available for sale

     54,510       20,889  

Proceeds from maturities of securities held to maturity

     54,203       64,969  

Proceeds from sale of available for sale securities

     293,279       25,757  

Purchases of securities available for sale

     (370,843)       (195,465

Net redemption of restricted equity securities

     7,429       —    

Loan origination and principal collections, net

     (178,596     (174,914

Proceeds from sale of foreclosed assets

     2,206       1,787  

Proceeds from sale of premises held for sale

     —         3,338  

Proceeds from sale of premises and equipment

     62       —    

Purchases of premises and equipment

     (5,736     (10,874

Life insurance proceeds

     —         649  
  

 

 

   

 

 

 

Net cash from investing activities

     (112,873     (263,864
  

 

 

   

 

 

 

Financing activities:

    

Net change in deposits

     92,051       31,896  

Net change in other borrowings

     (4,335)       81,237  

Repurchase of common stock

     (834)       (1,629

Dividends paid

     (12,984)       (11,228

Exercise of stock options

     185       193  
  

 

 

   

 

 

 

Net cash from financing activities

     74,083       100,469  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     21,115       (117,578
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of year

     205,428       305,612  
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 226,543     $ 188,034  
  

 

 

   

 

 

 

Supplemental disclosure of noncash activities:

    

Unrealized (loss) gain on securities available for sale

   $ (29,704   $ 5,411  

Loans transferred to foreclosed assets

   $ 511     $ 726  

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

   $ 1,124     $ 3,854  

Supplemental disclosure of cash flow activity:

    

Cash paid for interest expense

   $ 8,010     $ 4,881  

Cash paid for income taxes

   $ 11,625     $ 15,450  

Assets acquired in acquisition plus goodwill recognized, net

   $ 1,456,505     $ —    

Liabilities assumed in acquisition

   $ 1,172,068     $ —    

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 29 California counties. The Bank operates from 69 traditional branches, 9 in-store branches and 2 loan production offices. The Company has five capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by the Company and three acquired with the acquisition of North Valley Bancorp.

The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,741,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.

Use of Estimates in the Preparation of Financial Statements

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulatinos of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidtated financial statements and notes thereto included in the Company’s Annua Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”).

Significant Group Concentration of Credit Risk

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

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s 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.

Business Combinations

The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Cash and Cash Equivalents

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

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.

Most of our revenue-generating transactions are not subject to Topic 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 September 30, 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 15 was not necessary.

 

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Table of Contents

Accounting Standards Adopted in 2018

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 and nine months ended September 30, 2018. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of September 30, 2018 using an exit price notion (see Note 18 Fair Value Measurement).

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 did not 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 the Company on January 1, 2018 and did not 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 2017-09, 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

 

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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.

Accounting Standards Pending Adoption

FASB issued 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. FASB has issued incremental guidance to the new leasing standard through ASU No. 2018-10 and 2018-11. Based on current leases, subject to change, the Company estimates that the adoption of this standard will result in an increase in assets of approximately $30 million to recognize the present value of the lease obligations with a corresponding increase in liabilities of approximately $30 million. This amount is subject to change as the Company continues to evaluate the provisions of ASU No. 2016-02, 2018-10 and 2018-11. The Company does not expect this to have a material impact on the Company’s results of operations or cash flows.

FASB issued ASU No. 2016-13, Financial InstrumentsCredit 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. 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 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.

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

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

 

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Note 2 - Business Combinations

Merger with FNB Bancorp

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

In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core deposit intangibles on the acquisition date. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase prices accounting adjustments including goodwill are all non-taxable and /or non-deductible. Acquisition related costs of $4,150,000 and $5,227,000 are included in the income statement for the three and nine months ended September 30, 2018. During the nine months ended September 30, 2017, there were no acquisition costs incurred.

