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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
___________________
| | | | | |
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended: SeptemberJune 30, 20192020
| | | | | |
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission File Number: 000-10661
___________________
TriCo Bancshares(Exact Name of Registrant as Specified in Its Charter)
___________________
| | | | | | | | |
CA | | 94-2792841 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
63 Constitution Drive
Chico, California 95973
(Address of Principal Executive Offices)(Zip Code)
(530) 898-0300
(Registrant’s Telephone Number, Including Area Code)
___________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock | | TCBK | | The NASDAQ Stock Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
☒ | | Large accelerated filer | ☐ | | Accelerated filer |
☐ | | Non-accelerated filer | ☐ | | Smaller reporting company |
☐ | | Emerging growth company | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:
Common stock, no par value: 30,520,72529,759,209 shares outstanding as of November 4, 2019.August 6, 2020.
TriCo Bancshares
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
TRICO BANCSHARES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unauditedunaudited)
| | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
Assets: | Assets: | | | | Assets: | | | |
Cash and due from banks | Cash and due from banks | $ | 118,960 | | | $ | 119,781 | | Cash and due from banks | $ | 78,666 | | | $ | 92,816 | |
Cash at Federal Reserve and other banks | Cash at Federal Reserve and other banks | 140,087 | | | 107,752 | | Cash at Federal Reserve and other banks | 627,186 | | | 183,691 | |
Cash and cash equivalents | Cash and cash equivalents | 259,047 | | | 227,533 | | Cash and cash equivalents | 705,852 | | | 276,507 | |
Investment securities: | Investment securities: | | Investment securities: | |
Marketable equity securities | Marketable equity securities | 2,974 | | | 2,874 | | Marketable equity securities | 3,033 | | | 2,960 | |
Available for sale debt securities | 984,080 | | | 1,115,036 | | |
Held to maturity debt securities | 393,449 | | | 444,936 | | |
Available for sale debt securities, net of allowance for credit losses of $— | | Available for sale debt securities, net of allowance for credit losses of $— | 996,280 | | | 950,138 | |
Held to maturity debt securities, net of allowance for credit losses of $— | | Held to maturity debt securities, net of allowance for credit losses of $— | 337,165 | | | 375,606 | |
Restricted equity securities | Restricted equity securities | 17,250 | | | 17,250 | | Restricted equity securities | 17,250 | | | 17,250 | |
Loans held for sale | Loans held for sale | 7,604 | | | 3,687 | | Loans held for sale | 8,352 | | | 5,265 | |
Loans | Loans | 4,182,348 | | | 4,022,014 | | Loans | 4,801,405 | | | 4,307,366 | |
Allowance for loan losses | (31,537) | | | (32,582) | | |
Allowance for credit losses | | Allowance for credit losses | (79,739) | | | (30,616) | |
Total loans, net | Total loans, net | 4,150,811 | | | 3,989,432 | | Total loans, net | 4,721,666 | | | 4,276,750 | |
Premises and equipment, net | Premises and equipment, net | 87,424 | | | 89,347 | | Premises and equipment, net | 85,292 | | | 87,086 | |
Cash value of life insurance | Cash value of life insurance | 117,088 | | | 117,318 | | Cash value of life insurance | 119,254 | | | 117,823 | |
Accrued interest receivable | Accrued interest receivable | 18,205 | | | 19,412 | | Accrued interest receivable | 20,337 | | | 18,897 | |
Goodwill | Goodwill | 220,872 | | | 220,972 | | Goodwill | 220,872 | | | 220,872 | |
Other intangible assets, net | Other intangible assets, net | 24,988 | | | 29,280 | | Other intangible assets, net | 20,694 | | | 23,557 | |
Operating leases, right-of-use | Operating leases, right-of-use | 28,957 | | | — | | Operating leases, right-of-use | 29,842 | | | 27,879 | |
Other assets | Other assets | 72,134 | | | 75,364 | | Other assets | 74,182 | | | 70,591 | |
Total assets | Total assets | $ | 6,384,883 | | | $ | 6,352,441 | | Total assets | $ | 7,360,071 | | | $ | 6,471,181 | |
Liabilities and Shareholders’ Equity: | Liabilities and Shareholders’ Equity: | | | | Liabilities and Shareholders’ Equity: | | | |
Liabilities: | Liabilities: | | Liabilities: | |
Deposits: | Deposits: | | Deposits: | |
Noninterest-bearing demand | Noninterest-bearing demand | $ | 1,777,357 | | | $ | 1,760,580 | | Noninterest-bearing demand | $ | 2,487,120 | | | $ | 1,832,665 | |
Interest-bearing | Interest-bearing | 3,518,050 | | | 3,605,886 | | Interest-bearing | 3,761,138 | | | 3,534,329 | |
Total deposits | Total deposits | 5,295,407 | | | 5,366,466 | | Total deposits | 6,248,258 | | | 5,366,994 | |
Accrued interest payable | Accrued interest payable | 2,847 | | | 1,997 | | Accrued interest payable | 1,734 | | | 2,407 | |
Operating lease liability | Operating lease liability | 28,494 | | | — | | Operating lease liability | 29,743 | | | 27,540 | |
Other liabilities | Other liabilities | 87,867 | | | 83,724 | | Other liabilities | 98,684 | | | 91,984 | |
Other borrowings | Other borrowings | 16,423 | | | 15,839 | | Other borrowings | 38,544 | | | 18,454 | |
Junior subordinated debt | Junior subordinated debt | 57,180 | | | 57,042 | | Junior subordinated debt | 57,422 | | | 57,232 | |
Total liabilities | Total liabilities | 5,488,218 | | | 5,525,068 | | Total liabilities | 6,474,385 | | | 5,564,611 | |
Commitments and contingencies (Note 8) | | | | |
Commitments and contingencies (Note 7) | | Commitments and contingencies (Note 7) | | | |
Shareholders’ equity: | Shareholders’ equity: | | Shareholders’ equity: | |
Preferred stock, no par value: 1,000,000 shares authorized, 0 issued and outstanding at September 30, 2019 and December 31, 2018 | — | | | — | | |
Common stock, no par value: 50,000,000 shares authorized; 30,512,187 and 30,417,223 issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 543,415 | | | 541,762 | | |
Preferred stock, 0 par value: 1,000,000 shares authorized, 0 issued and outstanding at June 30, 2020 and December 31, 2019 | | Preferred stock, 0 par value: 1,000,000 shares authorized, 0 issued and outstanding at June 30, 2020 and December 31, 2019 | — | | | — | |
Common stock, 0 par value: 50,000,000 shares authorized; 29,759,209 and 30,523,824 issued and outstanding at June 30, 2020 and December 31, 2019, respectively | | Common stock, 0 par value: 50,000,000 shares authorized; 29,759,209 and 30,523,824 issued and outstanding at June 30, 2020 and December 31, 2019, respectively | 530,422 | | | 543,998 | |
Retained earnings | Retained earnings | 351,751 | | | 303,490 | | Retained earnings | 354,645 | | | 367,794 | |
Accumulated other comprehensive income (loss), net of tax | Accumulated other comprehensive income (loss), net of tax | 1,499 | | | (17,879) | | Accumulated other comprehensive income (loss), net of tax | 619 | | | (5,222) | |
Total shareholders’ equity | Total shareholders’ equity | 896,665 | | | 827,373 | | Total shareholders’ equity | 885,686 | | | 906,570 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 6,384,883 | | | $ | 6,352,441 | | Total liabilities and shareholders’ equity | $ | 7,360,071 | | | $ | 6,471,181 | |
See accompanying notes to unaudited condensed consolidated financial statements.
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data; unaudited)
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended June 30, | | | Six months ended June 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Interest and dividend income: | Interest and dividend income: | | | | | | | | Interest and dividend income: | | | | | | | |
Loans, including fees | Loans, including fees | $ | 56,999 | | | $ | 53,102 | | | $ | 166,888 | | | $ | 130,455 | | Loans, including fees | $ | 58,409 | | | $ | 55,491 | | | $ | 114,667 | | | $ | 109,889 | |
Investments: | Investments: | | Investments: | |
Taxable securities | Taxable securities | 9,864 | | | 9,189 | | | 30,876 | | | 23,949 | | Taxable securities | 7,466 | | | 10,457 | | | 15,677 | | | 21,012 | |
Tax exempt securities | Tax exempt securities | 961 | | | 1,189 | | | 3,095 | | | 3,272 | | Tax exempt securities | 952 | | | 1,061 | | | 1,856 | | | 2,134 | |
Dividends | Dividends | 308 | | | 459 | | | 973 | | | 1,093 | | Dividends | 223 | | | 305 | | | 584 | | | 665 | |
Interest bearing cash at Federal Reserve and other banks | Interest bearing cash at Federal Reserve and other banks | 757 | | | 615 | | | 2,694 | | | 1,384 | | Interest bearing cash at Federal Reserve and other banks | 98 | | | 866 | | | 881 | | | 1,937 | |
Total interest and dividend income | Total interest and dividend income | 68,889 | | | 64,554 | | | 204,526 | | | 160,153 | | Total interest and dividend income | 67,148 | | | 68,180 | | | 133,665 | | | 135,637 | |
Interest expense: | Interest expense: | | | | | | | | Interest expense: | | | | | | | |
Deposits | Deposits | 3,050 | | | 2,072 | | | 8,768 | | | 4,402 | | Deposits | 1,813 | | | 2,999 | | | 4,364 | | | 5,718 | |
Other borrowings | Other borrowings | 334 | | | 1,178 | | | 384 | | | 2,106 | | Other borrowings | 4 | | | 37 | | | 9 | | | 50 | |
Junior subordinated debt | Junior subordinated debt | 817 | | | 815 | | | 2,501 | | | 2,301 | | Junior subordinated debt | 672 | | | 829 | | | 1,441 | | | 1,684 | |
Total interest expense | Total interest expense | 4,201 | | | 4,065 | | | 11,653 | | | 8,809 | | Total interest expense | 2,489 | | | 3,865 | | | 5,814 | | | 7,452 | |
Net interest income | Net interest income | 64,688 | | | 60,489 | | | 192,873 | | | 151,344 | | Net interest income | 64,659 | | | 64,315 | | | 127,851 | | | 128,185 | |
Provision for (benefit from reversal of) loan losses | (329) | | | 2,651 | | | (1,392) | | | 1,777 | | |
Net interest income after provision for (benefit from reversal of) loan losses | 65,017 | | | 57,838 | | | 194,265 | | | 149,567 | | |
Provision for (reversal of) credit losses | | Provision for (reversal of) credit losses | 22,089 | | | 537 | | | 30,089 | | | (1,063) | |
Net interest income after credit loss provision (reversal) | | Net interest income after credit loss provision (reversal) | 42,570 | | | 63,778 | | | 97,762 | | | 129,248 | |
Non-interest income: | Non-interest income: | | | | | | | | Non-interest income: | | | | | | | |
Service charges and fees | Service charges and fees | 10,590 | | | 9,743 | | | 29,788 | | | 28,327 | | Service charges and fees | 8,168 | | | 10,128 | | | 17,294 | | | 19,198 | |
Gain on sale of loans | Gain on sale of loans | 1,236 | | | 539 | | | 2,223 | | | 1,831 | | Gain on sale of loans | 1,736 | | | 575 | | | 2,627 | | | 987 | |
Gain on sale of investment securities | Gain on sale of investment securities | 107 | | | | 207 | | | | 107 | | | | 207 | | Gain on sale of investment securities | — | | | — | | | — | | | — | |
Asset management and commission income | Asset management and commission income | 721 | | | 728 | | | 2,102 | | | 2,414 | | Asset management and commission income | 661 | | | 739 | | | 1,577 | | | 1,381 | |
Increase in cash value of life insurance | Increase in cash value of life insurance | 773 | | | 732 | | | 2,294 | | | 1,996 | | Increase in cash value of life insurance | 710 | | | 746 | | | 1,430 | | | 1,521 | |
Other | Other | 681 | | | 387 | | | 2,820 | | | 1,691 | | Other | 382 | | | 1,235 | | | 549 | | | 2,139 | |
Total non-interest income | Total non-interest income | 14,108 | | | 12,336 | | | 39,334 | | | 36,466 | | Total non-interest income | 11,657 | | | 13,423 | | | 23,477 | | | 25,226 | |
Non-interest expense: | Non-interest expense: | | | | | | | | Non-interest expense: | | | | | | | |
Salaries and related benefits | Salaries and related benefits | 26,899 | | | 25,823 | | | 78,746 | | | 68,928 | | Salaries and related benefits | 27,055 | | | 26,719 | | | 54,327 | | | 51,847 | |
Other | Other | 19,445 | | | 21,705 | | | 59,747 | | | 54,298 | | Other | 18,650 | | | 19,978 | | | 36,197 | | | 40,302 | |
Total non-interest expense | Total non-interest expense | 46,344 | | | 47,528 | | | 138,493 | | | 123,226 | | Total non-interest expense | 45,705 | | | 46,697 | | | 90,524 | | | 92,149 | |
Income before provision for income taxes | Income before provision for income taxes | 32,781 | | | 22,646 | | | 95,106 | | | 62,807 | | Income before provision for income taxes | 8,522 | | | 30,504 | | | 30,715 | | | 62,325 | |
Provision for income taxes | Provision for income taxes | 9,386 | | | 6,476 | | | 25,924 | | | 17,698 | | Provision for income taxes | 1,092 | | | 7,443 | | | 7,164 | | | 16,538 | |
Net income | Net income | $ | 23,395 | | | $ | 16,170 | | | $ | 69,182 | | | $ | 45,109 | | Net income | $ | 7,430 | | | $ | 23,061 | | | $ | 23,551 | | | $ | 45,787 | |
Earnings per share: | | | | | | | | |
Basic | $ | 0.77 | | | $ | 0.54 | | | $ | 2.27 | | | $ | 1.78 | | |
Diluted | $ | 0.76 | | | $ | 0.53 | | | $ | 2.25 | | | $ | 1.76 | | |
Per share data: | | Per share data: | | | | | | | |
Basic earnings per share | | Basic earnings per share | $ | 0.25 | | | $ | 0.76 | | | $ | 0.78 | | | $ | 1.50 | |
Diluted earnings per share | | Diluted earnings per share | $ | 0.25 | | | $ | 0.75 | | | $ | 0.78 | | | $ | 1.49 | |
Dividends per share | | Dividends per share | $ | 0.22 | | | $ | 0.19 | | | $ | 0.44 | | | $ | 0.38 | |
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 7,430 | | | $ | 23,061 | | | $ | 23,551 | | | $ | 45,787 | |
Other comprehensive income, net of tax: | | | | | | | |
Unrealized gains on available for sale securities arising during the period | 24,625 | | | 6,729 | | | 3,803 | | | 15,681 | |
Change in minimum pension liability | 1,126 | | | — | | | 2,038 | | | — | |
Other comprehensive income | 25,751 | | | 6,729 | | | 5,841 | | | 15,681 | |
Comprehensive income (loss) | $ | 33,181 | | | $ | 29,790 | | | $ | 29,392 | | | $ | 61,468 | |
See accompanying notes to unaudited condensed consolidated financial statements.
statements
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Nine months ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 23,395 | | | $ | 16,170 | | | $ | 69,182 | | | $ | 45,109 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Unrealized gains (losses) on available for sale securities arising during the period | 3,697 | | | (5,917) | | | 19,378 | | | (20,941) | |
Change in minimum pension liability | — | | | 81 | | | — | | | 241 | |
Other comprehensive income (loss) | 3,697 | | | (5,836) | | | 19,378 | | | (20,700) | |
Comprehensive income | $ | 27,092 | | | $ | 10,334 | | | $ | 88,560 | | | $ | 24,409 | |
See accompanying notes to unaudited condensed consolidated financial statements.
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance at June 30, 2019 | 30,502,757 | | | $ | 542,939 | | | $ | 335,145 | | | $ | (2,198) | | | $ | 875,886 | |
Net income | | | | | 23,395 | | | | | 23,395 | |
Other comprehensive income | | | | | | | 3,697 | | | 3,697 | |
Stock option vesting | | | | | | | | | — | |
Stock options exercised | 9,000 | | | 146 | | | | | | | 146 | |
RSU vesting | | | 296 | | | | | | | 296 | |
PSU vesting | | | 102 | | | | | | | 102 | |
RSUs released | 4,250 | | | | | | | | | — | |
PSUs released | — | | | | | | | | | — | |
Repurchase of common stock | (3,820) | | | (68) | | | (79) | | | | | (147) | |
Dividends paid ($0.22 per share) | | | | | (6,710) | | | | | (6,710) | |
Three months ended September 30, 2019 | 30,512,187 | | | $ | 543,415 | | | $ | 351,751 | | | $ | 1,499 | | | $ | 896,665 | |
| | | | | | | | | |
| | | | | | | | | |
Balance at January 1, 2019 | 30,417,223 | | | $ | 541,762 | | | $ | 303,490 | | | $ | (17,879) | | | $ | 827,373 | |
Net income | | | | | 69,182 | | | | | 69,182 | |
Other comprehensive income | | | | | | | 19,378 | | | 19,378 | |
Stock option vesting | | | | | | | | | — | |
Stock options exercised | 166,000 | | | 2,646 | | | | | | | 2,646 | |
RSU vesting | | | 863 | | | | | | | 863 | |
PSU vesting | | | 350 | | | | | | | 350 | |
RSUs released | 30,461 | | | | | | | | | — | |
PSUs released | 22,237 | | | | | | | | | — | |
Repurchase of common stock | (123,734) | | | (2,206) | | | (2,636) | | | | | (4,842) | |
Dividends paid ($0.60 per share) | | | | | (18,285) | | | | | (18,285) | |
Nine months ended September 30, 2019 | 30,512,187 | | | $ | 543,415 | | | $ | 351,751 | | | $ | 1,499 | | | $ | 896,665 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance at March 31, 2019 | 30,432,419 | | | $ | 542,340 | | | $ | 319,865 | | | $ | (8,927) | | | $ | 853,278 | |
Net income | | | | | 23,061 | | | | | 23,061 | |
Other comprehensive income | | | | | | | 6,729 | | | 6,729 | |
Stock options exercised | 116,000 | | | 1,853 | | | | | | | 1,853 | |
RSU vesting | | | 289 | | | | | | | 289 | |
PSU vesting | | | 129 | | | | | | | 129 | |
RSUs released | 25,856 | | | | | | | | | — | |
PSUs released | 22,237 | | | | | | | | | — | |
Repurchase of common stock | (93,755) | | | (1,672) | | | (1,988) | | | | | (3,660) | |
Dividends paid ($0.19 per share) | | | | | (5,793) | | | | | (5,793) | |
Three months ended June 30, 2019 | 30,502,757 | | | $ | 542,939 | | | $ | 335,145 | | | $ | (2,198) | | | $ | 875,886 | |
| | | | | | | | | |
Balance at March 31, 2020 | 29,973,516 | | | $ | 534,623 | | | $ | 356,935 | | | $ | (25,132) | | | $ | 866,426 | |
Net income | | | | | 7,430 | | | | | 7,430 | |
Other comprehensive income | | | | | | | 25,751 | | | 25,751 | |
Stock options exercised | 8,000 | | | 140 | | | | | | | 140 | |
RSU vesting | | | 338 | | | | | | | 338 | |
PSU vesting | | | 154 | | | | | | | 154 | |
RSUs released | 28,727 | | | | | | | | | — | |
PSUs released | 20,265 | | | | | | | | | — | |
Repurchase of common stock | (271,299) | | | (4,833) | | | (3,176) | | | | | (8,009) | |
Dividends paid ($0.22 per share) | | | | | (6,544) | | | | | (6,544) | |
Three months ended June 30, 2020 | 29,759,209 | | | $ | 530,422 | | | $ | 354,645 | | | $ | 619 | | | $ | 885,686 | |
See accompanying notes to unaudited condensed consolidated financial statements.
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance at June 30, 2018 | 23,004,153 | | | $ | 256,590 | | | $ | 276,877 | | | $ | (21,123) | | | $ | 512,344 | |
Net income | | | | | 16,170 | | | | | 16,170 | |
Adoption ASU2016-01 | | | | | — | | | — | | | — | |
Adoption ASU2018-02 | | | | | — | | | — | | | — | |
Other comprehensive loss | | | | | | | (5,836) | | | (5,836) | |
Stock option vesting | | | 21 | | | | | | | 21 | |
Stock options exercised | 12,900 | | | 252 | | | | | | | 252 | |
RSU vesting | | | 274 | | | | | | | 274 | |
PSU vesting | | | 77 | | | | | | | 77 | |
RSUs released | 7,118 | | | | | | | | | — | |
PSUs released | — | | | | | | | | | — | |
Issuance of common stock | 7,405,277 | | | | 284,437 | | | | | | | | | | | | 284,437 | |
Repurchase of common stock | (11,630) | | | (132) | | | (321) | | | | | (453) | |
Dividends paid ($0.17 per share) | | | | | (5,171) | | | | | (5,171) | |
Three months ended September 30, 2018 | 30,417,818 | | | $ | 541,519 | | | $ | 287,555 | | | $ | (26,959) | | | $ | 802,115 | |
| | | | | | | | | |
| | | | | | | | | |
Balance at January 1, 2018 | 22,955,963 | | | $ | 255,836 | | | $ | 255,200 | | | $ | (5,228) | | | $ | 505,808 | |
Net income | | | | | 45,109 | | | | | 45,109 | |
Adoption ASU 2016-01 | | | | | (62) | | | 62 | | | — | |
Adoption ASU 2018-02 | | | | | 1,093 | | | (1,093) | | | — | |
Other comprehensive loss | | | | | | | (20,700) | | | (20,700) | |
Stock option vesting | | | 75 | | | | | | | 75 | |
Stock options exercised | 27,400 | | | 475 | | | | | | | 475 | |
RSU vesting | | | 1,019 | | | | | | | 1,019 | |
PSU vesting | | | — | | | | | | | — | |
RSUs released | 58,028 | | | | | | | | | — | |
PSUs released | — | | | | | | | | | — | |
Issuance of common stock | 7,405,277 | | | | 284,437 | | | | | | | | | | | 284,437 | |
Repurchase of common stock | (28,850) | | | (323) | | | (801) | | | | | (1,124) | |
Dividends paid ($0.51 per share) | | | | | (12,984) | | | | | (12,984) | |
Nine months ended September 30, 2018 | 30,417,818 | | | $ | 541,519 | | | $ | 287,555 | | | $ | (26,959) | | | $ | 802,115 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance at January 1, 2019 | 30,417,223 | | | $ | 541,762 | | | $ | 303,490 | | | $ | (17,879) | | | $ | 827,373 | |
Net income | | | | | 45,787 | | | | | 45,787 | |
Other comprehensive income | | | | | | | 15,681 | | | 15,681 | |
Stock options exercised | 157,000 | | | 2,500 | | | | | | | 2,500 | |
RSU vesting | | | 567 | | | | | | | 567 | |
PSU vesting | | | 248 | | | | | | | 248 | |
RSUs released | 26,211 | | | | | | | | | — | |
PSUs released | 22,237 | | | | | | | | | — | |
Repurchase of common stock | (119,914) | | | (2,138) | | | (2,557) | | | | | (4,695) | |
Dividends paid ($0.38 per share) | | | | | (11,575) | | | | | (11,575) | |
Six months ended June 30, 2019 | 30,502,757 | | | $ | 542,939 | | | $ | 335,145 | | | $ | (2,198) | | | $ | 875,886 | |
| | | | | | | | | |
Balance at January 1, 2020 | 30,523,824 | | | $ | 543,998 | | | $ | 367,794 | | | $ | (5,222) | | | $ | 906,570 | |
Cumulative change from adoption of ASU 2016-13 | | | | | (12,983) | | | | | (12,983) | |
Balance at January 1, 2020 (as adjusted for change in accounting principle) | 30,523.824 | | | 543,998 | | | 354,811 | | | (5,222) | | | 893,587 | |
Net income | | | | | 23,551 | | | | | 23,551 | |
Other comprehensive income | | | | | | | 5,841 | | | 5,841 | |
Stock options exercised | 16,000 | | | 288 | | | | | | | 288 | |
RSU vesting | | | 635 | | | | | | | 635 | |
PSU vesting | | | 296 | | | | | | | 296 | |
RSUs released | 29,089 | | | | | | | | | — | |
PSUs released | 20,265 | | | | | | | | | — | |
Repurchase of common stock | (829,969) | | | (14,795) | | | (10,509) | | | | | (25,304) | |
Dividends paid ($0.44 per share) | | | | | (13,208) | | | | | (13,208) | |
Six months ended June 30, 2020 | 29,759,209 | | | $ | 530,422 | | | $ | 354,645 | | | $ | 619 | | | $ | 885,686 | |
See accompanying notes to unaudited condensed consolidated financial statements.
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
| | | For the nine months ended September 30, | | | For the six months ended June 30, | |
| | 2019 | | 2018 | | 2020 | | 2019 |
Operating activities: | Operating activities: | | | | Operating activities: | | | |
Net income | Net income | $ | 69,182 | | | $ | 45,109 | | Net income | $ | 23,551 | | | $ | 45,787 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation of premises and equipment, and amortization | Depreciation of premises and equipment, and amortization | 5,273 | | | 4,914 | | Depreciation of premises and equipment, and amortization | 3,193 | | | 3,582 | |
Amortization of intangible assets | Amortization of intangible assets | 4,293 | | | 2,068 | | Amortization of intangible assets | 2,862 | | | 2,862 | |
(Reversal of) provision for loan losses | (1,392) | | | 1,777 | | |
Provision for (reversal of) credit losses | | Provision for (reversal of) credit losses | 30,089 | | | (1,063) | |
Amortization of investment securities premium, net | Amortization of investment securities premium, net | 2,050 | | | 1,953 | | Amortization of investment securities premium, net | 1,054 | | | 1,186 | |
Gain on sale of investment securities | (107) | | | | (207) | | |
| Originations of loans for resale | Originations of loans for resale | (92,002) | | | (63,912) | | Originations of loans for resale | (84,872) | | | (46,936) | |
Proceeds from sale of loans originated for resale | Proceeds from sale of loans originated for resale | 89,506 | | | 66,138 | | Proceeds from sale of loans originated for resale | 83,867 | | | 45,407 | |
Gain on sale of loans | Gain on sale of loans | (2,223) | | | (1,831) | | Gain on sale of loans | (2,627) | | | (987) | |
Change in market value of mortgage servicing rights | Change in market value of mortgage servicing rights | 1,652 | | | (38) | | Change in market value of mortgage servicing rights | 2,494 | | | 1,197 | |
Provision for losses on foreclosed assets | Provision for losses on foreclosed assets | 56 | | | 89 | | Provision for losses on foreclosed assets | 106 | | | 62 | |
Gain on transfer of loans to foreclosed assets | Gain on transfer of loans to foreclosed assets | (151) | | | — | | Gain on transfer of loans to foreclosed assets | — | | | (97) | |
Gain on sale of foreclosed assets | Gain on sale of foreclosed assets | (246) | | | (390) | | Gain on sale of foreclosed assets | (57) | | | (198) | |
Operating lease expense payments | | Operating lease expense payments | (2,480) | | | (2,447) | |
Loss on disposal of fixed assets | Loss on disposal of fixed assets | 82 | | | 206 | | Loss on disposal of fixed assets | 15 | | | 80 | |
Increase in cash value of life insurance | Increase in cash value of life insurance | (2,294) | | | (1,996) | | Increase in cash value of life insurance | (1,430) | | | (1,521) | |
Gain on life insurance death benefit | Gain on life insurance death benefit | (831) | | | — | | Gain on life insurance death benefit | — | | | (728) | |
(Gain) loss on marketable equity securities | (100) | | | 92 | | |
Gain on marketable equity securities | | Gain on marketable equity securities | (72) | | | (78) | |
Equity compensation vesting expense | Equity compensation vesting expense | 1,213 | | | 1,094 | | Equity compensation vesting expense | 931 | | | 815 | |
Change in: | Change in: | | Change in: | |
Interest receivable | Interest receivable | 1,207 | | | (5,820) | | Interest receivable | (1,440) | | | (1,578) | |
Interest payable | Interest payable | 850 | | | 799 | | Interest payable | (673) | | | 668 | |
Amortization of operating lease ROUA | Amortization of operating lease ROUA | (463) | | | — | | Amortization of operating lease ROUA | 2,720 | | | 2,326 | |
Other assets and liabilities, net | Other assets and liabilities, net | 711 | | | 9,860 | | Other assets and liabilities, net | 6,474 | | | (14,470) | |
Net cash from operating activities | Net cash from operating activities | 76,266 | | | 59,905 | | Net cash from operating activities | 63,705 | | | 33,869 | |
Investing activities: | Investing activities: | | | | Investing activities: | | | |
Cash acquired in acquisition, net of consideration paid | — | | | | 30,613 | | |
Proceeds from maturities of securities available for sale | Proceeds from maturities of securities available for sale | 69,278 | | | 54,510 | | Proceeds from maturities of securities available for sale | 60,637 | | | 39,845 | |
Proceeds from maturities of securities held to maturity | Proceeds from maturities of securities held to maturity | 50,738 | | | 54,203 | | Proceeds from maturities of securities held to maturity | 37,905 | | | 31,938 | |
Proceeds from sale of available for sale securities | 125,247 | | | | 293,279 | | |
| Purchases of securities available for sale | Purchases of securities available for sale | (37,253) | | | (370,843) | | Purchases of securities available for sale | (101,899) | | | (37,253) | |
Net redemption of restricted equity securities | — | | | | 7,429 | | |
Loan origination and principal collections, net | Loan origination and principal collections, net | (159,991) | | | (178,596) | | Loan origination and principal collections, net | (493,437) | | | (80,440) | |
Proceeds from sale of other real estate owned | Proceeds from sale of other real estate owned | 1,255 | | | 2,206 | | Proceeds from sale of other real estate owned | 570 | | | 1,082 | |
Proceeds from sale of premises and equipment | Proceeds from sale of premises and equipment | — | | | 62 | | Proceeds from sale of premises and equipment | — | | | 11 | |
Purchases of premises and equipment | Purchases of premises and equipment | (3,070) | | | (5,736) | | Purchases of premises and equipment | (1,266) | | | (2,586) | |
Net cash from (used by) investing activities | 46,204 | | | (112,873) | | |
Net cash used by investing activities | | Net cash used by investing activities | (497,490) | | | (47,403) | |
Financing activities: | Financing activities: | | | | Financing activities: | | | |
Net change in deposits | Net change in deposits | (71,059) | | | 92,051 | | Net change in deposits | 881,264 | | | (24,293) | |
Net change in other borrowings | Net change in other borrowings | 584 | | | (4,335) | | Net change in other borrowings | 20,090 | | | (2,547) | |
Repurchase of common stock | (2,196) | | | (834) | | |
Repurchase of common stock, net of option exercises | | Repurchase of common stock, net of option exercises | (25,164) | | | — | |
Dividends paid | Dividends paid | (18,285) | | | (12,984) | | Dividends paid | (13,208) | | | (11,575) | |
Exercise of stock options | Exercise of stock options | — | | | 185 | | Exercise of stock options | 148 | | | — | |
Net cash used by (from) financing activities | (90,956) | | | 74,083 | | |
Net cash (used by) from financing activities | | Net cash (used by) from financing activities | 863,130 | | | (38,415) | |
Net change in cash and cash equivalents | Net change in cash and cash equivalents | 31,514 | | | 21,115 | | Net change in cash and cash equivalents | 429,345 | | | (51,949) | |
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 227,533 | | | 205,428 | | Cash and cash equivalents, beginning of period | 276,507 | | | 227,533 | |
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 259,047 | | | $ | 226,543 | | Cash and cash equivalents, end of period | $ | 705,852 | | | $ | 175,584 | |
Supplemental disclosure of noncash activities: | Supplemental disclosure of noncash activities: | | | | Supplemental disclosure of noncash activities: | | | |
Unrealized gain (loss) on securities available for sale | $ | 27,511 | | | $ | (29,704) | | |
Loans transferred to foreclosed assets | 331 | | | 511 | | |
Unrealized gain on securities available for sale | | Unrealized gain on securities available for sale | $ | 5,398 | | | $ | 22,263 | |
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes | Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes | 4,842 | | | 1,124 | | Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes | 494 | | | 4,695 | |
Obligations incurred in conjunction with leased assets | Obligations incurred in conjunction with leased assets | 156 | | | — | | Obligations incurred in conjunction with leased assets | 4,068 | | | 156 | |
Loans transferred to foreclosed assets | | Loans transferred to foreclosed assets | — | | | 116 | |
Supplemental disclosure of cash flow activity: | Supplemental disclosure of cash flow activity: | | Supplemental disclosure of cash flow activity: | |
Cash paid for interest expense | Cash paid for interest expense | 10,803 | | | 8,010 | | Cash paid for interest expense | 6,487 | | | 6,982 | |
Cash paid for income taxes | Cash paid for income taxes | 25,950 | | | 11,625 | | Cash paid for income taxes | — | | | 22,000 | |
Assets acquired in acquisition | — | | | 1,456,505 | | |
Liabilities assumed in acquisition | — | | | 1,172,068 | | |
See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -Summary- Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 29 California counties. The Company has 5 capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including 2 organized by the Company and three3 acquired with the acquisition of North Valley Bancorp.
The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,717,000$1,761,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 (the “2018“2019 Annual Report”). The Company believes that the disclosures made are adequate to make the information not misleading.
Segment and Significant Group Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout northern and central California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into 1 business segment that it denotes as community banking.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.
Reclassification
Some items in the prior year consolidated financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
Cash and Cash Equivalents
Net cash flows are reported for loan and deposit transactions and other borrowings. For purposes of the consolidated statement of cash flows, cash, due from banks with original maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents.
Allowance for Credit Losses - Held to Maturity Securities
The Company measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type, then further disaggregated by sector and bond rating. Accrued interest receivable on held-to-maturity (HTM) debt securities totaled $860,000 at June 30, 2020 and is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current condition and reasonable and supportable forecasts based on current and expected changes in credit ratings and default rates. Based on the implied guarantees of the U. S. Government or its agencies related to certain of these investment securities, and the absence of any historical or expected losses, substantially all qualify for a zero loss assumption. Management has separately evaluated its HTM investment securities from obligations of state and political subdivisions utilizing the historical loss data represented by similar securities over a period of time spanning nearly 50 years. As a result of this evaluation, management determined that the expected credit losses associated with these securities is not significant for financial reporting purposes and therefore, no allowance for credit losses has been recognized.
Loans
Loans that management has the intent and ability to hold until maturity or payoff are reported at principle amount outstanding, net of deferred loan fees and costs. Loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal, or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is considered probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loan is estimated to be fully collectible as to both principal and interest. Accrued interest receivable is not included in the calculation of the allowance for credit losses.
Allowance for Credit Losses - Loans
The allowance for credit losses (ACL) is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Regardless of the determination that a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in accordance with the original contract or modified terms, if appropriate.
Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over the remaining life. The Company identified and accumulated loan cohort historical loss data beginning with the fourth quarter of 2008 and through the current period. In situations where the Company's actual loss history was not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than three billion and less than ten billion, were utilized to create a minimum loss rate. Adjustments to historical loss information are made for differences in relevant current loan-specific risk characteristics, such as historical timing of losses relative to the loan origination. In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios incorporate variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to changes in environmental conditions, such as California unemployment rates, household debt levels and U.S. gross domestic product.
A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring (TDR). The ACL on a TDR is measured using the same method as all other portfolio loans, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan.
The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss:
Commercial real estate:
Commercial real estate - Non-owner occupied: These commercial properties typically consist of buildings which are leased to others for their use and rely on rents as the primary source of repayment. Property types are predominantly office, retail, or light industrial but the portfolio also has some special use properties. As such, the risk of loss associated with these properties is primarily driven by general economic changes or changes in regional economies and the impact of such on a tenant’s ability to pay. Ultimately this can affect occupancy, rental rates, or both. Additional risk of loss can come from new construction resulting in oversupply, the costs to hold or operate the property, or changes in interest rates. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty years.
Commercial real estate - Owner occupied: These credits are primarily susceptible to changes in the financial condition of the business operated by the property owner. This may be driven by changes in, among other things, industry challenges, factors unique to the operating geography of the borrower, change in the individual fortunes of the business owner, general economic conditions and changes in business cycles. 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 more by general economic conditions, the underlying collateral may have devalued more and thus result in larger losses in the event of default. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty years.
Multifamily: These commercial properties are generally comprised of more than four rentable units, such as apartment buildings, with each unit intended to be occupied as the primary residence for one or more persons. Multifamily properties are also subject to changes in general or regional economic conditions, such as unemployment, ultimately resulting in increased vacancy rates or reduced rents or both. In addition, new construction can create an oversupply condition and market competition resulting in increased vacancy, reduced market rents, or both. Due to the nature of their use and the greater likelihood of tenant turnover, the management of these properties is more intensive and therefore is more critical to the preclusion of loss.
Farmland: While the Company has few loans that were originated for the purpose of the acquisition of these commercial properties, loans secured by farmland represent unique risks that are associated with the operation of an agricultural businesses. The valuation of farmland can vary greatly over time based on the property's access to resources including but not limited to water, crop prices, foreign exchange rates, government regulation or restrictions, and the nature of ongoing capital investment needed to maintain the quality of the property. Loans secured by farmland typically represent less risk to the Company than other agriculture loans as the real estate typically provides greater support in the event of default or need for longer term repayment.
Consumer loans:
SFR 1-4 1st DT Liens: The most significant drivers of potential loss within the Company's residential real estate portfolio relate general, regional, or individual changes in economic conditions and their effect on employment and borrowers cash flow. Risk in this portfolio is best measured by changes in borrower credit score and loan-to-value. Loss estimates are based on the general movement in credit score, economic outlook and its effects on employment and the value of homes and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate.
SFR HELOCs and Junior Liens: Similar to residential real estate term loans, HELOCs and junior liens performance is also primarily driven by borrower cash flows based on employment status. However, HELOCs carry additional risks associated with the fact that most of these loans are secured by a deed of trust in a position that is junior to the primary lien holder. Furthermore, the risk that as the borrower's financial strength deteriorates, the outstanding balance on these credit lines may increase as they may only be canceled by the Company if certain limited criteria are met. In addition to the allowance for credit losses maintained as a percent of the outstanding loan balance, the Company maintains additional reserves for the unfunded portion of the HELOC.
Other: The majority of consumer loans are secured by automobiles, with the remainder primarily unsecured revolving debt (credit cards). These loans 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, if any. Typically non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of those factors. Credit card loans are unsecured and while collection efforts are pursued in the event of default, there is typically limited opportunity for recovery. Loss estimates are based on the general movement in credit score, economic outlook and its
effects on employment and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate.
Commercial and Industrial:
Repayment of these loans is primarily based on the cash flow of the borrower, and secondarily on the underlying collateral provided by the borrower. A borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, collateral includes accounts receivable, inventory, or equipment. Collateral securing these loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Actual and forecast changes in gross domestic product are believed to be corollary to losses associated with these credits.
Construction:
While secured by real estate, construction loans represent a greater level of risk than term real estate loans due to the nature of the additional risks associated with the not only the completion of construction within an estimated time period and budget, but also the need to either sell the building or reach a level of stabilized occupancy sufficient to generate the cash flows necessary to support debt service and operating costs. The Company seeks to mitigate the additional risks associated with construction lending by requiring borrowers to comply with lower loan to value ratios and additional covenants as well as strong tertiary support of guarantors. The loss forecasting model applies the historical rate of loss for similar loans over the expected life of the asset as adjusted for macroeconomic factors.
Agriculture Production:
Repayment of agricultural loans is dependent upon successful operation of the agricultural business, which is greatly impacted by factors outside the control of the borrower. These factors include adverse weather conditions, including access to water, that may impact crop yields, loss of livestock due to disease or other factors, declines in market prices for agriculture products, changes in foreign exchange, and the impact of government regulations. In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the business. Consequently, agricultural production loans may involve a greater degree of risk than other types of loans.
Leases:
The loss forecasting model applies the historical rate of loss for similar loans over the expected life of the asset. Leases typically represent an elevated level of credit risk as compared to loans secured by real estate as the collateral for leases is often subject to a more rapid rate of depreciation or depletion. The ultimate severity of loss is impacted by the type of collateral securing the exposure, the size of the exposure, the borrower’s industry sector, any guarantors and the geographic market. Assumptions of expected loss are conditioned to the economic outlook and the other variables discussed above.
Unfunded commitments:
The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the consolidated balance sheet in other liabilities.
Accounting Standards Adopted in 20192020
The Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-2, Leases (Topic 842). ASU 2016-2, which among other things, requires lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. The FASB has issued incremental guidance to Topic 842 standard through ASU No. 2018-11, 2018-20, and 2019-1. The Company has elected to use the transition relief approach as provided in ASU 2018-11, which permitsOn January 1, 2020, the Company to use January 1, 2019 as both the application date and the adoption date, rather than the modified retrospective approach which would have required an application date of January 1, 2017 and adoption date of January 1, 2019. The Company also elected certain relief options offered within the new standard, which include the package of practical expedients, the option not to recognize a right-of-use asset (ROUA) and lease liability that arise from short-term leases (i.e. leases with terms of 12 months or less), and the option of hindsight when determining lease term. Substantially all of the Company’s lease agreements are considered operating leases and were not previously recognized on the Company’s balance sheets. As of January 1, 2019, the Company recorded a ROUA and corresponding lease liability for all applicable operating leases. While the guidance increased the Company’s gross assets and liabilities, the adoption ofadopted ASU 2016-2 did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 6 for more information.
Accounting Standards Pending Adoption
The FASB issued ASU No. 2016-13, 2016-03Financial Instruments -— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13, which replaces the incurred loss methodology that is referred to as 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(CECL) methodology. The measurement of expected credit losses extendsunder the CECL methodology is applicable to held to maturity (‘‘HTM’’)financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. ASU 2016-13 amendsIt also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require increases or decreases in credit losses on available-for-sale securities (‘‘AFS’’), whereby credit losses will be presented as an allowance rather than as opposeda write-down on available for sale debt securities, based on management's intent to a write- down. In addition, CECLsell the security or likelihood the Company will modifybe required to sell the accountingsecurity, before recovery of the amortized cost basis.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased loans with credit deterioration since origination, so(PCD) that reserves are established atwere previously classified as purchase credit impaired (PCI) and accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of acquisition for purchased loans. Lastly, ASU 2016-13 requires enhanced disclosuresadoption. The remaining noncredit discount (based on the significant estimates and judgments usedadjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption. The Company recognized an increase in the ACL for loans totaling $18,913,000, including a
reclassification of $481,000 from discounts on acquired loans to estimatethe allowance for 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 tofrom change in accounting policies, with a corresponding decrease in retained earnings, insteadnet of the income statement). ASU 2016-13 will be effective for the Company on$5,449,000 in taxes of $12,983,000. Management has separately evaluated its held-to-maturity investment securities from obligations of state and political subdivisions and determined that no loss reserves were required.
