UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2013
Commission File Number 0-10661
TriCo Bancshares
(Exact name of Registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
94-2792841
(I.R.S. Employer Identification No.)
63 Constitution Drive, Chico, California
(Address of principal executive offices)
95973
(Zip Code)
Registrant’s telephone number, including area code:(530) 898-0300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, without par value
(Title of Class)
Nasdaq Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES
NO
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(cid:0)
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. YES
NO
⌧
(cid:0)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. YES
NO
⌧
(cid:0)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
⌧
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES
NO
(cid:0)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of the Form 10-K or any amendment to this Form 10-K. YES
NO
⌧
(cid:0)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Act (check one).
Large accelerated filer
Non-accelerated filer
(cid:0)
(cid:0)
(Do not check if a smaller reporting company)
Smaller reporting company
Accelerated filer
⌧
(cid:0)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). YES
NO
⌧
(cid:0)
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 2013, was
approximately $262,109,000 (based on the closing sales price of the Registrant’s common stock on the date). This computation
excludes a total of 3,777,212 shares that are beneficially owned by the officers and directors of Registrant who may be deemed to be
the affiliates of Registrant under applicable rules of the Securities and Exchange Commission.
The number of shares outstanding of Registrant’s common stock, as of February 28, 2014, was 16,107,242 shares of common stock,
without par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be disclosed pursuant to Part III of this report either shall be (i) deemed to be incorporated by
reference from selected portions of TriCo Bancshares’ definitive proxy statement for the 2014 annual meeting of stockholders,
if such proxy statement is filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the end of the Company’s most recently completed fiscal year, or (ii) included in an amendment to this report
filed with the Commission on Form 10-K/A not later than the end of such 120 day period.
PART I
TABLE OF CONTENTS
Page Number
Business
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
Item 6
Item 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15
Signatures
Exhibits and Financial Statement Schedules
FORWARD-LOOKING STATEMENTS
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In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements about TriCo Bancshares
(the “Company,” “TriCo” or “we”) and its subsidiaries for which it claims the protection of the safe harbor provisions contained in
the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management’s current
knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results
of operations. When you see any of the words “believes”, “expects”, “anticipates”, “estimates”, or similar expressions, these generally
indicate that we are making forward-looking statements. A number of factors, some of which are beyond the Company’s ability to
predict or control, could cause future results to differ materially from those contemplated. These factors include those listed at
Item 1A Risk Factors, in this report.
Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking
statements to reflect circumstances or events that occur after the date the forward-looking statements are made, whether as a result of
new information, future developments or otherwise.
ITEM 1. BUSINESS
Information About TriCo Bancshares’ Business
PART I
TriCo Bancshares is a bank holding company incorporated in California in 1981 and registered under the Bank Holding Company Act of 1956, as
amended (the “BHC Act”). The Company’s principal subsidiary is Tri Counties Bank, a California-chartered commercial bank (the “Bank”). The
Bank offers banking services to retail customers and small to medium-sized businesses through 63 branch offices in Northern and Central
California. See “Business of Tri Counties Bank”. As a bank holding company, TriCo is subject to the supervision of the Board of Governors of the
Federal Reserve System (the “FRB”) under the BHC Act. The Bank is subject to the supervision of the California Department of Business
Oversight (the “DBO”) and the Federal Deposit Insurance Corporation (the “FDIC”). The Company and the Bank are headquartered in Chico,
California.
On July 31, 2003, the Company formed a subsidiary business trust, TriCo Capital Trust I, to issue trust preferred securities. On June 22, 2004, the
Company formed a subsidiary business trust, TriCo Capital Trust II, to issue additional trust preferred securities. See Note 17 in the financial
statements at Item 8 of this report for a discussion about the Company’s issuance of trust preferred securities. The Bank, TriCo Capital Trust I and
TriCo Capital Trust II are TriCo’s only subsidiaries and TriCo does not conduct any material business operations independent of the Bank, TriCo
Capital Trust I and TriCo Capital Trust II.
Additional information concerning the Company can be found on our website at www.tcbk.com. Copies of our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available free of charge through the investors
relations page of our website, www.tcbk.com, as soon as reasonably practicable after the Company files these reports with the U.S. Securities and
Exchange Commission (“SEC”). The information on our website is not incorporated into this annual report.
Business of Tri Counties Bank
The Bank was incorporated as a California banking corporation on June 26, 1974, and received its certificate of authority to begin banking
operations on March 11, 1975. The Bank engages in the general commercial banking business in the California counties of Butte, Contra Costa,
Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Napa, Nevada, Placer, Sacramento, Shasta, Siskiyou, Stanislaus,
Sutter, Tehama, Tulare, Yolo and Yuba. The Bank currently operates from 41 traditional branches and 22 in-store branches.
The Bank conducts a commercial banking business including accepting demand, savings and time deposits and making commercial, real estate,
and consumer loans. It also offers installment note collection, issues cashier’s checks, sells travelers checks and provides safe deposit boxes and
other customary banking services. Brokerage services are provided at the Bank’s offices by the Bank’s association with Raymond James Financial
Services, Inc., an independent financial services provider and broker-dealer. The Bank does not offer trust services or international banking
services.
The Bank has emphasized retail banking since it opened. Most of the Bank’s customers are retail customers and small to medium-sized businesses.
The Bank emphasizes serving the needs of local businesses, farmers and ranchers, retired individuals and wage earners. The majority of the Bank’s
loans are direct loans made to individuals and businesses in Northern and Central California where its branches are located. At December 31, 2013,
the total of the Bank’s consumer loans net of deferred fees outstanding was $383,163,000 (22.9%), the total of commercial loans outstanding was
$131,878,000 (7.9%), and the total of real estate loans including construction loans of $49,103,000 was $1,156,966,000 (69.2%). The Bank takes
real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery, equipment, inventory, accounts receivable and notes
receivable secured by property as collateral for loans.
Most of the Bank’s deposits are attracted from individuals and business-related sources. No single person or group of persons provides a material
portion of the Bank’s deposits, the loss of any one or more of which would have a materially adverse effect on the business of the Bank, nor is a
material portion of the Bank’s loans concentrated within a single industry or group of related industries.
Agreement to acquire North Valley Bancorp
On January 21, 2014, TriCo announced that it had entered into an Agreement and Plan of Merger and Reorganization under which it would acquire
North Valley Bancorp (“North Valley”). North Valley shareholders will receive a fixed exchange ratio of 0.9433 shares of TriCo common stock
for each share of North Valley common stock, which would provide North Valley shareholders with aggregate ownership, on a pro forma basis, of
approximately 28.6% of the common stock of the combined company. Based on TriCo’s closing stock price of $27.66 on January 17, 2014, North
Valley shareholders would have received consideration valued at approximately $26.09 per share.
The merger will not be completed unless a number of customary closing conditions are met, including, among others, approval of the merger by
shareholders of both companies, the registration of the offering of the TriCo common stock to the North Valley shareholders under the Securities
Act of 1933, receipt of required regulatory and other approvals and the
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expiration of applicable statutory waiting periods, the accuracy of specified representations and warranties of each party, the receipt of tax opinions
confirming certain tax aspects of the merger, North Valley’s satisfaction of certain financial measures shortly prior to closing, and the absence of
any injunctions or other legal restraints.
TriCo has agreed to appoint three North Valley directors to TriCo’s board upon closing of the merger. The merger is expected to be completed in
the second or third quarter of 2014, subject to approval of the merger by shareholders of both companies, receipt of required regulatory and other
approvals and satisfaction of customary closing conditions.
North Valley, headquartered in Redding, California, is the parent of North Valley Bank and had approximately $917.8 million in assets and 22
commercial banking offices in Shasta, Humboldt, Del Norte, Mendocino, Yolo, Sonoma, Placer and Trinity Counties in Northern California at
December 31, 2013. In connection with the acquisition, North Valley Bank will merge into Tri Counties Bank.
As of December 31, 2013, on a pro forma consolidated basis with North Valley, TriCo would have had approximately $3.61 billion in assets.
Purchase and Assumption of Certain Assets and Liabilities of Citizens Bank of Northern California
On September 23, 2011, the Bank acquired certain of the assets and assumed substantially all of the liabilities of Citizens Bank of Northern
California, Nevada City, California (“Citizens”), including substantially all the deposits from the FDIC, as receiver for Citizens. The acquisition
was made pursuant to the terms of a purchase and assumption agreement entered into by the Bank and the FDIC. Based upon a preliminary closing
with the FDIC as of September 23, 2011, the Bank acquired $167.5 million in loans, $9.4 million in investment securities, and $93.5 million in
cash and other assets, and assumed an estimated $239.9 million in deposits, $22.0 million in borrowings, and $0.8 million in other liabilities. The
Bank paid no cash or other consideration to acquire Citizens. See Note 2 in the financial statements at Item 8 of this report for a discussion about
this transaction.
Purchase and Assumption of Certain Assets and Liabilities of Granite Community Bank
On May 28, 2010, the Bank acquired certain of the assets and assumed substantially all of the liabilities of Granite Community Bank, N.A., Granite
Bay, California (“Granite”), including substantially all the deposits from the FDIC, as receiver for Granite. The acquisition was made pursuant to
the terms of a purchase and assumption agreement entered into by the Bank and the FDIC. The Bank acquired $64.8 million in loans, $3.6 million
in investment securities, and $31.9 million in cash and other assets, and assumed an estimated $95.0 million in deposits, $5.0 million in
borrowings, and $0.05 million in other liabilities. The Bank paid no cash or other consideration to acquire Granite. In connection with the
Acquisition, the Bank entered into a loss-sharing agreement with the FDIC that covered approximately $89.3 million of Granite’s assets (before
fair value adjustments). The Bank will share in the losses on the asset pools (loans, foreclosed loan collateral, and certain investment securities)
covered under the loss-sharing agreement. Pursuant to the terms of the loss sharing agreement, the FDIC is obligated to reimburse the Bank for
80% of losses with respect to covered assets. The Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC
paid the Bank under the loss sharing agreement.
Other Activities
The Bank may in the future engage in other businesses either directly or indirectly through subsidiaries acquired or formed by the Bank subject to
regulatory constraints. See “Regulation and Supervision”.
Employees
At December 31, 2013, the Company and the Bank employed 794 persons, including seven executive officers. Full time equivalent employees
were 733. No employees of the Company or the Bank are presently represented by a union or covered under a collective bargaining agreement.
Management believes that its employee relations are good.
Competition
The banking business in California generally, and in the Bank’s primary service area of Northern and Central California specifically, is highly
competitive with respect to both loans and deposits. It is dominated by a relatively small number of national and regional banks with many offices
operating over a wide geographic area. Among the advantages such major banks have over the Bank is their ability to finance wide ranging
advertising campaigns and to allocate their investment assets to regions of high yield and demand. By virtue of their greater total capitalization
such institutions have substantially higher lending limits than does the Bank.
In addition to competing with savings institutions, commercial banks compete with other financial markets for funds as a result of the deregulation
of the financial services industry. Yields on corporate and government debt securities and other commercial paper may be higher than on deposits,
and therefore affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for available funds with money
market instruments and mutual funds. During past periods of high interest rates, money market funds have provided substantial competition to
banks for deposits and they may continue to do so in the future. Mutual funds are also a major source of competition for savings dollars.
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The Bank relies substantially on local promotional activity, personal contacts by its officers, directors, employees and shareholders,
extended hours, personalized service and its reputation in the communities it services to compete effectively.
Regulation and Supervision
General
The Company and the Bank are subject to extensive regulation under both federal and state law. This regulation is intended primarily
for the protection of depositors, the deposit insurance fund, and the banking system as a whole, and not for the protection of
shareholders of the Company. Set forth below is a summary description of the significant laws and regulations applicable to the
Company and the Bank. The description is qualified in its entirety by reference to the applicable laws and regulations.
Regulatory Agencies
The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. As a bank holding company, the
Company is regulated under the BHC Act, and is subject to supervision, regulation and inspection by the FRB. The Company is also
under the jurisdiction of the SEC and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the
Securities Exchange Act of 1934, each administered by the SEC. The Company’s common stock is listed on the Nasdaq Global Select
market (“Nasdaq”) under the trading symbol “TCBK” and the Company is, therefore, subject to the rules of Nasdaq for listed
companies.
The Bank, as a state chartered bank, is subject to broad federal regulation and oversight extending to all its operations by the FDIC
and to state regulation by the DBO.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The implementation and impact of legislation and regulations enacted since 2008 in response to the U.S. economic downturn and
financial industry instability continued in 2013 as modest recovery returned to many institutions in the banking sector. Certain
provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was enacted in 2010, are now
effective and have been fully implemented, including revisions in the deposit insurance assessment base for FDIC insurance and the
permanent increase in coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of
barriers to interstate branching and required disclosure and shareholder advisory votes on executive compensation. Action in 2013 to
implement the final Dodd-Frank provisions included (i) final new capital rules, (ii) a final rule to implement the so called Volcker rule
restrictions on certain proprietary trading and investment activities and (iii) final rules and increased enforcement action by the
Consumer Finance Protection Bureau (“CFPB”).
The Bank Holding Company Act
The Company is registered as a bank holding company under the BHC Act. In general, the BHC Act limits the business of bank
holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely
related to banking as to be a proper incident thereto. As a result of the Gramm-Bliley Act, which amended the BHC Act, qualified
bank holding companies that elected to be financial holding companies may engage in any activity, or acquire and retain the shares of
a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the
FRB in consultation with the Office of the Comptroller of the Currency (the “OCC”)) or (ii) complementary to a financial activity,
and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as
determined solely by the FRB). Activities that are financial in nature include securities underwriting and dealing, insurance
underwriting and agency, and making merchant banking investments. The Company has not elected to become a financial holding
company.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act
requires the prior approval of the FRB for the direct or indirect acquisition of more than 5 percent of the voting shares of a
commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of an acquiring bank’s primary
federal regulator is required before it may merge with another bank or purchase the assets or assume the deposits of another bank. In
reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among
other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the
applicant’s performance record under the Community Reinvestment Act, consumer compliance, fair housing laws and the
effectiveness of the subject organizations in combating money laundering activities.
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CFPB Actions
Dodd-Frank created the CFPB as an independent entity with broad rulemaking, supervisory and enforcement authority over consumer
financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s
functions include investigating consumer complaints, conducting market research, rulemaking, supervising and examining bank
consumer transactions, and enforcing rules related to consumer financial products and services. CFPB regulations and guidance
apply to all financial institutions and banks with $10 billion or more in assets are subject to examination by the CFPB. Banks with
less than $10 billion in assets, including the Bank, will continue to be examined for compliance by their primary federal banking
agency. Significant recent CFPB developments that may affect the Bank’s operations and compliance costs include:
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The issuance of final rules for residential mortgage lending, which became effective January 10, 2013, including definitions for
“qualified mortgages” and detailed standards by which lenders must satisfy themselves of the borrower’s ability to repay the
loan and revised forms of disclosure under the Truth in Lending Act and the Real Estate Settlement Procedures Act
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The issuance of a policy report on arbitration clauses which could result in the restriction or prohibition of lenders including
arbitration clauses in consumer financial services contracts
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Actions taken to regulate and supervise credit bureaus and debt collections
Positions taken by CFPB on fair lending, including applying the disparate impact theory in auto financing, which could make it
harder for lenders to charge different rates or apply different terms to loans to different customers.
The Bank is not subject to examination by the CFPB but is required to comply with CFPB rules and regulations.
Safety and Soundness Standards
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) implemented certain specific restrictions on
transactions and required the regulators to adopt overall safety and soundness standards for depository institutions related to internal
control, loan underwriting and documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on
deposits by undercapitalized institutions, the use of brokered deposits and the aggregate extension of credit by a depository institution
to an executive officer, director, principal stockholder or related interest, and reduces deposit insurance coverage for deposits offered
by undercapitalized institutions for deposits by certain employee benefits accounts.
Section 39 to the Federal Deposit Insurance Act requires the agencies to establish safety and soundness standards for insured financial
institutions covering:
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internal controls, information systems and internal audit systems;
loan documentation;
credit underwriting;
interest rate exposure;
asset growth;
compensation, fees and benefits;
asset quality, earnings and stock valuation; and
excessive compensation for executive officers, directors or principal shareholders which could lead to material financial
loss.
If an agency determines that an institution fails to meet any standard established by the guidelines, the agency may require the
financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires
submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the
agency must require the institution to correct the deficiency. An institution must file a compliance plan within 30 days of a request to
do so from the institution’s primary federal regulatory agency. The agencies may elect to initiate enforcement action in certain cases
rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound
operation of the institution.
Restrictions on Dividends and Distributions
A California corporation such as TriCo may make a distribution to its shareholders to the extent that either the corporation’s retained
earnings meet or exceed the amount of the proposed distribution or the value of the corporation’s assets exceed the amount of its
liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met. It is the FRB’s policy that bank
holding companies should generally pay dividends on common stock only out of income available over the past year, and only if
prospective earnings retention is consistent with the organization’s expected future needs and financial condition.
The primary source of funds for payment of dividends by TriCo to its shareholders has been and will be the receipt of dividends and
management fees from the Bank. TriCo’s ability to receive dividends from the Bank is limited by applicable state and federal law.
Under the California Financial Code, funds available for cash dividend payments by a bank are restricted to the lesser of: (i) retained
earnings; or (ii) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such period).
However, with the prior approval of the Commissioner of the DBO, a bank may pay cash dividends in an amount not to exceed the
greatest of the: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) net income of the bank for its
current fiscal year. However, if the DBO finds that the shareholders’ equity of the bank is not adequate or that the payment of a
dividend would be unsafe or unsound, the Commissioner may order the bank not to pay a dividend to shareholders.
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Additionally, under FDICIA, a bank may not make any capital distribution, including the payment of dividends, if after making such
distribution the bank would be in any of the “undercapitalized” categories under the FDIC’s Prompt Corrective Action regulations. A
bank is undercapitalized for this purpose if its leverage ratios, Tier 1 risk-based capital level and total risk-based capital ratio are not
at least four percent, four percent and eight percent, respectively.
The FRB, FDIC and the DBO have authority to prohibit a bank holding company or a bank from engaging in practices which are
considered to be unsafe and unsound. Depending on the financial condition of TriCo and the Bank and other factors, the FRB, FDIC
or the DBO could determine that payment of dividends or other payments by TriCo or the Bank might constitute an unsafe or
unsound practice.
Consumer Protection Laws and Regulations
The Company is subject to many federal consumer protection statues and regulations, some of which are discussed below.
The Community Reinvestment Act of 1977 is intended to encourage insured depository institutions, while operating safely and
soundly, to help meet the credit needs of their communities. This act specifically directs the federal regulatory agencies to assess a
bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods,
consistent with safe and sound practices. This act further requires the agencies to take a financial institution’s record of meeting its
community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. The agencies use the Community Reinvestment Act assessment factors in order to
provide a rating to the financial institution. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.”
The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction, whether for consumer or business
purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of
income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act. The Truth-
in-Lending Act is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms
more readily and knowledgeably.
The Fair Housing Act regulates many practices, including making it unlawful for any lender to discriminate in its housing-related
lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. The Home
Mortgage Disclosure Act grew out of public concern over credit shortages in certain urban neighborhoods and provides public
information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and
communities in which they are located. This act also includes a “fair lending” aspect that requires the collection and disclosure of data
about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-
discrimination statutes.
The Real Estate Settlement Procedures Act requires lenders to provide borrowers with disclosures regarding the nature and cost of
real estate settlements. Also, this act prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of
escrow accounts.
Penalties under the above laws may include fines, reimbursements, injunctive relief and other penalties.
USA Patriot Act of 2001
The USA Patriot Act was enacted in 2001 to combat money laundering and terrorist financing. The impact of the Patriot Act on
financial institutions is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial
transparency laws and requires various regulations, including:
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due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or
correspondent accounts for non-U.S. persons,
standards for verifying customer identification at account opening,
rules to promote cooperation among financial institutions, regulators, and law enforcement entities to assist in the
identification of parties that may be involved in terrorism or money laundering,
reports to be filed by non-financial trades and business with the Treasury Department’s Financial Crimes Enforcement
Network for transactions exceeding $10,000, and
the filing of suspicious activities reports by securities brokers and dealers if they believe a customer may be violating U.S.
laws and regulations.
Capital Requirements
Federal regulation imposes upon all financial institutions a variable system of risk-based capital guidelines designed to make capital
requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures
and to promote uniformity in the definition of bank capital uniform nationally.
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The Bank and the Company are subject to the minimum capital requirements of the FDIC and the FRB, respectively. As a result of these
requirements, the growth in assets is limited by the amount of its capital as defined by the respective regulatory agency. Capital requirements
may have an effect on profitability and the payment of dividends on the common stock of the Bank and the Company. If an entity is unable to
increase its assets without violating the minimum capital requirements or is forced to reduce assets, its ability to generate earnings would be
reduced.
The FRB and the FDIC have adopted guidelines utilizing a risk-based capital structure. Qualifying capital is divided into two tiers. Tier 1
capital consists generally of common stockholders’ equity, qualifying noncumulative perpetual preferred stock, qualifying cumulative
perpetual preferred stock (up to 25% of total Tier 1 capital) and minority interests in the equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets. Tier 2 capital consists of, among other things, allowance for loan and lease losses up to 1.25% of
weighted risk assets, other perpetual preferred stock, hybrid capital instruments, perpetual debt, mandatory convertible debt securities,
subordinated debt and intermediate-term preferred stock. Tier 2 capital qualifies as part of total capital up to a maximum of 100% of Tier 1
capital. Amounts in excess of these limits may be issued but are not included in the calculation of risk-based capital ratios. Under these risk-
based capital guidelines, the Bank and the Company are required to maintain capital equal to at least 8% of its assets, of which at least 4%
must be in the form of Tier 1 capital.
The guidelines also require the Company and the Bank to maintain a minimum leverage ratio of 4% of Tier 1 capital to total assets (the
“leverage ratio”). The leverage ratio is determined by dividing an institution’s Tier 1 capital by its quarterly average total assets, less goodwill
and certain other intangible assets. The leverage ratio constitutes a minimum requirement for the most well-run banking organizations. See
Note 29 in the financial statements at Item 8 of this report for a discussion about the Company’s risk-based capital and leverage ratios.
New Capital Rules and the Basel Accords
The current risk-based capital guidelines which apply to the Company and the Bank are based upon the 1988 capital accord (referred to as
“Basel I”) of the International Basel Committee on Banking Supervision (the “Basel Committee”), a committee of central banks and bank
supervisors and regulators from the major industrialized countries. The Basel Committee develops broad policy guidelines for use by each
country’s supervisors in determining the supervisory policies they apply. On July 2, 2013, the FRB approved final rules that substantially
amend the regulatory risk-based capital rules applicable to TriCo and the Bank. The FDIC has subsequently approved these rules. The final
rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative
documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss
absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital and leverage ratios, which would be phased in from 2015 to 2019, and would refine the definition of
what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to TriCo and the
Bank under the final rules would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from
4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules
also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common
equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the
maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This
will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of
8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share
repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum
percentage of eligible retained income that could be utilized for such actions. Basel III provided discretion for regulators to impose an
additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial
environment and periods of excessive credit growth. However, the final rules permit the countercyclical buffer to be applied only to “advanced
approach banks” ( i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently
excludes TriCo and the Bank. The final rules also implement revisions and clarifications consistent with Basel III regarding the various
components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify
as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding
companies with less than $15 billion in total assets as of December 31, 2009 (which includes TriCo) will be able to permanently include non-
qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until
they redeem such instruments or until the instruments mature.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository
institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the
prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will
be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier
1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules);
and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
7
The final rules set forth certain changes for the calculation of risk-weighted assets, which we will be required to utilize beginning
January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights,
and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act Act;
(ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised
capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with
$50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250
billion in consolidated assets. Based on our current capital composition and levels, we believe that we would be in compliance with
the requirements applicable to us as set forth in the final rules if they were presently in effect.
Prompt Corrective Action
Prompt Corrective Action Regulations of the federal bank regulatory agencies establish five capital categories in descending order
(well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), assignment
to which depends upon the institution’s total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio. Institutions
classified in one of the three undercapitalized categories are subject to certain mandatory and discretionary supervisory actions, which
include increased monitoring and review, implementation of capital restoration plans, asset growth restrictions, limitations upon
expansion and new business activities, requirements to augment capital, restrictions upon deposit gathering and interest rates,
replacement of senior executive officers and directors, and requiring divestiture or sale of the institution. The Bank has been classified
as well-capitalized since adoption of these regulations.
Premiums for Deposit Insurance
Deposit accounts in the Bank are insured by the FDIC, generally up to a maximum of $250,000 per separately insured depositor. The
Bank’s deposits are subject to FDIC deposit insurance assessments. The Bank pays insurance assessments based on its consolidated
total assets less tangible equity capital. This assessment is based on the risk category of the institution. To determine the total base
assessment rate, the FDIC first establishes an institution’s initial base assessment rate and then adjusts the initial base assessment
based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits. The total base assessment rate ranges
from 2.5 to 45 basis points of the institution’s average consolidated total assets less tangible equity capital.
The Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional
bank or financial institution failures or if the FDIC otherwise determines, the Bank may be required to pay even higher FDIC
premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums may
have a material and adverse affect on the Company’s earnings and could have a material adverse effect on the value of, or market for,
the Company’s common stock.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe
or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the
interest of the bank’s depositors. The termination of deposit insurance for the Bank would also result in the revocation of the Bank’s
charter by the DBO.
Impact of Monetary Policies
Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its
deposits and other borrowings, and the interest rate earned by banks on loans, securities and other interest-earning assets comprises
the major source of banks’ earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions
generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly
the FRB. The FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by its open-market
dealings in United States government securities, by adjusting the required level of reserves for financial institutions subject to reserve
requirements and through adjustments to the discount rate applicable to borrowings by banks which are members of the FRB. The
actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates. The
nature and timing of any future changes in such policies and their impact on the Company cannot be predicted. In addition, adverse
economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan loss charge-offs,
thus adversely affecting the Company’s net earnings.
8
ITEM 1A. RISK FACTORS
In analyzing whether to make or continue an investment in the Company, investors should consider, among other factors, the following:
Risks Related to the Nature and Geographic Area of Our Business
We are exposed to risks in connection with the loans we make.
A significant source of risk for us arises from the possibility that we will sustain losses because borrowers, guarantors and related parties may
fail to perform in accordance with the terms of their loans. Our earnings are significantly affected by our ability to properly originate,
underwrite and service loans. We have underwriting and credit monitoring procedures and credit policies, including the establishment and
review of the allowance for loan losses, that we believe to be appropriate to minimize this risk by assessing the likelihood of nonperformance,
tracking loan performance and diversifying our respective loan portfolios. Such policies and procedures, however, may not prevent
unexpected losses that could adversely affect our results of operations. We could sustain losses if we incorrectly assess the creditworthiness of
our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner.
Our allowance for loan losses may not be adequate to cover actual losses.
Like other financial institutions, we maintain an allowance for loan losses to provide for loan defaults and non-performance. Our allowance
for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our
business, financial condition, results of operations and cash flows. The allowance for loan losses reflects our estimate of the probable losses in
our loan portfolio at the relevant balance sheet date. Our allowance for loan losses is based on prior experience, as well as an evaluation of the
known risks in the current portfolio, composition and growth of the loan portfolio and economic factors. The determination of an appropriate
level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control and
these losses may exceed current estimates. Federal and state regulatory agencies, as an integral part of their examination process, review our
loans and allowance for loan losses. While we believe that our allowance for loan losses is adequate to cover current losses, we cannot assure
you that we will not increase the allowance for loan losses further or that the allowance will be adequate to absorb loan losses we actually
incur. Either of these occurrences could have a material adverse affect on our business, financial condition and results of operations.
Our business may be adversely affected by business conditions in Northern and Central California.
We conduct most of our business in Northern and Central California. As a result of this geographic concentration, our results are impacted by
the difficult economic conditions in California. A deterioration in the economic conditions or a prolonged delay in economic recovery in
California could result in the following consequences, any of which could have a material adverse effect on our business, financial condition,
results of operations and cash flows:
•
•
•
•
problem assets and foreclosures may increase,
demand for our products and services may decline,
low cost or non-interest bearing deposits may decrease, and
collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and
reducing the value of assets and collateral associated with our existing loans.
In view of the concentration of our operations and the collateral securing our loan portfolio in both Northern and Central California, we may
be particularly susceptible to the adverse effects of any of these consequences, any of which could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
A significant majority of the loans in our portfolio are secured by real estate and a downturn in our real estate markets could hurt our
business.
A downturn in our real estate markets or prolonged delay in economic recovery in California could hurt our business because most of our
loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local
economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other
governmental statutes, regulations and policies and acts of nature. As real estate prices decline, the value of real estate collateral securing our
loans is reduced. As a result, our ability to recover on defaulted loans by foreclosing and selling the real estate collateral could then be
diminished and we would be more likely to suffer losses on defaulted loans. As of December 31, 2013, approximately 90.4% of the book
value of our loan portfolio consisted of loans collateralized by various types of real estate. Substantially all of our real estate collateral is
located in California. So if there is a significant adversely decline in real estate values in California, the collateral for our loans will provide
less
9
security. Real estate values could also be affected by, among other things, earthquakes, drought and national disasters in our markets. Any
such downturn could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We depend on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons
with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the
combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon
our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and
upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly
dependent upon the abilities of our senior management team of Messrs. Smith, O’Sullivan, Bailey, Reddish, Carney, Rios, Hunter and
Ms. Ward, who have expertise in banking and experience in the California markets we serve and have targeted for future expansion. We
also depend upon a number of other key executives who are California natives or are long-time residents and who are integral to
implementing our business plan. The loss of the services of any one of our senior executive management team or other key executives
could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are exposed to risk of environmental liabilities with respect to properties to which we take title.
In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to
these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and
clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean-up
hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could
be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to
significant environmental liabilities, our business, financial condition, results of operations and cash flows could be materially adversely
affected.
Strong competition in California could hurt our profits.
Competition in the banking and financial services industry is intense. Our profitability depends upon our continued ability to successfully
compete. We compete exclusively in Northern and Central California for loans, deposits and customers with commercial banks, savings
and loan associations, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms.
In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace
advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Additionally,
banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may
have larger lending limits which would allow them to serve the credit needs of larger customers. Areas of competition include interest
rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products and services provided,
including new technology-driven products and services. Technological innovation continues to contribute to greater competition in
domestic and international financial services markets as technological advances enable more companies to provide financial services. We
also face competition from out-of-state financial intermediaries that have opened loan production offices or that solicit deposits in our
market areas. If we are unable to attract and retain banking customers, we may be unable to continue our loan growth and level of deposits
and our business, financial condition, results of operations and cash flows may be adversely affected.
Our previous results may not be indicative of our future results.
We may not be able to sustain our historical rate of growth and level of profitability or may not even be able to grow our business or
continue to be profitable at all. Various factors, such as economic conditions, regulatory and legislative considerations and competition,
may also impede or prohibit our ability to expand our market presence and financial performance. If we experience a significant decrease
in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our
operating costs being fixed expenses.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of clearing, counterparty, or other relationships. We have exposure to many
different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including
commercial banks, brokers and dealers, and other institutional clients. Many of these transactions expose us to credit risk in the event of a
default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral that we hold cannot be realized
upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses
could have a material adverse affect on our financial condition and results of operations.
10
Recent health care legislation could increase our expenses or require us to pass further costs on to our employees, which could
adversely affect our operations, financial condition and earnings.
Legislation enacted in 2010 requires companies to provide expanded health care coverage to their employees, such as affordable
coverage to part-time employees and coverage to dependent adult children of employees. Companies will also be required to enroll
new employees automatically into their health plans. Compliance with these and other new requirements of the health care legislation
will increase our employee benefits expense, and may require us to pass these costs on to our employees, which could give us a
competitive disadvantage in hiring and retaining qualified employees.
Our business may be adversely affected the continuing drought in California.
California is experiencing the third year of a severe drought. A considerable portion of our borrowers are involved in, or are impacted
to some extent by, the agricultural industry, which is dependent on water. Agriculture operating loans comprised $33.5 million and
$41.7 million, or 2.0% and 2.7%, of our loan portfolio at December 31, 2013 and 2012, respectively. We also originate agriculture
real estate loans, which comprised $55.5 million and $65.2 million or 3.3% and 4.2% of our loan portfolio at December 31, 2013 and
2012. As a result of the drought, there are various governmental proposals concerning the distribution or rationing of water. If the
amount of water available to agriculture in our market areas becomes increasingly scarce due to drought, rationing and/or diversion,
growers may not be able to continue to produce agricultural products at a reasonable profit, which has the potential to force many out
of business. While many of our borrowers are not directly involved in agriculture, they could be impacted by difficulties in the
agricultural industry because many jobs in our market areas are ancillary to the production, processing, marketing and sales of
agricultural products. The drought has the potential to adversely affect agricultural industries as well as consumer purchasing power,
and could lead to further unemployment throughout our market area. The drought therefore could have a material adverse effect on
our business, financial condition, results of operations and asset quality.
Market and Interest Rate Risk
Decreasing interest rates could hurt our profits.
Our ability to earn a profit, like that of most financial institutions, depends on our net interest income, which is the difference between
the interest income we earn on our interest-earning assets, such as mortgage loans and investments, and the interest expense we pay
on our interest-bearing liabilities, such as deposits. Our profitability depends on our ability to manage our assets and liabilities during
periods of changing market interest rates. Recently, the FRB has maintained the targeted federal funds rate at record low levels. A
sustained decrease in market interest rates could adversely affect our earnings. When interest rates decline, borrowers tend to
refinance higher-rate, fixed-rate loans at lower rates. Under those circumstances, we would not be able to reinvest those prepayments
in assets earning interest rates as high as the rates on the prepaid loans on investment securities. In addition, our commercial real
estate and commercial loans, which carry interest rates that adjust in accordance with changes in the prime rate, will adjust to lower
rates.
Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.
Because of the differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities,
changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on
interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread and, in turn, our
profitability. In addition, loan origination volumes are affected by market interest rates. Rising interest rates, generally, are associated
with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely,
in rising interest rate environments, loan repayment rates may decline and in falling interest rate environments, loan repayment rates
may increase. Although we have been successful in generating new loans during 2013, the continuation of historically low long-term
interest rate levels may cause additional refinancing of commercial real estate and 1-4 family residence loans, which may depress our
loan volumes or cause rates on loans to decline. In addition, an increase in the general level of short-term interest rates on variable
rate loans may adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations or reduce the
amount they wish to borrow. Additionally, if short-term market rates rise, in order to retain existing deposit customers and attract new
deposit customers we may need to increase rates we pay on deposit accounts. Accordingly, changes in levels of market interest rates
could materially and adversely affect our net interest spread, asset quality, loan origination volume, business, financial condition,
results of operations and cash flows.
11
Regulatory Risks
Recently enacted financial reform legislation will, among other things, create a new Consumer Financial Protection Bureau, tighten capital
standards and result in new laws and regulations that are expected to increase our costs of operations.
On July 21, 2010, the President signed the Dodd-Frank Act. This new law significantly changes the current bank regulatory structure and affects
the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act
requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports
for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of
the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
Among other things, the Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce
consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and
savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and
enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks such as the Bank with $10 billion or less
in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also
weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys
general the ability to enforce federal consumer protection laws.
The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies
that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank
holding companies as Tier 1 capital, such as trust preferred securities (unless such securities were issued prior to May 19, 2010 by a bank holding
company with less than $15 billion in assets).
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will
have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase
our interest expense.
We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations. Regulations may prevent or
impair our ability to pay dividends, engage in acquisitions or operate in other ways.
We are subject to extensive regulation, supervision and examination by the DBO, FDIC, and the FRB. See Item 1—Regulation and Supervision
of this report for information on the regulation and supervision which governs our activities. Regulatory authorities have extensive discretion in
their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and
determination of the level of our allowance for loan losses. Banking regulations, designed primarily for the protection of depositors, may limit
our growth and the return to our shareholders by restricting certain of our activities, such as:
•
•
•
•
•
•
•
the payment of dividends to our shareholders,
possible mergers with or acquisitions of or by other institutions,
desired investments,
loans and interest rates on loans,
interest rates paid on deposits,
the possible expansion of branch offices, and
the ability to provide securities or trust services.
We also are subject to capitalization guidelines set forth in federal legislation and could be subject to enforcement actions to the extent that we
are found by regulatory examiners to be undercapitalized. We cannot predict what changes, if any, will be made to existing federal and state
legislation and regulations or the effect that such changes may have on our future business and earnings prospects. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our
operations.
Compliance with changing regulation of corporate governance and public disclosure may result in additional risks and expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Act, the Sarbanes-
Oxley Act of 2002 and new SEC regulations, are creating additional expense for publicly-traded companies such as TriCo. The application of
these laws, regulations and standard may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in
continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving
laws,
12
regulations and standards have resulted in, and are likely to continue to result in, increased expenses and a diversion of management
time and attention. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations
regarding management’s required assessment of its internal control over financial reporting and its external auditors’ audit of that
assessment has required the commitment of significant financial and managerial resources. We expect these efforts to require the
continued commitment of significant resources. Further, the members of our board of directors, members of our audit or compensation
and management succession committees, our chief executive officer, our chief financial officer and certain other executive officers could
face an increased risk of personal liability in connection with the performance of their duties. It may also become more difficult and
more expensive to obtain director and officer liability insurance. As a result, our ability to attract and retain executive officers and
qualified board and committee members could be more difficult.
We could be adversely affected by new regulations.
Federal and state governments and regulators could pass legislation and adopt policies responsive to current credit conditions that would
have an adverse affect on the Company and its financial performance. For example, the Company could experience higher credit losses
because of federal or state legislation or regulatory action that limits the Bank’s ability to foreclose on property or other collateral or
makes foreclosure less economically feasible.
Risks Related to Growth and Expansion
If we cannot attract deposits, our growth may be inhibited.
We plan to increase the level of our assets, including our loan portfolio. Our ability to increase our assets depends in large part on our
ability to attract additional deposits at favorable rates. We intend to seek additional deposits by offering deposit products that are
competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our
customers. We cannot assure that these efforts will be successful. Our inability to attract additional deposits at competitive rates could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
There are potential risks associated with future acquisitions and expansions.
