0000356171us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberus-gaap:USGovernmentCorporationsAndAgenciesSecuritiesMember2020-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

___________________


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

for the quarterly period ended: ~~September~~June 30, ~~2019~~2020


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

for the transition period from to

Commission File Number: 000-10661

___________________

~~TriCo Bancshares~~

(Exact Name of Registrant as Specified in Its Charter)

___________________


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

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

___________________

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

Title of each class

Trading
Symbol(s)

Name of each exchange
on which registered

Common Stock

TCBK

The NASDAQ Stock Market

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

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

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

☒

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

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

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

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

Common stock, no par value: ~~30,520,725~~29,759,209 shares outstanding as of ~~November 4, 2019.~~August 6, 2020.

Table of Contents

TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; ~~unaudited~~unaudited)


		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.

Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)


		Three months ended September 30,						Nine months ended September 30,							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

Table of Contents

~~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.~~

~~Table of Contents~~

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.

Table of Contents

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.

Table of Contents

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.

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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 ~~three~~3 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, ~~2018~~2019 (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.

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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.

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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

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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 ~~2019~~2020

~~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 ~~extends~~under 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 amends~~It 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 ~~opposed~~a write-down on available for sale debt securities, based on management's intent to ~~a write- down. In addition, CECL~~sell the security or likelihood the Company will ~~modify~~be required to sell the ~~accounting~~security, 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 at~~were 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 disclosures~~adoption. The remaining noncredit discount (based on the ~~significant estimates and judgments used~~adjusted 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

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reclassification of $481,000 from discounts on acquired loans to ~~estimate~~the 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 to~~from change in accounting policies, with a corresponding decrease in retained earnings, ~~instead~~net 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 of~~adopted 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-Goodwill~~Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment ~~(Topic~~(Topic 350):, ~~ASU 2017-4~~which 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 ~~2017-4~~2019-12, 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, ~~2020~~2021 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 - Changes~~Reference 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 Requirements~~valuations 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.

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Note 2 ~~- Business Combinations~~

~~Merger with FNB Bancorp~~

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

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

~~Table of Contents~~


	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

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

Proceeds from the sales of investment securities totaled $125,247,000 and $293,279,000 during the nine months ended September 30, 2019 and 2018, respectively. Gross realized gains from the sale of investment securities totaled $335,000 and $207,000 during the three and nine months ended September 30, 2019 and 2018, respectively. Gross realized losses from the sale of investment securities totaled $228,000 during the three and nine months ended September 30, 2019.


	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 sale~~no sales of investment securities during the three and ~~nine~~six months ended ~~September~~June 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 ~~September~~June 30, ~~2019~~2020 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 ~~September~~June 30, ~~2019~~2020 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At ~~September~~June 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 ~~September~~June 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 ~~4.7~~3.26 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:

Table of Contents

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)


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)

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 ~~September~~June 30, ~~2019~~2020 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 September~~securities and there has been no allowance for credit losses recorded as of June 30, ~~2019, 25 asset backed~~2020.

The Company monitors credit quality of debt securities ~~had unrealized losses with aggregate depreciation~~held-to-maturity through the use of ~~1.49% from~~credit rating. The Company monitors the ~~Company’s~~credit 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

Table of Contents

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.

Table of Contents

~~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 ~~Loan~~Credit Losses on Loans

The following tables summarize the activity in the allowance for ~~loan~~credit 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

Table of Contents

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

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


	Allowance for Loan 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

~~Table of Contents~~

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

~~Table of Contents~~

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

~~Table of Contents~~

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.

~~Table of Contents~~

•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~~

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Based on the most recent analysis performed, the risk category of loans by ~~loan category and risk grade~~class of loans is as follows for the ~~periods~~period 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

Table of Contents


	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

Table of Contents


	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


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

Table of Contents


	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

Table of Contents

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

Table of Contents

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


	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

Table of Contents

~~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


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


	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 $ —

~~Table of Contents~~

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

Analysis of Originated Past Due Loans - As of 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

Table of Contents

The following table shows the ending balance of ~~current and past due PNCI~~non 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 nonaccrual~~non accrual loans that would have been recognized during the three months ended ~~September~~June 30, ~~2019~~2020 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 ~~September~~June 30, 2020 and 2019 was $39,000 and ~~2018 was $59,000 and $59,000,~~$164,000, respectively.

