TRICO BANCSHARES / 10-Q

Item 1. Financial Statements (unaudited) TRICO BANCSHARES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data; unaudited) September 30, 2020 December 31, 2019 Assets: Cash and due from banks $ 71,034 $ 92,816 Cash at Federal Reserve and other banks 581,548 183,691 Cash and cash equivalents 652,582 276,507 Investment securities: Marketable equity securities 3,032 2,960 Available for sale debt securities, net of allowance for credit losses of $ — 1,142,957 950,138 Held to maturity debt securities, net of allowance for credit losses of $ — 310,696 375,606 Restricted equity securities 17,250 17,250 Loans held for sale 6,570 5,265 Loans 4,826,338 4,307,366 Allowance for credit losses ( 87,575 ) ( 30,616 ) Total loans, net 4,738,763 4,276,750 Premises and equipment, net 84,856 87,086 Cash value of life insurance 120,026 117,823 Accrued interest receivable 19,557 18,897 Goodwill 220,872 220,872 Other intangible assets, net 19,264 23,557 Operating leases, right-of-use 28,879 27,879 Other assets 84,495 70,591 Total assets $ 7,449,799 $ 6,471,181 Liabilities and Shareholders’ Equity: Liabilities: Deposits: Noninterest-bearing demand $ 2,517,819 $ 1,832,665 Interest-bearing 3,822,769 3,534,329 Total deposits 6,340,588 5,366,994 Accrued interest payable 1,571 2,407 Operating lease liability 28,894 27,540 Other liabilities 91,902 91,984 Other borrowings 27,055 18,454 Junior subordinated debt 57,527 57,232 Total liabilities 6,547,537 5,564,611 Commitments and contingencies (Note 7) Shareholders’ equity: Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at September 30, 2020 and December 31, 2019 — — Common stock, no par value: 50,000,000 shares authorized; 29,769,389 and 30,523,824 issued and outstanding at September 30, 2020 and December 31, 2019, respectively 531,075 543,998 Retained earnings 365,611 367,794 Accumulated other comprehensive income (loss), net of tax 5,576 ( 5,222 ) Total shareholders’ equity 902,262 906,570 Total liabilities and shareholders’ equity $ 7,449,799 $ 6,471,181 See accompanying notes to unaudited condensed consolidated financial statements. 2 Table of Contents TRICO BANCSHARES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data; unaudited) Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Interest and dividend income: Loans, including fees $ 58,039 $ 56,999 $ 172,706 $ 166,888 Investments: Taxable securities 6,153 9,864 21,830 30,876 Tax exempt securities 848 961 2,704 3,095 Dividends 223 308 807 973 Interest bearing cash at Federal Reserve and other banks 175 757 1,056 2,694 Total interest and dividend income 65,438 68,889 199,103 204,526 Interest expense: Deposits 1,412 3,050 5,776 8,768 Other borrowings 4 334 13 384 Junior subordinated debt 568 817 2,009 2,501 Total interest expense 1,984 4,201 7,798 11,653 Net interest income 63,454 64,688 191,305 192,873 Provision for (reversal of) credit losses 7,649 ( 329 ) 37,963 ( 1,392 ) Net interest income after credit loss provision (reversal) 55,805 65,017 153,342 194,265 Non-interest income: Service charges and fees 10,469 10,590 27,763 29,788 Gain on sale of loans 3,035 1,236 5,662 2,223 Gain on sale of investment securities 7 107 7 107 Asset management and commission income 667 721 2,244 2,102 Increase in cash value of life insurance 773 773 2,203 2,294 Other 186 681 735 2,820 Total non-interest income 15,137 14,108 38,614 39,334 Non-interest expense: Salaries and related benefits 29,321 26,899 83,648 78,746 Other 17,393 19,445 53,365 59,747 Total non-interest expense 46,714 46,344 137,013 138,493 Income before provision for income taxes 24,228 32,781 54,943 95,106 Provision for income taxes 6,622 9,386 13,786 25,924 Net income $ 17,606 $ 23,395 $ 41,157 $ 69,182 Per share data: Basic earnings per share $ 0.59 $ 0.77 $ 1.37 $ 2.27 Diluted earnings per share $ 0.59 $ 0.76 $ 1.37 $ 2.25 Dividends per share $ 0.22 $ 0.22 $ 0.66 $ 0.60 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In thousands; unaudited) Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Net income $ 17,606 $ 23,395 $ 41,157 $ 69,182 Other comprehensive income, net of tax: Unrealized gains on available for sale securities arising during the period 3,266 3,697 7,069 19,378 Change in minimum pension liability 1,691 — 2,817 — Change in joint beneficiary agreements — — 912 — Other comprehensive income 4,957 3,697 10,798 19,378 Comprehensive income $ 22,563 $ 27,092 $ 51,955 $ 88,560 See accompanying notes to unaudited condensed consolidated financial statements. 3 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 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 June 30, 2020 29,759,209 $ 530,422 $ 354,645 $ 619 $ 885,686 Net income 17,606 17,606 Other comprehensive income 4,957 4,957 Stock options exercised 16,000 259 259 RSU vesting 383 383 PSU vesting 162 162 RSUs released 2,619 — PSUs released — — Repurchase of common stock ( 8,439 ) ( 151 ) ( 91 ) ( 242 ) Dividends paid ($ 0.22 per share) ( 6,549 ) ( 6,549 ) Three months ended September 30, 2020 29,769,389 $ 531,075 $ 365,611 $ 5,576 $ 902,262 See accompanying notes to unaudited condensed consolidated financial statements. 4 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 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 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 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 41,157 41,157 Other comprehensive income 10,798 10,798 Stock options exercised 32,000 547 547 RSU vesting 1,018 1,018 PSU vesting 458 458 RSUs released 31,708 — PSUs released 20,265 — Repurchase of common stock ( 838,408 ) ( 14,946 ) ( 10,599 ) ( 25,545 ) Dividends paid ($ 0.66 per share) ( 19,758 ) ( 19,758 ) Nine months ended September 30, 2020 29,769,389 $ 531,075 $ 365,611 $ 5,576 $ 902,262 See accompanying notes to unaudited condensed consolidated financial statements. 5 Table of Contents TRICO BANCSHARES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands; unaudited) For the nine months ended September 30, 2020 2019 Operating activities: Net income $ 41,157 $ 69,182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment, and amortization 4,778 5,273 Amortization of intangible assets 4,293 4,293 Provision for (reversal of) credit losses 37,963 ( 1,392 ) Amortization of investment securities premium, net 1,747 2,050 Gain on sale of investment securities ( 7 ) ( 107 ) Originations of loans for resale ( 152,968 ) ( 92,002 ) Proceeds from sale of loans originated for resale 156,347 89,506 Gain on sale of loans ( 5,662 ) ( 2,223 ) Change in market value of mortgage servicing rights 2,258 1,652 Provision for losses on foreclosed assets — 56 Gain (loss) on transfer of loans to foreclosed assets 128 ( 151 ) Gain on sale of foreclosed assets ( 57 ) ( 246 ) Operating lease expense payments ( 3,716 ) ( 3,683 ) Loss on disposal of fixed assets 37 82 Increase in cash value of life insurance ( 2,203 ) ( 2,294 ) Gain on life insurance death benefit — ( 831 ) Gain on marketable equity securities ( 72 ) ( 100 ) Equity compensation vesting expense 1,476 1,213 Change in: Interest receivable ( 660 ) 1,207 Interest payable ( 836 ) 850 Accretion (amortization) of operating lease ROUA 4,070 ( 463 ) Other assets and liabilities, net ( 9,489 ) 4,394 Net cash from operating activities 78,584 76,266 Investing activities: Proceeds from maturities of securities available for sale 114,122 69,278 Proceeds from maturities of securities held to maturity 64,054 50,738 Proceeds from sale of available for sale securities 229 125,247 Purchases of securities available for sale ( 298,018 ) ( 37,253 ) Loan origination and principal collections, net ( 518,564 ) ( 159,991 ) Proceeds from sale of other real estate owned 570 1,255 Proceeds from sale of premises and equipment — — Purchases of premises and equipment ( 2,340 ) ( 3,070 ) Net cash (used by) from investing activities ( 639,947 ) 46,204 Financing activities: Net change in deposits 973,594 ( 71,059 ) Net change in other borrowings 8,601 584 Repurchase of common stock, net of option exercises ( 24,999 ) ( 2,196 ) Dividends paid ( 19,758 ) ( 18,285 ) Exercise of stock options — — Net cash (used by) from financing activities 937,438 ( 90,956 ) Net change in cash and cash equivalents 376,075 31,514 Cash and cash equivalents, beginning of period 276,507 227,533 Cash and cash equivalents, end of period $ 652,582 $ 259,047 Supplemental disclosure of noncash activities: Unrealized gain on securities available for sale $ 10,036 $ 27,511 Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes 736 4,842 Obligations incurred in conjunction with leased assets 4,161 32,162 Loans transferred to foreclosed assets 157 331 Supplemental disclosure of cash flow activity: Cash paid for interest expense 8,634 10,803 Cash paid for income taxes 26,000 25,950 See accompanying notes to unaudited condensed consolidated financial statements. 