We intend to continue to explore expanding our branch system through opening new bank branches and in-store branches in existing or
new markets in Northern and Central California. In the ordinary course of business, we evaluate potential branch locations that would
bolster our ability to cater to the small business, individual and residential lending markets in California. Any given new branch, if and
when opened, will have expenses in excess of revenues for varying periods after opening that may adversely affect our results of
operations or overall financial condition.
In addition, to the extent that we acquire other banks in the future, our business may be negatively impacted by certain risks inherent
with such acquisitions. These risks include:
•
•
•
•
•
•
•
•
•
•
incurring substantial expenses in pursuing potential acquisitions without completing such acquisitions,
losing key clients as a result of the change of ownership,
the acquired business not performing in accordance with our expectations,
difficulties arising in connection with the integration of the operations of the acquired business with our operations,
needing to make significant investments and infrastructure, controls, staff, emergency backup facilities or other critical
business functions that become strained by our growth,
management needing to divert attention from other aspects of our business,
potentially losing key employees of the acquired business,
incurring unanticipated costs which could reduce our earnings per share,
assuming potential liabilities of the acquired company as a result of the acquisition, and
an acquisition may dilute our earnings per share, in both the short and long term, or it may reduce our tangible capital ratios.
As result of these risks, any given acquisition, if and when consummated, may adversely affect our results of operations or financial
condition. In addition, because the consideration for an acquisition may involve cash, debt or the issuance of shares of our stock and may
involve the payment of a premium over book and market values, existing shareholders may experience dilution in connection with any
acquisition.
13
Our growth and expansion may strain our ability to manage our operations and our financial resources.
Our financial performance and profitability depend on our ability to execute our corporate growth strategy. In addition to seeking deposit
and loan and lease growth in our existing markets, we may pursue expansion opportunities in new markets. Continued growth, however,
may present operating and other problems that could adversely affect our business, financial condition, results of operations and cash
flows. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that
we have recently experienced.
Our growth may place a strain on our administrative, operational and financial resources and increase demands on our systems and
controls. This business growth may require continued enhancements to and expansion of our operating and financial systems and controls
and may strain or significantly challenge them. In addition, our existing operating and financial control systems and infrastructure may
not be adequate to maintain and effectively monitor future growth. Our continued growth may also increase our need for qualified
personnel. We cannot assure you that we will be successful in attracting, integrating and retaining such personnel.
Our decisions regarding the fair value of assets acquired from Citizens and Granite, including the FDIC loss sharing assets associated
with Granite, could be inaccurate which could materially and adversely affect our business, financial condition, results of operations, and
future prospects.
Management makes various assumptions and judgments about the collectability of acquired loans, including the creditworthiness of
borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted
acquisitions that include loss sharing agreements, such as our acquisition of Granite, we may record a loss sharing asset that we consider
adequate to absorb future losses which may occur in the acquired loan portfolio. In determining the size of the loss sharing asset, we
analyze the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and
nonaccruals, local economic conditions, and other pertinent information.
If our assumptions are incorrect, the balance of the FDIC indemnification asset may at any time be insufficient to cover future loan losses,
and credit loss provisions may be needed to respond to different economic conditions or adverse developments in the acquired loan
portfolio. Any increase in future loan losses could have a negative effect on our operating results.
Our ability to obtain reimbursement under the loss sharing agreement on covered assets purchased from the FDIC depends on our
compliance with the terms of the loss sharing agreement.
We must certify to the FDIC on a quarterly basis our compliance with the terms of the FDIC loss sharing agreement as a prerequisite to
obtaining reimbursement from the FDIC for realized losses on covered assets. The required terms of the agreements are extensive and
failure to comply with any of the guidelines could result in a specific asset or group of assets permanently losing their loss sharing
coverage. Additionally, Management may decide to forgo loss share coverage on certain assets to allow greater flexibility over the
management of certain assets. As of December 31, 2013, $28,586,000, or 1.0%, of the Company’s assets were covered by these FDIC
loss sharing agreements.
Risks Relating to Dividends and Our Common Stock
Our future ability to pay dividends is subject to restrictions.
Since we are a holding company with no significant assets other than the Bank, we currently depend upon dividends from the Bank for a
substantial portion of our revenues. Our ability to continue to pay dividends in the future will continue to depend in large part upon our
receipt of dividends or other capital distributions from the Bank. The ability of the Bank to pay dividends or make other capital
distributions to us is subject to the restrictions in the California Financial Code and the DBO. As of December 31, 2013, the Bank could
have paid $44,548,000 in dividends without the prior approval of the DBO. The amount that the Bank may pay in dividends is further
restricted due to the fact that the Bank must maintain a certain minimum amount of capital to be considered a “well capitalized”
institution as further described under Item 1—Capital Requirements in this report.
From time to time, we may become a party to financing agreements or other contractual arrangements that have the effect of limiting or
prohibiting us or the Bank from declaring or paying dividends. Our holding company expenses and obligations with respect to our trust
preferred securities and corresponding junior subordinated deferrable interest debentures issued by us may limit or impair our ability to
declare or pay dividends. Finally, our ability to pay dividends is also subject to the restrictions of the California Corporations Code. See
“Regulation and Supervision – Restrictions on Dividends and Distributions”.
Only a limited trading market exists for our common stock, which could lead to price volatility.
Our common stock is quoted on Nasdaq and trading volumes have been modest. The limited trading market for our common stock may
cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess
14
of that which would occur in a more active trading market of our common stock. In addition, even if a more active market in our common
stock develops, we cannot assure you that such a market will continue or that shareholders will be able to sell their shares.
Anti-takeover provisions and federal law may limit the ability of another party to acquire us, which could cause our stock price to decline.
Various provisions of our articles of incorporation and bylaws could delay or prevent a third party from acquiring us, even if doing so might
be beneficial to our shareholders. These provisions provide for, among other things:
•
•
•
•
specified actions that the Board of Directors shall or may take when an offer to merge, an offer to acquire all assets or a tender
offer is received,
a shareholder rights plan which could deter a tender offer by requiring a potential acquiror to pay a substantial premium over the
market price of our common stock,
advance notice requirements for proposals that can be acted upon at shareholder meetings, and
the authorization to issue preferred stock by action of the board of directors acting alone, thus without obtaining shareholder
approval.
The BHC Act and the Change in Bank Control Act of 1978, as amended, together with federal regulations, require that, depending on the
particular circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any
person or entity acquiring “control” of a bank holding company such as TriCo. These provisions may prevent a merger or acquisition that
would be attractive to shareholders and could limit the price investors would be willing to pay in the future for our common stock.
The amount of common stock owned by, and other compensation arrangements with, our officers and directors may make it more difficult to
obtain shareholder approval of potential takeovers that they oppose.
As of December 31, 2013, directors and executive officers beneficially owned approximately 14.4% of our common stock and our Employee
Stock Ownership Plan owned approximately 8.2%. Agreements with our senior management also provide for significant payments under
certain circumstances following a change in control. These compensation arrangements, together with the common stock and option
ownership of our board of directors and management, could make it difficult or expensive to obtain majority support for shareholder
proposals or potential acquisition proposals of us that our directors and officers oppose.
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing
shareholders.
In order to maintain our capital at desired or regulatorily-required levels, or to fund future growth, our board of directors may decide from
time to time to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire
shares of our common stock. The sale of these shares may significantly dilute your ownership interest as a shareholder. New investors in the
future may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current
shareholders.
Holders of our junior subordinated debentures have rights that are senior to those of our common stockholders.
We have supported our continued growth through the issuance of trust preferred securities from special purpose trusts and accompanying
junior subordinated debentures. At December 31, 2013, we had outstanding trust preferred securities and accompanying junior subordinated
debentures totaling $41,238,000. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us.
Further, the accompanying junior subordinated debentures we issued to the trusts are senior to our shares of common stock. As a result, we
must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our
bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be
made on our common stock.
Risks Relating to Systems, Accounting and Internal Controls
If we fail to maintain an effective system of internal and disclosure controls, we may not be able to accurately report our financial results or
prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our
business and the trading price of our securities.
Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial
reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide
15
reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We continually review and analyze our
internal control over financial reporting for Sarbanes-Oxley Section 404 compliance. As part of that process we may discover material
weaknesses or significant deficiencies in our internal control as defined under standards adopted by the Public Company Accounting
Oversight Board that require remediation. Material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected in a timely basis. Significant deficiency is a deficiency or combination of deficiencies, in
internal control over financial reporting that is less severe than material weakness, yet important enough to merit attention by those
responsible for the oversight of the Company’s financial reporting.
As a result of weaknesses that may be identified in our internal control, we may also identify certain deficiencies in some of our disclosure
controls and procedures that we believe require remediation. If we discover weaknesses, we will make efforts to improve our internal and
disclosure control. However, there is no assurance that we will be successful. Any failure to maintain effective controls or timely effect any
necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting
obligations, which could affect our ability to remain listed with Nasdaq. Ineffective internal and disclosure controls could also cause
investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our
securities.
We rely on communications, information, operating and financial control systems technology and we may suffer an interruption in or breach
of the security of those systems.
We rely heavily on our communications, information, operating and financial control systems technology to conduct our business. We rely
on third party services providers to provide many of these systems. Any failure, interruption or breach in security of these systems could
result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and loan origination systems.
We cannot assure you that such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately
addressed by us or the third parties service providers on which we rely. The occurrence of any failures, interruptions or security breaches
could damage our reputation, result in a loss of customers, expose us to possible financial liability, lead to additional regulatory scrutiny or
require that we make expenditures for remediation or prevention. Any of these circumstances could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
A failure to implement technological advances could negatively impact our business.
The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services. In
addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce
costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products
and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our
competitors have substantially greater resources than we do to invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or successfully market such products and services to our customers.
Risks Related to the Announced Merger with North Valley Bancorp
Failure to consummate the Merger, or a delay in consummating the Merger, could negatively impact the market price of TriCo common
stock and could have a material adverse effect on our business, financial condition and results of operations.
On January 21, 2014, TriCo and North Valley Bancorp entered into an Agreement and Plan of Merger and Reorganization (the “Merger
Agreement”) providing for the merger of North Valley Bancorp with and into TriCo, with Trico as the surviving entity (the “Merger”).
Consummation of the Merger is subject to various customary conditions, including (i) approval by TriCo’s shareholders and North Valley
Bancorp’s shareholders, (ii) receipt of certain required regulatory approvals without materially burdensome regulatory conditions, (iii) the
absence of any governmental order or law prohibiting the consummation of the Merger, and (iv) effectiveness of the registration statement
for the TriCo common stock to be issued as consideration in the Merger.
We have incurred substantial expenses in connection with the negotiation and preparations for completion of the transactions contemplated
by the Merger Agreement. If the Merger is not completed, we will have incurred these expenses without realizing the expected benefits of
the Merger. If the Merger is not consummated for any reason, our ongoing business, financial condition and results of operations may be
materially adversely affected and the market price of TriCo common stock may decline significantly, particularly to the extent that the
current market price reflects a market assumption that the Merger will be consummated. If the consummation of the Merger is delayed,
including by a delay in receipt of necessary governmental approvals or by the receipt of a competing acquisition proposal or by reason of
litigation, our business, financial condition and results of operations may also be materially adversely affected. Additionally, if the Merger
Agreement is terminated, under certain circumstances, TriCo could be required to pay a termination fee to North Valley
16
Bancorp equal to $3,800,000. In addition, our business may have been impacted adversely by the failure to pursue other beneficial
opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger.
We may fail to realize the cost savings we have estimated for the Merger or integrate the business operations and managements of our
two companies in an efficient manner.
The success of the Merger will depend, in part, on our ability to realize anticipated cost savings and to combine the businesses of TriCo
and North Valley Bancorp in a manner that permits growth opportunities to be realized and does not materially disrupt the existing
customer relationships of the Tri Counties Bank or North Valley Bank, nor result in decreased revenues due to any loss of customers.
TriCo and North Valley Bancorp have operated and, until the completion of the Merger, will continue to operate independently. To
realize these anticipated benefits, the businesses of TriCo and North Valley and Tri Counties Bank and North Valley Bank must be
successfully combined. While management has taken existing leases and other contractual obligations into consideration in developing
its estimate of cost savings, changes in transaction volumes, operating systems and procedures and other factors may cause the actual
cost savings to be different from these estimates. In addition, difficulties encountered in integrating our information systems could
prevent us from realizing some of the estimated cost savings. Such difficulties could also jeopardize customer relationships and cause a
loss of deposits or loan customers and the revenue associated with those customers. It is possible that the integration process could result
in the loss of key employees, as well as the disruption of each company’s ongoing businesses or inconsistencies in standards, controls,
procedures and policies, any or all of which could adversely affect our ability to maintain relationships with customers and employees
after the Merger or to achieve the anticipated benefits of the Merger. Integration efforts between the two companies will also divert
management attention and resources. A failure to successfully navigate the complicated integration process could have an adverse effect
on the combined companies or the combined bank. If the combined bank is not able to achieve these cost-savings objectives, the
anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected.
We are subject to various uncertainties and contractual restrictions while the Merger is pending that could disrupt the conduct of our
business and could have a material adverse effect on our business, financial condition and results of operations.
Uncertainty about the effect of the Merger on employees, customers, suppliers, and vendors may have a material adverse effect on our
business, financial condition and results of operations. These uncertainties may impair our ability or the ability of North Valley Bancorp
to attract, retain and motivate key personnel, depositors and borrowers pending the consummation of the Merger, as such personnel,
depositors and borrowers may experience uncertainty about their future roles following the consummation of the Merger. Additionally,
these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with us to seek
to change existing business relationships with us or fail to extend an existing relationship with us. In addition, competitors may target
our existing customers by highlighting potential uncertainties and integration difficulties that may result from the Merger.
In addition, the Merger Agreement restricts us from taking certain actions without North Valley Bancorp’s consent while the Merger is
pending. These restrictions may, among other matters, prevent us from pursuing certain transactions or making other changes to our
business prior to consummation of the Merger or termination of the Merger Agreement. These restrictions could have a material adverse
effect on our business, financial condition and results of operations.
We have a small number of key personnel. The pursuit of the Merger and the preparation for the integration may place a burden on
management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any
difficulties encountered in the transition and integration process could have a material adverse effect on our business, financial condition
and results of operations.
The consideration to be paid in the Merger is fixed and will not be adjusted for changes in the business, assets, liabilities, prospects,
outlook, financial condition or results of operations of TriCo or North Valley Bancorp, or in the event of any change in our stock price
or North Valley Bancorp’s stock price.
The Merger Agreement provides that the merger consideration, i.e. the number of shares of TriCo common stock that we will issue to
holders of North Valley Bancorp common stock, is fixed and will not be adjusted for changes in our business, assets, liabilities,
prospects, outlook, financial condition or results of operations, or changes in the market price of, analyst estimates of, or projections
relating to, TriCo common stock or those of North Valley Bancorp. For example, if we experienced an improvement in our business,
assets, liabilities, prospects, outlook, financial condition or results of operations prior to the consummation of the Merger, there would be
no adjustment to the amount of the merger consideration.
17
The market price of our common stock after the Merger may be affected by factors different from those affecting our shares currently.
The results of operations of the combined company and the market price of our common stock after the completion of the Merger may be affected
by factors different from those currently affecting the independent results of our operations and the market price of our common stock.
The costs relating to the Merger could reduce our future earnings per share.
We estimate that we have incurred or will incur significant transaction costs associated with the Merger, a portion of which will be incurred
whether or not the Merger closes. We believe the combined company may incur charges to operations, which are not currently reasonably
estimable, in the quarter in which the Merger is completed or subsequent quarters, to reflect costs associated with integrating Tri Counties Bank
and North Valley Bank. There is no assurance that the combined company will not incur additional material charges in subsequent quarters to
reflect additional costs associated with the Merger, including charges associated with the impairment of any goodwill booked in connection with
the Merger.
The Failure of Tri Counties Bank’s or North Valley Bank’s Loan Portfolios to Perform as Expected May Unfavorably Impact Us.
Our performance and prospects after the Merger will be dependent to a significant extent on the performance of the combined loan portfolios of Tri
Counties Bank and North Valley Bank, and ultimately on the financial condition of their respective borrowers and other customers. The existing
loan portfolios of the two banks differ to some extent in the types of borrowers, industries and credits represented. In addition, there are differences
in the documentation, classifications, underwriting and management of the portfolios. As a result, our overall loan portfolio after the Merger will
have a different risk profile than the loan portfolio of either Tri Counties Bank or North Valley Bank before the Merger. The performance of the
two loan portfolios will be adversely affected if any of such factors is worse than currently anticipated. In addition, to the extent that present
customers are not retained by North Valley Bancorp or North Valley Bank, or additional expenses are incurred in retaining them, there could be
adverse effects on our future consolidated results of operations following the Merger. The anticipated benefits of the Merger are dependent, in part,
on the extent to which the revenues of North Valley Bancorp are maintained and enhanced.
Goodwill resulting from the Merger may adversely affect our results of operations.
Goodwill and other intangible assets are expected to increase substantially as a result of the Merger. Potential impairment of goodwill and
amortization of other intangible assets could adversely affect our financial condition and results of operations. We assess our goodwill and other
intangible assets and long-lived assets for impairment annually and more frequently when required by U.S. GAAP. We are required to record an
impairment charge if circumstances indicate that the asset carrying values exceed their fair values. Our assessment of goodwill, other intangible
assets, or long-lived assets could indicate that an impairment of the carrying value of such assets may have occurred that could result in a material,
non-cash write-down of such assets, which could have a material adverse effect on our results of operations and future earnings.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company is engaged in the banking business through 63 offices in 23 counties in Northern and Central California including ten offices in
Shasta County, nine in Butte County, seven in Sacramento and Nevada Counties, six in Placer County, four in Stanislaus County, three each in
Siskiyou, Sutter and Kern Counties, two each in Glenn and Yolo Counties, and one each in Contra Costa, Del Norte, Fresno, Lake, Lassen,
Madera, Mendocino, Merced, Napa, Tehama, Tulare, and Yuba Counties. All offices are constructed and equipped to meet prescribed security
requirements.
The Company owns twenty branch office locations, four administrative buildings, and two other buildings that it leases out. The Company leases
forty-three branch office locations, and one administrative building. Most of the leases contain multiple renewal options and provisions for rental
increases, principally for changes in the cost of living index, property taxes and maintenance.
ITEM 3. LEGAL PROCEEDINGS
The Bank owns 10,214 shares of Class B common stock of Visa Inc. which are convertible into Class A common stock at a conversion ratio of
0.4206 per Class A share. As of December 31, 2013, the value of the Class A shares was $222.68 per share. Utilizing the conversion ratio, the
value of unredeemed Class A equivalent shares owned by the Bank was $957,000 as of December 31, 2013, and has not been reflected in the
accompanying financial statements. The shares of Visa Class B common stock are restricted and may not be transferred. Visa Member Banks are
required to fund an escrow account to cover settlements, resolution of pending litigation and related claims. If the funds in the escrow account are
insufficient to settle all the covered litigation, Visa may sell additional Class A shares, use the proceeds to settle litigation, and further reduce the
conversion ratio. If funds remain in the escrow account after all litigation is settled, the Class B conversion ratio will be increased to reflect that
surplus.
18
On January 24, 2014, a putative shareholder class action lawsuit was filed against TriCo, North Valley Bancorp and certain other defendants
in connection with TriCo entering into the Merger Agreement with North Valley Bancorp. The lawsuit, which was filed in the Shasta
County, California Superior Court, alleges that the members of the North Valley Bancorp board of directors breached their fiduciary duties
to North Valley Bancorp shareholders by approving the proposed merger for inadequate consideration; approving the transaction in order
receive benefits not equally shared by other North Valley Bancorp shareholders; entering into the Merger Agreement containing preclusive
deal protection devices; and failing to take steps to maximize the value to be paid to the North Valley Bancorp shareholders. The lawsuit
alleges claims against TriCo for aiding and abetting these alleged breaches of fiduciary duties. The plaintiff seeks, among other things,
declaratory and injunctive relief concerning the alleged breaches of fiduciary duties injunctive relief prohibiting consummation of the
merger, rescission, attorneys’ of the merger agreement, fees and costs, and other and further relief. At this stage, TriCo is unable to predict
the outcome of the proceedings or their impact on TriCo or North Valley Bancorp.
On September 27, 2012, the Company announced that the Bank entered into a tentative settlement with a former employee who filed a class
action lawsuit against the Bank in the Superior Court of California, Kern County on behalf of herself and a putative class of current and
former Bank employees serving as assistant branch managers seeking undisclosed damages, alleging that the Bank improperly classified its
assistant branch managers as exempt employees under California laws. The lawsuit alleges claims for: failure to pay overtime compensation;
failure to provide meal periods; failure to provide rest periods; failure to provide accurate wage statements; failure to provide suitable
seating; declaratory relief; accounting; and unfair business practices in violation of California Business and Professions Code section
17200. On September 26, 2012, after efforts to mediate the claim, the Bank and the former employee agreed to settle the case in an amount
ranging from $2,039,500 to $2,500,000, depending primarily on the number of class participants who file claims, and pending final approval
by the court, including determination of the method to allocate settlement payments among current and former employees who are members
of the defined settlement class, and the portion of the total settlement allocable to attorney’s fees and costs to plaintiff’s counsel. On
September 26, 2012, the Bank recorded a $2,090,000 expense and accrued liability in anticipation of approval of this settlement by the court
and estimated related payroll taxes. On May 7, 2013, the court preliminariy approved the settlement. On August 27, 2013, the court approved
a final settlement agreement for $2,429,000, and the Bank recorded an additional $339,000 expense and accrued liability related to this
matter. During September 2013, the Bank paid the settlement amount.
The Bank is named as defendant in a lawsuit filed by a former employee seeking undisclosed damages, alleging that the Bank improperly
terminated his employment under California law. The Bank denies all allegations and is vigorously defending the suit.
Neither the Company nor its subsidiaries, are party to any other material pending legal proceeding, nor is their property the subject of any
material pending legal proceeding, except routine legal proceedings arising in the ordinary course of their business. None of these
proceedings is expected to have a material adverse impact upon the Company’s business, consolidated financial position or results of
operations.
ITEM 4. MINE SAFETY DISCLOSURES
Inapplicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Common Stock Market Prices and Dividends
The Company’s common stock is traded on the Nasdaq under the symbol “TCBK.” The following table shows the high and the low closing
sale prices for the common stock for each quarter in the past two years, as reported by Nasdaq:
2013:
Fourth quarter
Third quarter
Second quarter
First quarter
2012:
Fourth quarter
Third quarter
Second quarter
First quarter
High
Low
$28.76
$23.07
$21.75
$17.90
$17.14
$16.81
$17.71
$17.67
$22.50
$20.50
$15.77
$16.31
$14.73
$14.76
$14.84
$14.22
19
As of February 28, 2014 there were approximately 1,397 shareholders of record of the Company’s common stock. On February 28,
2014, the closing sales price was $24.99.
The Company has paid cash dividends on its common stock in every quarter since March 1990, and it is currently the intention of the
Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that
any dividends will be paid since they are dependent upon earnings, financial condition and capital requirements of the Company and
the Bank. As of December 31, 2013, $44,548,000 was available for payment of dividends by the Bank to the Company, under
applicable laws and regulations. The Company paid cash dividends of $0.11 per common share in each of the quarters ended
December 31, 2013, September 30, 2013, June 30, 2013, and $0.09 per common share in each of the quarters ended March 31,
2013, December 31, 2012, September 30, 2012, June 30, 2012, and March 31, 2012.
Stock Repurchase Plan
The Company adopted a stock repurchase plan on August 21, 2007 for the repurchase of up to 500,000 shares of the Company’s
common stock from time to time as market conditions allow. The 500,000 shares authorized for repurchase under this plan
represented approximately 3.2% of the Company’s approximately 15,815,000 common shares outstanding as of August 21, 2007.
This plan has no stated expiration date for the repurchases. As of December 31, 2013, the Company had purchased 166,600 shares
under this plan. The following table shows the repurchases made by the Company or any affiliated purchaser (as defined in Rule 10b-
18(a)(3) under the Exchange Act) during the fourth quarter of 2013:
Period
Oct. 1-31, 2013
Nov. 1-30, 2013
Dec. 1-31, 2013
Total
(a) Total number
of shares purchased
—
—
—
—
(b) Average price
paid per share
—
—
—
—
20
(c) Total number of
shares purchased as of
part of publicly
announced plans or
programs
—
—
—
—
(d)
Maximum number
shares that may yet
be purchased
under the
plans or programs
333,400
333,400
333,400
333,400
The following graph presents the cumulative total yearly shareholder return from investing $100 on December 31, 2008, in each of
TriCo common stock, the Russell 3000 Index, and the SNL Western Bank Index. The SNL Western Bank Index compiled by SNL
Financial includes banks located in California, Oregon, Washington, Montana, Hawaii and Alaska with market capitalization similar
to that of TriCo’s. The amounts shown assume that any dividends were reinvested.
Index
TriCo Bancshares
Russell 3000
SNL Western Bank
Equity Compensation Plans
Period Ending
12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13
100.00 68.90 68.46 61.85 74.49 128.61
100.00 128.34 150.07 151.61 176.49 235.71
100.00 91.83 104.05 94.00 118.63 166.91
The following table shows shares reserved for issuance for outstanding options, stock appreciation rights and warrants granted under
our equity compensation plans as of December 31, 2013. All of our equity compensation plans have been approved by shareholders.
Plan category
Equity compensation plans not approved by
shareholders
Equity compensation plans approved by shareholders
Total
(a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(b)
Weighted average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available for
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
—
1,246,370
1,246,370
$
$
—
18.04
18.04
—
937,500
937,500
21
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our consolidated financial statements. This data should be read in
connection with our consolidated financial statements and the related notes located at Item 8 of this report.
Year ended December 31,
Interest income
Interest expense
Net interest income
(Benefit from) provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Per share:
Dividends paid
Book value at December 31
Tangible book value at December 31
Average common shares outstanding
Average diluted common shares outstanding
Shares outstanding at December 31
At December 31:
Loans, net of allowance
Total assets
Total deposits
Other borrowings
Junior subordinated debt
Shareholders’ equity
Financial Ratios:
For the year:
Return on average assets
Return on average equity
Net interest margin1
Net loan losses to average loans
Efficiency ratio 2
Average equity to average assets
At December 31:
Equity to assets
Total capital to risk-adjusted assets
TRICO BANCSHARES
Financial Summary
(in thousands, except per share amounts)
2013
$ 106,560
4,696
101,864
(715)
36,829
93,604
45,804
18,405
27,399
$
2012
$ 108,716
7,344
101,372
9,423
37,980
97,998
31,931
12,937
18,994
$
2011
$ 102,982
10,238
92,744
23,060
42,813
82,715
29,782
11,192
18,590
$
2010
$ 104,572
14,133
90,439
37,458
32,695
77,205
8,471
2,466
6,005
$
2009
$ 112,333
20,615
91,718
31,450
30,329
75,450
15,147
5,185
9,962
$
1.71
1.69
$
$
1.19
1.18
$
$
1.17
1.16
$
$
0.38
0.37
$
$
0.63
0.62
$
$
$
$
$
0.42
15.61
14.59
16,045
16,197
16,077
$1,633,762
2,744,066
2,410,483
6,335
41,238
250,946
$
$
$
0.36
14.33
13.30
15,988
16,052
16,001
$1,522,175
2,609,269
2,289,702
9,197
41,238
229,359
$
$
$
$
$
$
0.36
13.55
12.49
15,935
16,000
15,979
$
$
$
0.40
12.64
11.62
15,860
16,010
15,860
0.52
12.71
11.71
15,783
16,011
15,787
$1,505,118
2,555,597
2,190,536
72,541
41,238
216,441
$1,377,000
2,189,789
1,852,173
62,020
41,238
200,397
$1,460,097
2,170,520
1,828,512
66,753
41,238
200,649
1.04%
11.34%
4.18%
0.23%
67.32%
9.21%
9.15%
14.77%
0.75%
8.44%
4.32%
0.82%
70.19%
8.91%
8.79%
14.53%
0.82%
8.93%
4.43%
1.37%
60.88%
9.15%
8.47%
13.94%
0.27%
2.94%
4.45%
2.07%
62.49%
9.25%
9.15%
14.20%
0.48%
4.89%
4.77%
1.53%
61.53%
9.73%
9.24%
13.36%
1
2
Fully taxable equivalent.
The sum of fully taxable equivalent net interest income and noninterest income divided by noninterest expense.
22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
As TriCo Bancshares has not commenced any business operations independent of the Bank, the following discussion pertains primarily to the
Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances
for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income and net
interest income are generally presented on a fully tax-equivalent (FTE) basis. The presentation of interest income and net interest income on a
FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a non-FTE basis in this Item 7
this report, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those
that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing
rights, fair value measurements, retirement plans and intangible assets. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The Company’s policies related to estimates on the allowance for loan losses, other than temporary
impairment of investments and impairment of intangible assets, can be found in Note 1 in the financial statements at Item 8 of this report.
Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances for the
Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, certain performance measures
including interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (FTE)
basis. The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in
assessing its results.
On January 21, 2014, TriCo announced that it had entered into an Agreement and Plan of Merger and Reorganization under which it would
acquire North Valley Bancorp. North Valley Bancorp shareholders will receive a fixed exchange ratio of 0.9433 shares of TriCo common stock
for each share of North Valley Bancorp common stock, which would provide North Valley Bancorp shareholders with aggregate ownership, on a
pro forma basis, of approximately 28.6% of the common stock of the combined company. Based on TriCo’s closing stock price of $27.66 on
January 17, 2014, North Valley Bancorp shareholders would have received consideration valued at approximately $26.09 per share.
The Merger will not be completed unless a number of customary closing conditions are met, including, among others, approval of the merger by
shareholders of both companies, the registration of the offering of the TriCo common stock to the North Valley Bancorp shareholders under the
Securities Act of 1933, receipt of required regulatory and other approvals and the expiration of applicable statutory waiting periods, the accuracy
of specified representations and warranties of each party, the receipt of tax opinions confirming certain tax aspects of the merger, North Valley
Bancorp’s satisfaction of certain financial measures shortly prior to closing, and the absence of any injunctions or other legal restraints.
TriCo has agreed to appoint three North Valley Bancorp directors to TriCo’s board upon closing of the Merger. The Merger is expected to be
completed in the second or third quarter of 2014, subject to approval of the Merger by shareholders of both companies, receipt of required
regulatory and other approvals and satisfaction of customary closing conditions.
North Valley, headquartered in Redding, California, is the parent of North Valley Bank and had approximately $917.8 million in assets and 22
commercial banking offices in Shasta, Humboldt, Del Norte, Mendocino, Yolo, Sonoma, Placer and Trinity Counties in Northern California at
December 31, 2013. In connection with the acquisition, North Valley Bank will merge into the Bank.
As of December 31, 2013, on a pro forma consolidated basis with North Valley Bancorp, TriCo would have had approximately $3.61 billion in
assets.
On September 23, 2011, the California DBO closed Citizens Bank of Northern California (“Citizens”), Nevada City, California and appointed the
FDIC as receiver. That same date, the Bank assumed the banking operations of Citizens from the FDIC under a whole bank purchase and
assumption agreement without loss sharing. With this agreement, the Bank added seven traditional bank branches including two in Grass Valley,
and one in each of Nevada City, Penn Valley, Lake of the Pines, Truckee, and Auburn, California. This acquisition is consistent with the Bank’s
community banking expansion strategy and provides further opportunity to fill in the Bank’s market presence in the Northern California market.
23
On May 28, 2010, the Office of the Comptroller of the Currency closed Granite Community Bank (“Granite”), Granite Bay,
California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Granite from the FDIC
under a whole bank purchase and assumption agreement with loss sharing. Under the terms of the loss sharing agreement, the FDIC
will cover a substantial portion of any future losses on loans, related unfunded loan commitments, other real estate owned
(OREO)/foreclosed assets and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of
loss recoveries on the covered assets acquired from Granite. The loss sharing arrangements for non-single family residential and
single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8
years and 10 years, respectively, from the acquisition date. With this agreement, the Bank added one traditional bank branch in each
of Granite Bay and Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and
provides further opportunity to fill in the Bank’s market presence in the greater Sacramento, California market.
The Company refers to loans and foreclosed assets that are covered by loss sharing agreements as “covered loans” and “covered
foreclosed assets”, respectively. In addition, the Company refers to loans purchased or obtained in a business combination as
“purchased credit impaired” (PCI) loans, or “purchased not credit impaired” (PNCI) loans. The Company refers to loans that it
originates as “originated” loans. Additional information regarding the Citizens acquisition can be found in Note 2 in the financial
statements at Item 8 of this report. Additional information regarding the definitions and accounting for originated, PNCI and PCI
loans can be found in Notes 1, 2, 4 and 5 in the financial statements at Item 8 of this report, and under the heading Asset Quality and
Non-Performing Assets below.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that
area of California north of, and including, Stockton; central California as that area of the State south of Stockton, to and including,
Bakersfield; and southern California as that area of the State south of Bakersfield.
Results of Operations
Overview
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to
the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and
should be read in conjunction with the consolidated financial statements of the Company and the related notes at Item 8 of this report.
Following is a summary of the components of net income for the periods indicated (dollars in thousands):
Components of Net Income
Net interest income
Benefit from (provision for) loan losses
Noninterest income
Noninterest expense
Taxes
Net income
Net income per average fully-diluted share
Net income as a percentage of average shareholders’ equity
Net income as a percentage of average total assets
24
Year ended December 31,
2013
2012
2011
$101,864
715
36,829
(93,604)
(18,405)
$ 27,399
1.69
$
11.34%
1.04%
$101,372
(9,423)
37,980
(97,998)
(12,937)
$ 18,994
1.18
$
8.44%
0.75%
$ 92,744
(23,060)
42,813
(82,715)
(11,192)
$ 18,590
1.16
$
8.93%
0.82%
Net Interest Income
The Company’s primary source of revenue is net interest income, which is the difference between interest income on earning assets
and interest expense on interest-bearing liabilities.
Following is a summary of the Company’s net interest income for the periods indicated (dollars in thousands):
Components of Net Interest Income
Interest income
Interest expense
Net interest income
FTE adjustment
Net interest income (FTE)
Net interest margin (FTE)
2013
Year ended December 31,
2012
2011
$106,560
(4,696)
101,864
350
$102,214
$108,716
(7,344)
101,372
257
$101,629
$102,982
(10,238)
92,744
309
$ 93,053
4.18%
4.32%
4.43%
Net interest income (FTE) for the year ended December 31, 2013 was $102,214,000, an increase of $585,000 or 0.6% compared to
the year ended December 31, 2012. The increase in net interest income during 2013 when compared to 2012 is mainly due to a
decrease in average balance of other borrowings, a shift in deposit balances from relatively high interest rate earning time deposits to
noninterest-earning, demand, and savings deposits, an increase in the average balance of investments securities, and an increase in the
average balance of loans; all of which were substantially offset by a decrease in the average yield on loans. The “Yield” and
“Volume/Rate” tables shown below are useful in illustrating and quantifying the developments that affected net interest income
during 2013.
Net interest income (FTE) for the year ended December 31, 2012 was $101,629,000, an increase of $8,576,000 or 9.2% compared to
the year ended December 31, 2011. The increase in net interest income during 2012 when compared to 2011 is mainly due to the
acquisition of Citizens on September 23, 2011 and its associated net interest income of $17,852,000 during 2012 compared to
$6,117,000 from the acquisition date of September 23, 2011 to December 31, 2011. Included in the net interest income associated
with the Citizens acquisition is $7,572,000 and $3,146,000 from the accretion of loan purchase discounts during 2012 and 2011,
respectively. Also contributing to the increase in net interest income was a reduction in deposit rates, the flow of deposits from
relatively higher paying time deposits to lower paying non-maturity deposits, and the reduction of relatively high cost other
borrowings. During 2012, investment opportunities continued to be unattractive given their low market yields and interest rate risk
profile. The “Yield” and “Volume/Rate” tables shown below are useful in illustrating and quantifying the developments that affected
net interest income during 2012.
25
Summary of Average Balances, Yields/Rates and Interest Differential – Yield Tables
The following tables present, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities
and shareholders’ equity, the amounts of interest income from average earning assets and resulting yields, and the amount of interest
expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds
from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on
securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at
the current statutory tax rate (dollars in thousands):
Assets
Loans
Investment securities - taxable
Investment securities - nontaxable
Cash at Federal Reserve and other banks
Total earning assets
Other assets
Total assets
Liabilities and shareholders’ equity
Interest-bearing demand deposits
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Noninterest-bearing demand
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread (1)
Net interest income and interest margin (2)
Year ended December 31, 2013
Average
balance
Interest
income/expense
Rates
earned/paid
$1,610,725
224,636
16,632
591,507
2,443,500
179,267
$2,622,767
$ 524,139
797,803
315,253
8,026
41,238
1,686,459
657,377
37,297
241,634
$2,622,767
$
97,548
6,736
933
1,693
106,910
528
1,026
1,891
4
1,247
4,696
6.06%
3.00%
5.61%
0.29%
4.38%
0.10%
0.13%
0.60%
0.05%
3.02%
0.28%
$
102,214
4.10%
4.18%
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing
liabilities.
(2) Net interest margin is computed by dividing net interest income by total average earning assets.
26
Summary of Average Balances, Yields/Rates and Interest Differential – Yield Tables (continued)
Assets
Loans
Investment securities - taxable
Investment securities - nontaxable
Cash at Federal Reserve and other banks
Total earning assets
Other assets
Total assets
Liabilities and shareholders’ equity
Interest-bearing demand deposits
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Noninterest-bearing demand
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread (1)
Net interest income and interest margin (2)
Assets
Loans
Investment securities - taxable
Investment securities - nontaxable
Cash at Federal Reserve and other banks
Total earning assets
Other assets
Total assets
Liabilities and shareholders’ equity
Interest-bearing demand deposits
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Noninterest-bearing demand
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread (1)
Net interest income and interest margin (2)
Year ended December 31, 2012
Interest
income/
expense
Rates
earned/paid
$100,496
6,177
685
1,615
108,973
784
1,212
2,420
1,604
1,324
7,344
6.47%
3.07%
7.19%
0.28%
4.64%
0.17%
0.16%
0.65%
3.51%
3.21%
0.43%
Average
balance
$1,552,540
200,958
9,529
587,118
2,350,145
176,927
$2,527,072
$ 471,747
763,065
372,698
45,753
41,238
1,694,501
572,568
34,852
225,151
$2,527,072
$101,629
4.21%
4.32%
Year ended December 31, 2011
Average
balance
$1,442,821
262,306
11,403
386,067
2,102,597
173,311
$2,275,908
$ 410,870
661,480
415,319
63,602
41,238
1,592,509
442,174
33,005
208,220
$2,275,908
Interest
income/
expense
Rates
earned/paid
$ 92,691
8,760
833
1,007
103,291
$ 1,217
1,421
3,921
2,420
1,259
10,238
6.42%
3.34%
7.31%
0.26%
4.91%
0.30%
0.21%
0.94%
3.80%
3.05%
0.64%
$ 93,053
4.27%
4.43%
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing
liabilities.