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

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

 

     FNB Bancorp
July 6, 2018
 

Fair value of consideration transferred:

  

Fair value of shares issued

   $ 284,437  

Cash consideration

     6,695  
  

 

 

 

Total fair value of consideration transferred

     291,132  
  

 

 

 

Assets acquired:

  

Cash and cash equivalents

     37,308  

Securities available for sale

     335,667  

Restricted equity securities

     7,723  

Loans

     834,683  

Premises and equipment

     30,522  

Cash value of life insurance

     16,817  

Core deposit intangible

     27,605  

Other assets

     16,214  
  

 

 

 

Total assets acquired

     1,306,539  
  

 

 

 

Liabilities assumed:

  

Deposits

     991,935  

Other liabilities

     15,133  

Short-term borrowings - Federal Home Loan Bank

     165,000  
  

 

 

 

Total liabilities assumed

     1,172,068  
  

 

 

 

Total net assets acquired

     134,471  
  

 

 

 

Goodwill recognized

   $ 156,661  
  

 

 

 

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

 

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The accompanying condensed consolidated financial statements include the accounts of FNB Bancorp since July 6, 2018. The table below presents the unaudited pro forma information as if the acquisition of FNB Bancorp had occurred on January 1, 2017 after giving effect to certain acquisition accounting adjustments. The pro forma information for the three and nine months ended September 30, 2018 and 2017 includes acquisition adjustments for the amortization/accretion on loans, core deposit intangibles, and related income tax effects. The pro forma financial information also includes one-time costs associated with the acquisition but does not include expected costs savings synergies that we expect to achieve. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

 

     Three months ended      Nine months ended  
     September 30,
2018
     September 30,
2017
     September 30,
2018
     September 30,
2017
 
     ( in thousands, except per share data)  

Summarized proforma income statement data:

           

Net interest income

   $ 61,259      $ 57,329      $ 178,434      $ 168,363  

Provision for (benefit from) loan losses

     2,651        765        1,374        (1,728

Noninterest income

     12,288        13,902        38,517        40,537  

Noninterest expense

     (40,850      (45,983      (135,048      (135,218
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     30,046        24,483        80,529        75,410  

Income taxes

     8,384        9,055        22,996        27,436  

Net income

   $ 21,662      $ 15,428      $ 57,533      $ 47,974  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.72      $ 0.51      $ 1.76      $ 1.58  

Diluted earnings per share

   $ 0.71      $ 0.50      $ 1.74      $ 1.56  

It is impracticable to separately provide information regarding the revenue and earnings of FNB Bancorp included in the Company’s consolidated income statement from the July 6, 2018 acquisition date to September 30, 2018 because the operations of FNB Bancorp were substantially comingled with the operations of the Company as of the system conversion date of July 22, 2018.

 

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Note 3 - Investment Securities

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

 

     September 30, 2018  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated Fair
Value
 
     (in thousands)  

Debt Securities Available for Sale

           

Obligations of U.S. government agencies

   $ 666,021        163        (27,308    $ 638,876  

Obligations of states and political subdivisions

     129,072        107        (5,759      123,420  

Corporate bonds

     4,368        65        (2      4,431  

Asset backed securities

     289,550        181        (498      289,233  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities available for sale

   $  1,089,011      $ 516      $  (33,567 )    $  1,055,960  
  

 

 

    

 

 

    

 

 

    

 

 

 

Debt Securities Held to Maturity

           

Obligations of U.S. government agencies

   $ 445,309      $ 88      $  (13,361    $ 432,036  

Obligations of states and political subdivisions

     14,588        58        (395      14,251  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities held to maturity

   $ 459,897      $ 146      $  (13,756    $ 446,287  
  

 

 

    

 

 

    

 

 

    

 

 

 
     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 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 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  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from sales of available for sale debt securities of $293,279,000 and $25,757,000 were received during the three months ended September 30, 2018 and 2017, respectively. Gross realized gains during the three months ended September 30, 2018 and 2017 were $207,000 and $961,000, respectively. There were no sales of investment securities during the first six months of 2018 or 2017. Investment securities with an aggregate carrying value of $548,123,000 and $285,596,000 at September 30, 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 September 30, 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 September 30, 2018, obligations of U.S. government corporations and agencies with a cost basis totaling $1,111,330,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At September 30, 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

   $ 2,435      $ 2,434      $ —        $ —    

Due after one year through five years

     12,486        12,501        1,231        1,240  

Due after five years through ten years

     17,764        17,740        25,955        25,210  

Due after ten years

     1,056,326        1,023,285        432,711        419,837  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $  1,089,011      $  1,055,960      $  459,897      $  446,287  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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
 
September 30, 2018                 (in thousands)               

Debt Securities Available for Sale

               

Obligations of U.S. government agencies

   $  323,972      $  (10,839   $  311,035      $  (16,469   $  635,007      $  (27,308