On January 1, 2020 and early adoption is permitted. While the Company is currently evaluating the provisions ofadopted ASU 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. While detailed modeling efforts are ongoing, the validation of expected credit loss estimates will likely not be available until late in 2019. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one- time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.
FASB issued ASU No. 2017-4,2017-04, Intangibles-GoodwillIntangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic(Topic 350):, ASU 2017-4which 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. There was 0 goodwill impairment recorded during the three and six month periods ended June 30, 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the Coronavirus Disease 2019 (COVID-19) pandemic. The CARES Act provides optional temporary relief from troubled debt restructuring and impairment accounting requirements for loan modifications related to the COVID-19 pandemic made during the period from March 1, 2020 to the earlier of December 31, 2020 or 60 days after the national emergency concerning COVID-19 declared by the President terminates. Following the passage of the CARES Act legislation, the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" was issued by federal bank regulators, which similarly offers temporary relief from troubled debt restructuring accounting for loan payment deferrals for certain customers whose businesses are experiencing economic hardship due to Coronavirus. The Interagency Statement requires the modification event to be short-term and COVID-19 related, requiring the borrower be not more than 30 days past due as of the date the modification program was implemented, and allowing Management to apply judgement as when the modification program terminates. The ability to suspend TDR accounting under either program does not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic.
Accounting Standards Pending Adoption
FASB issued ASU 2017-42019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The guidance also promotes consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU No. 2019-12 will be effective for the Company onbeginning January 1, 20202021 and is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,2020-04, “Disclosure Framework - ChangesReference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform by providing optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The election to apply the optional relief for existing fair value and cash flow hedge accounting relationships may be made on a hedge-by-hedge basis and across multiple reporting periods. Amendments in this ASU are effective for the Company through December 31, 2022. As the company has an insignificant number of instruments that are applicable to this ASU, management has determined that no impact to the Disclosure Requirementsvaluations of these instruments are applicable 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 annualfinancial reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a significant impact on the Company’s consolidated financial statements.purposes.
Note 2 - Business Combinations
Merger with FNB Bancorp
On July 6, 2018, the Company completed the acquisition of FNB Bancorp (“FNBB”) for an aggregate transaction value of $291,132,000. FNBB was merged into the Company, and the Company issued 7,405,277 shares of common stock to the former shareholders of FNBB. FNBB’s subsidiary, First National Bank of Northern California, merged into the Bank on the same day. The Company also paid $6.7 million to settle and retire all FNBB stock options outstanding as of the acquisition date. Upon the consummation of the merger, the Company added 12 branches within San Mateo, San Francisco, and Santa Clara counties.
In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core deposit intangibles on the acquisition date. Subsequently, the Company revised its estimate of other liabilities acquired in connection with the business combination and reduced the amount of goodwill by $100,000 to $156,561,000. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2 years with no significant residual value. For tax purposes, purchase price accounting adjustments including goodwill are all non-taxable and /or non-deductible. Acquisition related costs of $601,000 and $1,077,000 are included in the consolidated statements of income for the three and nine months ended September 30, 2018. There have been 0 acquisition costs incurred during the nine months ended September 30, 2019.
The acquisition was consistent with the Company’s strategy to expand into the Bay Area market. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of the estimated cost savings resulting from the combined operations.
The following table summarizes the consideration paid for FNBB and the amounts of assets acquired and liabilities assumed that were recorded at the acquisition date (in thousands).
| | | | | |
| FNB Bancorp July 6, 2018 |
Fair value of consideration transferred: | |
Fair value of shares issued | $ | 284,437 | |
Cash consideration | 6,695 | |
Total fair value of consideration transferred | 291,132 | |
Assets acquired: | |
Cash and cash equivalents | 37,308 | |
Securities available for sale | 335,667 | |
Restricted equity securities | 7,723 | |
Loans | 834,683 | |
Premises and equipment | 30,522 | |
Cash value of life insurance | 16,817 | |
Core deposit intangible | 27,605 | |
Other assets | 16,214 | |
Total assets acquired | 1,306,539 | |
Liabilities assumed: | |
Deposits | 991,935 | |
Other liabilities | 15,033 | |
Short-term borrowings - Federal Home Loan Bank | 165,000 | |
Total liabilities assumed | 1,171,968 | |
Total net assets acquired | 134,571 | |
Goodwill recognized | $ | 156,561 | |
A summary of the estimated fair value adjustments resulting in the goodwill recorded in the FNB Bancorp acquisition are presented below (in thousands):
| | | | | |
| FNB Bancorp July 6, 2018 |
Value of stock consideration paid to FNB Bancorp Shareholders | $ | 284,437 | |
Cash consideration | 6,695 | |
Less: | |
Cost basis net assets acquired | 114,030 | |
Fair value adjustments: | |
Investments | (1,081) | |
Loans | (22,390) | |
Premises and equipment | 21,590 | |
Core deposit intangible | 27,327 | |
Deferred income taxes | (6,394) | |
Other | 1,489 | |
Goodwill | $ | 156,561 | |
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired (PNCI loans) as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans (PCI loans), which have shown evidence of credit deterioration since origination. The gross contractual amounts receivable and fair value for PNCI loans as of the acquisition date was $866,189,000 and $833,381,000, respectively. The gross contractual amounts receivable and fair value for PCI loans as of the acquisition date was $1,683,000 and $1,302,000, respectively. At the acquisition date, the Company was unable to estimate the expected contractual cash flows to be collected from the purchased credit impaired loans.
Note 3 - Investment Securities
The amortized cost, and estimated fair values and allowance for credit losses of investments in debt securities are summarized in the following tables:
| | | September 30, 2019 | | | June 30, 2020 | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | |
| | | (in thousands) | | | | |
(in thousands) | | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Estimated Fair Value |
Debt Securities Available for Sale | Debt Securities Available for Sale | | Debt Securities Available for Sale | | | | | | | | | |
Obligations of U.S. government agencies | Obligations of U.S. government agencies | $ | 488,080 | | | $ | 8,004 | | | $ | (447) | | | $ | 495,637 | | Obligations of U.S. government agencies | $ | 414,494 | | | $ | 20,320 | | | $ | — | | | $ | — | | | $ | 434,814 | |
Obligations of states and political subdivisions | Obligations of states and political subdivisions | 108,360 | | | 3,550 | | | — | | | 111,910 | | Obligations of states and political subdivisions | 104,811 | | | 4,835 | | | — | | | — | | | 109,646 | |
Corporate bonds | Corporate bonds | 4,420 | | | 108 | | | — | | | 4,528 | | Corporate bonds | 2,444 | | | 126 | | | — | | | — | | | 2,570 | |
Asset backed securities | Asset backed securities | 376,683 | | | 192 | | | (4,870) | | | 372,005 | | Asset backed securities | 465,746 | | | 37 | | | (16,533) | | | — | | | 449,250 | |
Total debt securities available for sale | Total debt securities available for sale | $ | 977,543 | | | $ | 11,854 | | | $ | (5,317) | | | $ | 984,080 | | Total debt securities available for sale | $ | 987,495 | | | $ | 25,318 | | | $ | (16,533) | | | $ | — | | | $ | 996,280 | |
Debt Securities Held to Maturity | | | | | | | | |
Obligations of U.S. government agencies | $ | 379,634 | | | $ | 6,382 | | | $ | (482) | | | $ | 385,534 | | |
Obligations of states and political subdivisions | 13,815 | | | 350 | | | — | | | 14,165 | | |
Total debt securities held to maturity | $ | 393,449 | | | $ | 6,732 | | | $ | (482) | | | $ | 399,699 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | | (in thousands) | | | | |
Debt Securities Available for Sale | | | | | | | |
Obligations of U.S. government agencies | $ | 647,288 | | | $ | 771 | | | $ | (18,078) | | | $ | 629,981 | |
Obligations of states and political subdivisions | 128,890 | | | 294 | | | (3,112) | | | 126,072 | |
Corporate bonds | 4,381 | | | 97 | | | — | | | 4,478 | |
Asset backed securities | 355,451 | | | 73 | | | (1,019) | | | 354,505 | |
Total debt securities available for sale | $ | 1,136,010 | | | $ | 1,235 | | | $ | (22,209) | | | $ | 1,115,036 | |
Debt Securities Held to Maturity | | | | | | | |
Obligations of U.S. government agencies | 430,343 | | | 327 | | | (7,745) | | | 422,925 | |
Obligations of states and political subdivisions | 14,593 | | | 82 | | | (230) | | | 14,445 | |
Total debt securities held to maturity | $ | 444,936 | | | $ | 409 | | | $ | (7,975) | | | $ | 437,370 | |
Proceeds from the sales of investment securities totaled $125,247,000 and $293,279,000 during the nine months ended September 30, 2019 and 2018, respectively. Gross realized gains from the sale of investment securities totaled $335,000 and $207,000 during the three and nine months ended September 30, 2019 and 2018, respectively. Gross realized losses from the sale of investment securities totaled $228,000 during the three and nine months ended September 30, 2019. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | |
(in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Allowance for Credit Losses |
Debt Securities Held to Maturity | | | | | | | | | |
Obligations of U.S. government agencies | $ | 324,976 | | | $ | 16,596 | | | $ | — | | | $ | 341,572 | | | $ | — | |
Obligations of states and political subdivisions | 12,189 | | | 418 | | | — | | | 12,607 | | | — | |
Total debt securities held to maturity | $ | 337,165 | | | $ | 17,014 | | | $ | — | | | $ | 354,179 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
(in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Debt Securities Available for Sale | | | | | | | |
Obligations of U.S. government agencies | $ | 466,139 | | | $ | 7,261 | | | $ | (420) | | | $ | 472,980 | |
Obligations of states and political subdivisions | 106,373 | | | 3,229 | | | (1) | | | 109,601 | |
Corporate bonds | 2,430 | | | 102 | | | — | | | 2,532 | |
Asset backed securities | 371,809 | | | 129 | | | (6,913) | | | 365,025 | |
Total debt securities available for sale | $ | 946,751 | | | $ | 10,721 | | | $ | (7,334) | | | $ | 950,138 | |
Debt Securities Held to Maturity | | | | | | | |
Obligations of U.S. government agencies | 361,785 | | | 6,072 | | | (480) | | | 367,377 | |
Obligations of states and political subdivisions | 13,821 | | | 327 | | | — | | | 14,148 | |
Total debt securities held to maturity | $ | 375,606 | | | $ | 6,399 | | | $ | (480) | | | $ | 381,525 | |
There were 0 realized losses from the saleno sales of investment securities during the three and ninesix months ended SeptemberJune 30, 2018.2020 and 2019, respectively. Investment securities with an aggregate carrying value of $504,475,000$479,242,000 and $597,591,000$466,321,000 at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively, were pledged as collateral for specific borrowings, lines of credit or local agency deposits.
The amortized cost and estimated fair value of debt securities at SeptemberJune 30, 20192020 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 SeptemberJune 30, 2019,2020, obligations of U.S. government corporations and agencies with a cost basis totaling $867,714,000$739,470,000 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 SeptemberJune 30, 2019,2020, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 4.73.26 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.
| | | | | | | | | | | | | | | | | | | | | | | |
Debt Securities | Available for Sale | | | | Held to Maturity | | |
(in thousands) | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| | | | | | | |
Due in one year | $ | 2,607 | | | $ | 2,613 | | | $ | 1,263 | | | $ | 1,274 | |
Due after one year through five years | 14,986 | | | 15,401 | | | — | | | — | |
Due after five years through ten years | 46,263 | | | 47,273 | | | 20,747 | | | 21,035 | |
Due after ten years | 913,687 | | | 918,793 | | | 371,439 | | | 377,390 | |
Totals | $ | 977,543 | | | $ | 984,080 | | | $ | 393,449 | | | $ | 399,699 | |
As of June 30, 2020, the contractual final maturity for available for sale and held to maturity investment securities is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
Debt Securities | Available for Sale | | | | Held to Maturity | | |
(in thousands) | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| | | | | | | |
Due in one year | $ | 600 | | | $ | 600 | | | $ | 1,287 | | | $ | 1,289 | |
Due after one year through five years | 17,981 | | | 18,690 | | | — | | | — | |
Due after five years through ten years | 114,403 | | | 113,718 | | | 21,156 | | | 22,231 | |
Due after ten years | 854,511 | | | 863,272 | | | 314,722 | | | 330,659 | |
Totals | $ | 987,495 | | | $ | 996,280 | | | $ | 337,165 | | | $ | 354,179 | |
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 | | |
September 30, 2019: | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| | | | | (in thousands) | | | | | | |
Debt Securities Available for Sale | | | | | | | | | | | |
Obligations of U.S. government agencies | $ | 38,295 | | | $ | (374) | | | $ | 25,171 | | | $ | (73) | | | $ | 63,466 | | | $ | (447) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Asset backed securities | 293,500 | | | (4,432) | | | 45,981 | | | (438) | | | 339,481 | | | (4,870) | |
Total debt securities available for sale | $ | 331,795 | | | $ | (4,806) | | | $ | 71,152 | | | $ | (511) | | | $ | 402,947 | | | $ | (5,317) | |
Debt Securities Held to Maturity | | | | | | | | | | | |
Obligations of U.S. government agencies | $ | 19,749 | | | $ | (94) | | | $ | 78,604 | | | $ | (388) | | | $ | 98,353 | | | $ | (482) | |
| | | | | | | | | | | |
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June 30, 2020: | Less than 12 months | | | | 12 months or more | | | | Total | | |
(in thousands) | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Debt Securities Available for Sale | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Asset backed securities | $ | 153,086 | | | $ | (2,742) | | | $ | 291,893 | | | $ | (13,791) | | | $ | 444,979 | | | $ | (16,533) | |
| | | | | | | | | | | |
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| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | | | 12 months or more | | | | Total | | |
December 31, 2018: | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| | | | | (in thousands) | | | | | | |
Debt Securities Available for Sale | | | | | | | | | | | |
Obligations of U.S. government agencies | $ | 171,309 | | | $ | (3,588) | | | $ | 394,630 | | | $ | (14,490) | | | $ | 565,939 | | | $ | (18,078) | |
Obligations of states and political subdivisions | 63,738 | | | (1,541) | | | 20,719 | | | (1,571) | | | 84,457 | | | (3,112) | |
Asset backed securities | 101,386 | | | (1,019) | | | — | | | — | | | 101,386 | | | (1,019) | |
Total debt securities available for sale | $ | 336,433 | | | $ | (6,148) | | | $ | 415,349 | | | $ | (16,061) | | | $ | 751,782 | | | $ | (22,209) | |
Debt Securities Held to Maturity | | | | | | | | | | | |
Obligations of U.S. government agencies | 223,810 | | | (2,619) | | | 158,648 | | | (5,126) | | | 382,458 | | | (7,745) | |
Obligations of states and political subdivisions | 5,786 | | | (114) | | | 4,042 | | | (116) | | | 9,828 | | | (230) | |
Total debt securities held to maturity | $ | 229,596 | | | $ | (2,733) | | | $ | 162,690 | | | $ | (5,242) | | | $ | 392,286 | | | $ | (7,975) | |
Obligations of U.S. government agencies: Unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At September 30, 2019, 19 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of 0.59% from the Company’s amortized cost basis. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2019: | Less than 12 months | | | | 12 months or more | | | | Total | | |
(in thousands) | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Debt Securities Available for Sale | | | | | | | | | | | |
Obligations of U.S. government agencies | $ | 36,709 | | | $ | (309) | | | $ | 23,852 | | | $ | (111) | | | $ | 60,561 | | | $ | (420) | |
Obligations of states and political subdivisions | 778 | | | (1) | | | — | | | — | | | 778 | | | (1) | |
Asset backed securities | 237,463 | | | (4,535) | | | 99,981 | | | (2,378) | | | 337,444 | | | (6,913) | |
Total debt securities available for sale | $ | 274,950 | | | $ | (4,845) | | | $ | 123,833 | | | $ | (2,489) | | | $ | 398,783 | | | $ | (7,334) | |
Debt Securities Held to Maturity | | | | | | | | | | | |
Obligations of U.S. government agencies | 18,813 | | | (142) | | | 62,952 | | | (338) | | | 81,765 | | | (480) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors infor these types of securities. At the time of purchase, each of these securities was rated AA or AAA and through SeptemberJune 30, 20192020 has not experienced any deterioration in credit rating. At June 30, 2020, 13 asset backed securities had unrealized losses with aggregate depreciation of 3.58% from the Company’s amortized cost basis. 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, there is no impairment on these investments are not considered other-than-temporarily impaired. At Septembersecurities and there has been no allowance for credit losses recorded as of June 30, 2019, 25 asset backed2020.
The Company monitors credit quality of debt securities had unrealized losses with aggregate depreciationheld-to-maturity through the use of 1.49% fromcredit rating. The Company monitors the Company’scredit rating on a monthly basis. The following table summarizes the amortized cost basis.of debt securities held-to-maturity at the dates indicated, aggregated by credit quality indicator:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| AAA/AA/A | | BBB/BB/B | | AAA/AA/A | | BBB/BB/B |
| (In thousands) | | | | (In thousands) | | |
Debt Securities Held to Maturity | | | | | | | |
Obligations of U.S. government agencies | $ | 324,976 | | | $ | — | | | $ | 361,785 | | | $ | — | |
Obligations of states and political subdivisions | 11,496 | | | 693 | | | 13,136 | | | 685 | |
Total debt securities held to maturity | $ | 336,472 | | | $ | 693 | | | $ | 374,921 | | | $ | 685 | |
Note 43 – Loans
A summary of loan balances follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | | | | |
(in thousands) | Originated | | PNCI | | PCI | | Total |
Mortgage loans on real estate: | | | | | | | |
Residential 1-4 family | $ | 355,646 | | | $ | 148,731 | | | $ | 1,417 | | | $ | 505,794 | |
Commercial | 2,109,309 | | | 626,924 | | | 5,129 | | | 2,741,362 | |
Total mortgage loans on real estate | 2,464,955 | | | 775,655 | | | 6,546 | | | 3,247,156 | |
Consumer: | | | | | | | |
Home equity lines of credit | 294,411 | | | 36,635 | | | 826 | | | 331,872 | |
Home equity loans | 27,034 | | | 2,915 | | | 421 | | | 30,370 | |
Other | 64,153 | | | 16,142 | | | 2 | | | 80,297 | |
Total consumer loans | 385,598 | | | 55,692 | | | 1,249 | | | 442,539 | |
Commercial | 256,379 | | | 19,569 | | | 2,510 | | | 278,458 | |
Construction: | | | | | | | |
Residential | 158,907 | | | 10,127 | | | — | | | 169,034 | |
Commercial | 44,704 | | | 457 | | | — | | | 45,161 | |
Total construction loans | 203,611 | | | 10,584 | | | — | | | 214,195 | |
Total loans, net of deferred loan fees and discounts | $ | 3,310,543 | | | $ | 861,500 | | | $ | 10,305 | | | $ | 4,182,348 | |
Total principal balance of loans owed, net of charge-offs | $ | 3,319,052 | | | $ | 892,608 | | | $ | 16,274 | | | $ | 4,227,934 | |
Unamortized net deferred loan fees | (8,509) | | | — | | | — | | | (8,509) | |
Discounts to principal balance of loans owed, net of charge-offs | — | | | (31,108) | | | (5,969) | | | (37,077) | |
Total loans, net of unamortized deferred loan fees and discounts | $ | 3,310,543 | | | $ | 861,500 | | | $ | 10,305 | | | $ | 4,182,348 | |
Allowance for loan losses | $ | (31,112) | | | $ | (419) | | | $ | (6) | | | $ | (31,537) | |
| | | | | | | | | | | |
(in thousands) | June 30, 2020 | | December 31, 2019 |
Commercial real estate: | | | |
CRE non-owner occupied | $ | 1,596,941 | | | $ | 1,609,556 | |
CRE owner occupied | 579,803 | | | 546,434 | |
Multifamily | 577,217 | | | 517,725 | |
Farmland | 151,524 | | | 145,067 | |
Total commercial real estate loans | 2,905,485 | | | 2,818,782 | |
Consumer: | | | |
SFR 1-4 1st DT liens | 506,069 | | | 509,508 | |
SFR HELOCs and junior liens | 358,087 | | | 362,886 | |
Other | 81,513 | | | 82,656 | |
Total consumer loans | 945,669 | | | 955,050 | |
Commercial and industrial | 634,481 | | | 249,791 | |
Construction | 278,566 | | | 249,827 | |
Agriculture production | 35,441 | | | 32,633 | |
Leases | 1,763 | | | 1,283 | |
Total loans, net of deferred loan fees and discounts | 4,801,405 | | | 4,307,366 | |
Total principal balance of loans owed, net of charge-offs | 4,854,351 | | | 4,351,725 | |
Unamortized net deferred loan fees | (22,500) | | | (8,927) | |
Discounts to principal balance of loans owed, net of charge-offs | (30,446) | | | (35,432) | |
Total loans, net of unamortized deferred loan fees and discounts | 4,801,405 | | | 4,307,366 | |
Allowance for credit losses on loans | $ | (79,739) | | | $ | (30,616) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | |
(in thousands) | Originated | | PNCI | | PCI | | Total |
Mortgage loans on real estate: | | | | | | | |
Residential 1-4 family | $ | 343,796 | | | $ | 169,792 | | | $ | 1,674 | | | $ | 515,262 | |
Commercial | 1,910,981 | | | 708,401 | | | 8,456 | | | 2,627,838 | |
Total mortgage loans on real estate | 2,254,777 | | | 878,193 | | | 10,130 | | | 3,143,100 | |
Consumer: | | | | | | | |
Home equity lines of credit | 284,453 | | | 40,957 | | | 1,167 | | | 326,577 | |
Home equity loans | 32,660 | | | 3,585 | | | 439 | | | 36,684 | |
Other | 34,020 | | | 21,659 | | | 42 | | | 55,721 | |
Total consumer loans | 351,133 | | | 66,201 | | | 1,648 | | | 418,982 | |
Commercial | 228,635 | | | 45,468 | | | 2,445 | | | 276,548 | |
Construction: | | | | | | | |
Residential | 90,703 | | | 30,593 | | | — | | | 121,296 | |
Commercial | 56,208 | | | 5,880 | | | — | | | 62,088 | |
Total construction loans | 146,911 | | | 36,473 | | | — | | | 183,384 | |
Total loans, net of deferred loan fees and discounts | $ | 2,981,456 | | | $ | 1,026,335 | | | $ | 14,223 | | | $ | 4,022,014 | |
Total principal balance of loans owed, net of charge-offs | $ | 2,991,324 | | | $ | 1,062,655 | | | $ | 21,265 | | | $ | 4,075,244 | |
Unamortized net deferred loan fees | (9,868) | | | — | | | — | | | (9,868) | |
Discounts to principal balance of loans owed, net of charge-offs | — | | | (36,320) | | | (7,042) | | | (43,362) | |
Total loans, net of unamortized deferred loan fees and discounts | $ | 2,981,456 | | | $ | 1,026,335 | | | $ | 14,223 | | | $ | 4,022,014 | |
Allowance for loan losses | $ | (31,793) | | | $ | (667) | | | $ | (122) | | | $ | (32,582) | |
During the three months ended June 30, 2020, the Company originated more than 2,900 loans under the Payment Protection Program (PPP), which as of quarter end had balances outstanding of $423,431,000, net of $13,300,000 in deferred loan costs, included within commercial and industrial. There were 0 PPP loans originated as of December 31, 2019. In connection with the origination of these loans, the Company generated approximately $15,680,000 in loan fees that will be amortized over the two-year term of the loans, offset by deferred loan costs of approximately $756,000. During the three and six months ended June 30, 2020, interest and fee income recognized from PPP loans totaled $2,356,000, which was inclusive of $1,626,000 in net deferred fee accretion.
The following is a summary of the change in accretable yield for PCI during the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Nine months ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Change in accretable yield: | | | | | | | |
Balance at beginning of period | $ | 5,318 | | | $ | 5,871 | | | $ | 6,059 | | | $ | 6,137 | |
Accretion to interest income | (292) | | | (253) | | | (702) | | | (769) | |
Reclassification from (to) nonaccretable difference | 71 | | | (47) | | | (260) | | | 203 | |
Balance at end of period | $ | 5,097 | | | $ | 5,571 | | | $ | 5,097 | | | $ | 5,571 | |
Note 54 – Allowance for LoanCredit Losses on Loans
The following tables summarize the activity in the allowance for loancredit losses on loans, and ending balance of loans, net of unearned fees for the periods indicated.indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Three Months Ended September 30, 2019 | | | | | | | | |
(in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (benefit) | | Ending Balance |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 2,576 | | | $ | — | | | $ | 48 | | | $ | (218) | | | $ | 2,406 | |
Commercial | 12,099 | | | (746) | | | 126 | | | 462 | | | 11,941 | |
Total mortgage loans on real estate | 14,675 | | | (746) | | | 174 | | | 244 | | | 14,347 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 5,859 | | | — | | | 27 | | | (152) | | | 5,734 | |
Home equity loans | 1,242 | | | (3) | | | 156 | | | (133) | | | 1,262 | |
Other | 1,451 | | | (188) | | | 79 | | | 211 | | | 1,553 | |
Total consumer loans | 8,552 | | | (191) | | | 262 | | | (74) | | | 8,549 | |
Commercial | 6,745 | | | (585) | | | 84 | | | (557) | | | 5,687 | |
Construction: | | | | | | | | | |
Residential | 2,538 | | | — | | | — | | | 119 | | | 2,657 | |
Commercial | 358 | | | — | | | — | | | (61) | | | 297 | |
Total construction loans | 2,896 | | | — | | | — | | | 58 | | | 2,954 | |
Total | $ | 32,868 | | | $ | (1,522) | | | $ | 520 | | | $ | (329) | | | $ | 31,537 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Three Months Ended June 30, 2020 | | | | | | | | | | |
(in thousands) | Beginning Balance | | | | Charge-offs | | Recoveries | | Provision | | Ending Balance |
Commercial real estate: | | | | | | | | | | | |
CRE non-owner occupied | $ | 18,034 | | | | | $ | — | | | $ | 5 | | | $ | 8,052 | | | $ | 26,091 | |
CRE owner occupied | 5,366 | | | | | — | | | 4 | | | 3,340 | | | 8,710 | |
Multifamily | 5,140 | | | | | — | | | — | | | 3,441 | | | 8,581 | |
Farmland | 713 | | | | | — | | | — | | | 755 | | | 1,468 | |
Total commercial real estate loans | 29,253 | | | | | — | | | 9 | | | 15,588 | | | 44,850 | |
Consumer: | | | | | | | | | | | |
SFR 1-4 1st DT liens | 5,650 | | | | | (11) | | | 2 | | | 2,374 | | | 8,015 | |
SFR HELOCs and junior liens | 11,196 | | | | | (23) | | | 92 | | | 843 | | | 12,108 | |
Other | 2,746 | | | | | (243) | | | 72 | | | 467 | | | 3,042 | |
Total consumer loans | 19,592 | | | | | (277) | | | 166 | | | 3,684 | | | 23,165 | |
Commercial and industrial | 3,867 | | | | | (214) | | | 55 | | | 310 | | | 4,018 | |
Construction | 4,595 | | | | | — | | | — | | | 2,180 | | | 6,775 | |
Agriculture production | 593 | | | | | — | | | — | | | 326 | | | 919 | |
Leases | 11 | | | | | — | | | — | | | 1 | | | 12 | |
Total | $ | 57,911 | | | | | $ | (491) | | | $ | 230 | | | $ | 22,089 | | | $ | 79,739 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Six months ended June 30, 2020 | | | | | | | | | | |
(in thousands) | Beginning Balance | | Impact of CECL Adoption | | Charge-offs | | Recoveries | | Provision | | Ending Balance |
Commercial real estate: | | | | | | | | | | | |
CRE non-owner occupied | $ | 5,948 | | | $ | 6,701 | | | $ | — | | | $ | 193 | | | $ | 13,249 | | | $ | 26,091 | |
CRE owner occupied | 2,027 | | | 2,281 | | | — | | | 9 | | | 4,393 | | | 8,710 | |
Multifamily | 3,352 | | | 2,281 | | | — | | | — | | | 2,948 | | | 8,581 | |
Farmland | 668 | | | 585 | | | — | | | — | | | 215 | | | 1,468 | |
Total commercial real estate loans | 11,995 | | | 11,848 | | | — | | | 202 | | | 20,805 | | | 44,850 | |
Consumer: | | | | | | | | | | | |
SFR 1-4 1st DT liens | 2,306 | | | 2,675 | | | (11) | | | 412 | | | 2,633 | | | 8,015 | |
SFR HELOCs and junior liens | 6,183 | | | 4,638 | | | (23) | | | 140 | | | 1,170 | | | 12,108 | |
Other | 1,595 | | | 971 | | | (373) | | | 167 | | | 682 | | | 3,042 | |
Total consumer loans | 10,084 | | | 8,284 | | | (407) | | | 719 | | | 4,485 | | | 23,165 | |
Commercial and industrial | 4,867 | | | (1,961) | | | (594) | | | 181 | | | 1,525 | | | 4,018 | |
Construction | 3,388 | | | 933 | | | — | | | — | | | 2,454 | | | 6,775 | |
Agriculture production | 261 | | | (179) | | | — | | | 20 | | | 817 | | | 919 | |
Leases | 21 | | | (12) | | | — | | | — | | | 3 | | | 12 | |
Total | $ | 30,616 | | | $ | 18,913 | | | $ | (1,001) | | | $ | 1,122 | | | $ | 30,089 | | | $ | 79,739 | |
In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various econometrics, including California unemployment, gross domestic product, and corporate bond yields. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. At both January 1, 2020, the adoption and implementation date of ASC Topic 326, and June 30, 2020, the Company utilized a reasonable and supportable forecast period of approximately eight quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. During the quarter ended June 30, 2020 the majority of the increase in ACL reflects potential future credit deterioration. Specifically, portfolio-wide qualitative indicators such as the
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Nine months ended September 30, 2019 | | | | | | | | |
(in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (benefit) | | Ending Balance |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 2,676 | | | $ | (2) | | | $ | 53 | | | $ | (321) | | | $ | 2,406 | |
Commercial | 12,944 | | | (746) | | | 1,517 | | | (1,774) | | | 11,941 | |
Total mortgage loans on real estate | 15,620 | | | (748) | | | 1,570 | | | (2,095) | | | 14,347 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 6,042 | | | — | | | 305 | | | (613) | | | 5,734 | |
Home equity loans | 1,540 | | | (3) | | | 414 | | | (689) | | | 1,262 | |
Other | 793 | | | (548) | | | 262 | | | 1,046 | | | 1,553 | |
Total consumer loans | 8,375 | | | (551) | | | 981 | | | (256) | | | 8,549 | |
Commercial | 6,090 | | | (1,242) | | | 337 | | | 502 | | | 5,687 | |
Construction: | | | | | | | | | |
Residential | 1,834 | | | — | | | — | | | 823 | | | 2,657 | |
Commercial | 663 | | | — | | | — | | | (366) | | | 297 | |
Total construction loans | 2,497 | | | — | | | — | | | 457 | | | 2,954 | |
Total | $ | 32,582 | | | $ | (2,541) | | | $ | 2,888 | | | $ | (1,392) | | | $ | 31,537 | |
outlook for changes in California Unemployment and Gross Domestic Product (GDP), resulted in a $19,143,000 increase in credit reserves on loans. Management further noted that the majority of economic forecasts, as of the end of the current quarter, utilized in the ACL calculation have shown a migration in the estimated timing of recovery from late 2020 as the end of the first quarter to mid-2021 or beyond. Management believes that the allowance for credit losses at June 30, 2020 appropriately reflected expected credit losses inherent in the loan portfolio at that date.
| | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – As of September 30, 2019 | | | | | | |
(in thousands) | Loans pooled for evaluation | | Individually evaluated for impairment | | Loans acquired with deteriorated credit quality | | Total allowance for loan losses |
Mortgage loans on real estate: | | | | | | | |
Residential 1-4 family | $ | 2,315 | | | $ | 91 | | | $ | — | | | $ | 2,406 | |
Commercial | 11,915 | | | 26 | | | — | | | 11,941 | |
Total mortgage loans on real estate | 14,230 | | | 117 | | | — | | | 14,347 | |
Consumer: | | | | | | | |
Home equity lines of credit | 5,644 | | | 84 | | | 6 | | | 5,734 | |
Home equity loans | 1,216 | | | 46 | | | — | | | 1,262 | |
Other | 1,535 | | | 18 | | | — | | | 1,553 | |
Total consumer loans | 8,395 | | | 148 | | | 6 | | | 8,549 | |
Commercial | 4,428 | | | 1,259 | | | — | | | 5,687 | |
Construction: | | | | | | | |
Residential | 2,657 | | | — | | | — | | | 2,657 | |
Commercial | 297 | | | — | | | — | | | 297 | |
Total construction loans | 2,954 | | | — | | | — | | | 2,954 | |
Total | $ | 30,007 | | | $ | 1,524 | | | $ | 6 | | | $ | 31,537 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Year Ended December 31, 2019 | | | | | | | | |
(in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (benefit) | | Ending Balance |
Commercial real estate: | | | | | | | | | |
CRE non-owner occupied | $ | 7,401 | | | $ | — | | | $ | 1,486 | | | $ | (2,939) | | | $ | 5,948 | |
CRE owner occupied | 2,711 | | | (746) | | | 42 | | | 20 | | | 2,027 | |
Multifamily | 2,429 | | | — | | | — | | | 923 | | | 3,352 | |
Farmland | 403 | | — | | | — | | | 265 | | 668 | |
Total commercial real estate loans | 12,944 | | | (746) | | | 1,528 | | | (1,731) | | | 11,995 | |
Consumer: | | | | | | | | | |
SFR 1-4 1st DT liens | 2,676 | | | (2) | | | 54 | | | (422) | | | 2,306 | |
SFR HELOCs and junior liens | 7,582 | | | (3) | | | 935 | | | (2,331) | | | 6,183 | |
Other | 793 | | | (765) | | | 321 | | | 1,246 | | | 1,595 | |
Total consumer loans | 11,051 | | | (770) | | | 1,310 | | | (1,507) | | | 10,084 | |
Commercial and industrial | 5,610 | | | (2,104) | | | 513 | | | 848 | | | 4,867 | |
Construction | 2,497 | | | — | | | — | | | 891 | | | 3,388 | |
Agriculture production | 480 | | | (19) | | | 12 | | | (212) | | | 261 | |
Leases | — | | | — | | | — | | | 21 | | | 21 | |
Total | $ | 32,582 | | | $ | (3,639) | | | $ | 3,363 | | | $ | (1,690) | | | $ | 30,616 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Three Months Ended June 30, 2019 | | | | | | | | |
(in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (benefit) | | Ending Balance |
Commercial real estate: | | | | | | | | | |
CRE non-owner occupied | $ | 6,268 | | | $ | — | | | $ | 6 | | | $ | (92) | | | $ | 6,182 | |
CRE owner occupied | 2,323 | | | — | | | 4 | | | (113) | | | 2,214 | |
Multifamily | 3,271 | | | — | | | — | | | (189) | | | 3,082 | |
Farmland | 468 | | | — | | | — | | | 153 | | | 621 | |
Total commercial real estate loans | 12,330 | | | — | | | 10 | | | (241) | | | 12,099 | |
Consumer: | | | | | | | | | — | |
SFR 1-4 1st DT liens | 2,500 | | | (2) | | | 3 | | | 75 | | | 2,576 | |
SFR HELOCs and junior liens | 7,301 | | | — | | | 354 | | | (554) | | | 7,101 | |
Other | 1,040 | | | (153) | | | 108 | | | 456 | | | 1,451 | |
Total consumer loans | 10,841 | | | (155) | | | 465 | | | (23) | | | 11,128 | |
Commercial and industrial | 5,854 | | | (138) | | | 84 | | | 681 | | | 6,481 | |
Construction | 2,815 | | | — | | | — | | | 81 | | | 2,896 | |
Agriculture production | 224 | | | — | | | 1 | | | 39 | | | 264 | |
Leases | — | | | — | | | — | | | — | | | — | |
Total | $ | 32,064 | | | $ | (293) | | | $ | 560 | | | $ | 537 | | | $ | 32,868 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Loans, Net of Unearned fees – As of September 30, 2019 | | | | | | |
(in thousands) | Loans pooled for evaluation | | Individually evaluated for impairment | | Loans acquired with deteriorated credit quality | | Total loans, net of unearned fees |
Mortgage loans on real estate: | | | | | | | |
Residential 1-4 family | $ | 499,620 | | | $ | 4,757 | | | $ | 1,417 | | | $ | 505,794 | |
Commercial | 2,727,228 | | | 9,005 | | | 5,129 | | | 2,741,362 | |
Total mortgage loans on real estate | 3,226,848 | | | 13,762 | | | 6,546 | | | 3,247,156 | |
Consumer: | | | | | | | |
Home equity lines of credit | 329,129 | | | 1,917 | | | 826 | | | 331,872 | |
Home equity loans | 27,793 | | | 2,156 | | | 421 | | | 30,370 | |
Other | 80,146 | | | 149 | | | 2 | | | 80,297 | |
Total consumer loans | 437,068 | | | 4,222 | | | 1,249 | | | 442,539 | |
Commercial | 271,447 | | | 4,501 | | | 2,510 | | | 278,458 | |
Construction: | | | | | | | |
Residential | 169,034 | | | — | | | — | | | 169,034 | |
Commercial | 45,161 | | | — | | | — | | | 45,161 | |
Total construction loans | 214,195 | | | — | | | — | | | 214,195 | |
Total | $ | 4,149,558 | | | $ | 22,485 | | | $ | 10,305 | | | $ | 4,182,348 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Six months ended June 30, 2019 | | | | | | | | |
(in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (benefit) | | Ending Balance |
Commercial real estate: | | | | | | | | | |
CRE non-owner occupied | $ | 7,401 | | | $ | — | | | $ | 1,383 | | | $ | (2,602) | | | $ | 6,182 | |
CRE owner occupied | 2,711 | | — | | 8 | | (505) | | 2,214 |
Multifamily | 2,429 | | — | | — | | 653 | | 3,082 |
Farmland | 403 | | — | | — | | 218 | | 621 |
Total commercial real estate loans | 12,944 | | — | | 1,391 | | (2,236) | | 12,099 |
Consumer: | | | | | | | | | |
SFR 1-4 1st DT liens | 2,676 | | (2) | | 5 | | (103) | | 2,576 |
SFR HELOCs and junior liens | 7,582 | | — | | 536 | | (1,017) | | 7,101 |
Other | 793 | | (360) | | 183 | | 835 | | 1,451 |
Total consumer loans | 11,051 | | (362) | | 724 | | (285) | | 11,128 |
Commercial and industrial | 5,610 | | (657) | | 242 | | 1,286 | | 6,481 |
Construction | 2,497 | | — | | — | | 399 | | 2,896 |
Agriculture production | 480 | | — | | 11 | | (227) | | 264 |
Leases | — | | — | | — | | — | | — |
Total | $ | 32,582 | | | $ | (1,019) | | | $ | 2,368 | | | $ | (1,063) | | | $ | 32,868 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Loses – Year Ended December 31, 2018 | | | | | | | | |
(in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (benefit) | | Ending Balance |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 2,317 | | | $ | (77) | | | $ | — | | | $ | 436 | | | $ | 2,676 | |
Commercial | 11,441 | | | (15) | | | 68 | | | 1,450 | | | 12,944 | |
Total mortgage loans on real estate | 13,758 | | | (92) | | | 68 | | | 1,886 | | | 15,620 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 5,800 | | | (277) | | | 846 | | | (327) | | | 6,042 | |
Home equity loans | 1,841 | | | (24) | | | 297 | | | (574) | | | 1,540 | |
Other | 586 | | | (783) | | | 288 | | | 702 | | | 793 | |
Total consumer loans | 8,227 | | | (1,084) | | | 1,431 | | | (199) | | | 8,375 | |
Commercial | 6,512 | | | (1,188) | | | 541 | | | 225 | | | 6,090 | |
Construction: | | | | | | | | | |
Residential | 1,184 | | | — | | | — | | | 650 | | | 1,834 | |
Commercial | 642 | | | — | | | — | | | 21 | | | 663 | |
Total construction loans | 1,826 | | | — | | | — | | | 671 | | | 2,497 | |
Total | $ | 30,323 | | | $ | (2,364) | | | $ | 2,040 | | | $ | 2,583 | | | $ | 32,582 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – As of December 31, 2018 | | | | | | |
(in thousands) | Loans pooled for evaluation | | Individually evaluated for impairment | | Loans acquired with deteriorated credit quality | | Total allowance for loan losses |
Mortgage loans on real estate: | | | | | | | |
Residential 1-4 family | $ | 2,620 | | | $ | 56 | | | $ | — | | | $ | 2,676 | |
Commercial | 12,737 | | | 91 | | | 116 | | | 12,944 | |
Total mortgage loans on real estate | 15,357 | | | 147 | | | 116 | | | 15,620 | |
Consumer: | | | | | | | |
Home equity lines of credit | 5,838 | | | 198 | | | 6 | | | 6,042 | |
Home equity loans | 1,486 | | | 54 | | | — | | | 1,540 | |
Other | 779 | | | 14 | | | — | | | 793 | |
Total consumer loans | 8,103 | | | 266 | | | 6 | | | 8,375 | |
Commercial | 4,309 | | | 1,781 | | | — | | | 6,090 | |
Construction: | | | | | | | |
Residential | 1,834 | | | — | | | — | | | 1,834 | |
Commercial | 663 | | | — | | | — | | | 663 | |
Total construction loans | 2,497 | | | — | | | — | | | 2,497 | |
Total | $ | 30,266 | | | $ | 2,194 | | | $ | 122 | | | $ | 32,582 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Loans , Net of Unearned fees - As of December 31, 2018 | | | | | | |
(in thousands) | Loans pooled for evaluation | | Individually evaluated for impairment | | Loans acquired with deteriorated credit quality | | Total loans, net of unearned fees |
Mortgage loans on real estate: | | | | | | | |
Residential 1-4 family | $ | 509,267 | | | $ | 4,321 | | | $ | 1,674 | | | $ | 515,262 | |
Commercial | 2,606,819 | | | 12,563 | | | 8,456 | | | 2,627,838 | |
Total mortgage loans on real estate | 3,116,086 | | | 16,884 | | | 10,130 | | | 3,143,100 | |
Consumer: | | | | | | | |
Home equity lines of credit | 322,764 | | | 2,646 | | | 1,167 | | | 326,577 | |
Home equity loans | 33,142 | | | 3,103 | | | 439 | | | 36,684 | |
Other | 55,483 | | | 196 | | | 42 | | | 55,721 | |
Total consumer loans | 411,389 | | | 5,945 | | | 1,648 | | | 418,982 | |
Commercial | 268,885 | | | 5,218 | | | 2,445 | | | 276,548 | |
Construction: | | | | | | | |
Residential | 121,296 | | | — | | | — | | | 121,296 | |
Commercial | 62,088 | | | — | | | — | | | 62,088 | |
Total construction loans | 183,384 | | | — | | | — | | | 183,384 | |
Total | $ | 3,979,744 | | | $ | 28,047 | | | $ | 14,223 | | | $ | 4,022,014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Three Months Ended September 30, 2018 | | | | | | | | |
(in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (benefit) | | Ending Balance |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 1,991 | | | $ | (25) | | | $ | — | | | $ | 434 | | | $ | 2,400 | |
Commercial | 11,607 | | | — | | | 15 | | | 1,257 | | | 12,879 | |
Total mortgage loans on real estate | 13,598 | | | (25) | | | 15 | | | 1,691 | | | 15,279 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 5,048 | | | (172) | | | 151 | | | 194 | | | 5,221 | |
Home equity loans | 1,532 | | | (23) | | | 139 | | | (55) | | | 1,593 | |
Other | 557 | | | (229) | | | 63 | | | 309 | | | 700 | |
Total consumer loans | 7,137 | | | (424) | | | 353 | | | 448 | | | 7,514 | |
Commercial | 6,378 | | | (693) | | | 202 | | | 337 | | | 6,224 | |
Construction: | | | | | | | | | |
Residential | 1,434 | | | — | | | — | | | 192 | | | 1,626 | |
Commercial | 977 | | | — | | | — | | | (17) | | | 960 | |
Total construction loans | 2,411 | | | — | | | — | | | 175 | | | 2,586 | |
Total | $ | 29,524 | | | $ | (1,142) | | | $ | 570 | | | $ | 2,651 | | | $ | 31,603 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – Nine months ended September 30, 2018 | | | | | | | | |
(in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (benefit) | | Ending Balance |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 2,317 | | | $ | (77) | | | $ | — | | | $ | 160 | | | $ | 2,400 | |
Commercial | 11,441 | | | (15) | | | 51 | | | 1,402 | | | 12,879 | |
Total mortgage loans on real estate | 13,758 | | | (92) | | | 51 | | | 1,562 | | | 15,279 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 5,800 | | | (276) | | | 677 | | | (980) | | | 5,221 | |
Home equity loans | 1,841 | | | (23) | | | 176 | | | (401) | | | 1,593 | |
Other | 586 | | | (597) | | | 208 | | | 503 | | | 700 | |
Total consumer loans | 8,227 | | | (896) | | | 1,061 | | | (878) | | | 7,514 | |
Commercial | 6,512 | | | (952) | | | 331 | | | 333 | | | 6,224 | |
Construction: | | | | | | | | | |
Residential | 1,184 | | | — | | | — | | | 442 | | | 1,626 | |
Commercial | 642 | | | — | | | — | | | 318 | | | 960 | |
Total construction loans | 1,826 | | | — | | | — | | | 760 | | | 2,586 | |
Total | $ | 30,323 | | | $ | (1,940) | | | $ | 1,443 | | | $ | 1,777 | | | $ | 31,603 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses – As of September 30, 2018 | | | | | | |
(in thousands) | Loans pooled for evaluation | | Individually evaluated for impairment | | Loans acquired with deteriorated credit quality | | Total allowance for loan losses |
Mortgage loans on real estate: | | | | | | | |
Residential 1-4 family | $ | 2,313 | | | $ | 57 | | | $ | 30 | | | $ | 2,400 | |
Commercial | 12,552 | | | 268 | | | 59 | | | 12,879 | |
Total mortgage loans on real estate | 14,865 | | | 325 | | | 89 | | | 15,279 | |
Consumer: | | | | | | | |
Home equity lines of credit | 5,046 | | | 168 | | | 7 | | | 5,221 | |
Home equity loans | 1,418 | | | 175 | | | — | | | 1,593 | |
Other | 597 | | | 103 | | | — | | | 700 | |
Total consumer loans | 7,061 | | | 446 | | | 7 | | | 7,514 | |
Commercial | 4,353 | | | 1,857 | | | 14 | | | 6,224 | |
Construction: | | | | | | | |
Residential | 1,626 | | | — | | | — | | | 1,626 | |
Commercial | 960 | | | — | | | — | | | 960 | |
Total construction loans | 2,586 | | | — | | | — | | | 2,586 | |
Total | $ | 28,865 | | | $ | 2,628 | | | $ | 110 | | | $ | 31,603 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Loans, Net of Unearned fees – As of September 30, 2018 | | | | | | |
(in thousands) | Loans pooled for evaluation | | Individually evaluated for impairment | | Loans acquired with deteriorated credit quality | | Total loans, net of unearned fees |
Mortgage loans on real estate: | | | | | | | |
Residential 1-4 family | $ | 517,935 | | | $ | 4,781 | | | $ | 1,698 | | | $ | 524,414 | |
Commercial | 2,586,659 | | | 13,244 | | | 7,885 | | | 2,607,788 | |
Total mortgage loans on real estate | 3,104,594 | | | 18,025 | | | 9,583 | | | 3,132,202 | |
Consumer: | | | | | | | |
Home equity lines of credit | 327,649 | | | 2,188 | | | 1,299 | | | 331,136 | |
Home equity loans | 37,840 | | | 2,406 | | | 447 | | | 40,693 | |
Other | 49,171 | | | 243 | | | 42 | | | 49,456 | |
Total consumer loans | 414,660 | | | 4,837 | | | 1,788 | | | 421,285 | |
Commercial | 282,588 | | | 4,632 | | | 2,427 | | | 289,647 | |
Construction: | | | | | | | |
Residential | 114,574 | | | — | | | — | | | 114,574 | |
Commercial | 69,728 | | | — | | | — | | | 69,728 | |
Total construction loans | 184,302 | | | — | | | — | | | 184,302 | |
Total | $ | 3,986,144 | | | $ | 27,494 | | | $ | 13,798 | | | $ | 4,027,436 | |
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans, and (iv) delinquency within the portfolio. The Company analyzes loans individually to classify the loans as to credit risk and grading. This analysis is performed annually for all outstanding balances greater than $1,000,000 and non-homogeneous loans, such as commercial real estate loans, unless other indicators, such as delinquency, trigger more frequent evaluation. Loans below the $1,000,000 threshold and homogenous in nature are evaluated as needed for proper grading based on delinquency and borrower credit scores.