Interest income on ~~PNCI nonaccrual~~non accrual loans that would have been recognized during the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 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 ~~nine~~six months ended ~~September~~June 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.

~~Table of Contents~~

~~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

~~Table of Contents~~

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

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

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

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

~~Originated loans~~The 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	—	$	—	$	—

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


	TDR Information for the 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	$	—

~~Table~~The Company also modified the terms of ~~Contents~~

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

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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 record~~records a right-of-use asset (“ROUA”) on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company is also ~~required to record~~records a lease liability on the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is lessee of real estate property for branches, ATM locations, and general administration and operations. The Company elected not to include short-term leases (i.e. leases with initial terms of ~~twelve months~~12 or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance were unknown and not determinable at lease commencement and therefore, were not included in the determination of the Company’s ROUA or lease liability.

The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include ~~one~~1 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

~~Table of Contents~~

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~~	%

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	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 ~~September~~June 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

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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 ~~September~~June 30, ~~2019~~2020 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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018, respectively~~2019, 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

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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 ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively and ~~$25,361,000~~$39,448,000 and ~~$22,649,000~~$18,350,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 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 plan~~approved the authorization to repurchase ~~as conditions warrant,~~ up to ~~500,000~~1,525,000 shares of the ~~Company’s~~Company'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 ~~purchases~~any share repurchases will be determined by the Company's management and therefore the ~~exact number~~total value of the shares to be purchased ~~will depend on market conditions. This stock repurchase plan~~under 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 periods~~three and six months ended ~~September~~June 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, there~~Repurchase 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.~~

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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 ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, employees tendered ~~3,820~~0 and ~~11,630~~93,755 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 ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, employees tendered ~~123,734~~4,668 and ~~28,850~~119,914 shares, respectively, of the Company’s common stock in connection with ~~market value~~option 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 purchase~~and 11,439 and 15,242 shares during the six months period ended June 30, 2020 and 2019, respectively. In total, shares of the ~~Company’s~~Company'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 ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, were made from the 2019 Plan.

Stock option activity during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 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

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The following table shows the number, weighted-average exercise price, intrinsic value, and weighted average remaining contractual life of options exercisable, options not yet exercisable and total options outstanding as of ~~September~~June 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 375~~As of June 30, 2020 all options ~~that~~outstanding are ~~currently not exercisable as of September 30, 2019~~fully 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 ~~2018~~2019 or the ~~nine~~six months ended ~~September~~June 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 ~~70,828~~104,794 of service condition vesting RSUs outstanding as of ~~September~~June 30, ~~2019~~2020 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

~~Table of Contents~~

RSUs outstanding under the original grant. The dividend credits follow the same vesting requirements as the RSU awards and are not considered participating securities. The ~~70,828~~104,794 of service condition vesting RSUs outstanding as of ~~September~~June 30, ~~2019~~2020 are expected to vest, and be released, on a weighted-average basis, over the next ~~1.2~~1.82 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 ~~September~~June 30, ~~2019~~2020 and their vesting dates. The Company did not modify any service condition vesting RSUs during ~~2018~~2019 or during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.

The ~~51,312~~83,232 of market plus service condition vesting RSUs outstanding as of ~~September~~June 30, ~~2019~~2020 are expected to vest, and be released, on a weighted-average basis, over the next ~~1.9~~2.33 years. The Company expects to recognize ~~$1,045,845~~$1,686,594 of pre-tax compensation costs related to these RSUs between ~~September~~June 30, ~~2019~~2020 and their vesting dates. As of ~~September~~June 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 ~~76,968~~124,848 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 ~~2018~~2019 or during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.

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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

~~Table of Contents~~


	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

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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	—		—

~~Table of Contents~~


		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

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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 PNCI~~Individually evaluated loans - ~~Originated and PNCI loans~~Loans are not recorded at fair value on a recurring basis. However, from time to time, ~~an originated or PNCI loan~~certain loans have individual risk characteristics not consistent with a pool of loans and is ~~considered impaired and an allowance~~individually evaluated for ~~loan losses is established. Originated~~credit reserves.