6 Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Description of Business and Basis of Presentation TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 29 California counties. The Company has five capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by the Company and three acquired with the acquisition of North Valley Bancorp. The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $ 1,727,699 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, 2019 (the “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 one 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. 7 Table of Contents 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 $ 795,000 at September 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. 8 Table of Contents The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss: Commercial real estate : Commercial real estate - Non-owner occupied: These commercial properties typically consist of buildings which are leased to others for their use and rely on rents as the primary source of repayment. Property types are predominantly office, retail, or light industrial but the portfolio also has some special use properties. As such, the risk of loss associated with these properties is primarily driven by general economic changes or changes in regional economies and the impact of such on a tenant’s ability to pay. Ultimately this can affect occupancy, rental rates, or both. Additional risk of loss can come from new construction resulting in oversupply, the costs to hold or operate the property, or changes in interest rates. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty years . Commercial real estate - Owner occupied: These credits are primarily susceptible to changes in the financial condition of the business operated by the property owner. This may be driven by changes in, among other things, industry challenges, factors unique to the operating geography of the borrower, change in the individual fortunes of the business owner, general economic conditions and changes in business cycles. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven more by general economic conditions, the underlying collateral may have devalued more and thus result in larger losses in the event of default. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty years . Multifamily: These commercial properties are generally comprised of more than four rentable units, such as apartment buildings, with each unit intended to be occupied as the primary residence for one or more persons. Multifamily properties are also subject to changes in general or regional economic conditions, such as unemployment, ultimately resulting in increased vacancy rates or reduced rents or both. In addition, new construction can create an oversupply condition and market competition resulting in increased vacancy, reduced market rents, or both. Due to the nature of their use and the greater likelihood of tenant turnover, the management of these properties is more intensive and therefore is more critical to the preclusion of loss. Farmland: While the Company has few loans that were originated for the purpose of the acquisition of these commercial properties, loans secured by farmland represent unique risks that are associated with the operation of an agricultural businesses. The valuation of farmland can vary greatly over time based on the property's access to resources including but not limited to water, crop prices, foreign exchange rates, government regulation or restrictions, and the nature of ongoing capital investment needed to maintain the quality of the property. Loans secured by farmland typically represent less risk to the Company than other agriculture loans as the real estate typically provides greater support in the event of default or need for longer term repayment. Consumer loans : SFR 1-4 1st DT Liens: The most significant drivers of potential loss within the Company's residential real estate portfolio relate general, regional, or individual changes in economic conditions and their effect on employment and borrowers cash flow. Risk in this portfolio is best measured by changes in borrower credit score and loan-to-value. Loss estimates are based on the general movement in credit score, economic outlook and its effects on employment and the value of homes and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate. SFR HELOCs and Junior Liens: Similar to residential real estate term loans, HELOCs and junior liens performance is also primarily driven by borrower cash flows based on employment status. However, HELOCs carry additional risks associated with the fact that most of these loans are secured by a deed of trust in a position that is junior to the primary lien holder. Furthermore, the risk that as the borrower's financial strength deteriorates, the outstanding balance on these credit lines may increase as they may only be canceled by the Company if certain limited criteria are met. In addition to the allowance for credit losses maintained as a percent of the outstanding loan balance, the Company maintains additional reserves for the unfunded portion of the HELOC. Other: The majority of consumer loans are secured by automobiles, with the remainder primarily unsecured revolving debt (credit cards). These loans are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value, if any. Typically non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of those factors. Credit card loans are unsecured and while collection efforts are pursued in the event of default, there is typically limited opportunity for recovery. Loss estimates are based on the general movement in credit score, economic outlook and its effects on employment and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate. Commercial and Industrial: Repayment of these loans is primarily based on the cash flow of the borrower, and secondarily on the underlying collateral provided by the borrower. A borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, collateral includes accounts receivable, inventory, or equipment. Collateral securing these loans may depreciate over time, may 9 Table of Contents 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 2020 On January 1, 2020, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which replaces the incurred loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. 