(2) Net interest margin is computed by dividing net interest income by total average earning assets.
27
Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned
and Rates Paid – Volume/Rate Tables
The following table sets forth a summary of the changes in the Company’s interest income and interest expense from changes in average
asset and liability balances (volume) and changes in average interest rates for the periods indicated. The rate/volume variance has been
included in the rate variance. Amounts are calculated on a fully taxable equivalent basis:
2013 over 2012
Yield/
Rate
Volume
2012 over 2011
Yield/
Rate
Total
(dollars in thousands)
Volume
Increase (decrease) in interest income:
Loans
Investments - taxable
Investments - nontaxable
Cash at Federal Reserve and other banks
Total
Increase (decrease) in interest expense:
Demand deposits (interest-bearing)
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total
Increase (decrease) in net interest income
Provision for Loan Losses
$ 3,765
727
511
12
5,015
89
56
(373)
(1,324)
—
(1,552)
$ 6,567
$(6,713) $(2,948) $ 7,044 $
559
248
78
(2,063)
(2,049)
(137)
523
5,381
(168)
(263)
66
(7,078)
761
(534)
(11)
85
301
(345)
(242)
(156)
(276)
(77)
(1,096)
$(5,982) $
(256)
(186)
(529)
(1,600)
(77)
(2,648)
(616)
183
(422)
213
(1,100)
(401)
(138)
(678)
65
—
(2,211)
(683)
585 $ 6,064 $ 2,512
Total
$ 7,805
(2,583)
(148)
608
5,682
(433)
(209)
(1,501)
(816)
65
(2,894)
$ 8,576
The provision for loan losses during any period is the sum of the allowance for loan losses required at the end of the period and any loan
charge offs during the period, less the allowance for loan losses required at the beginning of the period, and less any loan recoveries during
the period. See the Tables labeled “Allowance for loan losses – year ended December 31, 2013 and 2012” at Note 5 in Item 8 of Part II of
this report for the components that make up the provision for loan losses for the years ended December 31, 2013 and 2012.
The Company benefited from a $715,000 reversal of provision for loan losses during the year ended December 31, 2013 versus a provision
for loan losses of $9,423,000 during the year ended December 31, 2012. As shown in the Table labeled “Allowance for Loan Losses— year
ended December 31, 2013” at Note 5 in Item 8 of Part II of this report, residential real estate mortgage loans, home equity lines of credit and
auto indirect loans experienced a reversal of provision for loan losses during the year ended December 31, 2013. All other categories of loans
experienced a provision for loan losses during the year ended December 31, 2013. The level of provision, or reversal of provision, for loan
losses of each loan category during the year ended December 31, 2013 was due primarily to a decrease in the required allowance for loan
losses as of December 31, 2013 when compared to the required allowance for loan losses as of December 31, 2012 less net charge-offs
during the year ended December 31, 2013, and the effect of the changes in the allowance methodology during the year ended December 31,
2013 as described under the heading “Loans and Allowance for Loan Losses” at Note 1 in Item 8 of Part II of this report. All categories of
loans except commercial real estate mortgage loans, home equity loans, and residential construction loans experienced a decrease in the
required allowance for loan losses during the year ended December 31, 2013. These decreases in required allowance for loan losses were due
primarily to reduced impaired loans, improvements in estimated cash flows and collateral values for the remaining and newly impaired
loans, and reductions in historical loss factors that, in part, determine the required loan loss allowance for performing loans in accordance
with the Company’s allowance for loan losses methodology as described under the heading “Loans and Allowance for Loan Losses” at Note
1 in Item 8 of Part II of this report. These same factors were also present, to some extent, for commercial real estate mortgage loans, home
equity loans, and residential construction loans, but were more than offset by the effect of increased loan balances or changes in credit
quality within the “pass” category of these loan categories resulting in net provisions for loan losses in these categories during the year ended
December 31, 2013. For details of the change in nonperforming loans during the year ended December 31, 2013 see the Tables, and
associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2013” and “Changes in
nonperforming assets during the three months ended December 31, September 30, June 30, and March 31, 2013” under the heading “Asset
Quality and Non-Performing Assets” below. During the year ended December 31, 2013, the Company made several changes to its allowance
for loan loss methodology. The changes in methodology are described under the heading “Allowance for loan losses” in the section below
labeled “Financial Condition”. Excluding the effect of the changes in allowance methodology during the year ended December 31, 2013,
the reversal of provision for loan losses during the year ended December 31, 2013 would have been approximately $4,188,000, or
$3,473,000 more than the $715,000 that was actually recorded, and the allowance for loan losses at December 31, 2013 would have been
approximately $34,772,000, or $3,473,000 less than the $38,245,000 that was actually recorded.
28
The provision for loan losses was $9,423,000 and $23,060,000 for the years ended December 31, 2012, and 2011, respectively. The decrease
in the provision for loan losses for the year ended December 31, 2012 as compared to the year ended December 31, 2011 was primarily the
result of improvement in collateral values and estimated cash flows related to nonperforming loans and purchased credit impaired loans, and
a reduction in nonperforming loans.
The provision for loan losses related to Originated and PNCI loans is based on management’s evaluation of inherent risks in these loan
portfolios and a corresponding analysis of the allowance for loan losses. The provision for loan losses related to PCI loan portfolio is based
on changes in estimated cash flows expected to be collected on PCI loans. Additional discussion on loan quality, our procedures to measure
loan impairment, and the allowance for loan losses is provided under the heading “Asset Quality and Non-Performing Assets” below.
Management re-evaluates the loss ratios and other assumptions used in its calculation of the allowance for loan losses for its Originated and
PNCI loan portfolios on a quarterly basis and makes changes as appropriate based upon, among other things, changes in loss rates
experienced, collateral support for underlying loans, changes and trends in the economy, and changes in the loan mix. Management also re-
evaluates expected cash flows used in its accounting for its PCI loan portfolio, including any required allowance for loan losses, on a
quarterly basis and makes changes as appropriate based upon, among other things, changes in loan repayment experience, changes in loss
rates experienced, and collateral support for underlying loans.
Noninterest Income
The following table summarizes the Company’s noninterest income for the periods indicated (dollars in thousands):
Components of Noninterest Income
Service charges on deposit accounts
ATM fees and interchange
Other service fees
Mortgage banking service fees
Change in value of mortgage servicing rights
Total service charges and fees
Gain on sale of loans
Commissions on sale of nondeposit investment products
Increase in cash value of life insurance
Change in indemnification asset
Gain on disposition of foreclosed assets
Bargain purchase gain
Gain on life insurance death benefit
Other noninterest income
Total noninterest income
Year ended December 31,
2012
2013
2011
$12,716
8,370
2,144
1,774
253
25,257
5,602
2,983
1,727
(1,649)
1,640
—
—
1,269
$36,829
$14,290
7,762
2,223
1,666
(2,016)
23,925
6,810
3,209
1,820
(286)
786
—
675
1,041
$37,980
$14,776
7,058
1,722
1,495
(1,107)
23,944
3,037
2,105
1,885
2,059
680
7,575
789
739
$42,813
Noninterest income decreased $1,151,000 (3.0%) to $36,829,000 in 2013. Service charges on deposit accounts were down $1,574,000
(11.0%) due to reduced customer overdrafts and a resulting decrease in non-sufficient funds fees. ATM fees and interchange income was up
$608,000 (7.8%) due to increased customer point-of-sale transactions that are primarily the result of incentives for such usage. Overall,
mortgage banking activities, which includes mortgage banking servicing fees, change in value of mortgage servicing rights, and gain on sale
of loans, accounted for $7,629,000 of noninterest income in the 2013 compared to $6,460,000 in 2012. This $1,169,000 (18.1%) increase in
mortgage banking related revenue is mainly due to historically low mortgage rates and the associated high level of mortgage refinance
activity that existed during most of 2013, the Bank’s focus of resources in this area, and an increase in mortgage rates in the second half of
2013 that while significantly decreasing originations, sales, and gain on sale of loans during the second half of 2013, also resulted in an
increase in the value of the Company’s mortgage servicing rights during 2013. Commissions on sale of nondeposit investment products
decreased $226,000 (7.0%) in 2013. The change in indemnification asset from ($286,000) in 2012 to ($1,649,000) in 2013 is primarily due
to a decrease in estimated loan losses from the loan portfolio and foreclosed assets acquired in the Granite acquisition on May 28, 2010, and
the fact that such losses are generally “covered” at the rate of 80% by the FDIC. The decrease in estimated losses is also reflected in
increased interest income, decreased provision for loan losses and/or decreased provision for foreclosed asset losses.
Noninterest income decreased $4,833,000 (11.3%) to $37,980,000 in 2012. Excluding bargain purchase gains and gain on life insurance
death benefits, noninterest income would have increased $2,856,000 (8.3%) to $37,305,000 in 2012 from $34,449,000 in 2011. Service
charges on deposit accounts were down $486,000 (3.3%) due to reduced customer overdrafts and a resulting decrease in non-sufficient funds
fees. ATM fees and interchange income was up $704,000 (10.0%) due to increased customer point-of-sale transactions that are the result of
incentives for such usage. Overall, mortgage banking
29
activities, which includes mortgage banking servicing fees, change in value of mortgage servicing rights, and gain on sale of loans, accounted
for $6,460,000 of noninterest income in the 2012 compared to $3,425,000 in 2011. This $3,035,00 (88.6%) increase in mortgage banking
related revenue is mainly due to historically low mortgage rates, an associated level of mortgage refinance activity, and the Bank’s focus of
resources in this area. Commissions on sale of nondeposit investment products increased $1,104,000 (52.4%) in 2012 due to the Bank’s focus
of resources in this area. The change in indemnification asset from $2,059,000 in 2011 to ($286,000) in 2012 is primarily due to a decrease in
estimated loan losses from the loan portfolio and foreclosed assets acquired in the Granite acquisition on May 28, 2010, and the fact that such
losses are generally “covered” at the rate of 80% by the FDIC. The actual decrease in estimated losses is reflected in increased interest
income, decreased provision for loan losses and/or decreased provision for foreclosed asset losses. The operations of Citizens added
$2,585,000 to noninterest income during 2012.
Noninterest Expense
The following table summarizes the Company’s other noninterest expense for the periods indicated (dollars in thousands):
Components of Noninterest Expense
Salaries and related benefits:
Base salaries, net of deferred loan origination costs
Incentive compensation
Benefits and other compensation costs
Total salaries and related benefits
Other noninterest expense:
Occupancy
Equipment
Data processing and software
Assessments
ATM network charges
Advertising
Professional fees
Telecommunications
Postage
Courier service
Foreclosed asset expense
Intangible amortization
Operational losses
Provision for foreclosed asset losses
Change in reserve for unfunded commitments
Legal settlement
Other
Total other noninterest expenses
Total noninterest expense
Average full time equivalent staff
Noninterest expense to revenue (FTE)
Year ended December 31,
2012
2013
2011
$34,404
4,694
12,838
51,936
7,405
4,162
4,844
2,248
2,480
1,981
3,019
2,449
786
988
514
209
618
682
(1,200)
339
10,144
41,668
$93,604
733
67.3%
$33,093
5,138
11,721
49,952
7,263
4,444
4,793
2,393
2,390
2,876
2,879
2,250
920
1,013
1,474
209
787
1,728
875
2,090
9,662
48,046
$97,998
737
70.2%
$29,753
3,735
10,715
44,203
6,198
3,770
3,980
2,491
1,939
2,649
2,004
1,875
935
953
755
177
600
1,984
100
—
8,102
38,512
$82,715
687
60.9%
Salary and benefit expenses increased $1,984,000 (4.0%) to $51,936,000 during the year ended December 31, 2013 compared to the year
ended December 31, 2012. Base salaries increased $1,311,000 (4.0%) to $34,404,000 during the year ended December 31, 2013. The increase
in base salaries was mainly due to annual merit increases and an increase in administrative, central operations, and electronic banking
personnel that were partially offset by a reduction in branch personnel. Average full time equivalent personnel decreased to 733 during the
year ended December 31, 2013 from 737 during the year ended December 31, 2012. Incentive and commission related salary expenses
decreased $444,000 (8.6%) to $4,694,000 during year ended December 31, 2013 due primarily to reduced mortgage loan production
incentives when compared to the prior year. Benefits expense, including retirement, medical and workers’ compensation insurance, and taxes,
increased $1,117,000 (9.5%) to $12,838,000 during the year ended December 31, 2013 primarily due to increased medical insurance costs,
employee stock ownership plan expense, and employer payroll taxes.
Salary and benefit expenses increased $5,749,000 (13.0%) to $49,952,000 in 2012 compared to 2011. Base salaries increased $3,340,000
(11.2%) to $33,093,000 in 2012. The increase in base salaries was mainly due to a 50 FTE (7.3%) increase in average full time equivalent
staff to 737 during 2012, and annual merit increases. Incentive and commission related salary expenses increased $1,403,000 (37.6%) to
$5,138,000 in 2012 due primarily to increases in commissions related to loan production and nondeposit investment product fee production.
Benefits expense, including retirement, medical and workers’ compensation insurance, and taxes, increased $1,006,000 (9.4%) to $11,721,000
during 2012. The operations of Citizens added $2,452,000 and $751,000 to salaries and benefits expense for the year ended December 31,
2012, and the period from September 23, 2011 to December 31, 2011, respectively.
30
Other noninterest expenses decreased $6,378,000 (13.3%) to $41,668,000 during the year ended December 31, 2013 when compared to the year
ended December 31, 2012. The decrease in other noninterest expense is primarily due to decreases of $2,075,000, $1,751,000, $1,046,000,
$960,000, and $895,000 in change in reserve for unfunded commitments, legal settlement expense, provision for foreclosed asset losses,
foreclosed asset expenses, and advertising and marketing expense, respectively, from the prior year. The decrease in change in reserve for
unfunded commitments was mainly due to improved loss histories for performing originated loans that are used to calculate the required reserve
for unfunded commitments. The decrease in legal settlement expense is due to the resolution of a legal proceeding, and is further described at
Item 3 of Part I of this report. The decreases in provision for foreclosed asset losses and foreclosed asset expense are due to decreased foreclosed
assets, and improved values of foreclosed values. During 2013, the Bank opened no branches, closed three (leased) branches, closed one (leased)
non-branch facility, and opened its Campus (owned) facility.
Other noninterest expenses increased $9,534,000 (24.8%) to $48,046,000 in 2012. The operations of Citizens added $3,333,000 to other
noninterest expense during 2012, compared to $1,114,000 from September 23, 2011 to December 31, 2011. Changes in the various categories of
other noninterest expense are reflected in the table above. The changes from 2011 to 2012 are indicative of the economic environment which lead
to increases in professional loan collection expenses, provision for foreclosed asset losses, and foreclosed asset expenses. Occupancy expense
increased primarily due to seven branches and one admin facility acquired in the Citizens acquisition on September 23, 2011. The increase in
change in reserve for unfunded commitments during 2012 is primarily due to increased unfunded construction loan commitments during the three
months ended December 31, 2012. During 2012, the Bank opened one (leased) branch, and closed two (leased) branches.
Income Taxes
The effective tax rate on income was 40.2%, 40.5%, and 37.6% in 2013, 2012, and 2011, respectively. The effective tax rate was greater than the
federal statutory tax rate due to state tax expense of $4,811,000, $3,277,000, and $2,845,000, respectively, in these years. Tax-exempt income of
$583,000, $428,000, and $514,000, respectively, from investment securities, and $1,727,000, $2,495,000, and $2,674,000, respectively, from
increase in cash value and gain on death benefit of life insurance in these years helped to reduce the effective tax rate.
Investment Securities
The following table presents the available for sale investment securities portfolio by major type as of the dates indicated:
Financial Condition
(In thousands)
Investment securities available for sale (at fair value):
Obligations of US government corporations and agencies
Obligations of states and political subdivisions
Corporate bonds
Total investment securities available for sale
2013
Year ended December 31,
2011
2010
2012
2009
$ 97,143 $151,701 $217,384 $264,181 $193,130
17,953
539
$104,647 $163,027 $229,223 $277,271 $211,622
9,421 10,028 12,541
549
1,811
1,905
5,589
1,915
Investment securities available for sale decreased $58,380,000 to $104,647,000 as of December 31, 2013, as compared to December 31, 2012.
This decrease is attributable to maturities and principal repayments of $53,468,000, a decrease in fair value of investments securities available for
sale of $4,233,000, and amortization of net purchase price premiums of $679,000.
The following table presents the held to maturity investment securities portfolio by major type as of the dates indicated:
(In thousands)
Investment securities held to maturity (at cost):
Obligations of US government corporations and agencies
Obligations of states and political subdivisions
Total investment securities held to maturity
Year ended December 31,
2013
2012 2011 2010 2009
$227,864
12,640
$240,504
—
—
—
—
—
—
— —
— —
— —
Investment securities held to maturity increased to $240,504,000 as of December 31, 2013, as compared to December 31, 2012. This increase is
attributable to purchases of $244,967,000, less principal repayments of $4,391,000, and amortization of net purchase price discounts/premiums of
$72,000.
Additional information about the investment portfolio is provided in Note 3 in the financial statements at Item 8 of Part II of this report.
31
Restricted Equity Securities
Restricted equity securities were $9,163,000 at December 31, 2013 and $9,647,000 at December 31, 2012. The entire balance of restricted
equity securities at December 31, 2013 and December 31, 2012 represents the Bank’s investment in the Federal Home Loan Bank of San
Francisco (“FHLB”). The decrease of $484,000 is attributable to the redemption of $484,000 of FHLB stock.
FHLB stock is carried at par and does not have a readily determinable fair value. While technically these are considered equity securities,
there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically
evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is
based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of
whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net
assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating
performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the
FHLB, and (4) the liquidity position of the FHLB.
As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific
percentages of its outstanding mortgages, total assets, or FHLB advances. The Company may request redemption at par value of any stock
in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.
Loans
The Bank concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial loans),
consumer loans, commercial loans (including agricultural loans), and real estate construction loans. The interest rates charged for the
loans made by the Bank vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Bank and
prevailing money market rates indicative of the Bank’s cost of funds.
The majority of the Bank’s loans are direct loans made to individuals, farmers and local businesses. The Bank relies substantially on local
promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The
Bank makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment
established at inception and generally backed by a secondary source of repayment.
Loan Portfolio Composite
The following table shows the Company’s loan balances, including net deferred loan costs, at the dates indicated:
(dollars in thousands)
Real estate mortgage
Consumer
Commercial
Real estate construction
Total loans
2013
2012
Year ended December 31,
2011
$1,107,863 $1,010,130 $ 965,922 $ 835,471 $ 844,053
406,330 395,771 428,722
139,131 143,413 164,094
58,701
$1,672,007 $1,564,823 $1,551,032 $1,419,571 $1,495,570
383,163
131,878
49,103
386,111
135,528
33,054
39,649
44,916
2009
2010
The following table shows the Company’s loan balances, including net deferred loan costs, as a percentage of total loans at the dates
indicated:
Real estate mortgage
Consumer
Commercial
Real estate construction
Total loans
2013
66.3%
22.9%
7.9%
2.9%
100.0%
Year ended December 31,
2011
62.2%
26.2%
9.0%
2.6%
100.0%
2012
64.5%
24.7%
8.7%
2.1%
100.0%
2010
58.8%
27.9%
10.1%
3.2%
100.0%
2009
56.4%
28.7%
11.0%
3.9%
100.0%
At December 31, 2013 loans, including net deferred loan costs, totaled $1,672,007,000 which was a 6.8% ($107,184,000) increase over
the balances at the end of 2012. Demand for commercial real estate (real estate mortgage) loans was weak to modest during 2013. During
2013, the Company purchased $62,698,000 of residential (real estate mortgage) loans. Demand for home equity loans and lines of credit
were weak during 2013. Real estate construction loans increased during 2013 primarily due to one large loan that was originated during
2013.
32
At December 31, 2012 loans, including net deferred loan costs, totaled $1,564,823,000 which was a 0.9% ($13,791,000) increase over
the balances at the end of 2011. Demand for commercial real estate (real estate mortgage) loans was weak to modest during 2012.
Demand for home equity loans and lines of credit were weak during 2012. Real estate construction loans declined during 2012 as did
auto dealer loans.
At December 31, 2011 loans, including net deferred loan costs, totaled $1,551,032,000 which was a 9.3% ($131,461,000) increase over
the balances at the end of 2010. This increase in loans during 2011 included $167,484,000 of loans acquired in the Citizens acquisition
on September 23, 2011. Demand for commercial real estate (real estate mortgage) loans was weak during 2011. Demand for home
equity loans and lines of credit was weak to modest during 2011. Real estate construction loans declined during 2011 as did auto dealer
loans.
Asset Quality and Nonperforming Assets
Nonperforming Assets
Loans originated by the Company, i.e., not purchased or acquired in a business combination, are referred to as originated loans.
Originated loans are reported at the principal amount outstanding, net of deferred loan fees and costs. Loan origination and commitment
fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield
over the actual life of the loan. Originated loans on which the accrual of interest has been discontinued are designated as nonaccrual
loans.
Originated loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal, or a
loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the process of
collection. When an originated loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income
on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the
judgment of Management, the loan is estimated to be fully collectible as to both principal and interest.
An allowance for loan losses for originated loans is established through a provision for loan losses charged to expense. Originated loans
and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectability of the
principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is
an amount that Management believes will be adequate to absorb probable losses inherent in existing loans and leases, based on
evaluations of the collectability, impairment and prior loss experience of loans and leases. The evaluations take into consideration such
factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and
current economic conditions that may affect the borrower’s ability to pay. The Company defines an originated loan as impaired when it
is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired
originated loans are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest
rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance.
In situations related to originated loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company
grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the
related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early
and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include
rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid
foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that result in the loan being
classified as a TDR, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are
classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans,
remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to
be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies
as noted above with respect to their restructured principal balance.
Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses
inherent in the Company’s originated loan portfolio. This is maintained through periodic charges to earnings. These charges are included
in the Consolidated Statements of Income as provision for loan losses. All specifically identifiable and quantifiable losses are
immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company
and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company’s
allowance for originated loan losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio.
33
The Company formally assesses the adequacy of the allowance for originated loan losses on a quarterly basis. Determination of the
adequacy is based on ongoing assessments of the probable risk in the outstanding originated loan portfolio, and to a lesser extent the
Company’s originated loan commitments. These assessments include the periodic re-grading of credits based on changes in their
individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors,
changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are
initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when
identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs
at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by
consultants specifically hired for this purpose and by various bank regulatory agencies.
The Company’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for
impaired originated loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental
factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools were based on historical loss
experience by product type and prior risk rating.
During the three months ended March 31, 2012, management changed some of the assumptions utilized in the Allowance for Loan
Losses estimate calculation. These changes were intended to more accurately reflect the current risk in the loan portfolio and to better
estimate the losses inherent but not yet quantifiable. These changes included the conversion to a historical loss migration analysis
intended to better determine the appropriate formula reserve ratio by loan category and risk rating, the addition of an environmental
factor related to the delinquency rate of loans not classified as impaired by loan category, the elimination of an unspecified reserve
allocation previously intended to account for imprecision inherent in the overall calculation, and the reclassification of risk rating of
certain consumer loans based on current credit score in an attempt to better identify the risk in the portfolio. The financial effect of
these changes resulted in a net reduction in the calculated Allowance for Loan Losses of $1,388,000 during the three months ended
March 31, 2012. Allowances for impaired loans are based on analysis of individual credits. Allowances for changing environmental
factors are Management’s best estimate of the probable impact these changes have had on the originated loan portfolio as a whole.
The allowance for originated loans is included in the allowance for loan losses.
During the three months ended March 31, 2013, the Company changed the method it uses to estimate net sale proceeds from real
estate collateral sales when calculating the allowance for loan losses associated with impaired real estate collateral dependent loans.
Previously, the Company used the greater of fifteen percent or actual estimated selling costs. Currently, the Company uses the actual
estimated selling costs, and an adjustment to appraised value based on the age of the appraisal. These changes are intended to more
accurately reflect the estimated net sale proceeds from the sale of impaired collateral dependent real estate loans. This change in
methodology resulted in the allowance for loan losses as of March 31, 2013 being $494,000 more than it would have been without
this change in methodology.
During the three months ended June 30, 2013, the Company modified its loss migration analysis methodology used to determine the
formula allowance factors. When the Company originally established its loss migration analysis methodology during the quarter
ended March 31, 2012, it reviewed the loss experience of each rolling twelve month period over the previous three years in order to
calculate an annualized loss rate by loan category and risk rating. The use of three years of loss experience data was originally used
because that was the extent of the detailed loss data, by loan category and risk rating that was available at the time. This three year
historical look-back period was used through the quarter ended March 31, 2013. Starting with the quarter ended June 30, 2013, the
Company reviews all available detailed loss experience data, going back to, and including, the twelve month period ended June 30,
2009, and does not limit the look-back period to the most recent three years of historical loss data. Using this data, the Company
calculates loss factors for each quarter from the quarter ended June 30, 2009 to the most recent quarter. The Company then calculates
a weighted average formula allowance factor for each loan category and risk rating with the most recent quarterly loss factor being
weighted 125%, the quarter ended June 30, 2009 loss factor being weighted 75%, and the loss factors for all the quarters between the
most recent quarter and the quarter ended June 30, 2009, being weighted on a linear scale from 75% to 125%. This change is intended
to more accurately reflect the risk inherent in the loan portfolio by considering historical loss data for all years as the data for new
periods becomes available. This change in methodology resulted in the allowance for loan losses as of June 30, 2013 being
$1,314,000 more than it would have been without this change in methodology.
During the three months ended September 30, 2013, the Company modified its methodology used to determine the allowance for
changing environmental factors. Previously, the Company compared the current value of each environmental factor to a fixed
baseline value. The deviation of the current value from the baseline value was then multiplied by a conversion factor to determine the
required allowance related to each environmental factor. As of September 30, 2013, the Company replaced the fixed baseline values
with average baseline values derived from historical averages, and adjusted the conversion factors. This change is intended to more
accurately reflect the risk inherent in the portfolio by recognizing that baseline, or normal, levels for environmental factors may
change over time. This change in methodology resulted in the allowance for loan losses as of September 30, 2013 being $1,665,000
more than it would have been without this change in methodology.
34
Loans purchased or acquired in a business combination are referred to as acquired loans. Acquired loans are valued as of acquisition
date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805,
Business Combinations. Loans acquired with evidence of credit deterioration since origination for which it is probable that all
contractually required payments will not be collected are referred to as purchased credit impaired (PCI) loans. PCI loans are
accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under FASB
ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses
expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the
acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments of the loan, with the
discount rate used in the present value calculation representing the estimated effective yield of the loan. Default rates, loss severity,
and prepayment speed assumptions are periodically reassessed and our estimate of future payments is adjusted accordingly. The
difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The
difference between estimated future payments and the present value of the estimated future payments is referred to as the accretable
yield. The accretable yield represents the amount that is expected to be recorded as interest income over the remaining life of the loan.
If after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be more than the
originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable yield
would be recognized, on a level yield basis, over the remaining estimated life of the loan. If, after acquisition, the Company
determines that the estimated future cash flows of a PCI loan are expected to be less than the previously estimated, the discount rate
would first be reduced until the present value of the reduced cash flow estimate equals the previous present value however, the
discount rate may not be lowered below its original level at acquisition. If the discount rate has been lowered to its original level and
the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan
losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance
has been established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash
flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status
when cash flows cannot be reasonably estimated. PCI loans on nonaccrual status are accounted for using the cost recovery method or
cash basis method of income recognition. PCI loans are charged off when evidence suggests cash flows are not recoverable.
Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing
cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and
have their cash flows aggregated as if they were one loan. The Company elected to use the “pooled” method of ASC 310-30 for PCI –
other loans in the acquisition of certain assets and liabilities of Granite and Citizens.
Acquired loans that are not PCI loans are referred to as purchased not credit impaired (PNCI) loans. PNCI loans are accounted for
under FASB ASC Topic 310-20, Receivables – Nonrefundable Fees and Other Costs, in which interest income is accrued on a level-
yield basis for performing loans. For income recognition purposes, this method assumes that all contractual cash flows will be
collected, and no allowance for loan losses is established at the time of acquistion. Post-acquisition date, an allowance for loan losses
may need to be established for acquired loans through a provision charged to earnings for credit losses incurred subsequent to
acquisition. Under ASC 310-20, the loss would be measured based on the probable shortfall in relation to the contractual note
requirements, consistent with our allowance for loan loss policy for similar loans.
When referring to PNCI and PCI loans we use the terms “nonaccretable difference”, “accretable yield”, or “purchase discount”.
Nonaccretable difference is the difference between undiscounted contractual cash flows due and undiscounted cash flows we expect
to collect, or put another way, it is the undiscounted contractual cash flows we do not expect to collect. Accretable yield is the
difference between undiscounted cash flows we expect to collect and the value at which we have recorded the loan on our financial
statements. On the date of acquisition, all purchased loans are recorded on our consolidated financial statements at estimated fair
value. Purchase discount is the difference between the estimated fair value of loans on the date of acquisition and the principal
amount owed by the borrower, net of charge offs, on the date of acquisition. We may also refer to “discounts to principal balance of
loans owed, net of charge-offs”. Discounts to principal balance of loans owed, net of charge-offs is the difference between principal
balance of loans owed, net of charge-offs, and loans as recorded on our financial statements. Discounts to principal balance of loans
owed, net of charge-offs arise from purchase discounts, and equal the purchase discount on the acquisition date.
Loans are also categorized as “covered” or “noncovered”. Covered loans refer to loans covered by a FDIC loss sharing agreement.
Noncovered loans refer to loans not covered by a FDIC loss sharing agreement.
Originated loans and PNCI loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the
following occurs: the loan becomes 90 days past due as to interest or principal, the full and timely collection of additional interest or
principal becomes uncertain, the loan is classified as doubtful by internal credit review or bank regulatory agencies, a portion of the
principal balance has been charged off, or the Company takes possession of the collateral. Loans that are placed on nonaccrual even
though the borrowers continue to repay the loans as scheduled are classified as “performing nonaccrual” and are included in total
nonperforming loans. The reclassification of loans as nonaccrual does not necessarily reflect Management’s judgment as to whether
they are collectible.
35
Interest income on originated nonaccrual loans that would have been recognized during the years ended December 31, 2013, 2012
and 2011, if all such loans had been current in accordance with their original terms, totaled $1,524,000, $5,281,000 and $5,422,000,
respectively. Interest income actually recognized on these originated loans during the years ended December 31, 2013, 2012 and 2011
was $273,000, $936,000 and $1,497,000,000, respectively. Interest income on PNCI nonaccrual loans that would have been
recognized during the years ended December 31, 2013, 2012 and 2011, if all such loans had been current in accordance with their
original terms, totaled $295,000, $284,000 and $4,000. Interest income actually recognized on these PNCI loans during the years
ended December 31, 2013, 2012 and 2011 was $38,000, $136,000 and $5,000.
The Company’s policy is to place originated loans and PNCI loans 90 days or more past due on nonaccrual status. In some instances
when an originated loan is 90 days past due Management does not place it on nonaccrual status because the loan is well secured and
in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected
that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days. Loans where the collateral
has been repossessed are classified as foreclosed assets. Management considers both the adequacy of the collateral and the other
resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are
foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits.
The following table sets forth the amount of the Bank’s nonperforming assets as of the dates indicated. For purposes of the following
table, “PCI – other” loans that are 90 days past due and still accruing are not considered nonperforming loans. “Performing
nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for
which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:
(dollars in thousands)
Performing nonaccrual loans
Nonperforming nonaccrual loans
Total nonaccrual loans
Originated and PNCI loans 90 days past due and still accruing
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
2013
$48,112
5,104
53,216
—
53,216
5,588
674
$59,478
2012
$49,045
23,471
72,516
—
72,516
5,957
1,541
$80,014
December 31,
2011
$ 61,164
23,647
84,811
920
85,731
13,268
3,064
$102,063
2010
$36,518
39,224
75,742
245
75,987
5,000
4,913
$85,900
2009
$22,870
26,301
49,171
700
49,871
3,726
—
$53,597
U.S. government, including its agenciesand its government-
sponsored agencies,guaranteed portion of nonperforming
loans
Indemnified portion ofcovered foreclosed assets
Nonperforming assets to total assets
Nonperforming loans to total loans
Allowance for loan losses to nonperforming loans
Allowance for loan losses, unamortized loan fees,and discounts
$
$
101
539
2.30%
3.18%
72%
$
131
$ 1,233
$ 3,061
$ 2,451
$ 3,937
$ 3,930
3.07%
4.63%
59%
3.99%
5.53%
54%
$ 4,975
—
2.24%
2.99%
79%
3.92%
5.35%
56%
to loan principal balances owed
4.09%
5.30%
6.34%
3.74%
2.48%
36
The following tables set forth the amount of the Bank’s nonperforming assets as of the dates indicated. For purposes of the following
tables, “PCI – other” loans that are 90 days past due and still accruing are not considered nonperforming loans. “Performing
nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for
which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:
(dollars in thousands)
Performing nonaccrual loans
Nonperforming nonaccrual loans
Total nonaccrual loans
Originated and PNCI loans 90 days past due and still
accruing
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
U.S. government, including its agencies and its
government-sponsored agencies, guaranteed portion
of nonperforming loans
Indemnified portion of covered foreclosed assets
Nonperforming assets to total assets
Nonperforming loans to total loans
Allowance for loan losses to nonperforming loans
Allowance for loan losses, unamortized loan fees, and
discounts to loan principal balances owed
(dollars in thousands)
Performing nonaccrual loans
Nonperforming nonaccrual loans
Total nonaccrual loans
Originated loans 90 days past due and still accruing
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
U.S. government, including its agencies and its
Originated
$ 40,294
4,837
45,131
—
45,131
5,479
—
$ 50,610
$
101
—
PNCI
$1,649
217
1,866
—
1,866
—
—
$1,866
December 31, 2013
PCI – cash basis
6,169
$
50
6,219
—
6,219
—
—
6,219
$
PCI - other
—
—
—
—
—
109
$
674
783
$
—
—
$
539
3.04%
69%
1.38%
153%
100.0%
6%
—
n/m
Total
$48,112
5,104
53,216
—
53,216
5,588
674
$59,478
$
$
101
539
2.30%
3.18%
72%
2.36%
7.62%
64.5%
22.93%
4.09%
Originated
$ 38,646
23,123
61,769
—
61,769
5,172
—
$ 66,941
PNCI
$1,428
348
1,776
—
1,776
—
—
$1,776
December 31, 2012
PCI –cash basis
8,971
$
—
8,971
—
8,971
—
—
8,971
$
PCI - other
—
—
—
—
—
785
$
1,541
$ 2,326
Total
$49,045
23,471
72,516
—
72,516
5,957
1,541
$80,014
government-sponsored agencies, guaranteed portion of
nonperforming loans
$
Indemnified portion of covered foreclosed assets
Nonperforming assets to total assets
Nonperforming loans to total loans
Allowance for loan losses to nonperforming loans
Allowance for loan losses, unamortized loan fees, and
discounts to loan principal balances owed
131
—
—
—
—
—
—
$ 1,233
$
131
$ 1,233
4.42%
58%
1.81%
111%
100.00%
12%
—
n/m
3.07%
4.63%
59%
2.76%
13.78%
61.60%
24.63%
5.30%
n/m – not meaningful
37
The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2013:
(dollars in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Balance at
December 31,
2013
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed Assets
Category
Changes
Balance at
December 31,
2012
$
4,959 $ 1,562 $
9,823
31,871
48 $
(972) $
(46) $
744
(12,272)
(1,990)
(527)
— $
(6,316) $ 2,155
4,894
39,727
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total nonperforming
loans
Noncovered foreclosed
assets
Covered foreclosed
assets
Total nonperforming
11,601
719
54
62
1,299
89
3,931
7
126
1
75
198 —
1,971 —
(4,023)
(108)
(127)
(40)
(1,612)
2,473
178
238 —
169 —
(794)
(253)
(2,651)
(94)
(69)
(188)
(1,645)
(20)
(141)
(1,971)
—
—
—
(2,115)
(274)
274
—
—
(2,071)
(263)
(45) $
—
(84)
16,500
514
174
92
6,771
3,312
532
53,216 18,093
889
(20,201)
(6,844)
(11,237)
—
72,516
5,588
—
480
(10,992)
(601)
10,744
—
5,957
674
— —
(1,279)
(81) $
493
—
1,541
assets
$
59,478 $18,093 $ 1,369 $(32,472) $
(7,526)
—
— $
80,014
The table above does not include deposit overdraft charge-offs.
The following tables and narratives describe the activity in the balance of nonperforming assets during each of the three-month
periods ending March 31, June 30, September 30, and December 31, 2013. These tables and narratives are presented in chronological
order:
Changes in nonperforming assets during the three months ended December 31, 2013
(In thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total nonperforming loans
Noncovered foreclosed
assets
Covered foreclosed assets
Total nonperforming assets
Balance at
December 31,
2013
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
September 30,
2013
$
4,959 $ 515 $
31,871 2,066
43 $
98
(161)
(6,568)
—
(326)
$
(57)
(2,527)
— $
86
4,619
39,042
11,601 916
1
70 —
10 —
26 —
1,299 1,067 —
719
54
62
2,473 — —
49 —
142
4,719
178
53,216
(745)
(40)
(14)
(3)
(403)
(115)
(74)
(8,123)
5,588
674
—
—
480
—
(988)
(510)
$
59,478 $4,719 $
622 $ (9,621) $
(808)
(38)
(1)
(26)
(456)
—
(49)
(1,704)
(62)
—
(1,766)
(618)
—
—
—
—
(188)
188
—
—
(86)
—
—
(3,202)
—
—
—
3,202
—
—
—
—
— $
13,043
539
59
65
1,177
2,588
252
61,384
2,956
1,184
65,524
Nonperforming assets decreased during the fourth quarter of 2013 by $6,046,000 (9.23%) to $59,478,000 at December 31, 2013
compared to $65,524,000 at September 30, 2013. The decrease in nonperforming assets during the fourth quarter of 2013 was
primarily the result of new nonperforming loans of $4,719,000, advances on existing nonperforming loans and capitalized costs on
foreclosed assets of $622,000, less pay-downs, sales or upgrades of nonperforming loans to performing status totaling $8,123,000,
less dispositions of foreclosed assets totaling $1,498,000, less loan charge-offs of $1,704,000, and less write-downs of foreclosed
assets of $62,000.