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~~and PNCI loans~~Loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are ~~considered impaired.~~typically individually evaluated. The fair value of ~~an impaired originated or PNCI loan is~~these 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 loans~~Loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the ~~impaired originated or PNCI~~ loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the ~~impaired originated or PNCI~~ loan as nonrecurring Level 3.

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

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

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


Fair value at September 30, 2019		Total		Level 1		Level 2		Level 3
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

~~Table of Contents~~


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 ~~nine~~three and six months ended ~~September~~June 30, ~~2019~~2020, or the year ended December 31, ~~2018.~~2019.

Table of Contents

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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

As of ~~September~~June 30, ~~2019:~~2020:

Fair Value
(in thousands)

Valuation
Technique

Unobservable
Inputs

Range,
Weighted
Average

Mortgage Servicing Rights

~~6,072~~4,250

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

~~7,098~~6,200

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)

Table of Contents

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

The ~~impaired originated and PNCI~~individually evaluated loan ~~amount~~amounts 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 ~~measures~~evaluates the ~~impairment~~need 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 lease~~credit 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 lease~~credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on real estate owned for fair value adjustments based on the fair value of the real estate.

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

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at ~~September~~June 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 & PNCI~~Individually 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)%~~

~~Table of Contents~~

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

Table of Contents


	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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 for the Company and the Bank under applicable Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 based on the then phased-in provisions of the Basel III Capital Rules. As of January 1, 2019, the minimum required capital levels of the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

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Table of Contents


		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 ~~September~~June 30, ~~2019~~2020 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 ~~September~~June 30, ~~2019~~2020 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 ~~September~~June 30, ~~2019,~~2020, the Company and the Bank are in compliance with the capital conservation buffer requirement.

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

FORWARD-LOOKING STATEMENTS

Cautionary Statements Regarding Forward-Looking Information

~~Certain~~The statements contained ~~in this Form 10-Q~~herein that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There can be no assurance that future developments affecting us will be the same as those anticipated by management. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of changes in financial services policies, laws and regulations; technological changes; ~~mergers~~weather, natural disasters and ~~acquisitions (including~~other 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 integration~~effects 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 of~~efficiency ratio; competition ~~from other~~and 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

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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.

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Geographical Descriptions

Financial Highlights

~~Following the acquisition of FNB Bancorp on July 7, 2018, the period ended September 30, 2019 represents the first year over year comparable period end of the combined entity.~~ Performance highlights and other developments for the Company as of or for the three months ended June 30, 2020 included the following:

•For the three and ~~nine~~six months ended ~~September~~June 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 wa~~s 10.42%~~was 3.39% and ~~10.67%~~5.28%, re~~spectively.~~

•~~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 ~~September~~June 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 ~~September~~June 30, ~~2019~~2020, as compared to ~~76.8%~~81.05% at March 31, 2020 and 76.82% at June 30, ~~2019~~2019.

•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 ~~intere~~stinterest margin was ~~4.44%~~4.10% on a taxtax equivalent basis as compared to ~~4.29%~~4.50% in the q~~uarter~~quarter ended ~~September~~June 30, ~~2018~~2019, and a~~nd decreased 6~~ decrease of 24 basis points ~~fro~~mfrom the 4.34% in the trailing quarter.

•Non-interest bearing deposits as a percentage of total deposits were ~~33.6%~~39.81% at ~~September~~June 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, ~~including~~including non-interest-bearing deposits, ~~remained low but increased slightly~~decreased to ~~0.23%~~0.12% for the ~~third~~second quarter of ~~2019~~2020 as compared with ~~0.22%~~0.19% for the trailing quarter, and ~~an increase of 7~~also 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 S~~eptember~~June 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,~~ ~~and~~efficiency 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~~

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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 and~~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 ~~increased by 4.6%~~that will be amortized over the ~~trailing quarter~~two-year term of the loans, offset by deferred loan costs of approximately $756,000. During the three and ~~8.7% over~~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.