The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows:
•Pass– This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital.
•Special Mention– This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention.
•Substandard– This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well-defined workout/rehabilitation program.
•Doubtful– This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans.
•Loss– This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the quarter in which the loss is identified.
The following tables present ending loan balances
Based on the most recent analysis performed, the risk category of loans by loan category and risk gradeclass of loans is as follows for the periodsperiod indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit Quality Indicators Originated Loans – As of September 30, 2019 | | | | | | | | |
(in thousands) | Pass | | Special Mention | | Substandard | | Doubtful / Loss | | Total Originated Loans |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 348,668 | | | $ | 2,743 | | | $ | 4,235 | | | $ | — | | | $ | 355,646 | |
Commercial | 2,063,991 | | | 38,150 | | | 7,168 | | | — | | | 2,109,309 | |
Total mortgage loans on real estate | 2,412,659 | | | 40,893 | | | 11,403 | | | — | | | 2,464,955 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 288,554 | | | 3,378 | | | 2,479 | | | — | | | 294,411 | |
Home equity loans | 23,819 | | | 1,184 | | | 2,031 | | | — | | | 27,034 | |
Other | 63,648 | | | 452 | | | 53 | | | — | | | 64,153 | |
Total consumer loans | 376,021 | | | 5,014 | | | 4,563 | | | — | | | 385,598 | |
Commercial | 242,308 | | | 8,968 | | | 5,103 | | | | | | 256,379 | |
Construction: | | | | | | | | | |
Residential | 158,657 | | | — | | | 250 | | | — | | | 158,907 | |
Commercial | 44,380 | | | 324 | | | — | | | — | | | 44,704 | |
Total construction loans | 203,037 | | | 324 | | | 250 | | | — | | | 203,611 | |
Total loans | $ | 3,234,025 | | | $ | 55,199 | | | $ | 21,319 | | | $ | — | | | $ | 3,310,543 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year – As of June 30, 2020 | | | | | | | | | | | | | | | | |
(in thousands) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
Commercial real estate: | | | | | | | | | | | | | | | | | |
CRE non-owner occupied risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 68,986 | | | $ | 255,297 | | | $ | 178,000 | | | $ | 273,918 | | | $ | 207,896 | | | $ | 519,597 | | | $ | 66,225 | | | $ | — | | | $ | 1,569,919 | |
Special Mention | — | | | 1,266 | | | — | | | 1,712 | | | 7,374 | | | 603 | | | 11,014 | | | — | | 21,969 | |
Substandard | — | | | — | | | 1,479 | | | 466 | | | — | | | 3,108 | | | — | | | — | | 5,053 | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total CRE non-owner occupied risk ratings | $ | 68,986 | | | $ | 256,563 | | | $ | 179,479 | | | $ | 276,096 | | | $ | 215,270 | | | $ | 523,308 | | | $ | 77,239 | | | $ | — | | | $ | 1,596,941 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | |
CRE owner occupied risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 50,412 | | | $ | 61,065 | | | $ | 52,394 | | | $ | 65,943 | | | $ | 63,286 | | | $ | 249,270 | | | $ | 17,464 | | | $ | — | | | $ | 559,834 | |
Special Mention | — | | | — | | | — | | | 4,302 | | | 3,821 | | | 5,602 | | | — | | | — | | | 13,725 | |
Substandard | — | | | 1,459 | | | — | | | 484 | | | 693 | | | 3,608 | | | — | | | — | | | 6,244 | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total CRE owner occupied risk ratings | $ | 50,412 | | | $ | 62,524 | | | $ | 52,394 | | | $ | 70,729 | | | $ | 67,800 | | | $ | 258,480 | | | $ | 17,464 | | | $ | — | | | $ | 579,803 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | |
Multifamily risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 47,118 | | | $ | 90,562 | | | $ | 109,562 | | | $ | 73,089 | | | $ | 94,016 | | | $ | 130,181 | | | $ | 28,518 | | | $ | — | | | $ | 573,046 | |
Special Mention | 67 | | | — | | | — | | | 612 | | | — | | | — | | | 1,468 | | | — | | | 2,147 | |
Substandard | — | | | — | | | — | | | — | | | 2,024 | | | — | | | — | | | — | | | 2,024 | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total multifamily loans | $ | 47,185 | | | $ | 90,562 | | | $ | 109,562 | | | $ | 73,701 | | | $ | 96,040 | | | $ | 130,181 | | | $ | 29,986 | | | $ | — | | | $ | 577,217 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year – As of June 30, 2020 | | | | | | | | | | | | | | | | |
(in thousands) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
Commercial real estate: | | | | | | | | | | | | | | | | | |
Farmland risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 6,510 | | | $ | 27,441 | | | $ | 20,217 | | | $ | 11,885 | | | $ | 8,930 | | | $ | 21,473 | | | $ | 42,694 | | | $ | — | | | $ | 139,150 | |
Special Mention | — | | | — | | | — | | | 1,271 | | | 226 | | | 3,277 | | | 1,512 | | | — | | | 6,286 | |
Substandard | — | | | 699 | | | — | | | 614 | | | 451 | | | 2,603 | | | 1,721 | | | — | | | 6,088 | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total farmland loans | $ | 6,510 | | | $ | 28,140 | | | $ | 20,217 | | | $ | 13,770 | | | $ | 9,607 | | | $ | 27,353 | | | $ | 45,927 | | | $ | — | | | $ | 151,524 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans: | | | | | | | | | | | | | | | | | |
SFR 1-4 1st DT liens risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 61,920 | | | $ | 90,702 | | | $ | 51,816 | | | $ | 64,342 | | | $ | 56,167 | | | $ | 163,073 | | | $ | — | | | $ | 5,708 | | | $ | 493,728 | |
Special Mention | — | | 292 | | 74 | | 556 | | 17 | | 1,735 | | — | | 509 | | 3,183 |
Substandard | — | | — | | 564 | | 1,839 | | 948 | | 4,980 | | — | | 827 | | 9,158 |
Doubtful/Loss | — | | — | | — | | — | | — | | — | | — | | — | | — |
Total SFR 1st DT liens | $ | 61,920 | | | $ | 90,994 | | | $ | 52,454 | | | $ | 66,737 | | | $ | 57,132 | | | $ | 169,788 | | | $ | — | | | $ | 7,044 | | | $ | 506,069 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans: | | | | | | | | | | | | | | | | | |
SFR HELOCs and Junior Liens | | | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | 500 | | | $ | 13 | | | $ | 375 | | | $ | 373 | | | $ | 1,716 | | | $ | 324,511 | | | $ | 17,075 | | | $ | 344,563 | |
Special Mention | — | | — | | 18 | | — | | — | | 37 | | 4,828 | | 795 | | 5,678 |
Substandard | — | | — | | — | | — | | 134 | | 66 | | 5,818 | | 1,828 | | 7,846 |
Doubtful/Loss | — | | — | | — | | — | | — | | — | | — | | — | | — |
Total SFR HELOCs and Junior Liens | $ | — | | | $ | 500 | | | $ | 31 | | | $ | 375 | | | $ | 507 | | | $ | 1,819 | | | $ | 335,157 | | | $ | 19,698 | | | $ | 358,087 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year – As of June 30, 2020 | | | | | | | | | | | | | | | | |
(in thousands) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
Consumer loans: | | | | | | | | | | | | | | | | | |
Other risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 14,687 | | | $ | 37,507 | | | $ | 18,556 | | | $ | 5,471 | | | $ | 1,555 | | | $ | 1,530 | | | $ | 1,148 | | | $ | — | | | $ | 80,454 | |
Special Mention | 24 | | | 104 | | | 211 | | | 93 | | | 36 | | | 118 | | | 93 | | | — | | | 679 | |
Substandard | — | | | 133 | | | 83 | | | 73 | | | 15 | | | 54 | | | 22 | | | — | | | 380 | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total other consumer loans | $ | 14,711 | | | $ | 37,744 | | | $ | 18,850 | | | $ | 5,637 | | | $ | 1,606 | | | $ | 1,702 | | | $ | 1,263 | | | $ | — | | | $ | 81,513 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial loans: | | | | | | | | | | | | | | | | | |
Commercial and industrial risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 439,901 | | | $ | 54,477 | | | $ | 26,595 | | | $ | 20,081 | | | $ | 7,530 | | | $ | 12,517 | | | $ | 66,817 | | | $ | 1,240 | | | $ | 629,158 | |
Special Mention | — | | — | | 65 | | 348 | | 113 | | 80 | | 1,043 | | 12 | | 1,661 | |
Substandard | — | | 145 | | 60 | | 1,224 | | 1,036 | | 141 | | 924 | | 132 | | 3,662 | |
Doubtful/Loss | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial and industrial loans | $ | 439,901 | | | $ | 54,622 | | | $ | 26,720 | | | $ | 21,653 | | | $ | 8,679 | | | $ | 12,738 | | | $ | 68,784 | | | $ | 1,384 | | | $ | 634,481 | |
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Construction loans: | | | | | | | | | | | | | | | | | |
Construction risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 39,391 | | | $ | 57,143 | | | $ | 105,394 | | | $ | 45,971 | | | $ | 20,782 | | | $ | 3,089 | | | $ | — | | | $ | — | | | $ | 271,770 | |
Special Mention | — | | | — | | | — | | | 346 | | | 4,385 | | | 1,824 | | | — | | | — | | | 6,555 | |
Substandard | — | | | — | | — | | | — | | | — | | | 241 | | | — | | | — | | | 241 | |
Doubtful/Loss | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total construction loans | $ | 39,391 | | | $ | 57,143 | | | $ | 105,394 | | | $ | 46,317 | | | $ | 25,167 | | | $ | 5,154 | | | $ | — | | | $ | — | | | $ | 278,566 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year – As of June 30, 2020 | | | | | | | | | | | | | | | | |
(in thousands) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
Agriculture production loans: | | | | | | | | | | | | | | | | | |
Agriculture production risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 59 | | | $ | 1,744 | | | $ | 1,060 | | | $ | 907 | | | $ | 787 | | | $ | 595 | | | $ | 29,856 | | | $ | — | | | $ | 35,008 | |
Special Mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | 19 | | | (12) | | | 426 | | | — | | | 433 | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total agriculture production loans | $ | 59 | | | $ | 1,744 | | | $ | 1,060 | | | $ | 907 | | | $ | 806 | | | $ | 583 | | | $ | 30,282 | | | $ | — | | | $ | 35,441 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Leases: | | | | | | | | | | | | | | | | | |
Lease risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 1,763 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $1,763 |
Special Mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | |
Total leases | $ | 1,763 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,763 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans outstanding: | | | | | | | | | | | | | | | | | |
Risk ratings | | | | | | | | | | | | | | | | | |
Pass | $ | 730,747 | | | $ | 676,438 | | | $ | 563,607 | | | $ | 561,982 | | | $ | 461,322 | | | $ | 1,103,041 | | | $ | 577,233 | | | $ | 24,023 | | | $ | 4,698,393 | |
Special Mention | 91 | | | 1,662 | | | 368 | | | 9,240 | | | 15,972 | | | 13,276 | | | 19,958 | | | 1,316 | | | 61,883 |
Substandard | — | | | 2,436 | | | 2,186 | | | 4,700 | | | 5,320 | | | 14,789 | | | 8,911 | | | 2,787 | | | 41,129 |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total loans outstanding | $ | 730,838 | | | $ | 680,536 | | | $ | 566,161 | | | $ | 575,922 | | | $ | 482,614 | | | $ | 1,131,106 | | | $ | 606,102 | | | $ | 28,126 | | | $ | 4,801,405 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit Quality Indicators PNCI Loans – As of September 30, 2019 | | | | | | | | |
(in thousands) | Pass | | Special Mention | | Substandard | | Doubtful / Loss | | Total PNCI Loans |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 145,141 | | | $ | 1,617 | | | $ | 1,973 | | | $ | — | | | $ | 148,731 | |
Commercial | 618,372 | | | 2,674 | | | 5,878 | | | — | | | 626,924 | |
Total mortgage loans on real estate | 763,513 | | | 4,291 | | | 7,851 | | | — | | | 775,655 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 34,660 | | | 891 | | | 1,084 | | | — | | | 36,635 | |
Home equity loans | 2,841 | | | — | | | 74 | | | — | | | 2,915 | |
Other | 15,792 | | | 341 | | | 9 | | | — | | | 16,142 | |
Total consumer loans | 53,293 | | | 1,232 | | | 1,167 | | | — | | | 55,692 | |
Commercial | 19,399 | | | 1 | | | 169 | | | | | | 19,569 | |
Construction: | | | | | | | | | |
Residential | 5,980 | | | 4,147 | | | — | | | — | | | 10,127 | |
Commercial | 457 | | | — | | | — | | | — | | | 457 | |
Total construction loans | 6,437 | | | 4,147 | | | — | | | — | | | 10,584 | |
Total loans | $ | 842,642 | | | $ | 9,671 | | | $ | 9,187 | | | $ | — | | | $ | 861,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019 | | | | | | | | | | | | | | | |
(in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
Commercial real estate: | | | | | | | | | | | | | | | | |
CRE non-owner occupied risk ratings | | | | | | | | | | | | | | | | |
Pass | | $ | 253,321 | | | $ | 174,869 | | | $ | 287,183 | | | $ | 221,864 | | | $ | 578,255 | | | $ | 77,070 | | | $ | — | | | $ | 1,592,562 | |
Special Mention | | — | | | — | | | 3,182 | | | 8,401 | | | 616 | | | — | | | — | | | 12,199 |
Substandard | | — | | | 1,183 | | | 474 | | | — | | | 3,138 | | | — | | | — | | | 4,795 |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | $0 |
Total CRE non-owner occupied risk ratings | | $ | 253,321 | | | $ | 176,052 | | | $ | 290,839 | | | $ | 230,265 | | | $ | 582,009 | | | $ | 77,070 | | | $ | — | | | $ | 1,609,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit Quality Indicators Originated Loans – As of December 31, 2018 | | | | | | | | |
(in thousands) | Pass | | Special Mention | | Substandard | | Doubtful / Loss | | Total Originated Loans |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 337,189 | | | $ | 1,724 | | | $ | 4,883 | | | $ | — | | | $ | 343,796 | |
Commercial | 1,861,627 | | | 33,483 | | | 15,871 | | | — | | | 1,910,981 | |
Total mortgage loans on real estate | 2,198,816 | | | 35,207 | | | 20,754 | | | — | | | 2,254,777 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 279,491 | | | 2,309 | | | 2,653 | | | — | | | 284,453 | |
Home equity loans | 29,289 | | | 1,054 | | | 2,317 | | | — | | | 32,660 | |
Other | 33,606 | | | 341 | | | 73 | | | — | | | 34,020 | |
Total consumer loans | 342,386 | | | 3,704 | | | 5,043 | | | — | | | 351,133 | |
Commercial | 217,126 | | | 6,127 | | | 5,382 | | | — | | | 228,635 | |
Construction: | | | | | | | | | |
Residential | 90,412 | | | 32 | | | 259 | | | — | | | 90,703 | |
Commercial | 55,863 | | | 345 | | | — | | | — | | | 56,208 | |
Total construction loans | 146,275 | | | 377 | | | 259 | | | — | | | 146,911 | |
Total loans | $ | 2,904,603 | | | $ | 45,415 | | | $ | 31,438 | | | $ | — | | | $ | 2,981,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | |
CRE owner occupied risk ratings | | | | | | | | | | | | | | | | |
Pass | | $ | 57,376 | | | $ | 54,298 | | | $ | 73,019 | | | $ | 69,136 | | | $ | 263,750 | | | $ | 18,524 | | | $ | — | | | $ | 536,103 | |
Special Mention | | — | | | — | | | 437 | | | 745 | | | 3,459 | | | — | | | — | | | 4,641 | |
Substandard | | 601 | | | — | | | 493 | | | 726 | | | 3,870 | | | — | | | — | | | 5,690 | |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total CRE owner occupied risk ratings | | $ | 57,977 | | | $ | 54,298 | | | $ | 73,949 | | | $ | 70,607 | | | $ | 271,079 | | | $ | 18,524 | | | $ | — | | | $ | 546,434 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | |
Multifamily risk ratings | | | | | | | | | | | | | | | | |
Pass | | $ | 82,435 | | | $ | 112,739 | | | $ | 41,673 | | | $ | 99,170 | | | $ | 141,040 | | | $ | 36,061 | | | $ | — | | | $ | 513,118 | |
Special Mention | | — | | | — | | | — | | | — | | | 1,103 | | | 1,480 | | | — | | | 2,583 | |
Substandard | | — | | | — | | | — | | | 2,024 | | | — | | | — | | | — | | | 2,024 | |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total multifamily loans | | $ | 82,435 | | | $ | 112,739 | | | $ | 41,673 | | | $ | 101,194 | | | $ | 142,143 | | | $ | 37,541 | | | $ | — | | | $ | 517,725 | |
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| Credit Quality Indicators PNCI Loans – As of December 31, 2018 | | | | | | | | |
(in thousands) | Pass | | Special Mention | | Substandard | | Doubtful / Loss | | Total PNCI Loans |
Mortgage loans on real estate: | | | | | | | | | |
Residential 1-4 family | $ | 167,908 | | | $ | 1,086 | | | $ | 798 | | | $ | — | | | $ | 169,792 | |
Commercial | 701,868 | | | 3,085 | | | 3,448 | | | — | | | 708,401 | |
Total mortgage loans on real estate | 869,776 | | | 4,171 | | | 4,246 | | | — | | | 878,193 | |
Consumer: | | | | | | | | | |
Home equity lines of credit | 38,780 | | | 1,124 | | | 1,053 | | | — | | | 40,957 | |
Home equity loans | 3,413 | | | 74 | | | 98 | | | — | | | 3,585 | |
Other | 21,481 | | | 173 | | | 5 | | | — | | | 21,659 | |
Total consumer loans | 63,674 | | | 1,371 | | | 1,156 | | | — | | | 66,201 | |
Commercial | 45,027 | | | 321 | | | 120 | | | — | | | 45,468 | |
Construction: | | | | | | | | | |
Residential | 30,593 | | | — | | | — | | | — | | | 30,593 | |
Commercial | 5,880 | | | — | | | — | | | — | | | 5,880 | |
Total construction loans | 36,473 | | | — | | | — | | | — | | | 36,473 | |
Total | $ | 1,014,950 | | | $ | 5,863 | | | $ | 5,522 | | | $ | — | | | $ | 1,026,335 | |
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| Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019 | | | | | | | | | | | | | | | |
(in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
Commercial real estate: | | | | | | | | | | | | | | | | |
Farmland risk ratings | | | | | | | | | | | | | | | | |
Pass | | $ | 26,786 | | | $ | 21,212 | | | $ | 12,248 | | | $ | 9,618 | | | $ | 22,471 | | | $ | 41,783 | | | $ | — | | | $ | 134,118 | |
Special Mention | | — | | | — | | | 1,346 | | | 226 | | | 3,289 | | | 774 | | | — | | | 5,635 | |
Substandard | | — | | | — | | | 624 | | | 466 | | | 2,929 | | | 1,295 | | | — | | | 5,314 | |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total farmland loans | | $ | 26,786 | | | $ | 21,212 | | | $ | 14,218 | | | $ | 10,310 | | | $ | 28,689 | | | $ | 43,852 | | | $ | — | | | $ | 145,067 | |
Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value. Typically, payment performance will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate; non-payment is likely due to loss of employment. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of the two. Problem consumer loans are generally identified by payment history and current performance of the borrower (delinquency). The Bank manages its consumer loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggesting modifications if appropriate, and, when continued scheduled payments become unrealistic, initiating repossession or foreclosure through appropriate channels.
Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner occupied real estate are primarily susceptible to changes in the business conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual fortunes of the business owner, and general economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by equipment or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often these shifts are a result of changes in general economic or market conditions or overbuilding and resultant over-supply. Losses are dependent on value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans: | | | | | | | | | | | | | | | | |
SFR 1-4 1st DT liens risk ratings | | | | | | | | | | | | | | | | |
Pass | | $ | 102,612 | | | $ | 63,542 | | | $ | 73,195 | | | $ | 65,051 | | | $ | 187,972 | | | $ | — | | | $ | 6,242 | | | $ | 498,614 | |
Special Mention | | — | | | — | | | 1,408 | | | 19 | | | 2,564 | | | — | | | 723 | | | 4,714 | |
Substandard | | — | | | 813 | | | 711 | | | 52 | | | 4,050 | | | — | | | 554 | | | 6,180 | |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total SFR 1st DT liens | | $ | 102,612 | | | $ | 64,355 | | | $ | 75,314 | | | $ | 65,122 | | | $ | 194,586 | | | $ | — | | | $ | 7,519 | | | $ | 509,508 | |
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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans: | | | | | | | | | | | | | | | | |
SFR HELOCs and Junior Liens | | | | | | | | | | | | | | | | |
Pass | | $ | 1,412 | | | $ | 14 | | | $ | 382 | | | $ | 403 | | | $ | 2,077 | | | $ | 327,589 | | | $ | 19,531 | | | $ | 351,408 | |
Special Mention | | — | | | 20 | | | — | | | — | | | 4 | | | 4,189 | | | 1,169 | | | 5,382 | |
Substandard | | — | | | — | | | — | | | 156 | | | 14 | | | 4,208 | | | 1,718 | | | 6,096 | |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total SFR HELOCs and Junior Liens | | $ | 1,412 | | | $ | 34 | | | $ | 382 | | | $ | 559 | | | $ | 2,095 | | | $ | 335,986 | | | $ | 22,418 | | | $ | 362,886 | |
valuations or revaluations are obtained at initiation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019 | | | | | | | | | | | | | | | |
(in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
Consumer loans: | | | | | | | | | | | | | | | | |
Other risk ratings | | | | | | | | | | | | | | | | |
Pass | | $ | 45,876 | | | $ | 23,045 | | | $ | 7,176 | | | $ | 2,245 | | | $ | 2,071 | | | $ | 1,402 | | | $ | — | | | $ | 81,815 | |
Special Mention | | 56 | | | 182 | | | 176 | | | 52 | | | 161 | | | 91 | | | — | | | 718 | |
Substandard | | 60 | | | — | | | 13 | | | — | | | 35 | | | 15 | | | — | | | 123 | |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total other consumer loans | | $ | 45,992 | | | $ | 23,227 | | | $ | 7,365 | | | $ | 2,297 | | | $ | 2,267 | | | $ | 1,508 | | | $ | — | | | $ | 82,656 | |
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Commercial and industrial loans: | | | | | | | | | | | | | | | | |
Commercial and industrial risk ratings | | | | | | | | | | | | | | | | |
Pass | | $ | 61,720 | | | $ | 31,149 | | | $ | 24,176 | | | $ | 10,747 | | | $ | 16,346 | | | $ | 96,654 | | | $ | 973 | | | $ | 241,765 | |
Special Mention | | — | | | 339 | | | 1,141 | | | 151 | | | 164 | | | 1,921 | | | 110 | | | 3,826 | |
Substandard | | — | | | 47 | | | 1,281 | | | 1,571 | | | 401 | | | 814 | | | 86 | | | 4,200 | |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial and industrial loans | | $ | 61,720 | | | $ | 31,535 | | | $ | 26,598 | | | $ | 12,469 | | | $ | 16,911 | | | $ | 99,389 | | | $ | 1,169 | | | $ | 249,791 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction loans: | | | | | | | | | | | | | | | |
Construction risk ratings | | | | | | | | | | | | | | | |
Pass | $ | 50,275 | | | $ | 92,449 | | | $ | 76,042 | | | $ | 18,973 | | | $ | 7,322 | | | $ | — | | | $ | — | | | $ | 245,061 | |
Special Mention | — | | | — | | | — | | | 4,202 | | | 317 | | | — | | | — | | | 4,519 | |
Substandard | — | | | — | | | — | | | — | | | 247 | | | — | | | — | | | 247 | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | $ | 50,275 | | | $ | 92,449 | | | $ | 76,042 | | | $ | 23,175 | | | $ | 7,886 | | | $ | — | | | $ | — | | | $ | 249,827 | |
Table 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.Contents
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
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| Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019 | | | | | | | | | | | | | | | |
(in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
Agriculture production risk ratings | | | | | | | | | | | | | | | | |
Pass | | $ | 1,929 | | | $ | 1,201 | | | $ | 1,324 | | | $ | 1,012 | | | $ | 834 | | | $ | 26,306 | | | $ | — | | | $ | 32,606 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | 27 | | | — | | | — | | | — | | | 27 | |
Doubtful/Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total agriculture production loans | | $ | 1,929 | | | $ | 1,201 | | | $ | 1,324 | | | $ | 1,039 | | | $ | 834 | | | $ | 26,306 | | | $ | — | | | $ | 32,633 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Leases: | | | | | | | | | | | | | | | |
Lease risk ratings | | | | | | | | | | | | | | | |
Pass | $ | 1,283 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,283 | |
Special Mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total leases | $ | 1,283 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,283 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans outstanding: | | | | | | | | | | | | | | | |
Risk ratings | | | | | | | | | | | | | | | |
Pass | $ | 685,025 | | | $ | 574,518 | | | $ | 596,418 | | | $ | 498,219 | | | $ | 1,222,138 | | | $ | 625,389 | | | $ | 26,746 | | | $ | 4,228,453 | |
Special Mention | 56 | | | 541 | | | 7,690 | | | 13,796 | | | 11,677 | | | 8,455 | | | 2,002 | | | 44,217 | |
Substandard | 661 | | | 2,043 | | | 3,596 | | | 5,022 | | | 14,684 | | | 6,332 | | | 2,358 | | | 34,696 | |
Doubtful/Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total loans outstanding | $ | 685,742 | | | $ | 577,102 | | | $ | 607,704 | | | $ | 517,037 | | | $ | 1,248,499 | | | $ | 640,176 | | | $ | 31,106 | | | $ | 4,307,366 | |
Table 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.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, 2019 | | | | | | | | | | | | |
(in thousands) | 30-59 days | | 60-89 days | | > 90 days | | Total Past Due Loans | | Current | | Total | | > 90 Days and Still Accruing |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 289 | | | $ | 66 | | | $ | 1,187 | | | $ | 1,542 | | | $ | 354,104 | | | $ | 355,646 | | | $ | — | |
Commercial | 117 | | | 48 | | | — | | | 165 | | | 2,109,144 | | | 2,109,309 | | | — | |
Total mortgage loans on real estate | 406 | | | 114 | | | 1,187 | | | 1,707 | | | 2,463,248 | | | 2,464,955 | | | — | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 890 | | | 282 | | | 624 | | | 1,796 | | | 292,615 | | | 294,411 | | | — | |
Home equity loans | 253 | | | 105 | | | 137 | | | 495 | | | 26,539 | | | 27,034 | | | 6 | |
Other | 134 | | | 138 | | | 4 | | | 276 | | | 63,877 | | | 64,153 | | | — | |
Total consumer loans | 1,277 | | | 525 | | | 765 | | | 2,567 | | | 383,031 | | | 385,598 | | | 6 | |
Commercial | 955 | | | 227 | | | 272 | | | 1,454 | | | 254,925 | | | 256,379 | | | 30 | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | 158,907 | | | 158,907 | | | — | |
Commercial | — | | | — | | | — | | | — | | | 44,704 | | | 44,704 | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | 203,611 | | | 203,611 | | | — | |
Total originated loans | $ | 2,638 | | | $ | 866 | | | $ | 2,224 | | | $ | 5,728 | | | $ | 3,304,815 | | | $ | 3,310,543 | | | $ | 36 | |
The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Analysis of Past Due Loans - As of June 30, 2020 | | | | | | | | | | |
(in thousands) | 30-59 days | | 60-89 days | | > 90 days | | Total Past Due Loans | | Current | | Total |
Commercial real estate: | | | | | | | | | | | |
CRE non-owner occupied | $ | 2,589 | | | $ | 667 | | | $ | 113 | | | $ | 3,369 | | | $ | 1,593,572 | | | $ | 1,596,941 | |
CRE owner occupied | 954 | | | 1,188 | | | 387 | | | 2,529 | | | 577,274 | | | 579,803 | |
Multifamily | — | | | — | | | 2,024 | | | 2,024 | | | 575,193 | | | 577,217 | |
Farmland | 180 | | | — | | | — | | | 180 | | | 151,344 | | | 151,524 | |
Total commercial real estate loans | 3,723 | | | 1,855 | | | 2,524 | | | 8,102 | | | 2,897,383 | | | 2,905,485 | |
Consumer: | | | | | | | | | | | |
SFR 1-4 1st DT liens | — | | | 1,046 | | | 2,270 | | | 3,316 | | | 502,753 | | | 506,069 | |
SFR HELOCs and junior liens | 125 | | | 453 | | | 2,249 | | | 2,827 | | | 355,260 | | | 358,087 | |
Other | 85 | | | 229 | | | 80 | | | 394 | | | 81,119 | | | 81,513 | |
Total consumer loans | 210 | | | 1,728 | | | 4,599 | | | 6,537 | | | 939,132 | | | 945,669 | |
Commercial and industrial | 751 | | | 767 | | | 181 | | | 1,699 | | | 632,782 | | | 634,481 | |
Construction | 19 | | | — | | | — | | | 19 | | | 278,547 | | | 278,566 | |
Agriculture production | 115 | | | — | | | 150 | | | 265 | | | 35,176 | | | 35,441 | |
Leases | — | | | — | | | — | | | — | | | 1,763 | | | 1,763 | |
Total | $ | 4,818 | | | $ | 4,350 | | | $ | 7,454 | | | $ | 16,622 | | | $ | 4,784,783 | | | $ | 4,801,405 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Analysis of PNCI Past Due Loans - As of September 30, 2019 | | | | | | | | | | | | |
(in thousands) | 30-59 days | | 60-89 days | | > 90 days | | Total Past Due Loans | | Current | | Total | | > 90 Days and Still Accruing |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | — | | | $ | 52 | | | $ | 243 | | | $ | 295 | | | $ | 148,436 | | | $ | 148,731 | | | $ | — | |
Commercial | — | | | — | | | 949 | | | 949 | | | 625,975 | | | 626,924 | | | — | |
Total mortgage loans on real estate | — | | | 52 | | | 1,192 | | | 1,244 | | | 774,411 | | | 775,655 | | | — | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 182 | | | 122 | | | — | | | 304 | | | 36,331 | | | 36,635 | | | — | |
Home equity loans | — | | | 14 | | | 232 | | | 246 | | | 2,669 | | | 2,915 | | | — | |
Other | 54 | | | 7 | | | — | | | 61 | | | 16,081 | | | 16,142 | | | — | |
Total consumer loans | 236 | | | 143 | | | 232 | | | 611 | | | 55,081 | | | 55,692 | | | — | |
Commercial | — | | | — | | | 174 | | | 174 | | | 19,395 | | | 19,569 | | | — | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | 10,127 | | | 10,127 | | | — | |
Commercial | — | | | — | | | — | | | — | | | 457 | | | 457 | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | 10,584 | | | 10,584 | | | — | |
Total PNCI loans | $ | 236 | | | $ | 195 | | | $ | 1,598 | | | $ | 2,029 | | | $ | 859,471 | | | $ | 861,500 | | | $ | — | |
The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Analysis of Originated Past Due Loans - As of December 31, 2018 | | | | | | | | | | | | |
(in thousands) | 30-59 days | | 60-89 days | | > 90 days | | Total Past Due Loans | | Current | | Total | | > 90 Days and Still Accruing |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 1,675 | | | $ | 132 | | | $ | 478 | | | $ | 2,285 | | | $ | 341,511 | | | $ | 343,796 | | | $ | — | |
Commercial | 431 | | | 1,200 | | | 296 | | | 1,927 | | | 1,909,054 | | | 1,910,981 | | | — | |
Total mortgage loans on real estate | 2,106 | | | 1,332 | | | 774 | | | 4,212 | | | 2,250,565 | | | 2,254,777 | | | — | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 908 | | | 47 | | | 609 | | | 1,564 | | | 282,889 | | | 284,453 | | | — | |
Home equity loans | 1,043 | | | 24 | | | 214 | | | 1,281 | | | 31,379 | | | 32,660 | | | — | |
Other | 298 | | | 17 | | | — | | | 315 | | | 33,705 | | | 34,020 | | | — | |
Total consumer loans | 2,249 | | | 88 | | | 823 | | | 3,160 | | | 347,973 | | | 351,133 | | | — | |
Commercial | 1,053 | | | 579 | | | 1,247 | | | 2,879 | | | 225,756 | | | 228,635 | | | — | |
Construction: | | | | | | | | | | | | | |
Residential | 209 | | | — | | | — | | | 209 | | | 90,494 | | | 90,703 | | | — | |
Commercial | — | | | — | | | — | | | — | | | 56,208 | | | 56,208 | | | — | |
Total construction loans | 209 | | | — | | | — | | | 209 | | | 146,702 | | | 146,911 | | | — | |
Total loans | $ | 5,617 | | | $ | 1,999 | | | $ | 2,844 | | | $ | 10,460 | | | $ | 2,970,996 | | | $ | 2,981,456 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Analysis of Past Due Loans - As of December 31, 2019 | | | | | | | | | | |
(in thousands) | 30-59 days | | 60-89 days | | > 90 days | | Total Past Due Loans | | Current | | Total |
Commercial real estate: | | | | | | | | | | | |
CRE non-owner occupied | $ | 268 | | | $ | 136 | | | $ | 114 | | | $ | 518 | | | $ | 1,609,038 | | | $ | 1,609,556 | |
CRE owner occupied | — | | | | | 293 | | | 293 | | | 546,141 | | | 546,434 | |
Multifamily | 283 | | | — | | | 2,024 | | | 2,307 | | | 515,418 | | | 517,725 | |
Farmland | 30 | | 0 | | 0 | | 30 | | 145,037 | | 145,067 |
Total commercial real estate loans | 581 | | | 136 | | | 2,431 | | | 3,148 | | | 2,815,634 | | | 2,818,782 | |
Consumer: | | | | | | | | | | | |
SFR 1-4 1st DT liens | 1,149 | | | 371 | | | 1,957 | | | 3,477 | | | 506,031 | | | 509,508 | |
SFR HELOCs and junior liens | 1,258 | | | 580 | | | 1,088 | | | 2,926 | | | 359,960 | | | 362,886 | |
Other | 172 | | | 1 | | | 23 | | | 196 | | | 82,460 | | | 82,656 | |
Total consumer loans | 2,579 | | 952 | | 3,068 | | 6,599 | | 948,451 | | 955,050 |
Commercial and industrial | 603 | | | 297 | | | 24 | | | 924 | | | 248,867 | | | 249,791 | |
Construction | — | | | — | | | — | | | — | | | 249,827 | | | 249,827 | |
Agriculture production | 49 | | | — | | | — | | | 49 | | | 32,584 | | | 32,633 | |
Leases | — | | | — | | | — | | | — | | | 1,283 | | | 1,283 | |
Total | $ | 3,812 | | | $ | 1,385 | | | $ | 5,523 | | | $ | 10,720 | | | $ | 4,296,646 | | | $ | 4,307,366 | |
The following table shows the ending balance of current and past due PNCInon accrual loans by loan category as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Analysis of PNCI Past Due Loans - As of December 31, 2018 | | | | | | | | | | | | |
(in thousands) | 30-59 days | | 60-89 days | | > 90 days | | Total Past Due Loans | | Current | | Total | | > 90 Days and Still Accruing |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 1,009 | | | $ | 133 | | | $ | 156 | | | $ | 1,298 | | | $ | 168,494 | | | $ | 169,792 | | | $ | — | |
Commercial | 1,646 | | | 1,136 | | | 1,082 | | | 3,864 | | | 704,537 | | | 708,401 | | | — | |
Total mortgage loans on real estate | 2,655 | | | 1,269 | | | 1,238 | | | 5,162 | | | 873,031 | | | 878,193 | | | — | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 304 | | | 35 | | | 237 | | | 576 | | | 40,381 | | | 40,957 | | | — | |
Home equity loans | 74 | | | — | | | — | | | 74 | | | 3,511 | | | 3,585 | | | — | |
Other | 160 | | | — | | | — | | | 160 | | | 21,499 | | | 21,659 | | | — | |
Total consumer loans | 538 | | | 35 | | | 237 | | | 810 | | | 65,391 | | | 66,201 | | | — | |
Commercial | 678 | | | 145 | | | 113 | | | 936 | | | 44,532 | | | 45,468 | | | — | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | 30,593 | | | 30,593 | | | — | |
Commercial | — | | | — | | | — | | | — | | | 5,880 | | | 5,880 | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | 36,473 | | | 36,473 | | | — | |
Total loans | $ | 3,871 | | | $ | 1,449 | | | $ | 1,588 | | | $ | 6,908 | | | $ | 1,019,427 | | | $ | 1,026,335 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non Accrual Loans | | | | | | | | | | |
| As of June 30, 2020 | | | | | | As of December 31, 2019 | | | | |
(in thousands) | Non accrual with no allowance for credit losses | | Total non accrual | | Past due 90 days or more and still accruing | | Non accrual with no allowance for credit losses | | Total non accrual | | Past due 90 days or more and still accruing |
Commercial real estate: | | | | | | | | | | | |
CRE non-owner occupied | $ | 677 | | | $ | 677 | | | $ | — | | | $ | 639 | | | $ | 642 | | | $ | — | |
CRE owner occupied | 2,266 | | | 2,409 | | | — | | | 1,411 | | | 1,408 | | | — | |
Multifamily | 2,024 | | | 2,024 | | | — | | | 2,024 | | | 2,024 | | | — | |
Farmland | 1,819 | | | 1,819 | | | — | | | 1,242 | | | 1,242 | | | — | |
Total commercial real estate loans | 6,786 | | | 6,929 | | | — | | | 5,316 | | | 5,316 | | | — | |
Consumer: | | | | | | | | | | | |
SFR 1-4 1st DT liens | 5,737 | | | 6,719 | | | — | | | 5,023 | | | 5,192 | | | — | |
SFR HELOCs and junior liens | 4,128 | | | 5,665 | | | — | | | 3,992 | | | 4,217 | | | — | |
Other | 82 | | | 105 | | | 1 | | | 4 | | | 32 | | | 19 | |
Total consumer loans | 9,947 | | | 12,489 | | | 1 | | | 9,019 | | | 9,441 | | | 19 | |
Commercial and industrial | 973 | | | 1,680 | | | 30 | | | 476 | | | 2,050 | | | — | |
Construction | — | | | — | | | — | | | — | | | — | | | — | |
Agriculture production | 282 | | | 445 | | | — | | | 14 | | | 38 | | | — | |
Leases | — | | | — | | | — | | | | | | | — | |
Sub-total | 17,988 | | 21,543 | | 31 | | 14,825 | | 16,845 | | 19 |
Less: Guaranteed loans | (813) | | | (813) | | | — | | | (916) | | | (990) | | | — | |
Total, net | $ | 17,175 | | | $ | 20,730 | | | $ | 31 | | | $ | 13,909 | | | $ | 15,855 | | | $ | 19 | |
Interest income on originated nonaccrualnon accrual loans that would have been recognized during the three months ended SeptemberJune 30, 20192020 and 2018,2019, if all such loans had been current in accordance with their original terms, totaled $124,000$428,000 and $338,000,$449,000, respectively. Interest income actually recognized on these originated loans during the three months ended SeptemberJune 30, 2020 and 2019 was $39,000 and 2018 was $59,000 and $59,000,$164,000, respectively.