Obligations of states and political subdivisions

     85,668        (3,659     18,323        (2,100     103,991        (5,759

Corporate bonds

     1,969        (2     —          —         1,969        (2

Asset backed securities

     79,943        (498     —          —         79,943        (498
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities available for sale

   $ 491,552      $  (14,998   $ 329,358      $  (18,569   $ 820,910      $  (33,567
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Debt Securities Held to Maturity

               

Obligations of U.S. government agencies

   $ 307,432      $ (7,693   $ 109,312      $ (5,668   $ 416,744      $  (13,361

Obligations of states and political subdivisions

     8,971        (230     3,076        (165     12,047        (395
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities held to maturity

   $ 316,403      $ (7,923   $ 112,388      $ (5,833   $ 428,791      $  (13,756
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 months     12 months or more     Total  
     Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
    Fair Value      Unrealized
Loss
 
December 31, 2017                 (in thousands)               

Debt Securities Available for Sale

               

Obligations of U.S. government 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 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 agencies: Unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At September, 2018, 171 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of (3.7%) 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 September 30, 2018, 132 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of (5.0%) from the Company’s amortized cost basis.

Corporate bonds: The unrealized losses on investments in corporate bonds 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 management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At September 30, 2018, one corporate bond had unrealized losses with aggregate depreciation of (0.1%) from the Company’s amortized cost basis.

Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors in these types of securities. At the time of purchase, each of these securities were rated AA or AAA and through September 30, 2018 have not experienced any deterioration in credit rating. The Company continues to monitor these securities for changes in credit rating or other indications of credit deterioration. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At September 30, 2018, 6asset backed securities had unrealized losses with aggregate depreciation of (0.6%) 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 September 30, 2018.

 

12


Table of Contents

Note 4 – Loans

A summary of loan balances follows (in thousands):

 

     September 30, 2018  
     Originated      PNCI      PCI      Total  

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 340,515      $ 182,201      $ 1,698      $ 524,414  

Commercial

     1,863,604        736,299        7,885        2,607,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     2,204,119        918,500        9,583        3,132,202  

Consumer:

           

Home equity lines of credit

     284,956        44,881        1,299        331,136  

Home equity loans

     35,556        4,690        447        40,693  

Other

     26,294        23,120        42        49,456  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     346,806        72,691        1,788        421,285  

Commercial

     234,741        52,479        2,427        289,647  

Construction:

           

Residential

     81,533        33,041        —          114,574  

Commercial

     63,508        6,220        —          69,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     145,041        39,261        —          184,302  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of deferred loan fees and discounts

   $ 2,930,707      $ 1,082,931      $ 13,798      $ 4,027,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 2,940,897      $ 1,120,654      $ 21,007      $ 4,082,558  

Unamortized net deferred loan fees

     (10,190      —          —          (10,190

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

     —          (37,723      (7,209      (44,932
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $ 2,930,707      $  1,082,931      $ 13,798      $ 4,027,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses

   $ (30,927    $ (566    $ (110    $ (31,603
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Originated      PNCI      PCI      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        2,498        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        3,028        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      $ 15,560      $ 3,015,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 2,699,053      $ 316,238      $ 23,181      $ 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      (7,621      (14,656
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unamortized deferred loan fees and discounts

   $  2,690,402      $ 309,203      $  15,560      $  3,015,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses

   $ (29,122    $ (929    $ (272    $ (30,323
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended September 30,      Nine months ended September 30,  
     2018      2017      2018      2017  

Change in accretable yield:

           

Balance at beginning of period

   $  3,996      $ 7,956      $  4,262      $  10,348  

Accretion to interest income

     (253      (594      (769      (2,554

Reclassification (to) from nonaccretable difference

     (47      (2,893      203        (3,325
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 3,696      $ 4,469      $ 3,696      $ 4,469  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

Note 5 - Allowance for Loan Losses

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

 

     Allowance for Loan Losses – Three Months Ended September 30, 2018  
(in thousands)    Beginning
Balance
     Charge-offs     Recoveries      Provision
(benefit)
    Ending Balance  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 1,991      $  (25   $ —        $ 434     $ 2,400  

Commercial

     11,607        —         15        1,257       12,879  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total mortgage loans on real estate

     13,598        (25     15        1,691       15,279  

Consumer:

            

Home equity lines of credit

     5,048        (172     151        194       5,221  

Home equity loans

     1,532        (23     139        (55     1,593  

Other

     557        (229     63        309       700  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer loans