Following the ~~same quarter~~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 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.

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TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)


		Three months ended September 30,									Nine months ended September 30,											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 above~~Company 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, 2019~~provision 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. While~~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 ~~growth~~changes in ~~interest-earning assets was funded by increases~~loan volume and changes in ~~interest-bearing liabilities, net interest income was benefited by reductions~~credit quality associated with levels of classified, past due and non-performing loans, resulted in ~~both~~ the ~~rates paid and average balance~~need 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

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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 ~~September~~June 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. ~~During~~Net accretion for the ~~three and nine~~six months ended ~~September~~June 30, ~~2018, purchased loan discount accretion~~2019 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.

Table of Contents

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.

Table of Contents

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.~~

~~Table of Contents~~

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

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

⁽¹⁾~~Fully taxable equivalent (FTE)~~

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

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

~~Table of Contents~~

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

Table of Contents


(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 ~~September~~June 30, ~~2019~~2020 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 ~~September~~June 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. Increases~~increases in average ~~balance of loans added $1,657,000 to net~~loan balances (including PPP), which improved interest ~~income. Increases~~income 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.~~

~~Table of Contents~~

The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, has decreased during the quarter by 0.50% to 5.00% at September 30, 2019, consistent with the rate at September 30, 2018~~. As compared to the same quarter~~declines 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 expense~~income 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 ~~nine~~six months ended ~~September~~June 30, ~~2019 increased $41,476,000~~2020 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 ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease 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 increase~~attributed to $12,593,000 in ~~loan yields resulted in an increase in~~additional interest ~~income~~margin.

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 ~~September~~June 30, ~~2019~~2020, the ~~sale~~Company 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 to~~resulted in the ~~reduction~~need for a provision for credit losses of $2,685,000. However, the majority of the increase in ~~required~~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 ~~held~~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 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.

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Non-interest Income

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


		Three months ended September 30,											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 periods~~months ended ~~September~~June 30, ~~2019 as~~2020 compared to $13,423,000 during the ~~three and nine month periods ended September 30, 2018, respectively. The increase quarter over quarter was primarily driven~~comparable 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 transactions~~income 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. Growth~~mortgage 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 largely~~15 and 30 year mortgage rates, continued to be the largest contributor to the ~~acquisition~~decline 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 periods~~mortgage servicing asset which decreased by $1,236,000 during the quarter, representing an additional $684,000 decline over the same period ended ~~September~~2019. Conversely, mortgage loan origination volume demand increased notably during the period ended June 30, ~~2019,~~2020 as a result of the ~~Company recorded~~low interest rate environment, leading to an ~~increase in~~additional $1,161,000 gain on ~~the~~ sale of loans ~~of $697,000 and $392,000,~~over the comparable quarter.

Table of Contents

~~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 proceeds~~same 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 asset~~assets, 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, respectively~~returned 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 periods~~six months ended ~~September~~June 30, ~~2019~~2020 as compared to the ~~three~~same 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 offsets~~contributed $1,640,000 to the overall increase ~~were due to declines~~ in ~~asset management and commission~~non-interest income ~~of $7,000 and $312,000, respectively~~ during the ~~three and nine month periods~~six months ended ~~September~~June 30, ~~2019 as compared to the three and nine month periods ended September 30, 2018.~~2020.

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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)	%

~~Table of Contents~~

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 ~~September~~June 30, ~~2019~~2020 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 ~~September~~June 30, ~~2018. Base salaries, net of deferred loan origination~~2020 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 increase~~partially offset by decreases in ~~base salaries~~incentive compensation and ~~benefits related to compensation was largely due to an increase~~a 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-interest~~by $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 ~~September~~June 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 attributable~~2019. 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.

Table of Contents

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 ~~acquisition~~bottom 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, and~~state-wide shelter-in-place restrictions which were partially offset by the ~~$5,227,000 reduction in merger~~loan 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 ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~28.6%~~27.4% for the ~~same quarter~~year ended December 31, 2019. The reduction in effective tax rate was made possible through the ~~prior year. During~~provisions of the ~~three~~Coronavirus Aid, Relief, and ~~nine months ended September 30, 2019~~Economic 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 percentage~~levels 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.