Interest income on PNCI nonaccrualnon accrual loans that would have been recognized during the threesix months ended SeptemberJune 30, 20192020 and 2018,2019, if all such loans had been current in accordance with their original terms, totaled $201,000$859,000 and $39,000, respectively. Interest income actually recognized on these PNCI loans during the three months ended September 30, 2019 and 2018 was $92,000 and $12,000.
Interest income on originated nonaccrual loans that would have been recognized during the nine months ended September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $692,000 and $964,000,$849,000, respectively. Interest income actually recognized on these originated loans during the ninesix months ended SeptemberJune 30, 2020 and 2019 was $86,000 and 2018 was $145,000 and $133,000,$257,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the nine months ended September 30, 2019 and 2018, if all such loans had been current in accordance with their original terms, totaled $322,000 and $93,000, respectively. Interest income actually recognized on these PNCI loans during the nine months ended September 30, 2019 and 2018 was $152,000 and $23,000.
The following table shows the ending balance of nonaccrual originated and PNCI loans by loan category as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non Accrual Loans | | | | | | | | | | |
| As of September 30, 2019 | | | | | | As of December 31, 2018 | | | | |
(in thousands) | Originated | | PNCI | | Total | | Originated | | PNCI | | Total |
Mortgage loans on real estate: | | | | | | | | | | | |
Residential 1-4 family | $ | 2,820 | | | $ | 908 | | | $ | 3,728 | | | $ | 3,244 | | | $ | 334 | | | $ | 3,578 | |
Commercial | 2,532 | | | 3,253 | | | 5,785 | | | 9,263 | | | 1,468 | | | 10,731 | |
Total mortgage loans on real estate | 5,352 | | | 4,161 | | | 9,513 | | | 12,507 | | | 1,802 | | | 14,309 | |
Consumer: | | | | | | | | | | | |
Home equity lines of credit | 1,188 | | | 426 | | | 1,614 | | | 1,429 | | | 885 | | | 2,314 | |
Home equity loans | 1,405 | | | 263 | | | 1,668 | | | 1,722 | | | 47 | | | 1,769 | |
Other | 90 | | | 3 | | | 93 | | | 3 | | | 4 | | | 7 | |
Total consumer loans | 2,683 | | | 692 | | | 3,375 | | | 3,154 | | | 936 | | | 4,090 | |
Commercial | 3,225 | | | 174 | | | 3,399 | | | 3,755 | | | 120 | | | 3,875 | |
Construction: | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | |
Total construction | — | | | — | | | — | | | — | | | — | | | — | |
Total non accrual loans | $ | 11,260 | | | $ | 5,027 | | | $ | 16,287 | | | $ | 19,416 | | | $ | 2,858 | | | $ | 22,274 | |
Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due in accordance with the original contractual terms of the loan agreement. The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated. The average recorded investment in impaired loans and interest income recognized on impaired loans during the three months ended September 30, 2019 and 2018 was not considered significant for financial reporting purposes.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired Originated Loans – As of, or for the Nine months ended September 30, 2019 | | | | | | | | | | | | |
(in thousands) | Unpaid principal balance | | Recorded investment with no related allowance | | Recorded investment with related allowance | | Total recorded investment | | Related Allowance | | Average recorded investment | | Interest income recognized |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 4,461 | | | $ | 3,053 | | | $ | 796 | | | $ | 3,849 | | | $ | 91 | | | $ | 4,214 | | | $ | 32 | |
Commercial | 6,006 | | | 4,423 | | | 1,329 | | | 5,752 | | | 26 | | | 9,096 | | | 59 | |
Total mortgage loans on real estate | 10,467 | | | 7,476 | | | 2,125 | | | 9,601 | | | 117 | | | 13,310 | | | 91 | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 1,279 | | | 1,232 | | | — | | | 1,232 | | | — | | | 1,662 | | | 26 | |
Home equity loans | 2,157 | | | 1,542 | | | 238 | | | 1,780 | | | 46 | | | 1,973 | | | 5 | |
Other | 74 | | | 3 | | | 51 | | | 54 | | | 14 | | | 46 | | | 1 | |
Total consumer loans | 3,510 | | | 2,777 | | | 289 | | | 3,066 | | | 60 | | | 3,681 | | | 32 | |
Commercial | 4,760 | | | 611 | | | 3,716 | | | 4,327 | | | 1,199 | | | 4,769 | | | 22 | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 18,737 | | | $ | 10,864 | | | $ | 6,130 | | | $ | 16,994 | | | $ | 1,376 | | | $ | 21,760 | | | $ | 145 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired PNCI Loans – As of, or for the Nine months ended September 30, 2019 | | | | | | | | | | | | |
(in thousands) | Unpaid principal balance | | Recorded investment with no related allowance | | Recorded investment with related allowance | | Total recorded investment | | Related Allowance | | Average recorded investment | | Interest income recognized |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 959 | | | $ | 908 | | | $ | — | | | $ | 908 | | | $ | — | | | $ | 621 | | | $ | 9 | |
Commercial | 3,255 | | | 3,253 | | | — | | | 3,253 | | | — | | | 2,360 | | | 134 | |
Total mortgage loans on real estate | 4,214 | | | 4,161 | | | — | | | 4,161 | | | — | | | 2,981 | | | 143 | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 741 | | | 444 | | | 241 | | | 685 | | | 84 | | | 844 | | | — | |
Home equity loans | 395 | | | 376 | | | — | | | 376 | | | — | | | 308 | | | 9 | |
Other | 95 | | | 72 | | | 23 | | | 95 | | | 4 | | | 103 | | | — | |
Total consumer loans | 1,231 | | | 892 | | | 264 | | | 1,156 | | | 88 | | | 1,255 | | | 9 | |
Commercial | 181 | | | 113 | | | 60 | | | 173 | | | 60 | | | 147 | | | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 5,626 | | | $ | 5,166 | | | $ | 324 | | | $ | 5,490 | | | $ | 148 | | | $ | 4,383 | | | $ | 152 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2018 | | | | | | | | | | | | |
(in thousands) | Unpaid principal balance | | Recorded investment with no related allowance | | Recorded investment with related allowance | | Total recorded investment | | Related Allowance | | Average recorded investment | | Interest income recognized |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 4,594 | | | $ | 3,663 | | | $ | 308 | | | $ | 3,971 | | | $ | 56 | | | $ | 3,517 | | | $ | 90 | |
Commercial | 13,081 | | | 10,676 | | | 1,765 | | | 12,441 | | | 42 | | | 13,115 | | | 137 | |
Total mortgage loans on real estate | 17,675 | | | 14,339 | | | 2,073 | | | 16,412 | | | 98 | | | 16,632 | | | 227 | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 1,900 | | | 1,749 | | | 111 | | | 1,860 | | | 71 | | | 1,885 | | | 43 | |
Home equity loans | 2,374 | | | 1,892 | | | 65 | | | 1,957 | | | 2 | | | 1,520 | | | 23 | |
Other | 3 | | | — | | | 3 | | | 3 | | | 3 | | | 17 | | | 2 | |
Total consumer loans | 4,277 | | | 3,641 | | | 179 | | | 3,820 | | | 76 | | | 3,422 | | | 68 | |
Commercial | 5,433 | | | 2,924 | | | 2,287 | | | 5,211 | | | 1,774 | | | 4,654 | | | 91 | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | 5 | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | 5 | | | — | |
Total | $ | 27,385 | | | $ | 20,904 | | | $ | 4,539 | | | $ | 25,443 | | | $ | 1,948 | | | $ | 24,713 | | | $ | 386 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2018 | | | | | | | | | | | | |
(in thousands) | Unpaid principal balance | | Recorded investment with no related allowance | | Recorded investment with related allowance | | Total recorded investment | | Related Allowance | | Average recorded investment | | Interest income recognized |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 375 | | | $ | 334 | | | $ | — | | | $ | 334 | | | $ | — | | | $ | 529 | | | $ | 5 | |
Commercial | 3,110 | | | 1,468 | | | — | | | 1,468 | | | — | | | 1,713 | | | 183 | |
Total mortgage loans on real estate | 3,485 | | | 1,802 | | | — | | | 1,802 | | | — | | | 2,242 | | | 188 | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 1,027 | | | 587 | | | 367 | | | 954 | | | 127 | | | 1,120 | | | 18 | |
Home equity loans | 252 | | | 47 | | | 197 | | | 244 | | | 101 | | | 155 | | | — | |
Other | 106 | | | 21 | | | 85 | | | 106 | | | 11 | | | 114 | | | — | |
Total consumer loans | 1,385 | | | 655 | | | 649 | | | 1,304 | | | 239 | | | 1,389 | | | 18 | |
Commercial | 120 | | | 113 | | | 7 | | | 120 | | | 7 | | | 60 | | | 1 | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 4,990 | | | $ | 2,570 | | | $ | 656 | | | $ | 3,226 | | | $ | 246 | | | $ | 3,691 | | | $ | 207 | |
The following tables present the amortized cost basis of collateral dependent loans by class of loans as of the following periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired Originated Loans – As of, or for the Nine months ended September 30, 2018 | | | | | | | | | | | | |
(in thousands) | Unpaid principal balance | | Recorded investment with no related allowance | | Recorded investment with related allowance | | Total recorded investment | | Related Allowance | | Average recorded investment | | Interest income recognized |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 4,185 | | | $ | 3,251 | | | $ | 311 | | | $ | 3,562 | | | $ | 57 | | | $ | 3,883 | | | $ | 67 | |
Commercial | 12,553 | | | 9,619 | | | 2,370 | | | 11,989 | | | 268 | | | 11,549 | | | 208 | |
Total mortgage loans on real estate | 16,738 | | | 12,870 | | | 2,681 | | | 15,551 | | | 325 | | | 15,432 | | | 275 | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 1,444 | | | 1,346 | | | 59 | | | 1,405 | | | 19 | | | 1,410 | | | 32 | |
Home equity loans | 2,554 | | | 1,960 | | | 157 | | | 2,117 | | | 30 | | | 1,753 | | | 24 | |
Other | 3 | | | — | | | 3 | | | 3 | | | 3 | | | 3 | | | — | |
Total consumer loans | 4,001 | | | 3,306 | | | 219 | | | 3,525 | | | 52 | | | 3,166 | | | 56 | |
Commercial | 4,868 | | | 2,135 | | | 2,497 | | | 4,632 | | | 1,857 | | | 4,626 | | | 78 | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | 68 | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | 68 | | | — | |
Total | $ | 25,607 | | | $ | 18,311 | | | $ | 5,397 | | | $ | 23,708 | | | $ | 2,234 | | | $ | 23,292 | | | $ | 409 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Retail | | Office | | Warehouse | | Other | | Multifamily | | Farmland | | SFR -1st Deed | | SFR -2nd Deed | | Automobile/Truck | | A/R and Inventory | | Equipment | | Total |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | |
CRE non-owner occupied | $ | 677 | | | $ | — | | | $ | 1,207 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,884 | |
CRE owner occupied | 833 | | | 1,023 | | | 630 | | | 451 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,937 | |
Multifamily | — | | | — | | | — | | | — | | | 2,024 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,024 | |
Farmland | — | | | — | | | — | | | — | | | — | | | 1,368 | | | — | | | — | | | — | | | — | | | — | | | 1,368 | |
Total commercial real estate loans | 1,510 | | | 1,023 | | | 1,837 | | | 451 | | | 2,024 | | | 1,368 | | | — | | | — | | | — | | | — | | | — | | | 8,213 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | |
SFR 1-4 1st DT liens | — | | | — | | | — | | | — | | | — | | | — | | | 6,055 | | | — | | | — | | | — | | | — | | | 6,055 | |
SFR HELOCs and junior liens | — | | | — | | | — | | | — | | | — | | | — | | | 1,105 | | | 3,569 | | | — | | | — | | | — | | | 4,674 | |
Other | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 83 | | | — | | | — | | | 86 | |
Total consumer loans | — | | | — | | | — | | | 3 | | | — | | | — | | | 7,160 | | | 3,569 | | | 83 | | | — | | | — | | | 10,815 | |
Commercial and industrial | — | | | — | | | — | | | 9 | | | — | | | — | | | — | | | — | | | — | | | 1,413 | | | 212 | | | 1,634 | |
Construction | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Agriculture production | — | | | — | | | — | | | 426 | | | — | | | — | | | — | | | — | | | — | | | 13 | | | 6 | | | 445 | |
Leases | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 1,510 | | | $ | 1,023 | | | $ | 1,837 | | | $ | 889 | | | $ | 2,024 | | | $ | 1,368 | | | $ | 7,160 | | | $ | 3,569 | | | $ | 83 | | | $ | 1,426 | | | $ | 218 | | | $ | 21,107 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Retail | | Office | | Warehouse | | Other | | Multifamily | | Farmland | | SFR -1st Deed | | SFR -2nd Deed | | Automobile/Truck | | A/R and Inventory | | Equipment | | Total |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | |
CRE non-owner occupied | $ | 2,145 | | | $ | — | | | $ | 1,220 | | | $ | 497 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,862 | |
CRE owner occupied | 361 | | | 163 | | | 420 | | | 13 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,000 | | | 1,957 | |
Multifamily | — | | | — | | | — | | | — | | | 2,060 | | | — | | | — | | | — | | | — | | | — | | | ��� | | | 2,060 | |
Farmland | — | | | — | | | — | | | — | | | — | | — | 1,242 | | | — | | | — | | | — | | | — | | | — | | | 1,242 | |
Total commercial real estate loans | 2,506 | | | 163 | | | 1,640 | | | 510 | | | 2,060 | | | 1,242 | | | — | | | — | | | — | | | — | | | 1,000 | | | 9,121 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | |
SFR 1-4 1st DT liens | — | | | — | | | — | | | — | | | — | | | — | | | 5,341 | | | — | | | — | | | — | | | — | | | 5,341 | |
SFR HELOCs and junior liens | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,848 | | | — | | | — | | | — | | | 3,848 | |
Other | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 27 | | | — | | | — | | | 30 | |
Total consumer loans | — | | | — | | | — | | | 3 | | | — | | | — | | | 5,341 | | | 3,848 | | | 27 | | | — | | | — | | | 9,219 | |
Commercial and industrial | — | | | — | | | — | | | 107 | | | — | | | — | | | — | | | — | | | — | | | 1,926 | | | 14 | | | 2,047 | |
Construction | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Agriculture production | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 26 | | | 12 | | | 38 | |
Leases | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 2,506 | | | $ | 163 | | | $ | 1,640 | | | $ | 620 | | | $ | 2,060 | | | $ | 1,242 | | | $ | 5,341 | | | $ | 3,848 | | | $ | 27 | | | $ | 1,952 | | | $ | 1,026 | | | $ | 20,425 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired PNCI Loans – As of, or for the Nine months ended September 30, 2018 | | | | | | | | | | | | |
(in thousands) | Unpaid principal balance | | Recorded investment with no related allowance | | Recorded investment with related allowance | | Total recorded investment | | Related Allowance | | Average recorded investment | | Interest income recognized |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | $ | 1,302 | | | $ | 1,219 | | | $ | — | | | $ | 1,219 | | | $ | — | | | $ | 1,275 | | | $ | — | |
Commercial | 1,255 | | | 1,255 | | | — | | | 1,255 | | | — | | | 627 | | | 58 | |
Total mortgage loans on real estate | 2,557 | | | 2,474 | | | — | | | 2,474 | | | — | | | 1,902 | | | 58 | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 852 | | | 625 | | | 158 | | | 783 | | | 149 | | | 909 | | | 13 | |
Home equity loans | 296 | | | 50 | | | 239 | | | 289 | | | 145 | | | 287 | | | 9 | |
Other | 240 | | | — | | | 240 | | | 240 | | | 100 | | | 257 | | | 7 | |
Total consumer loans | 1,388 | | | 675 | | | 637 | | | 1,312 | | | 394 | | | 1,453 | | | 29 | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 3,945 | | | $ | 3,149 | | | $ | 637 | | | $ | 3,786 | | | $ | 394 | | | $ | 3,355 | | | $ | 87 | |
Originated loansThe CARES Act, in addition to providing financial assistance to both businesses and consumers, provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with concurrence of the Financial Accounting Standards Board and provisions of the CARES Act, allow modifications made on a good faith basis in response to COVID-19 to borrowers who were generally current with their payments prior to any relief, to not be treated as troubled debt restructurings. To the extent that such modifications meet the criteria previously described, such modifications are not expected to be classified as TDRs and impaired were $8,556,000, $10,253,000, and $8,845,000 at September 30, 2019, December 31, 2018, and September 30, 2018, respectively. PNCI loans classified as TDRs and impaired were $738,000, $615,000, and $840,000 at September 30, 2019, December 31, 2018 and September 30, 2018, respectively. The Company had no significant obligations to lend additional funds on Originated or PNCI TDRs as of September 30, 2019, December 31, 2018, or September 30, 2018.
troubled debt restructurings. The following tables show certain information regarding TDRs that occurred during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TDR Information for the three months ended September 30, 2019 | | | | | | | | | | | | |
(dollars in thousands) | Number | | Pre-mod outstanding principal balance | | Post-mod outstanding principal balance | | Financial impact due to TDR taken as additional provision | | Number that defaulted during the period | | Recorded investment of TDRs that defaulted during the period | | Financial impact due to the default of previous TDR taken as charge- offs or additional provisions |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | 2 | | | | $ | 496 | | | | $ | 500 | | | $ | 30 | | | — | | | $ | — | | | $ | — | |
Commercial | 2 | | | 60 | | | 67 | | | — | | | — | | | — | | | — | |
Total mortgage loans on real estate | 4 | | | 556 | | | 567 | | | 30 | | | — | | | — | | | — | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Home equity loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | 4 | | | 150 | | | 148 | | | (2) | | | — | | | | — | | | — | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 4 | | | $ | 706 | | | $ | 715 | | | $ | 28 | | | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TDR information for the three months ended June 30, 2020 | | | | | | | | | | | | |
(dollars in thousands) | Number | | Pre-mod outstanding principal balance | | Post-mod outstanding principal balance | | Financial impact due to TDR taken as additional provision | | Number that defaulted during the period | | Recorded investment of TDRs that defaulted during the period | | Financial impact due to the default of previous TDR taken as charge- offs or additional provisions |
Commercial real estate: | | | | | | | | | | | | | |
CRE non-owner occupied | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
CRE owner occupied | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Multifamily | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Farmland | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Total commercial real estate loans | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Consumer: | | | | | | | | | | | | | |
SFR 1-4 1st DT liens | — | | | $ | — | | | $ | — | | | $ | — | | | 1 | | | $ | 735 | | | $ | — | |
SFR HELOCs and junior liens | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Other | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Total consumer loans | — | | | $ | — | | | $ | — | | | $ | — | | | 1 | | | $ | 735 | | | $ | — | |
Commercial and industrial | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Construction | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Agriculture production | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Leases | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
Total | — | | | $ | — | | | $ | — | | | $ | — | | | 1 | | | $ | 735 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TDR information for the three months ended June 30, 2019 | | | | | | | | | | | | |
(dollars in thousands) | Number | | Pre-mod outstanding principal balance | | Post-mod outstanding principal balance | | Financial impact due to TDR taken as additional provision | | Number that defaulted during the period | | Recorded investment of TDRs that defaulted during the period | | Financial impact due to the default of previous TDR taken as charge- offs or additional provisions |
Commercial real estate: | | | | | | | | | | | | | |
CRE non-owner occupied | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
CRE owner occupied | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Multifamily | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Farmland | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial real estate loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer: | | | | | | | | | | | | | |
SFR 1-4 1st DT liens | — | | | — | | | — | | | — | | | — | | | — | | | — | |
SFR HELOCs and junior liens | 2 | | | 93 | | | 95 | | | 27 | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | 2 | | | 93 | | | 95 | | | 27 | | | | | | | — | |
Commercial and industrial | 4 | | | 1,754 | | | 1,722 | | | 2 | | | — | | | — | | | — | |
Construction | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Agriculture production | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Leases | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 6 | | | $ | 1,847 | | | $ | 1,817 | | | $ | 29 | | | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TDR Information for the nine months ended September 30, 2019 | | | | | | | | | | | | |
(dollars in thousands) | Number | | Pre-mod outstanding principal balance | | Post-mod outstanding principal balance | | Financial impact due to TDR taken as additional provision | | Number that defaulted during the period | | Recorded investment of TDRs that defaulted during the period | | Financial impact due to the default of previous TDR taken as charge- offs or additional provisions |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | 3 | | | $ | 659 | | | $ | 662 | | | $ | 30 | | | $ | — | | | $ | — | | | $ | — | |
Commercial | 2 | | | 60 | | | 67 | | | — | | | — | | | — | | | — | |
Total mortgage loans on real estate | 5 | | | 719 | | | 729 | | | 30 | | | — | | | — | | | — | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 1 | | | 65 | | | 68 | | | — | | | — | | | — | | | — | |
Home equity loans | 2 | | | 149 | | | 147 | | | 29 | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | 3 | | | 214 | | | 215 | | | 29 | | | — | | | — | | | — | |
Commercial | 10 | | | 1,918 | | | 1,885 | | | — | | | 1 | | | 7 | | | — | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 18 | | | $ | 2,851 | | | $ | 2,829 | | | $ | 59 | | | $ | 1 | | | $ | 7 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TDR Information for the six months ended June 30, 2020 | | | | | | | | | | | | |
(dollars in thousands) | Number | | Pre-mod outstanding principal balance | | Post-mod outstanding principal balance | | Financial impact due to TDR taken as additional provision | | Number that defaulted during the period | | Recorded investment of TDRs that defaulted during the period | | Financial impact due to the default of previous TDR taken as charge- offs or additional provisions |
Commercial real estate: | | | | | | | | | | | | | |
CRE non-owner occupied | 1 | | | $ | 257 | | | $ | 251 | | | $ | — | | | — | | | $ | — | | | $ | — | |
CRE owner occupied | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Multifamily | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Farmland | 2 | | | 230 | | | 298 | | | — | | | — | | | — | | | — | |
Total commercial real estate loans | 3 | | | 487 | | | 549 | | | — | | | — | | | — | | | — | |
Consumer: | | | | | | | | | | | | | |
SFR 1-4 1st DT liens | — | | | — | | | — | | | — | | | 2 | | | 1,037 | | | — | |
SFR HELOCs and junior liens | 2 | | | 172 | | | 169 | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | 2 | | | 172 | | | 169 | | | — | | | 2 | | | 1,037 | | | — | |
Commercial and industrial | 1 | | | 21 | | | 20 | | | 21 | | | — | | | — | | | — | |
Construction | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Agriculture production | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Leases | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 6 | | | $ | 680 | | | $ | 738 | | | $ | 21 | | | 2 | | | $ | 1,037 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TDR Information for the three months ended September 30, 2018 | | | | | | | | | | | | |
(dollars in thousands) | Number | | Pre-mod outstanding principal balance | | Post-mod outstanding principal balance | | Financial impact due to TDR taken as additional provision | | Number that defaulted during the period | | Recorded investment of TDRs that defaulted during the period | | Financial impact due to the default of previous TDR taken as charge- offs or additional provisions |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Commercial | 4 | | | 1,326 | | | 1,324 | | | (308) | | | — | | | — | | | — | |
Total mortgage loans on real estate | 4 | | | 1,326 | | | 1,324 | | | (308) | | | — | | | — | | | — | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | — | | | | — | | | | — | | | — | | | 1 | | | 128 | | | — | |
Home equity loans | 1 | | 478 | | 478 | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | 1 | | | 478 | | | 478 | | | — | | | 1 | | | 128 | | | — | |
Commercial | 2 | | | 203 | | | 203 | | | — | | | — | | | — | | | — | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 7 | | | $ | 2,007 | | | $ | 2,005 | | | $ | (308) | | | $ | 1 | | | $ | 128 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| TDR Information for the six months ended June 30, 2019 | | | | | | | | | | | | |
(dollars in thousands) | Number | | Pre-mod outstanding principal balance | | Post-mod outstanding principal balance | | Financial impact due to TDR taken as additional provision | | Number that defaulted during the period | | Recorded investment of TDRs that defaulted during the period | | Financial impact due to the default of previous TDR taken as charge- offs or additional provisions |
Commercial real estate: | | | | | | | | | | | | | |
CRE non-owner occupied | — | | | $ | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
CRE owner occupied | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Multifamily | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Farmland | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial real estate loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer: | | | | | | | | | | | | | |
SFR 1-4 1st DT liens | 1 | | | 163 | | | 162 | | | — | | | — | | | — | | | — | |
SFR HELOCs and junior liens | 3 | | | 214 | | | 215 | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | 4 | | | 377 | | | 377 | | | — | | | — | | | — | | | — | |
Commercial and industrial | 6 | | | 1,768 | | | 1,737 | | | 31 | | | 1 | | | 7 | | | — | |
Construction | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Agriculture production | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Leases | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 10 | | | $ | 2,145 | | | $ | 2,114 | | | $ | 31 | | | 1 | | | $ | 7 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TDR Information for the nine months ended September 30, 2018 | | | | | | | | | | | | |
(dollars in thousands) | Number | | Pre-mod outstanding principal balance | | Post-mod outstanding principal balance | | Financial impact due to TDR taken as additional provision | | Number that defaulted during the period | | Recorded investment of TDRs that defaulted during the period | | Financial impact due to the default of previous TDR taken as charge- offs or additional provisions |
Mortgage loans on real estate: | | | | | | | | | | | | | |
Residential 1-4 family | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Commercial | 6 | | | 1,743 | | | 1,741 | | | (262) | | | 1 | | | 169 | | | — | |
Total mortgage loans on real estate | 6 | | | 1,743 | | | 1,741 | | | (262) | | | 1 | | | 169 | | | — | |
Consumer: | | | | | | | | | | | | | |
Home equity lines of credit | 1 | | | 133 | | | 138 | | | — | | | 1 | | | 128 | | | — | |
Home equity loans | 2 | | | 599 | | | 599 | | | — | | | — | | | — | | | — | |
Other | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | 3 | | | 732 | | | 737 | | | — | | | 1 | | | 128 | | | — | |
Commercial | 4 | | | 619 | | | 623 | | | (3) | | | 4 | | | 340 | | | (2) | |
Construction: | | | | | | | | | | | | | |
Residential | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction loans | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 13 | | | $ | 3,094 | | | $ | 3,101 | | | $ | (265) | | | $ | 6 | | | $ | 637 | | | $ | (2) | |
select loans in an effort to assist borrowers that were not related to the COVID-19 pandemic. If the borrower was experiencing financial difficulty and a concession was granted, the Company considered such modifications as troubled debt restructurings. Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions. The objective of the modifications was to increase loan repayments by customers and thereby reduce net charge-offs. The modified loans are included in impaired loans for purposes of determining the level of the allowance for credit losses.
For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined
not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above.
Typically if a TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting from default of previously modified TDR’s are noted above. Loans that defaulted within the twelve month period subsequent to modification were not considered significant for financial reporting purposes.
Note 65 - Leases
The Company adopted ASU 2016-2 “Leases” (Topic 842) as of January 1, 2019, which requires the Company to recordrecords a right-of-use asset (“ROUA”) on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company is also required to recordrecords a lease liability on the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is lessee of real estate property for branches, ATM locations, and general administration and operations. The Company elected not to include short-term leases (i.e. leases with initial terms of twelve months12 or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance were unknown and not determinable at lease commencement and therefore, were not included in the determination of the Company’s ROUA or lease liability.
The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one1 or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the
ROU asset and lease liability. Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a
collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the amount of lease liability and adjusted for prepaid or accrued lease payments, remaining lease incentives, unamortized direct costs (if any), and impairment (if any).
The following table presents the components of lease expense for the three and nine months ended September 30, 2019:periods ended:
| | | | | | | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
(in thousands) | (in thousands) | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | |
Operating lease cost | Operating lease cost | $ | 1,306 | | | $ | 3,924 | | Operating lease cost | $ | 1,291 | | | $ | 1,310 | | | $ | 2,586 | | | $ | 2,621 | | |
Short-term lease cost | Short-term lease cost | 65 | | | 194 | | Short-term lease cost | 65 | | | 58 | | | 128 | | | 129 | | |
Variable lease cost | Variable lease cost | (13) | | | (33) | | Variable lease cost | 1 | | | (17) | | | 6 | | | (22) | | |
Sublease income | Sublease income | (32) | | | (98) | | Sublease income | (35) | | | (32) | | | (69) | | | (66) | | |
Total lease cost | Total lease cost | $ | 1,326 | | | $ | 3,987 | | Total lease cost | $ | 1,322 | | | $ | 1,319 | | | $ | 2,651 | | | $ | 2,662 | | |
Prior to the adoption of ASU 2016-2, rent expense under operating leases was $1,161,000 and $2,937,000 during the three and nine months ended September 30, 2018, respectively. Rent expense was offset by rent income of $10,000 and $31,000 during the three and nine months ended September 30, 2018, respectively.
The following table presents supplemental cash flow information related to leases for the nine months ended September 30, 2019:periods ended:
| | | | | | | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
(in thousands) | (in thousands) | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows for operating leases | Operating cash flows for operating leases | $ | 1,236 | | | $ | 3,683 | | Operating cash flows for operating leases | $ | 1,243 | | | $ | 1,229 | | | $ | 2,480 | | | $ | 2,447 | | |
ROUA obtained in exchange for operating lease liabilities | ROUA obtained in exchange for operating lease liabilities | $ | — | | | $ | 32,162 | | ROUA obtained in exchange for operating lease liabilities | $ | 675 | | | $ | 156 | | | $ | 4,068 | | | $ | 32,162 | | |
The following table presents the weighted average operating lease term and discount rate at September 30, 2019:as of the period ended:
| | | | | |
| |
Weighted-average remaining lease term | 9.4 years |
Weighted-average discount rate | 3.19 | % |
| | | | | | | | | | | | | |
| As of June 30, | | | | |
| 2020 | | 2019 | | |
Weighted-average remaining lease term (years) | 10.3 | | 9.5 | | |
Weighted-average discount rate | 3.17 | % | | 3.18 | % | | |
At SeptemberJune 30, 2019,2020, future expected operating lease payments are as follows:
| (in thousands) | (in thousands) | | (in thousands) | |
Periods ending December 31, | Periods ending December 31, | | Periods ending December 31, | |
2019 | $ | 1,180 | | |
2020 | 2020 | 4,389 | | 2020 | $ | 2,311 | |
2021 | 2021 | 4,235 | | 2021 | 4,561 | |
2022 | 2022 | 3,896 | | 2022 | 4,225 | |
2023 | 2023 | 3,216 | | 2023 | 3,549 | |
2024 | | 2024 | 3,273 | |
Thereafter | Thereafter | 16,682 | | Thereafter | 17,398 | |
| | 33,598 | | | 35,317 | |
Discount for present value of expected cash flows | Discount for present value of expected cash flows | (5,104) | | Discount for present value of expected cash flows | (5,574) | |
Lease liability at September 30, 2019 | $ | 28,494 | | |
Lease liability at June 30, 2020 | | Lease liability at June 30, 2020 | $ | 29,743 | |
Note 76 - Deposits
A summary of the balances of deposits follows (in thousands):
| | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
Noninterest-bearing demand | Noninterest-bearing demand | $ | 1,777,357 | | | $ | 1,760,580 | | Noninterest-bearing demand | $ | 2,487,120 | | | $ | 1,832,665 | |
Interest-bearing demand | Interest-bearing demand | 1,222,955 | | | 1,252,366 | | Interest-bearing demand | 1,318,951 | | | 1,242,274 | |
Savings | Savings | 1,843,873 | | | 1,921,324 | | Savings | 2,043,593 | | | 1,851,549 | |
Time certificates, $250,000 or more | Time certificates, $250,000 or more | 148,449 | | | 132,429 | | Time certificates, $250,000 or more | 102,434 | | | 129,061 | |
Other time certificates | Other time certificates | 302,773 | | | 299,767 | | Other time certificates | 296,160 | | | 311,445 | |
Total deposits | Total deposits | $ | 5,295,407 | | | $ | 5,366,466 | | Total deposits | $ | 6,248,258 | | | $ | 5,366,994 | |
Certificate of deposit balances of $50,000,000 and $60,000,000$30,000,000 from the State of California were included in time certificates, over $250,000, at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company. Overdrawn deposit balances of $1,431,000$847,000 and $1,469,000$1,550,000 were classified as consumer loans at SeptemberJune 30, 20192020 and December 31, 2018, respectively2019, respectively.
Note 87 - Commitments and Contingencies
The following table presents a summary of the Bank’s commitments and contingent liabilities:
| (in thousands) | (in thousands) | September 30, 2019 | | December 31, 2018 | (in thousands) | June 30, 2020 | | December 31, 2019 |
Financial instruments whose amounts represent risk: | Financial instruments whose amounts represent risk: | | | | Financial instruments whose amounts represent risk: | | | |
Commitments to extend credit: | Commitments to extend credit: | | Commitments to extend credit: | |
Commercial loans | Commercial loans | $ | 325,681 | | | $ | 306,191 | | Commercial loans | $ | 391,333 | | | $ | 363,793 | |
Consumer loans | Consumer loans | 512,345 | | | 496,575 | | Consumer loans | 541,569 | | | 533,576 | |
Real estate mortgage loans | Real estate mortgage loans | 189,700 | | | 140,292 | | Real estate mortgage loans | 208,973 | | | 188,959 | |
Real estate construction loans | Real estate construction loans | 182,701 | | | 248,996 | | Real estate construction loans | 224,701 | | | 222,998 | |
Standby letters of credit | Standby letters of credit | 12,368 | | | 11,346 | | Standby letters of credit | 11,034 | | | 12,014 | |
Deposit account overdraft privilege | Deposit account overdraft privilege | 111,187 | | | 111,956 | | Deposit account overdraft privilege | 110,468 | | | 110,402 | |
Note 98 - Shareholders’ Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of $7,011,000$12,694,000 and $13,507,000$10,236,000 during the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively and $25,361,000$39,448,000 and $22,649,000$18,350,000 during the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California Department of Business Oversight (DBO). Absent approval from the Commissioner of the DBO, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period.
Stock Repurchase Plan
On August 21, 2007,November 12, 2019 the Board of Directors adopted a planapproved the authorization to repurchase as conditions warrant, up to 500,0001,525,000 shares of the Company’sCompany's common stock on(the 2019 Repurchase Plan), which approximated 5.0% of the open market.shares outstanding as of the approval date. The actual timing of purchasesany share repurchases will be determined by the Company's management and therefore the exact numbertotal value of the shares to be purchased will depend on market conditions. This stock repurchase planunder the program is subject to change. The 2019 Repurchase Plan has no expiration date. As of September 30,date and during the year ended December 31, 2019, the Company had repurchased 196,566 shares under this plan.0 shares. During the nine month periodsthree and six months ended SeptemberJune 30, 2020, the Company repurchased 259,993 and 813,862 shares with a market value of $7,669,000 and $24,809,000, respectively.
In connection with approval of the 2019 and 2018, thereRepurchase Plan, the Company’s previous repurchase program adopted on August 21, 2007 (the 2007 Repurchase Plan) was terminated. There were 0 shares of common stock repurchased under this plan.
the 2007 Repurchase Plan during 2019. Stock Repurchased Under Equity Compensation Plans
The Company's shareholder-approved equity compensation plans permit employees to tender recently vested shares in lieu of cash for the payment of withholding taxes on such shares. During the three months ended SeptemberJune 30, 20192020 and 2018,2019, employees tendered 3,8200 and 11,63093,755 shares, respectively, of the Company’s common stock in connection with market value of $147,000, and $453,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans.option exercises. During the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, employees tendered 123,7344,668 and 28,850119,914 shares, respectively, of the Company’s common stock in connection with market valueoption exercises. Employees also tendered 11,306 and 15,151 shares in connection with the tax withholding requirements of $4,842,000,other share based awards during the three months ended June 30, 2020 and $1,124,000,2019, respectively, in lieu of cash to exercise options to purchaseand 11,439 and 15,242 shares during the six months period ended June 30, 2020 and 2019, respectively. In total, shares of the Company’sCompany's common stock tendered had market values of $346,000 and $3,659,000 during the quarter ended June 30, 2020 and 2019, respectively, and $494,000 and $4,695,000 year to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans.date June 30, 2020 and 2019, respectively. The tendered shares were retired. The market value of tendered shares is based on the last market trade price at closing on the day an option is exercised.exercised or the other share based award vests. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.2019 or 2007 Stock Repurchase Plans.
Note 109 - Stock Options and Other Equity-Based Incentive Instruments
The Company’s 2009 Equity Incentive Plan (2009 Plan) expired on March 26, 2019. While no new awards can be granted under the 2009 Plan, existing grants continue to be governed by the terms, conditions and procedures set forth in any applicable award agreement. On April 16, 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (2019 Plan) which was approved by shareholders on May 21, 2019. The 2019 Plan allows for up to 1,500,000 shares to be issued in connection with equity-based incentives. All grants of equity awards made during the ninesix months ended SeptemberJune 30, 20192020, were made from the 2019 Plan.
Stock option activity during the ninesix months ended SeptemberJune 30, 20192020 is summarized in the following table:
| | | Number of Shares | | Option Price per Share | | Weighted Average Exercise Price | | Number of Shares | | Option Price per Share | | Weighted Average Exercise Price |
Outstanding at December 31, 2018 | 343,000 | | | $12.63 to $23.21 | | $ | 16.67 | | |
Outstanding at December 31, 2019 | | Outstanding at December 31, 2019 | 160,500 | | | $14.54 to $23.21 | | $ | 17.60 | |
Options granted | Options granted | — | | | — to — | | — | | Options granted | — | | | — | | — | |
Options exercised | Options exercised | (166,000) | | | $12.63 to $19.46 | | 15.93 | | Options exercised | (16,000) | | | $17.54 to $19.46 | | 18.02 | |
Options forfeited | Options forfeited | — | | | — to — | | — | | Options forfeited | — | | | — | | — | |
Outstanding at September 30, 2019 | 177,000 | | | $14.54 to $23.21 | | $ | 17.52 | | |
Outstanding at June 30, 2020 | | Outstanding at June 30, 2020 | 144,500 | | | $14.54 to $23.21 | | $ | 17.55 | |
The following table shows the number, weighted-average exercise price, intrinsic value, and weighted average remaining contractual life of options exercisable, options not yet exercisable and total options outstanding as of SeptemberJune 30, 2019:2020:
| | | Currently Exercisable | | Currently Not Exercisable | | Total Outstanding | | Currently Exercisable | | Currently Not Exercisable | | Total Outstanding |
Number of options | Number of options | 176,625 | | | 375 | | | 177,000 | | Number of options | 144,500 | | | — | | | 144,500 | |
Weighted average exercise price | Weighted average exercise price | $ | 17.50 | | | $ | 23.21 | | | $ | 17.52 | | Weighted average exercise price | $ | 17.55 | | | $ | — | | | $ | 17.55 | |
Intrinsic value (in thousands) | Intrinsic value (in thousands) | $ | 3,321 | | | $ | 5 | | | $ | 3,326 | | Intrinsic value (in thousands) | $ | 1,864 | | | $ | — | | | $ | 1,864 | |
Weighted average remaining contractual term (yrs.) | Weighted average remaining contractual term (yrs.) | 2.9 | | 5.0 | | 2.9 | Weighted average remaining contractual term (yrs.) | 2.4 | | 0 | | 2.4 |
The 375As of June 30, 2020 all options thatoutstanding are currently not exercisable as of September 30, 2019fully vested and are expected to vest, on a weighted-average basis, over the next three months.be exercised prior to expiration. The Company did not modify any option grants during 20182019 or the ninesix months ended SeptemberJune 30, 2019.2020.
| | | | | | | | | | | |
| Service Condition Vesting RSUs | | Market Plus Service Condition Vesting RSUs |
Outstanding at December 31, 2018 | 66,947 | | | 45,536 | |
RSUs granted | 35,272 | | | 22,898 | |
RSUs added through dividend and performance credits | 946 | | | 7,414 | |
RSUs released | (30,461) | | | (22,237) | |
RSUs forfeited/expired | (1,876) | | | (2,299) | |
Outstanding at September 30, 2019 | 70,828 | | | 51,312 | |
Activity related to restricted stock unit awards during the six months ended June 30, 2020 is summarized in the following table: | | | | | | | | | | | |
| Service Condition Vesting RSUs | | Market Plus Service Condition Vesting RSUs |
Outstanding at December 31, 2019 | 68,597 | | | 51,312 | |
RSUs granted | 64,036 | | | 46,416 | |
RSUs added through dividend and performance credits | 1,344 | | | 5,847 | |
RSUs released | (29,089) | | | (20,265) | |
RSUs forfeited/expired | (94) | | | (78) | |
Outstanding at June 30, 2020 | 104,794 | | | 83,232 | |
The 70,828104,794 of service condition vesting RSUs outstanding as of SeptemberJune 30, 20192020 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of
RSUs outstanding under the original grant. The dividend credits follow the same vesting requirements as the RSU awards and are not considered participating securities. The 70,828104,794 of service condition vesting RSUs outstanding as of SeptemberJune 30, 20192020 are expected to vest, and be released, on a weighted-average basis, over the next 1.21.82 years. The Company expects to recognize $2,135,210$3,211,517 of pre-tax compensation costs related to these service condition vesting RSUs between SeptemberJune 30, 20192020 and their vesting dates. The Company did not modify any service condition vesting RSUs during 20182019 or during the ninesix months ended SeptemberJune 30, 2019.2020.