     7,137        (424     353        448       7,514  

Commercial

     6,378        (693     202        337       6,224  

Construction:

            

Residential

     1,434        —         —          192       1,626  

Commercial

     977        —         —          (17     960  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total construction

     2,411        —         —          175       2,586  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $  29,524      $  (1,142   $ 570      $  2,651     $  31,603  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     Allowance for Loan Losses – Nine Months Ended September 30, 2018  
(in thousands)    Beginning
Balance
     Charge-offs     Recoveries      Provision
(benefit)
    Ending Balance  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 2,317      $ (77   $ —        $ 160     $ 2,400  

Commercial

     11,441        (15     51        1,402       12,879  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total mortgage loans on real estate

     13,758        (92     51        1,562       15,279  

Consumer:

            

Home equity lines of credit

     5,800        (276     677        (980     5,221  

Home equity loans

     1,841        (23     176        (401     1,593  

Other

     586        (597     208        503       700  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer loans

     8,227        (896     1,061        (878     7,514  

Commercial

     6,512        (952     331        333       6,224  

Construction:

            

Residential

     1,184        —         —          442       1,626  

Commercial

     642        —         —          318       960  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total construction

     1,826        —         —          760       2,586  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 30,323      $  (1,940   $  1,443      $ 1,777     $ 31,603  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses – As of September 30, 2018  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total allowance
for loan losses
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 57      $ 2,313      $ 30      $ 2,400  

Commercial

     268        12,552        59        12,879  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     325        14,865        89        15,279  

Consumer:

           

Home equity lines of credit

     168        5,046        7        5,221  

Home equity loans

     175        1,418        —          1,593  

Other

     103        597        —          700  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     446        7,061        7        7,514  

Commercial

     1,857        4,353        14        6,224  

Construction:

           

Residential

     —          1,626        —          1,626  

Commercial

     —          960        —          960  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          2,586        —          2,586  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  2,628      $  28,865      $  110      $  31,603  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents
     Loans, Net of Unearned fees – As of September 30, 2018  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total loans, net
of unearned fees
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 4,781      $ 517,935      $ 1,698      $ 524,414  

Commercial

     13,244        2,586,659        7,885        2,607,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     18,025        3,104,594        9,583        3,132,202  

Consumer:

           

Home equity lines of credit

     2,188        327,649        1,299        331,136  

Home equity loans

     2,406        37,840        447        40,693  

Other

     243        49,171        42        49,456  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     4,837        414,660        1,788        421,285  

Commercial

     4,632        282,588        2,427        289,647  

Construction:

           

Residential

     —          114,574        —          114,574  

Commercial

     —          69,728        —          69,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          184,302        —          184,302  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  27,494      $  3,986,144      $  13,798      $  4,027,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Allowance for Loan Losses – Year Ended December 31, 2017  
(in thousands)    Beginning
Balance
     Charge-offs     Recoveries      Provision
(benefit)
    Ending
Balance
 

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 2,748      $ (60   $ —        $ (371   $ 2,317  

Commercial

     11,517        (186     397        (287     11,441  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total mortgage loans on real estate

     14,265        (246     397        (658     13,758  

Consumer:

            

Home equity lines of credit

     7,044        (98     698        (1,844     5,800  

Home equity loans

     2,644        (332     242        (713     1,841  

Other

     622        (1,186     375        775       586  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer loans

     10,310        (1,616     1,315        (1,782     8,227  

Commercial

     5,831        (1,444     428        1,697       6,512  

Construction:

            

Residential

     1,417        (1,104     —          871       1,184  

Commercial

     680        —         1        (39     642  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total construction

     2,097        (1,104     1        832       1,826  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $  32,503      $  (4,410   $  2,141      $ 89     $  30,323  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses – As of December 31, 2017  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total allowance
for loan losses
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 230      $ 1,932      $ 155      $ 2,317  

Commercial

     30        11,351        60        11,441  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     260        13,283        215        13,758  

Consumer:

           

Home equity lines of credit

     427        5,356        17        5,800  

Home equity loans

     107        1,734        —          1,841  

Other

     57        529        —          586  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     591        7,619        17        8,227  

Commercial

     1,848        4,624        40        6,512  

Construction:

           

