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, 2014
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)
63 Constitution Drive, Chico, California
(Address of principal executive offices)
94-2792841
(I.R.S. Employer
Identification No.)
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 Global Select Market
(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.
(cid:0)
⌧
YES
NO
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
(cid:0)
YES
NO
⌧
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).
⌧
NO
(cid:0)
YES
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.
⌧
(cid:0)
YES
NO
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).
(cid:0)
YES
NO
⌧
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 2014, was
approximately $289,650,631 (based on the closing sales price of the Registrant’s common stock on the date). This computation
excludes a total of 3,616,101 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 27, 2015, was 22,740,503.
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 2015 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.
TABLE OF CONTENTS
Page Number
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
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
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
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
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Exhibits and Financial Statement Schedules
Signatures
FORWARD-LOOKING STATEMENTS
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8
16
16
17
17
18
20
21
51
51
103
103
103
104
104
104
104
104
104
105
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 73 branch offices in Northern and Central
California and had total assets of approximately $3.9 billion at December 31, 2014. The Bank’s deposits are insured by the Federal Deposit
Insurance Corporation (the “FDIC”) up to applicable limits. See “Business of Tri Counties Bank”. The Company and the Bank are headquartered
in Chico, California.
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 FDIC. See “Regulation
and Supervision.”
TriCo has five capital trusts, which are all wholly-owned trust subsidiaries formed for the purpose of issuing trust preferred securities (“Trust
Preferred Securities”) and lending the proceeds to TriCo. For more information regarding the trust preferred securities please refer to Note 17,
“Junior Subordinated Debt” to the financial statements at Item 8 of this report.
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 part 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 conduct banking
operations on March 11, 1975. The Bank engages in the general commercial banking business in 26 counties in Northern and Central California.
The Bank currently operates from 57 traditional branches and 16 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 arrangement 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, 2014, the total of the Bank’s consumer loans net of deferred fees outstanding was $423,097,000 (18.5%), the total of commercial
loans outstanding was $177,643,000 (7.8%), and the total of real estate loans including construction loans of $76,414,000 was $1,681,783,000
(73.7%). 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.
Acquisition of North Valley Bancorp
On October 3, 2014, TriCo completed the acquisition of North Valley Bancorp following receipt of shareholder approval for both institutions and
all required regulatory approvals. As part of the acquisition, North Valley Bank, a wholly-owned subsidiary of North Valley Bancorp, merged with
and into Tri Counties Bank. In the acquisition, each share of North Valley common stock was converted into the right to receive 0.9433 shares of
TriCo common stock. TriCo issued an aggregate of approximately 6.58 million shares of TriCo common stock to North Valley Bancorp
shareholders, which was valued at a total of approximately $151 million based on the closing trading price of TriCo common stock on October 3,
2014 of $23.01. In addition, each outstanding option to purchase shares of North Valley Bancorp common stock, whether or not previously vested
and exercisable, was cancelled and the holder of the option was entitled to receive from North Valley Bancorp, subject to any required tax
withholding, an amount in cash, without interest, equal to the excess over the exercise price per share, if any, of 0.9433 multiplied by the weighted
average closing price of TriCo’s common stock for the 20 days preceding the merger, a total of $1,061,000. In connection with the merger, TriCo
assumed North Valley Bancorp’s obligations with respect to its outstanding trust preferred securities.
2
North Valley Bank was a full-service commercial bank headquartered in Redding, California. North Valley conducted a commercial
and retail banking services which included accepting demand, savings, and money market rate deposit accounts and time deposits,
and making commercial, real estate and consumer loans. North Valley Bank had $935 million in assets and 22 commercial banking
offices in Shasta, Humboldt, Del Norte, Mendocino, Yolo, Sonoma, Placer and Trinity Counties in Northern California at June 30,
2014.
See Note 2 in the financial statements at Item 8 of this report for a discussion about this transaction.
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, 2014, the Company and the Bank employed 1,009 persons, including seven executive officers. Full time equivalent
employees were 965. 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 other banks, the Bank competes with savings institutions, credit unions and the financial markets for
funds. 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.
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 examination 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.
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 bank holding company, TriCo is required to file reports with the FRB and
the FRB periodically examines the Company. Under the Dodd-Frank Wall Street Reform and Consumer
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Protection Act (the “Dodd-Frank Act”), a bank holding company is required to serve as a source of financial and managerial strength
to its subsidiary bank and, under appropriate circumstances, to commit resources to support the subsidiary bank. Qualified bank
holding companies that elect 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 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.
The Consumer Financial Protection Bureau
The Dodd-Frank Act created the Consumer Financial Protection Bureau (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:
•
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
•
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
•
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:
•
•
•
•
•
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
4
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.