The $4,719,000 in new nonperforming loans during the fourth quarter of 2013 was comprised of increases of $515,000 on four
residential real estate loans, $2,066,000 on six commercial real estate loans, $986,000 on 15 home equity lines and loans, $10,000 on
two indirect auto loans, $26,000 on 15 consumer loans, $1,067,000 on nine C&I loans, and $49,000 on a single commercial
construction loan.
The $2,066,000 in new nonperforming commercial real estate loans was primarily made up of two loans totaling $1,346,000 secured
by commercial office buildings in northern California, and a single loan in the amount of $250,000 secured by a commercial retail
building in northern California. Related charge-offs are discussed below.
38
The $1,067,000 in new nonperforming C&I loans was primarily made up of a single loan in the amount of $550,000 secured by the
accounts receivable of a business located in central California. Related charge-offs are discussed below.
Loan charge-offs during the three months ended December 31, 2013
In the fourth quarter of 2013, the Company recorded $1,704,000 in loan charge-offs and $136,000 in deposit overdraft charge-offs
less $426,000 in loan recoveries and $147,000 in deposit overdraft recoveries resulting in $1,267,000 of net charge-offs. Primary
causes of the loan charges taken in the fourth quarter of 2013 were gross charge-offs of $326,000 on three commercial real estate
loans, $846,000 on 17 home equity lines and loans, $1,000 on a single indirect auto loan, $26,000 on 16 other consumer loans,
$456,000 on eight C&I loans, and $49,000 on a single commercial construction loan.
During the fourth quarter of 2013, there were no individual charges greater than $250,000. Generally losses are triggered by non-
performance by the borrower and calculated based on any difference between the current loan amount and the current value of the
underlying collateral less any estimated costs associated with the disposition of the collateral.
Differences between the amounts explained in this section and the total charge-offs listed for a particular category are generally made
up of individual charges of less than $250,000 each. Generally losses are triggered by non-performance by the borrower and
calculated based on any difference between the current loan amount and the current value of the underlying collateral less any
estimated costs associated with the disposition of the collateral.
Changes in nonperforming assets during the three months ended September 30, 2013
(In thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
$
Balance at
September 30,
2013
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
June 30,
2013
$
4,619 $ 632 — $
(341) $
39,042 3,262 $
13
(1,431)
(4) $
(23)
(29)
(290)
— $ 4,361
37,511
—
13,043 1,193
30
27
1
2 —
56 —
1,177 134 —
539
59
65
2,588 142 —
252 — —
41
—
—
61,384
2,956
1,184
65,524 $5,451 $
5,451
—
—
(1,624)
(12)
(42)
(8)
(97)
(351)
(10)
(3,916)
(1,738)
—
41 $ (5,654) $
(331)
(30)
(9)
(41)
(318)
—
(31)
(787)
(47)
—
(834)
(393) $
—
—
—
—
(52)
52
—
—
—
14,223
498
108
58
1,458
(142)
(17)
(871)
729
142
—
2,939
—
310
—
61,466
—
4,012
—
—
1,042
— $ 66,520
Nonperforming assets decreased during the third quarter of 2013 by $996,000 (1.5%) to $65,524,000 at September 30, 2013
compared to $66,520,000 at June 30, 2013. The decrease in nonperforming assets during the third quarter of 2013 was primarily the
result of new nonperforming loans of $5,451,000, advances on existing nonperforming loans of $41,000, less pay-downs or upgrades
of nonperforming loans to performing status totaling $3,916,000, less dispositions of foreclosed assets totaling $1,738,000, less loan
charge-offs of $787,000, and less write-downs of foreclosed assets of $47,000.
The primary causes of the $5,451,000 in new nonperforming loans during the third quarter of 2013 were increases of $632,000 on two
residential real estate loans, $3,262,000 on six commercial real estate loans, $1,223,000 on 16 home equity lines and loans, $2,000 on
three indirect auto loans, $56,000 on 21 consumer loans, $134,000 on three C&I loans, and $142,000 on one residential construction
loan.
The $3,262,000 in new nonperforming commercial real estate loans was primarily comprised of one loan totaling $2,832,000 secured
by agricultural production land and buildings in central California.
Loan charge-offs during the three months ended September 30, 2013
In the third quarter of 2013, the Company recorded $787,000 in loan charge-offs and $198,000 in deposit overdraft charge-offs less
$954,000 in loan recoveries and $164,000 in deposit overdraft recoveries resulting in $133,000 of net recoveries. Primary causes of
the charges taken in the third quarter of 2013 were gross charge-offs of $4,000 on one residential real estate loan, $22,000 on one
commercial real estate loans, $361,000 on 12 home equity lines and loans, $10,000 on five auto indirect loans, $41,000 on 20 other
consumer loans, $318,000 on five C&I loans, and $31,000 on one commercial construction loan.
The $787,000 in charge-offs the Bank took in its loan portfolio was comprised of 45 individual charges of less than $250,000 each
spread throughout the Company’s footprint. Generally losses are triggered by non-performance by the borrower and calculated based
on any difference between the current loan amount and the current value of the underlying collateral less any estimated costs
associated with the disposition of the collateral.
39
During the third quarter of 2013, there were no individual charges greater than $250,000. Generally losses are triggered by non-
performance by the borrower and calculated based on any difference between the current loan amount and the current value of the
underlying collateral less any estimated costs associated with the disposition of the collateral.
Changes in nonperforming assets during the three months ended June 30, 2013
(In thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
Balance at
June 30,
2013
New
NPA
Advances/
Capitalized
Costs
Pay-
downs
/Sales
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
March 31,
2013
$ 4,361 $ 406
37,511 1,771 $
— $ (373) $
633
(1,531)
(35) $
(839)
(207) — $ 4,570
36,064
(656) $ 2,069
14,223 1,083
498 —
15
108
32
58
1,458 157
34
6
—
—
—
(692)
(45)
(41)
(10)
(716)
(746)
—
(33)
(32)
(81)
26
(450)
—
(26)
— —
— —
— (2,069)
14,968
563
167
68
4,167
2,939
87
73
310
61,466 3,624
4,012 —
1,042 —
$66,520 $3,624 $
(187)
(5)
(3,600)
(1,450)
(502)
—
—
673
—
—
673 $(5,552) $
—
—
(1,766)
(465)
(81)
(2,312)
3,126
(87) —
270
(28) —
63,963
—
4,587
—
—
1,537
— $ 70,087
(1,428)
1,340
88
—
Nonperforming assets decreased during the second quarter of 2013 by $3,567,000 (5.1%) to $66,520,000 at June 30, 2013 compared
to $70,087,000 at March 31, 2013. The decrease in nonperforming assets during the second quarter of 2013 was primarily the result
of new nonperforming loans of $3,624,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of
$673,000, less pay-downs or upgrades of nonperforming loans to performing status totaling $3,600,000, less dispositions of
foreclosed assets totaling $1,952,000, less loan charge-offs of $1,766,000, and less write-downs of foreclosed assets of $546,000.
The primary causes of the $3,624,000 in new nonperforming loans during the second quarter of 2013 were increases of $406,000 on
three residential real estate loans, $1,771,000 on five commercial real estate loans, $1,083,000 on 20 home equity lines and loans,
$15,000 on one indirect auto loan, $32,000 on 14 consumer loans, $157,000 on two C&I loans, $87,000 on one residential
construction loan, and $73,000 on one commercial construction loan.
The $1,771,000 in new nonperforming commercial real estate loans was primarily comprised of one loan totaling $325,000 secured
by a commercial office building in northern California, one loan totaling $331,000 secured by a restaurant in northern California, and
a $671,000 loan secured by a agricultural production land and buildings in northern California.
Loan charge-offs during the three months ended June 30, 2013
In the second quarter of 2013, the Company recorded $1,766,000 in loan charge-offs and $180,000 in deposit overdraft charge-offs
less $903,000 in loan recoveries and $162,000 in deposit overdraft recoveries resulting in $881,000 of net charge-offs. Primary causes
of the charges taken in the second quarter of 2013 were gross charge-offs of $35,000 on two residential real estate loans, $839,000 on
four commercial real estate loans, $746,000 on 19 home equity lines and loans, $33,000 on four auto indirect loans, $32,000 on 14
other consumer loans, and $81,000 on four C&I loans.
The $839,000 in charge-offs the Company took in its commercial real estate portfolio were primarily the result of a $425,000 charge
on a loan secured by a commercial warehouse in central California and a $351,000 charge on a loan secured by a commercial office in
northern California. The remaining $63,000 was spread over two loans spread throughout the Company’s footprint.
Differences between the amounts explained in this section and the total charge-offs listed for a particular category are generally made
up of individual charges of less than $250,000 each. Generally losses are triggered by non-performance by the borrower and
calculated based on any difference between the current loan amount and the current value of the underlying collateral less any
estimated costs associated with the disposition of the collateral.
40
Changes in nonperforming assets during the three months ended March 31, 2013
(In thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
Balance
at March 31,
2013
New
NPA
Advances/
Capitalized
Costs
Pay-
downs /
Sales
Charge-offs/
Write-
downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
December
31, 2012
$
4,570 $
9 $
5 ($
36,064 2,724 —
97)
(2,740)
($
7)
(803)
($
234)
(2,844)
— $ 4,894
39,727
—
14,968 739
27
26 —
1
48
84 —
4,167 613 —
563
167
68
(962)
(11)
(31)
(19)
(396)
3,126
270
63,963
4,587
1,537
9 —
47 —
33
—
—
(141)
(164)
(4,561)
(6,816)
(268)
33 ($11,645)
4,299
—
—
$ 70,087 $4,299 $
(766)
(26)
(25)
(89)
(790)
(20)
(61)
(2,587)
(27)
($ 2,614)
(510) $
—
—
—
(2,115)
(60)
60
—
—
84
16,500
514
174
92
6,771
(34)
—
(5,737)
5,473
264
—
3,312
—
532
(84)
72,516
—
5,957
—
—
1,541
— $ 80,014
Nonperforming assets decreased during the first quarter of 2013 by $9,927,000 (12.4%) to $70,087,000 at March 31, 2013 compared
to $80,014,000 at December 31, 2012. The decrease in nonperforming assets during the first quarter of 2013 was primarily the result
of new nonperforming loans of $4,299,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of
$33,000, less pay-downs or upgrades of nonperforming loans to performing status totaling $4,561,000, less dispositions of foreclosed
assets totaling $7,084,000, less loan charge-offs of $2,587,000, and less write-downs of foreclosed assets of $27,000.
The primary causes of the $4,299,000 in new nonperforming loans during the first quarter of 2013 were increases of $9,000 on one
residential real estate loan, $2,724,000 on six commercial real estate loans, $766,000 on 20 home equity lines and loans, $48,000 on
eight indirect auto loans, $84,000 on 21 consumer loans, $613,000 on 14 C&I loans, $9,000 on one residential construction loan, and
$47,000 on one commercial construction loan.
The $2,724,000 in new nonperforming commercial real estate loans was primarily comprised of one loan totaling $2,133,000 secured
by a commercial retail building in northern California, and a $354,000 loan secured by a commercial office building in northern
California.
Loan charge-offs during the three months ended March 31, 2013
In the first quarter of 2013, the Company recorded $2,587,000 in loan charge-offs and $184,000 in deposit overdraft charge-offs less
$900,000 in loan recoveries and $198,000 in deposit overdraft recoveries resulting in $1,673,000 of net charge-offs. Primary causes
of the charges taken in the first quarter of 2013 were gross charge-offs of $7,000 on one residential real estate loan, $803,000 on five
commercial real estate loans, $792,000 on 22 home equity lines and loans, $25,000 on eight auto indirect loans, $89,000 on 24 other
consumer loans, $613,000 on 15 C&I loans, $20,000 on two residential construction loans, and $61,000 on two commercial
construction loans.
The $803,000 in charge-offs the Company took in its commercial real estate portfolio was primarily the result of a $734,000 charge
on a loan secured by a commercial warehouse in central California. The remaining $69,000 was spread over four loans spread
throughout the Company’s footprint.
Differences between the amounts explained in this section and the total charge-offs listed for a particular category are generally made
up of individual charges of less than $250,000 each. Generally losses are triggered by non-performance by the borrower and
calculated based on any difference between the current loan amount and the current value of the underlying collateral less any
estimated costs associated with the disposition of the collateral.
41
Allowance for Loan Losses
The Company’s allowance for loan losses is comprised of allowances for originated, PNCI and PCI loans. All such allowances are established
through a provision for loan losses charged to expense.
Originated and PNCI loans, and deposit related overdrafts are charged against the allowance for originated loan losses when Management
believes that the collectability of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency
schedule. The allowances for originated and PNCI loan losses are amounts that Management believes will be adequate to absorb probable losses
inherent in existing originated loans, based on evaluations of the collectability, impairment and prior loss experience of those loans and leases.
The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. The Company defines an
originated or PNCI loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms
of the loan agreement. Impaired originated and PNCI loans are measured based on the present value of expected future cash flows discounted at
the loan’s original effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or
the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in
the loan, the impairment is recorded through a valuation allowance.
In situations related to originated and PNCI loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company
grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan
is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early and work with them to
modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal
forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the
collateral. In cases where the Company grants the borrower new terms that provide for a reduction of either interest or principal, the Company
measures any impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully paid off
or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in nonaccrual status until the borrower
demonstrates a sustained period of performance which the Company generally believes to be six consecutive months of payments, or equivalent.
Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with respect to their restructured principal
balance.
Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses inherent in the
Company’s originated and PNCI loan portfolios. These are maintained through periodic charges to earnings. These charges are included in the
Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off
against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the
full extent of the loss may not be quantifiable at that point in time. The balance of the Company’s allowances for originated and PNCI loan losses
are meant to be an estimate of these unknown but probable losses inherent in these portfolios.
The Company formally assesses the adequacy of the allowance for originated and PNCI loan losses on a quarterly basis. Determination of the
adequacy is based on ongoing assessments of the probable risk in the outstanding originated and PNCI loan portfolios, and to a lesser extent the
Company’s originated and PNCI loan commitments. These assessments include the periodic re-grading of credits based on changes in their
individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the
interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when
originated or acquired. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate
heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the
quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by
various bank regulatory agencies.
The Company’s method for assessing the appropriateness of the allowance for originated and PNCI loan losses includes specific allowances for
impaired loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates,
growth, economic conditions, etc.). Allowance factors for loan pools are based on historical loss experience by product type and prior risk rating.
Allowances for impaired loans are based on analysis of individual credits. Allowances for changing environmental factors are Management’s best
estimate of the probable impact these changes have had on the originated or PNCI loan portfolio as a whole. The allowances for originated and
PNCI loans are included in the allowance for loan losses.
As noted above, the allowances for originated and PNCI loan losses consists of a specific allowance, a formula allowance, and an allowance for
environmental factors. The first component, the specific allowance, results from the analysis of identified credits that meet management’s criteria
for specific evaluation. These loans are reviewed individually to determine if such loans are considered impaired. Impaired loans are those where
management has concluded that it is probable that the borrower will be unable to pay all amounts due under the contractual terms. Impaired loans
are specifically reviewed and evaluated individually by management for loss potential by evaluating sources of repayment, including collateral as
applicable, and a specified allowance for loan losses is established where necessary.
42
During the three months ended March 31, 2013, the Company changed the method it uses to estimate net sale proceeds from real
estate collateral sales when calculating the allowance for loan losses associated with impaired real estate collateral dependent loans.
Previously, the Company used the greater of fifteen percent or actual estimated selling costs. Currently, the Company uses the actual
estimated selling costs, and an adjustment to appraised value based on the age of the appraisal. These changes are intended to more
accurately reflect the estimated net sale proceeds from the sale of impaired collateral dependent real estate loans. This change in
methodology resulted in the allowance for loan losses as of March 31, 2013 being $494,000 more than it would have been without
this change in methodology.
The second component of the allowance for originated and PNCI loan losses, the formula allowance, is an estimate of the probable
losses that have occurred across the major loan categories in the Company’s originated and PNCI loan portfolios. This analysis is
based on loan grades by pool and the loss history of these pools. This analysis covers the Company’s entire originated and PNCI loan
portfolios including unused commitments but excludes any loans that were analyzed individually and assigned a specific allowance as
discussed above. The total amount allocated for this component is determined by applying loss estimation factors to outstanding loans
and loan commitments. The loss factors were previously based primarily on the Company’s historical loss experience tracked over a
five-year period and adjusted as appropriate for the input of current trends and events. Because historical loss experience varies for
the different categories of originated loans, the loss factors applied to each category also differed. In addition, there is a greater chance
that the Company would suffer a loss from a loan that was risk rated less than satisfactory than if the loan was last graded satisfactory.
Therefore, for any given category, a larger loss estimation factor was applied to less than satisfactory loans than to those that the
Company last graded as satisfactory. The resulting formula allowance was the sum of the allocations determined in this manner.
During the three month period ended March 31, 2012, the Company converted to a loss migration analysis to determine the formula
allowance. Under this method, the Company reviewed the loss experience of each quarter over the previous three years and
determined an annualized loss rate by loan category as well as risk rating at the beginning of each period reviewed. A weighted
average was then applied to arrive at the average annualized loss rate for each loan category and risk rating, which was then applied
against the net recorded investment for all loans by category and risk rating not classified as impaired. The effect of this change in
methodology resulted in a net reduction in formula allowance required of $3,296,000. This loss migration approach was promoted by
regulatory agencies and implemented by the Company during the three month period ended March 31, 2012 as this was the first
period in which sufficient historical data could be compiled to support the analysis.
During the three months ended June 30, 2013, the Company modified its loss migration analysis methodology used to determine the
formula allowance factors. When the Company originally established its loss migration analysis methodology during the quarter
ended March 31, 2012, it reviewed the loss experience of each quarter over the previous three years in order to calculate an
annualized loss rate by loan category and risk rating. The use of three years of loss experience data was originally used because that
was the extent of the detailed loss data, by loan category and risk rating that was available at the time. This three year historical look-
back period was used through the quarter ended March 31, 2013. Starting with the quarter ended June 30, 2013, the Company reviews
all available detailed loss experience data, going back to, and including, the quarter end June 30, 2008, and does not limit the look-
back period to the most recent three years of historical loss data. Using this data, the Company calculates loss factors for each quarter
from the quarter ended June 30, 2009 to the most recent quarter. The Company then calculates a weighted average formula allowance
factor for each loan category and risk rating with the most recent quarterly loss factor being weighted 125%, the quarter ended
June 30, 2009 loss factor being weighted 75%, and the loss factors for all the quarters between the most recent quarter and the quarter
ended June 30, 2009, being weighted on a linear scale from 75% to 125%. This change is intended to more accurately reflect the risk
inherent in the loan portfolio by considering historical loss data for all years as the data for new periods becomes available. This
change in methodology resulted in the allowance for loan losses as of June 30, 2013 being $1,314,000 more than it would have been
without this change in methodology.
In addition to updating the method by which the estimated formula allowance required is calculated, management also improved the
monitoring and risk recognition within its consumer portfolio. Previously, consumer loans with no identified credit weakness had a
risk rating of “Pass” assigned, and this would generally only change if the loan went 90 days past due, at which time the risk rating
was systematically downgraded to “Substandard” and the loan was placed in nonaccrual. For the period ended March 31, 2012,
management has chosen to monitor consumer loans based on current credit score and assign a risk rating of “Special Mention” for
those scores below a certain threshold. This change is primarily intended to more effectively monitor and manage the risk in the
Company’s portfolio of consumer loans and lines of credit secured by junior liens on 1-4 family residential properties. We believe
that the current credit score allows us to better account for increasing default risk in these types of loans. It is also the only reasonably
available tool that can be used to attempt to monitor the performance of the senior lien on the associated properties, as the Company
does not generally service both the 1st and 2nd loans in these instances. The result of this change in methodology resulted in an
additional required formula allowance of $1,874,000. $1,596,000 of this additional requirement is specifically related to loans and
lines of credit secured by junior liens on 1-4 family residential properties.
43
The third component of the allowances for originated and PNCI loan losses, the environmental factor allowance, is a component that is
not allocated to specific loans or groups of loans, but rather is intended to absorb losses that may not be provided for by the other
components.
There are several primary reasons that the other components discussed above might not be sufficient to absorb the losses present in the
originated and PNCI loan portfolios, and the environmental factor allowance is used to provide for the losses that have occurred because
of them.
The first reason is that there are limitations to any credit risk grading process. The volume of originated and PNCI loans makes it
impractical to re-grade every loan every quarter. Therefore, it is possible that some currently performing originated or PNCI loans not
recently graded will not be as strong as their last grading and an insufficient portion of the allowance will have been allocated to them.
Grading and loan review often must be done without knowing whether all relevant facts are at hand. Troubled borrowers may
deliberately or inadvertently omit important information from reports or conversations with lending officers regarding their financial
condition and the diminished strength of repayment sources.
The second reason is that the loss estimation factors are based primarily on historical loss totals. As such, the factors may not give
sufficient weight to such considerations as the current general economic and business conditions that affect the Company’s borrowers
and specific industry conditions that affect borrowers in that industry. The factors might also not give sufficient weight to other
environmental factors such as changing economic conditions and interest rates, portfolio growth, entrance into new markets or products,
and other characteristics as may be determined by Management.
Specifically, in assessing how much environmental factor allowance needed to be provided, management considered the following:
•
•
•
•
•
•
with respect to the economy, management considered the effects of changes in GDP, unemployment, CPI, debt statistics, housing
starts, housing sales, auto sales, agricultural prices, and other economic factors which serve as indicators of economic health and
trends and which may have an impact on the performance of our borrowers, and
with respect to changes in the interest rate environment, management considered the recent changes in interest rates and the
resultant economic impact it may have had on borrowers with high leverage and/or low profitability; and
with respect to changes in energy prices, management considered the effect that increases, decreases or volatility may have on the
performance of our borrowers, and
with respect to loans to borrowers in new markets and growth in general, management considered the relatively short seasoning of
such loans and the lack of experience with such borrowers, and
with respect to the potential imprecision in the total Allowance for Loan Losses calculation, management previously included an
unspecified reserve equal to 1.00% of the total allowance and reserve for unfunded commitments calculated. For the period ended
March 31, 2012, this unspecified reserve was eliminated resulting in a reduction in allowances required of $425,000, and
with respect to loans that have not yet been identified as impaired, management considered the volume and severity of past due
loans. This environmental consideration was added to the Company’s Allowance for Loan Losses methodology for the period
ended March 31, 2012 and resulted in additional allowances required of $459,000.
Each of these considerations was assigned a factor and applied to a portion or the entire originated and PNCI loan portfolios. Since these
factors are not derived from experience and are applied to large non-homogeneous groups of loans, they are available for use across the
portfolio as a whole.
During the three months ended September 30, 2013, the Company modified its methodology used to determine the allowance for
changing environmental factors. Previously, the Company compared the current value of each environmental factor to a fixed baseline
value. The deviation of the current value from the baseline value was then multiplied by a conversion factor to determine the required
allowance related to each environmental factor. As of September 30, 2013, the Company replaced the fixed baseline values with average
baseline values derived from historical averages, and adjusted the conversion factors. This change is intended to more accurately reflect
the risk inherent in the portfolio by recognizing that baseline, or normal, levels for environmental factors may change over time. This
change in methodology resulted in the allowance for loan losses as of September 30, 2013 being $1,665,000 more than it would have
been without this change in methodology.
Acquired loans are valued as of acquisition date in accordance with Financial Accounting Standards Board Accounting Standards
Codification (“FASB ASC”) Topic 805, Business Combinations. Loans purchased with evidence of credit deterioration since origination
for which it is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI)
loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit
Quality. In addition, because of the significant credit discounts
44
associated with the loans acquired in the Granite acquisition, the Company elected to account for all loans acquired in the Granite
acquisition under FASB ASC Topic 310-30, and classify them all as PCI loans. Under FASB ASC Topic 805 and FASB ASC Topic
310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the
loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the
present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value
calculation representing the estimated effective yield of the loan. The difference between contractual future payments and estimated
future payments is referred to as the nonaccretable difference. The difference between estimated future payments and the present
value of the estimated future payments is referred to as the accretable yield. The accretable yield represents the amount that is
expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company determines that the
future cash flows of a PCI loan are expected to be more than the originally estimated, an increase in the discount rate (effective yield)
would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining
estimated life of the loan. If after acquisition, the Company determines that the future cash flows of a PCI loan are expected to be less
than the previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals
the previous present value however, the discount rate may not be lowered below its original level. If the discount rate has been
lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established
through a provision for loan losses charged to expense to decrease the present value to the required level. If the estimated cash flows
improve after an allowance has been established for a loan, the allowance may be partially or fully reversed depending on the
improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI
loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans are charged off when evidence
suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair
value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and
acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan.
The Components of the Allowance for Loan Losses
The following table sets forth the Bank’s allowance for loan losses as of the dates indicated (dollars in thousands):
Allowance for originated and PNCI loan losses:
Specific allowance
Formula allowance
Environmental factors allowance
Allowance for originated and PNCI loan losses
Allowance for PCI loan losses
Allowance for loan losses
Allowance for loan losses to loans
2013
2012
December 31,
2011
2010
2009
$ 3,975
24,611
5,619
34,205
4,040
$38,245
$ 4,505
29,314
3,919
37,738
4,910
$42,648
$ 5,993
32,023
3,687
41,703
4,211
$45,914
$ 6,945
31,070
2,948
40,963
1,608
$42,571
$ 8,627
23,361
3,485
35,473
—
$35,473
2.29%
2.73%
2.96%
3.00%
2.37%
Based on the current conditions of the loan portfolio, management believes that the $38,245,000 allowance for loan losses at
December 31, 2013 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however,
that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The following table summarizes the allocation of the allowance for loan losses between loan types:
(dollars in thousands)
Real estate mortgage
Consumer
Commercial
Real estate construction
Total allowance for loan losses
45
2013
2012
December 31,
2011
$12,854 $12,305 $15,621 $15,707 $ 7,689
17,026
18,238 23,461
6,958
4,703
3,800
2,179
$38,245 $42,648 $45,914 $42,571 $35,473
17,779
5,991
3,094
20,506
6,545
3,242
4,331
2,822
2009
2010
The following table summarizes the allocation of the allowance for loan losses between loan types as a percentage of the total allowance for
loan losses:
Real estate mortgage
Consumer
Commercial
Real estate construction
Total allowance for loan losses
2013
33.6%
47.7%
11.3%
7.4%
100.0%
2012
28.9%
55.0%
11.0%
5.1%
100.0%
December 31,
2011
34.0%
44.7%
14.2%
7.1%
100.0%
2010
36.9%
41.8%
14.1%
7.2%
100.0%
2009
21.7%
48.0%
19.6%
10.7%
100.0%
The following table summarizes the allocation of the allowance for loan losses between loan types as a percentage of the total loans:
Real estate mortgage
Consumer
Commercial
Real estate construction
Total allowance for loan losses
2013
1.16%
4.76%
3.28%
5.75%
2.29%
December 31,
2011
1.62%
5.05%
4.70%
8.18%
2.96%
2012
1.22%
6.08%
3.47%
6.59%
2.73%
2010
1.88%
4.49%
4.18%
6.89%
3.00%
2009
0.91%
3.97%
4.24%
6.47%
2.37%
The following tables summarize the activity in the allowance for loan losses, reserve for unfunded commitments, and allowance for losses
(which is comprised of the allowance for loan losses and the reserve for unfunded commitments) for the years indicated (dollars in
thousands):
Allowance for loan losses:
Balance at beginning of period
(Benefit from) provision for loan losses
Loans charged off:
Real estate mortgage:
Residential
Commercial
Consumer:
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total loans charged off
Recoveries of previously charged-off loans:
Real estate mortgage:
Residential
Commercial
Consumer:
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total recoveries of previously charged off loans
Net charge-offs
Balance at end of period
46
2013
Year ended December 31,
2011
2010
2012
2009
$42,648
(715)
$ 45,914
9,423
$ 42,571 $ 35,473 $ 27,590
31,450
37,458
23,060
(46)
(2,038)
(2,651)
(94)
(68)
(887)
(1,599)
(20)
(140)
(7,543)
345
994
1,053
41
195
759
340
(1,558)
(3,457)
(8,042)
(385)
(83)
(1,202)
(1,251)
(1,655)
(4,451)
(1,498)
(8,281)
(583)
(1,223)
(9,746)
(789)
(427)
(1,158)
(2,534)
(11,221)
(1,339)
(1,403)
(1,687)
(3,539)
(7,487)
(656)
(2,806)
(1,238)
(3,219)
(406)
(100)
(16,484)
(634)
(653)
(22,047)
(4,666)
(94)
(33,728)
(7,737)
(89)
(25,038)
147
1,020
398
100
215
860
643
126
127
573
45
379
839
173
2
1,456
138
15
505
816
205
40
71
98
—
484
677
71
63
65
3,855
(3,688)
$38,245
412
—
3,795
(12,689)
$ 42,648
30
231
28
—
—
40
1,471
3,368
2,330
(19,717)
(23,567)
(30,360)
$ 45,914 $ 42,571 $ 35,473
Reserve for unfunded commitments:
2013
2012
Year ended December 31,
2011
2010
2009
Balance at beginning of period
Provision for losses –unfunded commitments
Balance at end of period
$
$
3,615
(1,200)
2,415
Balance at end of period:
Allowance for loan losses
Reserve for unfunded commitments
Allowance for loan losses and reserve for
$
38,245
2,415
$
$
$
2,740
875
3,615
42,648
3,615
$
$
$
2,640
100
2,740
45,914
2,740
$
$
$
$
3,640
(1,000)
2,640
42,571
2,640
2,565
1,075
3,640
35,473
3,640
$
$
unfunded commitments
$
40,660
$
46,263
$
48,654
$
45,211
$
39,113
As a percentage of total loans at end of period:
Allowance for loan losses
Reserve for unfunded commitments
Allowance for loan losses and reserve for
unfunded commitments
Average total loans
Ratios:
Net charge-offs during period to average loans
outstanding during period
Provision for loan losses to average loans
outstanding
Allowance for loan losses to loans at year end
Foreclosed Assets, Net of Allowance for Losses
2.29%
0.14%
2.43%
2.73%
0.23%
2.96%
2.96%
0.18%
3.00%
0.18%
3.14%
3.18%
2.37%
0.24%
2.61%
$1,610,725
$1,552,540
$1,442,821
$1,464,606
$1,542,147
0.23%
(0.04)%
2.29%
0.82%
0.61%
2.73%
1.37%
1.60%
2.96%
2.07%
2.56%
3.00%
1.53%
2.04%
2.37%
The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the years
indicated (dollars in thousands):
(dollars in thousands):
Noncovered:
Land & Construction
Residential real estate
Commercial real estate
Total noncovered
Covered:
Land & Construction
Residential real estate
Commercial real estate
Total covered
Total foreclosed assets
(dollars in thousands):
Noncovered:
Land & Construction
Residential real estate
Commercial real estate
Total noncovered
Covered:
Land & Construction
Residential real estate
Commercial real estate
Total covered
Total foreclosed assets
Balance at
December 31,
2013
New
NPA
Advances/
Capitalized
Costs
Sales
Valuation
Adjustments
Transfers
from Loans
Category
Changes
Balance at
December 31,
2012
$
$
578
1,944
3,066
5,588
674
—
—
674
6,262
—
— $
—
—
— $ (1,107)
(2,853)
(7,032)
(10,992)
480
—
480
—
—
—
—
— $
—
—
—
—
(267)
—
(1,012)
(1,279)
480 $(12,271)
$
$
(70)
(101)
(430)
(601)
—
—
(81)
(81)
(682)
$
79
2,676
7,989
10,744
— $
—
—
—
229
—
264
493
$ 11,237
—
—
—
—
— $
1,676
1,742
2,539
5,957
712
—
829
1,541
7,498
Balance at
December 31,
2012
New
NPA
Advances/
Capitalized
Costs
Sales
Valuation
Adjustments
Transfers
from Loans
Category
Changes
Balance at
December 31,
2011
$
1,676
1,742
2,539
5,957
—
— $
—
—
—
833
(75)
758
$ (3,549)
(5,452)
(5,775)
(14,776)
$
(587)
(336)
(344)
(1,267)
$
778
3,507
3,689
7,974
— $
—
—
—
712
—
829
1,541
7,498
—
—
—
—
— $
—
—
225
225
983
(779)
(121)
(795)
(1,695)
$(16,471)
(308)
(59)
(94)
(461)
$ (1,728)
—
—
408
408
$ 8,382
—
—
—
—
— $
$
5,034
3,190
5,044
13,268
1,799
180
1,085
3,064
16,332
47
Premises and Equipment
Premises and equipment were comprised of:
Land & land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
December 31,
2013
2012
(In thousands)
$ 5,975
30,103
27,881
63,959
(32,397)
31,562
50
$ 31,612
$ 5,929
23,090
25,877
54,896
(32,101)
22,795
4,190
$ 26,985
During the year ended December 31, 2013, premises and equipment increased $4,627,000 due to purchases of $8,313,000, that were
partially offset by depreciation of $3,635,000 and disposals of premises and equipment with net book value of $51,000. Included in
the $8,313,000 of purchases during the year ended December 31, 2013 is $5,576,000 related to the Company’s new campus and
operations center in Chico, California that was completed and put into service during June 2013. As of December 31, 2013 the
campus and operations center had a cost basis as follows: land & land improvements $450,000, building $8,405,000, and furniture
and equipment $2,362,000.
Intangible Assets
Intangible assets at December 31, 2013 and 2012 were comprised of the following:
December 31,
2013
2012
(In thousands)
Core-deposit intangible
Goodwill
Total intangible assets
$
883 $ 1,092
15,519
$16,611
15,519
$16,402
The core-deposit intangible assets resulted from the Bank’s acquisition of Citizens in 2011, and Granite in 2010. The goodwill
intangible asset resulted from the North State National Bank acquisition in 2003. Amortization of core deposit intangible assets
amounting to $209,000, $209,000, and $177,000 was recorded in 2013, 2012, and 2011, respectively.
Deposits
Deposits at December 31, 2013 increased $120,781,000 (5.3%) over the 2012 year-end balances to $2,410,483,000. All categories of
deposits were up in 2013 except time certificates. Included in the December 31, 2013 certificate of deposit balances is $5,000,000
from the State of California. The Bank participates in a deposit program offered by the State of California whereby the State may
make deposits at the Bank’s request subject to collateral and creditworthiness constraints. The negotiated rates on these State deposits
are generally more favorable than other wholesale funding sources available to the Bank.
Deposits at December 31, 2012 increased $99,166,000 (4.5%) over the 2011 year-end balances to $2,289,702,000. All categories of
deposits were up in 2012 with the exception of money market accounts and time certificates. Included in the December 31, 2012
certificate of deposit balances is $5,000,000 from the State of California.
Long-Term Debt
See Note 16 to the consolidated financial statements at Item 8 of this report for information about the Company’s other borrowings,
including long-term debt.
Junior Subordinated Debt
See Note 17 to the consolidated financial statements at Item 8 of this report for information about the Company’s junior subordinated
debt.
Equity
See Note 19 and Note 29 in the consolidated financial statements at Item 8 of this report for a discussion of shareholders’ equity and
regulatory capital, respectively. Management believes that the Company’s capital is adequate to support anticipated growth, meet the
cash dividend requirements of the Company and meet the future risk-based capital requirements of the Bank and the Company.
Market Risk Management
Overview. The goal for managing the assets and liabilities of the Bank is to maximize shareholder value and earnings while
maintaining a high quality balance sheet without exposing the Bank to undue interest rate risk. The Board of Directors has overall
responsibility for the Company’s interest rate risk management policies. The Bank has an Asset and Liability Management
Committee (ALCO) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates.
48
Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and
placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability
management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a
different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed
with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of
volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin
and market value of equity under changing interest environments. Market value of equity is the net present value of estimated cash
flows from the Bank’s assets, liabilities and off-balance sheet items. The Bank uses simulation models to forecast net interest margin
and market value of equity.
Simulation of net interest margin and market value of equity under various interest rate scenarios is the primary tool used to measure
interest rate risk. Using computer-modeling techniques, the Bank is able to estimate the potential impact of changing interest rates on
net interest margin and market value of equity. A balance sheet forecast is prepared using inputs of actual loan, securities and interest-
bearing liability (i.e. deposits/borrowings) positions as the beginning base.
In the simulation of net interest income, the forecast balance sheet is processed against various interest rate scenarios. These various
interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and rate ramp scenarios
including -100, +100, and +200 basis points around the flat scenario. These ramp scenarios assume that interest rates increase or
decrease evenly (in a “ramp” fashion) over a twelve-month period and remain at the new levels beyond twelve months.
The following table summarizes the projected effect on net interest income and net income due to changing interest rates as measured
against a flat rate (no interest rate change) scenario over the succeeding twelve month period. The simulation results shown below
assume no changes in the structure of the Company’s balance sheet over the twelve months being measured (a “flat” balance sheet
scenario), and that deposit rates will track general interest rate changes by approximately 50%:
Interest Rate Risk Simulation of Net Interest Income and Net Income as of December 31, 2013
Change in Interest
Rates (Basis Points)
+200(ramp)
+100(ramp)
+0(flat)
-100(ramp)
Estimated Change in
Net Interest Income (NII)
(as % of “flat” NII)
0.72%
0.20%
—
(0.81%)
In the simulation of market value of equity, the forecast balance sheet is processed against various interest rate scenarios. These
various interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and rate shock
scenarios including -100, +100, and +200 basis points around the flat scenario. These rate shock scenarios assume that interest rates
increase or decrease immediately (in a “shock” fashion) and remain at the new level in the future.