Residential

     —          1,184        —          1,184  

Commercial

     —          642        —          642  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          1,826        —          1,826  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  2,699      $  27,352      $  272      $  30,323  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     Loans, Net of Unearned fees – As of December 31, 2017  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total loans, net
of unearned fees
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 5,298      $ 378,743      $ 1,385      $ 385,426  

Commercial

     13,911        1,892,422        8,563        1,914,896  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     19,209        2,271,165        9,948        2,300,322  

Consumer:

           

Home equity lines of credit

     2,688        283,502        2,498        288,688  

Home equity loans

     1,470        41,076        485        43,031  

Other

     257        24,853        45        25,155  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     4,415        349,431        3,028        356,874  

Commercial

     4,470        213,358        2,584        220,412  

Construction:

           

Residential

     140        67,790        —          67,930  

Commercial

     —          69,627        —          69,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     140        137,417        —          137,557  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,234      $ 2,971,371      $ 15,560      $ 3,015,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Allowance for Loan Losses – Three Months Ended September 30, 2017  
(in thousands)    Beginning
Balance
     Charge-
offs
     Recoveries      Provision
(benefit)
     Ending Balance  

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 2,495      $ (60    $ —        $ (217    $ 2,218  

Commercial

     10,119        (20      238        1,033        11,370  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     12,614        (80      238        816        13,588  

Consumer:

              

Home equity lines of credit

     6,156        (14      189        (610      5,721  

Home equity loans

     2,354        (94      121        (390      1,991  

Other

     645        (349      91        203        590  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     9,155        (457      401        (797      8,302  

Commercial

     4,729        (291      61        303        4,802  

Construction:

              

Residential

     1,179        (33      —          284        1,430  

Commercial

     466        —          —          159        625  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     1,645        (33      —          443        2,055  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,143      $ (861    $
 
 
700
 
 
   $ 765      $ 28,747  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Allowance for Loan Losses – Nine Months Ended September 30, 2017  
(in thousands)    Beginning
Balance
     Charge-offs     Recoveries      Provision
(benefit)
    Ending Balance  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 2,748      $ (60   $        $ (470   $ 2,218  

Commercial

     11,517        (170     365        (342     11,370  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total mortgage loans on real estate

     14,265        (230     365        (812     13,588  

Consumer:

            

Home equity lines of credit

     7,044        (98     487        (1,712     5,721  

Home equity loans

     2,644        (331     146        (468     1,991  

Other

     622        (831     300        499       590  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer loans

     10,310        (1,260     933        (1,681     8,302  

Commercial

     5,831        (1,188     315        (156     4,802  

Construction:

            

Residential

     1,417        (1,104     —          1,117       1,430  

Commercial

     680        —         1        (56     625  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total construction

     2,097        (1,104     1        1,061       2,055  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $  32,503      $  (3,782   $  1,614      $  (1,588   $  28,747  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

16


Table of Contents
     Allowance for Loan Losses – As of September 30, 2017  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total allowance
for loan losses
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 240      $ 1,978      $ —        $ 2,218  

Commercial

     73        11,022        275        11,370  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     313        13,000        275        13,588  

Consumer:

           

Home equity lines of credit

     363        5,346        12        5,721  

Home equity loans

     111        1,880        —          1,991  

Other

     77        513        —          590  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     551        7,739        12        8,302  

Commercial

     1,276        3,526        —          4,802  

Construction:

           

Residential

     —          1,430        —          1,430  

Commercial

     —          625        —          625  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          2,055        —          2,055  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,140      $ 26,320      $ 287      $ 28,747  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Loans, Net of Unearned fees – As of September 30, 2017  
(in thousands)    Individually
evaluated for
impairment
     Loans pooled
for evaluation
     Loans acquired
with deteriorated
credit quality
     Total Loans  

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 5,027      $ 384,640      $ 1,405      $ 391,072  

Commercial

     19,788        1,775,843        8,171        1,803,802  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     24,815        2,160,483        9,576        2,194,874  

Consumer:

           

Home equity lines of credit

     2,219        284,335        2,952        289,506  

Home equity loans

     1,842        42,454        737        45,033  

Other

     267        26,470        44        26,781  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     4,328        353,259        3,733        361,320  

Commercial

     2,938        221,846        2,695        227,479  

Construction:

           

Residential

     144        74,976        —          75,120  

Commercial

     —          72,820        —          72,820  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     144        147,796        —          147,940  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,225      $ 2,883,384      $ 16,004      $ 2,931,613  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