The 51,31283,232 of market plus service condition vesting RSUs outstanding as of SeptemberJune 30, 20192020 are expected to vest, and be released, on a weighted-average basis, over the next 1.92.33 years. The Company expects to recognize $1,045,845$1,686,594 of pre-tax compensation costs related to these RSUs between SeptemberJune 30, 20192020 and their vesting dates. As of SeptemberJune 30, 2019,2020, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to 0 or increased to 76,968124,848 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 20182019 or during the ninesix months ended SeptemberJune 30, 2019.2020.
Note 1110 - Non-interest Income and Expense
The following table summarizes the Company’s non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Nine months ended September 30, | | |
(dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
ATM and interchange fees | $ | 5,427 | | | $ | 4,590 | | | $ | 15,412 | | | $ | 13,335 | |
Service charges on deposit accounts | 4,327 | | | 4,015 | | | 12,389 | | | 11,407 | |
Other service fees | 808 | | | 676 | | | 2,198 | | | 2,020 | |
Mortgage banking service fees | 483 | | | 499 | | | 1,441 | | | 1,527 | |
Change in value of mortgage servicing rights | (455) | | | (37) | | | (1,652) | | | 38 | |
Total service charges and fees | 10,590 | | | 9,743 | | | 29,788 | | | 28,327 | |
Increase in cash value of life insurance | 773 | | | 732 | | | 2,294 | | | 1,996 | |
Asset management and commission income | 721 | | | 728 | | | 2,102 | | | 2,414 | |
Gain on sale of loans | 1,236 | | | 539 | | | 2,223 | | | 1,831 | |
Lease brokerage income | 172 | | | 186 | | | 631 | | | 514 | |
Sale of customer checks | 126 | | | 88 | | | 401 | | | 327 | |
Gain on sale of investment securities | 107 | | | | 207 | | | | 107 | | | | 207 | |
Gain (loss) on marketable equity securities | 22 | | | (22) | | | 100 | | | (92) | |
Other | 361 | | | 135 | | | 1,688 | | | 942 | |
Total other non-interest income | 3,518 | | | 2,593 | | | 9,546 | | | 8,139 | |
Total non-interest income | $ | 14,108 | | | $ | 12,336 | | | $ | 39,334 | | | $ | 36,466 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
ATM and interchange fees | $ | 5,165 | | | $ | 5,404 | | | $ | 10,276 | | | $ | 9,985 | |
Service charges on deposit accounts | 3,046 | | | 4,182 | | | 7,092 | | | 8,062 | |
Other service fees | 734 | | | 619 | | | 1,492 | | | 1,390 | |
Mortgage banking service fees | 459 | | | 475 | | | 928 | | | 958 | |
Change in value of mortgage servicing rights | (1,236) | | | (552) | | | (2,494) | | | (1,197) | |
Total service charges and fees | 8,168 | | | 10,128 | | | 17,294 | | | 19,198 | |
Increase in cash value of life insurance | 710 | | | 746 | | | 1,430 | | | 1,521 | |
Asset management and commission income | 661 | | | 739 | | | 1,577 | | | 1,381 | |
Gain on sale of loans | 1,736 | | | 575 | | | 2,627 | | | 987 | |
Lease brokerage income | 127 | | | 239 | | | 320 | | | 459 | |
Sale of customer checks | 88 | | | 135 | | | 212 | | | 275 | |
Gain on sale of investment securities | — | | | — | | | — | | | — | |
Gain on marketable equity securities | 25 | | | 42 | | | 72 | | | 78 | |
Other | 142 | | | 819 | | | (55) | | | 1,327 | |
Total other non-interest income | 3,489 | | | 3,295 | | | 6,183 | | | 6,028 | |
Total non-interest income | $ | 11,657 | | | $ | 13,423 | | | $ | 23,477 | | | $ | 25,226 | |
The components of non-interest expense were as follows (in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended June 30, | | | Six months ended June 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Base salaries, net of deferred loan origination costs | Base salaries, net of deferred loan origination costs | $ | 17,656 | | | $ | 15,685 | | | $ | 51,624 | | | $ | 44,076 | | Base salaries, net of deferred loan origination costs | $ | 17,277 | | | $ | 17,211 | | | $ | 34,900 | | | $ | 33,968 | |
Incentive compensation | Incentive compensation | 3,791 | | | 4,515 | | | 10,064 | | | 9,126 | | Incentive compensation | 2,395 | | | 3,706 | | | 5,496 | | | 6,273 | |
Benefits and other compensation costs | Benefits and other compensation costs | 5,452 | | | 5,623 | | | 17,058 | | | 15,726 | | Benefits and other compensation costs | 7,383 | | | 5,802 | | | 13,931 | | | 11,606 | |
Total salaries and benefits expense | Total salaries and benefits expense | 26,899 | | | 25,823 | | | 78,746 | | | 68,928 | | Total salaries and benefits expense | 27,055 | | | 26,719 | | | 54,327 | | | 51,847 | |
Occupancy | Occupancy | 3,711 | | | 3,173 | | | 11,223 | | | 8,574 | | Occupancy | 3,398 | | | 3,738 | | | 7,273 | | | 7,512 | |
Data processing and software | Data processing and software | 3,411 | | | 2,786 | | | 10,114 | | | 7,979 | | Data processing and software | 3,657 | | | 3,354 | | | 7,024 | | | 6,703 | |
Equipment | Equipment | 1,679 | | | 1,750 | | | 5,298 | | | 4,938 | | Equipment | 1,350 | | | 1,752 | | | 2,862 | | | 3,619 | |
Intangible amortization | Intangible amortization | 1,431 | | | 1,390 | | | 4,293 | | | 2,068 | | Intangible amortization | 1,431 | | | 1,431 | | | 2,862 | | | 2,862 | |
Advertising | Advertising | 1,358 | | | 1,341 | | | 4,222 | | | 3,214 | | Advertising | 531 | | | 1,533 | | | 1,196 | | | 2,864 | |
ATM and POS network charges | ATM and POS network charges | 1,343 | | | 1,197 | | | 3,936 | | | 3,860 | | ATM and POS network charges | 1,210 | | | 1,270 | | | 2,583 | | | 2,593 | |
Professional fees | Professional fees | 999 | | | 1,352 | | | 2,895 | | | 2,898 | | Professional fees | 741 | | | 1,057 | | | 1,444 | | | 1,896 | |
Telecommunications | Telecommunications | 867 | | | 819 | | | 2,437 | | | 2,201 | | Telecommunications | 639 | | | 773 | | | 1,364 | | | 1,570 | |
Regulatory assessments and insurance | Regulatory assessments and insurance | 94 | | | 537 | | | 1,095 | | | 1,384 | | Regulatory assessments and insurance | 360 | | | 490 | | | 455 | | | 1,001 | |
Merger and acquisition expense | — | | | 4,150 | | | — | | | 5,227 | | |
Postage | Postage | 438 | | | 275 | | | 1,063 | | | 934 | | Postage | 283 | | | 315 | | | 573 | | | 625 | |
Operational losses | Operational losses | 228 | | | 217 | | | 679 | | | 763 | | Operational losses | 184 | | | 226 | | | 405 | | | 451 | |
Courier service | Courier service | 357 | | | 278 | | | 1,039 | | | 769 | | Courier service | 337 | | | 412 | | | 668 | | | 682 | |
Gain on sale of foreclosed assets | Gain on sale of foreclosed assets | (50) | | | | (2) | | | | (246) | | | | (390) | | Gain on sale of foreclosed assets | (16) | | | (99) | | | (57) | | | (198) | |
Loss on disposal of fixed assets | Loss on disposal of fixed assets | 2 | | | 152 | | | 82 | | | 206 | | Loss on disposal of fixed assets | 15 | | | 42 | | | 15 | | | 66 | |
Other miscellaneous expense | Other miscellaneous expense | 3,577 | | | 2,290 | | | 11,617 | | | 9,673 | | Other miscellaneous expense | 4,530 | | | 3,684 | | | 7,530 | | | 8,056 | |
Total other non-interest expense | Total other non-interest expense | 19,445 | | | 21,705 | | | 59,747 | | | 54,298 | | Total other non-interest expense | 18,650 | | | 19,978 | | | 36,197 | | | 40,302 | |
Total non-interest expense | Total non-interest expense | $ | 46,344 | | | $ | 47,528 | | | $ | 138,493 | | | $ | 123,226 | | Total non-interest expense | $ | 45,705 | | | $ | 46,697 | | | $ | 90,524 | | | $ | 92,149 | |
Note 1211 - Earnings Per Share
Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock units (RSUs), and are determined using the treasury stock method. Earnings per share have been computed based on the following:
| | | Three months ended September 30, | | | Three months ended June 30, | |
(in thousands) | (in thousands) | 2019 | | 2018 | (in thousands) | 2020 | | 2019 |
Net income | Net income | $ | 23,395 | | | $ | 16,170 | | Net income | $ | 7,430 | | | $ | 23,061 | |
Average number of common shares outstanding | Average number of common shares outstanding | 30,509 | | | 30,011 | | Average number of common shares outstanding | 29,754 | | | 30,458 | |
Effect of dilutive stock options and restricted stock | Effect of dilutive stock options and restricted stock | 120 | | | 280 | | Effect of dilutive stock options and restricted stock | 129 | | | 185 | |
Average number of common shares outstanding used to calculate diluted earnings per share | Average number of common shares outstanding used to calculate diluted earnings per share | 30,629 | | | 30,291 | | Average number of common shares outstanding used to calculate diluted earnings per share | 29,883 | | | 30,643 | |
Options excluded from diluted earnings per share because the effect of these options was antidilutive | Options excluded from diluted earnings per share because the effect of these options was antidilutive | 42 | | | 10 | | Options excluded from diluted earnings per share because the effect of these options was antidilutive | — | | | — | |
| | | Nine months ended September 30, 2019 | | | Six months ended June 30, | |
(in thousands) | (in thousands) | 2019 | | 2018 | (in thousands) | 2020 | | 2019 |
Net income | Net income | $ | 69,182 | | | $ | 45,109 | | Net income | $ | 23,551 | | | $ | 45,787 | |
Average number of common shares outstanding | Average number of common shares outstanding | 30,464 | | | 25,317 | | Average number of common shares outstanding | 30,074 | | | 30,441 | |
Effect of dilutive stock options and restricted stock | Effect of dilutive stock options and restricted stock | 179 | | | 300 | | Effect of dilutive stock options and restricted stock | 129 | | | 209 | |
Average number of common shares outstanding used to calculate diluted earnings per share | Average number of common shares outstanding used to calculate diluted earnings per share | 30,643 | | | 25,617 | | Average number of common shares outstanding used to calculate diluted earnings per share | 30,203 | | | 30,650 | |
Options excluded from diluted earnings per share because the effect of these options was antidilutive | Options excluded from diluted earnings per share because the effect of these options was antidilutive | 42 | | | 10 | | Options excluded from diluted earnings per share because the effect of these options was antidilutive | — | | | — | |
Note 1312 – Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of other comprehensive income.
The components of other comprehensive income (loss) and related tax effects are as follows:
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended June 30, | | | Six months ended June 30, | |
(in thousands) | (in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Unrealized holding gains (losses) on available for sale securities before reclassifications | $ | 5,355 | | | $ | (8,193) | | | $ | 27,618 | | | $ | (29,134) | | |
Amounts reclassified out of accumulated other comprehensive income: | | |
Realized (gain) loss on debt securities | (107) | | | (207) | | | (107) | | | (207) | | |
Adoption ASU 2016-01 | — | | | — | | | — | | | 62 | | |
Adoption ASU 2018-02 | — | | | — | | | — | | | (425) | | |
Total amounts reclassified out of accumulated other comprehensive income (loss) | (107) | | | (207) | | | (107) | | | (570) | | |
Unrealized holding gains (losses) on available for sale securities after reclassifications | 5,248 | | | (8,400) | | | 27,511 | | | (29,704) | | |
Unrealized holding gains on available for sale securities before reclassifications | | Unrealized holding gains on available for sale securities before reclassifications | $ | 34,959 | | | $ | 9,553 | | | $ | 5,398 | | | $ | 22,263 | |
| Tax effect | Tax effect | (1,551) | | | 2,483 | | | (8,133) | | | 8,763 | | Tax effect | (10,334) | | | (2,824) | | | (1,595) | | | (6,582) | |
Unrealized holding gains (losses) on available for sale securities, net of tax | 3,697 | | | (5,917) | | | 19,378 | | | (20,941) | | |
Unrealized holding gains on available for sale securities, net of tax | | Unrealized holding gains on available for sale securities, net of tax | 24,625 | | | 6,729 | | | 3,803 | | | 15,681 | |
Change in unfunded status of the supplemental retirement plans before reclassifications | Change in unfunded status of the supplemental retirement plans before reclassifications | (89) | | | — | | | (266) | | | 668 | | Change in unfunded status of the supplemental retirement plans before reclassifications | 661 | | | (88) | | | 1,109 | | | (177) | |
Amounts reclassified out of accumulated other comprehensive income (loss): | Amounts reclassified out of accumulated other comprehensive income (loss): | | Amounts reclassified out of accumulated other comprehensive income (loss): | |
Amortization of prior service cost | Amortization of prior service cost | (13) | | | (13) | | | (40) | | | (40) | | Amortization of prior service cost | (13) | | | (14) | | | (27) | | | (27) | |
Amortization of actuarial losses | Amortization of actuarial losses | 102 | | | 128 | | | 306 | | | 382 | | Amortization of actuarial losses | 478 | | | 102 | | | 956 | | | 204 | |
Adoption ASU 2018-02 | — | | | — | | | — | | | (668) | | |
Total amounts reclassified out of accumulated other comprehensive income (loss) | 89 | | | 115 | | | 266 | | | (326) | | |
| Total amounts reclassified out of accumulated other comprehensive income | | Total amounts reclassified out of accumulated other comprehensive income | 465 | | | 88 | | | 929 | | | 177 | |
Change in unfunded status of the supplemental retirement plans after reclassifications | Change in unfunded status of the supplemental retirement plans after reclassifications | — | | | 115 | | | — | | | 342 | | Change in unfunded status of the supplemental retirement plans after reclassifications | 1,126 | | | — | | | 2,038 | | | — | |
Tax effect | Tax effect | — | | | (34) | | | — | | | (101) | | Tax effect | — | | | — | | | — | | | — | |
Change in unfunded status of the supplemental retirement plans, net of tax | Change in unfunded status of the supplemental retirement plans, net of tax | — | | | 81 | | | — | | | 241 | | Change in unfunded status of the supplemental retirement plans, net of tax | 1,126 | | | — | | | 2,038 | | | — | |
Total other comprehensive income (loss) | Total other comprehensive income (loss) | $ | 3,697 | | | $ | (5,836) | | | $ | 19,378 | | | $ | (20,700) | | Total other comprehensive income (loss) | $ | 25,751 | | | $ | 6,729 | | | $ | 5,841 | | | $ | 15,681 | |
The components of accumulated other comprehensive income (loss), included in shareholders’ equity, are as follows:
| (in thousands) | (in thousands) | September 30, 2019 | | December 31, 2018 | (in thousands) | June 30, 2020 | | December 31, 2019 |
Net unrealized gain (loss) on available for sale securities | $ | 6,537 | | | $ | (20,974) | | |
Net unrealized gain on available for sale securities | | Net unrealized gain on available for sale securities | $ | 8,785 | | | $ | 3,387 | |
Tax effect | Tax effect | (1,932) | | | 6,201 | | Tax effect | (2,597) | | | (1,001) | |
Unrealized holding gain (loss) on available for sale securities, net of tax | 4,605 | | | (14,773) | | |
Unrealized holding gain on available for sale securities, net of tax | | Unrealized holding gain on available for sale securities, net of tax | 6,188 | | | 2,386 | |
Unfunded status of the supplemental retirement plans | Unfunded status of the supplemental retirement plans | (4,802) | | | (4,802) | | Unfunded status of the supplemental retirement plans | (9,593) | | | (11,193) | |
Tax effect | Tax effect | 1,420 | | | 1,420 | | Tax effect | 2,836 | | | 3,309 | |
Unfunded status of the supplemental retirement plans, net of tax | Unfunded status of the supplemental retirement plans, net of tax | (3,382) | | | (3,382) | | Unfunded status of the supplemental retirement plans, net of tax | (6,757) | | | (7,884) | |
Joint beneficiary agreement liability | Joint beneficiary agreement liability | 276 | | | 276 | | Joint beneficiary agreement liability | 1,188 | | | 276 | |
Tax effect | Tax effect | — | | | — | | Tax effect | — | | | — | |
Joint beneficiary agreement liability, net of tax | Joint beneficiary agreement liability, net of tax | 276 | | | 276 | | Joint beneficiary agreement liability, net of tax | 1,188 | | | 276 | |
Accumulated other comprehensive gain (loss) | $ | 1,499 | | | $ | (17,879) | | |
Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | $ | 619 | | | $ | (5,222) | |
Note 1413 - Fair Value Measurement
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Marketable equity securities, debt securities available-for-sale, loans held for sale, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application impairment write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observable nature of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Marketable equity securities and debt securities available for sale - Marketable equity securities and debt securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had 0 securities classified as Level 3 during any of the periods covered in these financial statements.
Loans held for sale - Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to recurring fair value adjustments as Level 2.
Impaired originated and PNCIIndividually evaluated loans - Originated and PNCI loansLoans are not recorded at fair value on a recurring basis. However, from time to time, an originated or PNCI loancertain loans have individual risk characteristics not consistent with a pool of loans and is considered impaired and an allowanceindividually evaluated for loan losses is established. Originatedcredit reserves.
and PNCI loansLoans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are considered impaired.typically individually evaluated. The fair value of an impaired originated or PNCI loan isthese loans are estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired originated and PNCI loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired originated and PNCI loansLoans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated or PNCI loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the impaired originated or PNCI loan as nonrecurring Level 3.
Foreclosed assets - Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.
Mortgage servicing rights - Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3.
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):
| Fair value at September 30, 2019 | Total | | Level 1 | | Level 2 | | Level 3 | |
Fair value at June 30, 2020 | | Fair value at June 30, 2020 | Total | | Level 1 | | Level 2 | | Level 3 |
Marketable equity securities | Marketable equity securities | $ | 2,974 | | | $ | 2,974 | | | $ | — | | | $ | — | | Marketable equity securities | $ | 3,033 | | | $ | 3,033 | | | $ | — | | | $ | — | |
Debt securities available for sale: | Debt securities available for sale: | | Debt securities available for sale: | |
Obligations of U.S. government corporations and agencies | Obligations of U.S. government corporations and agencies | 495,637 | | | — | | | 495,637 | | | — | | Obligations of U.S. government corporations and agencies | 434,814 | | | — | | | 434,814 | | | — | |
Obligations of states and political subdivisions | Obligations of states and political subdivisions | 111,910 | | | — | | | 111,910 | | | — | | Obligations of states and political subdivisions | 109,646 | | | — | | | 109,646 | | | — | |
Corporate bonds | Corporate bonds | 4,528 | | | — | | | 4,528 | | | — | | Corporate bonds | 2,570 | | | — | | | 2,570 | | | — | |
Asset backed securities | Asset backed securities | 372,005 | | | — | | | 372,005 | | | — | | Asset backed securities | 449,250 | | | — | | | 449,250 | | | — | |
Loans held for sale | Loans held for sale | 7,604 | | | — | | | 7,604 | | | — | | Loans held for sale | 8,352 | | | — | | | 8,352 | | | — | |
Mortgage servicing rights | Mortgage servicing rights | 6,072 | | | — | | | — | | | 6,072 | | Mortgage servicing rights | 4,250 | | | — | | | — | | | 4,250 | |
Total assets measured at fair value | Total assets measured at fair value | $ | 1,000,730 | | | $ | 2,974 | | | $ | 991,684 | | | $ | 6,072 | | Total assets measured at fair value | $ | 1,011,915 | | | $ | 3,033 | | | $ | 1,004,632 | | | $ | 4,250 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Fair value at December 31, 2018 | Total | | Level 1 | | Level 2 | | Level 3 |
Marketable equity securities | $ | 2,874 | | | $ | 2,874 | | | $ | — | | | $ | — | |
Debt securities available for sale: | | | | | | | |
Obligations of U.S. government corporations and agencies | 629,981 | | | — | | | 629,981 | | | — | |
Obligations of states and political subdivisions | 126,072 | | | — | | | 126,072 | | | — | |
Corporate bonds | 4,478 | | | — | | | 4,478 | | | — | |
Asset backed securities | 354,505 | | | — | | | 354,505 | | | — | |
Loans held for sale | 3,687 | | | — | | | 3,687 | | | — | |
Mortgage servicing rights | 7,098 | | | — | | | — | | | 7,098 | |
Total assets measured at fair value | $ | 1,128,695 | | | $ | 2,874 | | | $ | 1,118,723 | | | $ | 7,098 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Fair value at December 31, 2019 | Total | | Level 1 | | Level 2 | | Level 3 |
Marketable equity securities | $ | 2,960 | | | $ | 2,960 | | | $ | — | | | $ | — | |
Debt securities available for sale: | | | | | | | |
Obligations of U.S. government corporations and agencies | 472,980 | | | — | | | 472,980 | | | — | |
Obligations of states and political subdivisions | 109,601 | | | — | | | 109,601 | | | — | |
Corporate bonds | 2,532 | | | — | | | 2,532 | | | — | |
Asset backed securities | 365,025 | | | — | | | 365,025 | | | — | |
Loans held for sale | 5,265 | | | — | | | 5,265 | | | — | |
Mortgage servicing rights | 6,200 | | | — | | | — | | | 6,200 | |
Total assets measured at fair value | $ | 964,563 | | | $ | 2,960 | | | $ | 955,403 | | | $ | 6,200 | |
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were 0no transfers between any levels during the ninethree and six months ended SeptemberJune 30, 20192020, or the year ended December 31, 2018.2019.
The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the time periods indicated. Had there been any transfer into or out of Level 3 during the time periods indicated, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, | Beginning Balance | | Transfers into (out of) Level 3 | | Change Included in Earnings | | Issuances | | Ending Balance |
2019: Mortgage servicing rights | $ | 6,229 | | | — | | | $ | (455) | | | $ | 298 | | | $ | 6,072 | |
2018: Mortgage servicing rights | $ | 7,021 | | | — | | | $ | (37) | | | $ | 138 | | | $ | 7,122 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended June 30, | Beginning Balance | | Transfers into (out of) Level 3 | | Change Included in Earnings | | Issuances | | Ending Balance |
2020: Mortgage servicing rights | $ | 5,168 | | | — | | | $ | (1,236) | | | $ | 318 | | | $ | 4,250 | |
2019: Mortgage servicing rights | $ | 6,572 | | | — | | | $ | (552) | | | $ | 209 | | | $ | 6,229 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, | Beginning Balance | | Transfers into (out of) Level 3 | | Change Included in Earnings | | Issuances | | Ending Balance |
2019: Mortgage servicing rights | $ | 7,098 | | | — | | | $ | (1,652) | | | $ | 626 | | | $ | 6,072 | |
2018: Mortgage servicing rights | $ | 6,687 | | | — | | | $ | 38 | | | $ | 397 | | | $ | 7,122 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, | Beginning Balance | | Transfers into (out of) Level 3 | | Change Included in Earnings | | Issuances | | Ending Balance |
2020: Mortgage servicing rights | $ | 6,200 | | | — | | | $ | (2,494) | | | $ | 544 | | | $ | 4,250 | |
2019: Mortgage servicing rights | $ | 7,098 | | | — | | | $ | (1,197) | | | $ | 328 | | | $ | 6,229 | |
The key unobservable inputs used in determining the fair value of mortgage servicing rights are mortgage prepayment speeds and the discount rate used to discount cash projected cash flows. Generally, any significant increases in the mortgage prepayment speed and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the mortgage prepayment speed and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement).
The following table presents quantitative information about recurring Level 3 fair value measurements at SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
As of SeptemberJune 30, 2019:2020: | Fair Value (in thousands) | | Valuation Technique | | Unobservable Inputs | | Range, Weighted Average |
Mortgage Servicing Rights | $ | 6,0724,250 | | | Discounted cash flow | | Constant prepayment rate | | 7%9% - 42%28%; 11%25% |
| | | | | Discount rate | | 10% - 14%; 12% |
As of December 31, 2018:2019: | | | | | | | |
Mortgage Servicing Rights | $ | 7,0986,200 | | | Discounted cash flow | | Constant prepayment rate | | 5%6% - 27.3%42.0%; 7.6%11.0% |
| | | | | Discount rate | | 12%10% - 13%14%; 12% |
The tables below present the recorded investment in assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2019 | Total | | Level 1 | | Level 2 | | Level 3 | | Total Gains (Losses) |
Fair value: | | | | | | | | | |
Impaired Originated & PNCI loans | $ | 1,055 | | | — | | | — | | | $ | 1,055 | | | $ | (652) | |
Foreclosed assets | 417 | | | — | | | — | | | 417 | | | (27) | |
Total assets measured at fair value | $ | 1,472 | | | — | | | — | | | $ | 1,472 | | | $ | (679) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | Total | | Level 1 | | Level 2 | | Level 3 | | Total Losses |
Fair value: | | | | | | | | | |
Individually evaluated loans | $ | 162 | | | — | | | — | | | $ | 162 | | | $ | (16) | |
| | | | | | | | | |
| | | | | | | | | |
| December 31, 2018 | Total | | Level 1 | | Level 2 | | Level 3 | | Total Gains (Losses) | |
December 31, 2019 | | December 31, 2019 | Total | | Level 1 | | Level 2 | | Level 3 | | Total Losses |
Fair value: | Fair value: | | | | | | | | | | Fair value: | | | | | | | | | |
Impaired Originated & PNCI loans | $ | 281 | | | — | | | — | | | $ | 281 | | | $ | (294) | | |
Individually evaluated loans | | Individually evaluated loans | $ | 1,055 | | | — | | | — | | | $ | 1,055 | | | $ | (652) | |
Foreclosed assets | Foreclosed assets | 1,311 | | | — | | | — | | | 1,311 | | | (8) | | Foreclosed assets | 417 | | | — | | | — | | | 417 | | | (27) | |
Total assets measured at fair value | Total assets measured at fair value | $ | 1,592 | | | — | | | — | | | $ | 1,592 | | | $ | (302) | | Total assets measured at fair value | $ | 1,472 | | | — | | | — | | | $ | 1,472 | | | $ | (679) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2019 | Total | | Level 1 | | Level 2 | | Level 3 | | Total Losses |
Fair value: | | | | | | | | | |
Individually evaluated loans | $ | 1,164 | | | — | | | — | | | $ | 1,164 | | | $ | (808) | |
Foreclosed assets | 454 | | | — | | | — | | | 454 | | | (63) | |
Total assets measured at fair value | $ | 1,618 | | | — | | | — | | | $ | 1,618 | | | $ | (871) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2018 | Total | | Level 1 | | Level 2 | | Level 3 | | Total Gains (Losses) |
Fair value: | | | | | | | | | |
Impaired Originated & PNCI loans | $ | 445 | | | — | | | — | | | $ | 445 | | | $ | (808) | |
Foreclosed assets | 863 | | | — | | | — | | | 863 | | | (23) | |
Total assets measured at fair value | $ | 1,308 | | | — | | | — | | | $ | 1,308 | | | $ | (831) | |
The impaired originated and PNCIindividually evaluated loan amountamounts above represents impaired,represent collateral dependent loans that have been adjusted to fair value. When the Company identifies a collateral dependent loan as impaired,with unique risk characteristics, the Company measuresevaluates the impairmentneed for an allowance using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If the Company determines that the value of the impaired loan is less than the recorded investment in the loan, the Company recognizes this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and leasecredit losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is 0.
The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and leasecredit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on real estate owned for fair value adjustments based on the fair value of the real estate.
The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at SeptemberJune 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | Fair Value (in thousands) | | Valuation Technique | | Unobservable Inputs | | Range, Weighted Average |
Individually evaluated loans | $ | 162 | | | Sales comparison approach Income approach | | Adjustment for differences between comparable sales Capitalization rate | | Not meaningful N/A |
| | | | | | | |
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
September 30,December 31, 2019 | Fair Value (in thousands) | | Valuation Technique | | Unobservable Inputs | | Range, Weighted Average |
Impaired Originated & PNCIIndividually evaluated loans | $ | 1,055 | | | Sales comparison approach Income approach | | Adjustment for differences between comparable sales Capitalization rate | | Not meaningful N/meaningfulN/A | |
Foreclosed assets (Residential real estate) | $ | 417 | | | Sales comparison approach | | Adjustment for differences between comparable sales | | Not meaningful | meaningfulN/A |
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | Fair Value (in thousands) | | Valuation Technique | | Unobservable Inputs | | Range, Weighted Average |
Impaired Originated & PNCI loans | $ | 281 | | | Sales comparison approach Income approach | | Adjustment for differences between comparable sales Capitalization rate | | (16.30)% - 35.14%; 10.45% N/A |
Foreclosed assets (Residential real estate) | $ | 693 | | | Sales comparison approach | | Adjustment for differences between comparable sales | | (21.83)% - 7.25%; (3.75)% |
Foreclosed assets (Commercial real estate) | $ | 618 | | | Sales comparison approach | | Adjustment for differences between comparable sales | | (65)% - 20%; (45)% |
Fair values for financial instruments are management’s estimates of the values at which the instruments could be exchanged in a transaction between willing parties. The Company uses the exit price notion when measuring the fair value of financial instruments. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | | December 31, 2018 | | |
(in thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | |
Level 1 inputs: | | | | | | | |
Cash and due from banks | $ | 118,960 | | | $ | 118,960 | | | $ | 119,781 | | | $ | 119,781 | |
Cash at Federal Reserve and other banks | 140,087 | | | 140,087 | | | 107,752 | | | 107,752 | |
Level 2 inputs: | | | | | | | |
Securities held to maturity | 393,449 | | | 399,699 | | | 444,936 | | | 437,370 | |
Restricted equity securities | 17,250 | | | N/A | | 17,250 | | | N/A |
Loans held for sale | 7,604 | | | 7,604 | | | 3,687 | | | 4,616 | |
Level 3 inputs: | | | | | | | |
Loans, net | 4,150,811 | | | 4,137,528 | | | 3,989,432 | | | 4,006,986 | |
Financial liabilities: | | | | | | | |
Level 2 inputs: | | | | | | | |
Deposits | 5,295,407 | | | 5,294,348 | | | 5,366,466 | | | 5,362,173 | |
Other borrowings | 16,423 | | | 16,423 | | | 15,839 | | | 15,839 | |
Level 3 inputs: | | | | | | | |
Junior subordinated debt | 57,180 | | | 56,209 | | | 57,042 | | | 62,610 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
(in thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | |
Level 1 inputs: | | | | | | | |
Cash and due from banks | $ | 78,666 | | | $ | 78,666 | | | $ | 92,816 | | | $ | 92,816 | |
Cash at Federal Reserve and other banks | 627,186 | | | 627,186 | | | 183,691 | | | 183,691 | |
Level 2 inputs: | | | | | | | |
Securities held to maturity | 337,165 | | | 354,179 | | | 375,606 | | | 381,525 | |
Restricted equity securities | 17,250 | | | N/A | | 17,250 | | | N/A |
| | | | | | | |
Level 3 inputs: | | | | | | | |
Loans, net | 4,721,666 | | | 4,716,869 | | | 4,276,750 | | | 4,263,064 | |
Financial liabilities: | | | | | | | |
Level 2 inputs: | | | | | | | |
Deposits | 6,248,258 | | | 6,250,757 | | | 5,366,994 | | | 5,365,921 | |
Other borrowings | 38,544 | | | 38,544 | | | 18,454 | | | 18,454 | |
Level 3 inputs: | | | | | | | |
Junior subordinated debt | 57,422 | | | 56,388 | | | 57,232 | | | 56,297 | |
| (in thouands) | Contract Amount | | Fair Value | | Contract Amount | | Fair Value | |
(in thousands) | | (in thousands) | Contract Amount | | Fair Value | | Contract Amount | | Fair Value |
Off-balance sheet: | Off-balance sheet: | | | | | | | | Off-balance sheet: | | | | | | | |
Level 3 inputs: | Level 3 inputs: | | Level 3 inputs: | |
Commitments | Commitments | $ | 1,210,427 | | | $ | 12,104 | | | $ | 1,192,054 | | | $ | 11,921 | | Commitments | $ | 1,366,576 | | | $ | 13,666 | | | $ | 1,309,326 | | | $ | 13,093 | |
Standby letters of credit | Standby letters of credit | 12,368 | | | 124 | | | 11,346 | | | 113 | | Standby letters of credit | 11,034 | | | 110 | | | 12,014 | | | 120 | |
Overdraft privilege commitments | Overdraft privilege commitments | 111,187 | | | 1,112 | | | 111,956 | | | 1,120 | | Overdraft privilege commitments | 110,468 | | | 1,105 | | | 110,402 | | | 1,104 | |
Note 1514 - Regulatory Matters
The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. The following tables present actual and required capital ratios as of SeptemberJune 30, 20192020 and December 31, 20182019 for the Company and the Bank under applicable Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of SeptemberJune 30, 20192020 and December 31, 20182019 based on the then phased-in provisions of the Basel III Capital Rules. As of January 1, 2019, the minimum required capital levels of the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
| | | Actual | | | Minimum Capital Required – Basel III Fully Phased In | | | Required to be Considered Well Capitalized | | | Actual | | | Required for Capital Adequacy Purposes | | | Required to be Considered Well Capitalized | |
As of September 30, 2019: | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
As of June 30, 2020: | | As of June 30, 2020: | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (dollars in thousands) | | | (dollars in thousands) | |
Total Capital (to Risk Weighted Assets): | Total Capital (to Risk Weighted Assets): | | Total Capital (to Risk Weighted Assets): | |
Consolidated | Consolidated | $ | 735,884 | | | 15.23 | % | | $ | 507,335 | | | 10.50 | % | | N/A | | N/A | Consolidated | $ | 760,120 | | | 15.13 | % | | $ | 527,598 | | | 10.50 | % | | N/A | | N/A |
Tri Counties Bank | Tri Counties Bank | $ | 731,359 | | | 15.14 | % | | $ | 507,152 | | | 10.50 | % | | $ | 483,002 | | | 10.00 | % | Tri Counties Bank | $ | 755,481 | | | 15.04 | % | | $ | 527,409 | | | 10.50 | % | | $ | 502,294 | | | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets): | Tier 1 Capital (to Risk Weighted Assets): | | Tier 1 Capital (to Risk Weighted Assets): | |
Consolidated | Consolidated | $ | 701,703 | | | 14.52 | % | | $ | 410,700 | | | 8.50 | % | | N/A | | N/A | Consolidated | $ | 697,043 | | | 13.87 | % | | $ | 427,103 | | | 8.50 | % | | N/A | | N/A |
Tri Counties Bank | Tri Counties Bank | $ | 697,178 | | | 14.43 | % | | $ | 410,551 | | | 8.50 | % | | $ | 386,401 | | | 8.00 | % | Tri Counties Bank | $ | 692,448 | | | 13.79 | % | | $ | 426,950 | | | 8.50 | % | | $ | 401,835 | | | 8.00 | % |
Common equity Tier 1 Capital (to Risk Weighted Assets): | Common equity Tier 1 Capital (to Risk Weighted Assets): | | Common equity Tier 1 Capital (to Risk Weighted Assets): | |
Consolidated | Consolidated | $ | 646,240 | | | 13.37 | % | | $ | 338,224 | | | 7.00 | % | | N/A | | N/A | Consolidated | $ | 641,346 | | | 12.76 | % | | $ | 351,732 | | | 7.00 | % | | N/A | | N/A |
Tri Counties Bank | Tri Counties Bank | $ | 697,178 | | | 14.43 | % | | $ | 338,101 | | | 7.00 | % | | $ | 313,951 | | | 6.50 | % | Tri Counties Bank | $ | 692,448 | | | 13.79 | % | | $ | 351,606 | | | 7.00 | % | | $ | 326,491 | | | 6.50 | % |
Tier 1 Capital (to Average Assets): | Tier 1 Capital (to Average Assets): | | Tier 1 Capital (to Average Assets): | |
Consolidated | Consolidated | $ | 701,703 | | | 11.31 | % | | $ | 248,073 | | | 4.00 | % | | N/A | | N/A | Consolidated | $ | 697,043 | | | 10.28 | % | | $ | 271,269 | | | 4.00 | % | | N/A | | N/A |
Tri Counties Bank | Tri Counties Bank | $ | 697,178 | | | 11.24 | % | | $ | 248,068 | | | 4.00 | % | | $ | 310,085 | | | 5.00 | % | Tri Counties Bank | $ | 692,448 | | | 10.21 | % | | $ | 271,263 | | | 4.00 | % | | $ | 339,079 | | | 5.00 | % |
| | | Actual | | | Minimum Capital Required – Basel III Phase-inSchedule | | | Minimum Capital Required – Basel III Fully Phased In | | | Required to be Considered Well Capitalized | | | Actual | | | | Required for Capital Adequacy Purposes | | | Required to be Considered Well Capitalized | |
As of December 31, 2018: | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
As of December 31, 2019: | | As of December 31, 2019: | Amount | | Ratio | | | Amount | | Ratio | | Amount | | Ratio |
| | (dollars in thousands) | | | (dollars in thousands) | |
Total Capital (to Risk Weighted Assets): | Total Capital (to Risk Weighted Assets): | | Total Capital (to Risk Weighted Assets): | | | |
Consolidated | Consolidated | $ | 682,419 | | | 14.40 | % | | $ | 467,874 | | | 9.875 | % | | $ | 497,486 | | | 10.50 | % | | N/A | | N/A | Consolidated | $ | 753,200 | | | 15.07 | % | | | $ | 524,944 | | | 10.50 | % | | N/A | | N/A |
Tri Counties Bank | Tri Counties Bank | $ | 680,624 | | | 14.37 | % | | $ | 467,704 | | | 9.875 | % | | $ | 497,305 | | | 10.50 | % | | $ | 473,624 | | | 10.00 | % | Tri Counties Bank | $ | 748,660 | | | 14.98 | % | | | $ | 524,759 | | | 10.50 | % | | $ | 499,770 | | | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets): | Tier 1 Capital (to Risk Weighted Assets): | | Tier 1 Capital (to Risk Weighted Assets): | | | |
Consolidated | Consolidated | $ | 647,262 | | | 13.66 | % | | $ | 373,115 | | | 7.875 | % | | $ | 402,727 | | | 8.50 | % | | N/A | | N/A | Consolidated | $ | 719,809 | | | 14.40 | % | | | $ | 424,955 | | | 8.50 | % | | N/A | | N/A |
Tri Counties Bank | Tri Counties Bank | $ | 645,467 | | | 13.63 | % | | $ | 372,979 | | | 7.875 | % | | $ | 402,581 | | | 8.50 | % | | $ | 378,899 | | | 8.00 | % | Tri Counties Bank | $ | 715,269 | | | 14.31 | % | | | $ | 424,805 | | | 8.50 | % | | $ | 399,816 | | | 8.00 | % |
Common equity Tier 1 Capital (to Risk Weighted Assets): | Common equity Tier 1 Capital (to Risk Weighted Assets): | | Common equity Tier 1 Capital (to Risk Weighted Assets): | | | |
Consolidated | Consolidated | $ | 591,933 | | | 12.49 | % | | $ | 302,045 | | | 6.375 | % | | $ | 331,658 | | | 7.00 | % | | N/A | | N/A | Consolidated | $ | 664,296 | | | 13.29 | % | | | $ | 349,963 | | | 7.00 | % | | N/A | | N/A |
Tri Counties Bank | Tri Counties Bank | $ | 645,467 | | | 13.63 | % | | $ | 301,935 | | | 6.375 | % | | $ | 331,537 | | | 7.00 | % | | $ | 307,856 | | | 6.50 | % | Tri Counties Bank | $ | 715,269 | | | 14.31 | % | | | $ | 349,839 | | | 7.00 | % | | $ | 324,851 | | | 6.50 | % |
Tier 1 Capital (to Average Assets): | Tier 1 Capital (to Average Assets): | | Tier 1 Capital (to Average Assets): | | | |
Consolidated | Consolidated | $ | 647,262 | | | 10.68 | % | | $ | 242,452 | | | 4.000 | % | | $ | 242,452 | | | 4.00 | % | | N/A | | N/A | Consolidated | $ | 719,809 | | | 11.55 | % | | | $ | 249,343 | | | 4.00 | % | | N/A | | N/A |
Tri Counties Bank | Tri Counties Bank | $ | 645,467 | | | 10.65 | % | | $ | 242,447 | | | 4.000 | % | | $ | 242,447 | | | 4.00 | % | | $ | 303,059 | | | 5.00 | % | Tri Counties Bank | $ | 715,269 | | | 11.47 | % | | | $ | 249,337 | | | 4.00 | % | | $ | 311,672 | | | 5.00 | % |
As of SeptemberJune 30, 20192020 and December 31, 2018,2019, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules. Also, at SeptemberJune 30, 20192020 and December 31, 2018,2019, the Bank’s capital levels exceeded the minimum amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action.