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 be presented as an allowance rather than as a write-down on available for sale debt securities, based on management's intent to sell the security or likelihood the Company will be required to sell the 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 with credit deterioration (PCD) that 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 adoption. The remaining noncredit discount (based on the 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 reclassification of $ 481,000 from discounts on acquired loans to the allowance for credit losses, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $ 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 the Company adopted ASU 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350), 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 10 Table of Contents which the reporting unit’s carrying amount exceeds its fair value. There was no goodwill impairment recorded during the three and nine month periods ended September 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 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 and simplification of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU No. 2019-12 will be effective for the Company beginning January 1, 2021 and is not expected to have a significant impact on the Company’s consolidated financial statements. FASB issued ASU 2020-04, 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 valuations of these instruments are applicable for financial reporting purposes. Note 2 - Investment Securities The amortized cost, estimated fair values and allowance for credit losses of investments in debt securities are summarized in the following tables: September 30, 2020 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value Debt Securities Available for Sale Obligations of U.S. government agencies $ 556,295 $ 17,821 $ ( 228 ) $ — $ 573,888 Obligations of states and political subdivisions 107,840 4,898 ( 13 ) — 112,725 Corporate bonds 2,451 101 — — 2,552 Asset backed securities 462,948 450 ( 9,606 ) — 453,792 Total debt securities available for sale $ 1,129,534 $ 23,270 $ ( 9,847 ) $ — $ 1,142,957 Debt Securities Held to Maturity Obligations of U.S. government agencies $ 299,797 $ 14,363 $ — $ 314,160 $ — Obligations of states and political subdivisions 10,899 399 — 11,298 — Total debt securities held to maturity $ 310,696 $ 14,762 $ — $ 325,458 $ — 11 Table of Contents 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 Proceeds from the sale of investment securities totaled $ 229,000 and $ 125,247,000 during the nine month periods ended September 30, 2020 and 2019, respectively. Gross realized gains from the sale of investment securities totaled $ 7,000 during the three and nine months ended September 30, 2020, respectively. There were no gross realized losses on the sale of securities during 2020. Gross realized gains from the sale of investment securities totaled $ 335,000 during the three and nine months ended September 30, 2019, respectively. Gross realized losses from the sale of investment securities during the three and nine months ended September 30, 2019 totaled $ 228,000 . Investment securities with an aggregate carrying value of $ 460,317,000 and $ 466,321,000 at September 30, 2020 and December 31, 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 30, 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 30, 2020, obligations of U.S. government corporations and agencies with a cost basis totaling $ 856,092,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At September 30, 2020, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 2.76 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half. As of September 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 $ — $ — $ — $ — Due after one year through five years 138,993 139,469 — — Due after five years through ten years 142,939 143,492 20,439 21,485 Due after ten years 847,602 859,996 290,257 303,973 Totals $ 1,129,534 $ 1,142,957 $ 310,696 $ 325,458 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: 12 Table of Contents September 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 Obligations of U.S. government agencies $ 152,656 $ ( 228 ) $ — $ — $ 152,656 $ ( 228 ) Obligations of states and political subdivisions 963 ( 13 ) — — 963 ( 13 ) Asset backed securities 92,463 ( 1,495 ) 296,841 ( 8,111 ) 389,304 ( 9,606 ) Total debt securities available for sale $ 246,082 $ ( 1,736 ) $ 296,841 $ ( 8,111 ) $ 542,923 $ ( 9,847 ) 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 ) Obligations of U.S. government agencies: The unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases and illiquidity. 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 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 securities and there has been no allowance for credit losses recorded. At September 30, 2020, 13 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of 0.15 % from the Company’s amortized cost basis. Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because 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 securities and there has been no allowance for credit losses recorded as of September 30, 2020. At September 30, 2020, one ( 1 ) debt security representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of 1.33 % from the Company’s amortized cost basis. Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors for these types of securities. At the time of purchase, each of these securities was rated AA or AAA and through September 30, 2020 has not experienced any deterioration in credit rating. At September 30, 2020, 9 asset backed securities had unrealized losses with aggregate depreciation of 2.41 % 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 securities and there has been no allowance for credit losses recorded as of September 30, 2020. The Company monitors credit quality of debt securities held-to-maturity through the use of credit rating. The Company monitors the credit rating on a monthly basis. The following table summarizes the amortized cost of debt securities held-to-maturity at the dates indicated, aggregated by credit quality indicator: 13 Table of Contents September 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 $ 299,797 $ — $ 361,785 $ — Obligations of states and political subdivisions 10,899 — 13,136 685 Total debt securities held to maturity $ 310,696 $ — $ 374,921 $ 685 Note 3 – Loans A summary of loan balances follows: (in thousands) September 30, 2020 December 31, 2019 Commercial real estate: CRE non-owner occupied $ 1,600,284 $ 1,609,556 CRE owner occupied 581,090 546,434 Multifamily 602,199 517,725 Farmland 152,849 145,067 Total commercial real estate loans 2,936,422 2,818,782 Consumer: SFR 1-4 1st DT liens 511,759 509,508 SFR HELOCs and junior liens 332,820 362,886 Other 82,256 82,656 Total consumer loans 926,835 955,050 Commercial and industrial 633,897 249,791 Construction 284,933 249,827 Agriculture production 40,613 32,633 Leases 3,638 1,283 Total loans, net of deferred loan fees and discounts 4,826,338 4,307,366 Total principal balance of loans owed, net of charge-offs 4,875,675 4,351,725 Unamortized net deferred loan fees ( 20,767 ) ( 8,927 ) Discounts to principal balance of loans owed, net of charge-offs ( 28,570 ) ( 35,432 ) Total loans, net of unamortized deferred loan fees and discounts 4,826,338 4,307,366 Allowance for credit losses on loans $ ( 87,575 ) $ ( 30,616 ) As of the quarter ended September 30, 2020, the total balance outstanding of PPP loans, which are included in commercial and industrial loans, was $ 437,793,000 (approximately 2,900 loans) as compared to total PPP originations of $ 438,510,000 . Included in the balance of outstanding PPP loans as of September 30, 2020 are approximately 1,420 loans with outstanding balances of less than $50,000 each and with a total balance outstanding of approximately $ 32,296,000 . In connection with the origination of these loans, the Company earned approximately $ 15,735,000 in loan fees, offset by deferred loan costs of approximately $ 763,000 , the net of which will be recognized over the earlier of loan maturity, repayment or receipt of forgiveness confirmation. As of September 30, 2020 there was approximately $ 11,846,000 in net deferred fee income expected to be recognized. During the three and nine months ended September 30, 2020, the Company recognized $ 2,603,000 and $ 4,959,000 , respectively, in interest and fees on PPP loans. 