17


Table of Contents

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

 

     Credit Quality Indicators Originated Loans – As of September 30, 2018  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful / Loss      Total Originated
Loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 334,902      $ 1,690      $ 3,923      $  —        $ 340,515  

Commercial

     1,821,995        28,747        12,862        —          1,863,604  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     2,156,897        30,437        16,785        —          2,204,119  

Consumer:

              

Home equity lines of credit

     281,480        1,747        1,729        —          284,956  

Home equity loans

     32,242        1,006        2,308        —          35,556  

Other

     25,885        334        75        —          26,294  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     339,607        3,087        4,112        —          346,806  

Commercial

     220,328        9,942        4,471        —          234,741  

Construction:

              

Residential

     81,235        32        266        —          81,533  

Commercial

     62,660        848               —          63,508  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     143,895        880        266        —          145,041  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 2,860,727      $ 44,346      $ 25,634      $ —        $ 2,930,707  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Quality Indicators PNCI Loans – As of September 30, 2018  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful / Loss      Total PNCI
Loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 179,634      $ 880      $ 1,687      $ —        $ 182,201  

Commercial

     729,261        3,478        3,560        —          736,299  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     908,895        4,358        5,247        —          918,500  

Consumer:

              

Home equity lines of credit

     43,406        826        649        —          44,881  

Home equity loans

     4,471        116        103        —          4,690  

Other

     23,083        32        5        —          23,120  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     70,960        974        757        —          72,691  

Commercial

     51,633        734        112        —          52,479  

Construction:

              

Residential

     33,041        —          —          —          33,041  

Commercial

     6,220        —          —          —          6,220  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     39,261        —          —          —          39,261  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,070,749      $ 6,066      $ 6,116      $ —        $ 1,082,931  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Quality Indicators Originated Loans – As of December 31, 2017  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful / Loss      Total Originated
Loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 315,120      $ 2,234      $ 3,168      $ —        $ 320,522  

Commercial

     1,649,333        18,434        22,743        —          1,690,510  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     1,964,453        20,668        25,911        —          2,011,032  

Consumer:

              

Home equity lines of credit

     265,345        2,558        2,039        —          269,942  

Home equity loans

     37,428        800        1,620        —          39,848  

Other

     22,432        272        155        —          22,859  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     325,205        3,630        3,814        —          332,649  

Commercial

     195,208        9,492        4,737        —          209,437  

Construction:

              

Residential

     67,813        —          107        —          67,920  

Commercial

     64,492        4,872        —          —          69,364  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     132,305        4,872        107        —          137,284  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 2,617,171      $ 38,662      $ 34,569      $ —        $ 2,690,402  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents
     Credit Quality Indicators PNCI Loans – As of December 31, 2017  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful / Loss      Total PNCI
Loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 61,411      $ 218      $ 1,890      $ —        $ 63,519  

Commercial

     203,751        11,513        559        —          215,823  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     265,162        11,731        2,449        —          279,342  

Consumer:

              

Home equity lines of credit

     14,866        450        932        —          16,248  

Home equity loans

     2,433        188        77        —          2,698  

Other

     2,207        38        6        —          2,251  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     19,506        676        1,015        —          21,197  

Commercial

     8,390        1        —          —          8,391  

Construction:

              

Residential

     10        —          —          —          10  

Commercial

     263        —          —          —          263  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     273        —          —          —          273  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 293,331      $ 12,408      $ 3,464      $ —        $ 309,203  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value. Typically, payment performance will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate, non-payment is likely due to loss of employment. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of the two.

Problem consumer loans are generally identified by payment history and current performance of the borrower (delinquency). The Bank manages its consumer loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggest modifications if appropriate, and, when continued scheduled payments become unrealistic, initiate repossession or foreclosure through appropriate channels.    