The Basel III Capital Rules require for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the risk-based capital ratios but not the leverage ratio. At SeptemberJune 30, 2019,2020, the Company and the Bank are in compliance with the capital conservation buffer requirement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Cautionary Statements Regarding Forward-Looking Information
CertainThe statements contained in this Form 10-Qherein that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There can be no assurance that future developments affecting us will be the same as those anticipated by management. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of changes in financial services policies, laws and regulations; technological changes; mergersweather, natural disasters and acquisitions (includingother catastrophic events that may or may not be caused by climate change and their effects on economic and business environments in which the Company operates; the adverse impact on the U.S. economy, including the markets in which we operate, of the novel coronavirus, which caused the Coronavirus disease 2019 (“COVID-19”) global pandemic, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products; the costs or difficulties related to integrationeffects of acquired companies);mergers, acquisitions or dispositions we may make; the future operating or financial performance of the Company, including our outlook for future growth, changes in the level of our nonperforming assets and charge-offs; the appropriateness of the allowance for credit losses including the timing and effects of the implementation of the current expected credit losses model; any deterioration in values of California real estate, both residential and commercial; the effect of changes in accounting standards and practices; possible other-than-temporary impairment of securities held by us; changes in consumer spending, borrowing and savings habits; our ability to attract deposits and other sources of liquidity; changes in the financial performance and/or condition of our borrowers; our noninterest expense and the impact ofefficiency ratio; competition from otherand innovation with respect to financial service providers; the possibility that any of the anticipated benefits of our recent merger with FNB Bancorp (“FNBB”) will not be realized or will not be realized within the expected time period, or that integration of FNBB’s operations will be more costly or difficult than expected;products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies; the challenges of integrating and retaining key employees; unanticipated regulatory or judicial proceedings; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber-attacks and the cost to defend against such attacks; the effect of a fall in stock market prices on our brokerage and wealth management businesses; and our ability to manage the risks involved in the foregoing. Additional factors that could cause results to differ materially from those described above can be found in in Part II Item 1A of this report and our Annual Report on Form 10-K for the year ended December 31, 2018,2019, which is on file with the Securities and Exchange Commission (the “SEC”) and available in the “Investor Relations” section of our website, https://www.tcbk.com/investor-relations and in other documents we file with the SEC. Annualized, pro forma, projections and estimates are not forecasts and may not reflect actual results.
General
As TriCo Bancshares (referred to in this report as “we”, “our” or the “Company”) has not commenced any business operations independent of Tri Counties Bank (the “Bank”), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (“FTE”) basis. The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results, and the presentation of these measures on a FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a non-FTE basis in the Part I - Financial Information section of this Form 10-Q, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value
measurements, retirement plans and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 of the consolidated financial statements included in the Company’s annual report ofon Form 10-K for the year ended December 31, 2018.2019.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.
Financial Highlights
Following the acquisition of FNB Bancorp on July 7, 2018, the period ended September 30, 2019 represents the first year over year comparable period end of the combined entity. Performance highlights and other developments for the Company as of or for the three months ended June 30, 2020 included the following:
•For the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company’s return on average assets was 1.44% 0.43% and 1.44%0.70%, respectively, and the return on average equity was 10.42%was 3.39% and 10.67%5.28%, respectively.
•For the three and nine months ended September 30, 2019, the Company's diluted earnings per share was $0.76 and $2.25, respectively, as compared to $0.53 and $1.76 for the same periods ended 2018.respectively.
•As of SeptemberJune 30, 2019,2020, the Company reported total loans, total assets and total deposits of $4.18$4.80 billion, $6.38$7.36 billion and $5.30$6.25 billion, respectively.
•The loan to deposit ratio was 79.0%76.84% as of SeptemberJune 30, 20192020, as compared to 76.8%81.05% at March 31, 2020 and 76.82% at June 30, 20192019.
•The Company originated and 79.0% at September 30, 2018.funded 2,908 loans totaling $436.7 million under the Payment Protection Program (PPP).
•For the current quarter, net interestinterest margin was 4.44%4.10% on a taxtax equivalent basis as compared to 4.29%4.50% in the quarterquarter ended SeptemberJune 30, 20182019, and and decreased 6 decrease of 24 basis points fromfrom the 4.34% in the trailing quarter.
•Non-interest bearing deposits as a percentage of total deposits were 33.6%39.81% at SeptemberJune 30, 2019,2020, as compared to 33.3%34.86% at March 31, 2020 and 33.33% at June 30, 2019 and 33.6% at September 30, 2018.2019.
•The average rate of interest paid on deposits, includingincluding non-interest-bearing deposits, remained low but increased slightlydecreased to 0.23%0.12% for the thirdsecond quarter of 20192020 as compared with 0.22%0.19% for the trailing quarter, and an increase of 7also decreased by ten basis points from the average rate paid of 0.22% during the same quarter of the prior year.
•Non-performing assets to total assets were 0.31% at SeptemberJune 30, 2019,2020, as compared to 0.35%0.31% as of March 31, 2020, and 0.35% at June 30, 2019.
•Credit provision expense for loans and debt securities was $22.1 million during the quarter ended June 30, 2020, as compared to provision expense of $8.0 million during the trailing quarter ended March 31, 2020, and $0.5 million for the three month period ended June 30, 2019.
•Gain on sale of loans for the three and six months ended June 30, 2020 totaled $1,736,000 and $2,627,000, as compared to $575,000 and $987,000 for the equivalent periods ended June 30, 2019, and 0.47% at December 31, 2018.respectively.
•The balance of nonperforming loans decreased by $2.0 million, andefficiency ratio was facilitated by the sale of loans and charge-offs. Net charge-offs (recoveries)59.89% for the second quarter ended September 30, 2019 and 2018 were $1.0 million and ($0.2) million, respectively, while net charge-offs (recoveries) for the nine months ended September 30, 2019 were ($0.3) million and $0.5 million, respectively.
•For the three months ended September 30, 2019, the efficiency ratio declined to 58.8%,of 2020, as compared to 60.1%,59.75% in the trailing quarter and 65.3%60.07% in the same quarter of the 2018 year. Excluding merger and acquisition costs from the 2018 year results in an efficiency ratio of 59.56%.2019.
•
Non-interest income associated
SBA Paycheck Protection Program and COVID Deferrals
The United States has been operating under a state of emergency related to the COVID-19 global pandemic since March 13, 2020. The direct and indirect effects of the pandemic have resulted in a dramatic reduction in economic activity that has severely hampered the ability for businesses and consumers to meet their current repayment obligations. In March 2020 the SBA Paycheck Protection Program ("PPP") was created to help small businesses keep workers employed during the COVID-19 crisis. As a Small Business Administration (SBA) Preferred Lender, the Company was able to provide PPP loans to small business customers. During the quarter ended June 30, 2020, the Company originated more than 2,900 loans under the PPP program, with service charges anda total balance outstanding of $423,431,000 as of quarter end. In connection with the origination of these loans, the Company generated approximately $15,680,000 in loan fees increased by 4.6%that will be amortized over the trailing quartertwo-year term of the loans, offset by deferred loan costs of approximately $756,000. During the three and 8.7% oversix months ended June 30, 2020, interest and fee income recognized from PPP loans totaled $2,356,000, which was inclusive of $1,626,000 in net deferred fee accretion.
Following the same quarterpassage of the CARES Act legislation, the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" was issued by federal bank regulators, which offers temporary relief from troubled debt restructuring accounting for loan payment deferrals for certain customers whose businesses are experiencing economic hardship due to Coronavirus. The Company is closely monitoring the effects of the pandemic on our loan and deposit customers. Our management team continues to be focused on assessing the risks in our loan portfolio and working with our customers to mitigate where possible, the risk of potential losses. The Company implemented loan programs to allow certain consumers and businesses impacted by the pandemic to defer loan principal and interest payments.
The following is a summary of COVID related loan customer modifications as of June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Modification Type | | | | Deferral Term | | | | |
(dollars in thousands) | Balance of Modified Loans | | % of Total Category of Loans | | Interest Only Deferral | | Principal and Interest Deferral | | 90 Days | | 180 Days | | Other |
Commercial real estate: | | | | | | | | | | | | | |
CRE non-owner occupied | $213,394 | | 13.4 | % | | 10.1 | % | | 89.9 | % | | 46.7 | % | | 53.1 | % | | 0.2 | % |
CRE owner occupied | 37,816 | | 6.5 | % | | 18.3 | % | | 81.7 | % | | 17.4 | % | | 82.6 | % | | — | % |
Multifamily | 13,776 | | 2.4 | % | | — | % | | 100.0 | % | | 46.0 | % | | 54.0 | % | | — | % |
Farmland | 2,102 | | 1.4 | % | | 26.1 | % | | 73.9 | % | | — | % | | 100.0 | % | | — | % |
Total commercial real estate loans | 267,088 | | 9.2 | % | | 10.9 | % | | 89.2 | % | | 42.1 | % | | 57.7 | % | | 0.2 | % |
Consumer: | | | | | | | | | | | | | |
SFR 1-4 1st lien | 34,742 | | 6.9 | % | | 1.3 | % | | 98.7 | % | | 97.2 | % | | 2.8 | % | | — | % |
SFR HELOCs and junior liens | 8,275 | | 2.3 | % | | 76.1 | % | | 23.9 | % | | 93.3 | % | | 6.7 | % | | — | % |
Other | 4,629 | | 5.7 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % | | — | % |
Total consumer loans | 47,646 | | 5.0 | % | | 14.2 | % | | 85.8 | % | | 96.7 | % | | 3.3 | % | | — | % |
Commercial and industrial | 19,831 | | 3.1 | % | | 24.5 | % | | 75.5 | % | | 23.8 | % | | 75.9 | % | | 0.3 | % |
Construction | 6,349 | | 2.3 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % | | — | % |
Agriculture production | — | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
Leases | — | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
Total modifications | $340,915 | | 7.1 | % | | 11.9 | % | | 88.1 | % | | 49.7 | % | | 50.1 | % | | 0.2 | % |
While the Company has provided loan modifications in the prior year.form of payment deferrals to various borrowers as outlined above, ongoing discussions with borrowers remain a fluid process. More specifically, the deferral program designed by the Company did not result in the automatic approval of all customers that requested a deferral. Customers requesting a deferral were evaluated and reviewed for, among other things, past performance, unique impacts caused by or reasonably expected to be caused by economic conditions and potential governmental restrictions or limitations on the operations of their business. Based on the facts unique to each borrower, management believes that an appropriate deferral option was provided to the borrower with the goal of maximizing the likelihood of borrower's ability to return to a regularly scheduled payment structure at the conclusion of the deferral period.
TRICO BANCSHARES
Financial Summary
(In thousands, except per share amounts; unaudited)
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended June 30, | | | Six months ended June 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net interest income | Net interest income | 64,688 | | | $ | 60,489 | | | $ | 192,873 | | | $ | 151,344 | | Net interest income | 64,659 | | | 64,315 | | | $ | 127,851 | | | $ | 128,185 | |
Reversal of (provision for) loan losses | 329 | | | (2,651) | | | 1,392 | | | (1,777) | | |
(Provision for) reversal of credit losses | | (Provision for) reversal of credit losses | (22,089) | | | (537) | | | (30,088) | | | 1,063 | |
Non-interest income | Non-interest income | 14,108 | | | 12,336 | | | 39,334 | | | 36,466 | | Non-interest income | 11,657 | | | 13,423 | | | 23,477 | | | 25,226 | |
Non-interest expense | Non-interest expense | (46,344) | | | (47,528) | | | (138,493) | | | (123,226) | | Non-interest expense | (45,705) | | | (46,697) | | | (90,525) | | | (92,149) | |
Provision for income taxes | Provision for income taxes | (9,386) | | | (6,476) | | | (25,924) | | | (17,698) | | Provision for income taxes | (1,092) | | | (7,443) | | | (7,164) | | | (16,538) | |
Net income | Net income | $ | 23,395 | | | $ | 16,170 | | | $ | 69,182 | | | $ | 45,109 | | Net income | $ | 7,430 | | | $ | 23,061 | | | $ | 23,551 | | | $ | 45,787 | |
Per Share Data: | Per Share Data: | | | | | | | | Per Share Data: | | | | | | | |
Basic earnings per share | Basic earnings per share | $ | 0.77 | | | $ | 0.54 | | | $ | 2.27 | | | $ | 1.78 | | Basic earnings per share | $ | 0.25 | | | $ | 0.76 | | | $ | 0.78 | | | $ | 1.50 | |
Diluted earnings per share | Diluted earnings per share | $ | 0.76 | | | $ | 0.53 | | | $ | 2.25 | | | $ | 1.76 | | Diluted earnings per share | $ | 0.25 | | | $ | 0.75 | | | $ | 0.78 | | | $ | 1.49 | |
Dividends paid | Dividends paid | $ | 0.22 | | | $ | 0.17 | | | $ | 0.60 | | | $ | 0.51 | | Dividends paid | $ | 0.22 | | | $ | 0.19 | | | $ | 0.44 | | | $ | 0.38 | |
Book value at period end | Book value at period end | | | | | | $ | 29.39 | | | $ | 26.37 | | Book value at period end | | | | | $ | 29.76 | | | $ | 28.71 | |
Average common shares outstanding | Average common shares outstanding | 30,509 | | | 30,011 | | | 30,464 | | | 25,317 | | Average common shares outstanding | 29,754 | | | 30,458 | | | 30,074 | | | 30,441 | |
Average diluted common shares outstanding | Average diluted common shares outstanding | 30,629 | | | 30,291 | | | 30,643 | | | 25,617 | | Average diluted common shares outstanding | 29,883 | | | 30,643 | | 30657833 | 30,203 | | | 30,650 | |
Shares outstanding at period end | Shares outstanding at period end | | | | | | 30,512 | | | 30,418 | | Shares outstanding at period end | | | | | 29,759 | | | 30,503 | |
At period end: | At period end: | | At period end: | |
Loans, net | Loans, net | | | | | | | 4,150,811 | | | 3,995,833 | | Loans, net | | | | | 4,721,666 | | | 4,070,819 | |
Total investment securities | Total investment securities | | | | | | 1,397,753 | | | 1,535,953 | | Total investment securities | | | | | 1,353,728 | | | 1,566,720 | |
Total assets | Total assets | | | | | | | 6,384,883 | | | 6,318,865 | | Total assets | | | | | 7,360,071 | | | 6,395,172 | |
Total deposits | Total deposits | | | | | | | 5,295,407 | | | 5,093,117 | | Total deposits | | | | | 6,248,258 | | | 5,342,173 | |
Other borrowings | Other borrowings | | | | | | | 16,423 | | | 282,831 | | Other borrowings | | | | | 38,544 | | | 13,292 | |
Shareholders’ equity | Shareholders’ equity | | | | | | | 896,665 | | | 802,115 | | Shareholders’ equity | | | | | 885,686 | | | 875,886 | |
Financial Ratios: | Financial Ratios: | | Financial Ratios: | |
During the period: | During the period: | | During the period: | |
Return on average assets (annualized) | Return on average assets (annualized) | 1.44 | % | | 1.05 | % | | 1.44 | % | | 1.15 | % | Return on average assets (annualized) | 0.43 | % | | 1.45 | % | | 0.70 | % | | 1.15 | % |
Return on average equity (annualized) | Return on average equity (annualized) | 10.42 | % | | 9.11 | % | | 10.67 | % | | 10.44 | % | Return on average equity (annualized) | 3.39 | % | | 10.68 | % | | 5.28 | % | | 10.44 | % |
Net interest margin(1) (annualized) | Net interest margin(1) (annualized) | 4.44 | % | | 4.29 | % | | 4.48 | % | | 4.22 | % | Net interest margin(1) (annualized) | 4.10 | % | | 4.50 | % | | 4.22 | % | | 4.22 | % |
Efficiency ratio | Efficiency ratio | 58.82 | % | | 65.26 | % | | 59.64 | % | | 65.61 | % | Efficiency ratio | 59.89 | % | | 60.07 | % | | 59.82 | % | | 65.61 | % |
Average equity to average assets | Average equity to average assets | 13.80 | % | | 12.74 | % | | 13.50 | % | | 11.48 | % | Average equity to average assets | 12.53 | % | | 13.60 | % | | 13.22 | % | | 13.30 | % |
At end of period: | At end of period: | | At end of period: | |
Equity to assets | Equity to assets | | | | | | | 14.04 | % | | 12.69 | % | Equity to assets | | | | | 12.03 | % | | 13.70 | % |
Total capital to risk-adjusted assets | Total capital to risk-adjusted assets | | 15.23 | % | | 13.90 | % | Total capital to risk-adjusted assets | | | | | 15.13 | % | | 14.93 | % |
(1) Fully taxable equivalent (FTE)
The financial results aboveCompany reported net income of $7,430,000 for the quarter ended June 30, 2020, compared to $16,121,000 and $23,061,000 for the quarters ended March 31, 2020 and June 30, 2019, respectively. Diluted earnings per share were primarily benefited$0.25, $0.53 and $0.75 for the quarters ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively.
During the three months ended June 30, 2020, the Company's net income was impacted by an increase in interest-earning assets during both the three and nine month periods ended September 30, 2019provision for credit losses which totaled $22,089,000, as compared to provision expense of $8,000,000 for the trailing quarter, and $537,000 during the same 2018 periods. Whileperiod in 2019. The net increase in allowance for credit losses (ACL) as of quarter ended June 30, 2020 totaled $21,828,000. More specifically, the growthchanges in interest-earning assets was funded by increasesloan volume and changes in interest-bearing liabilities, net interest income was benefited by reductionscredit quality associated with levels of classified, past due and non-performing loans, resulted in both the rates paid and average balanceneed for a provision for credit losses of other borrowings which were paid down$2,685,000. However, the majority of the increase in ACL reflects potential future credit deterioration. Specifically, portfolio-wide qualitative indicators such as the outlook for changes in California Unemployment and Gross Domestic Product (GDP), resulted in a $19,143,000 increase in credit reserves on loans as of June 30, 2020. The Company utilizes a forecast period of approximately eight quarters and obtains the forecast data from publicly available sources as of the balance of average deposits increased.
sheet date. This forecast data continues to rapidly
evolve and included significant shifts in the magnitude of changes for both the unemployment and GDP factors leading up to the balance sheet date. Management noted that the majority of economic forecasts, as of the end of the current quarter, utilized in the ACL calculation have shown a migration in the estimated timing of recovery from late 2020 as the end of the first quarter to mid-2021 or beyond.
Results of Operations
Overview
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Nine months ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Net interest income | $ | 64,688 | | | $ | 60,489 | | | $ | 192,873 | | | $ | 151,344 | |
Reversal of (provision for) loan losses | 329 | | | (2,651) | | | 1,392 | | | (1,777) | |
Non-interest income | 14,108 | | | 12,336 | | | 39,334 | | | 36,466 | |
Non-interest expense | (46,344) | | | (47,528) | | | (138,493) | | | (123,226) | |
Provision for income taxes | (9,386) | | | (6,476) | | | (25,924) | | | (17,698) | |
Net income | $ | 23,395 | | | $ | 16,170 | | | $ | 69,182 | | | $ | 45,109 | |
The Company reported net income of $23,395,000 and $69,182,000 for the quarter and nine months ended September 30, 2019, respectively, compared to $16,170,000 and $45,109,000 for the quarter and nine months ended September 30, 2018, respectively. Diluted earnings per share were $0.76 and $2.25 for the quarter and nine months ended September 30, 2019, respectively, compared to $0.53 and $1.76 for the quarter and nine months ended September 30, 2018, respectively.
Net Interest Income
The Company’s primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Following is a summary of the components of FTE net income for the periods indicated (dollars in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended June 30, | | | Six months ended June 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Interest income | Interest income | 68,889 | | | 64,554 | | | 204,526 | | | 160,153 | | Interest income | $ | 67,148 | | | $ | 68,180 | | | 133,665 | | | 135,637 | |
Interest expense | Interest expense | (4,201) | | | (4,065) | | | (11,653) | | | (8,809) | | Interest expense | (2,489) | | | (3,865) | | | (5,814) | | | (7,452) | |
FTE adjustment | FTE adjustment | 289 | | | 357 | | | 929 | | | 982 | | FTE adjustment | 286 | | | 298 | | | 557 | | | 619 | |
Net interest income (FTE) | Net interest income (FTE) | $ | 64,977 | | | $ | 60,846 | | | $ | 193,802 | | | $ | 152,326 | | Net interest income (FTE) | $ | 64,945 | | | $ | 64,613 | | | $ | 128,408 | | | $ | 128,804 | |
Net interest margin (FTE) | Net interest margin (FTE) | 4.44 | % | | 4.29 | % | | 4.48 | % | | 4.22 | % | Net interest margin (FTE) | 4.10 | % | | 4.50 | % | | 4.22 | % | | 4.51 | % |
Acquired loans discount accretion, net: | Acquired loans discount accretion, net: | | | | | | | | Acquired loans discount accretion, net: | | | | | | | |
Amount (included in interest income) | Amount (included in interest income) | $ | 2,360 | | | $ | 2,098 | | | $ | 5,919 | | | $ | 3,289 | | Amount (included in interest income) | $ | 2,587 | | | $ | 1,904 | | | $ | 4,335 | | | $ | 3,559 | |
Effect on average loan yield | Effect on average loan yield | 0.23 | % | | 0.21 | % | | 0.19 | % | | 0.13 | % | Effect on average loan yield | 0.24 | % | | 0.19 | % | | 0.20 | % | | 0.17 | % |
Effect on net interest margin (FTE) | Effect on net interest margin (FTE) | 0.16 | % | | 0.14 | % | | 0.08 | % | | 0.05 | % | Effect on net interest margin (FTE) | 0.16 | % | | 0.13 | % | | 0.14 | % | | 0.12 | % |
Net interest margin less effect of acquired loan discount | | Net interest margin less effect of acquired loan discount | 3.94 | % | | 4.37 | % | | 4.08 | % | | 4.39 | % |
PPP loans yield: | | PPP loans yield: | |
Amount (included in interest income) | | Amount (included in interest income) | $ | 2,356 | | | $ | — | | | $ | 2,356 | | | $ | — | |
Effect on net interest margin (FTE) | | Effect on net interest margin (FTE) | (0.04) | % | | — | % | | (0.03) | % | | — | % |
Net interest margin less effect of PPP loan yield | | Net interest margin less effect of PPP loan yield | 4.14 | % | | — | % | | 4.25 | % | | — | % |
Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income. As a result of the uncertain economic environment and corresponding rate volatility, the prepayment rate of portfolio loans, inclusive of those acquired at a premium or discount, increased during the second quarter of 2020. During the three and nine months ended SeptemberJune 30, 2020, March 31, 2020, December 31, 2019, and June 30, 2019, purchased loan discount accretion was $2,360,000$2,587,000, $1,748,000, $2,218,000, and $5,919,000,$1,904,000, respectively. DuringNet accretion for the three and ninesix months ended SeptemberJune 30, 2018, purchased loan discount accretion2019 was $2,098,000 and $3,289,000, respectively. On a year over year basis, the increase in discount accretion is directly attributable to the acquisition of FNB Bancorp in July 2018. Quarter over quarter, the increase in accretion is attributed to an increased level of pay-off activity resultingreduced by $259,000 from the declining rate environment.
early repayment of loans purchased at a premium several years ago.
Summary of Average Balances, Yields/Rates and Interest Differential
Net interest income (FTE) during the three months ended June 30, 2020 increased $1,482,000 or 2.3% to $64,945,000 compared to $63,463,000 during the three months ended March 31, 2020. Over the same period net interest margin declined 24 basis points to 4.10% as compared to 4.34% in the trailing quarter. The decline in net interest income (FTE) was due primarily to a decline in yield on interest earning assets, which was 4.26% for the quarter ended June 30, 2020, which represents a decrease of 31 basis points over the trailing quarter and a decrease of 50 basis points over the same quarter in the prior year. The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, remained unchanged during the quarter ended June 30, 2020 but decreased by 150 basis points during the prior quarter to 3.25% at March 31, 2020, continuing the downward trend as compared to 4.75% at December 31, 2019 and 5.50% at June 30, 2019. See the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid, below for additional information.
The following table presents, for the three month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | | | | | | | | | |
| June 30, 2020 | | | | | | June 30, 2019 | | | | |
| Average Balance | | Interest Income/ Expense | | Rates Earned /Paid | | Average Balance | | Interest Income/ Expense | | Rates Earned /Paid |
Assets: | | | | | | | | | | | |
Loans, excluding PPP | $ | 4,363,481 | | | $ | 56,053 | | | 5.17 | % | | $ | 4,044,044 | | | $ | 55,492 | | | 5.50 | % |
PPP loans | 292,569 | | | 2,356 | | | 3.24 | % | | — | | | — | | | — | % |
Investment securities - taxable | 1,251,873 | | | 7,689 | | | 2.47 | % | | 1,432,550 | | | 10,762 | | | 3.01 | % |
Investment securities - nontaxable(1) | 119,860 | | | 1,238 | | | 4.15 | % | | 140,562 | | | 1,358 | | | 3.88 | % |
Total investments | 1,371,733 | | | 8,927 | | | 2.62 | % | | 1,573,112 | | | 12,120 | | | 3.09 | % |
Cash at Federal Reserve and other banks | 338,082 | | | 98 | | | 0.12 | % | | 147,810 | | | 866 | | | 2.35 | % |
Total interest-earning assets | 6,365,865 | | | 67,434 | | | 4.26 | % | | 5,764,966 | | | 68,478 | | | 4.76 | % |
Other assets | 661,870 | | | | | | | 620,923 | | | | | |
Total assets | $ | 7,027,735 | | | | | | | $ | 6,385,889 | | | | | |
Liabilities and shareholders’ equity: | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 1,293,007 | | | $ | 64 | | | 0.02 | % | | $ | 1,276,388 | | | $ | 289 | | | 0.09 | % |
Savings deposits | 1,968,374 | | | 644 | | | 0.13 | % | | 1,888,234 | | | 1,306 | | | 0.28 | % |
Time deposits | 409,242 | | | 1,105 | | | 1.09 | % | | 441,116 | | | 1,404 | | | 1.28 | % |
Total interest-bearing deposits | 3,670,623 | | | 1,813 | | | 0.20 | % | | 3,605,738 | | | 2,999 | | | 0.33 | % |
Other borrowings | 26,313 | | | 4 | | | 0.06 | % | | 17,963 | | | 37 | | | 0.83 | % |
Junior subordinated debt | 57,372 | | | 672 | | | 4.71 | % | | 57,222 | | | 829 | | | 5.81 | % |
Total interest-bearing liabilities | 3,754,308 | | | 2,489 | | | 0.27 | % | | 3,680,923 | | | 3,865 | | | 0.42 | % |
Noninterest-bearing deposits | 2,266,671 | | | | | | | 1,765,141 | | | | | |
Other liabilities | 126,351 | | | | | | | 73,541 | | | | | |
Shareholders’ equity | 880,405 | | | | | | | 866,284 | | | | | |
Total liabilities and shareholders’ equity | $ | 7,027,735 | | | | | | | $ | 6,385,889 | | | | | |
Net interest spread(2) | | | | | 3.99 | % | | | | | | 4.34 | % |
Net interest income and interest margin(3) | | | $ | 64,945 | | | 4.10 | % | | | | $ | 64,613 | | | 4.50 | % |
(1)Fully taxable equivalent (FTE)
(2)Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.
The following table presents, for the six month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest- bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
| | | For the three months ended | | | For the six months ended | |
| | September 30, 2019 | | | September 30, 2018 | | | June 30, 2020 | | | June 30, 2019 | |
| | Average Balance | | Interest Income/ Expense | | Rates Earned /Paid | | Average Balance | | Interest Income/ Expense | | Rates Earned /Paid | | Average Balance | | Income/ Expense | | Yield/ Rate | | Average Balance | | Income/ Expense | | Yield/ Rate |
Assets: | | | | | | | | | | | | |
Loans | $ | 4,142,602 | | | $ | 56,999 | | | 5.46 | % | | $ | 4,019,391 | | | $ | 53,102 | | | 5.24 | % | |
Investment securities - taxable | 1,403,653 | | | 10,172 | | | 2.88 | % | | 1,326,756 | | | 9,648 | | | 2.89 | % | |
Investment securities - nontaxable(1) | 133,038 | | | 1,250 | | | 3.73 | % | | 163,309 | | | 1,546 | | | 3.76 | % | |
Assets | | Assets | | | | | | | | | | | |
Loans, excluding PPP | | Loans, excluding PPP | $ | 4,346,419 | | | $ | 112,311 | | | 5.20 | % | | $ | 4,033,954 | | | $ | 109,889 | | | 5.49 | % |
PPP loans | | PPP loans | 146,285 | | | 2,356 | | | 3.24 | % | | — | | | — | | | — | % |
Investments-taxable | | Investments-taxable | 1,235,672 | | | 16,261 | | | 2.65 | % | | 1,428,951 | | | 21,677 | | | 3.06 | % |
Investments-nontaxable (1) | | Investments-nontaxable (1) | 118,992 | | | 2,413 | | | 4.08 | % | | 141,397 | | | 2,753 | | | 3.93 | % |
Total investments | Total investments | 1,536,691 | | | 11,422 | | | 2.95 | % | | 1,490,065 | | | 11,194 | | | 2.98 | % | Total investments | 1,354,664 | | | 18,674 | | | 2.77 | % | | 1,570,348 | | | 24,430 | | | 3.14 | % |
Cash at Federal Reserve and other banks | Cash at Federal Reserve and other banks | 130,955 | | | 757 | | | 2.29 | % | | 119,635 | | | 615 | | | 2.04 | % | Cash at Federal Reserve and other banks | 266,752 | | | 881 | | | 0.66 | % | | 158,164 | | | 1,937 | | | 2.47 | % |
Total interest-earning assets | 5,810,248 | | | 69,178 | | | 4.72 | % | | 5,629,091 | | | 64,911 | | | 4.57 | % | |
Other assets | 642,222 | | | 626,622 | | | |
Total earning assets | | Total earning assets | 6,114,120 | | | 134,222 | | | 4.41 | % | | 5,762,466 | | | 136,256 | | | 4.77 | % |
Other assets, net | | Other assets, net | 653,006 | | | 643,592 | | |
Total assets | Total assets | $ | 6,452,470 | | | $ | 6,255,713 | | | Total assets | $ | 6,767,126 | | | $ | 6,406,058 | | |
Liabilities and shareholders’ equity: | | | | | |
Liabilities and shareholders’ equity | | Liabilities and shareholders’ equity | | | | |
Interest-bearing demand deposits | Interest-bearing demand deposits | $ | 1,240,548 | | | $ | 284 | | | 0.09 | % | | $ | 1,125,159 | | | $ | 248 | | | 0.09 | % | Interest-bearing demand deposits | $ | 1,269,452 | | | 233 | | | 0.04 | % | | $ | 1,274,882 | | | 576 | | | 0.09 | % |
Savings deposits | Savings deposits | 1,861,166 | | | 1,192 | | | 0.25 | % | | 1,803,022 | | | 833 | | | 0.18 | % | Savings deposits | 1,918,918 | | | 1,706 | | | 0.18 | % | | 1,907,677 | | | 2,439 | | | 0.26 | % |
Time deposits | Time deposits | 447,669 | | | 1,574 | | | 1.39 | % | | 430,286 | | | 991 | | | 0.91 | % | Time deposits | 419,638 | | | 2,425 | | | 1.16 | % | | 441,447 | | | 2,703 | | | 1.23 | % |
Total interest-bearing deposits | Total interest-bearing deposits | 3,549,383 | | | 3,050 | | | 0.34 | % | | 3,358,467 | | | 2,072 | | | 0.24 | % | Total interest-bearing deposits | 3,608,008 | | | 4,364 | | | 0.24 | % | | 3,624,006 | | | 5,718 | | | 0.32 | % |
Other borrowings | Other borrowings | 73,350 | | | 334 | | | 1.81 | % | | 246,637 | | | 1,178 | | | 1.89 | % | Other borrowings | 24,552 | | | 9 | | | 0.07 | % | | 16,736 | | | 50 | | | 0.60 | % |
Junior subordinated debt | Junior subordinated debt | 57,156 | | | 817 | | | 5.67 | % | | 56,973 | | | 815 | | | 5.68 | % | Junior subordinated debt | 57,324 | | | 1,441 | | | 5.06 | % | | 57,086 | | | 1,684 | | | 5.95 | % |
Total interest-bearing liabilities | Total interest-bearing liabilities | 3,679,889 | | | 4,201 | | | 0.45 | % | | 3,662,077 | | | 4,065 | | | 0.44 | % | Total interest-bearing liabilities | 3,689,884 | | | 5,814 | | | 0.32 | % | | 3,697,828 | | | 7,452 | | | 0.41 | % |
Noninterest-bearing deposits | Noninterest-bearing deposits | 1,777,852 | | | | | | | 1,710,374 | | | | | | Noninterest-bearing deposits | 2,059,242 | | | | | | | 1,754,973 | | | | | |
Other liabilities | Other liabilities | 104,062 | | | 86,131 | | | Other liabilities | 123,481 | | | 98,570 | | |
Shareholders’ equity | Shareholders’ equity | 890,667 | | | 797,131 | | | Shareholders’ equity | 894,519 | | | 854,687 | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 6,452,470 | | | $ | 6,255,713 | | | Total liabilities and shareholders’ equity | $ | 6,767,126 | | | $ | 6,406,058 | | |
Net interest spread(2) | | | 4.27 | % | | | | 4.13 | % | |
Net interest income and interest margin(3) | | | $ | 64,977 | | | 4.44 | % | | $ | 60,846 | | | 4.29 | % | |
Net interest rate spread (1) (2) | | Net interest rate spread (1) (2) | | | 4.09 | % | | | | 4.36 | % |
Net interest income and margin (1) (3) | | Net interest income and margin (1) (3) | | $ | 128,408 | | | 4.22 | % | | $ | 128,804 | | | 4.51 | % |
(1)Fully taxable equivalent (FTE)
(2)Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing
liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average
balance of interest-earning assets, then annualized based on the number of days in the given period.
During the comparable three month periods above, net interest income and net interest margin were benefited by both the increases in average volume and rates earned on loans. These benefits were partially offset by the increases in rates paid on savings and time deposits. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable nine-month periods increased from 154% to 158%, which contributed to the growth in net interest income and net interest margin of $4,131,000 and 15 basis points, respectively. See the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid, below for additional information.
The following table presents, for the nine month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest- bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the nine months ended | | | | | | | | | | |
| September 30, 2019 | | | | | | September 30, 2018 | | | | |
| Average Balance | | Interest Income/ Expense | | Rates Earned /Paid | | Average Balance | | Interest Income/ Expense | | Rates Earned /Paid |
Assets: | | | | | | | | | | | |
Loans | $ | 4,070,568 | | | $ | 166,888 | | | 5.48 | % | | $ | 3,387,390 | | | $ | 130,455 | | | 5.15 | % |
Investment securities - taxable | 1,420,426 | | | 31,849 | | | 3.00 | % | | 1,192,304 | | | 25,042 | | | 2.81 | % |
Investment securities - nontaxable(1) | 138,580 | | | 4,024 | | | 3.88 | % | | 145,298 | | | 4,254 | | | 3.91 | % |
Total investments | 1,559,006 | | | 35,873 | | | 3.08 | % | | 1,337,602 | | | 29,296 | | | 2.93 | % |
Cash at Federal Reserve and other banks | 148,995 | | | 2,694 | | | 2.42 | % | | 101,889 | | | 1,384 | | | 1.82 | % |
Total interest-earning assets | 5,778,569 | | | 205,455 | | | 4.75 | % | | 4,826,881 | | | 161,135 | | | 4.46 | % |
Other assets | 643,130 | | | | | | | 449,020 | | | | | |
Total assets | $ | 6,421,699 | | | | | | | $ | 5,275,901 | | | | | |
Liabilities and shareholders’ equity: | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 1,263,312 | | | $ | 860 | | | 0.09 | % | | $ | 1,038,775 | | | $ | 673 | | | 0.09 | % |
Savings deposits | 1,892,122 | | | 3,631 | | | 0.26 | % | | 1,524,048 | | | 1,671 | | | 0.15 | % |
Time deposits | 443,546 | | | 4,277 | | | 1.29 | % | | 350,559 | | | 2,058 | | | 0.78 | % |
Total interest-bearing deposits | 3,598,980 | | | 8,768 | | | 0.33 | % | | 2,913,382 | | | 4,402 | | | 0.20 | % |
Other borrowings | 35,814 | | | 384 | | | 1.43 | % | | 165,026 | | | 2,106 | | | 1.71 | % |
Junior subordinated debt | 57,109 | | | 2,501 | | | 5.86 | % | | 56,928 | | | 2,301 | | | 5.39 | % |
Total interest-bearing liabilities | 3,691,903 | | | 11,653 | | | 0.42 | % | | 3,135,336 | | | 8,809 | | | 0.38 | % |
Noninterest-bearing deposits | 1,761,037 | | | | | | | 1,462,209 | | | | | |
Other liabilities | 101,947 | | | | | | | 72,772 | | | | | |
Shareholders’ equity | 866,812 | | | | | | | 605,584 | | | | | |
Total liabilities and shareholders’ equity | $ | 6,421,699 | | | | | | | $ | 5,275,901 | | | | | |
Net interest spread(2) | | | | | 4.33 | % | | | | | | 4.08 | % |
Net interest income and interest margin(3) | | | $ | 193,802 | | | 4.48 | % | | | | $ | 152,326 | | | 4.22 | % |
(1)Fully taxable equivalent (FTE)
(2)Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(3)Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.
The change in average balances of assets and liabilities were significantly impacted by the July 6, 2018 acquisition of FNB Bancorp. During the comparable nine month periods above, net interest income and net interest margin were benefited by both the increases in average volume and rates earned on loans. These benefits were partially offset by the increases in rates paid on savings and time deposits. Total average interest-earning assets increased as a percent of total average interest-bearing liabilities during these comparable nine-month periods increased from 154% to 156%, which contributed to the growth in net interest income and net interest margin of $41,476,000 and 26 basis points, respectively. See the "Summary of changes in interest income and expense due to changes in average asset and liability balances and yields earned and rates paid", below for additional information.
Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth, for the period identified, a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components.
| | | | | | | | | | | | | | | | | |
(in thousands) | Three months ended September 30, 2019 compared with three months ended September 30, 2018 | | | | |
| Volume | | Rate | | Total |
Increase in interest income: | | | | | |
Loans | $ | 1,657 | | | $ | 2,240 | | | $ | 3,897 | |
Investment securities(1) | 345 | | | (117) | | | 228 | |
Cash at Federal Reserve and other banks | 61 | | | 81 | | | 142 | |
Total interest-earning assets | 2,063 | | | 2,204 | | | 4,267 | |
Increase (decrease) in interest expense: | | | | | |
Interest-bearing demand deposits | 26 | | | 10 | | | 36 | |
Savings deposits | 28 | | | 331 | | | 359 | |
Time deposits | 42 | | | 541 | | | 583 | |
Other borrowings | (792) | | | (52) | | | (844) | |
Junior subordinated debt | 3 | | | (1) | | | 2 | |
Total interest-bearing liabilities | (693) | | | 829 | | | 136 | |
Increase in net interest income | $ | 2,756 | | | $ | 1,375 | | | $ | 4,131 | |
| | | | | | | | | | | | | | | | | |
(in thousands) | Three months ended June 30, 2020 compared with three months ended June 30, 2019 | | | | |
| Volume | | Rate | | Total |
Increase in interest income: | | | | | |
Loans, including PPP | $ | 8,415 | | | $ | (5,498) | | | $ | 2,917 | |
Investment securities(1) | (3,469) | | | 276 | | | (3,193) | |
Cash at Federal Reserve and other banks | 1,118 | | | (1,886) | | | (768) | |
Total interest-earning assets | 6,064 | | | (7,108) | | | (1,044) | |
Increase (decrease) in interest expense: | | | | | |
Interest-bearing demand deposits | 4 | | | (229) | | | (225) | |
Savings deposits | 56 | | | (718) | | | (662) | |
Time deposits | (102) | | | (197) | | | (299) | |
Other borrowings | 17 | | | (50) | | | (33) | |
Junior subordinated debt | 2 | | | (159) | | | (157) | |
Total interest-bearing liabilities | (23) | | | (1,353) | | | (1,376) | |
Increase in net interest income | $ | 6,087 | | | $ | (5,755) | | | $ | 332 | |
(1)Fully taxable equivalent (FTE)
| | | | | | | | | | | | | | | | | |
(in thousands) | Nine months ended September 30, 2019 compared with nine months ended September 30, 2018 | | | | |
| Volume | | Rate | | Total |
Increase in interest income: | | | | | |
Loans | $ | 27,597 | | | $ | 8,836 | | | $ | 36,433 | |
Investment securities(1) | 4,834 | | | 1,743 | | | 6,577 | |
Cash at Federal Reserve and other banks | 1,058 | | | 252 | | | 1,310 | |
Total interest-earning assets | 33,489 | | | 10,831 | | | 44,320 | |
Increase (decrease) in interest expense: | | | | | |
Interest-bearing demand deposits | 152 | | | 35 | | | 187 | |
Savings deposits | 478 | | | 1,482 | | | 1,960 | |
Time deposits | 648 | | | 1,571 | | | 2,219 | |
Other borrowings | (1,430) | | | (292) | | | (1,722) | |
Junior subordinated debt | 7 | | | 193 | | | 200 | |
Total interest-bearing liabilities | (145) | | | 2,989 | | | 2,844 | |
Increase in net interest income | $ | 33,634 | | | $ | 7,842 | | | $ | 41,476 | |
(1)Fully taxable equivalent (FTE) | | | | | | | | | | | | | | | | | |
(in thousands) | Six months ended June 30, 2020 compared with six months ended June 30, 2019 | | | | |
| Volume | | Rate | | Total |
Increase in interest income: | | | | | |
Loans, including PPP | $ | 12,593 | | | $ | (7,815) | | | $ | 4,778 | |
Investment securities(1) | (7,538) | | | 1,782 | | | (5,756) | |
Cash at Federal Reserve and other banks | 1,341 | | | (2,397) | | | (1,056) | |
Total interest-earning assets | 6,396 | | | (8,430) | | | (2,034) | |
Increase (decrease) in interest expense: | | | | | |
Interest-bearing demand deposits | (5) | | | (338) | | | (343) | |
Savings deposits | 29 | | | (762) | | | (733) | |
Time deposits | (268) | | | (10) | | | (278) | |
Other borrowings | 47 | | | (88) | | | (41) | |
Junior subordinated debt | 14 | | | (257) | | | (243) | |
Total interest-bearing liabilities | (183) | | | (1,455) | | | (1,638) | |
Decrease in net interest income | $ | 6,579 | | | $ | (6,975) | | | $ | (396) | |
The following commentary regarding net interest income, interest income and interest expense may be best understood while referencing the Summary of Average Balances, Yields/Rates and Interest Differential and the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid shown above.
Net interest income (FTE) during the three months ended SeptemberJune 30, 20192020 increased $4,131,000$332,000 or 6.8%0.51% to $64,977,000$64,945,000 compared to $60,846,000$64,613,000 during the three months ended SeptemberJune 30, 2018.2019. The overall increase in net interest income (FTE) was primarily due most notably to both an increase in the average balances, and increase in market rates, on loans. Increasesincreases in average balance of loans added $1,657,000 to netloan balances (including PPP), which improved interest income. Increasesincome by $8,415,000. As an offset, the decrease in market rates and purchase discount accretion added $1,375,000 to net interest income due(FTE) was attributed to increases in rates earned on interest-earnings assets outpacing increases in rates paid on interest-bearing liabilities.
The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, has decreased during the quarter by 0.50% to 5.00% at September 30, 2019, consistent with the rate at September 30, 2018. As compared to the same quarterdeclines in the prior year, average loan yields increased 22 basis points to 5.46% during the three months ended September 30, 2019 from 5.24% during the three months ended September 30, 2018. Of the 22 basis point increase in yieldsinterest rates on loans 20 basis points(including PPP), which reduced interest income by $5,498,000. Also noteworthy was attributable to increases in market rates while 2 basis points was from increased accretion of purchased loans.