14 Table of Contents Note 4 – Allowance for Credit Losses on Loans For the periods indicated, the following tables summarize the activity in the allowance for credit losses on loans which is recorded as a contra asset, and the reserve for unfunded commitments which is recorded on the balance sheet within other liabilities: Allowance for Loan Losses – Three Months Ended September 30, 2020 (in thousands) Beginning Balance Charge-offs Recoveries Provision Ending Balance Commercial real estate: CRE non-owner occupied $ 26,091 $ — $ 23 $ 2,733 $ 28,847 CRE owner occupied 8,710 — 1 914 9,625 Multifamily 8,581 — — 1,451 10,032 Farmland 1,468 — — 322 1,790 Total commercial real estate loans 44,850 — 24 5,420 50,294 Consumer: SFR 1-4 1st DT liens 8,015 ( 2 ) 2 922 8,937 SFR HELOCs and junior liens 12,108 — 126 ( 558 ) 11,676 Other 3,042 ( 98 ) 85 365 3,394 Total consumer loans 23,165 ( 100 ) 213 729 24,007 Commercial and industrial 4,018 ( 94 ) 142 468 4,534 Construction 6,775 — — 865 7,640 Agriculture production 919 — 2 172 1,093 Leases 12 — — ( 5 ) 7 Allowance for credit losses on loans 79,739 ( 194 ) 381 7,649 87,575 Reserve for unfunded commitments 3,000 — — — 3,000 Total $ 82,739 $ ( 194 ) $ 381 $ 7,649 $ 90,575 Allowance for Loan Losses – Nine months ended September 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 $ — $ 223 $ 15,975 $ 28,847 CRE owner occupied 2,027 2,281 — 3 5,314 9,625 Multifamily 3,352 2,281 — — 4,399 10,032 Farmland 668 585 — — 537 1,790 Total commercial real estate loans 11,995 11,848 — 226 26,225 50,294 Consumer: SFR 1-4 1st DT liens 2,306 2,675 ( 13 ) 414 3,555 8,937 SFR HELOCs and junior liens 6,183 4,638 ( 23 ) 265 613 11,676 Other 1,595 971 ( 471 ) 253 1,046 3,394 Total consumer loans 10,084 8,284 ( 507 ) 932 5,214 24,007 Commercial and industrial 4,867 ( 1,961 ) ( 688 ) 323 1,993 4,534 Construction 3,388 933 — — 3,319 7,640 Agriculture production 261 ( 179 ) — 22 989 1,093 Leases 21 ( 12 ) — — ( 2 ) 7 Allowance for credit losses on loans 30,616 18,913 ( 1,195 ) 1,503 37,738 87,575 Reserve for unfunded commitments 2,775 — — — 225 3,000 Total $ 33,391 $ 18,913 $ ( 1,195 ) $ 1,503 $ 37,963 $ 90,575 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 September 30, 2020, the Company utilized 15 Table of Contents 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 September 30, 2020 the majority of the increase in ACL reflects potential future credit deterioration. Specifically, portfolio-wide qualitative indicators for changes in California Unemployment and US Policy uncertainty contributed to the majority of the increase in credit reserves on loans as of September 30, 2020 as compared to the trailing quarter, adding approximately $ 9,556,000 to the required reserves. These increases were partially offset with a reduced need for reserves for concentration risks totaling $ 1,472,000 and reductions in specific reserves on individually evaluated loans of $ 321,000 . Management noted that the majority of economic forecasts utilized in the ACL calculation have continued to identify an expanded duration of the current recessionary period as caused by the global pandemic and partially offset by the governmental stimulus that has been provided to date. Management believes that the allowance for credit losses at September 30, 2020 appropriately reflected expected credit losses inherent in the loan portfolio at that date. 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 September 30, 2019 (in thousands) Beginning Balance Charge-offs Recoveries Provision (benefit) Ending Balance Commercial real estate: CRE non-owner occupied $ 6,182 $ — $ 8 $ 261 $ 6,451 CRE owner occupied 2,214 ( 746 ) 118 93 1,679 Multifamily 3,082 — — 69 3,151 Farmland 621 — — 39 660 Total commercial real estate loans 12,099 ( 746 ) 126 462 11,941 Consumer: SFR 1-4 1st DT liens 2,576 — 47 ( 217 ) 2,406 SFR HELOCs and junior liens 7,101 ( 3 ) 183 ( 286 ) 6,995 Other 1,451 ( 189 ) 80 213 1,555 Total consumer loans 11,128 ( 192 ) 310 ( 290 ) 10,956 Commercial and industrial 6,481 ( 565 ) 83 ( 528 ) 5,471 Construction 2,896 — — 57 2,953 Agriculture production 264 ( 19 ) 1 ( 30 ) 216 Leases — — — — — Total $ 32,868 $ ( 1,522 ) $ 520 $ ( 329 ) $ 31,537 16 Table of Contents Allowance for Loan Losses – Nine months ended September 30, 2019 (in thousands) Beginning Balance Charge-offs Recoveries Provision (benefit) Ending Balance Commercial real estate: CRE non-owner occupied $ 7,401 $ — $ 1,397 $ ( 2,347 ) $ 6,451 CRE owner occupied 2,711 ( 746 ) 121 ( 407 ) 1,679 Multifamily 2,429 — — 722 3,151 Farmland 403 — — 257 660 Total commercial real estate loans 12,944 ( 746 ) 1,518 ( 1,775 ) 11,941 Consumer: SFR 1-4 1st DT liens 2,676 ( 2 ) 53 ( 321 ) 2,406 SFR HELOCs and junior liens 7,582 ( 3 ) 719 ( 1,303 ) 6,995 Other 793 ( 548 ) 263 1,047 1,555 Total consumer loans 11,051 ( 553 ) 1,035 ( 577 ) 10,956 Commercial and industrial 5,610 ( 1,222 ) 325 758 5,471 Construction 2,497 — — 456 2,953 Agriculture production 480 ( 20 ) 10 ( 254 ) 216 Leases — — — — — Total $ 32,582 $ ( 2,541 ) $ 2,888 $ ( 1,392 ) $ 31,537 As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans, and (iv) delinquency within the portfolio. The Company analyzes loans individually to classify the loans as to credit risk and grading. This analysis is performed annually for all outstanding balances greater than $1,000,000 and non-homogeneous loans, such as commercial real estate loans, unless other indicators, such as delinquency, trigger more frequent evaluation. Loans below the $1,000,000 threshold and homogenous in nature are evaluated as needed for proper grading based on delinquency and borrower credit scores. The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows: • Pass – This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital. • Special Mention – This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention. • Substandard – This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well-defined workout/rehabilitation program. • Doubtful – This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans. • Loss – This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the quarter in which the loss is identified. 17 Table of Contents Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the period indicated: Term Loans Amortized Cost Basis by Origination Year – As of September 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 $ 97,561 $ 249,707 $ 157,838 $ 264,223 $ 196,645 $ 489,900 $ 71,986 $ — $ 1,527,860 Special Mention — 7,562 11,981 8,892 11,936 12,641 12,257 — 65,269 Substandard — — 1,473 593 2,147 2,942 — 7,155 Doubtful/Loss — — — — — — — — — Total CRE non-owner occupied risk ratings $ 97,561 $ 257,269 $ 171,292 $ 273,708 $ 210,728 $ 505,483 $ 84,243 $ — $ 1,600,284 Commercial real estate: CRE owner occupied risk ratings Pass $ 67,205 $ 63,202 $ 49,719 $ 65,416 $ 55,970 $ 240,327 $ 17,662 $ — $ 559,501 Special Mention — — — 4,090 3,749 5,488 — — 13,327 Substandard — 1,538 1,314 479 902 4,029 — — 8,262 Doubtful/Loss — — — — — — — — — Total CRE owner occupied risk ratings $ 67,205 $ 64,740 $ 51,033 $ 69,985 $ 60,621 $ 249,844 $ 17,662 $ — $ 581,090 Commercial real estate: Multifamily risk ratings Pass $ 58,058 $ 96,373 $ 114,385 $ 72,493 $ 68,891 $ 123,875 $ 23,315 $ — $ 557,390 Special Mention 9,443 — — 608 24,695 779 9,284 — 44,809 Substandard — — — — — — — — — Doubtful/Loss — — — — — — — — — Total multifamily loans $ 67,501 $ 96,373 $ 114,385 $ 73,101 $ 93,586 $ 124,654 $ 32,599 $ — $ 602,199 Commercial real estate: Farmland risk ratings Pass $ 10,026 $ 23,970 $ 19,127 $ 11,677 $ 8,684 $ 20,133 $ 43,437 $ — $ 137,054 Special Mention — 2,566 — 1,271 227 3,271 2,005 — 9,340 Substandard — 700 — 608 451 2,606 2,090 — 6,455 Doubtful/Loss — — — — — — — — — Total farmland loans $ 10,026 $ 27,236 $ 19,127 $ 13,556 $ 9,362 $ 26,010 $ 47,532 $ — $ 152,849 Consumer loans: SFR 1-4 1st DT liens risk ratings Pass $ 103,547 $ 88,421 $ 44,171 $ 60,223 $ 50,397 $ 146,254 $ — $ 5,351 $ 498,364 Special Mention — 291 687 553 16 1,752 — 1,001 4,300 Substandard — — 1,203 1,224 944 