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

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

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

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

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

 

19


Table of Contents

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

 

     Analysis of Originated Past Due Loans - As of September 30, 2018      ³ 90
Days
and Still
Accruing
 
(in thousands)    30-59 days      60-89 days      > 90 days      Total Past
Due Loans
     Current      Total  

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 275      $ 749      $ 738      $ 1,762      $ 338,753      $ 340,515      $ —    

Commercial

     499        150        117        766        1,862,838        1,863,604        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     774        899        855        2,528        2,201,591        2,204,119        —    

Consumer:

                    

Home equity lines of credit

     1,450        97        112        1,659        283,297        284,956        —    

Home equity loans

     527        293        411        1,231        34,325        35,556        —    

Other

     262        24        —          286        26,008        26,294        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,239        414        523        3,176        343,630        346,806        —    

Commercial

     1,010        134        1,309        2,453        232,288        234,741        —    

Construction:

                    

Residential

     488        —          —          488        81,045        81,533        —    

Commercial

     —          —          —          —          63,508        63,508        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     488        —          —          488        144,553        145,041        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans

   $ 4,511      $ 1,447      $ 2,687      $ 8,645      $ 2,922,062      $ 2,930,707      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Analysis of PNCI Past Due Loans - As of September 30, 2018      ³ 90
Days
and Still
Accruing
 
(in thousands)    30-59 days      60-89 days      > 90 days      Total Past
Due Loans
     Current      Total  

Mortgage loans on real estate:

                    

Residential 1-4 family

   $        $ 397      $ 163      $ 560      $ 181,641      $ 182,201      $ —    

Commercial

     992        18        949        1,959        734,340        736,299        949  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     992        415        1,112        2,519        915,981        918,500        949  

Consumer:

                    

Home equity lines of credit

     613        192        227        1,032        43,849        44,881        99  

Home equity loans

     262        —          16        278        4,412        4,690        —    

Other

     242        —          —          242        22,878        23,120        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,117        192        243        1,552        71,139        72,691        99  

Commercial

     30        472        —          502        51,977        52,479        —    

Construction:

                    

Residential

     —          —          —          —          33,041        33,041        —    

Commercial

     —          —          —          —          6,220        6,220        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          39,261        39,261        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 2,139      $ 1,079      $ 1,355      $ 4,573      $ 1,078,358      $ 1,082,931      $ 1,048  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Analysis of Originated Past Due Loans - As of December 31, 2017      ³ 90
Days
and Still
Accruing
 
(in thousands)    30-59 days      60-89 days      > 90 days      Total Past
Due Loans
     Current      Total  

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 1,740      $ 510      $ 243      $ 2,493      $ 318,029      $ 320,522      $ —    

Commercial

     158        987        —          1,145        1,689,365        1,690,510        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     1,898        1,497        243        3,638        2,007,394        2,011,032        —    

Consumer:

                    

Home equity lines of credit

     528        48        372        948        268,994        269,942        —    

Home equity loans

     511        107        373        991        38,857        39,848        —    

Other

     56        36        3        95        22,764        22,859        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,095        191        748        2,034        330,615        332,649        —    

Commercial

     956        738        1,527        3,221        206,216        209,437        —    

Construction:

                    

Residential

     34        —          —          34        67,886        67,920        —    

Commercial

     —          —          —          —          69,364        69,364        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     34        —          —          34        137,250        137,284        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 3,983      $ 2,426      $ 2,518      $ 8,927      $ 2,681,475      $ 2,690,402      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     Analysis of PNCI Past Due Loans - As of December 31, 2017      > 90 Days
and Still
Accruing
 
(in thousands)    30-59 days      60-89 days      > 90 days      Total Past
Due Loans
     Current      Total  

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 1,495      $ 90      $ 109      $ 1,694      $ 61,825      $ 63,519      $ 81  

Commercial

     70        —          —          70        215,753        215,823        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     1,565        90        109        1,764        277,578        279,342        81  

Consumer:

                    

Home equity lines of credit

     298        228        330        856        15,392        16,248        200  

Home equity loans

     30        —          —          30        2,668        2,698        —    

Other

     6        26        —          32        2,219        2,251        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     334        254        330        918        20,279        21,197        200  

Commercial

     —          —          —          —          8,391        8,391        —    

Construction:

                    

Residential

     —          —          —          —          10        10        —    

Commercial

     —          —          —          —          263        263        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          273        273        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,899      $ 344      $ 439      $ 2,682      $ 306,521      $ 309,203      $ 281  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income on originated nonaccrual loans that would have been recognized during the three months ended September 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $338,000 and $244,000, respectively. Interest income actually recognized on these originated loans during the three months ended September 30, 2018 and 2017 was $59,000 and $33,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the three months ended September 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $39,000 and $90,000, respectively. Interest income actually recognized on these PNCI loans during the three months ended September 30, 2018 and 2017 was $12,000 and $2,000.