The organic growth in deposits was driven primarily by normal and expected seasonal trends as well as the impact of deposit customer’s receipt of insurance proceeds from the property and casualty losses incurred in connection with the wildfires in Northern California. This growth in deposits allowed for the repayment of overnight borrowings resulting in a reduction in average outstanding balance of investment securities from sales and maturities, which reduced interest expense of $792,000, however, the increases in rates paid on deposit products increased interest expenseincome by $882,000 for the three month period ended September 30, 2019 as compared with the same period in 2018. The Company’s cost of interest-bearing deposits increased from 24 basis points during the three months ended September 30, 2018 to 34 basis points during the three months ended September 30, 2019.$3,469,000.
Net interest income (FTE) during the ninesix months ended SeptemberJune 30, 2019 increased $41,476,0002020 decreased modestly by $396,000 or 27.2%0.30% to $193,802,000$128,408,000 compared to $152,326,000$128,804,000 during the ninesix months ended SeptemberJune 30, 2018.2019. The increasedecrease in net interest income (FTE) was primarily from a reduction in average outstanding balance of investment securities from sales, calls and maturities, which reduced interest income by $7,538,000, followed by a reduction in interest rates on cash and due from banks leading to a further $2,397,000 decline in interest income. As an increase both in the average balance and rate on loans and investment securities, which were partially offset, by an increase in the average rates paid on interest-bearing deposits which increased by 13 basis points to 0.33% for the nine months ended September 30, 2019 as compared to the 0.20% for the nine months ended September 30, 2018. The 13 basis point increase in the average rate paid on interest-bearing deposits was due to increases in competitive pressures related to the rates which the Company pays on its savings and time deposits. However, the growth in total average deposits during the comparable nine-month periods allowed for the repayment of overnight borrowings which, combined with changes in related rates, contributed to a decrease in related interest expense of $1,722,000.
During the nine months ended September 30, 2019, the average balance of loans increased by $683,178,000 or 20.2% to$4,070,568,000. This increase in loan volume combined with the 33 basis point increaseattributed to $12,593,000 in loan yields resulted in an increase inadditional interest incomemargin.
Table of $36,433,000 for the nine months ended September 30, 2019 as compared to the same period in 2018. The increase in net interest income and net interest margin was benefited by an increase in the year-to-date purchased loan discount accretion from $3,289,000 during the nine months ended September 30, 2018 to $5,919,000 during the nine months ended September 30, 2019. This increase in purchased loan discount accretion benefited loan yields by 6 basis points, and net interest margin by 3 basis points.Contents
Asset Quality and Loan Loss Provisioning
The Company continued to experience improvement in the overall credit quality of its loan portfolio. At September 30, 2019, total nonperforming loans decreased to $18,565,000 or 0.44% of total loans from $27,494,000 or 0.68% of total loans as of December 31, 2018.
The Company recorded a benefit due to reversal of loan losses of $329,000 during the three months ended September 30, 2019, as compared to a provision of loan losses of $2,651,000 in the same quarter of the prior year. The benefit from reversal was recorded, despite average loan growth of $98,558,000 during the quarter, due to declines in calculated required specific reserves following the sale and charge-off of nonperforming loans, and a $250,000 decrease in reserves attributed to loans associated with borrowers and collateral associated with the November 2018 Camp Fire. Additionally, the overall level of past due loans decreased significantly during the quarter, from approximately $14,580,000 as of June 30, 2019 to approximately $8,089,000 as of September 30, 2019, resulting in reductions during the quarter in the calculated qualitative factor by approximately $206,000 associated with 'delinquency' loan volume. Net charge-offs (recoveries) for the nine months ended September 30, 2019 and 2018 were ($347,000) and $497,000, respectively.adopted CECL on January 1, 2020. During the three months ended SeptemberJune 30, 20192020, the saleCompany recorded a provision for credit losses of $22,089,000, as compared to provision expense of $8,000,000 for the trailing quarter, and $537,000 during the same period in 2019.
The net increase in allowance for credit losses (ACL) as of quarter ended June 30, 2020 totaled $21,828,000. More specifically, the changes in loan volume and changes in credit quality associated with levels of classified, past due and non-performing loans, with carrying values totaling $2,887,000 further contributed toresulted in the reductionneed for a provision for credit losses of $2,685,000. However, the majority of the increase in requiredACL reflects potential future credit deterioration. Specifically, portfolio-wide qualitative indicators such as the outlook for changes in California Unemployment and Gross Domestic Product (GDP), resulted in a $19,143,000 increase in credit reserves on loans heldas of June 30, 2020. The Company utilizes a forecast period of approximately eight quarters and obtains the forecast data from publicly available sources as of the balance sheet date. This forecast data continues to rapidly evolve and included significant shifts in the magnitude of changes for investment.both the unemployment and GDP factors leading up to the balance sheet date. Management noted that the majority of economic forecasts, as of the end of the current quarter, utilized in the ACL calculation have shown a migration in the estimated timing of recovery from late 2020 as the end of the first quarter to mid-2021 or beyond.
The following provides credit quality trend data specific to the Company's loan portfolio for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, | % of Total Loans | | As of March 31, | % of Total Loans | | | As of December 31, | % of Total Loans | | |
(in thousands) | 2020 | | | 2020 | | | | 2019 | | | |
Risk Rating: | | | | | | | | | | | |
Pass | $ | 4,698,393 | | 97.9 | % | | $ | 4,280,031 | | 97.7 | % | | | $ | 4,228,453 | | 98.2 | % | | |
Special Mention | 61,883 | | 1.3 | % | | 63,169 | | 1.4 | % | | | 44,217 | | 1.0 | % | | |
Substandard | 41,129 | | 0.8 | % | | 35,862 | | 0.9 | % | | | 34,696 | | 0.8 | % | | |
Doubtful/Loss | — | | | — | | | | — | | | |
Total | $ | 4,801,405 | | | | $ | 4,379,062 | | | | | $ | 4,307,366 | | | | |
| | | | | | | | | | | |
Classified loans to total loans | 0.86 | % | | | 0.82 | % | | | | 0.81 | % | | | |
Loans past due 30+ days to total loans | 0.35 | % | | | 0.67 | % | | | | 0.25 | % | | | |
Loan grading trends within the Company's portfolio have been generally consistent for the quarter ended June 30, 2020 as compared to the trailing quarter ended March 31, 2020, with non-classified loans (loans graded special mention or better) representing 99.1% and 99.2% of total loans outstanding, respectively. Loans past due 30 days or more decreased by $12,071,000 during the quarter ended June 30, 2020 to $16,622,000 to 0.35% of total loans, as compared to $28,693,000 or 0.67% of total loans at March 31, 2020. The decrease in past due balances was driven primarily by a single loan in excess of $13,000,000 that was 60 days past due as of March 31, 2020 but was brought current during the current quarter.
Loan grading trends within the Company's portfolio have been consistent for the quarter ended June 30, 2020 as compared to the quarter ended December 31, 2019, with non-classified loans representing 99.1% and 99.2% of total loans outstanding, respectively, and past due 30 days or more as a percentage of total loans were 0.35% and 0.25%, respectively.
Total non-performing loans were $20,730,000 at June 30, 2020 and $17,955,000 at March 31, 2020 and have remained generally consistent with the $16,864,000 and $20,585,000 as of December 31, 2019 and June 30, 2019, respectively. Immediately following the quarter ended June 30, 2020, two non-accrual loans totaling $2,024,000 were paid in full including approximately $160,000 in past due interest and fees.
There were no additions and two sales of other real estate owned during the three month period ended June 30, 2020. The sold properties generated $217,000 in proceeds and had a carrying value of $201,000. As of June 30, 2020, other real estate owned consisted of three properties with a carrying value of $1,922,000.
Non-interest Income
The following table summarizes the Company’s non-interest income for the periods indicated (in thousands):
| | | Three months ended September 30, | | | | Three months ended June 30, | | |
(dollars in thousands) | (dollars in thousands) | 2019 | | 2018 | | $ Change | | % Change | (dollars in thousands) | 2020 | | 2019 | | $ Change | | % Change |
ATM and interchange fees | ATM and interchange fees | $ | 5,427 | | | $ | 4,590 | | | $ | 837 | | | 18.2 | % | ATM and interchange fees | $ | 5,165 | | | $ | 5,404 | | | $ | (239) | | | (4.4) | % |
Service charges on deposit accounts | Service charges on deposit accounts | 4,327 | | | 4,015 | | | $ | 312 | | | 7.8 | % | Service charges on deposit accounts | 3,046 | | | 4,182 | | | (1,136) | | | (27.2) | % |
Other service fees | Other service fees | 808 | | | 676 | | | $ | 132 | | | 19.5 | % | Other service fees | 734 | | | 619 | | | 115 | | | 18.6 | % |
Mortgage banking service fees | Mortgage banking service fees | 483 | | | 499 | | | $ | (16) | | | (3.2) | % | Mortgage banking service fees | 459 | | | 475 | | | (16) | | | (3.4) | % |
Change in value of mortgage servicing rights | Change in value of mortgage servicing rights | (455) | | | (37) | | | $ | (418) | | | 1,129.7 | % | Change in value of mortgage servicing rights | (1,236) | | | (552) | | | (684) | | | 123.9 | % |
Total service charges and fees | Total service charges and fees | 10,590 | | | 9,743 | | | 847 | | | 8.7 | % | Total service charges and fees | 8,168 | | | 10,128 | | | (1,960) | | | (19.4) | % |
Increase in cash value of life insurance | Increase in cash value of life insurance | 773 | | | 732 | | | $ | 41 | | | 5.6 | % | Increase in cash value of life insurance | 710 | | | 746 | | | (36) | | | (4.8) | % |
Asset management and commission income | Asset management and commission income | 721 | | | 728 | | | $ | (7) | | | (1.0) | % | Asset management and commission income | 661 | | | 739 | | | (78) | | | (10.6) | % |
Gain on sale of loans | Gain on sale of loans | 1,236 | | | 539 | | | $ | 697 | | | 129.3 | % | Gain on sale of loans | 1,736 | | | 575 | | | 1,161 | | | 201.9 | % |
Lease brokerage income | Lease brokerage income | 172 | | | 186 | | | $ | (14) | | | (7.5) | % | Lease brokerage income | 127 | | | 239 | | | (112) | | | (46.9) | % |
Sale of customer checks | Sale of customer checks | 126 | | | 88 | | | $ | 38 | | | 43.2 | % | Sale of customer checks | 88 | | | 135 | | | (47) | | | (34.8) | % |
Gain on sale of investment securities | Gain on sale of investment securities | 107 | | | 207 | | | $ | (100) | | | (48.3) | % | Gain on sale of investment securities | — | | | — | | | — | | | nm |
Gain (loss) on marketable equity securities | 22 | | | (22) | | | $ | 44 | | | (200.0) | % | |
Gain on marketable equity securities | | Gain on marketable equity securities | 25 | | | 42 | | | (17) | | | (40.5) | % |
Other | Other | 361 | | | 135 | | | $ | 226 | | | 167.4 | % | Other | 142 | | | 819 | | | (677) | | | (82.7) | % |
Total other non-interest income | Total other non-interest income | 3,518 | | | 2,593 | | | $ | 925 | | | 35.7 | % | Total other non-interest income | 3,489 | | | 3,295 | | | 194 | | | 5.9 | % |
Total non-interest income | Total non-interest income | $ | 14,108 | | | $ | 12,336 | | | $ | 1,772 | | | 14.4 | % | Total non-interest income | $ | 11,657 | | | $ | 13,423 | | | $ | (1,766) | | | (13.2) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | | | |
(dollars in thousands) | 2019 | | 2018 | | $ Change | | % Change |
ATM and interchange fees | $ | 15,412 | | | $ | 13,335 | | | $ | 2,077 | | | 15.6 | % |
Service charges on deposit accounts | 12,389 | | | 11,407 | | | 982 | | | 8.6 | % |
Other service fees | 2,198 | | | 2,020 | | | 178 | | | 8.8 | % |
Mortgage banking service fees | 1,441 | | | 1,527 | | | (86) | | | (5.6) | % |
Change in value of mortgage servicing rights | (1,652) | | | 38 | | | (1,690) | | | (4,447.4) | % |
Total service charges and fees | 29,788 | | | 28,327 | | | 1,461 | | | 5.2 | % |
Increase in cash value of life insurance | 2,294 | | | 1,996 | | | 298 | | | 14.9 | % |
Asset management and commission income | 2,102 | | | 2,414 | | | (312) | | | (12.9) | % |
Gain on sale of loans | 2,223 | | | 1,831 | | | 392 | | | 21.4 | % |
Lease brokerage income | 631 | | | 514 | | | 117 | | | 22.8 | % |
Sale of customer checks | 401 | | | 327 | | | 74 | | | 22.6 | % |
Gain on sale of investment securities | 107 | | | 207 | | | (100) | | | (48.3) | % |
Gain (loss) on marketable equity securities | 100 | | | (92) | | | 192 | | | (208.7) | % |
Other | 1,688 | | | 942 | | | 746 | | | 79.2 | % |
Total other non-interest income | 9,546 | | | 8,139 | | | 1,407 | | | 17.3 | % |
Total non-interest income | $ | 39,334 | | | $ | 36,466 | | | $ | 2,868 | | | 7.9 | % |
Non-interest income increased $1,772,000 (14.4%) and $2,868,000 (7.9%)decreased $1,766,000 or 13.2% to $11,657,000 during the three and nine month periodsmonths ended SeptemberJune 30, 2019 as2020 compared to $13,423,000 during the three and nine month periods ended September 30, 2018, respectively. The increase quarter over quarter was primarily drivencomparable 2019 quarter. Deposit account service charges declined by $1,960,000 during the comparable period as increases in average balances maintained by deposit customers caused a reduction in returned check fess of approximately $978,000. Other declines in service charge and fee charges for interchange and various deposit services. Specifically, growth in customers, volume of transactionsincome were directly related to customers,the COVID-19 pandemic and depressed levels of foot traffic to a lesser extent,various retail outlets, leading to fewer debit/credit transactions during the quarter. Changes in the value of mortgage servicing rights were consistent with the low rate environment and an increase in the fees charged for those services. Growthmortgage refinance index, two of the key assumptions utilized in determining their fair value. Specifically, accelerated prepayment speeds resulting from decreases in the nine month period over period is also due largely15 and 30 year mortgage rates, continued to be the largest contributor to the acquisitiondecline in fair value of FNB Bancorp effective July 2018, and resulting increase in customers and accounts that generate fee revenues. During the three and nine month periodsmortgage servicing asset which decreased by $1,236,000 during the quarter, representing an additional $684,000 decline over the same period ended September2019. Conversely, mortgage loan origination volume demand increased notably during the period ended June 30, 2019,2020 as a result of the Company recordedlow interest rate environment, leading to an increase inadditional $1,161,000 gain on the sale of loans of $697,000 and $392,000,over the comparable quarter.
respectively,
The following table summarizes the Company’s non-interest income for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | | | |
(dollars in thousands) | 2020 | | 2019 | | $ Change | | % Change |
ATM and interchange fees | $ | 10,276 | | | $ | 9,985 | | | $ | 291 | | | 2.9 | % |
Service charges on deposit accounts | 7,092 | | | 8,062 | | | (970) | | | (12.0) | % |
Other service fees | 1,492 | | | 1,390 | | | 102 | | | 7.3 | % |
Mortgage banking service fees | 928 | | | 958 | | | (30) | | | (3.1) | % |
Change in value of mortgage servicing rights | (2,494) | | | (1,197) | | | (1,297) | | | 108.4 | % |
Total service charges and fees | 17,294 | | | 19,198 | | | (1,904) | | | (9.9) | % |
Increase in cash value of life insurance | 1,430 | | | 1,521 | | | (91) | | | (6.0) | % |
Asset management and commission income | 1,577 | | | 1,381 | | | 196 | | | 14.2 | % |
Gain on sale of loans | 2,627 | | | 987 | | | 1,640 | | | 166.2 | % |
Lease brokerage income | 320 | | | 459 | | | (139) | | | (30.3) | % |
Sale of customer checks | 212 | | | 275 | | | (63) | | | (22.9) | % |
Gain on sale of investment securities | — | | | — | | | — | | | nm |
Gain on marketable equity securities | 72 | | | 78 | | | (6) | | | (7.7) | % |
Other | (55) | | | 1,327 | | | (1,382) | | | (104.1) | % |
Total other non-interest income | 6,183 | | | 6,028 | | | 155 | | | 2.6 | % |
Total non-interest income | $ | 23,477 | | | $ | 25,226 | | | $ | (1,749) | | | (6.9) | % |
Non-interest income decreased $1,749,000 or 6.9% to $23,477,000 during the six months ended June 30, 2020 compared to $25,226,000 during the comparable six month period in 2019. Non-interest income for the six months ended June 30, 2020 as compared to the three and nine months ended September 30, 2018. Death benefit insurance proceedssame period in 2019 was impacted by changes in the fair value of $800,000 were recognized within other income for the nine months ended September 30, 2019, compared to none in 2018. These increases were offset by valuation declines in the Company’s mortgage servicing right assetassets, as noted above, which contributed to a $1,297,000 decline. Deposit account service charges were impacted by reductions in the volume of $418,000 and $1,690,000, respectivelyreturned check fees. Other non-interest income declined by $1,382,000, partially from decreases in the fair value of assets used to fund acquired deferred compensation plans totaling $514,000 for the three and nine month periodssix months ended SeptemberJune 30, 20192020 as compared to the threesame period 2019, as well as from an absence of one-time death benefits totaling $728,000 realized during the six months ended June 30, 2019. The declines noted above were partially offset by gains from the sale of mortgage loans, which resulted from increased volume, and nine month periods ended September 30, 2018. Additional partial offsetscontributed $1,640,000 to the overall increase were due to declines in asset management and commissionnon-interest income of $7,000 and $312,000, respectively during the three and nine month periodssix months ended SeptemberJune 30, 2019 as compared to the three and nine month periods ended September 30, 2018.2020.
Non-interest Expense
The following table summarizes the Company’s non-interest expense for the periods indicated (dollars in thousands):
| | | Three months ended September 30, | | | | Three months ended June 30, | | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change |
Base salaries, net of deferred loan origination costs | Base salaries, net of deferred loan origination costs | $ | 17,656 | | | $ | 15,685 | | | $ | 1,971 | | | 12.6 | % | Base salaries, net of deferred loan origination costs | $ | 17,277 | | | $ | 17,211 | | | $ | 66 | | | 0.4 | % |
Incentive compensation | Incentive compensation | 3,791 | | | 4,515 | | | (724) | | | (16.0) | % | Incentive compensation | 2,395 | | | 3,706 | | | (1,311) | | | (35.4) | % |
Benefits and other compensation costs | Benefits and other compensation costs | 5,452 | | | 5,623 | | | (171) | | | (3.0) | % | Benefits and other compensation costs | 7,383 | | | 5,802 | | | 1,581 | | | 27.2 | % |
Total salaries and benefits expense | Total salaries and benefits expense | 26,899 | | | 25,823 | | | 1,076 | | | 4.2 | % | Total salaries and benefits expense | 27,055 | | | 26,719 | | | 336 | | | 1.3 | % |
Occupancy | Occupancy | 3,711 | | | 3,173 | | | 538 | | | 17.0 | % | Occupancy | 3,398 | | | 3,738 | | | (340) | | | (9.1) | % |
Data processing and software | Data processing and software | 3,411 | | | 2,786 | | | 625 | | | 22.4 | % | Data processing and software | 3,657 | | | 3,354 | | | 303 | | | 9.0 | % |
Equipment | Equipment | 1,679 | | | 1,750 | | | (71) | | | (4.1) | % | Equipment | 1,350 | | | 1,752 | | | (402) | | | (22.9) | % |
Intangible amortization | Intangible amortization | 1,431 | | | 1,390 | | | 41 | | | 2.9 | % | Intangible amortization | 1,431 | | | 1,431 | | | — | | | — | % |
Advertising | Advertising | 1,358 | | | 1,341 | | | 17 | | | 1.3 | % | Advertising | 531 | | | 1,533 | | | (1,002) | | | (65.4) | % |
ATM and POS network charges | ATM and POS network charges | 1,343 | | | 1,197 | | | 146 | | | 12.2 | % | ATM and POS network charges | 1,210 | | | 1,270 | | | (60) | | | (4.7) | % |
Professional fees | Professional fees | 999 | | | 1,352 | | | (353) | | | (26.1) | % | Professional fees | 741 | | | 1,057 | | | (316) | | | (29.9) | % |
Telecommunications | Telecommunications | 867 | | | 819 | | | 48 | | | 5.9 | % | Telecommunications | 639 | | | 773 | | | (134) | | | (17.3) | % |
Regulatory assessments and insurance | Regulatory assessments and insurance | 94 | | | 537 | | | (443) | | | (82.5) | % | Regulatory assessments and insurance | 360 | | | 490 | | | (130) | | | (26.5) | % |
Merger and acquisition expense | — | | | 4,150 | | | (4,150) | | | (100.0) | % | |
Postage | Postage | 438 | | | 275 | | | 163 | | | 59.3 | % | Postage | 283 | | | 315 | | | (32) | | | (10.2) | % |
Operational losses | Operational losses | 228 | | | 217 | | | 11 | | | 5.1 | % | Operational losses | 184 | | | 226 | | | (42) | | | (18.6) | % |
Courier service | Courier service | 357 | | | 278 | | | 79 | | | 28.4 | % | Courier service | 337 | | | 412 | | | (75) | | | (18.2) | % |
Gain on sale of foreclosed assets | Gain on sale of foreclosed assets | (50) | | | (2) | | | (48) | | | 2,400.0 | % | Gain on sale of foreclosed assets | (16) | | | (99) | | | 83 | | | (83.8) | % |
Loss on disposal of fixed assets | Loss on disposal of fixed assets | 2 | | | 152 | | | (150) | | | (98.7) | % | Loss on disposal of fixed assets | 15 | | | 42 | | | (27) | | | (64.3) | % |
Other miscellaneous expense | Other miscellaneous expense | 3,577 | | | 2,290 | | | 1,287 | | | 56.2 | % | Other miscellaneous expense | 4,530 | | | 3,684 | | | 846 | | | 23.0 | % |
Total other non-interest expense | Total other non-interest expense | 19,445 | | | 21,705 | | | (2,260) | | | (10.4) | % | Total other non-interest expense | 18,650 | | | 19,978 | | | (1,328) | | | (6.6) | % |
Total non-interest expense | Total non-interest expense | $ | 46,344 | | | $ | 47,528 | | | $ | (1,184) | | | (2.5) | % | Total non-interest expense | $ | 45,705 | | | $ | 46,697 | | | $ | (992) | | | (2.1) | % |
Average full time equivalent staff | Average full time equivalent staff | 1,160 | | | 1,146 | | | 14 | | | 1.2 | % | Average full time equivalent staff | 1,124 | | 1,138 | | (14) | | | (1.2) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | | | |
| 2019 | | 2018 | | $ Change | | % Change |
Base salaries, net of deferred loan origination costs | $ | 51,624 | | | $ | 44,076 | | | $ | 7,548 | | | 17.1 | % |
Incentive compensation | 10,064 | | | 9,126 | | | 938 | | | 10.3 | % |
Benefits and other compensation costs | 17,058 | | | 15,726 | | | 1,332 | | | 8.5 | % |
Total salaries and benefits expense | 78,746 | | | 68,928 | | | 9,818 | | | 14.2 | % |
Occupancy | 11,223 | | | 8,574 | | | 2,649 | | | 30.9 | % |
Data processing and software | 10,114 | | | 7,979 | | | 2,135 | | | 26.8 | % |
Equipment | 5,298 | | | 4,938 | | | 360 | | | 7.3 | % |
Intangible amortization | 4,293 | | | 2,068 | | | 2,225 | | | 107.6 | % |
Advertising | 4,222 | | | 3,214 | | | 1,008 | | | 31.4 | % |
ATM and POS network charges | 3,936 | | | 3,860 | | | 76 | | | 2.0 | % |
Professional fees | 2,895 | | | 2,898 | | | (3) | | | (0.1) | % |
Telecommunications | 2,437 | | | 2,201 | | | 236 | | | 10.7 | % |
Regulatory assessments and insurance | 1,095 | | | 1,384 | | | (289) | | | (20.9) | % |
Merger and acquisition expense | — | | | 5,227 | | | (5,227) | | | (100.0) | % |
Postage | 1,063 | | | 934 | | | 129 | | | 13.8 | % |
Operational losses | 679 | | | 763 | | | (84) | | | (11.0) | % |
Courier service | 1,039 | | | 769 | | | 270 | | | 35.1 | % |
Gain on sale of foreclosed assets | (246) | | | (390) | | | 144 | | | (36.9) | % |
Loss on disposal of fixed assets | 82 | | | 206 | | | (124) | | | (60.2) | % |
Other miscellaneous expense | 11,617 | | | 9,673 | | | 1,944 | | | 20.1 | % |
Total other non-interest expense | 59,747 | | | 54,298 | | | 5,449 | | | 10.0 | % |
Total non-interest expense | $ | 138,493 | | | $ | 123,226 | | | $ | 15,267 | | | 12.4 | % |
Average full time equivalent staff | 1,145 | | | 1,050 | | | 95 | | | 9.0 | % |
Salary and benefit expenses increased $1,076,000 (4.2%)Non-interest expense decreased by $992,000 or 2.1% to $26,899,000$45,705,000 during the three months ended SeptemberJune 30, 20192020 as compared to $25,823,000$46,697,000 for the three months ended June 30, 2019. Salary and benefit expense increased slightly by $336,000 or 1.3% to $27,055,000 during the three months ended SeptemberJune 30, 2018. Base salaries, net of deferred loan origination2020 as compared to $26,719,000 for the same period in 2019. This increase was attributed to increases in benefits and other compensations costs, increased $1,971,000 (12.6%) to $17,656,000. The increasepartially offset by decreases in base salariesincentive compensation and benefits related to compensation was largely due to an increasea decrease in average full time equivalent employees, to 1,160 from 1,146 in the year-ago quarter, as well as annual merit increases. Additionally, incentive compensation for retention bonuses related to the FNB Bancorp acquisition totaled $1,292,000staff. Miscellaneous expenses also increased during the three month period ended September 30, 2018.
Total other non-interestby $846,000 or 23.0% to $4,530,000 primarily as a result of the additional non-payroll related indirect lending costs incurred with the PPP program totaling $1,479,000. Reductions in advertising expense decreased $2,260,000 (10.4)%totaled $1,002,000 or 65.4%, to $19,445,000$531,000 during the three months ended SeptemberJune 30, 2019,2020 as compared to $21,705,000 during the three months ended September 30, 2018. The decrease in other non-interest expense during the three months ended September 30, 2019 was due primarily to the elimination of merger and acquisition expenses totaling $4,150,000 following the transaction with FNB Bancorp effective July 2018, offset partially with increases in other miscellaneous expenses 1,287,000 (56.2%), occupancy expenses 538,000 (17.0%), and data processing and software expenses 625,000 (22.4%), all during the comparative three months ended September 30, 2018.
The increase in total non-interest expense of $15,267,000 (12.4%) to $138,493,000 for the nine months ended September 30, 2019 compared to $123,226,000$1,533,000 for the same period in 2018 was also primarily attributable2019. Additional decreases in expenditures for the quarter ended June 30, 2020 totaling $340,000, $402,000 and $316,000 were realized within occupancy, equipment and professional fees, respectively.
The following table summarizes the Company’s non-interest expense for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
Base salaries, net of deferred loan origination costs | $ | 34,900 | | | $ | 33,968 | | | $ | 932 | | | 2.7 | % |
Incentive compensation | 5,496 | | | 6,273 | | | (777) | | | (12.4) | % |
Benefits and other compensation costs | 13,931 | | | 11,606 | | | 2,325 | | | 20.0 | % |
Total salaries and benefits expense | 54,327 | | | 51,847 | | | 2,480 | | | 4.8 | % |
Occupancy | 7,273 | | | 7,512 | | | (239) | | | (3.2) | % |
Data processing and software | 7,024 | | | 6,703 | | | 321 | | | 4.8 | % |
Equipment | 2,862 | | | 3,619 | | | (757) | | | (20.9) | % |
Intangible amortization | 2,862 | | | 2,862 | | | — | | | — | % |
Advertising | 1,196 | | | 2,864 | | | (1,668) | | | (58.2) | % |
ATM and POS network charges | 2,583 | | | 2,593 | | | (10) | | | (0.4) | % |
Professional fees | 1,444 | | | 1,896 | | | (452) | | | (23.8) | % |
Telecommunications | 1,364 | | | 1,570 | | | (206) | | | (13.1) | % |
Regulatory assessments and insurance | 455 | | | 1,001 | | | (546) | | | (54.5) | % |
Postage | 573 | | | 625 | | | (52) | | | (8.3) | % |
Operational losses | 405 | | | 451 | | | (46) | | | (10.2) | % |
Courier service | 668 | | | 682 | | | (14) | | | (2.1) | % |
Gain on sale of foreclosed assets | (57) | | | (198) | | | 141 | | | (71.2) | % |
Loss on disposal of fixed assets | 15 | | | 66 | | | (51) | | | (77.3) | % |
Other miscellaneous expense | 7,531 | | | 8,056 | | | (525) | | | (6.5) | % |
Total other non-interest expense | 36,198 | | | 40,302 | | | (4,104) | | | (10.2) | % |
Total non-interest expense | $ | 90,525 | | | $ | 92,149 | | | $ | (1,624) | | | (1.8) | % |
Average full time equivalent staff | 1,124 | | | 1,138 | | | (14) | | | (1.2) | % |
Non-interest expense decreased by $1,624,000 or 1.8% to $90,525,000 during the six months ended June 30, 2020 as compared to $92,149,000 for the same period in 2019. Reductions in advertising expenses totaling $1,668,000 or 58.2% to $1,196,000 provided a benefit to the acquisitionbottom line, as did declines in miscellaneous expenses totaling $525,000 or 6.5% attributed primarily to reduced travel and training expenses as a result of FNB Bancorp, including the growth in full time equivalent staff and expanded volume of operational activities, andstate-wide shelter-in-place restrictions which were partially offset by the $5,227,000 reduction in mergerloan documentation and acquisition expenses.administrative costs associated with PPP lending activity.
Income Taxes
The Company’s effective tax rate was 27.3%23.3% for the ninesix months ended SeptemberJune 30, 2019,2020, as compared to 28.6%27.4% for the same quarteryear ended December 31, 2019. The reduction in effective tax rate was made possible through the prior year. Duringprovisions of the threeCoronavirus Aid, Relief, and nine months ended September 30, 2019Economic Security Act (“CARES Act”) which provided the Company with an opportunity to file amended tax returns and generate proposed refunds of approximately $805,000. Other differences between the Company's effective tax rate and applicable federal and state statutory rates are due to the proportion of non-taxable revenue and low income housing tax credits as compared to the same periods in the 2018 year, the Company earned a greater percentagelevels of non-taxable income from investment securities and death benefits from life insurance proceeds. These benefits were partially offset by an increase in the estimated level of non-deductible compensation associated with increases in compensation to covered employees.pre-tax earnings.
Financial Condition
For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. Organic growth, inclusive of seasonal fluctuation, also contributes to the year-over-year balance sheet changes. During the twelve months ended September 30, 2019, organicmost recent quarter, loan growth of $154,912,000 or 3.8%$422,343,000 was primarily attributed to the PPP program, as total loan balances, excluding PPP, were effectively unchanged. Similarly, deposit increases of $845,560,000 was largely credit to the PPP program as non-interest bearing deposit balances associated with PPP recipients increase by approximately $412,725,000 during the same period. Expansion of Federal stimulus programs and the reduction in other borrowingsdelay of $266,408,000 or 94.2% was funded by2019 income tax payments is also attributed to the significant deposit growth during the quarter. Investment balances declined by $28,298,000 during the quarter ended June 30, 2020 due to prepayment and maturity of $202,290,000 or 4.0%debt securities.
The following is a comparison of the quarterly change in certain assets and the reduction via sale and principal repayment of investment securities of $138,200,000 or 9.0%. Total assets grew by $66,018,000 or 1.0% between September 2018 and September 2019. liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
($‘s in thousands) | As of June 30, 2020 | | As of March 31, 2020 | | $ Change | | Annualized % Change |
Ending balances | | | | | | | |
Total assets | $ | 7,360,071 | | | $ | 6,474,309 | | | $ | 885,762 | | | 54.7 | % |
Total loans | 4,801,405 | | | 4,379,062 | | | 422,343 | | | 38.6 | % |
Total investments | 1,353,728 | | | 1,382,026 | | | (28,298) | | | (8.2) | % |
Total deposits | 6,248,258 | | | 5,402,698 | | | 845,560 | | | 62.6 | % |
Total noninterest-bearing deposits | 2,487,120 | | | 1,883,143 | | | 603,977 | | | 128.3 | % |
Total other borrowings | 38,544 | | | 19,309 | | | 19,235 | | | 398.5 | % |
The following is a comparison of the year over year change in certain assets and liabilities:
| | | As of September 30, 2019 | | | $ Change | | % Change | | As of June 30, | | | $ Change | | % Change |
($‘s in thousands) | ($‘s in thousands) | 2019 | | 2018 | | | | | ($‘s in thousands) | 2020 | | 2019 | | | | |
Ending balances | Ending balances | | | | | | | | Ending balances | | | | | | | |
Total assets | Total assets | $ | 6,384,883 | | | $ | 6,318,865 | | | $ | 66,018 | | | 1.0 | % | Total assets | $ | 7,360,071 | | | $ | 6,395,172 | | | $ | 964,899 | | | 15.1 | % |
Total loans | Total loans | 4,182,348 | | | 4,027,436 | | | 154,912 | | | 3.8 | % | Total loans | 4,801,405 | | | 4,103,687 | | | 697,718 | | | 17.0 | % |
Total investments | Total investments | 1,397,753 | | | 1,535,953 | | | (138,200) | | | (9.0) | % | Total investments | 1,353,728 | | | 1,566,720 | | | (212,992) | | | (13.6) | % |
Total deposits | Total deposits | 5,295,407 | | | 5,093,117 | | | 202,290 | | | 4.0 | % | Total deposits | 6,248,258 | | | 5,342,173 | | | 906,085 | | | 17.0 | % |
Total noninterest-bearing deposits | Total noninterest-bearing deposits | 1,777,357 | | | 1,710,505 | | | 66,852 | | | 3.9 | % | Total noninterest-bearing deposits | 2,487,120 | | | 1,780,339 | | | 706,781 | | | 39.7 | % |
Total other borrowings | Total other borrowings | 16,423 | | | 282,831 | | | (266,408) | | | (94.2) | % | Total other borrowings | 38,544 | | | 13,292 | | | 25,252 | | | 190.0 | % |
Investment Securities
Investment securities available for sale decreased $130,956,000increased $46,142,000 to $984,080,000$996,280,000 as of SeptemberJune 30, 2019,2020, compared to December 31, 2018.2019. This decreaseincrease is primarily attributable to the sale of investment securities to provide liquidity to support loan growth. Proceedssupported by deposit growth and available cash reserves. There were no proceeds from the sale of, securities and net gains associated totaled $125,247,000 and $107,000, respectively, for the three and nine months periods ended September 30, 2019. There were noor transfers of available-for-sale investment securities to held-to-maturity, or vice versa, during the ninesix month periods ended SeptemberJune 30, 2020 and 2019, and 2018.respectively.
The following table presents the available for sale debt securities portfolio by major type as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2020 | | | December 31, 2019 | |
(dollars in thousands) | (dollars in thousands) | September 30, 2019 | | | December 31, 2018 | | (dollars in thousands) | Fair Value | | % | | Fair Value | | % |
| Fair Value | | % | | Fair Value | | % | |
Debt securities available for sale: | Debt securities available for sale: | | | | | | | | Debt securities available for sale: | | | | | | | |
Obligations of U.S. government agencies | Obligations of U.S. government agencies | $ | 495,637 | | | 50.3 | % | | $ | 629,981 | | | 56.5 | % | Obligations of U.S. government agencies | $ | 434,814 | | | 43.6 | % | | $ | 472,980 | | | 49.8 | % |
Obligations of states and political subdivisions | Obligations of states and political subdivisions | 111,910 | | | 11.4 | % | | 126,072 | | | 11.3 | % | Obligations of states and political subdivisions | 109,646 | | | 11.0 | % | | 109,601 | | | 11.5 | % |
Corporate bonds | Corporate bonds | 4,528 | | | 0.5 | % | | 4,478 | | | 0.4 | % | Corporate bonds | 2,570 | | | 0.3 | % | | 2,532 | | | 0.3 | % |
Asset backed securities | Asset backed securities | 372,005 | | | 37.8 | % | | 354,505 | | | 31.8 | % | Asset backed securities | 449,250 | | | 45.1 | % | | 365,025 | | | 38.4 | % |
Total debt securities available for sale | Total debt securities available for sale | $ | 984,080 | | | 100.0 | % | | $ | 1,115,036 | | | 100.0 | % | Total debt securities available for sale | $ | 996,280 | | | 100.0 | % | | $ | 950,138 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
(dollars in thousands) | Amortized Cost | | % | | Amortized Cost | | % |
Debt securities held to maturity: | | | | | | | |
Obligations of U.S. government and agencies | $ | 324,976 | | | 96.4 | % | | $ | 361,785 | | | 96.3 | % |
Obligations of states and political subdivisions | 12,189 | | | 3.6 | % | | 13,821 | | | 3.7 | % |
Total debt securities held to maturity | $ | 337,165 | | | 100.0 | % | | $ | 375,606 | | | 100.0 | % |
Investment securities held to maturity decreased $51,487,000$38,441,000 to $393,449,000$337,165,000 as of SeptemberJune 30, 2019,2020, as compared to December 31, 2018.2019. This decrease is attributable to principal repayments of $50,738,000,$37,905,000, and amortization of net purchase premiums of $749,000.
The following table presents the held to maturity investment securities portfolio by major type as of September 30, 2019 and December 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | September 30, 2019 | | | | December 31, 2018 | | |
| Amortized Cost | | % | | Amortized Cost | | % |
Debt securities held to maturity: | | | | | | | |
Obligations of U.S. government and agencies | $ | 379,634 | | | 96.5 | % | | $ | 430,343 | | | 96.7 | % |
Obligations of states and political subdivisions | 13,815 | | | 3.5 | % | | 14,593 | | | 3.3 | % |
Total debt securities held to maturity | $ | 393,449 | | | 100.0 | % | | $ | 444,936 | | | 100.0 | % |
$536,000.
Loans
The Company concentrates its lending activities in foursix principal areas: commercial real estate mortgage loans, (residential and commercial loans), consumer loans, commercial and industrial loans, (including agricultural loans),construction loans, agriculture production loans and real estate construction loans.leases. The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Company and prevailing money market rates indicative of the Company’s cost of funds.
The majority of the Company’s loans are direct loans made to individuals, farmers and local businesses. The Company relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.
The following table shows the Company’s loan balances, net deferred loan costs and discounts, as of the dates indicated:
| (dollars in thousands) | (dollars in thousands) | September 30, 2019 | | | December 31, 2018 | | (dollars in thousands) | June 30, 2020 | | | December 31, 2019 | |
Real estate mortgage | $ | 3,247,156 | | | 77.6 | % | | $ | 3,143,100 | | | 78.1 | % | |
Commercial real estate | | Commercial real estate | $ | 2,905,485 | | | 60.5 | % | | $ | 2,818,782 | | | 65.4 | % |
Consumer | Consumer | 442,539 | | | 10.6 | % | | 418,982 | | | 10.4 | % | Consumer | 945,669 | | | 19.7 | % | | 955,050 | | | 22.2 | % |
Commercial | 278,458 | | | 6.7 | % | | 276,548 | | | 6.9 | % | |
Real estate construction | 214,195 | | | 5.1 | % | | 183,384 | | | 4.6 | % | |
Commercial and industrial | | Commercial and industrial | 634,481 | | | 13.2 | % | | 249,791 | | | 5.8 | % |
Construction | | Construction | 278,566 | | | 5.8 | % | | 249,827 | | | 5.8 | % |
Agriculture production | | Agriculture production | 35,441 | | | 0.7 | % | | 32,633 | | | 0.8 | % |
Leases | | Leases | 1,763 | | | 0.01 | % | | 1,283 | | | 0.01 | % |
Total loans | Total loans | $ | 4,182,348 | | | 100.0 | % | | $ | 4,022,014 | | | 100.0 | % | Total loans | $ | 4,801,405 | | | 100.0 | % | | $ | 4,307,366 | | | 100.0 | % |
At SeptemberJune 30, 20192020 loans, including net deferred loan costs and discounts, totaled $4,182,348,000$4,801,405,000 which was a $160,334,000 (3.9%$422,343,000 (38.6%) annualized increase over the balances at December 31, 2018.2019. During the quarter ended June 30, 2020, the Company originated more than 2,900 loans under the Payment Protection Program (PPP), with a total balance outstanding of $423,431,000 as of quarter end. In connection with the origination of these loans, the Company generated approximately $15,680,000 in loan fees that will be amortized over the two-year term of the loans, offset by deferred loan costs of approximately $756,000. As of June 30, 2020 the net deferred fee to be recognized by the Company related to PPP loans totaled $13,300,000.