~~Table of Contents~~

Financial Condition

For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. Organic growth, inclusive of seasonal fluctuation, also contributes to the year-over-year balance sheet changes. During the ~~twelve months ended September 30, 2019, organic~~most 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 borrowings~~delay of ~~$266,408,000 or 94.2% was funded by~~2019 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.

Table of Contents

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 $130,956,000~~increased $46,142,000 to ~~$984,080,000~~$996,280,000 as of ~~September~~June 30, ~~2019,~~2020, compared to December 31, ~~2018.~~2019. This ~~decrease~~increase is primarily ~~attributable to the sale of investment securities to provide liquidity to support loan growth. Proceeds~~supported 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 no~~or transfers of available-for-sale investment securities to held-to-maturity, or vice versa, during the ~~nine~~six month periods ended ~~September~~June 30, 2020 and 2019, ~~and 2018.~~respectively.

The following table presents the available for sale debt securities portfolio by major type as of ~~September~~June 30, ~~2019~~2020 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	%

Table of Contents

Investment securities held to maturity decreased ~~$51,487,000~~$38,441,000 to ~~$393,449,000~~$337,165,000 as of ~~September~~June 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.~~

~~Table of Contents~~

~~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 ~~four~~six 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 ~~September~~June 30, ~~2019~~2020 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.

~~Table of Contents~~

~~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		%

Table of Contents

December 31, 2018
(dollars in thousands) Originated PNCI PCI Total
Performing nonaccrual loans $ 16,573 $ 1,269 $ 4,847 $ 22,689
Nonperforming nonaccrual loans 2,843 1,589 373 4,805
Total nonaccrual loans 19,416 2,858 5,220 27,494
Loans 90 days past due and still accruing — — — —
Total nonperforming loans 19,416 2,858 5,220 27,494
Foreclosed assets 1,490 — 790 2,280
Total nonperforming assets $ 20,906 $ 2,858 $ 6,010 $ 29,774
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans $ 800 $ — $ — $ 800
Nonperforming assets to total assets 0.33 % 0.04 % 0.09 % 0.47 %
Nonperforming loans to total loans 0.48 % 0.07 % 0.13 % 0.68 %
Allowance for loan losses to nonperforming loans 164 % 23.3 % 2.34 % 119 %
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed 1.39 % 3.48 % 33.69 % 2.11 %

Changes in nonperforming assets during the three months ended ~~September~~June 30, ~~2019~~2020

(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 ~~decreased~~increased 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 ~~decrease~~increase in nonperforming assets during the ~~third~~second quarter of ~~2019~~2020 was primarily the result of ~~write-downs of $1,392,000 on~~new 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 loans~~pay-downs of ~~$2,671,000.~~$1,096,000 and write-downs of $519,000.

~~The $2,671,000 of new nonperforming~~Non performing loans added during the ~~third~~second quarter of ~~2019 was mainly comprised~~2020 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 loans~~which 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 ~~September~~June 30, ~~2019.~~2020.

Loan charge-offs during the three months ended ~~September~~June 30, ~~2019~~2020

In the ~~third~~second 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 loan~~recoveries. Loan charge-offs were ~~two loans with carrying balances of $1,023,000 related to one lending~~not 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.~~

~~Table of Contents~~

~~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 ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020

(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 ~~decreased~~increased during the ~~nine~~first six months ~~ended 2019~~of 2020 by ~~$9,663,000 (32.5%~~$4,403,000 (23.1%) to ~~$20,111,000~~$23,496,000 at ~~September~~June 30, ~~2019~~2020 compared to ~~$29,774,000~~$19,093,000 at December 31, ~~2018.~~2019. The ~~decrease~~increase in nonperforming assets during the ~~nine months period ended September, 2019~~second quarter of 2020 was primarily the result of ~~pay-downs, sales and upgrades of~~new 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 loans~~pay-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.

~~Table of Contents~~

$922,000.

Loan charge-offs during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020

During the ~~first nine~~six 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 ~~Loan~~Credit Losses for Loans

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

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


(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 ~~September~~June 30, ~~2019~~2020 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.