Interest income on originated nonaccrual loans that would have been recognized during the nine months ended September 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $964,000 and $617,000, respectively. Interest income actually recognized on these originated loans during the nine months ended September 30, 2018 and 2017 was $133,000 and $49,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the nine months ended September 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $93,000 and $188,000. Interest income actually recognized on these PNCI loans during the nine months ended September 30, 2018 and 2017 was $23,000 and $14,000.

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

 

     Non Accrual Loans  
     As of September 30, 2018      As of December 31, 2017  
(in thousands)    Originated      PNCI      Total      Originated      PNCI      Total  

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 2,813      $ 1,219      $ 4,032      $ 1,725      $ 1,012      $ 2,737  

Commercial

     7,876        305        8,181        8,144        —          8,144  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     10,689        1,524        12,213        9,869        1,012        10,881  

Consumer:

                 

Home equity lines of credit

     725        568        1,293        811        402        1,213  

Home equity loans

     1,933        50        1,983        1,106        44        1,150  

Other

     3        5        8        7        5        12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,661        623        3,284        1,924        451        2,375  

Commercial

     3,737        —          3,737        3,669        —          3,669  

Construction:

                 

Residential

     —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non accrual loans

   $ 17,087      $ 2,147      $ 19,234      $ 15,462      $ 1,463      $ 16,925  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due in accordance with the original contractual terms of the loan agreement. The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated. The average recorded investment and interest income recognized for the three month periods ended September 30, 2018 and 2017 has not been separately presented as the amounts are not considered significant for disclosure.

 

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Table of Contents
     Impaired Originated Loans – As of, or for the Nine Months Ended, September 30, 2018  
(in thousands)    Unpaid
principal
balance
     Recorded
investment with
no related
allowance
     Recorded
investment with
related
allowance
     Total recorded
investment
     Related
Allowance
     Average
recorded
investment
     Interest income
recognized
 

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 4,185      $ 3,251      $ 311      $ 3,562      $ 57      $ 3,883      $ 67  

Commercial

     12,553        9,619        2,370        11,989        268        11,549        208  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     16,738        12,870        2,681        15,551        325        15,432        275  

Consumer:

                    

Home equity lines of credit

     1,444        1,346        59        1,405        19        1,410        32  

Home equity loans

     2,554        1,960        157        2,117        30        1,753        24  

Other

     3        —          3        3        3        3        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     4,001        3,306        219        3,525        52        3,166        56  

Commercial

     4,868        2,135        2,497        4,632        1,857        4,626        78  

Construction:

                    

Residential

     —          —          —          —          —          68        —    

Commercial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          —          68        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,607      $ 18,311      $ 5,397      $ 23,708      $ 2,234      $ 23,292      $ 409  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired PNCI Loans – As of, or for the Nine Months Ended, September 30, 2018  
(in thousands)    Unpaid
principal
balance
     Recorded
investment with
no related
allowance
     Recorded
investment with
related
allowance
     Total recorded
investment
     Related
Allowance
     Average
recorded
investment
     Interest income
recognized
 

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 1,302      $ 1,219      $ —        $ 1,219      $ —        $ 1,275      $ —    

Commercial

     1,255        1,255        —          1,255        —          627        58  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     2,557        2,474        —          2,474        —          1,902        58  

Consumer:

                    

Home equity lines of credit

     852        625        158        783        149        909        13  

Home equity loans

     296        50        239        289        145        287        9  

Other

     240        —          240        240        100        257        7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,388        675        637        1,312        394        1,453        29  

Commercial

     —          —          —          —          —          —          —    

Construction:

                    

Residential

     —          —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,945      $ 3,149      $ 637      $ 3,786      $ 394      $ 3,355      $ 87  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2017  
(in thousands)    Unpaid
principal
balance
     Recorded
investment with
no related
allowance
     Recorded
investment with
related
allowance
     Total recorded
investment
     Related
Allowance
     Average
recorded
investment
     Interest income
recognized
 

Mortgage loans on real estate:

                    

Residential 1-4 family

   $ 4,023      $ 2,058      $ 1,881      $ 3,939      $ 230      $ 3,501      $ 143  

Commercial

     14,186        13,101        810        13,911        30        13,851        645  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans on real estate

     18,209        15,159        2,691        17,850        260        17,352        788