The following table summarizes the effect on market value of equity due to changing interest rates as measured against a flat rate (no
change) scenario:
Interest Rate Risk Simulation of Market Value of Equity as of December 31, 2013
Change in Interest Rates (Basis Points)
+200(shock)
+100(shock)
+ 0(flat)
-100(shock)
Estimated Change in
Market Value of Equity (MVE)
(as % of “flat” MVE)
0.27%
0.70%
—
(9.18%)
These results indicate that given a “flat” balance sheet scenario, and if deposit rates track general interest rate changes by
approximately 50%, the Company’s balance sheet is neutral to slightly asset sensitive over a twelve month time horizon. “Neutral
sensitivity” implies that net interest income does not change when interest rates change. “Asset sensitive” implies that net interest
income increases when interest rates rise, and decrease when interest rates decrease. The asset liability management policy limits
aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs.
49
The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of
interest rate deviations. In addition, the simulation results noted above contain various assumptions such as a flat balance sheet, and
the rate that deposit interest rates change as general interest rates change. Therefore, they do not reflect likely actual results, but serve
as estimates of interest rate risk.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the
preceding tables. For example, although certain of the Company’s assets and liabilities may have similar maturities or repricing time
frames, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain of the
Company’s asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of
prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in
the preceding tables. Further, a change in U.S. Treasury rates accompanied by a change in the shape of the treasury yield curve could
result in different estimations from those presented herein. Accordingly, the results in the preceding tables should not be relied upon
as indicative of actual results in the event of changing market interest rates. Additionally, the resulting estimates of changes in market
value of equity are not intended to represent, and should not be construed to represent, estimates of changes in the underlying value of
the Company.
Interest rate sensitivity is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities. One aspect of
these repricing characteristics is the time frame within which the interest-bearing assets and liabilities are subject to change in interest
rates either at replacement, repricing or maturity. An analysis of the repricing time frames of interest-bearing assets and liabilities is
sometimes called a “gap” analysis because it shows the gap between assets and liabilities repricing or maturing in each of a number of
periods. Another aspect of these repricing characteristics is the relative magnitude of the repricing for each category of interest
earning asset and interest-bearing liability given various changes in market interest rates. Gap analysis gives no indication of the
relative magnitude of repricing given various changes in interest rates. Interest rate sensitivity management focuses on the maturity of
assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity gaps are measured
as the difference between the volumes of assets and liabilities in the Company’s current portfolio that are subject to repricing at
various time horizons.
The following interest rate sensitivity table shows the Company’s repricing gaps as of December 31, 2013. In this table transaction
deposits, which may be repriced at will by the Company, have been included in the less than 3-month category. The inclusion of all of
the transaction deposits in the less than 3-month repricing category causes the Company to appear liability sensitive. Because the
Company may reprice its transaction deposits at will, transaction deposits may or may not reprice immediately with changes in
interest rates.
Due to the limitations of gap analysis, as described above, the Company does not actively use gap analysis in managing interest rate
risk. Instead, the Company relies on the more sophisticated interest rate risk simulation model described above as its primary tool in
measuring and managing interest rate risk.
Interest Rate Sensitivity – December 31, 2013
(dollars in thousands)
Interest-earning assets:
Cash at Federal Reserve and other banks
Securities
Loans
Total interest-earning assets
Interest-bearing liabilities
Transaction deposits
Time
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Interest sensitivity gap
Cumulative sensitivity gap
As a percentage of earning assets:
Interest sensitivity gap
Cumulative sensitivity gap
Less than 3
months
3 — 6
months
Repricing within:
6 — 12
months
1 — 5
years
Over 5
years
$ 521,453
14,309
489,422
1,025,184
—
$ 12,605
95,638
108,243
—
$ 23,727
140,847
164,574
—
$133,758
787,606
921,364
—
$160,752
158,494
$319,246
1,332,337
99,939
6,335
41,238
$1,479,849
$ (454,665)
$ (454,665)
—
53,565
—
—
$ 53,565
$ 54,678
$(399,987)
—
62,940
—
—
$ 62,940
$ 101,634
$(298,353)
—
72,244
—
—
$ 72,244
$849,120
$550,767
—
—
—
—
—
$319,246
$870,013
(17.9%)
(17.9%)
2.1%
(15.8%)
4.0%
(11.8%)
33.5%
21.7%
12.6%
34.3%
50
Liquidity
Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well
as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the
asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and maturities of loans, selling of loans,
short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These
activities are generally summarized as investing activities in the Consolidated Statement of Cash Flows. Net cash used by investing
activities totaled $302,897,000 in 2013. Net increases in investment and loan balances used $187,108,000 and $122,109,000 of cash,
respectively.
Liquidity may also be generated from liabilities through deposit growth and borrowings. These activities are included under financing
activities in the Consolidated Statement of Cash Flows. In 2013, financing activities provide funds totaling $111,280,000 due mainly
to a $120,781,000 increase in deposit balances. Dividends paid and a decrease in short-term other borrowings used $6,745,000 and
$2,862,000 of funds, respectively. The Bank also had available correspondent banking lines of credit totaling $10,000,000 at
December 31, 2013. In addition, at December 31, 2013, the Company had loans and securities available to pledge towards future
borrowings from the Federal Home Loan Bank and the Federal Reserve Bank of up to $575,654,000 and $106,856,000, respectively.
As of December 31, 2013, the Company had $6,335,000 of other borrowings as described in Note 16 of the consolidated financial
statements of the Company and the related notes at Item 8 of this report. While these sources are expected to continue to provide
significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and
market conditions. Liquidity is also provided or used through the results of operating activities. In 2013, operating activities provided
cash of $41,086,000.
The Company’s investment securities available for sale plus cash and cash equivalents in excess of reserve requirements totaled
$664,656,000 at December 31, 2013, which was 24.2% of total assets at that time. This was down from $880,332,000 and 33.7% at
the end of 2012.
It is anticipated that loan demand may be modest during 2014, although such demand will be dictated by economic and competitive
conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are
the least sensitive to interest rates. The growth of deposit balances is subject to heightened competition, the success of the Company’s
sales efforts, delivery of superior customer service and market conditions. The reduction in the federal funds rate and various Federal
Reserve interest rate manipulation efforts have resulted in historic low short-term and long-term interest rates, which could impact
deposit volumes in the future. Depending on economic conditions, interest rate levels, and a variety of other conditions, deposit
growth may be used to fund loans, to reduce short-term borrowings or purchase investment securities. However, due to concerns such
as uncertainty in the general economic environment, competition and political uncertainty, loan demand and levels of customer
deposits are not certain.
The principal cash requirements of the Company are dividends on common stock when declared. The Company is dependent upon the
payment of cash dividends by the Bank to service its commitments. Shareholder dividends are expected to continue subject to the
Board’s discretion and continuing evaluation of capital levels, earnings, asset quality and other factors. The Company expects that the
cash dividends paid by the Bank to the Company will be sufficient to meet this payment schedule. Dividends from the Bank are
subject to certain regulatory restrictions.
The maturity distribution of certificates of deposit in denominations of $100,000 or more is set forth in the following table. These
deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain higher yields
elsewhere if available. The Bank participates in a program wherein the State of California places time deposits with the Bank at the
Bank’s option. At December 31, 2013, 2012 and 2011, the Bank had $5,000,000, $5,000,000 and $5,000,000, respectively, of these
State deposits.
Certificates of Deposit in Denominations of $100,000 or More
(dollars in thousands)
Time remaining until maturity:
Less than 3 months
3 months to 6 months
6 months to 12 months
More than 12 months
Total
Amounts as of December 31,
2013
2012
2011
$ 61,205
39,580
16,772
40,090
$157,647
$ 73,180
32,384
34,311
40,320
$180,195
$ 82,497
49,613
46,446
41,818
$220,374
51
Loan demand also affects the Company’s liquidity position. The following table presents the maturities of loans, net of deferred loan costs, at
December 31, 2013:
Within One
Year
After One
But Within
5 Years
After 5 Years
Total
(dollars in thousands)
Loans with predetermined interest rates:
Real estate mortgage
Consumer
Commercial
Real estate construction
Loans with floating interest rates:
Real estate mortgage
Consumer
Commercial
Real estate construction
Total loans
$ 35,687 $139,206 $ 216,972 $ 391,865
106,646
43,149
18,803
$ 560,463
44,833
7,654
4,543
$ 274,002
17,550
11,754
8,776
$ 73,767
44,263
23,741
5,484
$212,694
$ 42,347
1,657
60,060
5,803
$109,867
$183,634
$166,443
11,502
18,934
6,029
$202,908
$415,602
$ 507,208
263,358
9,735
18,468
$ 798,769
$1,072,771
$ 715,998
276,517
88,729
30,300
$1,111,544
$1,672,007
The maturity distribution and yields of the investment portfolio at December 31, 2013 is presented in the following table. The timing of the
maturities indicated in the table below is based on final contractual maturities. Most mortgage-backed securities return principal throughout
their contractual lives. As such, the weighted average life of mortgage-backed securities based on outstanding principal balance is usually
significantly shorter than the final contractual maturity indicated below. Yields on tax exempt securities are shown on a tax equivalent basis.
At December 31, 2012, the Company had no held-to-maturity securities.
Securities Available for Sale
Obligations of US government
corporations and agencies
Obligations of states andpolitical
subdivisions
Corporate bonds
Total securities available for sale
Within
One Year
Amount Yield
After One Year
but Through
Five Years
Amount
Yield
After Five Years
but Through Ten
Years
Amount
(dollars in thousands)
Yield
After Ten Years
Amount Yield
Total
Amount
Yield
$ 536 4.44% $1,721 4.81% $29,967 2.61% $64,919 3.80% $ 97,143 3.45%
5,589 6.99%
4,021 7.09%
— —
— —
1,915 1.78%
— —
$ 536 4.44% $3,966 3.44% $33,988 3.15% $66,157 3.85% $104,647 3.61%
330 6.32%
1,915 1.78%
1,238 6.85%
— —
Within
One Year
After One Year
but Through
Five Years
After Five Years
but Through
Ten Years
Amount Yield Amount
Yield Amount
Yield
(dollars in thousands)
After Ten Years
Amount
Yield
Total
Amount
Yield
Securities Available for Sale
Obligations of US government corporations
and agencies
Obligations of states and
political subdivisions
Total securities held to maturity
Off-Balance Sheet Items
— — — — — — $227,864 2.87% $227,864 2.87%
— — — — — —
12,640 4.13% 12,640 4.13%
— — — — — — $240,504 2.93% $240,504 2.93%
The Bank has certain ongoing commitments under operating and capital leases. See Note 18 of the financial statements at Item 8 of this
report for the terms. These commitments do not significantly impact operating results. As of December 31, 2013 commitments to extend
credit and commitments related to the Bank’s deposit overdraft privilege product were the Bank’s only financial instruments with off-
balance sheet risk. The Bank has not entered into any material contracts for financial derivative instruments such as futures, swaps, options,
etc. Commitments to extend credit were $557,987,000 and $560,159,000 at December 31, 2013and 2012, respectively, and represent 33.4%
of the total loans outstanding at year-end 2013 versus 35.8% at December 31, 2012. Commitments related to the Bank’s deposit overdraft
privilege product totaled $68,932,000 and $69,675,000 at December 31, 2013 and 2012, respectively.
52
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of December 31, 2013:
(dollars in thousands)
Time deposits
Other collateralized borrowings, fixed rate of 0.05% payable on
January 2, 2013
Junior subordinated debt (2)
Junior subordinated debt (3)
Operating lease obligations
Deferred compensation (1)
Supplemental retirement plans (1)
Total contractual obligations
Total
Less than
one year 1-3 years 3-5 years
$288,688 $216,444 $57,056 $15,186 $
More than
5 years
2
6,335
20,619
20,619
7,767
7,599
4,334
—
20,619
20,619
1,235
2,844
1,978
$355,961 $227,069 $62,870 $18,725 $47,297
6,335 — —
— — —
— — —
2,452 2,860 1,220
1,269 2,009 1,477
842
569
945
(1) These amounts represent known certain payments to participants under the Company’s deferred compensation and supplemental
retirement plans. See Note 25 in the financial statements at Item 8 of this report for additional information related to the
Company’s deferred compensation and supplemental retirement plan liabilities.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a
quarterly basis beginning October 7, 2008, matures October 7, 2033.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.55%, callable in whole or in part by the Company on a
quarterly basis beginning July 23, 2009, matures July 23, 2034.
(2)
(3)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Market Risk Management” under Item 7 of this report which is incorporated herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Income for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firms
Page
54
55
56
56
57
58
101
102
53
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
At December 31,
2013
2012
(in thousands, except share data)
$
76,915 $
521,453
598,368
81,086
667,813
748,899
104,647
240,504
9,163
2,270
1,672,007
(38,245)
1,633,762
6,262
31,612
52,309
6,516
15,519
883
6,165
206
35,880
163,027
—
9,647
12,053
1,564,823
(42,648)
1,522,175
7,498
26,985
50,582
6,636
15,519
1,092
4,552
1,997
38,607
$ 2,744,066 $ 2,609,269
$
789,458 $
1,621,025
2,410,483
938
2,415
31,711
6,335
41,238
2,493,120
684,833
1,604,869
2,289,702
1,036
3,615
35,122
9,197
41,238
2,379,910
Assets:
Cash and due from banks
Cash at Federal Reserve and other banks
Cash and cash equivalents
Investment securities:
Available for sale
Held to maturity
Restricted equity securities
Loans held for sale
Loans
Allowance for loan losses
Total loans, net
Foreclosed assets, net
Premises and equipment, net
Cash value of life insurance
Accrued interest receivable
Goodwill
Other intangible assets, net
Mortgage servicing rights
Indemnification asset
Other assets
Total assets
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand
Interest-bearing
Total deposits
Accrued interest payable
Reserve for unfunded commitments
Other liabilities
Other borrowings
Junior subordinated debt
Total liabilities
Commitments and contingencies (Note 18)
Shareholders’ equity:
Common stock, no par value: 50,000,000 shares authorized;issued and outstanding:
16,076,662 at December 31, 2013
16,000,838 at December 31, 2012
Retained earnings
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
54
89,356
85,561
141,639
2,159
229,359
$ 2,744,066 $ 2,609,269
159,733
1,857
250,946
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
Interest and dividend income:
Loans, including fees
Debt securities:
Taxable
Tax exempt
Dividends
Interest bearing cash at
Federal Reserve and other banks
Total interest and dividend income
Interest expense:
Deposits
Other borrowings
Junior subordinated debt
Total interest expense
Net interest income
(Benefit from) provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges and fees
Gain on sale of loans
Commissions on sale of non-deposit investment products
Increase in cash value of life insurance
Bargain purchase gain
Other
Total noninterest income
Noninterest expense:
Salaries and related benefits
Other
Total noninterest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
55
Years ended December 31,
2013
2011
2012
(in thousands, except per share data)
$ 97,548 $100,496 $ 92,691
6,349
583
387
6,072
428
105
8,733
524
27
1,693
106,560
1,615
108,716
1,007
102,982
3,445
4
1,247
4,696
101,864
(715)
102,579
4,416
1,604
1,324
7,344
101,372
9,423
91,949
25,257
5,602
2,983
1,727
—
1,260
36,829
23,925
6,810
3,209
1,820
—
2,216
37,980
6,559
2,420
1,259
10,238
92,744
23,060
69,684
23,944
3,037
2,105
1,885
7,575
4,267
42,813
51,936
41,668
93,604
45,804
18,405
44,203
38,512
82,715
29,782
11,192
$ 27,399 $ 18,994 $ 18,590
49,952
48,046
97,998
31,931
12,937
$
$
1.71 $
1.69 $
1.19 $
1.18 $
1.17
1.16
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains on securities arising during the period
Change in minimum pension liability
Change in joint beneficiary agreement liability
Other comprehensive (loss) income
Comprehensive income
Years ended December 31,
2013
2011
2012
(in thousands, except per share data)
$27,399 $18,994 $18,590
(2,452)
1,750
400
(302)
1,504
1,140
(143)
2,501
$27,097 $17,342 $21,091
(1,216)
(2)
(434)
(1,652)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2013, 2012 and 2011
Shares of
Common
Stock
Common
Stock
Retained
Earnings
(in thousands, except share data)
Accumulated
Other
Comprehensive
Income
Total
Balance at December 31, 2010
Net income
Other comprehensive income
Stock option vesting
Stock options forfeited
Stock options exercised
Tax benefit of stock options exercised
Repurchase of common stock
Dividends paid ($0.36 per share)
Balance at December 31, 2011
Net income
Other comprehensive loss
Stock option vesting
Stock options exercised
Tax benefit of stock options exercised
Repurchase of common stock
Dividends paid ($0.36 per share)
Balance at December 31, 2012
Net income
Other comprehensive loss
Stock option vesting
Stock options forfeited
Stock options exercised
Tax benefit of stock options exercised
Repurchase of common stock
Dividends paid ($0.42 per share)
Balance at December 31, 2013
15,860,138
$81,554
$117,533 $
18,590
830
(114)
2,428
296
(915)
296,250
(177,430)
15,978,958
$84,079
(1,830)
(5,742)
$128,551 $
18,994
36,000
(14,120)
1,083
430
44
(75)
(149)
(5,757)
16,000,838 $85,561 $141,639 $
27,399
1,151
(22)
3,240
356
(930)
248,765
(172,941)
16,076,662
$89,356
(2,560)
(6,745)
$159,733 $
The accompanying notes are an integral part of these consolidated financial statements.
56
(1,652)
2,501
1,310 $200,397
18,590
2,501
830
(114)
2,428
296
(2,745)
(5,742)
3,811 $216,441
18,994
(1,652)
1,083
430
44
(224)
(5,757)
2,159 $229,359
27,399
(302)
1,151
(22)
3,240
356
(3,490)
(6,745)
1,857 $250,946
(302)
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization
Amortization of intangible assets
(Benefit from) provision for loan losses
Amortization of investment securities premium, net
Originations of loans for resale
Proceeds from sale of loans originated for resale
Gain on sale of loans
Change in market value of mortgage servicing rights
Provision for losses on foreclosed assets
Gain on sale of foreclosed assets
Loss on disposal of fixed assets
Increase in cash value of life insurance
Gain on life insurance death benefit
Stock option vesting expense
Stock option excess tax benefits
Bargain purchase gain
Deferred income tax expense (benefit)
Change in:
Reserve for unfunded commitments
Interest receivable
Interest payable
Other assets and liabilities, net
Net cash from operating activities
Investing activities:
Proceeds from maturities of securities available for sale
Purchases of securities available for sale
Proceeds from maturities of securities held to maturity
Purchases of securities held to maturity
Redemption of restricted equity securities, net
Loan origination and principal collections, net
Loans purchased
Proceeds from sale of premises and equipment
Improvement of foreclosed assets
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Life insurance proceeds
Cash received from acquisitions
Net cash (used) provided by investing activities
Financing activities:
Net increase (decrease) in deposits
Net change in other borrowings
Stock option excess tax benefits
Repurchase of common stock
Dividends paid
Exercise of stock options
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents and beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of noncash activities:
2013
Years Ended December 31,
2012
(in thousands)
2011
$ 27,399 $ 18,994 $ 18,590
4,623
209
(715)
752
(123,834)
137,859
(5,602)
(253)
682
(1,640)
39
(1,727)
—
1,151
(356)
—
2,526
(1,200)
120
(98)
1,151
41,086
53,468
—
4,391
(244,967)
484
(59,411)
(62,698)
12
(479)
13,910
(8,313)
706
—
(302,897)
4,292
209
9,423
1,151
(225,602)
238,352
(6,810)
2,016
1,728
(786)
420
(1,820)
(675)
1,083
(44)
—
(384)
875
676
(638)
9,603
52,063
76,764
(13,815)
—
—
963
(44,601)
—
30
(983)
17,257
(10,792)
4,423
—
29,246
3,309
177
23,060
1,435
(119,855)
116,556
(3,037)
1,107
1,984
(680)
15
(1,885)
(789)
830
(296)
(7,575)
(1,691)
100
(181)
(477)
967
31,664
84,016
(25,456)
—
—
449
9,363
—
1
—
7,632
(3,350)
—
80,706
153,361
120,781
(2,862)
356
(501)
(6,745)
251
111,280
(150,531)
748,899
98,464
(11,517)
296
(753)
(5,742)
436
81,184
266,209
371,066
$ 598,368 $ 748,899 $ 637,275
99,166
(63,344)
44
—
(5,757)
206
30,315
111,624
637,275
Unrealized (loss) gain on securities available for sale
$ (4,232) $ (2,096) $
2,594
Loans transferred to foreclosed assets
Loans transferred to held-for-sale
Market value of shares tendered in-lieu ofcash to pay for exercise of options and/or
related taxes
Supplemental disclosure of cash flow activity:
Cash paid for interest expense
Cash paid for income taxes
Assets acquired in acquisition
Liabilities assumed in acquisition
The accompanying notes are an integral part of these consolidated financial statements.
57
11,717
—
8,382
9,739
6,943
—
2,989
224
1,992
4,794
10,715
7,982
16,625
$ 17,395 $ 10,995
—
270,304
— $ 262,729
—
—
TRICO BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012, 2011 and 2010
Note 1 –Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TriCo Bancshares is a California corporation organized to act as a bank holding company for Tri Counties Bank. The Bank is a state-
chartered financial institution that is engaged in the general commercial banking business in the California counties of Butte, Contra
Costa, Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Napa, Nevada, Placer, Sacramento, Shasta,
Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo and Yuba. Tri Counties Bank currently operates from 41 traditional branches and
22 in-store branches. The Company also formed two subsidiary business trusts, TriCo Capital Trust I and TriCo Capital Trust II
(collectively, the Trusts), to issue trust preferred securities.
The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of
America and general practices in the banking industry. The 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 Trusts of $1,238,000 are accounted for under the equity method and, accordingly, are not consolidated and are
included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and
held by the 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. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance
for loan losses, investments, intangible assets, income taxes and contingencies. 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. The allowance for loan losses, indemnification
asset, foreclosed assets, goodwill and other intangible assets, income taxes, fair value of assets acquired and liabilities assumed in
business combinations, the valuation of securities available-for-sale, and the valuation of mortgage servicing rights are the only
accounting estimates that materially affect the Company’s consolidated financial statements.
As described in Note 2, the Bank assumed the banking operations of two failed financial institutions from the FDIC under whole bank
purchase agreements. The acquired assets and assumed liabilities were measured at estimated fair value values under the acquisition
method of accounting. The Company made significant estimates and exercised significant judgment in accounting for the
acquisitions. The Company determined loan fair values based on loan file reviews, loan risk ratings, appraised collateral values,
expected cash flows and historical loss factors. Foreclosed assets were primarily valued based on appraised values of the repossessed
loan collateral. An identifiable intangible was also recorded representing the fair value of the core deposit customer base based on an
evaluation of the cost of such deposits relative to alternative funding sources. The fair value of time deposits and borrowings were
determined based on the present value of estimated future cash flows using current rates as of the acquisition date.
Significant Group Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San
Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio
within the business segments located in this geographical area. The Company currently classifies all its operation into one business
segment that it denotes as community banking.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks,
and federal funds sold. Net cash flows are reported for loan and deposit transactions and other borrowings.
Investment Securities
The Company classifies its debt and marketable equity securities into one of three categories: trading, available for sale or held to
maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held to maturity securities are
those securities which the Company has the ability and intent to hold until maturity. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives. All other
securities not included in trading or held to maturity are classified as available for sale. Available for sale securities are recorded at
fair value. Unrealized gains and losses, net of the related tax effect, on available for sale securities are reported as a separate
component of other accumulated comprehensive income in shareholders’ equity until realized. Premiums and discounts are amortized
or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and
interest income are recognized when earned. Realized gains and losses are derived from the amortized cost of the security sold.
During the years ended December 31, 2013 and 2012, the Company did not have any securities classified as trading. During the three
months ended March 31, 2013, and the year ended December 31, 2012, the Company did not have any securities classified as held to
maturity.
58
The Company assesses other-than-temporary impairment (“OTTI”) based on whether it intends to sell a security or if it is likely that
the Company would be required to sell the security before recovery of the amortized cost basis of the investment, which may be
maturity. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before
recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the
security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis
of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a
security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be
collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security
being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of
the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment
losses related to all other factors are presented as separate categories within OCI. The accretion of the amount recorded in OCI
increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the
security is re-evaluated according to the procedures described above. No OTTI losses were recognized during the years ended
December 31, 2013 and 2012.
Restricted Equity Securities
Restricted equity securities represent the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco
(“FHLB”) and are carried at par value, which reasonably approximates its fair value. While technically these are considered equity
securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities.
Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these
investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary
declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as
(1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of
time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions
and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.
As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on
specific percentages of its outstanding mortgages, total assets, or FHLB advances. The Company may request redemption at par value
of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined
by aggregate outstanding commitments from investors of current investor yield requirements. Net unrealized losses are recognized
through a valuation allowance by charges to noninterest income.
Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. Gains or losses on the
sale of loans that are held for sale are recognized at the time of the sale and determined by the difference between net sale proceeds
and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights.
Loans and Allowance for Loan Losses
Loans originated by the Company, i.e., not purchased or acquired in a business combination, are referred to as originated loans.
Originated loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported
at the principal amount outstanding, net of deferred loan fees and costs. Loan origination and commitment fees and certain direct loan
origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield over the actual life of the
loan. Originated loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.
Originated loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal,
or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the
process of collection. When an originated loan is placed on nonaccrual status, all interest previously accrued but not collected is
reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal
is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal
and when, in the judgment of Management, the loan is estimated to be fully collectible as to both principal and interest.
An allowance for loan losses for originated loans is established through a provision for loan losses charged to expense. The allowance
is maintained at a level which, in Management’s judgment, is adequate to absorb probable incurred credit losses inherent in the loan
portfolio as of the balance sheet date. Originated loans and deposit related overdrafts are charged against the allowance for loan losses
when Management believes that the collectability of the principal is unlikely or, with respect to consumer installment loans, according
to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable
losses inherent in existing loans and leases, based on evaluations of the collectability, impairment and prior loss experience of loans
and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower’s ability to pay.
The Company defines an originated loan as impaired when it is probable the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impaired originated loans are measured based on the present value of
expected future cash flows discounted at the loan’s original effective interest rate. As a practical expedient, impairment may be
measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the
measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation
allowance.
59
In situations related to originated loans where, for economic or legal reasons related to a borrower’s financial difficulties, the
Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise
consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial
difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified
terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic
loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that result
in the loan being classified as a TDR, the Company measures any impairment on the restructuring as noted above for impaired loans.
TDR loans are classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they
become TDR loans, remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the
Company generally believes to be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same
nonaccrual and charge-off policies as noted above with respect to their restructured principal balance.
Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses
inherent in the Company’s originated loan portfolio. This is maintained through periodic charges to earnings. These charges are
included in the Consolidated Statements of Income as provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the
Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the
Company’s allowance for originated loan losses is meant to be an estimate of these unknown but probable losses inherent in the
portfolio.
The Company formally assesses the adequacy of the allowance for originated loan losses on a quarterly basis. Determination of the
adequacy is based on ongoing assessments of the probable risk in the outstanding originated loan portfolio, and to a lesser extent the
Company’s originated loan commitments. These assessments include the periodic re-grading of credits based on changes in their
individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors,
changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are
initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when
identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs
at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by
consultants specifically hired for this purpose and by various bank regulatory agencies.
The Company’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for
impaired originated loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental
factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools were based on historical loss
experience by product type and prior risk rating.
During the three months ended March 31, 2012, management changed some of the assumptions utilized in the Allowance for Loan
Losses estimate calculation. These changes were intended to more accurately reflect the current risk in the loan portfolio and to better
estimate the losses inherent but not yet quantifiable. These changes included the conversion to a historical loss migration analysis
intended to better determine the appropriate formula reserve ratio by loan category and risk rating, the addition of an environmental
factor related to the delinquency rate of loans not classified as impaired by loan category, the elimination of an unspecified reserve
allocation previously intended to account for imprecision inherent in the overall calculation, and the reclassification of risk rating of
certain consumer loans based on current credit score in an attempt to better identify the risk in the portfolio. The financial effect of
these changes resulted in a net reduction in the calculated Allowance for Loan Losses of $1,388,000 during the three months ended
March 31, 2012. Allowances for impaired loans are based on analysis of individual credits. Allowances for changing environmental
factors are Management’s best estimate of the probable impact these changes have had on the originated loan portfolio as a whole.
The allowance for originated loans is included in the allowance for loan losses.
During the three months ended March 31, 2013, the Company changed the method it uses to estimate net sale proceeds from real
estate collateral sales when calculating the allowance for loan losses associated with impaired real estate collateral dependent loans.
Previously, the Company used the greater of fifteen percent or actual estimated selling costs. Currently, the Company uses the actual
estimated selling costs, and an adjustment to appraised value based on the age of the appraisal. These changes are intended to more
accurately reflect the estimated net sale proceeds from the sale of impaired collateral dependent real estate loans. This change in
methodology resulted in the allowance for loan losses as of March 31, 2013 being $494,000 more than it would have been without
this change in methodology.
During the three months ended June 30, 2013, the Company modified its loss migration analysis methodology used to determine the
formula allowance factors. When the Company originally established its loss migration analysis methodology during the quarter
ended March 31, 2012, it reviewed the loss experience of each rolling twelve month period over the previous three years in order to
calculate an annualized loss rate by loan category and risk rating. The use of three years of loss experience data was originally used
because that was the extent of the detailed loss data, by loan category and risk rating that was available at the time. This three year
historical look-back period was used through the quarter ended March 31, 2013. Starting with the quarter ended June 30, 2013, the
Company reviews all available detailed loss experience data, going back to, and including, the twelve month period ended June 30,
2009, and does not limit the look-back period to the most recent three years of historical loss data. Using this data, the Company
calculates loss factors for each quarter from the quarter ended June 30, 2009 to the most recent quarter. The Company then calculates
a weighted average formula allowance factor for each loan category and risk rating with the most recent quarterly loss factor being
weighted 125%, the quarter ended June 30, 2009 loss factor being weighted 75%, and the loss factors for all the quarters between the
most recent quarter and the quarter ended June 30, 2009, being weighted on a linear scale from 75% to 125%. This change is intended
to more accurately reflect the risk inherent in the loan portfolio by considering historical loss data for all years as the data for new
periods becomes available. This change in methodology resulted in the allowance for loan losses as of June 30, 2013 being
$1,314,000 more than it would have been without this change in methodology.
60
During the three months ended September 30, 2013, the Company modified its methodology used to determine the allowance for changing
environmental factors. Previously, the Company compared the current value of each environmental factor to a fixed baseline value. The deviation
of the current value from the baseline value was then multiplied by a conversion factor to determine the required allowance related to each
environmental factor. As of September 30, 2013, the Company replaced the fixed baseline values with average baseline values derived from
historical averages, and adjusted the conversion factors. This change is intended to more accurately reflect the risk inherent in the portfolio by
recognizing that baseline, or normal, levels for environmental factors may change over time. This change in methodology resulted in the allowance
for loan losses as of September 30, 2013 being $1,665,000 more than it would have been without this change in methodology.
Loans purchased or acquired in a business combination are referred to as acquired loans. Acquired loans are valued as of the acquisition date in
accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805, Business Combinations.
Loans acquired with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be
collected are referred to as purchased credit impaired (PCI) loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair
value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not
carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments
of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. Default rates, loss
severity, and prepayment speed assumptions are periodically reassessed and our estimate of future payments is adjusted accordingly. The
difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The difference
between estimated future payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable
yield represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company
determines that the estimated future cash flows of a PCI loan are expected to be more than originally estimated, an increase in the discount rate
(effective yield) would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining
estimated life of the loan. If, after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be less
than previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous
present value however, the discount rate may not be lowered below its original level at acquisition. If the discount rate has been lowered to its
original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan
losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance has been
established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash flows. Only after the
allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably
estimated. PCI loans on nonaccrual status are accounted for using the cost recovery method or cash basis method of income recognition. PCI loans
are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair
value with the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics
and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan. The Company elected to use the “pooled”
method of ASC 310-30 for PCI – other loans in the acquisition of certain assets and liabilities of Granite Community Bank (“Granite”) and
Citizens Bank of Northern California (“Citizens”).
Acquired loans that are not PCI loans are referred to as purchased not credit impaired (PNCI) loans. PNCI loans are accounted for under FASB
ASC Topic 310-20, Receivables – Nonrefundable Fees and Other Costs, in which interest income is accrued on a level-yield basis for performing
loans. For income recognition purposes, this method assumes that all contractual cash flows will be collected, and no allowance for loan losses is
established at the time of acquisition. Post-acquisition date, an allowance for loan losses may need to be established for acquired loans through a
provision charged to earnings for credit losses incurred subsequent to acquisition. Under ASC 310-20, the loss would be measured based on the
probable shortfall in relation to the contractual note requirements, consistent with our allowance for loan loss policy for similar loans.
Throughout these financial statements, and in particular in Note 4 and Note 5, when we refer to “Loans” or “Allowance for loan losses” we mean
all categories of loans, including Originated, PNCI, PCI – cash basis, and PCI– other. When we are not referring to all categories of loans, we will
indicate which we are referring to – Originated, PNCI, PCI – cash basis, or PCI–other.
When referring to PNCI and PCI loans we will use the terms “nonaccretable difference”, “accretable yield”, or “purchase discount”. Nonaccretable
difference is the difference between undiscounted contractual cash flows due and undiscounted cash flows we expect to collect, or put another way,
it is the undiscounted contractual cash flows we do not expect to collect. Accretable yield is the difference between undiscounted cash flows we
expect to collect and the value at which we have recorded the loan on our financial statements. On the date of acquisition, all purchased loans are
recorded on our consolidated financial statements at estimated fair value. Purchase discount is the difference between the estimated fair value of
loans on the date of acquisition and the principal amount owed by the borrower, net of charge offs, on the date of acquisition. We may also refer to
“discounts to principal balance of loans owed, net of charge-offs”. Discounts to principal balance of loans owed, net of charge-offs is the difference
between principal balance of loans owed, net of charge-offs, and loans as recorded on our financial statements. Discounts to principal balance of
loans owed, net of charge-offs arise from purchase discounts, and equal the purchase discount on the acquisition date.
Loans are also categorized as “covered” or “noncovered”. Covered loans refer to loans covered by a Federal Deposit Insurance Corporation
(“FDIC”) loss sharing agreement. Noncovered loans refer to loans not covered by a FDIC loss sharing agreement.
61
Foreclosed Assets
Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially
recorded at fair value less estimated costs to sell at the date of foreclosure, establishing a new cost basis. 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.
Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Gain or loss
on sale of foreclosed assets is included in noninterest income. Foreclosed assets that are not subject to a FDIC loss-share agreement
are referred to as noncovered foreclosed assets.
Foreclosed assets acquired through FDIC-assisted acquisitions that are subject to a FDIC loss-share agreement, and all assets acquired
via foreclosure of covered loans are referred to as covered foreclosed assets. Covered foreclosed assets are reported exclusive of
expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered foreclosed assets at
the loan’s carrying value, inclusive of the acquisition date fair value discount.
Covered foreclosed assets are initially recorded at estimated fair value less estimated costs to sell on the acquisition date based on
similar market comparable valuations less estimated selling costs. Any subsequent valuation adjustments due to declines in fair value
will be charged to noninterest expense, and will be mostly offset by noninterest income representing the corresponding increase to the
FDIC indemnification asset for the offsetting loss reimbursement amount. Any recoveries of previous valuation adjustments will be
credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to the
FDIC.
Premises and Equipment
Land is carried at cost. Land improvements, buildings and equipment, including those acquired under capital lease, are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method
over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and
15-40 years for land improvements and buildings.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and other intangible assets
acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for
impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment.
The Company has an identifiable intangible asset consisting of core deposit intangibles (CDI). CDI are amortized over their
respective estimated useful lives, and reviewed for impairment.
Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less
costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the consolidated balance sheet.
As of December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value. This determination is made at the reporting unit level. The Company may choose to first assess
qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than
not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the
Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then goodwill
is deemed not to be impaired. However, if the Company concludes otherwise, or if the Company elected not to first assess qualitative
factors, then the Company performs the first step of a two-step impairment test by calculating the fair value of the reporting unit and
comparing the fair value with the carrying amount of the reporting unit. Second, if the carrying amount of the reporting unit exceeds
its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied
fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit
goodwill. Currently, and historically, the Company is comprised of only one reporting unit that operates within the business segment
it has identified as “community banking”. Goodwill was not impaired as of December 31, 2013 because the fair value of the reporting
unit exceeded its carrying value.
Mortgage Servicing Rights
Mortgage servicing rights (MSR) represent the Company’s right to a future stream of cash flows based upon the contractual servicing
fee associated with servicing mortgage loans. Our MSR arise from residential mortgage loans that we originate and sell, but retain the
right to service the loans. The net gain from the retention of the servicing right is included in gain on sale of loans in noninterest
income when the loan is sold. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or
alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation
model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to
service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and
losses. Servicing fees are recorded in noninterest income when earned.
62
The Company accounts for MSR at fair value. The determination of fair value of our MSR requires management judgment because
they are not actively traded. The determination of fair value for MSR requires valuation processes which combine the use of
discounted cash flow models and extensive analysis of current market data to arrive at an estimate of fair value. The cash flow and
prepayment assumptions used in our discounted cash flow model are based on empirical data drawn from the historical performance
of our MSR, which we believe are consistent with assumptions used by market participants valuing similar MSR, and from data
obtained on the performance of similar MSR. The key assumptions used in the valuation of MSR include mortgage prepayment
speeds and the discount rate. These variables can, and generally will, change from quarter to quarter as market conditions and
projected interest rates change. The key risks inherent with MSR are prepayment speed and changes in interest rates. The Company
uses an independent third party to determine fair value of MSR.
Indemnification Asset
The Company accounts for amounts receivable under its loss-share agreements entered into with the FDIC in connection with its
purchase and assumption of certain assets and liabilities of Granite as indemnification assets in accordance with FASB ASC Topic
805, Business Combinations. FDIC indemnification assets are initially recorded at fair value, based on the discounted value of
expected future cash flows under the loss-share agreements. The difference between the fair value and the undiscounted cash flows
the Company expects to collect from the FDIC will be accreted into noninterest income over the life of the FDIC indemnification
asset. FDIC indemnification assets are reviewed quarterly and adjusted for any changes in expected cash flows based on recent
performance and expectations for future performance of the covered portfolios. These adjustments are measured on the same basis as
the related covered loans and covered other real estate owned. Any increases in cash flow of the covered assets over those expected
will reduce the FDIC indemnification asset and any decreases in cash flow of the covered assets under those expected will increase
the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest
income.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is established through a provision for losses – unfunded commitments charged to noninterest
expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses
inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits,
and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectability,
and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and
size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded
commitments, and current economic conditions that may affect the borrower’s or depositor’s ability to pay.