Asset Quality and Nonperforming Assets
Nonperforming Assets
The following tables set forth the amount of the Company’s nonperforming assets ("NPA") as of the dates indicated. “Performing nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2019 | | December 31, 2018 |
Performing nonaccrual loans | $ | 14,411 | | | $ | 22,689 | |
Nonperforming nonaccrual loans | 4,118 | | | 4,805 | |
Total nonaccrual loans | 18,529 | | | 27,494 | |
Loans 90 days past due and still accruing | 36 | | | — | |
Total nonperforming loans | 18,565 | | | 27,494 | |
Foreclosed assets | 1,546 | | | 2,280 | |
Total nonperforming assets | $ | 20,111 | | | $ | 29,774 | |
Nonperforming assets to total assets | 0.31 | % | | 0.47 | % |
Nonperforming loans to total loans | 0.44 | % | | 0.68 | % |
Allowance for loan losses to nonperforming loans | 170 | % | | 119 | % |
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed | 1.82 | % | | 2.11 | % |
| | | September 30, 2019 | | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | Originated | | PNCI | | PCI | | Total | (dollars in thousands) | June 30, 2020 | | December 31, 2019 |
Performing nonaccrual loans | Performing nonaccrual loans | $ | 9,000 | | | $ | 3,429 | | | $ | 1,982 | | | $ | 14,411 | | Performing nonaccrual loans | $ | 11,407 | | | $ | 11,266 | |
Nonperforming nonaccrual loans | Nonperforming nonaccrual loans | 2,224 | | | 1,598 | | | 296 | | | 4,118 | | Nonperforming nonaccrual loans | 10,136 | | | 5,579 | |
Total nonaccrual loans | Total nonaccrual loans | 11,224 | | | 5,027 | | | 2,278 | | | 18,529 | | Total nonaccrual loans | 21,543 | | | 16,845 | |
Loans 90 days past due and still accruing | Loans 90 days past due and still accruing | 36 | | | — | | | — | | | 36 | | Loans 90 days past due and still accruing | 31 | | | 19 | |
Total nonperforming loans | Total nonperforming loans | 11,260 | | | 5,027 | | | 2,278 | | | 18,565 | | Total nonperforming loans | 21,574 | | | 16,864 | |
Foreclosed assets | Foreclosed assets | 1,129 | | | — | | | 417 | | | 1,546 | | Foreclosed assets | 1,922 | | | 2,541 | |
Total nonperforming assets | Total nonperforming assets | $ | 12,389 | | | $ | 5,027 | | | $ | 2,695 | | | $ | 20,111 | | Total nonperforming assets | $ | 23,496 | | | $ | 19,405 | |
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans | $ | 791 | | | $ | — | | | $ | 255 | | | $ | 1,046 | | |
Nonperforming assets to total assets | Nonperforming assets to total assets | 0.19 | % | | 0.08 | % | | 0.04 | % | | 0.31 | % | Nonperforming assets to total assets | 0.32 | % | | 0.30 | % |
Nonperforming loans to total loans | Nonperforming loans to total loans | 0.27 | % | | 0.12 | % | | 0.05 | % | | 0.44 | % | Nonperforming loans to total loans | 0.45 | % | | 0.39 | % |
Allowance for loan losses to nonperforming loans | 276 | % | | 8 | % | | 0.26 | % | | 170 | % | |
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed | 1.19 | % | | 3.53 | % | | 36.72 | % | | 1.82 | % | |
Allowance for credit losses to nonperforming loans | | Allowance for credit losses to nonperforming loans | 369 | % | | 182 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | |
(dollars in thousands) | Originated | | PNCI | | PCI | | Total |
Performing nonaccrual loans | $ | 16,573 | | | $ | 1,269 | | | $ | 4,847 | | | $ | 22,689 | |
Nonperforming nonaccrual loans | 2,843 | | | 1,589 | | | 373 | | | 4,805 | |
Total nonaccrual loans | 19,416 | | | 2,858 | | | 5,220 | | | 27,494 | |
Loans 90 days past due and still accruing | — | | | — | | | — | | | — | |
Total nonperforming loans | 19,416 | | | 2,858 | | | 5,220 | | | 27,494 | |
Foreclosed assets | 1,490 | | | — | | | 790 | | | 2,280 | |
Total nonperforming assets | $ | 20,906 | | | $ | 2,858 | | | $ | 6,010 | | | $ | 29,774 | |
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans | $ | 800 | | | $ | — | | | $ | — | | | $ | 800 | |
Nonperforming assets to total assets | 0.33 | % | | 0.04 | % | | 0.09 | % | | 0.47 | % |
Nonperforming loans to total loans | 0.48 | % | | 0.07 | % | | 0.13 | % | | 0.68 | % |
Allowance for loan losses to nonperforming loans | 164 | % | | 23.3 | % | | 2.34 | % | | 119 | % |
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed | 1.39 | % | | 3.48 | % | | 33.69 | % | | 2.11 | % |
Changes in nonperforming assets during the three months ended SeptemberJune 30, 20192020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Balance at September 30, 2019 | | New NPA / Valuation Adjustments | | Pay-downs /Sales /Upgrades | | Charge-offs/ (1) Write-downs | | Transfers to Foreclosed Assets | | Balance at June 30, 2019 |
Real estate mortgage: | | | | | | | | | | | |
Residential | $ | 4,370 | | | $ | 1,226 | | | $ | (1,206) | | | $ | — | | | $ | — | | | $ | 4,350 | |
Commercial | 6,040 | | | 6 | | | (1,898) | | | (746) | | | — | | | 8,678 | |
Consumer | | | | | | | | | | | |
Home equity lines | 2,600 | | | 816 | | | (477) | | | — | | | (215) | | | 2,476 | |
Home equity loans | 2,063 | | | 235 | | | (216) | | | (3) | | | — | | | 2,047 | |
Other consumer | 64 | | | 59 | | | (10) | | | (59) | | | — | | | 74 | |
Commercial | 3,428 | | | 329 | | | (383) | | | (584) | | | — | | | 4,066 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Construction | — | | | — | | | — | | | — | | | — | | | — | |
Total nonperforming loans | 18,565 | | | 2,671 | | | (4,190) | | | (1,392) | | | (215) | | | 21,691 | |
Foreclosed assets | 1,546 | | | | | | (126) | | | (91) | | | 215 | | | 1,548 | |
Total nonperforming assets | $ | 20,111 | | | $ | 2,671 | | | $ | (4,316) | | | $ | (1,483) | | | $ | — | | | $ | 23,239 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Balance at March 31, 2020 | | New NPA / Valuation Adjustments | | Pay-downs /Sales /Upgrades | | Charge-offs/ (1) Write-downs | | Transfers to Foreclosed Assets | | Balance at June 30, 2020 |
Commercial real estate: | | | | | | | | | | | |
CRE non-owner occupied | $ | 687 | | | — | | | (10) | | | — | | | — | | | $ | 677 | |
CRE owner occupied | 1,610 | | | 1,009 | | | (210) | | | — | | | — | | | 2,409 | |
Multifamily | 2,024 | | | — | | | — | | | | | | | 2,024 | |
Farmland | 1,194 | | | 765 | | | (140) | | | — | | | — | | | 1,819 | |
Total commercial real estate loans | 5,515 | | | 1,774 | | | (360) | | | — | | | — | | | 6,929 | |
Consumer | | | | | | | | | | | |
SFR 1-4 1st DT liens | 5,784 | | | 1,053 | | | (107) | | | (11) | | | — | | | 6,719 | |
SFR HELOCs and junior liens | 4,864 | | | 1,118 | | | (294) | | | (23) | | | — | | | 5,665 | |
Other | 139 | | | 135 | | | (3) | | | (165) | | | — | | | 106 | |
Total consumer loans | 10,787 | | | 2,306 | | | (404) | | | (199) | | | — | | | 12,490 | |
Commercial and industrial | 1,628 | | | 421 | | | (125) | | | (214) | | | — | | | 1,710 | |
Construction | — | | | — | | | — | | | — | | | — | | | — | |
Agriculture production | 25 | | | 426 | | | (6) | | | — | | | — | | | 445 | |
Leases | — | | | — | | | — | | | — | | | — | | | — | |
Total nonperforming loans | 17,955 | | | 4,927 | | | (895) | | | (413) | | | — | | | 21,574 | |
Foreclosed assets | 2,229 | | | — | | | (201) | | | (106) | | | — | | | 1,922 | |
Total nonperforming assets | $ | 20,184 | | | 4,927 | | | (1,096) | | — | | (519) | | | — | | | $ | 23,496 | |
(1) The table above does not include deposit overdraft charge-offs.
Nonperforming assets decreasedincreased during the third quarter of 2019 by $3,128,000 (13.4%three months ended June 30, 2020 $3,312,000 (16.4%) to $20,111,000 at September 30, 2019 compared to $23,239,000$23,496,000 at June 30, 2020 compared to $20,184,000 at December 31, 2019. The decreaseincrease in nonperforming assets during the thirdsecond quarter of 20192020 was primarily the result of write-downs of $1,392,000 onnew nonperforming loans and sales and pay-downs of non-performing loans of $4,190,000,$4,927,000, which were partially offset by new nonperforming loanspay-downs of $2,671,000.$1,096,000 and write-downs of $519,000.
The $2,671,000 of new nonperformingNon performing loans added during the thirdsecond quarter of 2019 was mainly comprised2020 were primarily within CRE owner occupied and consumer SFR 1-4 1st DT and HELOC loans, both of 2 loans to the same borrower totaling $985,000, and a single loan to a different borrower totaling $407,000. All 3 loanswhich are secured by residential real estate which management believes are sufficiently secured by collateral.estate. SFR non-performing added $2,171,000 and CRE owner occupied added $1,009,000 during the quarter ended June 30, 2020. The new non performing SFR consumer loans were not concentrated amongst any one borrower, with the two largest individual loans totaling $573,000 and $276,000. Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the specific loan loss reserves associated with these loans is sufficient as of SeptemberJune 30, 2019.2020.
Loan charge-offs during the three months ended SeptemberJune 30, 20192020
In the thirdsecond quarter of 2019,2020, the Company recorded $1,392,000$413,000 in loan charge-offs and $130,000$78,000 in deposit overdraft charge-offs less $476,000$174,000 in loan recoveries and $44,000$56,000 in deposit overdraft recoveries resulting in $1,002,000$261,000 of net charge-offs. Included in loanrecoveries. Loan charge-offs were two loans with carrying balances of $1,023,000 related to one lendingnot concentrated within any single loan or borrower relationship that had long been identified as a fully reserved substandard credit where management determined that the collateral and estimated future cash flows were no longer supportive of the loan.
Otherwise, charge-offs during the quarter were generally comprised entirely of individual charges of less than $250,000$100,000 each. Generally, losses are triggered by non-performance by the borrower and calculated based on any difference between the current loan amount and the current value
Table of the underlying collateral less any estimated costs associated with the disposition of the collateral.Contents
Changes in nonperforming assets during the ninesix months ended SeptemberJune 30, 20192020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands): | Balance at September 30, 2019 | | New NPA / Valuation Adjustments | | Pay-downs /Sales /Upgrades | | Charge-offs/ (1) Write-downs | | Transfers to Foreclosed Assets | | Balance at December 31, 2018 |
Real estate mortgage: | | | | | | | | | | | |
Residential | $ | 4,370 | | | $ | 3,413 | | | $ | (1,779) | | | $ | (2) | | | $ | (116) | | | $ | 2,854 | |
Commercial | 6,040 | | | 852 | | | (9,112) | | | (746) | | | — | | | 15,046 | |
Consumer | | | | | | | | | | | |
Home equity lines | 2,600 | | | 907 | | | (841) | | | — | | | (215) | | | 2,749 | |
Home equity loans | 2,063 | | | 435 | | | (1,332) | | | (3) | | | — | | | 2,963 | |
Other consumer | 64 | | | 204 | | | (51) | | | (96) | | | — | | | 7 | |
Commercial | 3,428 | | | 1,728 | | | (964) | | | (1,211) | | | — | | | 3,875 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Construction | — | | | — | | | — | | | — | | | — | | | — | |
Total nonperforming loans | 18,565 | | | 7,539 | | | (14,079) | | | (2,058) | | | (331) | | | 27,494 | |
Foreclosed assets | 1,546 | | | 35 | | | (1,009) | | | (91) | | | 331 | | | 2,280 | |
Total nonperforming assets | $ | 20,111 | | | $ | 7,574 | | | $ | (15,088) | | | $ | (2,149) | | | $ | — | | | $ | 29,774 | |
(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Balance at December 31, 2019 | | New NPA / Valuation Adjustments | | Pay-downs /Sales /Upgrades | | Charge-offs/ (1) Write-downs | | Transfers to Foreclosed Assets | | Balance at June 30, 2020 |
Commercial real estate: | | | | | | | | | | | |
CRE non-owner occupied | $ | 642 | | | 66 | | | (31) | | | — | | | — | | | $ | 677 | |
CRE owner occupied | 1,408 | | | 1,254 | | | (253) | | | — | | | — | | | 2,409 | |
Multifamily | 2,024 | | | — | | | — | | | — | | | — | | | 2,024 | |
Farmland | 1,242 | | | 765 | | | (188) | | | — | | | — | | | 1,819 | |
Total commercial real estate loans | 5,316 | | | 2,085 | | | (472) | | | — | | | — | | | 6,929 | |
Consumer | | | | | | | | | | | |
SFR 1-4 1st DT liens | 5,191 | | | 2,038 | | | (499) | | | (11) | | | — | | | 6,719 | |
SFR HELOCs and junior liens | 4,217 | | | 2,132 | | | (661) | | | (23) | | | — | | | 5,665 | |
Other | 51 | | | 249 | | | (6) | | | (188) | | | — | | | 106 | |
Total consumer loans | 9,459 | | | 4,419 | | | (1,166) | | | (222) | | | — | | | 12,490 | |
Commercial and industrial | 2,050 | | | 876 | | | (622) | | | (594) | | | — | | | 1,710 | |
Construction | — | | | — | | | — | | | — | | | — | | | — | |
Agriculture production | 39 | | | 426 | | | (20) | | | — | | | — | | | 445 | |
Leases | — | | | — | | | — | | | — | | | — | | | — | |
Total nonperforming loans | 16,864 | | | 7,806 | | | (2,280) | | | (816) | | | — | | | 21,574 | |
Foreclosed assets | 2,229 | | | — | | | (201) | | | (106) | | | — | | | 1,922 | |
Total nonperforming assets | $ | 19,093 | | | 7,806 | | | (2,481) | | — | | (922) | | | — | | | $ | 23,496 | |
The table above does not include deposit overdraft charge-offs.
Nonperforming assets decreasedincreased during the ninefirst six months ended 2019of 2020 by $9,663,000 (32.5%$4,403,000 (23.1%) to $20,111,000$23,496,000 at SeptemberJune 30, 20192020 compared to $29,774,000$19,093,000 at December 31, 2018.2019. The decreaseincrease in nonperforming assets during the nine months period ended September, 2019second quarter of 2020 was primarily the result of pay-downs, sales and upgrades ofnew nonperforming loans totaling $14,079,000, and write-downs of $2,058,000 on nonperforming loans, that$7,806,000, which were partially offset by new nonperforming loanspay-downs of $7,539,000.
The $14,079,000 in reduction$2,481,000 and write-downs of nonperforming loans during the nine months ended 2019 was mainly comprised of decreases within commercial real estate, and included payoffs of three loans to two relationships with a combined balance $6,818,000 and sale of one relationship totaling $1,782,000.
Loan charge-offs during the ninesix months ended SeptemberJune 30, 20192020
During the first ninesix months of 2019,ended June 30, 2020, the Company recorded $2,183,000$816,000 in loan charge-offs and $358,000$185,000 in deposit overdraft charge-offs less $2,742,000$1,010,000 in loan recoveries and $146,000$112,000 in deposit overdraft recoveries resulting in $347,000$121,000 of net recoveries.recoveries for the year to date period.
The Components of the Allowance for LoanCredit Losses for Loans
The following table sets forth the allowance for loancredit losses as of the dates indicatedindicated:
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2019 | | December 31, 2018 |
Allowance for originated and PNCI loan losses: | | | |
Environmental factors allowance | $ | 12,675 | | | $ | 11,577 | |
Formula allowance | 17,332 | | | 18,689 | |
Total allowance for originated and PNCI loan losses | 30,007 | | | 30,266 | |
Allowance for impaired loans | 1,524 | | | 2,194 | |
Allowance for PCI loan losses | 6 | | | 122 | |
Total allowance for loan losses | $ | 31,537 | | | $ | 32,582 | |
Allowance for loan losses to loans | 0.75 | % | | 0.81 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | June 30, 2020 | | March 31, 2020 | | January 1, 2020 | | December 31, 2019 |
Allowance for credit losses: | | | | | | | |
Qualitative and forecast factor allowance | $ | 48,548 | | | $ | 29,250 | | | $ | 21,830 | | | $ | 13,476 | |
Cohort model allowance reserves | 30,061 | | | 27,699 | | | 26,900 | | | 16,205 | |
Total allowance for credit losses | 78,609 | | | 56,949 | | | 48,730 | | | 29,681 | |
Allowance for individually evaluated loans | 1,130 | | | 962 | | | 799 | | | 935 | |
Allowance for PCD loan losses | — | | | — | | | — | | | n/a |
Allowance for PCI loan losses | n/a | | n/a | | n/a | | 6 | |
Total allowance for credit losses | $ | 79,739 | | | $ | 57,911 | | | $ | 49,529 | | | $ | 30,616 | |
Allowance for credit losses for loans | 1.66 | % | | 1.32 | % | | 1.16 | % | | 0.71 | % |
For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Asset Quality and Loan Loss Provisioning” at “Results of Operations”, above. Based on the current conditions of the loan portfolio, management believes that the $31,537,000$79,739,000 allowance for loan losses at SeptemberJune 30, 20192020 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The following table summarizes the allocation of the allowance for loancredit losses between loan types and by percentage of the total allowance for loan losses as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | | December 31, 2018 | | |
Real estate mortgage | $ | 14,347 | | | 45.6 | % | | $ | 15,620 | | | 47.9 | % |
Consumer | 8,549 | | | 27.1 | % | | 8,375 | | | 25.7 | % |
Commercial | 5,687 | | | 18.0 | % | | 6,090 | | | 18.7 | % |
Real estate construction | 2,954 | | | 9.3 | % | | 2,497 | | | 7.7 | % |
Total allowance for loan losses | $ | 31,537 | | | 100.0 | % | | $ | 32,582 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | January 1, 2020 | | | | December 31, 2019 | | |
Commercial real estate | $ | 44,850 | | | 56.2 | % | | 23,843 | | | 48.1 | % | | $ | 11,995 | | | 39.2 | % |
Consumer | 23,165 | | | 29.1 | % | | 18,368 | | | 37.1 | % | | 10,084 | | | 32.9 | % |
Commercial and industrial | 4,018 | | | 5.0 | % | | 2,906 | | | 5.9 | % | | 4,867 | | | 15.9 | % |
Construction | 6,775 | | | 8.5 | % | | 4,321 | | | 8.7 | % | | 3,388 | | | 11.1 | % |
Agriculture production | 919 | | | 1.2 | % | | 82 | | | 0.2 | % | | 261 | | | 0.9 | % |
Leases | 12 | | | 0.02 | % | | 9 | | | 0.02 | % | | 21 | | | 0.1 | % |
Total allowance for credit losses | $ | 79,739 | | | 100.0 | % | | 49,529 | | 100.0 | % | | $ | 30,616 | | | 100.0 | % |
The following table summarizes the allocation of the allowance for loancredit losses as a percentage of the total loans for each loan category as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | | December 31, 2018 | | |
Real estate mortgage | $ | 3,247,156 | | | 0.44 | % | | $ | 3,143,100 | | | 0.50 | % |
Consumer | 442,539 | | | 1.93 | % | | 418,982 | | | 2.00 | % |
Commercial | 278,458 | | | 2.04 | % | | 276,548 | | | 2.20 | % |
Real estate construction | 214,195 | | | 1.38 | % | | 183,384 | | | 1.36 | % |
Total allowance for loan losses | $ | 4,182,348 | | | 0.75 | % | | $ | 4,022,014 | | | 0.81 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | January 1, 2020 | | | December 31, 2019 | | |
Commercial real estate | $ | 2,905,485 | | | 1.54 | % | | $ | 2,818,782 | | | 0.85 | % | $ | 2,818,782 | | | 0.42 | % |
Consumer | 945,669 | | | 2.45 | % | | 955,050 | | | 1.92 | % | 955,050 | | | 1.05 | % |
Commercial and industrial | 634,481 | | | 0.63 | % | | 249,791 | | | 1.16 | % | 249,791 | | | 1.81 | % |
Construction | 278,566 | | | 2.43 | % | | 249,827 | | | 1.73 | % | 249,827 | | | 1.36 | % |
Agriculture production | 35,441 | | | 2.59 | % | | 32,633 | | | 0.25 | % | 32,633 | | | 1.82 | % |
Leases | 1,763 | | | 0.68 | % | | 1,283 | | | 0.70 | % | 1,283 | | | 1.63 | % |
Total allowance for credit losses | $ | 4,801,405 | | | 1.66 | % | | $ | 4,307,366 | | | 1.15 | % | $ | 4,307,366 | | | 0.71 | % |
The following table summarizes the activity in the allowance for loancredit losses for the periods indicated (dollars in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended June 30, | | | Six months ended June 30, | |
(in thousands) | (in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Allowance for loan losses: | | | | | | | | |
Allowance for credit losses: | | Allowance for credit losses: | | | | | | | |
Balance at beginning of period | Balance at beginning of period | $ | 32,868 | | | $ | 29,524 | | | $ | 32,582 | | | $ | 30,323 | | Balance at beginning of period | $ | 57,911 | | | $ | 32,064 | | | $ | 30,616 | | | $ | 32,582 | |
Impact of adoption from ASU 2016-13 | | Impact of adoption from ASU 2016-13 | — | | | — | | | 18,913 | | | — | |
Provision for (reversal of) loan losses | Provision for (reversal of) loan losses | (329) | | | 2,651 | | | (1,392) | | | 1,777 | | Provision for (reversal of) loan losses | 22,089 | | | 537 | | | 30,089 | | | (1,063) | |
Loans charged-off: | Loans charged-off: | | | | | Loans charged-off: | |
Real estate mortgage: | | | | | |
Residential | — | | | (25) | | | (2) | | | (77) | | |
Commercial | (746) | | | — | | | (746) | | | (15) | | |
Commercial real estate: | | Commercial real estate: | |
CRE non-owner occupied | | CRE non-owner occupied | — | | | — | | | — | | | — | |
CRE owner occupied | | CRE owner occupied | — | | | — | | | — | | | — | |
Multifamily | | Multifamily | — | | | — | | | — | | | — | |
Farmland | | Farmland | — | | | — | | | — | | | — | |
Consumer: | | Consumer: | |
SFR 1-4 1st DT liens | | SFR 1-4 1st DT liens | (11) | | | (2) | | | (11) | | | (2) | |
SFR HELOCs and junior liens | | SFR HELOCs and junior liens | (23) | | | — | | | (23) | | | — | |
Other | | Other | (243) | | | (153) | | | (373) | | | (360) | |
Commercial and industrial | | Commercial and industrial | (214) | | | (138) | | | (594) | | | (657) | |
Construction | | Construction | — | | | — | | | — | | | — | |
Agriculture production | | Agriculture production | — | | | — | | | — | | | — | |
Leases | | Leases | — | | | — | | | — | | | — | |
Total loans charged-off | | Total loans charged-off | (491) | | | (293) | | | (1,001) | | | (1,019) | |
Recoveries of previously charged-off loans: | | Recoveries of previously charged-off loans: | |
Commercial real estate: | | Commercial real estate: | |
CRE non-owner occupied | | CRE non-owner occupied | 5 | | 6 | | 193 | | 1,383 |
CRE owner occupied | | CRE owner occupied | 4 | | 4 | | 9 | | 8 |
Multifamily | | Multifamily | — | | — | | — | | — |
Farmland | | Farmland | — | | — | | — | | — |
Consumer: | Consumer: | | | | | Consumer: | | | | | | | |
Home equity lines | Home equity lines | — | | | (172) | | | — | | | (276) | | Home equity lines | 2 | | 3 | | 412 | | 5 |
Home equity loans | Home equity loans | (3) | | | (23) | | | (3) | | | (23) | | Home equity loans | 92 | | 354 | | 140 | | 536 |
Other consumer | Other consumer | (188) | | | (229) | | | (548) | | | (597) | | Other consumer | 72 | | 108 | | 167 | | 183 |
Commercial | (585) | | | (693) | | | (1,242) | | | (952) | | |
Construction: | | | | | |
Residential | — | | | — | | | — | | | — | | |
Commercial | — | | | — | | | — | | | — | | |
Total loans charged-off | (1,522) | | | (1,142) | | | (2,541) | | | (1,940) | | |
Recoveries of previously charged-off loans: | | |
Real estate mortgage: | | |
Residential | 48 | | | — | | | 53 | | | — | | |
Commercial | 126 | | | 15 | | | 1,517 | | | 51 | | |
Consumer: | | | | | |
Home equity lines | 27 | | | 151 | | | 305 | | | 677 | | |
Home equity loans | 156 | | | 139 | | | 414 | | | 176 | | |
Other consumer | 79 | | | 63 | | | 262 | | | 208 | | |
Commercial | 84 | | | 202 | | | 337 | | | 331 | | |
Construction: | | | | | |
Residential | — | | | — | | | — | | | — | | |
Commercial | — | | | — | | | — | | | — | | |
Commercial and industrial | | Commercial and industrial | 55 | | 84 | | 181 | | 242 |
Construction | | Construction | — | | — | | — | | — |
Agriculture production | | Agriculture production | — | | 1 | | 20 | | 11 |
Leases | | Leases | — | | — | | — | | — |
Total recoveries of previously charged-off loans | Total recoveries of previously charged-off loans | 520 | | | 570 | | | 2,888 | | | 1,443 | | Total recoveries of previously charged-off loans | 230 | | | 560 | | | 1,122 | | | 2,368 | |
Net recoveries (charge-offs) | (1,002) | | | (572) | | | 347 | | | (497) | | |
Net (charge-offs) recoveries | | Net (charge-offs) recoveries | (261) | | | 267 | | | 121 | | | 1,349 | |
Balance at end of period | Balance at end of period | $ | 31,537 | | | $ | 31,603 | | | $ | 31,537 | | | $ | 31,603 | | Balance at end of period | $ | 79,739 | | | $ | 32,868 | | | $ | 79,739 | | | $ | 32,868 | |
Average total loans | Average total loans | $ | 4,142,602 | | | $ | 4,019,391 | | | $ | 4,070,568 | | | $ | 3,387,390 | | Average total loans | $ | 4,656,050 | | | $ | 4,044,044 | | | $ | 4,492,704 | | | $ | 4,033,954 | |
Ratios (annualized): | Ratios (annualized): | | Ratios (annualized): | |
Net charge-offs (recoveries) during period to average loans outstanding during period | 0.10 | % | | 0.06 | % | | (0.03) | % | | 0.06 | % | |
(Benefit from reversal of) provision for loan losses to average loans outstanding during period | (0.03) | % | | 0.26 | % | | (0.14) | % | | 0.21 | % | |
Net recoveries (charge-offs) during period to average loans outstanding during period | | Net recoveries (charge-offs) during period to average loans outstanding during period | (0.02) | % | | 0.03 | % | | 0.01 | % | | 0.07 | % |
Provision for loan losses (benefit from reversal of) to average loans outstanding during period | | Provision for loan losses (benefit from reversal of) to average loans outstanding during period | 1.90 | % | | 0.05 | % | | 1.34 | % | | (0.05) | % |
Foreclosed Assets, Net of Allowance for Losses
The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the period indicated:
| (in thousands) | (in thousands) | Balance at September 30, 2019 | | Sales | | Valuation Adjustments | | Transfers from Loans | | Balance at December 31, 2018 | (in thousands) | Balance at December 31, 2019 | | Sales | | Valuation Adjustments | | Transfers from Loans | | Balance at June 30, 2020 |
Land & Construction | Land & Construction | $ | 417 | | | $ | — | | | $ | (28) | | | $ | — | | | $ | 445 | | Land & Construction | $ | 312 | | | $ | (312) | | | $ | — | | | $ | — | | | $ | — | |
Residential real estate | Residential real estate | 1,129 | | | (981) | | | 37 | | | 331 | | | 1,742 | | Residential real estate | 1,048 | | | (201) | | | (106) | | | — | | | 741 | |
Commercial real estate | Commercial real estate | — | | | (28) | | | (65) | | | — | | | 93 | | Commercial real estate | 1,181 | | | — | | | — | | | — | | | 1,181 | |
Total foreclosed assets | Total foreclosed assets | $ | 1,546 | | | $ | (1,009) | | | $ | (56) | | | $ | 331 | | | $ | 2,280 | | Total foreclosed assets | $ | 2,541 | | | $ | (513) | | | $ | (106) | | | $ | — | | | $ | 1,922 | |
Deposits
During the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company’s deposits decreased $46,766,000increased $845,560,000 and $71,059,000$881,264,000, respectively, to $5,295,407,000.$6,248,258,000. Included in the SeptemberJune 30, 20192020 and December 31, 20182019 certificate of deposit balances are $50,000,000 and $60,000,000,$30,000,000, respectively, from the State of California. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and creditworthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company.
Off-Balance Sheet Arrangements
See Note 87 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s commitments and contingencies including off-balance-sheet arrangements.
Capital Resources
The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management.
The Company adopted and announced a stockOn November 12, 2019 the Board of Directors approved the authorization to repurchase plan on August 21, 2007 for the repurchase of up to 500,0001,525,000 shares of the Company’sCompany's common stock from time to time as market conditions allow. The 500,000 shares authorized for repurchase under this plan represented approximately 3.2%(the 2019 Repurchase Plan), which approximates 5.0% of the Company’s approximately 15,815,000 common shares outstanding as of August 21, 2007.the approval date. The actual timing of any share repurchases will be determined by the Company's management and therefore the total value of the shares to be purchased under the program is subject to change. The 2019 Repurchase Plan has no expiration date. During the ninethree and six months ended SeptemberJune 30, 2019,2020, the Company did not repurchase anyrepurchased 259,993 and 813,862 shares under this plan. This plan has no stated expiration date for the repurchases. Aswith a market value of September 30, 2019, the Company had repurchased 196,566 shares under this plan, which left 303,434 shares available for repurchase under the plan. Shares that are repurchased in accordance with the provisions of a Company stock option plan or equity compensation plan are not counted against the number of shares repurchased under the repurchase plan adopted on August 21, 2007.$7,669,000 and $24,809,000, respectively.
The Company’s primary capital resource is shareholders’ equity, which was $896,665,000$885,686,000 at SeptemberJune 30, 2019.2020. This amount represents an increase of $69,292,000 (8.3%) from December 31, 2018,$19,260,000 during the netquarter ended June 30, 2020 primarily as a result of comprehensivean improvement in unrealized gains (losses), net of tax, on investment securities totaling $25,751,000 and net income for the nine month period of $88,560,000, the effect of equity compensation vesting of $815,000, and the exercise of stock options of $2,646,000, that were$7,430,000, partially offset by dividends paid of $18,285,000, and repurchase of$8,009,000 in common stock of $4,842,000.repurchases. The Company’s ratio of equity to total assets was 14.0%13.4% and 13.0%14.0% as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. We believe that the Company and the Bank were in compliance with applicable minimum capital requirements set forth in the final Basel III Capital rules as of SeptemberJune 30, 2019.2020. The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | | December 31, 2018 | | |
| Ratio | | Minimum Regulatory Requirement | | Ratio | | Minimum Regulatory Requirement |
Total capital | 15.23 | % | | 10.50 | % | | 14.40 | % | | 9.25 | % |
Tier I capital | 14.52 | % | | 8.50 | % | | 13.66 | % | | 7.25 | % |
Common equity Tier 1 capital | 13.37 | % | | 7.00 | % | | 12.49 | % | | 5.75 | % |
Leverage | 11.31 | % | | 4.00 | % | | 10.68 | % | | 4.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| Ratio | | Minimum Regulatory Requirement | | Ratio | | Minimum Regulatory Requirement |
Total capital | 15.13 | % | | 10.50 | % | | 15.07 | % | | 9.25 | % |
Tier I capital | 13.87 | % | | 8.50 | % | | 14.40 | % | | 7.25 | % |
Common equity Tier 1 capital | 12.76 | % | | 7.00 | % | | 13.29 | % | | 5.75 | % |
Leverage | 10.28 | % | | 4.00 | % | | 11.55 | % | | 4.00 | % |
See Note 98 and Note 1514 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.
As of June 30, 2020, we had an effective shelf registration statement on file with the Securities and Exchange Commission that allows us to issue various types of debt securities, as well as common stock, preferred stock, warrants, depositary shares representing fractional interest in shares of preferred stock, purchase contracts and units from time to time in one or more offerings. Each issuance under the shelf registration statement will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. The registration statement does not limit the amount of securities that may be issued thereunder. Our ability to issue securities is subject to market conditions and other factors including, in the case of our debt securities, our credit ratings and compliance with the covenants in our credit agreement.
Liquidity
The Company’s principal source of asset liquidity is cash at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities available for sale. At SeptemberAs of June 30, 2019, cash at2020, Federal Reserve and other banks in excess ofcash reserve requirements and investment securities available for sale totaled $1,001,196,000 , or 15.7% of total assets.ratios have been temporarily reduced to zero as a response to the COVID-19 pandemic. The Company’s profitability during the first ninesix months of 20192020 generated cash flows from operations of $76,266,000$63,705,000 compared to $59,905,000$33,869,000 during the first ninesix months of 2018.2019. Net cash providedused by investing activities was $46,204,000$497,490,000 for the ninesix months ended SeptemberJune 30, 2019,2020, compared to net cash used by investing activities of $112,873,000$47,403,000 during the ninesix months ending 2018.2019. Financing activities used $90,956,000$863,130,000 during the ninesix months ended SeptemberJune 30, 2019,2020, compared to net cash$38,415,000 provided by financing activities of $74,083,000 during the ninesix months ended SeptemberJune 30, 2018.2019. Deposit balance changes reducedincreased available liquidity by $71,059,000$881,264,000 during the ninesix months ended SeptemberJune 30, 2019,2020, compared to an increasea decrease of $92,051,000$24,293,000 for financing activity during the the same period in 2018.2020. Dividends paid used $18,285,000$13,208,000 and $12,984,000$11,575,000 of cash during the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
TheBased on the changes in interest rates occurring subsequent to December 31, 2019, the following update of the Company’s assessment of market risk as of June 30, 2019 indicates there are no material2020 is being provided. These updates and changes should be read in conjunction with the additional quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Subsequent to December 31, 2019, declines in several market interest rates, including many rates that serve as reference indices for variable rate loans declined markedly from previous levels. As of December 31, 2019 the Company's loan portfolio consisted of approximately $4,346,723,000 in outstanding principal with a weighted average rate of 4.89%. As of June 30, 2020 the Company's loan portfolio consisted of approximately $4,854,000,000 in outstanding principal balances with weighted average coupon rate of 4.37%, inclusive of the PPP program loans. Excluding these loans, the Company's loan portfolio has approximately $4,417,000,000 outstanding with a weighted average coupon rate of 4.70% as of June 30, 2020. Included in this June 30, 2020 loan total exclusive of PPP loans, are variable rate loans totaling $2,984,000,000 of which 86.5% or $2,582,000,000 were at their floor rate. The remaining variable rate loans totaling $402,000,000, which carried a weighted average coupon rate of 5.13% as of June 30, 2020, are subject to further rate adjustment. If those remaining variable rate loans were to collectively, through future rate adjustments, be reduced to their respective floors, they would have a weighted average coupon rate of approximately 4.37% which would result in the reduction of the weighted average coupon rate of the total loan portfolio, exclusive of PPP loans, from 4.70% to approximately 4.64%.
As of June 30, 2020 the overnight Federal funds rate, the rate primarily used in these interest rate shock scenarios, was less than 1.00%. Based on the historical nature of these rates in the United States not falling below zero, management believes that a shock scenario that reduces interest rates below zero would not provide meaningful results and therefore, have not been modeled. These scenarios assume that 1) interest rates increase or decrease evenly (in a “ramp” fashion) over a twelve-month
period and remain at the new levels beyond twelve months or 2) that interest rates change instantaneously (“shock”). The simulation results shown below assume no changes in the structure of the Company’s balance sheet over the twelve months being measured.
The following table summarizes the estimated effect on net interest income and market value of equity to changing interest rates as measured against a flat rate (no interest rate change) instantaneous shock scenario over a twelve month period utilizing the Company's specific mix of interest earning assets and interest bearing liabilities as of June 30, 2020.
Interest Rate Risk Simulations:
| | | | | | | | | | | |
Change in Interest Rates (Basis Points) | Estimated Change in Net Interest Income (NII) (as % of NII) | | Estimated Change in Market Value of Equity (MVE) (as % of MVE) |
+200 (shock) | 5.3 | % | | 31.8 | % |
+100 (shock) | 2.6 | % | | 18.8 | % |
+ 0 (flat) | — | | | — | |
-100 (shock) | 0.6 | % | | (38.5) | % |
-200 (shock) | nm | | nm |
Item 4. Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of SeptemberJune 30, 2019.2020. Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 2019.2020.
During the three and ninesix months ended SeptemberJune 30, 2019,2020, there were no changes in our internal controls or in other factors that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Item 1A - Risk Factors
In addition to the other information set forth in this report,Form 10-Q, you should carefully consider the risk factors discussedthat appeared under “Part I-Item 1A-Risk Factors”Item 1A, "Risk Factors" in the Company’s 2019 Annual Report on Form 10-K. The following represents a material change in our risk factors from those disclosed in the Company's 2019 Annual Report on Form 10-K.
The novel coronavirus, COVID-19, has adversely affected our business, financial condition, results of operations and our liquidity and will likely continue to for the foreseeable future. The effects depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have created significant economic uncertainty and reduced economic activity, including within our market areas. On March 13, 2020, a National Emergency relating to the virus was declared. Governmental authorities, include the State of California and many of its local governments, have implemented numerous measures to try to contain the virus, such as travel bans and restrictions, “stay at home” orders and business limitations and shutdowns. These measures have negatively impacted consumer and business spending. Businesses nationwide and in the regions and communities in which we operate have laid off and furloughed significant numbers of employees, leading to record levels of unemployment. These conditions have significantly adversely affected our borrowers, including many different types of small and mid-sized businesses within our client base, particularly those in the gas station, retail, hotel, hospitality and food, beverage, and elective healthcare industries, among many others. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The Federal Reserve lowered the primary credit rate by 50 and 100 basis points on March 3 and March 15, 2020, respectively, for a total of 150 basis points to 0.25% to mitigate the effects of the COVID-19 pandemic and to support the liquidity and stability of banking institutions as they serve the increased demand for credit. We expect a long duration of reduced interest rates to negatively impact our net interest income, margin, cost of borrowing and future profitability and to have a material adverse effect on our financial results for the remainder of 2020.
The outbreak has adversely impacted and is likely to further adversely impact our operations and the operations of our borrowers, customers and business partners. In particular, we may experience losses and other adverse effects due to a number of factors impacting us or our borrowers, customers or business partners, including but not limited to:
•increased delinquencies and subsequent credit losses resulting from the weakened financial condition of our borrowers as a result of the outbreak and related governmental actions;
•the negative effect on earnings resulting from the Bank modifying loans and agreeing to loan payment deferrals due to the COVID-19 crisis;
•declines in the value of collateral securing loans we have made;
•court closures and temporary foreclosure and eviction protection laws, even when a customer is in breach of its obligations to us, are likely to restrict our ability to realize on the value of collateral;
•disruption in the businesses of third parties upon who we rely, including outages at network providers and other service providers and suppliers;
•increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;
•decreased loan growth;
•decreased interest and non-interest income;
•continued decreased demand for certain bank products and services;
•declines in the value of securities we own, credit ratings downgrades, deterioration in issuers’ financial condition or a decline in the liquidity for debt securities;
•operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions;
•reduced workforce numbers or capacity which may be caused by, but not limited to, illness, quarantine, stay at home or other government mandates, or difficulties transitioning back to an in-office environment;
•laws related to benefits and the treatment of employees, for example, mandating coverage of certain COVID-19 related testing and treatment, mandating additional paid or unpaid leave or expanding workers compensation coverage;
•volatile market prices of securities, including our common stock;
•unavailability of key personnel or a significant number of our employees due to the effects and restrictions of a COVID-19 outbreak within our market area;
•a protracted COVID-19 pandemic could further negatively affect the carrying amount of our goodwill, indefinite-lived intangibles and long-lived assets and result in realized losses on our financial assets, which would adversely impact our results of operations and the ability of certain of our bank subsidiary to pay dividends to us;
•increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic on market and economic conditions and actions governmental authorities take in response to those conditions; and
•additional costs to remedy damages, losses or disruption caused by such events
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.
The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. The longer the public health crisis lasts, and the greater its severity, the greater the likely material adverse impact on the economy, our customers and our business and financial performance. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s economic impact and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, it is not possible to predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. However, we believe the effects will have (at least in the short term) a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 20182019.
Our Bank's participation in the Paycheck Protection Program could expose us to additional risks.
Federal and state governments have enacted laws intending to stimulate the economy in light of the business and market disruptions related to COVID-19. President Trump signed into law three economic stimulus packages, including the $2.0 trillion Coronavirus Relief and Economic Security Act on March 26, 2020, which, among other things, initiated the PPP. On April 16, 2020, the original $349.0 billion of funding under the PPP was exhausted, and on April 24, 2020, the Federal Government allocated an additional $310.0 billion to the program. Our Bank participated as a lender in both the initial and second rounds of the PPP, which was designed to help small businesses maintain their workforce during the COVID-19 pandemic. As of June 30, 2020, we have made 2,908 loans totaling $436.7 million under the Payment Protection Program.
We understand that these loans are incorporatedfully guaranteed by reference herein. These factors could materiallythe SBA and believe the majority of these loans will be forgiven. However, there can be no assurance that the borrowers will use or have used the funds appropriately or will have satisfied the staffing or payment requirements to qualify for forgiveness in whole or in part. Any portion of the loan that is not forgiven must be repaid by the borrower. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by us, which may or may not be related to an ambiguity in the laws, rules or guidance regarding operation of the PPP, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if we have already been paid under the guaranty, seek recovery from us of any loss related to the deficiency.
Since the opening of the PPP, several other large banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of similar litigation, from both customers and non-customers that approached us regarding PPP loans, regarding its processes and procedures used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to the Bank, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition liquidity,and results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.operations.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows the repurchases made by the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | (a) Total number of shares purchased (1) | | (b) Average price paid per share | | (c) Total number of shares purchased as of part of publicly announced plans or programs | | (d) Maximum number of shares that may yet be purchased under the plans or programs (2) |
July 1 - 30, 2019 | 8,278 | | | $ | 37.78 | | | — | | | 303,434 | |
August 1 - 30, 2019 | 38,666 | | | $ | 36.20 | | | — | | | 303,434 | |
September 1 - 30, 2019 | — | | | — | | | — | | | 303,434 | |
Total | 46,944 | | | $ | 36.48 | | | — | | | 303,434 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Period | (a) Total number of shares purchased (1) | | (b) Average price paid per share | | (c) Total number of shares purchased as of part of publicly announced plans or programs | | (d) Maximum number of shares that may yet be purchased under the plans or programs (2) |
April 1-30, 2020 | 277,001 | | | $ | 29.53 | | | 259,993 | | | 971,131 | |
May 1-31, 2020 | 2,252 | | | $ | 26.24 | | | — | | | 711,138 | |
June 1-30, 2020 | 60,250 | | | $ | 29.86 | | | — | | | 711,138 | |
Total | 339,503 | | | $ | 29.57 | | | 259,993 | | | |
(1)Includes shares purchased by the Company’s Employee Stock Ownership Plan in open market purchases and tendered by employees pursuant to various other equity incentive plans. See NoteNotes 8 and 9 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchased under equity compensation plans.
(2)Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans. See Note 98 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchase plan.
Item 6 – Exhibits
EXHIBIT INDEX
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Exhibit No. | | Exhibit |
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
*Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| TRICO BANCSHARES |
| (Registrant) |
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Date: November 8, 2019August 10, 2020 | /s/ Peter G. Wiese |
| Peter G. Wiese |
| Executive Vice President and Chief Financial Officer |
| (Duly authorized officer and principal financial and chief accounting officer) |