4,888 — 836 9,095 Doubtful/Loss — — — — — — — — — Total SFR 1st DT liens $ 103,547 $ 88,712 $ 46,061 $ 62,000 $ 51,357 $ 152,894 $ — $ 7,188 $ 511,759 18 Table of Contents Term Loans Amortized Cost Basis by Origination Year – As of September 30, 2020 (in thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Consumer loans: SFR HELOCs and Junior Liens Pass $ 855 $ — $ 13 $ 373 $ 358 $ 1,618 $ 299,380 $ 15,585 $ 318,182 Special Mention — — 17 — — 35 5,249 761 6,062 Substandard — 499 — — 124 45 6,071 1,837 8,576 Doubtful/Loss — — — — — — — — — Total SFR HELOCs and Junior Liens $ 855 $ 499 $ 30 $ 373 $ 482 $ 1,698 $ 310,700 $ 18,183 $ 332,820 Consumer loans: Other risk ratings Pass $ 22,898 $ 33,118 $ 16,379 $ 4,930 $ 1,225 $ 1,252 $ 1,044 $ — $ 80,846 Special Mention 38 320 139 80 39 99 88 — 803 Substandard — 147 254 72 14 111 9 — 607 Doubtful/Loss — — — — — — — — — Total other consumer loans $ 22,936 $ 33,585 $ 16,772 $ 5,082 $ 1,278 $ 1,462 $ 1,141 $ — $ 82,256 Commercial and industrial loans: Commercial and industrial risk ratings Pass $ 449,180 $ 54,413 $ 24,053 $ 16,445 $ 6,112 $ 10,808 $ 66,890 $ 1,062 $ 628,963 Special Mention — — 224 312 76 72 588 12 1,284 Substandard — 134 57 1,477 825 143 888 126 3,650 Doubtful/Loss — — — — — — — — — Total commercial and industrial loans $ 449,180 $ 54,547 $ 24,334 $ 18,234 $ 7,013 $ 11,023 $ 68,366 $ 1,200 $ 633,897 Construction loans: Construction risk ratings Pass $ 55,041 $ 45,007 $ 103,191 $ 50,972 $ 20,978 $ 2,940 $ — $ — $ 278,129 Special Mention — — — 346 — 1,803 — — 2,149 Substandard — — — — 4,398 257 — — 4,655 Doubtful/Loss — — — — — — — — — Total construction loans $ 55,041 $ 45,007 $ 103,191 $ 51,318 $ 25,376 $ 5,000 $ — $ — $ 284,933 Agriculture production loans: Agriculture production risk ratings Pass $ 82 $ 1,680 $ 1,001 $ 869 $ 754 $ 543 $ 35,410 $ — $ 40,339 Special Mention — — — — — — — — — Substandard — — — — 18 — 256 — 274 Doubtful/Loss — — — — — — — — — Total agriculture production loans $ 82 $ 1,680 $ 1,001 $ 869 $ 772 $ 543 $ 35,666 $ — $ 40,613 19 Table of Contents Term Loans Amortized Cost Basis by Origination Year – As of September 30, 2020 (in thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Leases: Lease risk ratings Pass $ 3,638 $ — $ — $ — $ — $ — $ — $ — $ 3,638 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful/Loss — — — — — — — — — Total leases $ 3,638 $ — $ — $ — $ — $ — $ — $ — $ 3,638 Total loans outstanding: Risk ratings Pass $ 868,091 $ 655,891 $ 529,877 $ 547,621 $ 410,014 $ 1,037,650 $ 559,124 $ 21,998 $ 4,630,266 Special Mention 9,481 10,739 13,048 16,152 40,738 25,940 29,471 1,774 147,343 Substandard — 3,018 4,301 4,453 9,823 15,021 9,314 2,799 48,729 Doubtful/Loss — — — — — — — — — Total loans outstanding $ 877,572 $ 669,648 $ 547,226 $ 568,226 $ 460,575 $ 1,078,611 $ 597,909 $ 26,571 $ 4,826,338 The following information related to loan originations by vintage are presented for comparison purposes only. 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 — — — — — — — — Total CRE non-owner occupied risk ratings $ 253,321 $ 176,052 $ 290,839 $ 230,265 $ 582,009 $ 77,070 $ — $ 1,609,556 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 20 Table of Contents 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: 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 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: 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 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 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 21 Table of Contents 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 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 Agriculture production loans: 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 22 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 Past Due Loans - As of September 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 $ 960 $ 131 $ 306 $ 1,397 $ 1,598,887 $ 1,600,284 CRE owner occupied 782 — 421 1,203 579,887 581,090 Multifamily — — — — 602,199 602,199 Farmland — — 451 451 152,398 152,849 Total commercial real estate loans 1,742 131 1,178 3,051 2,933,371 2,936,422 Consumer: SFR 1-4 1st DT liens 434 74 2,005 2,513 509,246 511,759 SFR HELOCs and junior liens 1,205 492 1,440 3,137 329,683 332,820 Other 155 79 190 424 81,832 82,256 Total consumer loans 1,794 645 3,635 6,074 920,761 926,835 Commercial and industrial 365 395 105 865 633,032 633,897 Construction 138 47 17 202 284,731 284,933 Agriculture production — 330 — 330 40,283 40,613 Leases — — — — 3,638 3,638 Total $ 4,039 $ 1,548 $ 4,935 $ 10,522 $ 4,815,816 $ 4,826,338 The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated: 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 — — 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 23 Table of Contents The following table shows the ending balance of non accrual loans by loan category as of the date indicated: Non Accrual Loans As of September 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 $ 3,010 $ 3,010 $ — $ 639 $ 642 $ — CRE owner occupied 3,778 3,778 — 1,411 1,408 — Multifamily — — — 2,024 2,024 — Farmland 2,056 2,056 — 1,242 1,242 — Total commercial real estate loans 8,844 8,844 — 5,316 5,316 — Consumer: SFR 1-4 1st DT liens 6,182 6,351 — 5,023 5,192 — SFR HELOCs and junior liens 3,974 5,184 — 3,992 4,217 — Other 80 257 29 4 32 19 Total consumer loans 10,236 11,792 29 9,019 9,441 19 Commercial and industrial 761 1,978 16 476 2,050 — Construction — 18 — — — — Agriculture production 273 286 — 14 38 — Leases — — — — Sub-total 20,114 22,918 45 14,825 16,845 19 Less: Guaranteed loans ( 814 ) ( 814 ) — ( 916 ) ( 990 ) — Total, net $ 19,300 $ 22,104 $ 45 $ 13,909 $ 15,855 $ 19 Interest income on non accrual loans that would have been recognized during the three months ended September 30, 2020 and 2019, if all such loans had been current in accordance with their original terms, totaled $ 303,000 and $ 325,000 , respectively. Interest income actually recognized on these originated loans during the three months ended September 30, 2020 and 2019 was $ 187,000 and $ 151,000 , respectively. Interest income on non accrual loans that would have been recognized during the nine months ended September 30, 2020 and 2019, if all such loans had been current in accordance with their original terms, totaled $ 1,162,000 and $ 1,014,000 , respectively. Interest income actually recognized on these originated loans during the nine months ended September 30, 2020 and 2019 was $ 321,000 and $ 297,000 , respectively. 24 Table of Contents The following tables present the amortized cost basis of collateral dependent loans by class of loans as of the following periods: As of September 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 $ 2,696 $ — $ — $ — $ — $ — $ — $ — $ — $ — $ 2,696 CRE owner occupied 893 950 1,935 — — — — — — — 3,778 Multifamily — — — — — — — — — — — Farmland — — — — — 2,056 — — — — 2,056 Total commercial real estate loans 3,589 950 1,935 — — 2,056 — — — — — 8,530 Consumer: SFR 1-4 1st DT liens — — — — — — 6,135 190 — — — 6,325 SFR HELOCs and junior liens — — — — — — 1,187 3,024 — — — 4,211 Other — — — 8 — — — — 229 — — 237 Total consumer loans — — — 8 — — 7,322 3,214 229 — — 10,773 Commercial and industrial — — — — — — — — — 1,933 45 1,978 Construction — — — — — — — — — — — — Agriculture production — — — 268 — — — — — 13 5 286 Leases — — — — — — — — — — Total $ 3,589 $ 950 $ 1,935 $ 276 $ — $ 2,056 $ 7,322 $ 3,214 $ 229 $ 1,946 $ 50 $ 21,567 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 25 Table of Contents 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 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, 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 $ 319 $ 314 $ 314 1 $ 141 $ — CRE owner occupied 5 2,422 2,341 67 2 1,401 — Multifamily — — — — — — — Farmland — — — — — — — Total commercial real estate loans 6 2,741 2,655 381 3 1,542 — Consumer: SFR 1-4 1st DT liens — — — — — — — SFR HELOCs and junior liens — — — — 1 143 — Other — — — — — — — Total consumer loans — — — — 1 143 — Commercial and industrial — — — — — — — Construction — — — — — — — Agriculture production — — — — — — — Leases — — — — — — — Total 6 $ 2,741 $ 2,655 $ 381 4 $ 1,685 $ — 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 Commercial real estate: CRE non-owner occupied 2 $ 60 $ 67 $ — — $ — $ — CRE owner occupied — — — — — — — Multifamily — — — — — — — Farmland — — — — — — — Total commercial real estate loans 2 60 67 — — — — Consumer: SFR 1-4 1st DT liens 2 496 500 28 — — — SFR HELOCs and junior liens — — — — — — — Other — — — — — — — Total consumer loans 2 496 500 28 — Commercial and industrial 4 150 148 — — — — Construction — — — — — — — Agriculture production — — — — — — — Leases — — — — — — — Total 8 $ 706 $ 715 $ 28 — — $ — 26 Table of Contents TDR Information for the nine months ended September 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 2 $ 576 $ 565 $ 314 1 $ 141 $ — CRE owner occupied 5 2,422 2,341 67 2 1,401 — Multifamily — — — — — — — Farmland 2 229 298 — — — — Total commercial real estate loans 9 3,227 3,204 381 3 1,542 — 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 — — — — — — — Construction 1 21 20 21 — — — Total 12 $ 3,420 $ 3,393 $ 402 5 $ 2,579 $ — 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 Commercial real estate: CRE non-owner occupied 2 $ 60 $ 67 $ — — $ — $ — CRE owner occupied — — — — — — — Multifamily — — — — — — — Farmland — — — — — — — Total commercial real estate loans 2 60 67 — — — — Consumer: SFR 1-4 1st DT liens 3 659 662 30 — — — SFR HELOCs and junior liens 3 214 215 29 — — — Other — — — — — — — Total consumer loans 6 873 877 59 — — — Commercial and industrial 10 1,918 1,885 — 1 7 — Construction — — — — — — — Total 18 $ 2,851 $ 2,829 $ 59 1 $ 7 $ — The Company also modified the terms of select loans in an effort to assist borrowers that were not related to the COVID-19 pandemic. If the borrower was experiencing financial difficulty and a concession was granted, the Company considered such modifications as troubled debt restructurings. Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions. The objective of the modifications was to increase loan repayments by customers and thereby reduce net charge-offs. The modified loans are included in impaired loans for purposes of determining the level of the allowance for credit losses. For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above. 27 Table of Contents 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 5 - Leases The Company 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 also 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 12 month 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 or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the amount of lease liability and adjusted for prepaid or accrued lease payments, remaining lease incentives, unamortized direct costs (if any), and impairment (if any). The following table presents the components of lease expense for the periods ended: Three months ended September 30, Nine months ended September 30, (in thousands) 2020 2019 2020 2019 Operating lease cost $ 1,284 $ 1,306 $ 3,869 $ 3,924 Short-term lease cost 67 65 195 194 Variable lease cost ( 1 ) ( 13 ) 6 ( 33 ) Sublease income ( 33 ) ( 32 ) ( 102 ) ( 98 ) Total lease cost $ 1,317 $ 1,326 $ 3,968 $ 3,987 The following table presents supplemental cash flow information related to leases for the periods ended: Three months ended September 30, Nine months ended September 30, (in thousands) 2020 2019 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 1,236 $ 1,236 $ 3,716 $ 3,683 ROUA obtained in exchange for operating lease liabilities $ 93 $ — $ 4,161 $ 32,162 28 Table of Contents The following table presents the weighted average operating lease term and discount rate as of the period ended: September 30, 2020 2019 Weighted-average remaining lease term (years) 10.0 9.5 Weighted-average discount rate 3.10 % 3.18 % At September 30, 2020, future expected operating lease payments are as follows: (in thousands) Periods ending December 31, 2020 $ 1,144 2021 4,566 2022 4,230 2023 3,554 2024 3,278 Thereafter 17,457 34,229 Discount for present value of expected cash flows ( 5,335 ) Lease liability at September 30, 2020 $ 28,894 Note 6 - Deposits A summary of the balances of deposits follows (in thousands): September 30, 2020 December 31, 2019 Noninterest-bearing demand $ 2,517,819 $ 1,832,665 Interest-bearing demand 1,346,716 1,242,274 Savings 2,099,780 1,851,549 Time certificates, $250,000 or more 96,377 129,061 Other time certificates 279,896 311,445 Total deposits $ 6,340,588 $ 5,366,994 Certificate of deposit balances of $ 30,000,000 from the State of California were included in time certificates, over $250,000, at September 30, 2020 and December 31, 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 $ 1,139,000 and $ 1,550,000 were classified as consumer loans at September 30, 2020 and December 31, 2019, respectively. Note 7 - Commitments and Contingencies The following table presents a summary of the Bank’s commitments and contingent liabilities: (in thousands) September 30, 2020 December 31, 2019 Financial instruments whose amounts represent risk: Commitments to extend credit: Commercial loans $ 392,779 $ 363,793 Consumer loans 534,960 533,576 Real estate mortgage loans 207,423 188,959 Real estate construction loans 185,826 222,998 Standby letters of credit 11,255 12,014 Deposit account overdraft privilege 110,271 110,402 29 Table of Contents Note 8 - Shareholders’ Equity Dividends Paid The Bank paid to the Company cash dividends in the aggregate amounts of $ 6,913,000 and $ 7,011,000 during the three months ended September 30, 2020 and 2019, respectively and $ 46,361,000 and $ 25,361,000 during the nine months ended September 30, 2020 and 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 November 12, 2019 the Board of Directors approved the authorization to repurchase up to 1,525,000 shares of the Company's common stock (the 2019 Repurchase Plan), which approximated 5.0 % of the shares outstanding as of 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 and during the year ended 2019, the Company had repurchased no shares. During the three and nine months ended September 30, 2020, the Company repurchased 0 and 813,862 shares with a market value of $ 0 and $ 24,809,000 , respectively. In connection with approval of the 2019 Repurchase Plan, the Company’s previous repurchase program adopted on August 21, 2007 (the 2007 Repurchase Plan) was terminated. There were no shares of common stock repurchased under 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 30, 2020 and 2019, employees tendered 7,820 and 3,820 shares, respectively, of the Company’s common stock in connection with option exercises. During the nine months ended September 30, 2020 and 2019, employees tendered 12,488 and 108,492 shares, respectively, of the Company’s common stock in connection with option exercises. Employees also tendered 619 and 0 shares in connection with the tax withholding requirements of other share based awards during the three months ended September 30, 2020 and 2019, respectively, and 12,058 and 15,242 shares during the nine months period ended September 30, 2020 and 2019, respectively. In total, shares of the Company's common stock tendered had market values of $ 242,000 and $ 147,000 during the quarter ended September 30, 2020 and 2019, respectively, and $ 588,000 and $ 4,842,000 year to date September 30, 2020 and 2019, respectively. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is 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 2019 or 2007 Stock Repurchase Plans. Note 9 - 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 months ended September 30, 2020, were made from the 2019 Plan. Stock option activity during the nine months ended September 30, 2020 is summarized in the following table: Number of Shares Option Price per Share Weighted Average Exercise Price Outstanding at December 31, 2019 160,500 $ 14.54 to $ 23.21 $ 17.60 Options granted — — — Options exercised ( 32,000 ) $ 14.54 to $ 19.46 17.10 Options forfeited — — — Outstanding at September 30, 2020 128,500 $ 14.54 to $ 23.21 $ 17.72 30 Table of Contents 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 30, 2020: Currently Exercisable Currently Not Exercisable Total Outstanding Number of options 128,500 — 128,500 Weighted average exercise price $ 17.72 $ — $ 17.72 Intrinsic value (in thousands) $ 870 $ — $ 870 Weighted average remaining contractual term (yrs.) 2.2 n/a 2.2 As of September 30, 2020 all options outstanding are fully vested and are expected to be exercised prior to expiration. The Company did not modify any option grants during 2019 or the nine months ended September 30, 2020. Activity related to restricted stock unit awards during the nine months ended September 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 2,274 5,847 RSUs released ( 31,708 ) ( 20,265 ) RSUs forfeited/expired 1,373 ( 1,695 ) Outstanding at September 30, 2020 104,572 81,615 During the three months ended September 30, 2020 and 2019 there were no restricted stock unit awards granted under the 2019 Plan. The 104,572 of service condition vesting RSUs outstanding as of September 30, 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 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 104,572 of service condition vesting RSUs outstanding as of September 30, 2020 are expected to vest, and be released, on a weighted-average basis, over the next 1.60 years. The Company expects to recognize $ 2,782,321 of pre-tax compensation costs related to these service condition vesting RSUs between September 30, 2020 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2019 or during the nine months ended September 30, 2020. The 81,615 of market plus service condition vesting RSUs outstanding as of September 30, 2020 are expected to vest, and be released, on a weighted-average basis, over the next 2.10 years. The Company expects to recognize $ 1,469,701 of pre-tax compensation costs related to these RSUs between September 30, 2020 and their vesting dates. As of September 30, 2020, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 122,423 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 2019 or during the nine months ended September 30, 2020. 31 Table of Contents Note 10 - 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) 2020 2019 2020 2019 ATM and interchange fees $ 5,637 $ 5,427 $ 15,913 $ 15,412 Service charges on deposit accounts 3,334 4,327 10,426 12,389 Other service fees 805 808 2,296 2,198 Mortgage banking service fees 457 483 1,386 1,441 Change in value of mortgage servicing rights 236 ( 455 ) ( 2,258 ) ( 1,652 ) Total service charges and fees 10,469 10,590 27,763 29,788 Increase in cash value of life insurance 773 773 2,203 2,294 Asset management and commission income 667 721 2,244 2,102 Gain on sale of loans 3,035 1,236 5,662 2,223 Lease brokerage income 175 172 495 631 Sale of customer checks 91 126 303 401 Gain on sale of investment securities 7 107 7 107 Gain on marketable equity securities — 22 72 100 Other ( 80 ) 361 ( 135 ) 1,688 Total other non-interest income 4,668 3,518 10,851 9,546 Total non-interest income $ 15,137 $ 14,108 $ 38,614 $ 39,334 The components of non-interest expense were as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Base salaries, net of deferred loan origination costs $ 18,754 $ 17,656 $ 53,654 $ 51,624 Incentive compensation 2,184 3,791 7,680 10,064 Benefits and other compensation costs 8,383 5,452 22,314 17,058 Total salaries and benefits expense 29,321 26,899 83,648 78,746 Occupancy 3,440 3,711 10,713 11,223 Data processing and software 3,561 3,411 10,585 10,114 Equipment 1,549 1,679 4,411 5,298 Intangible amortization 1,431 1,431 4,293 4,293 Advertising 869 1,358 2,065 4,222 ATM and POS network charges 1,314 1,343 3,897 3,936 Professional fees 955 999 2,399 2,895 Telecommunications 619 867 1,983 2,437 Regulatory assessments and insurance 538 94 993 1,095 Postage 118 438 691 1,063 Operational losses 154 228 559 679 Courier service 345 357 1,013 1,039 Gain on sale of foreclosed assets — ( 50 ) ( 57 ) ( 246 ) Loss on disposal of fixed assets 22 2 37 82 Other miscellaneous expense 2,478 3,577 9,783 11,617 Total other non-interest expense 17,393 19,445 53,365 59,747 Total non-interest expense $ 46,714 $ 46,344 $ 137,013 $ 138,493 32 Table of Contents Note 11 - 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, (in thousands) 2020 2019 Net income $ 17,606 $ 23,395 Average number of common shares outstanding 29,764 30,509 Effect of dilutive stock options and restricted stock 80 120 Average number of common shares outstanding used to calculate diluted earnings per share 29,844 30,629 Options excluded from diluted earnings per share because of their antidilutive effect — 42 Nine months ended September 30, (in thousands) 2020 2019 Net income $ 41,157 $ 69,182 Average number of common shares outstanding 29,971 30,464 Effect of dilutive stock options and restricted stock 112 179 Average number of common shares outstanding used to calculate diluted earnings per share 30,083 30,643 Options excluded from diluted earnings per share because of their antidilutive effect — 42 Note 12 – 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 identified as accumulated other comprehensive income (AOCI), such items, along with net income, are components of other comprehensive income (OCI). 33 Table of Contents The components of other comprehensive income and related tax effects are as follows: Three months ended September 30, Nine months ended September 30, (in thousands) 2020 2019 2020 2019 Unrealized holding gains on available for sale securities before reclassifications $ 4,645 $ 5,355 $ 10,043 $ 27,618 Amounts reclassified out of AOCI: Realized gain on debt securities ( 7 ) ( 107 ) ( 7 ) ( 107 ) Unrealized holding gains (losses) on available for sale securities after reclassifications 4,638 5,248 10,036 27,511 Tax effect ( 1,372 ) ( 1,551 ) ( 2,967 ) ( 8,133 ) Unrealized holding gains on available for sale securities, net of tax 3,266 3,697 7,069 19,378 Change in unfunded status of the supplemental retirement plans before reclassifications 1,936 ( 89 ) 2,607 ( 266 ) Amounts reclassified out of AOCI: Amortization of prior service cost ( 14 ) ( 13 ) ( 41 ) ( 40 ) Amortization of actuarial losses 478 102 1,434 306 Total amounts reclassified out of accumulated other comprehensive income 464 89 1,393 266 Change in unfunded status of the supplemental retirement plans after reclassifications 2,400 — 4,000 — Tax effect ( 709 ) — ( 1,183 ) — Change in unfunded status of the supplemental retirement plans, net of tax 1,691 — 2,817 — Change in joint beneficiary agreement liability before reclassifications — — 912 — Tax effect — — — — Change in joint beneficiary agreement liability before reclassifications, net of tax — — 912 — Total other comprehensive income $ 4,957 $ 3,697 $ 10,798 $ 19,378 The components of accumulated other comprehensive income (loss), included in shareholders’ equity, are as follows: (in thousands) September 30, 2020 December 31, 2019 Net unrealized gain on available for sale securities $ 13,423 $ 3,387 Tax effect ( 3,968 ) ( 1,001 ) Unrealized holding gain on available for sale securities, net of tax 9,455 2,386 Unfunded status of the supplemental retirement plans ( 7,193 ) ( 11,193 ) Tax effect 2,126 3,309 Unfunded status of the supplemental retirement plans, net of tax ( 5,067 ) ( 7,884 ) Joint beneficiary agreement liability 1,188 276 Tax effect — — Joint beneficiary agreement liability, net of tax 1,188 276 Accumulated other comprehensive income (loss) $ 5,576 $ ( 5,222 ) Note 13 - 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. 