During the three months ended June 30, 2013, the Company modified the methodology employed to estimate potential losses on
unfunded commitments. Similar to the Allowance for Loan Losses, the Company performs a migration analysis of historical loss
experience. Prior to this quarter, the loss experience of each quarter over the previous three years was reviewed in order to calculate
an annualized loss rate by loan category. Going forward, the Company has chosen to review all loss experience available since the
conversion to a loss migration analysis. This change is intended to more accurately reflect the risk inherent in the unfunded
commitments and appropriately consider all losses incurred in prior years. This change in methodology resulted in the reserve for
unfunded commitments as of June 30, 2013 being $335,000 more than it would have been without this change in methodology.
Income Taxes
The Company’s accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of
taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been
recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of
enacted tax laws. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized.
Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes
paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax
assets will be realized. Interest and/or penalties related to income taxes are reported as a component of noninterest income.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit
card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are
funded.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that
area of California north of, and including, Stockton; central California as that area of the state south of Stockton, to and including,
Bakersfield; and southern California as that area of the state south of Bakersfield.
Reclassifications
Certain amounts reported in previous consolidated financial statements have been reclassified to conform to the presentation in this
report. These reclassifications did not affect previously reported net income or total shareholders’ equity.
Recent Accounting Pronouncements
FASB issued Accounting Standards Update (“ASU”) No. 2012-06, Business Combinations (Topic 805): Subsequent Accounting for
an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial
Institution. ASU 2012-06 requires that when a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-
20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to
be collected on the
63
indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the
reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change
in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification
agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). The Company
adopted this Standard on January 1, 2013, and the adoption did not have a significant impact on the Company’s consolidated financial
statements.
FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income. ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of
reclassifications out of accumulated other comprehensive income. The Company adopted this Standard on January 1, 2013, and the adoption
did not have a significant impact on the Company’s consolidated financial statements.
FASB issued ASU No. 2014-04, Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage
Loans upon Foreclosure. ASU 2014-04 clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be
considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan
receivable should be derecognized and the real estate property recognized. The Update is effective for public business entities for annual
periods, and interim periods within those annual periods, beginning after December 15, 2014. The Update is not expected to have a significant
impact on the Company’s consolidated financial statements.
Note 2 - Business Combinations
On January 21, 2014, TriCo announced that it had entered into an Agreement and Plan of Merger and Reorganization under which it would
acquire North Valley Bancorp. North Valley Bancorp shareholders will receive a fixed exchange ratio of 0.9433 shares of TriCo common
stock for each share of North Valley Bancorp common stock, which would provide North Valley Bancorp shareholders with aggregate
ownership, on a pro forma basis, of approximately 28.6% of the common stock of the combined company. Based on TriCo’s closing stock
price of $27.66 on January 17, 2014, North Valley Bancorp shareholders would have received consideration valued at approximately $26.09
per share.
The merger will not be completed unless a number of customary closing conditions are met, including, among others, approval of the merger
by shareholders of both companies, the registration of the offering of the TriCo common stock to the North Valley Bancorp shareholders
under the Securities Act of 1933, receipt of required regulatory and other approvals and the expiration of applicable statutory waiting periods,
the accuracy of specified representations and warranties of each party, the receipt of tax opinions confirming certain tax aspects of the merger,
North Valley Bancorp’s satisfaction of certain financial measures shortly prior to closing, and the absence of any injunctions or other legal
restraints. If the Merger Agreement is terminated, under certain circumstances, TriCo could be required to pay a termination fee to North
Valley Bancorp equal to $3,800,000.
TriCo has agreed to appoint three North Valley Bancorp directors to TriCo’s board upon closing of the merger. The merger is expected to be
completed in the second or third quarter of 2014, subject to approval of the merger by shareholders of both companies, receipt of required
regulatory and other approvals and satisfaction of customary closing conditions.
North Valley Bancorp, headquartered in Redding, California, is the parent of North Valley Bank and had approximately $917.8 million in
assets and 22 commercial banking offices in Shasta, Humboldt, Del Norte, Mendocino, Yolo, Sonoma, Placer and Trinity Counties in
Northern California at December 31, 2013. In connection with the acquisition, North Valley Bank will merge into Tri Counties Bank.
As of December 31, 2013, on a pro forma consolidated basis with North Valley Bancorp, TriCo would have had approximately $3.61 billion
in assets.
On September 23, 2011, the California Department of Financial Institutions closed Citizens Bank of Northern California, Nevada City,
California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Citizens from the FDIC under a
whole bank purchase and assumption agreement without loss sharing. With this agreement, the Bank added one administration building and
seven traditional bank branches, including two in Grass Valley, and one in each of Nevada City, Penn Valley, Lake of the Pines, Truckee, and
Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and provides further opportunity to
fill in the Bank’s market presence in the Northern California market.
The assets acquired and liabilities assumed for the Citizens acquisition have been accounted for under the acquisition method of accounting
(formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the
acquisition date. The fair values of the assets acquired and liabilities assumed were determined based on the requirements of the Fair Value
Measurements and Disclosures topic of the FASB ASC. The tax treatment of FDIC assisted acquisitions is complex and subject to
interpretations that may result in future adjustments of deferred taxes as of the acquisition date. The terms of the agreement provide for the
FDIC to indemnify the Bank against claims with respect to liabilities of Citizens not assumed by the Bank and certain other types of claims
identified in the agreement.
64
A summary of the net assets received in the Citizens acquisition, at their estimated fair values, is presented below:
(in thousands)
Asset acquired:
Cash and cash equivalents
Securities available-for-sale
Restricted equity securities
Loans
Core deposit intangible
Foreclosed assets
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Other borrowings
Other liabilities
Total liabilities assumed
Net assets acquired/bargain purchase gain
Citizens
September 23, 2011
$
$
$
$
$
80,707
9,353
1,926
167,484
898
8,412
1,524
270,304
239,899
22,038
792
262,729
7,575
In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount
of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer. In the Citizens acquisition, net assets with a cost
basis of $26,682,000 were transferred to the Bank. In the Citizens acquisition, the Company recorded a bargain purchase gain of
$7,575,000 representing the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities
assumed.
A summary of the estimated fair value adjustments resulting in the bargain purchase gain in the Citizens acquisition are presented below:
(in thousands)
Cost basis net assets acquired
Cash payment received from FDIC
Fair value adjustments:
Cash and cash equivalents
Loans
Foreclosed assets
Core deposit intangible
Deposits
Borrowings
Other
Bargain purchase gain
Citizens
September 23, 2011
26,682
$
44,140
539
(57,745)
(5,609)
898
(382)
(28)
(920)
7,575
$
The Bank acquired only certain assets and assumed certain liabilities of Citizens. A significant portion of Citizens’s operations, its
facilities and its central operations and administrative functions were not retained by the Bank. Therefore, disclosure of supplemental pro
forma financial information, especially prior period comparison is deemed neither practical nor meaningful given the troubled nature of
Citizens prior to the date of acquisition. The Bank did not immediately acquire all the banking facilities, furniture or equipment of
Citizens as part of the purchase and assumption agreement. However, the Bank had the option to lease the real estate and purchase the
furniture and equipment from the FDIC. The term of this option expired 90 days from the acquisition date. Prior to the expiration of the
option, The Bank agreed to purchase essentially all of the furniture and equipment, and assume all of the property leases except for the
administration building and Citizen’s Auburn branch. During the three months ended March 31, 2012, the Bank transferred the
operations of Citizen’s Auburn branch to the Bank’s existing branch in Auburn, and vacated the Citizen’s administration building.
The Company identified the loans acquired in the Citizens acquisition as either PNCI or PCI loans. The Company identified certain of
the Citizens PCI loans as having cash flows that were not reasonably estimable and elected to place these loans in nonaccrual status
under the cash basis method for income recognition (“PCI – cash basis” loans). The Company elected to use the ASC 310-30 “pooled”
method of accounting for all other Citizens PCI loans (“PCI – other” loans).
65
The following table presents a reconciliation of the undiscounted contractual cash flows, nonaccretable difference, accretable yield, fair
value, purchase discount, and principal balance of loans for the various categories of Citizens PNCI and PCI loans as of the acquisition
date. For PCI loans, the purchase discount does not necessarily represent cash flows to be collected as a portion of it is a nonaccretable
difference:
(in thousands)
Undiscounted contractual cash flows
Undiscounted cash flows not expectedto be collected
(nonaccretable difference)
Undiscounted cash flows expected to be collected
Accretable yield at acquisition
Estimated fair value of loans acquired at acquisition
Purchase discount
Principal balance loans acquired
Citizens Loans – September 23, 2011
PCI -
other
$ 69,346
PCI -
cash basis
$ 35,205
(26,846)
42,500
(10,146)
32,354
23,207
$ 55,561
(24,517)
10,688
—
10,688
14,174
$ 24,862
PNCI
$ 230,106
—
230,106
(105,664)
124,442
20,364
$ 144,806
Total
$ 334,657
(51,363)
283,295
(115,810)
167,484
57,745
$ 225,229
In estimating the fair value of Citizens PNCI loans at the acquisition date, the Company calculated the contractual amount and timing of
undiscounted principal and interest payments on an individual loan basis and then discounted those cash flows using an appropriate
market rate of interest adjusted for liquidity and credit loss risks inherent in each loan. The Citizens PNCI loans expected accretable
yield above represents undiscounted interest, and along with the purchase discount, is accounted for using an effective interest method
consistent with our accounting for originated loans.
In estimating the fair value of Citizens PCI – cash basis loans at the acquisition date, the Company calculated the contractual amount and
timing of undiscounted principal and interest payments and estimated the amount of undiscounted expected principal recovery using
historic loss rates or estimated collateral values if applicable. The difference between these two amounts represents the nonaccretable
difference. The Company used its estimate of the amount of undiscounted expected principal recovery as the fair value of the Citizens
PCI – cash basis loans, and placed these loans in nonaccrual status. Interest income and principal reductions on these PCI – cash basis
loans are recorded only when they are received. At each financial reporting date, the carrying value of each PCI – cash basis loan is
compared to an updated estimate of expected principal payment or recovery for each loan. To the extent that the loan carrying amount
exceeds the updated expected principal payment or recovery, a provision for loan loss would be recorded as a charge to income and an
allowance for loan loss established.
In estimating the fair value of Citizens PCI – other loans at the acquisition date, the Company calculated the contractual amount and
timing of undiscounted principal and interest payments and estimated the amount and timing of undiscounted expected principal and
interest payments. The difference between these two amounts represents the nonaccretable difference. On the acquisition date, the
amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”.
The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted
expected cash flows and the current carrying value of the loans. For PCI loans the accretable yield is accreted into interest income over
the life of the estimated remaining cash flows. For further information regarding the accounting for PCI – other loans, and acquired
loans in general, see the discussion under the heading “Loans and Allowance for Loan Losses” in Note 1 above.
The operations of Citizens, included in the Company’s operating results from September 23, 2011 to December 31, 2011, added
approximately $6,171,000 and $54,000 to interest income and interest expense, respectively, $1,462,000 to provision for loan losses,
$8,029,000 to noninterest income, including a bargain purchase gain of $7,575,000, and $1,865,000 to noninterest expense. Included in
the $6,171,000 of Citizens related interest income recorded from September 23, 2011 to December 31, 2011, is $3,146,000 of interest
income from fair value discount accretion. Citizens’ results of operations prior to the acquisition are not included in the Company’s
operating results. As of December 31, 2011, nonrecurring expenses related to the Citizens acquisition were insignificant.
During the three months ended March 31, 2012, the Company completed the conversion of Citizens’ information and data processing
systems to the Bank’s systems, and consolidated the Citizens Auburn branch into the Bank’s existing Auburn branch. The operations of
Citizens, included in the Company’s operating results from January 1, 2012 to December 31, 2012, added approximately $17,832,000
and ($20,000) to interest income and interest expense, respectively, $3,844,000 to provision for loan losses, $2,584,000 to noninterest
income, and $5,785,000 to noninterest expense. Included in the $17,832,000 of Citizens related interest income recorded from January 1,
2012 to December 31, 2012, is $7,572,000 of interest income from fair value discount accretion. Included in the $2,584,000 of Citizens
related noninterest income recorded from January 1, 2012 to December 31, 2012, is a $230,000 loss on disposal of fixed assets related to
the system conversion noted above. Included in the $5,785,000 of Citizens related noninterest expense recorded from January 1, 2012 to
December 31, 2012, is $415,000 of outside data processing expenses related to the system conversion noted above. Such operating
results are not necessarily indicative of future operating results.
66
Note 3—Investment Securities
The amortized cost and estimated fair values of investments in debt and equity securities are summarized in the following tables:
Amortized
Cost
December 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
Securities Available for Sale
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Corporate debt securities
Total securities available for sale
Securities Held to Maturity
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Total securities held to maturity
Securities Available for Sale
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Corporate debt securities
Total securities available for sale
$ 93,055 $ 4,445 $
77
(1)
38 —
5,513
1,877
(357) $ 97,143
5,589
1,915
(358) $104,647
$100,445 $ 4,560 $
$227,864 $
12,640
$240,504 $
298 $ (5,540) $222,622
11,185
—
298 $ (6,995) $233,807
(1,455)
Amortized
Cost
December 31, 2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
$143,633 $ 8,068
323
43
$ 8,434
9,098
1,862
$154,593
— $151,701
9,421
—
1,905
—
$163,027
—
The Company had no investment securities held to maturity at December 31, 2012.
No investment securities were sold during 2013, 2012, or 2011. Investment securities with an aggregate carrying value of
$62,064,000 and $66,911,000 at December 31, 2013 and 2012, respectively, were pledged as collateral for specific borrowings, lines
of credit and local agency deposits.
The amortized cost and estimated fair value of debt securities at December 31, 2013 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 December 31, 2013, obligations of U.S. government corporations and agencies with a cost basis
totaling $320,919,000 consist almost entirely of 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
December 31, 2013, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S.
government corporations and agencies to be approximately 5.6 years. Average remaining life is defined as the time span after which
the principal balance has been reduced by half.
Investment Securities
(In thousands)
Due in one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Totals
67
Available for Sale
Held to Maturity
$
505 $
Estimated
Fair Value
Amortized
Cost
Amortized
Cost
Estimated
Fair Value
—
—
536
—
—
3,966
33,988
—
—
66,157 $240,504 $233,807
$100,445 $104,647 $240,504 $233,807
3,819
33,017
63,104
Gross unrealized losses on investment 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:
December 31, 2013
Securities Available for Sale:
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Corporate debt securities
Total securities available-for-sale
Securities Held to Maturity:
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Corporate debt securities
Total securities available-for-sale
Less than 12 months
Fair Value
Unrealized
Loss
12 months or more
Fair
Value
Unrealized
Loss
(in thousands)
Total
Fair Value
Unrealized
Loss
$ 10,287 $
199
—
$ 10,486 $
(357) —
(1) —
— —
(358) —
— $ 10,287 $
—
199
— —
— $ 10,486 $
(357)
(1)
—
(358)
$188,218 $ (5,540) —
(1,455) —
— —
$199,403 $ (6,995) —
11,185
—
— $188,218 $ (5,540)
(1,455)
—
—
—
— $199,403 $ (6,995)
11,185
—
At December 31, 2012, the Company had no investment securities with gross unrealized losses.
Obligations of U.S. government corporations and agencies: Unrealized losses on investments in obligations of U.S. government
corporations and agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S.
Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a
price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and
not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these
investments are not considered other-than-temporarily impaired. At December 31, 2013, 31 debt securities representing obligations of
U.S. government corporations and agencies had unrealized losses with aggregate depreciation of 2.89% from the Company’s
amortized cost basis.
Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political
subdivisions were caused by increases in required yields by investors in these types of securities. It is expected that the securities
would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to
changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be
required to sell, these investments are not considered other-than-temporarily impaired. At December 31, 2013, 14 debt securities
representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of 11.34% from the
Company’s amortized cost basis.
Corporate debt securities: At December 31, 2013, no corporate debt securities had unrealized losses.
68
Note 4 – Loans
A summary of loan balances follows (in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loan on real estate
Consumer:
Home equity lines of credit
Home equity loans
Auto Indirect
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total loans, net of deferred loan fees and discounts
Total principal balance of loans owed, net of charge-offs
Unamortized net deferred loan fees
Discounts to principal balance of loans owed, net of charge-offs
Total loans, net of unamortized deferred loan fees and discounts
Noncovered loans
Covered loans
Total loans, net of unamortized deferred loan fees and discounts
Allowance for loan losses
Originated
PNCI
December 31, 2013
PCI -
Cash basis
PCI -
Other
Total
$ 129,882 $ 60,475
57,678
118,153
824,912
954,794
— $ 4,656 $ 195,013
912,850
—
1,107,863
—
30,260
34,916
316,207
13,849
946
25,608
356,610
124,650
13,576 $ 6,200
—
—
—
6,200
19
253
—
2,074
15,903
693
3,883
486
—
81
4,450
6,516
339,866
14,588
946
27,763
383,163
131,878
—
—
—
—
—
—
30,367
17,125
47,492
1,566
45
1,611
31,933
17,170
49,103
$1,483,546 $134,749 $ 6,219 $47,493 $1,672,007
$1,487,240 $142,786 $ 16,475 $56,879 $1,703,380
(3,694)
(27,679)
$1,483,546 $134,749 $ 6,219 $47,493 $1,672,007
$1,483,546 $134,749 $ 6,219 $19,581 $1,644,095
27,912
$1,483,546 $134,749 $ 6,219 $47,493 $1,672,007
(385) $ (3,656) $ (38,245)
$ (31,354) $ (2,850) $
—
(9,386)
—
(10,256)
—
(8,037)
(3,694)
—
27,912
—
—
—
69
A summary of loan balances follows (in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loan on real estate
Consumer:
Home equity lines of credit
Home equity loans
Auto Indirect
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total loans, net of deferred loan fees and discounts
Total principal balance of loans owed, net of charge-offs
Unamortized net deferred loan fees
Discounts to principal balance of loans owed, net of charge-offs
Total loans, net of unamortized deferred loan fees and discounts
Noncovered loans
Covered loans
Total loans, net of unamortized deferred loan fees and discounts
Allowance for loan losses
Originated
PNCI
December 31, 2012
PCI -
Cash basis
PCI -
Other
Total
$ 121,255 $ 5,413
72,090 $ 1,289
1,289
77,503
— $ 5,016 $ 131,684
878,446
1,010,130
29,943
34,959
775,124
896,379
311,671
13,011
3,816
24,263
352,761
125,122
16,788
342
—
2,418
19,548
869
7,612
49
—
—
7,661
22
5,954
155
—
32
6,141
9,515
342,025
13,557
3,816
26,713
386,111
135,528
—
—
—
—
—
—
6,582
3,399
9,981
11,877
11,196
23,073
18,459
14,595
33,054
$1,397,335 $ 97,920 $ 8,972 $ 60,596 $1,564,823
$1,400,147 $111,286 $ 20,621 $ 75,277 $1,607,331
(2,812)
(39,696)
$1,397,335 $ 97,920 $ 8,972 $ 60,596 $1,564,823
$1,397,335 $ 97,920 $ 8,972 $ 18,708 $1,522,935
41,888
$1,397,335 $ 97,920 $ 8,972 $ 60,596 $1,564,823
$ (35,769) $ (1,969) $ (1,054) $ (3,856) $ (42,648)
—
(14,681)
—
(11,649)
—
(13,366)
(2,812)
—
41,888
—
—
—
The following is a summary of the change in accretable yield for PCI – other loans during the periods indicated (in thousands):
Change in accretable yield:
Balance at beginning of period
Acquisitions
Accretion to interest income
Reclassification (to) from nonaccretable difference
Balance at end of period
Note 4 – Loans (continued)
70
Year ended December 31,
2012
2013
$ 22,337
—
(6,305)
2,201
$ 18,232
$ 25,145
—
(7,756)
4,948
$ 22,337
Note 5 – Allowance for Loan Losses
The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the
periods indicated.
Allowance for Loan Losses—Year Ended December 31, 2013
RE Mortgage
Home Equity
Resid.
Comm.
(in thousands)
Beginning balance $ 3,523 $ 8,782 $ 21,367 $ 1,155 $ 243 $
Charge-offs
(2,038)
Recoveries
994
(Benefit)
(2,651)
1,053
(46)
345
(68)
195
(94)
41
Loans
Lines
(668)
1,962
(3,394)
106
(304)
$ 3,154 $ 9,700 $ 16,375 $ 1,208 $ 66 $
provision
Ending balance
Ending balance:
Individ. evaluated
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
696 $ 4,703 $ 1,400 $
(20)
(887)
63
759
(1,599)
340
779 $
(140)
65
559
21
589 $ 4,331 $ 1,559 $ 1,263 $
116
887
Total
42,648
(7,543)
3,855
(715)
38,245
for impairment $
775 $ 1,198 $ 1,140 $
169 $
1 $
8 $
585 $
91 $
8 $
3,975
Loans pooled for
evaluation
Loans acquired
with
deteriorated
credit quality
(in thousands)
Ending balance:
Total loans
Individ. evaluated
$ 2,039 $ 7,815 $ 14,749 $ 1,039 $ 65 $
581 $ 2,402 $
751 $
789 $
30,230
$
340 $
687 $
486 — —
— $ 1,344 $
717 $
466 $
4,040
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Loans, net of unearned fees – As of December 31, 2013
$195,013 $912,850 $339,866 $14,588 $ 946 $27,763 $131,878 $31,933 $17,170 $1,672,007
for impairment $ 7,342 $ 59,936 $ 6,918 $
778 $ 60 $
90 $ 3,177 $ 2,756 $
178 $
81,235
Loans pooled for
evaluation
Loans acquired
with
deteriorated
credit quality
$183,015 $822,654 $322,865 $13,324 $ 886 $27,592 $122,166 $27,611 $16,947 $1,537,060
$ 4,656 $ 30,260 $ 10,083 $
486 — $
81 $ 6,535 $ 1,566 $
45 $
53,712
71
Note 5 – Allowance for Loan Losses (continued)
RE Mortgage
Home Equity
Auto
Other
Construction
Allowance for Loan Losses—Year Ended December 31, 2012
(in thousands)
Beginning balance
Charge-offs
Recoveries
Provision (benefit)
Ending balance
Ending balance:
Individ. evaluated for
impairment
Loans pooled for
evaluation
Loans acquired with
deteriorated credit
quality
(in thousands)
Ending balance:
Total loans
Individ. evaluated for
impairment
Loans pooled for
evaluation
Loans acquired with
deteriorated credit
quality
(in thousands)
Beginning balance
Charge-offs
Recoveries
Provision (benefit)
Ending balance
Ending balance:
Individ. evaluated for
Resid.
Lines
$ 2,404 $ 13,217 $ 18,258 $ 1,101 $ 215 $
Comm.
Loans
Indirect
(1,558)
147
2,530
(8,042)
(3,457)
1,020
398
(1,998) 10,753
(385)
100
339
(83)
215
(104)
$ 3,523 $ 8,782 $ 21,367 $ 1,155 $ 243 $
Consum.
C&I
Comm.
Resid.
932 $ 6,545 $ 1,817 $ 1,425 $
(100)
(406)
(1,251)
(1,202)
412 —
643
860
(546)
106
(423)
(1,234)
779 $
696 $ 4,703 $ 1,400 $
Total
45,914
(16,484)
3,795
9,423
42,648
$
631 $
515 $ 2,264 $
81 $
5 $
47 $
840 $
11 $
111 $
4,505
$ 2,526 $ 8,026 $ 17,862 $
995 $ 238 $
649 $ 2,342 $
430 $
165 $
33,233
$
366 $
241 $ 1,241 $
79 — — $ 1,521 $
959 $
503 $
4,910
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Loans, net of unearned fees – As of December 31, 2012
$131,684 $878,446 $342,025 $13,557 $3,816 $26,713 $135,528 $18,459 $14,595 $1,564,823
$ 6,586 $ 71,077 $ 10,056 $
528 $ 197 $
121 $ 8,562 $ 3,596 $
607 $ 101,330
$120,082 $776,137 $318,403 $12,825 $3,619 $26,560 $117,429 $ 8,281 $10,589 $1,393,925
$ 5,016 $ 31,232 $ 13,566 $
204 — $
32 $ 9,537 $ 6,582 $ 3,399 $
69,568
RE Mortgage
Allowance for Loan Losses—Year Ended December 31, 2011
Home Equity
Auto
Other
Construction
Comm.
Loans
Resid.
Lines
$ 3,007 $12,700 $15,054 $ 795 $1,229 $
(1,655)
126
926
(4,451) (9,746)
573
4,841 12,377
(789)
45
1,050
(427)
379
(966)
127
Indirect
$ 2,404 $13,217 $18,258 $1,101 $ 215 $
Consum.
C&I
Resid.
Comm.
Total
701 $ 5,991 $1,824 $1,270 $ 42,571
(22,047)
(1,158)
2,330
839
550
23,060
932 $ 6,545 $1,817 $1,425 $ 45,914
(2,534) (634) (653)
40
2,915 599 768
173
28
24 $
892 $ 4,618 $1,324 $
193 $ 258 $ 971 $ 5,993
57 $ 35,710
impairment
29 $
Loans pooled for evaluation $ 1,750 $11,374 $14,531 $ 978 $ 186 $
Loans acquired with
460 $ 1,620 $ 2,365 $
73 $
$
deteriorated credit quality $
194 $
223 $ 1,362 $
50 — $
16 $ 1,734 $ 235 $ 397 $ 4,211
(in thousands)
Ending balance:
Total loans
Individ. evaluated
for impairment
Loans pooled for
evaluation
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Loans, net of unearned fees – As of December 31, 2011
$139,586 $826,336 $357,305 $14,844 $10,821 $23,360 $139,131 $22,122 $17,527 $1,551,032
$ 10,167 $ 71,893 $ 9,388 $
661 $
571 $
109 $ 9,526 $ 5,627 $ 6,899 $ 114,841
$122,903 $721,217 $333,348 $14,026 $10,250 $23,202 $115,765 $ 8,281 $ 5,845 $1,354,837
Loans acquired
with deteriorated
credit quality
$ 6,516 $ 33,226 $ 14,569 $
157 — $
49 $ 13,840 $ 8,214 $ 4,783 $
81,354
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.
72
The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass
to Loss. A description of the general characteristics of the risk grades is as follows:
•
•
•
Pass – This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most
if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability,
leverage, and working capital.
Special Mention – This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines
and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the
repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant
more than normal supervision and attention.
Substandard – This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this
rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is,
however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect
the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true.
There is a definite need for a well defined workout/rehabilitation program.
•
Doubtful – This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as
Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable
and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection,
perfecting liens on additional collateral, and financing plans.
•
Loss – This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered
uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not
mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer
writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss
should be charged off no later than the end of the quarter in which the loss is identified.
The following tables present ending loan balances by loan category and risk grade for the periods indicated:
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Credit Quality Indicators – As of December 31, 2013
$121,969 $768,596 $203,232 $12,284 $ 717 $24,653 $121,580 $25,836 $16,571 $1,394,438
1,265 15,862
6,648 40,454
118
24,411
111
64,684
13
— — — — —
$129,882 $824,912 $316,207 $13,849 $ 946 $25,608 $124,650 $30,367 $17,125 $1,483,546
343
211
10 — —
96
2,122 4,435
4,529
504
9,446 1,061
756
196
3
938
$ 59,798 $ 48,548 $ 12,716 $
253 — $ 2,020 $
380 — — $ 123,715
5,810
3,320
—
677
195 — —
665 — —
6,336
313 — —
18
4,698
— — —
36
— — —
—
— — — — — —
693 — — $ 134,749
$ 60,475 $ 57,678 $ 13,576 $
$ 4,656 $ 30,260 $ 10,083 $
53,712
$195,013 $912,850 $339,866 $14,588 $ 946 $27,763 $131,878 $31,933 $17,170 $1,672,007
253 — $ 2,074 $
486 — $
81 $ 6,535 $ 1,566 $
45 $
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Credit Quality Indicators – As of December 31, 2012
(in thousands)
Originated loans:
Pass
Special
mention
Substandard
Loss
Total originated
PNCI loans:
Pass
Special
mention
Substandard
Loss
Total PNCI
PCI loans
Total loans
(in thousands)
Originated loans:
Pass
Special mention
Substandard
$108,946 $686,593 $291,701 $11,892 $2,949 $23,154 $113,595 $ 7,744 $10,221 $1,256,795
37,170
356
619 103,370
$121,255 $775,124 $311,671 $13,011 $3,816 $24,263 $125,122 $11,877 $11,196 $1,397,335
6,955
3,122 21,184
9,187 67,347 13,015
285
3,224
8,303 3,848
958
151
555
564
531
336
$ 4,968 $ 64,917 $ 15,915 $
342 — $ 2,240 $
848 — — $
89,230
Total originated
PNCI loans:
Pass
Special mention —
Substandard
436
Loss
5,249
1,924
193 — —
680 — —
104
74
9 — — — — —
5,567
3,114
9
97,920
$ 5,413 $ 72,090 $ 16,788 $
$ 5,016 $ 31,232 $ 13,566 $
69,568
$131,684 $878,446 $342,025 $13,557 $3,816 $26,713 $135,528 $18,459 $14,595 $1,564,823
21 — —
— — —
— — —
869 — — $
32 $ 9,537 $ 6,582 $ 3,399 $
342 — $ 2,418 $
204 — $
Total PNCI
PCI loans
Total loans
73
Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are susceptible to three
primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in
collateral value. Typically non-payment is due to loss of job and will follow general economic trends in the marketplace driven
primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or
a combination of the two.
Problem consumer loans are generally identified by payment history of the borrower (delinquency). The Bank manages its consumer
loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggest modifications if appropriate,
and, when continued scheduled payments become unrealistic, initiate repossession or foreclosure through appropriate channels.
Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third
parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are
obtained at initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable
and the loan has been classified.
Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner
occupied real estate are primarily susceptible to changes in the business conditions of the related business. This may be driven by,
among other things, industry changes, geographic business changes, changes in the individual fortunes of the business owner, and
general economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by
equipment or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other
personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral.
When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support
and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral
generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily
susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most
often these shifts are a result of changes in general economic or market conditions or overbuilding and resultant over-supply. Losses
are dependent on value of underlying collateral at the time of default. Values are generally driven by these same factors and
influenced by interest rates and required rates of return as well as changes in occupancy costs.
Construction loans, whether owner occupied or non-owner occupied commercial real estate loans or residential development loans,
are not only susceptible to the related risks described above but the added risks of construction itself including cost over-runs,
mismanagement of the project, or lack of demand or market changes experienced at time of completion. Again, losses are primarily
related to underlying collateral value and changes therein as described above.
Problem C&I loans are generally identified by periodic review of financial information which may include financial statements, tax
returns, rent rolls and payment history of the borrower (delinquency). Based on this information the Bank may decide to take any of
several courses of action including demand for repayment, additional collateral or guarantors, and, when repayment becomes unlikely
through borrower’s income and cash flow, repossession or foreclosure of the underlying collateral.
Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third
parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are
obtained at initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable
and the loan has been classified.
Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with
the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will
estimate its probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge
the loan down to the estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue
the underlying collateral and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months
depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated
and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued through lawsuit and
attachment of wages or judgment liens on borrower’s other assets.
The following table shows the ending balance of current, past due, and nonaccrual originated loans by loan category as of the date
indicated:
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2013
(in thousands)
Originated loan
balance:
Past due:
30-59 Days
60-89 Days
> 90 Days
Total past due
Current
Total orig. loans
> 90 Days and still
accruing
Nonaccrual loans
284 —
2,213
447
8,321
$ 2,272 $ 2,304 $ 3,121 $
1,661
1,070
4,824
1,050
14,806
$ 3,003 $ 4,517 $ 5,241 $
126,879 820,395 310,966 13,257
888 25,545 123,529 30,354 16,927 1,468,740
$129,882 $824,912 $316,207 $13,849 $ 946 25,608 $124,650 $30,367 $17,125 $1,483,546
296 — — $
40 $
198
76 — $
16
13 —
7
749
198 $
13 $
63 $ 1,121 $
264 $ 24 $
16
312
592 $ 58 $
1
33
— — — — — —
$ 4,697 $ 30,732 $ 4,972 $
719 $ 54 $
26 $ 1,280 $ 2,473 $
— — —
178 $
—
45,131
74
The following table shows the ending balance of current, past due, and nonaccrual PNCI loans by loan category as of the date
indicated:
(in thousands)
PNCI loan balance:
Past due:
30-59 Days
60-89 Days
> 90 Days
Total past due
Current
Total PNCI loans
> 90 Days and still accruing
Nonaccrual loans
Analysis of Past Due and Nonaccrual PNCI Loans – As of December 31, 2013
RE Mortgage
Resid.
Comm.
Home Equity
Lines
Loans
Auto
Other
Indirect
Consum.
Construction
Resid. Comm.
C&I
Total
799 $ 1,081 $
313 — — $
512 $
352
38 — — — — — —
217 — — — — — — —
$
799 $
49 — — — $ 1,673
—
390
—
217
49 — — — $ 2,280
$
59,676 56,597 13,225 $253 — 2,025 $693 — — 132,469
$60,475 $57,678 $13,576 $253 — $ 2,074 $693 — — $134,749
— — — — — — — — —
—
36 — — — $ 1,866
$
429 — — $
351 — — $
262 $ 1,139 $
The following table shows the ending balance of current, past due, and nonaccrual originated loans by loan category as of the date
indicated:
(in thousands)
Originated loan
balance:
Past due:
30-59 Days
60-89 Days
> 90 Days
Total past due
Current
Total orig. loans
> 90 Days and still
accruing
Nonaccrual loans
RE Mortgage
Home Equity
Auto
Other
Construction
Resid.
Comm.
Lines
Loans
Indirect
Consum.
C&I
Resid.
Comm.
Total
Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2012
278
1,578
674 13,829
10,136
$ 1,702 $ 2,695 $ 3,371 $
2,926
819
23,126
3,395
$ 2,654 $ 18,102 $ 7,585 $
36,188
118,601 757,022 304,086 12,694 3,620 24,142 118,354 11,526 11,102 1,361,147
$121,255 $775,124 $311,671 $13,011 $3,816 $24,263 $125,122 $11,877 $11,196 $1,397,335
309 — $
138 — —
94
42 $
94 $
351 $
67 $ 1,848 $
40
4,782
14
121 $ 6,768 $
67 $
33
217
317 $ 196 $
77 $
40
79
— — — — — —
$ 4,781 $ 37,220 $ 8,486 $
465 $ 174 $
— — —
532 $
49 $ 6,750 $ 3,312 $
—
61,769
The following table shows the ending balance of current, past due, and nonaccrual PNCI loans by loan category as of the date
indicated:
(in thousands)
PNCI loan balance:
Past due:
30-59 Days
60-89 Days
> 90 Days
Total past due
Current
Total PNCI loans
> 90 Days and still accruing
Nonaccrual loans
Analysis of Past Due and Nonaccrual PNCI Loans – As of December 31, 2012
RE Mortgage
Resid. Comm.
Home Equity
Lines
Loans
Auto
Other
Indirect
Consum.
Construction
Resid. Comm.
C&I
Total
500 $
$1,024 $
— —
148
648 $
124 — — $
63 — — — — — —
157 — — — — — —
344 — — $
31 — — — $ 1,679
63
348
43
$1,067 $
31 — — — $ 2,090
4,346 71,442 16,444 $342 — 2,387 $869 — — 95,830
$5,413 $72,090 $16,788 $342 — $ 2,418 $869 — — $97,920
— —
—
42 — — — $ 1,776
$ 113 $ 1,218 $
— — — — — — —
403 — — $
75
Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all
amounts due under the contractual terms. The following tables show the recorded investment (financial statement balance), unpaid
principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated
by those with no related allowance recorded and those with an allowance recorded for the periods indicated.
Impaired Originated Loans – As of December 31, 2013
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
Resid. Comm.
C&I
Total
(in thousands)
With no related allowance recorded:
Recorded investment
Unpaid principal
Average recorded Investment
Interest income
Recognized
With an allowance recorded:
Recorded investment
Unpaid principal
Related allowance
Average recorded Investment
Interest income Recognized
(in thousands)
With no related allowance recorded:
Recorded investment
Unpaid principal
Average recorded Investment
Interest income Recognized
With an allowance recorded:
Recorded investment
Unpaid principal
Related allowance
Average recorded Investment
Interest income Recognized
$4,366 $53,352 $3,710 $ 552 $ 55 $
$6,489 $58,894 $7,299 $1,249 $ 123 $
$4,123 $58,205 $4,410 $ 463 $ 93 $
16 $1,648 $2,473 $ 69 $66,241
21 $1,665 $6,611 $ 138 $82,489
18 $2,154 $1,567 $ 83 $71,116
$ 336 $ 3,361 $ 352 $
36 $ 12 $
1 $ 113 $ 108 $
7 $ 4,326
4 $
$2,630 $ 5,296 $2,779 $ 226 $
6 $
$2,689 $ 5,659 $3,053 $ 291 $
$ 648 $ 1,084 $ 968 $ 169 $
1 $
$2,245 $ 6,077 $3,064 $ 141 $ 12 $
1 $
$ 124 $
287 $ 146 $
18 $
10 $1,517 $ 284 $ 109 $12,855
10 $1,616 $ 284 $ 288 $13,896
5 $ 585 $
7 $ 3,558
91 $
7 $1,817 $1,499 $ 188 $15,050
707
2 $
19 $ 15 $
95 $
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
Resid. Comm.
C&I
Total
Impaired PNCI Loans – As of December 31, 2013
$ 148 $ 1,139 $ 227 — — $
$ 158 $ 3,323 $ 287 — — $
37 $ 1,005 $ 333 — — $
$
21 — — $
11 $
$
233 $
36 $
45 $
39 $
5 $
12 — — $ 1,562
12 — — $ 3,825
7 — — $ 1,421
271
1 — — $
$ 198 $
$ 207 $
$ 128 $
$ 275 $
12 $
$
149 $ 203 — — $
149 $ 215 — — $
114 $ 172 — — $
250 $ 162 — — $
10 — — $
9 $
28 — — — $
28 — — — $
3 — — — $
29 — — — $
1 — — — $
578
599
417
716
32
76
(in thousands)
With no related allowance recorded:
Recorded investment
Unpaid principal
Average recorded Investment
Interest income Recognized
With an allowance recorded:
Recorded investment
Unpaid principal
Related allowance
Average recorded Investment
Interest income Recognized
(in thousands)
With no related allowance recorded:
Recorded investment
Unpaid principal
Average recorded Investment
Interest income Recognized
With an allowance recorded:
Recorded investment
Unpaid principal
Related allowance
Average recorded Investment
Interest income Recognized
RE Mortgage
Resid.