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The following table summarizes the allocation of the allowance for ~~loan~~credit 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 ~~loan~~credit 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	%

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The following table summarizes the activity in the allowance for ~~loan~~credit 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)		%

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Foreclosed Assets, Net of Allowance for Losses

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


(in thousands)	(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 ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the Company’s deposits ~~decreased $46,766,000~~increased $845,560,000 and ~~$71,059,000~~$881,264,000, respectively, to ~~$5,295,407,000.~~$6,248,258,000. Included in the ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 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 stock~~On November 12, 2019 the Board of Directors approved the authorization to repurchase ~~plan on August 21, 2007 for the repurchase of~~ up to ~~500,000~~1,525,000 shares of the ~~Company’s~~Company's common stock ~~from time to time as market conditions allow. The 500,000 shares authorized for repurchase under this plan represented approximately 3.2%~~(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 ~~nine~~three and six months ended ~~September~~June 30, ~~2019,~~2020, the Company ~~did not repurchase any~~repurchased 259,993 and 813,862 shares ~~under this plan. This plan has no stated expiration date for the repurchases. As~~with 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 ~~September~~June 30, ~~2019.~~2020. This amount represents an increase of ~~$69,292,000 (8.3%) from December 31, 2018,~~$19,260,000 during the ~~net~~quarter ended June 30, 2020 primarily as a result of ~~comprehensive~~an 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 ~~September~~June 30, ~~2019~~2020 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 ~~September~~June 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 %

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	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.

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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 September~~As of June 30, ~~2019, cash at~~2020, Federal Reserve ~~and other banks in excess of~~cash 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 ~~nine~~six months of ~~2019~~2020 generated cash flows from operations of ~~$76,266,000~~$63,705,000 compared to ~~$59,905,000~~$33,869,000 during the first ~~nine~~six months of ~~2018.~~2019. Net cash ~~provided~~used by investing activities was ~~$46,204,000~~$497,490,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to net cash used by investing activities of ~~$112,873,000~~$47,403,000 during the ~~nine~~six months ending ~~2018.~~2019. Financing activities used ~~$90,956,000~~$863,130,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~net cash~~$38,415,000 provided ~~by financing activities of $74,083,000~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Deposit balance changes ~~reduced~~increased available liquidity by ~~$71,059,000~~$881,264,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~an increase~~a 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 ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 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

~~The~~Based 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 material~~2020 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.

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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 ~~September~~June 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 ~~September~~June 30, ~~2019.~~2020.

During the three and ~~nine~~six months ended ~~September~~June 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.

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PART II – OTHER INFORMATION

Item 1 - Legal Proceedings

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

Item 1A - Risk Factors

In addition to the other information set forth in this ~~report,~~Form 10-Q, you should carefully consider the risk factors ~~discussed~~that 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;

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•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, ~~2018~~2019.

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 ~~incorporated~~fully guaranteed by ~~reference herein. These factors could materially~~the 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.

Table of Contents

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 ~~Note~~Notes 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.

~~Table of Contents~~

Item 6 – Exhibits

EXHIBIT INDEX


Exhibit No.						Exhibit

10.1*						Form of 2020 Performance Award Agreement and Grant Notice pursuant to Tri Co Bancshares ' 2019 Equity Incentive Plan.

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

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

32.1						Section 1350 Certification of CEO

32.2						Section 1350 Certification of CFO

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

*Management contract or compensatory plan or arrangement

6567

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SIGNATURES

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


			TRICO BANCSHARES
			(Registrant)

Date: ~~November 8, 2019~~August 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)

6668


			Page
PART I – FINANCIAL INFORMATION			2
Item 1 – Financial Statements (Unaudited)			2
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			4443
Item 3 – Quantitative and Qualitative Disclosures about Market Risk			63
Item 4 – Controls and Procedures			6364
PART II – OTHER INFORMATION			6465
Item 1 – Legal Proceedings			6465
Item 1A – Risk Factors			6465
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			6467
Item 6 – Exhibits			6567
Signatures			6668
~~Exhibits~~


	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


	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 – 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


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


	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	%


(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)	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


(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 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