34 Table of Contents 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 no 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. Individually evaluated loans - Loans are not recorded at fair value on a recurring basis. However, from time to time, certain loans have individual risk characteristics not consistent with a pool of loans and is individually evaluated for credit reserves. 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 typically individually evaluated. The fair value of 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 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. 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 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 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 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): 35 Table of Contents Fair value at September 30, 2020 Total Level 1 Level 2 Level 3 Marketable equity securities $ 3,032 $ 3,032 $ — $ — Debt securities available for sale: Obligations of U.S. government corporations and agencies 573,888 — 573,888 — Obligations of states and political subdivisions 112,725 — 112,725 — Corporate bonds 2,522 — 2,522 — Asset backed securities 453,792 — 453,792 — Loans held for sale 6,570 — 6,570 — Mortgage servicing rights 4,920 — — 4,920 Total assets measured at fair value $ 1,157,449 $ 3,032 $ 1,149,497 $ 4,920 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 no transfers between any levels during the three and nine months ended September 30, 2020, or the year ended December 31, 2019. The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the time periods indicated. Had there been any transfer into or out of Level 3 during the time periods indicated, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands): Three months ended September 30, Beginning Balance Transfers into (out of) Level 3 Change Included in Earnings Issuances Ending Balance 2020: Mortgage servicing rights $ 4,250 — $ 236 $ 434 $ 4,920 2019: Mortgage servicing rights $ 6,229 — $ ( 455 ) $ 298 $ 6,072 Nine months ended September 30, 2020 Beginning Balance Transfers into (out of) Level 3 Change Included in Earnings Issuances Ending Balance 2020: Mortgage servicing rights $ 6,200 — $ ( 2,258 ) $ 978 $ 4,920 2019: Mortgage servicing rights $ 7,098 — $ ( 1,652 ) $ 626 $ 6,072 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). 36 Table of Contents The following table presents quantitative information about recurring Level 3 fair value measurements at September 30, 2020 and December 31, 2019: As of September 30, 2020: Fair Value (in thousands) Valuation Technique Unobservable Inputs Range, Weighted Average Mortgage Servicing Rights $ 4,920 Discounted cash flow Constant prepayment rate 15 % - 32 %; 19 % Discount rate 10 % - 14 %; 12 % As of December 31, 2019: Mortgage Servicing Rights $ 6,200 Discounted cash flow Constant prepayment rate 6 % - 42.0 %; 11.0 % Discount rate 10 % - 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, 2020 Total Level 1 Level 2 Level 3 Total Losses Fair value: Individually evaluated loans $ 1,024 — — $ 1,024 $ ( 309 ) December 31, 2019 Total Level 1 Level 2 Level 3 Total Losses Fair value: Individually evaluated loans $ 1,055 — — $ 1,055 $ ( 652 ) Foreclosed assets 417 — — 417 ( 27 ) Total assets measured at fair value $ 1,472 — — $ 1,472 $ ( 679 ) September 30, 2019 Total Level 1 Level 2 Level 3 Total Losses Fair value: Individually evaluated loans $ 1,055 — — $ 1,055 $ ( 652 ) Foreclosed assets 417 — — 417 ( 27 ) Total assets measured at fair value $ 1,472 — — $ 1,472 $ ( 679 ) The individually evaluated loan amounts above represent collateral dependent loans that have been adjusted to fair value. When the Company identifies a collateral dependent loan with unique risk characteristics, the Company evaluates the 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 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 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 zero . 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 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. 37 Table of Contents 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 30, 2020: September 30, 2020 Fair Value (in thousands) Valuation Technique Unobservable Inputs Range, Weighted Average Individually evaluated loans $ 1,024 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: December 31, 2019 Fair Value (in thousands) Valuation Technique Unobservable Inputs Range, Weighted Average Individually evaluated loans $ 346 Sales comparison approach Income approach Adjustment for differences between comparable sales Capitalization rate Not meaningful N/A Foreclosed assets (Residential real estate) $ 445 Sales comparison approach Adjustment for differences between comparable sales Not meaningful N/A 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, 2020 December 31, 2019 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Level 1 inputs: Cash and due from banks $ 71,034 $ 71,034 $ 92,816 $ 92,816 Cash at Federal Reserve and other banks 581,548 581,548 183,691 183,691 Level 2 inputs: Securities held to maturity 310,696 377,442 375,606 381,525 Restricted equity securities 17,250 N/A 17,250 N/A Level 3 inputs: Loans, net 4,738,763 4,841,120 4,276,750 4,263,064 Financial liabilities: Level 2 inputs: Deposits 6,340,588 6,346,930 5,366,994 5,365,921 Other borrowings 27,055 27,055 18,454 18,454 Level 3 inputs: Junior subordinated debt 57,527 55,348 57,232 56,297 (in thousands) Contract Amount Fair Value Contract Amount Fair Value Off-balance sheet: Level 3 inputs: Commitments $ 1,320,988 $ 13,210 $ 1,309,326 $ 13,093 Standby letters of credit 11,255 113 12,014 120 Overdraft privilege commitments 110,271 1,103 110,402 1,104 38 Table of Contents Note 14 - 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 30, 2020 and December 31, 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 30, 2020 and December 31, 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. Actual Required for Capital Adequacy Purposes Required to be Considered Well Capitalized As of September 30, 2020: Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) Total Capital (to Risk Weighted Assets): Consolidated $ 774,095 15.23 % $ 533,776 10.50 % N/A N/A Tri Counties Bank $ 769,528 15.14 % $ 533,575 10.50 % $ 508,166 10.00 % Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 710,195 13.97 % $ 432,104 8.50 % N/A N/A Tri Counties Bank $ 705,673 13.89 % $ 431,941 8.50 % $ 406,533 8.00 % Common equity Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 654,396 12.87 % $ 355,850 7.00 % N/A N/A Tri Counties Bank $ 705,673 13.89 % $ 355,716 7.00 % $ 330,308 6.50 % Tier 1 Capital (to Average Assets): Consolidated $ 710,195 9.95 % $ 285,482 4.00 % N/A N/A Tri Counties Bank $ 705,673 9.89 % $ 285,476 4.00 % $ 356,845 5.00 % Actual Required for Capital Adequacy Purposes Required to be Considered Well Capitalized As of December 31, 2019: Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) Total Capital (to Risk Weighted Assets): Consolidated $ 753,200 15.07 % $ 524,944 10.50 % N/A N/A Tri Counties Bank $ 748,660 14.98 % $ 524,759 10.50 % $ 499,770 10.00 % Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 719,809 14.40 % $ 424,955 8.50 % N/A N/A Tri Counties Bank $ 715,269 14.31 % $ 424,805 8.50 % $ 399,816 8.00 % Common equity Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 664,296 13.29 % $ 349,963 7.00 % N/A N/A Tri Counties Bank $ 715,269 14.31 % $ 349,839 7.00 % $ 324,851 6.50 % Tier 1 Capital (to Average Assets): Consolidated $ 719,809 11.55 % $ 249,343 4.00 % N/A N/A Tri Counties Bank $ 715,269 11.47 % $ 249,337 4.00 % $ 311,672 5.00 % 39 Table of Contents As of September 30, 2020 and December 31, 2019, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules. Also, at September 30, 2020 and December 31, 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 30, 2020, the Company and the Bank are in compliance with the capital conservation buffer requirement. 40 Table of Contents