Comm.
Impaired Originated Loans – As of December 31, 2012
Home Equity
Lines
Loans
Auto
Other
Indirect
Consum.
C&I
Construction
Resid. Comm.
Total
$3,520 $66,031 $4,241 $361 $ 163 $
$5,349 $70,709 $6,691 $781 $ 311 $
$6,329 $61,299 $4,311 $329 $ 263 $
$
71 $ 2,513 $
58 $ 1 $
19 $4,238 $3,554 $ 284 $82,411
40 $4,613 $8,227 $ 484 $97,205
42 $7,500 $3,505 $ 517 $84,095
10 $ 2,749
20 $
73 $
3 — $
$2,867 $ 3,258 $5,412 $167 $ 34 $
$3,432 $ 3,556 $7,103 $396 $ 51 $
$ 603 $
5 $
$3,890 $ 7,841 $6,331 $317 $ 102 $
1 $
$
352 $2,237 $ 81 $
129 $ 103 $ 16 $
67 $
42 $ 323 $16,457
30 $4,324 $
42 $ 523 $20,127
32 $4,992 $
12 $ 840 $
11 $ 111 $ 4,252
49 $2,800 $1,543 $6,570 $29,443
428
1 $ 100 $
6 $
5 $
RE Mortgage
Resid.
Comm.
Impaired PNCI Loans – As of December 31, 2012
Home Equity
Lines
Loans
Auto
Other
Indirect
Consum.
C&I
Construction
Resid. Comm.
Total
— $ 1,468 $ 365 — — — — — — $ 1,833
— $ 3,452 $ 586 — — — — — — $ 4,038
11 — — $ 2,474
$
138
— $
5 — — — — — — $
16 $ 2,097 $ 308 $ 11 — $
133 $
31 $
$ 199 $
$ 225 $
$
28 $
$ 213 $
9 $
$
38 — — $
320 $
41 — — $
331 $
163 $
27 — — $
121 $ 148 — — $
1 — — $
12 $
72 — — — $
76 — — — $
35 — — — $
43 — — — $
2 — — — $
629
673
253
525
24
77
(in thousands)
With no related allowance
recorded:
Recorded investment
Unpaid principal
Average recorded Investment
Interest income Recognized
With an allowance recorded:
Recorded investment
Unpaid principal
Related allowance
Average recorded Investment
Interest income Recognized
(in thousands)
With no related allowance
recorded:
Recorded investment
Unpaid principal
Average recorded Investment
Interest income Recognized
With an allowance recorded:
Recorded investment
Unpaid principal
Related allowance
Average recorded Investment
Interest income Recognized
RE Mortgage
Resid.
Comm.
Home Equity
Lines
Loans
Auto
Other
Indirect
Consum.
C&I
Construction
Resid. Comm.
Total
Impaired Originated Loans – As of December 31, 2011
$6,921 $61,205 $5,101 $224 $ 424 $
$8,663 $72,408 $8,519 $528 $ 777 $
$6,557 $53,346 $5,228 $458 $ 569 $
99 $ 7 $ 15 $
$
58 $ 2,235 $
39 $8,473 $1,809 $ 571 $ 84,767
56 $9,229 $2,857 $ 916 $103,953
44 $6,687 $3,942 $3,590 $ 80,421
4 $ 2,801
2 $ 381 — $
$3,246 $10,688 $4,177 $350 $ 147 $
$3,760 $11,094 $4,977 $666 $ 193 $
$ 460 $ 1,613 $2,365 $ 73 $ 29 $
$4,611 $10,019 $4,770 $215 $ 407 $
2 $
$
588 $ 122 $ 3 $
77 $
70 $ 964 $3,818 $6,328 $ 29,788
75 $1,040 $8,698 $6,330 $ 36,833
24 $ 200 $ 258 $ 971 $ 5,993
52 $1,023 $2,334 $3,578 $ 27,009
36 $ (16) $ 387 $ 1,201
2 $
Impaired PNCI Loans – As of December 31, 2011
RE Mortgage
Resid. Comm.
Home Equity
Lines Loans
Auto
Other
Indirect
Consum.
C&I
Construction
Resid. Comm.
Total
— — $ 110 $ 87 — — $
— — $ 126 $ 89 — — $
55 $ 44 — — $
— — $
5 $ 2 — — $
— — $
89 — — $
98 — — $
45 — — $
3 — — $
— — — — — — — — —
— — — — — — — — —
— — — — — — — — —
— — — — — — — — —
— — — — — — — — —
286
313
144
10
—
—
—
—
—
At December 31, 2013, $56,739,000 of Originated loans were TDRs and classified as impaired. The Company had obligations to lend
$25,000 of additional funds on these TDRs as of December 31, 2013. At December 31, 2013, $901,000 of PNCI loans were TDRs
and classified as impaired. The Company had no obligations to lend additional funds on these TDRs as of December 31, 2013.
At December 31, 2012, $57,223,000 of Originated loans were TDRs and classified as impaired. The Company had obligations to lend
$137,000 of additional funds on these TDRs as of December 31, 2012. At December 31, 2012, $950,000 of PNCI loans were TDRs
and classified as impaired. The Company had no obligations to lend additional funds on these TDRs as of December 31, 2012.
At December 31, 2011, $66,160,000 of Originated loans were TDRs and classified as impaired. The Company had obligations to lend
$258,000 of additional funds on these TDRs as of December 31, 2011. At December 31, 2011, $176,000 of PNCI loans were TDRs
and classified as impaired. The Company had no obligations to lend additional funds on these TDRs as of December 31, 2011.
78
The following tables show certain information regarding Troubled Debt Restructurings (TDRs) that occurred during the periods
indicated:
TDR Information for the Year Ended December 31, 2013
Construction
Resid. Comm.
8 — —
RE Mortgage
Home Equity
Lines
Auto
Indirect
Other
(in thousands)
Number
42
Pre-mod outstanding principal balance $2,173 $13,145 $1,546 $251 — — $ 274 — — $17,389
Post-mod outstanding principal
Resid. Comm.
9
2 — —
Consum.
Loans
12
11
Total
C&I
balance
$2,177 $13,146 $1,557 $253 — — $ 275 — — $17,408
Financial impact due to TDR taken as
additional provision
Number that defaulted during the
period
Recorded investment of TDRs that
$ 148 $
27 $ 340 $ (1) — — $
88 — — $
602
4
8
3
1 — —
4
1 —
21
defaulted during the period
$ 443 $ 1,702 $ 150 $ 15 — — $1,363 $ 73 — $ 3,746
Financial impact due to the default of
previous TDR taken as charge-offs
or additional provisions
$
(3) $
7 — — — — $
3 $
5 — $
12
The following tables show certain information regarding Troubled Debt Restructurings (TDRs) that occurred during the periods
indicated:
TDR Information for the Year Ended December 31, 2012
(in thousands)
Number
Pre-mod outstanding principal balance
Post-mod outstanding principal balance
Financial impact due to TDR taken as
RE Mortgage
Home Equity
Resid.
Comm. Lines
15
4
11 — —
$822 $3,220 $1,598 — — $
$842 $3,402 $1,678 — — $
Loans
Auto
Indirect
Other
Consum.
Construction
Resid. Comm.
C&I
Total
1
9
43
38 $1,105 $317 — $ 7,100
38 $1,105 $328 — $ 7,394
3 —
additional provision
$ (11) $ 212 $
Number that defaulted during the period
Recorded investment of TDRs that
1
13
60 — — — $ 317 — — $
5
1 — —
2
3
3
578
28
defaulted during the period
$112 $8,904 $ 500 $ 46 — — $1,238 $139 $ 256 $11,915
Financial impact due to the default of
previous TDR taken as charge-offs or
additional provisions
— — $ (13) $ (1) — — $
50 — — $
36
Modifications classified as Troubled Debt Restructurings 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.
For all new Troubled Debt Restructurings, an impairment analysis is conducted. If the loan is determined to be collateral dependent,
any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current
carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is
determined not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash
flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could
result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated
above.
Typically if a TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered
collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting
from default of previously modified TDR’s are noted above.
79
Note 6 – Foreclosed Assets
A summary of the activity in the balance of foreclosed assets follows (in thousands):
Year ended December 31, 2013
Year ended December 31, 2012
Beginning balance, net
Acquisitions
Additions/transfers from loans
Dispositions/sales
Valuation adjustments
Ending balance, net
Ending valuation allowance
Ending number of foreclosed assets
Proceeds from sale of foreclosed assets
Gain on sale of foreclosed assets
Note 7–Premises and Equipment
Premises and equipment were comprised of:
5,957
—
11,224
(10,992)
(601)
5,588
(414)
28
Noncovered Covered
$ 1,541
$
—
493
(1,279)
(81)
674
—
4
Total
$ 16,332
—
9,365
(16,471)
(1,728)
$ 7,498
$ (2,023)
39
$ 12,483 $ 1,427 $ 13,910 $ 15,319 $ 1,938 $ 17,257
786
$
Noncovered Covered
$ 13,268 $ 3,064
—
—
633
8,732
(1,695)
(14,776)
(1,267)
(461)
$
5,957 $ 1,541
$ (1,357) $ (666)
5
Total
$ 7,498
—
11,717
(12,271)
(682)
$ 6,262
(414)
$
32
$ 1,640
543 $
$
$
1,492
148
243
34
$
$
$
$
December 31,
2013
December 31,
2012
Land & land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
$
$
5,975
30,103
27,881
63,959
(32,397)
31,562
50
31,612
5,929
23,090
25,877
54,896
(32,101)
22,795
4,190
26,985
$
(In thousands)
$
Depreciation expense for premises and equipment amounted to $3,635,000, $3,250,000, and $2,561,000 in 2013, 2012, and 2011, respectively.
Note 8 – Cash Value of Life Insurance
A summary of the activity in the balance of cash value of life insurance follows (in thousands):
Beginning balance
Increase in cash value of life insurance
Gain on life insurance death benefit
Death benefit
Ending balance
End of period death benefit
Number of policies owned
Insurance companies used
Current and former employees and directors covered
Year ended December 31,
2012
2013
$ 50,403
1,820
675
(2,316)
$ 50,582
$ 94,754
133
6
36
$ 50,582
1,727
—
—
$ 52,309
$ 95,513
133
6
36
As of December 31, 2013, the Bank was the owner and beneficiary of 133 life insurance policies, issued by six life insurance companies, covering
36 current and former employees and directors. These life insurance policies are recorded on the Company’s financial statements at their reported
cash (surrender) values. As a result of current tax law and the nature of these policies, the Bank records any increase in cash value of these policies
as nontaxable noninterest income. If the Bank decided to surrender any of the policies prior to the death of the insured, such surrender may result in
a tax expense related to the life-to-date cumulative increase in cash value of the policy. If the Bank retains such policies until the death of the
insured, the Bank would receive nontaxable proceeds from the insurance company equal to the death benefit of the policies. The Bank has entered
into Joint Beneficiary Agreements (JBAs) with certain of the insured that for certain of the policies provide some level of sharing of the death
benefit, less the cash surrender value, among the Bank and the beneficiaries of the insured upon the receipt of death benefits. See Note 15 of these
consolidated financial statements for additional information on JBAs.
80
Note 9–Goodwill and Other Intangible Assets
The following table summarizes the Company’s goodwill intangible as of December 31, 2013 and 2012.
(Dollar in Thousands)
Goodwill
December 31,
2013
15,519
$
Additions
—
Reductions
—
December 31,
2012
15,519
$
The following table summarizes the Company’s core deposit intangibles as of December 31, 2013 and 2012.
(Dollar in Thousands)
Core deposit intangibles
Accumulated amortization
Core deposit intangibles, net
December 31,
2013
$
$
1,460
(577)
883
Additions
—
—
—
Reductions/
Amortization
—
(209)
(209)
$
$
Fully
Depreciated
—
—
—
December 31,
2012
$
$
1,460
(368)
1,092
The Company recorded additions to CDI of $898,000 in conjunction with the Citizens acquisition on September 23, 2011 and $562,000 in
conjunction with the Granite acquisition on May 28, 2010. The following table summarizes the Company’s estimated core deposit intangible
amortization (dollars in thousands):
Years Ended
2014
2015
2016
2017
2018
Thereafter
Estimated Core Deposit
Intangible Amortization
209
$
209
209
209
47
—
$
Note 10–Mortgage Servicing Rights
The following tables summarize the activity in, and the main assumptions we used to determine the fair value of mortgage servicing rights for
the periods indicated (dollars in thousands):
Balance at beginning of period
Additions
Change in fair value
Balance at end of period
Contractually specified servicingfees, late fees and ancillary fees earned
Balance of loans serviced at:
Beginning of period
End of period
Weighted-average prepayment speed (CPR)
Weighted-average discount rate
2013
$ 4,552
1,360
253
$ 6,165
$ 1,774
Years ended December 31,
2012
$ 4,603
1,965
(2,016)
$ 4,552
$ 1,666
2011
$ 4,605
1,105
(1,107)
$ 4,603
$ 1,495
$666,512
$680,197
$598,185
$666,512
$573,300
$598,185
10.3%
10.0%
20.3%
10.0%
19.3%
9.0%
The changes in fair value of MSRs that occurred during 2013 and 2012 were mainly due to changes in principal balances and changes in
estimate life of the MSRs.
Note 11–Indemnification Asset
A summary of the activity in the balance of indemnification asset follows (in thousands):
Beginning balance
Effect of actual covered losses and change in estimated future
covered losses
Reimbursable (revenue) expenses incurred
Payments received
Ending balance
81
Year ended December 31,
2013
$ 1,997
2012
$ 4,405
2011
$ 5,640
(1,419)
(159)
(213)
206
$
(245)
69
(2,232)
$ 1,997
2,059
393
(3,687)
$ 4,405
Note 12 – Other Assets
Other assets were comprised of (in thousands):
Deferred tax asset, net (Note 22)
Prepaid expense
Software
Life insurance proceeds receivable
Advanced compensation
TriCo Capital Trust I & II
Miscellaneous other assets
Total other assets
Note 13–Deposits
A summary of the balances of deposits follows (in thousands):
Noninterest-bearing demand
Interest-bearing demand
Savings
Time certificates, $100,000 and over
Other time certificates
Total deposits
As of December 31,
2012
2013
$26,781 $28,935
3,455
1,550
706
1,440
1,238
1,283
$38,607
2,131
1,318
—
1,175
1,238
3,237
$35,880
December 31,
2013
2012
$ 789,458 $ 684,833
503,465
762,924
180,195
158,285
$2,289,702
533,351
798,986
157,647
131,041
$2,410,483
Certificate of deposit balances of $5,000,000 and $5,000,000 from the State of California were included in time certificates, $100,000
and over, at December 31, 2013 and 2012, respectively. The Bank participates in a deposit program offered by the State of California
whereby the State may make deposits at the Bank’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 Bank. Overdrawn
deposit balances of $1,212,000 and $1,408,000 were classified as consumer loans at December 31, 2013 and 2012, respectively.
At December 31, 2013, the scheduled maturities of time deposits were as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
Total
Scheduled
Maturities
$216,444
38,803
18,253
10,709
4,477
2
$288,688
Note 14 – Reserve for Unfunded Commitments
The following tables summarize the activity in reserve for unfunded commitments for the periods indicated (dollars in thousands):
Balance at beginning of period
Provision for losses – Unfunded commitments
Balance at end of period
Note 15 – Other Liabilities
Other liabilities were comprised of (in thousands):
Years ended December 31,
2013
$ 3,615
(1,200)
$ 2,415
2012
$2,740
875
$3,615
2011
$2,640
100
$2,740
Deferred compensation
Pension liability
Joint beneficiary agreements
Accrued legal settlement
Miscellaneous other liabilities
Total other liabilities
82
December 31,
2013
$ 7,357
14,634
2,623
—
7,097
$31,711
2012
$ 7,738
16,345
2,736
2,090
6,213
$35,122
Note 16 - Other Borrowings
A summary of the balances of other borrowings follows:
Other collateralized borrowings, fixed rate, as of December 31, 2013 of 0.05%, payable
on January 2, 2014
Total other borrowings
December 31,
2013
2012
(in thousands)
$6,335
$6,335
$9,197
$9,197
During August 2007, the Company entered into a security repurchase agreement with principal balance of $50,000,000 that matured
and paid on August 30, 2012. The Company did not enter into any other repurchase agreements during 2013 or 2012. The average
balance of repurchase agreements for 2013 and 2012 was $0 and $33,333,000, respectively, with an average rate of 4.72% during
2012.
The Company had $6,335,000 and $9,197,000 of other collateralized borrowings at December 31, 2013 and December 31, 2012,
respectively. Other collateralized borrowings are generally overnight maturity borrowings from non-financial institutions that are
collateralized by securities owned by the Company. As of December 31, 2013, the Company has pledged as collateral and sold under
agreements to repurchase investment securities with fair value of $17,774,000 under these other collateralized borrowings.
The Company maintains a collateralized line of credit with the Federal Home Loan Bank of San Francisco. Based on the FHLB stock
requirements at December 31, 2013, this line provided for maximum borrowings of $575,654,000 of which none was outstanding,
leaving $575,654,000 available. As of December 31, 2013, the Company has designated loans totaling $1,076,291,000 as potential
collateral under this collateralized line of credit with the FHLB.
The Company maintains a collateralized line of credit with the Federal Reserve Bank of San Francisco. As of December 31, 2013,
this line provided for maximum borrowings of $106,856,000 of which none was outstanding, leaving $106,856,000 available. As of
December 31, 2013, the Company has designated investment securities with fair value of $46,000 and loans totaling $137,205,000 as
potential collateral under this collateralized line of credit with the FRB.
The Company has available unused correspondent banking lines of credit from commercial banks totaling $10,000,000 for federal
funds transactions at December 31, 2013.
Note 17 – Junior Subordinated Debt
On July 31, 2003, the Company formed a subsidiary business trust, TriCo Capital Trust I, to issue trust preferred securities.
Concurrently with the issuance of the trust preferred securities, the trust issued 619 shares of common stock to the Company for
$1,000 per share or an aggregate of $619,000. In addition, the Company issued a Junior Subordinated Debenture to the Trust in the
amount of $20,619,000. The terms of the Junior Subordinated Debenture are materially consistent with the terms of the trust preferred
securities issued by TriCo Capital Trust I. Also on July 31, 2003, TriCo Capital Trust I completed an offering of 20,000 shares of
cumulative trust preferred securities for cash in an aggregate amount of $20,000,000. The trust preferred securities are mandatorily
redeemable upon maturity on October 7, 2033 with an interest rate that resets quarterly at three-month LIBOR plus 3.05%. TriCo
Capital Trust I has the right to redeem the trust preferred securities on or after October 7, 2008. The trust preferred securities were
issued through an underwriting syndicate to which the Company paid underwriting fees of $7.50 per trust preferred security or an
aggregate of $150,000. The net proceeds of $19,850,000 were used to finance the opening of new branches, improve bank services
and technology, repurchase shares of the Company’s common stock under its repurchase plan and increase the Company’s capital.
The $20,619,000 of junior subordinated debentures issued by TriCo Capital Trust I are reflected as junior subordinated debt in the
consolidated balance sheets. The common stock issued by TriCo Capital Trust I are recorded in other assets in the consolidated
balance sheets. As of December 31, 2013, The TriCo Capital Trust I debentures carried an interest rate of 3.29%.
On June 22, 2004, the Company formed a second subsidiary business trust, TriCo Capital Trust II, to issue trust preferred securities.
Concurrently with the issuance of the trust preferred securities, the trust issued 619 shares of common stock to the Company for
$1,000 per share or an aggregate of $619,000. In addition, the Company issued a Junior Subordinated Debenture to the Trust in the
amount of $20,619,000. The terms of the Junior Subordinated Debenture are materially consistent with the terms of the trust preferred
securities issued by TriCo Capital Trust II. Also on June 22, 2004, TriCo Capital Trust II completed an offering of 20,000 shares of
cumulative trust preferred securities for cash in an aggregate amount of $20,000,000. The trust preferred securities are mandatorily
redeemable upon maturity on July 23, 2034 with an interest rate that resets quarterly at three-month LIBOR plus 2.55%. TriCo
Capital Trust II has the right to redeem the trust preferred securities on or after July 23, 2009. The trust preferred securities were
issued through an underwriting syndicate to which the Company paid underwriting fees of $2.50 per trust preferred security or an
aggregate of $50,000. The net proceeds of $19,950,000 were used to finance the opening of new branches, improve bank services and
technology, repurchase shares of the Company’s common stock under its repurchase plan and increase the Company’s capital.
The $20,619,000 of junior subordinated debentures issued by TriCo Capital Trust II are reflected as junior subordinated debt in the
consolidated balance sheets. The common stock issued by TriCo Capital Trust II is recorded in other assets in the consolidated
balance sheets. As of December 31, 2013, The TriCo Capital Trust II debentures carried an interest rate of 2.79%.
83
The debentures issued by TriCo Capital Trust I and TriCo Capital Trust II, less the common securities of TriCo Capital Trust I and
TriCo Capital Trust II, continue to qualify as Tier 1 or Tier 2 capital under interim guidance issued by the Board of Governors of the
Federal Reserve System.
Note 18 - Commitments and Contingencies
Restricted Cash Balances— Reserves (in the form of deposits with the San Francisco Federal Reserve Bank) of $38,359,000 and
$31,594,000 were maintained to satisfy Federal regulatory requirements at December 31, 2013 and 2012. These reserves are included
in cash and due from banks in the accompanying consolidated balance sheets.
Lease Commitments— The Company leases 43 sites under non-cancelable operating leases. The leases contain various provisions for
increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule.
Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of
the initial term. The Company currently does not have any capital leases.
At December 31, 2013, future minimum commitments under non-cancelable operating leases with initial or remaining terms of one
year or more are as follows:
2014
2015
2016
2017
2018
Thereafter
Future minimum lease payments
Operating
Leases
(in thousands)
2,452
$
1,706
1,154
791
429
1,235
7,767
$
Rent expense under operating leases was $4,300,000 in 2013, $4,332,000 in 2012, and $3,810,000 in 2011. Rent expense was offset
by rent income of $216,000 in 2013, $138,000 in 2012, and $32,000 in 2011.
Financial Instruments with Off-Balance-Sheet Risk— The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit, and deposit account overdraft privilege. Those instruments involve, to varying degrees,
elements of risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The
Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for deposit account
overdraft privilege is represented by the overdraft privilege amount disclosed to the deposit account holder.
The following table presents a summary of the Bank’s commitments and contingent liabilities:
(in thousands)
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans
Consumer loans
Real estate mortgage loans
Real estate construction loans
Standby letters of credit
Deposit account overdraft privilege
December 31,
2013
December 31,
2012
$ 136,986
360,194
35,309
22,897
2,601
68,932
$ 123,517
369,467
27,959
36,311
2,905
69,675
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates of one year or less or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on Management’s
credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and
equipment, residential properties, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support private borrowing arrangements. Most standby letters of credit are issued for
one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities
to customers. Collateral requirements vary, but in general follow the requirements for other loan facilities.
84
Deposit account overdraft privilege amount represents the unused overdraft privilege balance available to the Company’s deposit
account holders who have deposit accounts covered by an overdraft privilege. The Company has established an overdraft privilege for
certain of its deposit account products whereby all holders of such accounts who bring their accounts to a positive balance at least once
every thirty days receive the overdraft privilege. The overdraft privilege allows depositors to overdraft their deposit account up to a
predetermined level. The predetermined overdraft limit is set by the Company based on account type.
Legal Proceedings— The Bank owns 10,214 shares of Class B common stock of Visa Inc. which are convertible into Class A common
stock at a conversion ratio of 0.4206 per Class A share. As of December 31, 2013, the value of the Class A shares was $222.68 per
share. Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was $957,000 as of
December 31, 2013, and has not been reflected in the accompanying financial statements. The shares of Visa Class B common stock are
restricted and may not be transferred. Visa Member Banks are required to fund an escrow account to cover settlements, resolution of
pending litigation and related claims. If the funds in the escrow account are insufficient to settle all the covered litigation, Visa may sell
additional Class A shares, use the proceeds to settle litigation, and further reduce the conversion ratio. If funds remain in the escrow
account after all litigation is settled, the Class B conversion ratio will be increased to reflect that surplus.
On September 27, 2012, the Company announced that the Bank entered into a tentative settlement with a former employee who filed a
class action lawsuit against the Bank in the Superior Court of California, Kern County on behalf of herself and a putative class of current
and former Bank employees serving as assistant branch managers seeking undisclosed damages, alleging that the Bank improperly
classified its assistant branch managers as exempt employees under California laws. The lawsuit alleges claims for: failure to pay
overtime compensation; failure to provide meal periods; failure to provide rest periods; failure to provide accurate wage statements;
failure to provide suitable seating; declaratory relief; accounting; and unfair business practices in violation of California Business and
Professions Code section 17200. On September 26, 2012, after efforts to mediate the claim, the Bank and the former employee agreed to
settle the case in an amount ranging from $2,039,500 to $2,500,000, depending primarily on the number of class participants who file
claims, and pending final approval by the court, including determination of the method to allocate settlement payments among current
and former employees who are members of the defined settlement class, and the portion of the total settlement allocable to attorney’s
fees and costs to plaintiff’s counsel. On September 26, 2012, the Bank recorded a $2,090,000 expense and accrued liability in
anticipation of approval of this settlement by the court and estimated related payroll taxes. On May 7, 2013, the court preliminariy
approved the settlement. On August 27, 2013, the court approved a final settlement agreement for $2,429,000, and the Bank recorded an
additional $339,000 expense and accrued liability related to this matter. During September 2013, the Bank paid the settlement amount.
On January 24, 2014, a putative shareholder class action lawsuit was filed against TriCo, North Valley Bancorp and certain other
defendants in connection with TriCo entering into the merger agreement with North Valley Bancorp. The lawsuit, which was filed in the
Shasta County, California Superior Court, alleges that the members of the North Valley Bancorp board of directors breached their
fiduciary duties to North Valley Bancorp shareholders by approving the proposed merger for inadequate consideration; approving the
transaction in order receive benefits not equally shared by other North Valley Bancorp shareholders; entering into the merger agreement
containing preclusive deal protection devices; and failing to take steps to maximize the value to be paid to the North Valley Bancorp
shareholders. The lawsuit alleges claims against TriCo for aiding and abetting these alleged breaches of fiduciary duties. The plaintiff
seeks, among other things, declaratory and injunctive relief concerning the alleged breaches of fiduciary duties injunctive relief
prohibiting consummation of the merger, rescission, attorneys’ of the merger agreement, fees and costs, and other and further relief. At
this stage, TriCo is unable to predict the outcome of the proceedings or their impact on TriCo or North Valley Bancorp.
The Bank is named as defendant in a lawsuit filed by a former employee seeking undisclosed damages, alleging that the Bank
improperly terminated his employment under California law. The Bank denies all allegations and is vigorously defending the suit.
Neither the Company nor its subsidiaries, are party to any other material pending legal proceeding, nor is their property the subject of
any material pending legal proceeding, except routine legal proceedings arising in the ordinary course of their business. None of these
proceedings is expected to have a material adverse impact upon the Company’s business, consolidated financial position or results of
operations.
Other Commitments and Contingencies—The Company has entered into employment agreements or change of control agreements with
certain officers of the Company providing severance payments and accelerated vesting of benefits under supplemental retirement
agreements to the officers in the event of a change in control of the Company and termination for other than cause or after a substantial
and material change in the officer’s title, compensation or responsibilities.
Mortgage loans sold to investors may be sold with servicing rights retained, with only the standard legal representations and warranties
regarding recourse to the Bank. Management believes that any liabilities that may result from such recourse provisions are not
significant.
85
Note 19 – Shareholders’ Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of $8,175,000, $8,522,000, and $7,185,000, in 2013, 2012,
and 2011, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California
Department of Business Oversight. Absent approval from the Commissioner of Department of Business Oversight, 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. Under this law, at December 31, 2013, the Bank may pay dividends
of $44,548,000.
Shareholders’ Rights Plan
On June 25, 2001, the Company announced that its Board of Directors adopted and entered into a Shareholder Rights Plan designed
to protect and maximize shareholder value and to assist the Board of Directors in ensuring fair and equitable benefit to all
shareholders in the event of a hostile bid to acquire the Company.
The Company adopted this Rights Plan to protect shareholders from coercive or otherwise unfair takeover tactics. In general terms,
the Rights Plan imposes a significant penalty upon any person or group that acquires 15% or more of the Company’s outstanding
common stock without approval of the Company’s Board of Directors. The Rights Plan was not adopted in response to any known
attempt to acquire control of the Company.
Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was declared for each common share held of record as of the
close of business on July 10, 2001. No separate certificates evidencing the Rights will be issued unless and until they become
exercisable.
The Rights generally will not become exercisable unless an acquiring entity accumulates or initiates a tender offer to purchase 15% or
more of the Company’s common stock. In that event, each Right will entitle the holder, other than the unapproved acquirer and its
affiliates, to purchase either the Company’s common stock or shares in an acquiring entity at one-half of market value.
The Right’s initial exercise price, which is subject to adjustment, is $49.00 per Right. The Company’s Board of Directors generally
will be entitled to redeem the Rights at a redemption price of $.01 per Right until an acquiring entity acquires a 15% position. The
Rights were scheduled to expire on July 10, 2011, but on July 8, 2011, the Company extended the expiration date to July 10, 2021.
Stock Repurchase Plan
On August 21, 2007, the Board of Directors adopted a plan to repurchase, as conditions warrant, up to 500,000 shares of the
Company’s common stock on the open market. The timing of purchases and the exact number of shares to be purchased will depend
on market conditions. The 500,000 shares authorized for repurchase under this stock repurchase plan represented approximately 3.2%
of the Company’s 15,814,662 outstanding common shares as of August 21, 2007. This stock repurchase plan has no expiration date.
As of December 31, 2013, the Company had repurchased 166,600 shares under this plan.
Stock Repurchased Under Equity Compensation Plans
During the years ended December 31, 2013, 2012, and 2011, employees tendered 172,941, 14,120, and 177,430 shares, respectively,
of the Company’s common stock with market value of $3,490,000, $224,000, and $2,745,000, respectively, in lieu of cash to exercise
options to purchase shares of the Company’s stock and to pay income taxes related to such exercises as permitted by the Company’s
shareholder-approved equity compensation plans. 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. Stock repurchased under equity incentive plans are not counted in the
total of stock repurchased under the stock repurchase plan announced August 21, 2007.
Note 20 - Stock Options and Other Equity-Based Incentive Instruments
In March 2009, the Company’s Board of Directors adopted the TriCo Bancshares 2009 Equity Incentive Plan (2009 Plan) covering
officers, employees, directors of, and consultants to, the Company. The 2009 Plan was approved by the Company’s shareholders in
May 2009. The 2009 Plan allows for the granting of the following types of “stock awards” (Awards): incentive stock options,
nonstatutory stock options, performance awards, restricted stock, restricted stock unit awards and stock appreciation rights. In May
2013, the Company’s shareholders approved an amendment to the 2009 Plan increasing the maximum aggregate number of shares of
TriCo’s common stock which may be issued pursuant to or subject to Awards from 650,000 to 1,650,000. The number of shares
available for issuance under the 2009 Plan is reduced by: (i) one share for each share of common stock issued pursuant to a stock
option or a Stock Appreciation Right and (ii) two shares for each share of common stock issued pursuant to a Performance Award, a
Restricted Stock Award or a Restricted Stock Unit Award. When Awards made under the 2009 Plan expire or are forfeited or
cancelled, the underlying shares will become available for future Awards under the 2009 Plan. To the extent that a share of common
stock pursuant to an Award that counted as two shares against the number of shares again becomes available for issuance under the
2009 Plan, the number of shares of common stock available for issuance under the 2009 Plan shall increase by two shares. Shares
awarded and delivered under the 2009 Plan may be authorized but unissued, or reacquired shares. As of December 31, 2013, 700,500
options for the purchase of common shares remain outstanding, and 937,500 remain available for grant, under the 2009 Plan.
In May 2001, the Company adopted the TriCo Bancshares 2001 Stock Option Plan (2001 Plan) covering officers, employees,
directors of, and consultants to, the Company. Under the 2001 Plan, the option exercise price cannot be less than the fair market value
of the Common Stock at the date of grant except in the case of substitute options. Options for the 2001 Plan expire on the tenth
anniversary of the grant date. Vesting schedules under the 2001 Plan are determined individually for each grant. As of December 31,
2013, 545,870 options for the purchase of common shares remain outstanding under the 2001 Plan. As of May 2009, as a result of the
shareholder approval of the 2009 Plan, no new options may be granted under the 2001 Plan.
86
Stock option activity during 2013 is summarized in the following table:
Outstanding at December 31, 2012
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2013
Number
of Shares
Option Price
per Share
Weighted
Average
Exercise
Price
Weighted
Average Fair
Value on
Date of Grant
1,393,935 $12.60
144,500 $16.59
(248,765) $12.60
(43,300) $17.38
1,246,370 $12.63
to $25.91 $ 17.07
to $19.46 $ 19.31 $
to $20.58 $ 13.03
to $25.91 $ 19.95
to $25.91 $ 18.04
8.91
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 December 31, 2013:
Number of options
Weighted average exercise price
Intrinsic value (in thousands)
Weighted average remaining contractual term (yrs.)
Currently
Exercisable
826,270
$ 18.68
$ 8,808
4.1
Currently Not
Exercisable
420,100
16.78
4,869
8.3
$
$
Total
Outstanding
1,246,370
18.04
$
12,877
$
5.5
The 420,100 options that are currently not exercisable as of December 31, 2013 are expected to vest, on a weighted-average basis,
over the next 3.0 years, and the Company is expected to recognize $2,604,000 of pre-tax compensation costs related to these options
as they vest. The Company did not modify any option grants during 2013 or 2012.
The following table shows the total intrinsic value of options exercised, the total fair value of options vested, total compensation costs
for options recognized in income, and total tax benefit recognized in income related to compensation costs for options during the
periods indicated:
Intrinsic value of options exercised
Fair value of options that vested
Total compensation costs for options recognized in income
Total tax benefit recognized in income related to
compensation costs for options
Weighted average fair value of grants (per option)
2013
$1,777,000
$1,150,000
$1,150,000
Years Ended December 31,
2012
$ 138,000
$1,083,000
$1,083,000
2011
$2,087,000
$ 830,000
$ 830,000
$ 484,000
8.91
$
$ 455,000
6.63
$
$ 349,000
6.27
$
The fair value of the Company’s stock option grants is estimated on the measurement date, which, for the Company, is the date of
grant. The fair value of stock options is estimated using the Black-Scholes option-pricing model. The Company estimated expected
market price volatility and expected term of the options based on historical data and other factors. The weighted-average assumptions
used to determine the fair value of options granted are detailed in the table below:
Assumptions used to value option grants:
Average expected terms (years)
Volatility
Annual rate of dividends
Discount rate
87
7.0
56.2%
1.87%
1.26%
8.8
51.5%
2.36%
1.49%
8.8
51.2%
2.48%
1.70%
Years Ended December 31,
2012
2013
2011
Note 21—Noninterest Income and Expense
The components of other noninterest income were as follows (in thousands):
Service charges on deposit accounts
ATM and interchange fees
Other service fees
Mortgage banking service fees
Change in value of mortgage servicing rights
Total service charges and fees
Gain on sale of loans
Commissions on sale of non-deposit investment products
Increase in cash value of life insurance
Change in indemnification asset
Gain on sale of foreclosed assets
Bargain purchase gain
Sale of customer checks
Lease brokerage income
Loss on disposal of fixed assets
Commission rebates
Gain on life insurance death benefit
Other
Total other noninterest income
Total noninterest income
2013
2011
Years Ended December 31,
2012
$12,716 $14,290 $14,776
7,058
1,722
1,495
(1,107)
23,944
3,037
2,105
1,885
2,059
680
7,575
271
248
(15)
(58)
789
293
18,869
$36,829 $37,980 $42,813
7,762
2,223
1,666
(2,016)
23,925
6,810
3,209
1,820
(286)
786
—
346
276
(420)
(56)
675
895
14,055
8,370
2,144
1,774
253
25,257
5,602
2,983
1,727
(1,649)
1,640
—
377
337
(39)
—
—
594
11,572
Mortgage loan servicing fees, net of change in fair value of mortgage loan servicing rights, totaling $2,027,000, ($350,000), and
$388,000 were recorded in service charges and fees noninterest income for the years ended December 31, 2013, 2012, and 2011,
respectively.
The components of noninterest expense were as follows (in thousands):
Base salaries, net of deferred loan origination costs
Incentive compensation
Benefits and other compensation costs
Total salaries and benefits expense
Occupancy
Equipment
Data processing and software
Assessments
ATM network charges
Advertising
Professional fees
Telecommunications
Postage
Courier service
Foreclosed assets expense
Intangible amortization
Operational losses
Provision for foreclosed asset losses
Change in reserve for unfunded commitments
Legal settlement
Other
Total other noninterest expense
Total noninterest expense
88
2011
2013
Years Ended December 31,
2012
$34,404 $33,093 $29,753
3,735
10,715
44,203
6,198
3,770
3,980
2,491
1,939
2,649
2,004
1,875
935
953
755
177
600
1,984
100
—
8,102
38,512
$93,604 $97,998 $82,715
5,138
11,721
49,952
7,263
4,444
4,793
2,393
2,390
2,876
2,879
2,250
920
1,013
1,474
209
787
1,728
875
2,090
9,662
48,046
4,694
12,838
51,936
7,405
4,162
4,844
2,248
2,480
1,981
3,019
2,449
786
988
514
209
618
682
(1,200)
339
10,144
41,668
Note 22 – Income Taxes
The components of consolidated income tax expense are as follows:
Current tax expense
Federal
State
Deferred tax expense (benefit)
Federal
State
Total tax expense
2013
2012
(in thousands)
2011
$11,618
4,261
15,879
$ 9,895
3,425
13,320
$ 9,645
3,238
12,883
1,976
550
2,526
$18,405
(235)
(148)
(383)
$12,937
(1,298)
(393)
(1,691)
$11,192
A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of revenue and
expense for financial and tax reporting purposes. The net change during the year in the deferred tax asset or liability results in a deferred
tax expense or benefit.
Taxes recorded directly to shareholders’ equity are not included in the preceding table. These taxes (benefits) relating to changes in
unfunded status of the supplemental retirement plans amounting to $1,269,000 in 2013, ($2,000) in 2012, and $828,000 in 2011, taxes
(benefits) related to unrealized gains and losses on available-for-sale investment securities amounting to ($1,780,000) in 2013,
($880,000) in 2012, and $1,090,000 in 2011, taxes (benefits) related to employee stock options of $138,000 in 2013, $13,000 in 2012,
and $114,000 in 2011, and taxes (benefits) related to changes in joint beneficiary agreement liability of $0 in 2013, $64,000 in 2012, and
($105,000) in 2011, were recorded directly to shareholders’ equity.
The temporary differences, tax effected, which give rise to the Company’s net deferred tax asset recorded in other assets are as follows
as of December 31 for the years indicated:
Deferred tax assets:
Allowance for losses
Deferred compensation
Accrued pension liability
Accrued bonus
Other accrued expenses
Unfunded status of the supplemental retirement plans
State taxes
Stock option expense
Nonaccrual interest
Acquisition cost basis
OREO write downs
Total deferred tax assets
Deferred tax liabilities:
Securities income
Unrealized gain on securities
Depreciation
Merger related fixed asset valuations
Securities accretion
Mortgage servicing rights valuation
Indemnification asset
Prepaid expenses and other
Total deferred tax liability
Net deferred tax asset
2013
2012
(in thousands)
$17,096
3,093
5,817
1,037
—
331
1,390
2,225
1,840
699
331
33,859
(986)
(1,767)
(392)
(379)
(256)
(2,416)
(87)
(795)
(7,078)
$26,781
$19,073
3,254
5,272
980
879
1,600
1,297
1,879
1,889
482
1,103
37,708
(1,038)
(3,547)
(344)
(379)
(150)
(1,641)
(840)
(834)
(8,773)
$28,935
The Company believes that a valuation allowance is not needed to reduce the deferred tax assets as it is more likely than not that the
results of future operations will generate sufficient taxable income to realize the deferred tax assets.
89
The Company had no unrecognized tax benefits at December 31, 2013, 2012 or 2011. During the year ended December 31, 2013, the
Company recognized no interest and penalties related to taxes. During the year ended December 31, 2012, the Company recognized
interest and penalties related to taxes of $22,000 and $5,000, respectively. During the year ended December 31, 2011 the Company
recognized no interest and penalties related to taxes. The Company files income tax returns in the U.S. federal jurisdiction, and
California. With few exceptions, the Company is no longer subject to U.S. federal and state/local income tax examinations by tax
authorities for years before 2010 and 2009, respectively.
The provisions for income taxes applicable to income before taxes for the years ended December 31, 2013, 2012 and 2011 differ from
amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory
federal income tax rate are reconciled as follows:
Federal statutory income tax rate
State income taxes, net of federal tax benefit
Tax-exempt interest on municipal obligations
Tax-exempt life insurance related income
Non-deductible joint beneficiary agreement expense
Other
Effective Tax Rate
Years Ended December 31,
2012
35.0%
6.7
(0.5)
(2.0)
0.3
1.0
40.5%
2013
35.0%
6.8
(0.4)
(1.3)
0.2
(0.1)
40.2%
2011
35.0%
6.2
(0.6)
(3.1)
—
0.1
37.6%
Note 23 – Earnings Per Share
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share reflects 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 solely from outstanding stock options, and are determined using
the treasury stock method. Earnings per share have been computed based on the following:
Net income (in thousands)
(number of shares in thousands)
Average number of common shares outstanding
Effect of dilutive stock options
Average number of common shares outstanding used to calculate
diluted earnings per share
Years ended December 31,
2012
$18,994
2013
$27,399
2011
$18,590
16,045
152
15,988
64
15,935
65
16,197
16,052
16,000
Based on an average of quarterly computations, there were 407,985, 967,120, and 831,095, options excluded from the computation of
annual diluted earnings per share for the years ended December 31, 2013, 2012 and 2011, respectively, because the effect of these
options was antidilutive.
90
Note 24 – Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as follows:
Unrealized holding (losses) gains on available for sale securities before reclassifications
Amounts reclassified out of accumulated other comprehensive income
Unrealized holding (losses) gains on available for sale securities after reclassifications
Tax effect
Unrealized holding (losses) gains on available for sale securities, net of tax
Change in unfunded status of the supplemental retirement plans before reclassifications
Amounts reclassified out of accumulated other comprehensive income:
Amortization of prior service cost
Amortization of actuarial losses
Total amounts reclassified out of accumulated other comprehensive income
Change in unfunded status of the supplemental retirement plans after reclassifications
Tax effect
Change in unfunded status of the supplemental retirement plans, net of tax
Change in joint beneficiary agreement liability before reclassifications
Amounts reclassified out of accumulated other comprehensive income
Change in joint beneficiary agreement liability after reclassifications
Tax effect
Change in joint beneficiary agreement liability, net of tax
Total other comprehensive (loss) income
Years Ended December 31,
2013
2012
2011
(in thousands)
$(4,232) $(2,096) $ 2,594
—
—
—
2,594
(2,096)
(4,232)
(1,090)
1,780
880
1,504
(1,216)
(2,452)
1,429
(445)
2,575
153
291
444
3,019
(1,269)
1,750
400
—
400
—
400
153
386
539
1,968
(828)
1,140
(248)
—
(248)
105
(143)
$ (302) $(1,652) $ 2,501
153
288
441
(4)
2
(2)
(370)
—
(370)
(64)
(434)
The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:
Net unrealized gains on available for sale securities
Tax effect
Unrealized holding gains on available for sale securities, net of tax
Unfunded status of the supplemental retirement plans
Tax effect
Unfunded status of the supplemental retirement plans, net of tax
Joint beneficiary agreement liability
Tax effect
Joint beneficiary agreement liability, net of tax
Accumulated other comprehensive income
Note 25 - Retirement Plans
401(k) Plan
December 31,
2013
2012
(in thousands)
$ 4,202
(1,767)
2,435
(787)
331
(456)
(122)
—
(122)
$ 1,857
$ 8,434
(3,547)
4,887
(3,806)
1,600
(2,206)
(522)
—
(522)
$ 2,159
The Company sponsors a 401(k) Plan whereby substantially all employees age 21 and over with 90 days of service may participate.
Participants may contribute a portion of their compensation subject to certain limits based on federal tax laws. The Company does not
contribute to the 401(k) Plan. The Company did not incur any material expenses attributable to the 401(k) Plan during 2013, 2012,
and 2011.
Employee Stock Ownership Plan
Substantially all employees with at least one year of service are covered by a discretionary employee stock ownership plan (ESOP).
Contributions are made to the plan at the discretion of the Board of Directors. Contributions to the plan totaling $1,648,000 in 2013,
$1,229,000 in 2012, and $1,084,000 in 2011, are included in salary expense. Company shares owned by the ESOP are paid dividends
and included in the calculation of earnings per share exactly as other common shares outstanding.
Deferred Compensation Plans
The Company has deferred compensation plans for certain directors and key executives, which allow certain directors and key
executives designated by the Board of Directors of the Company to defer a portion of their compensation. The Company has
purchased insurance on the lives of the participants and intends to hold these policies until death as a cost recovery of the Company’s
deferred compensation obligations of $7,357,000 and $7,738,000 at December 31, 2013 and 2012, respectively. Earnings credits on
deferred balances totaling $568,000 in 2013, $599,000 in 2012, and $649,000 in 2011, are included in noninterest expense.
91
Supplemental Retirement Plans
The Company has supplemental retirement plans for certain directors and key executives. These plans are non-qualified defined
benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to
hold these policies until death as a cost recovery of the Company’s retirement obligations. The cash values of the insurance policies
purchased to fund the deferred compensation obligations and the supplemental retirement obligations were $52,309,000 and
$50,582,000 at December 31, 2013 and 2012, respectively.
The Company recorded in other liabilities the unfunded status of the supplemental retirement plans of $787,000 and $3,806,000
related to the supplemental retirement plans as of December 31, 2013 and 2012, respectively. These amounts represent the amount by
which the projected benefit obligations for these retirement plans exceeded the fair value of plan assets plus amounts previously
accrued related to the plans. The projected benefit obligation is recorded in other liabilities.
At December 31, 2013 and 2012, the unfunded status of the supplemental retirement plans of $787,000 and $3,806,000 were offset by
a reduction of shareholders’ equity accumulated other comprehensive loss of $456,000 and $2,206,000, respectively, representing the
after-tax impact of the unfunded status of the supplemental retirement plans, and the related deferred tax asset of $331,000 and
$1,600,000, respectively. Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not
been recognized as a component of the combined net period benefit cost of the Company’s defined benefit pension plans are
presented in the following table. The Company expects to recognize approximately $32,000 of the net actuarial loss reported in the
following table as of December 31, 2013 as a component of net periodic benefit cost during 2014.
(in thousands)
Transition obligation
Prior service cost
Net actuarial loss
Amount included in accumulated other comprehensive loss
Deferred tax benefit
Amount included in accumulated other comprehensive loss, net of tax
December 31,
2013
$ 11
(35)
811
787
(331)
$ 456
2012
$
13
118
3,675
3,806
(1,600)
$ 2,206
Information pertaining to the activity in the supplemental retirement plans, using a measurement date of December 31, is as follows:
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (loss)/gain
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Fair value of plan assets at end of year
Funded status
Unrecognized net obligation existing at January 1, 1986
Unrecognized net actuarial loss
Unrecognized prior service cost
Accumulated other comprehensive income
Accrued benefit cost
Accumulated benefit obligation
92
December 31,
2013
2012
(in thousands)
$(16,345)
(742)
(643)
2,573
523
$(14,634)
$ —
$ —
$(14,634)
11
811
(35)
(787)
$(14,634)
$(12,954)
$(15,002)
(680)
(687)
(447)
471
$(16,345)
$ —
$ —
$(16,345)
13
3,675
118
(3,806)
$(16,345)
$(14,285)
The following table sets forth the net periodic benefit cost recognized for the supplemental retirement plans:
Net pension cost included the following components:
Service cost-benefits earned during the period
Interest cost on projected benefit obligation
Amortization of net obligation at transition
Amortization of prior service cost
Recognized net actuarial loss
Net periodic pension cost
The following table sets forth assumptions used in accounting for the plans:
Discount rate used to calculate benefit obligation
Discount rate used to calculate net periodic pension cost
Average annual increase in executive compensation
Average annual increase in director compensation
Years Ended December 31,
2013
2012
(in thousands)
2011
$ 743
643
2
153
291
$1,832
$ 680
687
2
153
288
$1,810
$ 657
840
2
153
386
$2,038
Years Ended December 31,
2012
4.00%
4.00%
2.50%
2.50%
2013
4.85%
4.85%
2.50%
2.50%
2011
4.65%
4.65%
4.00%
2.50%
The following table sets forth the expected benefit payments to participants and estimated contributions to be made by the Company
under the supplemental retirement plans for the years indicated:
Years Ended
2014
2015
2016
2017
2018
2019-2023
Expected Benefit
Payments to
Participants
Estimated
Company
Contributions
$
$
(in thousands)
569
569
583
571
584
6,196
$
$
569
569
583
571
584
6,196
Note 26 - Related Party Transactions
Certain directors, officers, and companies with which they are associated were customers of, and had banking transactions with, the
Company or the Bank in the ordinary course of business.
The following table summarizes the activity in these loans for 2013 and 2012 (in thousands):
Balance December 31, 2011
Advances/new loans
Removed/payments
Balance December 31, 2012
Advances/new loans
Removed/payments
Balance December 31, 2013
$1,764
1,568
(964)
$2,368
1,154
(886)
$2,636
Director Chrysler is a principal owner and CEO of Modern Building Inc. Modern Building Inc. provided construction services to the
Company related to new and existing Bank facilities for aggregate payments of $4,261,000, $3,587,000, and $754,000 during 2013,
2012 and 2011, respectively.
Note 27 - 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. Securities available-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 as loans held for sale, loans held for investment and certain other assets. These nonrecurring
fair value adjustments typically involve application of lower of cost or market accounting or impairment write-downs of individual
assets.
93
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.
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.
Level 3 -
Securities available for sale - 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
nonrecurring fair value adjustments as Level 2.
Impaired originated and PNCI loans – Originated and PNCI loans are not recorded at fair value on a recurring basis. However, from
time to time, an originated or PNCI loan is considered impaired and an allowance for loan losses is established. Originated and PNCI
loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. The fair value of an impaired originated or PNCI loan is estimated using one of several
methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those
impaired originated and PNCI loans not requiring an allowance represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. Impaired originated and PNCI loans where an allowance is established
based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on
an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired
originated or PNCI loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value
of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption,
such as deviations from comparable sales, and there is no observable market price, the Company records the impaired originated or
PNCI loan as nonrecurring Level 3.
Foreclosed assets - Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for
sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell.
When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially
observable data, the Company records the impaired originated loan as nonrecurring Level 2. When an appraised value is not available
or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value
contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price,
the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the
valuation allowance are included in other noninterest 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. Additional information regarding
mortgage servicing rights can be found in Note 10 in the consolidated financial statements at Item 1 of this report.
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):
Fair value at December 31, 2013
Securities available-for-sale:
Obligations of U.S. government corporations and agencies
Total
Level 1
Level 2
Level 3
$ 97,143 — $ 97,143 —
Obligations of states and political subdivisions
Corporate debt securities
Mortgage servicing rights
Total assets measured at fair value
Fair value at December 31, 2012
Securities available-for-sale:
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Corporate debt securities
Mortgage servicing rights
Total assets measured at fair value
94
5,589 —
5,589 —
1,915 —
1,915 —
6,165 — — 6,165
— $104,647 $6,165
$110,812
Total
Level 1
Level 2
Level 3
$151,701 — $151,701 —
9,421 —
9,421 —
1,905 —
1,905 —
4,552 — — 4,552
— $163,027 $4,552
$167,579
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 2013 or 2012.
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 years ended December 31, 2013 and 2012. Had there been any transfer into or out of Level 3
during 2013 or 2012, 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):
Year ended December 31,
2013: Mortgage servicing rights
2012: Mortgage servicing rights
Beginning
Balance
$ 4,552
$ 4,603
Transfers
into (out of)
Level 3
Change
Included
in Earnings
— $
253
— $ (2,016)
Ending
Balance
Issuances
$ 1,360 $6,165
$ 1,965 $4,552
The Company’s method for determining the fair value of mortgage servicing rights is described in Note 1. 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). Note 10 contains additional information regarding mortgage servicing rights.
The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2013:
Mortgage Servicing Rights
$
Fair Value
(in thousands)
Valuation Technique
Range, Weighted Average
6,165 Discounted cash flow Constant prepayment rate 6.3%-33.0%, 10.3%
10.0%-12.0%, 10.0%
Discount rate
Unobservable Inputs
The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis, as of the dates
indicated, that had a write-down or an additional allowance provided during the periods indicated (in thousands):
Year ended December 31, 2013
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total assets measured at fair value
Year ended December 31, 2012
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total assets measured at fair value
Total
Level 1 Level 2
Level 3
Total Gains
(Losses)
$20,334 —
948 —
$21,282 —
— $20,334 $ (2,539)
—
(397)
948
— $21,282 $ (2,936)
Total
Level 1 Level 2
Level 3
Total Gains
(Losses)
$29,584 —
2,910 —
$32,494 —
— $29,584 $ (2,890)
—
(842)
2,910
— $32,494 $ (3,732)
The impaired Originated and PNCI loan amount above represents impaired, collateral dependent loans that have been adjusted to fair
value. When we identify a collateral dependent loan as impaired, we measure the impairment 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 we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize
this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease 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.
95
The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent
real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate
owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’s new
basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for
loan and lease 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 non-covered other real estate owned for fair value
adjustments based on the fair value of the real estate.
The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies,
which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to
reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments
may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income
producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal
can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given
these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from
period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual
property.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at
fair value on a nonrecurring basis at December 31, 2013:
Impaired Originated & PNCI
loans
Fair Value
(in thousands)
$20,334
Foreclosed assets
$948
Valuation Technique
Sales comparison
approach
Income approach
Sales comparison
approach
Unobservable Inputs
Range, Weighted Average
Adjustment for differences
between comparable sales (5.0)%-(56.4)%, (10.4)%
Capitalization rate
Adjustment for differences
between comparable sales (6.5)%-(16.7)%, (8.9)%
7.75%-9.25 %, 8.91%
In addition to the methods and assumptions used to estimate the fair value of each class of financial instrument noted above, the
following methods and assumptions were used to estimate the fair value of other classes of financial instruments for which it is
practical to estimate the fair value.
Short-term Instruments - Cash and due from banks, fed funds purchased and sold, interest receivable and payable, and short-term
borrowings are considered short-term instruments. For these short-term instruments their carrying amount approximates their fair
value.
Securities held to maturity - The fair value of securities held to maturity 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 held to maturity classified as Level 3 during any of the periods covered in these financial statements.
Restricted Equity Securities - The carrying value of restricted equity securities approximates fair value as the shares can only be
redeemed by the issuing institution at par.
Originated and PNCI loans - The fair value of variable rate originated and PNCI loans is the current carrying value. The interest rates
on these originated and PNCI loans are regularly adjusted to market rates. The fair value of other types of fixed rate originated and
PNCI loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers
with similar credit ratings for the same remaining maturities. The allowance for loan losses is a reasonable estimate of the valuation
allowance needed to adjust computed fair values for credit quality of certain originated and PNCI loans in the portfolio.
PCI Loans—PCI loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present
value of expected cash flows and approximates fair value.
FDIC Indemnification Asset—The fair value of the FDIC indemnification asset is based on the discounted value of expected future
cash flows under the loss-share agreement.
Deposit Liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable
on demand at the reporting date. These values do not consider the estimated fair value of the Company’s core deposit intangible,
which is a significant unrecognized asset of the Company. The fair value of time deposits and other borrowings is based on the
discounted value of contractual cash flows.
Other Borrowings - The fair value of other borrowings is calculated based on the discounted value of the contractual cash flows using
current rates at which such borrowings can currently be obtained.
96
Junior Subordinated Debentures—The fair value of junior subordinated debentures is estimated using a discounted cash flow model.
The future cash flows of these instruments are extended to the next available redemption date or maturity date as appropriate based
upon the spreads of recent issuances or quotes from brokers for comparable bank holding companies compared to the contractual
spread of each junior subordinated debenture measured at fair value.
Commitments to Extend Credit and Standby Letters of Credit—The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness
of the counter parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates
and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation with the counter parties at the reporting date.
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. 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.
The estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets,
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in
thousands):
December 31, 2013
December 31, 2012
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Financial assets:
Level 1 inputs:
Cash and due from banks
Cash at Federal Reserve and other banks
Level 2 inputs:
Securities held to maturity
Restricted equity securities
Loans held for sale
Level 3 inputs:
Loans, net
Indemnification asset
Financial liabilities:
Level 2 inputs:
Deposits
Other borrowings
Junior subordinated debt
Off-balance sheet:
Level 3 inputs:
Commitments
Standby letters of credit
Overdraft privilege commitments
$
76,915 $
76,915 $
81,086 $
521,453
521,453
667,813
81,086
667,813
240,504
9,163
2,270
233,807
9,163
2,270
—
9,647
12,053
—
9,647
12,053
1,672,007
206
1,760,274
206
1,522,175
1,997
1,607,044
1,997
2,410,483
6,335
41,238
2,411,402
6,335
25,774
2,289,702
9,197
41,238
2,291,841
9,197
28,042
Contract
Amount
Fair
Value
Contract
Amount
Fair
Value
$ 555,386 $
5,554 $ 557,254 $
2,601
68,932
26
689
2,905
69,675
5,573
29
697
97
Note 28 - TriCo Bancshares Condensed Financial Statements (Parent Only)
Condensed Balance Sheets
Assets
Cash and Cash equivalents
Investment in Tri Counties Bank
Other assets
Total assets
Liabilities and shareholders’ equity
Other liabilities
Junior subordinated debt
Total liabilities
Shareholders’ equity:
Common stock, no par value: authorized 50,000,000 shares; issued and outstanding 16,076,662 and
16,000,838 shares, respectively
Retained earnings
Accumulated other comprehensive loss, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Income
Interest expense
Administration expense
Loss before equity in net income of Tri Counties Bank
Equity in net income of Tri Counties Bank:
Distributed
Undistributed
Income tax benefit
Net income
Condensed Statements of Comprehensive Income
Net income
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains on securities arising during the period
Change in minimum pension liability
Change in joint beneficiary agreement liability
Other comprehensive (loss) income
Net income
Condensed Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed equity in earnings of Tri Counties Bank
December 31,
2013
2012
(in thousands)
$ 2,520 $ 2,511
267,118
1,238
$292,546 $270,867
288,746
1,280
$
362 $
41,238
41,600
270
41,238
41,508
89,356
159,733
1,857
250,946
85,561
141,639
2,159
229,359
$292,546 $270,867
2013
Years ended December 31,
2012
(in thousands)
$ (1,247) $ (1,325) $ (1,259)
(582)
(1,841)
(669)
(1,994)
(862)
(2,109)
2011
8,175
20,446
887
7,185
12,470
776
$27,399 $18,994 $18,590
8,522
11,632
834
2013
Years ended December 31,
2012
(in thousands)
$27,399 $18,994 $18,590
2011
(2,452)
1,750
400
(302)
1,504
1,140
(143)
2,501
$27,097 $17,342 $21,091
(1,216)
(2)
(434)
(1,652)
2013
Years ended December 31,
2012
(in thousands)
$ 27,399 $ 18,994 $ 18,590
2011
(20,446)
(11,632)
(12,470)
Stock option vesting expense
Stock option excess tax benefits
Net change in other assets and liabilities
Net cash provided by operating activities
Investing activities: None
Financing activities:
Issuance of common stock through option exercise
Stock option excess tax benefits
Repurchase of common stock
Cash dividends paid — common
Net cash used for financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
98
1,151
(356)
(1,100)
6,648
1,083
(44)
(1,089)
7,312
251
356
(501)
(6,745)
(6,639)
9
2,511
206
44
—
(5,757)
(5,507)
1,805
706
$ 2,520 $ 2,511 $
830
(296)
(818)
5,836
436
296
(753)
(5,742)
(5,763)
73
633
706
Note 29 - 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 and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of December 31, 2013, that the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2013, the Bank was well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that date that Management believes have changed the institution’s
category. The Bank’s actual capital amounts and ratios are also presented in the table.
As of December 31, 2013:
Total Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital (to Average Assets):
Consolidated
Tri Counties Bank
As of December 31, 2012:
Total Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital (to Average Assets):
Consolidated
Tri Counties Bank
Actual
Amount
Ratio
Minimum Capital
Requirement
Amount
Ratio
(dollars in thousands)
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$297,429 14.77% $161,064 8.0%
$295,212 14.67% $160,961 8.0% $201,201 10.0%
N/A N/A
$272,071 13.51% $ 80,532 4.0%
$269,870 13.41% $ 80,480 4.0% $120,720
N/A N/A
6.0%
$272,071 10.17% $107,017 4.0%
$269,870 10.09% $106,965 4.0% $133,706
N/A N/A
5.0%
$273,979 14.53% $150,896 8.0%
$271,723 14.42% $150,796 8.0% $188,495 10.0%
N/A N/A
$250,133 13.27% $ 75,448 4.0%
$247,892 13.16% $ 75,398 4.0% $113,097
N/A N/A
6.0%
$250,133
$247,892
99
9.82% $101,918 4.0%
9.73% $101,866 4.0% $127,333
N/A N/A
5.0%
Note 30 - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters of 2013 and 2012, and is unaudited; however, in the
opinion of Management, it reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the
summarized results for such periods.
Interest and dividend income:
Loans:
Discount accretion PCI – cash basis
Discount accretion PCI – other
Discount accretion PNCI
All other loan interest income
Total loan interest income
Debt securities, dividends and interest bearing cash at Banks (not FTE)
Total interest income
Interest expense
Net interest income
Provision for (benefit from) loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per common share:
Net income (diluted)
Dividends
Interest and dividend income:
Loans:
Discount accretion PCI – cash basis
Discount accretion PCI – other
Discount accretion PNCI
All other loan interest income
Total loan interest income
Debt securities, dividends and interest bearing cash at Banks (not FTE)
Total interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per common share:
Net income (diluted)
Dividends
100
2013 Quarters Ended
December 31,
September 30,
June 30, March 31,
(dollars in thousands, except per share data)
$
$
$
$
255
893
568
22,754
24,470
2,992
27,462
1,123
26,339
172
26,167
7,353
24,878
8,642
3,406
5,236
0.32
0.11
$
$
$
$
140
898
1,115
22,970
25,123
2,413
27,536
1,169
26,367
(393)
26,760
9,127
23,616
12,271
4,910
7,361
$
129
732
815
22,207
23,883
1,873
25,756
1,167
24,589
614
23,975
10,131
23,509
10,597
4,272
$ 6,325
$
167
597
766
22,542
24,072
1,734
25,806
1,237
24,569
(1,108)
25,677
10,218
21,601
14,294
5,817
$ 8,477
0.45
0.11
$ 0.39
$ 0.11
$
$
0.53
0.09
2012 Quarters Ended
December 31,
September 30,
June 30, March 31,
(dollars in thousands, except per share data)
$
$
$
$
42
979
841
22,383
24,245
1,898
26,143
1,372
24,771
1,524
23,247
10,011
25,126
8,132
3,410
4,722
0.29
0.09
$
$
$
$
24
1,192
591
23,723
25,530
1,935
27,465
1,834
25,631
532
25,099
9,127
25,590
8,636
3,616
5,020
$
108
886
1,391
23,407
25,792
2,152
27,944
2,010
25,934
3,371
22,563
10,577
24,367
8,773
3,452
$ 5,321
$
18
776
1,286
22,849
24,929
2,235
27,164
2,128
25,036
3,996
21,040
8,265
22,915
6,390
2,459
$ 3,931
0.31
0.09
$ 0.33
$ 0.09
$
$
0.25
0.09
Note 31 – Subsequent Event
On January 21, 2014, the Company and North Valley Bancorp announced that they entered into an Agreement and Plan of Merger
and Reorganization under which North Valley will merge with and into TriCo Bancshares, with TriCo Bancshares as the surviving
corporation. North Valley Bancorp shareholders will receive a fixed exchange ratio of 0.9433 shares of TriCo Bancshares common
stock for each share of North Valley common stock. The merger is expected to be completed in the second or third quarter of 2014,
subject to approval of the merger by shareholders of both companies, receipt of required regulatory and other approvals and
satisfaction of customary closing conditions.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of TriCo Bancshares is responsible for establishing and maintaining effective internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Under the supervision and with the participation of management, including the principal executive officer and principal financial
officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework
in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation under the framework in the 1992 Internal Control – Integrated Framework, management of the
Company has concluded the Company maintained effective internal control over financial reporting, as such term is defined in
Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2013.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its
inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject
to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be
circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements
may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though
not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial
information contained in this report. The accompanying consolidated financial statements were prepared in conformity with U.S.
generally accepted accounting principles and include, as necessary, best estimates and judgments by management.
Crowe Horwath LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements
as of and for the year ended December 31, 2013, and the Company’s effectiveness of internal control over financial reporting as of
December 31, 2013, as stated in its report, which is included herein.
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
/s/ Thomas J. Reddish
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
March 6, 2014
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
TriCo Bancshares
Chico, California
We have audited the accompanying consolidated balance sheet of TriCo Bancshares (the “Company”) as of December 31, 2013 and
2012 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for
the years then ended. We also have audited TriCo Bancshares’ internal control over financial reporting as of December 31, 2013,
based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). TriCo Bancshares’ management is responsible for these financial statements,
for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TriCo
Bancshares as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, TriCo Bancshares
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria
established in the 1992 Internal Control – Integrated Framework issued by COSO.
/s/ Crowe Horwath LLP
Sacramento, California
March 6, 2014
102
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
TriCo Bancshares
We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity and
cash flows of TriCo Bancshares (the “Company”) for the year ended December 31, 2011. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results
of operations and cash flows of TriCo Bancshares for the year ended December 31, 2011 in conformity with generally accepted
accounting principles in the United States of America.
/s/ Moss Adams LLP
Stockton, California
March 13, 2012
103
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2013, the end of the period covered by this Annual Report on Form 10-K, the Company’s Chief Executive
Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer each concluded that as of December 31, 2013, the Company’s disclosure controls and procedures were
effective to ensure that the information required to be disclosed by the Company in this Annual Report on Form 10-K was recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10-K.
(b) Management’s Report on Internal Control over Financial Reporting and Attestation Report of Registered Public
Accounting Firm
Management’s report on internal control over financial reporting is set forth on page 101 of this report and is incorporated herein by
reference. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by
Crowe Horwath LLP, an independent registered public accounting firm, as stated in its report, which is set forth on page 102 of this
report and is incorporated herein by reference.
(c) Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the fourth quarter of the year ended
December 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
All information required to be disclosed in a current report on Form 8-K during the fourth quarter of 2013 was so disclosed.
104
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 shall either be (i) incorporated herein by reference from the Company’s Proxy Statement for
the 2013 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or (ii) included in an
amendment to this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 shall either be (i) incorporated herein by reference from the Company’s Proxy Statement for
the 2014 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or (ii) included in an
amendment to this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 12 shall either be (i) incorporated herein by reference from the Company’s Proxy Statement for
the 2014 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or (ii) included in an
amendment to this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 shall either be (i) incorporated herein by reference from the Company’s Proxy Statement for
the 2014 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or (ii) included in an
amendment to this Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 shall either be (i) incorporated herein by reference from the Company’s Proxy Statement for
the 2014 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or (ii) included in an
amendment to this Form 10-K.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
1. All Financial Statements.
PART IV
The consolidated financial statements of Registrant are included in Item 8 of this report, and are incorporated herein by
reference.
2.
Financial statement schedules.
Schedules have been omitted because they are not applicable or are not required under the instructions contained in
Regulation S-X or because the information required to be set forth therein is included in the consolidated financial statements
or notes thereto at Item 8 of this report.
3.
Exhibits.
The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this report.
(b) Exhibits filed:
See Exhibit Index under Item 15(a)(3) above for the list of exhibits required to be filed by Item 601 of regulation S-K with this
report.
(c) Financial statement schedules filed:
See Item 15(a)(2) above.
105
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 6, 2014
TRICO BANCSHARES
By: /s/ Richard P. Smith
Richard P. Smith, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Date: March 6, 2014
Date: March 6, 2014
Date: March 6, 2014
Date: March 6, 2014
Date: March 6, 2014
Date: March 6, 2014
Date: March 6, 2014
Date: March 6, 2014
Date: March 6, 2014
Date: March 6, 2014
/s/ Richard P. Smith
Richard P. Smith, President, Chief Executive
Officer and Director (Principal Executive Officer)
/s/ Thomas J. Reddish
Thomas J. Reddish, Executive Vice President and
Chief Financial Officer (Principal Financial and
Accounting Officer)
/s/ Donald J. Amaral
Donald J. Amaral, Director
/s/ William J. Casey
William J. Casey, Director and Chairman of the
Board
/s/ Craig S. Compton
Craig S. Compton, Director
/s/ L. Gage Chrysler
L. Gage Chrysler, Director
/s/ Cory W. Giese
Cory W. Giese, Director
/s/ John S.A. Hasbrook
John S.A. Hasbrook, Director
/s/ Michael W. Koehnen
Michael W. Koehnen, Director
/s/ W. Virginia Walker
W. Virginia Walker, Director
106
Exhibit No.
2.1
2.2
2.3
3.1
3.2
4.1
4.2
4.3
4.4
10.2*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.13*
10.14*
EXHIBIT INDEX
Exhibit
Purchase and Assumption Agreement Whole Bank All Deposits, among the Federal Deposit Insurance Corporation,
receiver of Granite Community Bank, N.A., Granite Bay, California, the Federal Deposit Insurance Corporation and
Tri Counties Bank, dated as of May 28, 2010, and related addendum (incorporated by reference to Exhibit 2.1 to
TriCo’s Current Report on Form 8-K filed June 3, 2010).
Purchase and Assumption Agreement Whole Bank All Deposits, among the Federal Deposit Insurance Corporation,
receiver of Citizens Bank of Northern California, Nevada City, California, the Federal Deposit Insurance
Corporation and Tri Counties Bank, dated as of September 23, 2011, and related addendum (incorporated by
reference to Exhibit 2.1 to TriCo’s Current Report on Form 8-K filed September 27, 2011).
Agreement and Plan of Merger and Reorganization by and between TriCo and North Valley Bancorp dated January
21, 2014 (incorporated by reference to Exhibit 2.1 to TriCo’s Current Report on Form 8-K filed January 21, 2014).
Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to TriCo’s Current Report on Form 8-K
filed on March 16, 2009).
Bylaws of TriCo Bancshares, as amended (incorporated by reference to Exhibit 3.1 to TriCo’s Current Report on
Form 8-K filed February 17, 2011).
Certificate of Determination of Preferences of Series AA Junior Participating Preferred Stock (incorporated by
reference to Exhibit 3.3 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
Rights Agreement dated as of June 25, 2001 between TriCo Bancshares and Mellon Investor Services LLC
(incorporated by reference to Exhibit 1 to TriCo’s Registration Statement on Form 8-A filed on July 5, 2001).
Amendment to Rights Agreement dated as of July 8, 2011 between TriCo Bancshares and BNY Mellon Investor
Services LLC (incorporated by reference to Exhibit 4.1 to TriCo’s Current Report on Form 8-K filed on July 8,
2011).
Amended and Restated Form of Right Certificate (incorporated by reference to Exhibit 4.2 to TriCo’s Current
Report on Form 8-K filed on July 8, 2011).
Form of Change of Control Agreement dated as of July 17, 2014, among TriCo, Tri Counties Bank and each of Dan
Bailey, Bruce Belton, Craig Carney, Richard O’Sullivan, Thomas Reddish, and Ray Rios (incorporated by reference
to Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed on July 23, 2013).
TriCo’s 1995 Incentive Stock Option Plan (incorporated by reference to Exhibit 4.1 to The Company’s Form S-8
Registration Statement dated August 23, 1995 (No. 33-62063)).
TriCo’s 2001 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to TriCo’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2005).
TriCo’s 2009 Equity Incentive plan, as amended (incorporated by reference to Exhibit 10.2 to TriCo’s Current
Report on Form 8-K filed April 3, 2013).
Amended Employment Agreement between TriCo and Richard Smith dated as of March 28, 2013 (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 3, 2013).
Tri Counties Bank Executive Deferred Compensation Plan restated April 1, 1992, and January 1, 2005 (incorporated
by reference to Exhibit 10.9 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
Tri Counties Bank Deferred Compensation Plan for Directors effective January 1, 2005 (incorporated by reference
to Exhibit 10.10 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
2005 Tri Counties Bank Deferred Compensation Plan for Executives and Directors effective January 1, 2005
(incorporated by reference to Exhibit 10.11 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005).
Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1,
2001, and amended and restated January 1, 2004 (incorporated by reference to Exhibit 10.12 to TriCo’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 (incorporated by
reference to Exhibit 10.13 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.15*
Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated
10.16*
10.17*
10.18*
10.19*
January 1, 2004 (incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004).
2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January 1, 2004 (incorporated by
reference to Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George
Barstow, Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Richard O’Sullivan, Thomas
Reddish, Jerald Sax, and Richard Smith (incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003).
Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don
Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and
Alex Vereschagin (incorporated by reference to Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003).
Form of Tri Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties
Bank and each of Craig Carney, Richard Miller, Richard O’Sullivan, and Thomas Reddish (incorporated by
reference to Exhibit 10.16 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
107
10.20*
10.21*
10.22*
21.1
23.1
23.2
31.1
31.2
32.1
32.2
Form of Tri Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank
and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll
Taresh, and Alex Vereschagin (incorporated by reference to Exhibit 10.17 to TriCo’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003).
Form of Indemnification Agreement between TriCo Bancshares and its directors and executive officers (incorporated
by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed September 10, 2013).
Form of Indemnification Agreement between Tri Counties Bank its directors and executive officers (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 10, 2013).
Tri Counties Bank, a California banking corporation, TriCo Capital Trust I, a Delaware business trust, and TriCo
Capital Trust II, a Delaware business trust, are the only subsidiaries of TriCo.
Independent Registered Public Accounting Firm’s Consent
Independent Registered Public Accounting Firm’s Consent
Rule 13a-14(a)/15d-14(a) Certification of CEO
Rule 13a-14(a)/15d-14(a) Certification of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan or arrangement
108
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-190047, 333-66064, 333-115455 and 333-160405 on
Form S-8 of TriCo Bancshares of our report dated March 6, 2014 relating to the consolidated financial statements and effectiveness of
internal control over financial reporting, appearing in this Annual Report on Form 10-K.
Exhibit 23.1
/s/ Crowe Horwath LLP
Sacramento, California
March 6, 2014
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-190047, No. 333-66064, No. 333-115455 and No.
333-160405 on Form S-8 of our report dated March 13, 2012, relating to the 2011 consolidated financial statements, appearing in this
Annual Report on Form 10-K of TriCo Bancshares for the year ended December 31, 2013.
Exhibit 23.2
/s/ Moss Adams LLP
Stockton, California
March 6, 2014
Exhibit 31.1
Rule 13a-14/15d-14 Certification of CEO
I, Richard P. Smith, certify that;
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of TriCo Bancshares;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluations; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 6, 2014
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
Exhibit 31.2
Rule 13a-14/15d-14 Certification of CFO
I, Thomas J. Reddish, certify that;
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of TriCo Bancshares;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluations; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 6, 2014
/s/ Thomas J. Reddish
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
Section 1350 Certification of CEO
In connection with the Annual Report of TriCo Bancshares (the “Company”) on Form 10-K for the year ended December 31, 2013 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard P. Smith, President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
Exhibit 32.1
operations of the Company.
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by
TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request.
Section 1350 Certification of CFO
In connection with the Annual Report of TriCo Bancshares (the “Company”) on Form 10-K for the year ended December 31, 2013 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Reddish, Executive Vice President
and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
Exhibit 32.2
operations of the Company.
/s/ Thomas J. Reddish
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by
TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request.