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 (“CRA”) is intended to encourage insured depository institutions, while operating safely and
soundly, to help meet the credit needs of their communities. The CRA 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. The CRA 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 federal banking agencies rate depository institutions’ compliance with the Community Reinvestment. The ratings range from a high of
“outstanding” to a low of “substantial noncompliance.” A less than “satisfactory” rating would likely result in the suspension of any growth of
the Bank through acquisitions or opening de novo branches until the rating is improved. As of its most recent CRA examination, the Bank’s
CRA rating was “Satisfactory.”
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.
5
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.
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.
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 in effect as of December 31, 2014, 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
In July, 2013, the federal banking agencies approved final rules that substantially amend the regulatory risk-based capital rules applicable to
TriCo and the Bank. 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 will be phased in from 2015 to 2019, and will 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 as of January 1, 2015 under the final rules are: (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 previous 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
6
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 (such as 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 became effective on 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%).
The final rules also set forth certain changes for the calculation of risk-weighted assets, which will be phased in 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. We believe that we were in compliance with
the requirements applicable to us as set forth in the final rules as of January 1, 2015.
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.
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. The assessment rate 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.
Interstate Branching
The Dodd-Frank Act authorized national and state banks to establish branches in other states to the same extent as a bank chartered by that state
would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state
banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.
Anti-Money Laundering Laws
A series of banking laws and regulations beginning with the bank Secrecy Act in 1970 requires banks to prevent, detect, and report illicit or
illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the Uniting
and Strengthening America by Providing Appropriate Tools Required to
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Intercept and Obstruct Terrorism Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account
relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer”
standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities.
Transactions with Affiliates
Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal
shareholders (including the Company) or any related interest of such persons. Extensions of credit must be made on substantially the same terms,
including interest rates and collateral as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for
comparable transactions with persons not affiliated with the bank, and must not involve more than the normal risk of repayment or present other
unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. Regulation W requires that
certain transactions between the Bank and its affiliates, including its holding company, be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of
comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
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.
ITEM 1A. RISK FACTORS
In analyzing whether to make or continue holding 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.
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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:
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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, 2014,
approximately 90.9% 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 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.
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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.
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 fourth 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 $34.8
million and $33.5 million, or 1.5% and 2.0%, of our loan portfolio at December 31, 2014 and 2013, respectively. We also originate
agriculture real estate loans, which comprised $67.7 million and $55.5 million or 3.0% and 3.3% of our loan portfolio at
December 31, 2014 and 2013. 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.
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Market and Interest Rate Risk
Low 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.
Regulatory Risks
Recently enacted financial reform legislation has, among other things, created a new Consumer Financial Protection Bureau,
tightened capital standards and resulted in new laws and regulations that are expected to increase our costs of operations.
The Dodd-Frank Act, which was enacted in 2010, significantly changed the current bank regulatory structure and affects the lending,
deposit, investment, trading and operating activities of financial institutions and their holding companies. Among other things, the
Dodd-Frank Act created 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.
It is difficult to predict the continuing impact that 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.
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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:
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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, 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
We may fail to realize anticipated cost savings for the merger with North Valley Bancorp or to integrate the business operations and
managements of our two companies in an efficient manner.
We acquired North Valley Bancorp and its subsidiary, North Valley Bank, on October 3, 2014. The success of the acquisition 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.
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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 delay or 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
may 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 company. If the combined company 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.
Goodwill resulting from the acquisition of North Valley Bancorp may adversely affect our results of operations.
Goodwill and other intangible assets are expected to increase substantially as a result of the acquisition of North Valley Bancorp.
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.
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:
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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.
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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 North Valley Bancorp, Citizens Bank of Northern California and
Granite Community Bank, 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 Community Bank, 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, 2014, $22,713,000, or 0.6%, 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, 2014, the
Bank could have paid $52,798,000 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”.
14
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 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,
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, 2014, directors and executive officers beneficially owned approximately 10.7% of our common stock and our
Employee Stock Ownership Plan owned approximately 5.8%. 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, 2014, we had outstanding trust preferred securities and
accompanying junior subordinated debentures with face value of $62,889,000. 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.
15
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 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company is engaged in the banking business through 81 offices in 26 counties in Northern and Central California including thirteen offices
in Shasta County, nine in Butte County, six in Sacramento and Nevada Counties, five in Placer and Humboldt Counties, three each in Stanislaus,
Siskiyou, and Sutter Counties, two each in Glenn, Mendocino and Trinity Counties, and one each in Colusa, Contra Costa, Del Norte, Fresno,
Kern, Lake, Lassen, Madera, Merced, Sonoma, Tehama, Tulare, Yolo and Yuba Counties. All offices are constructed and equipped to meet
prescribed security requirements.
The Company owns twenty-nine branch office locations, five administrative buildings, two other buildings that it leases out and two that are for
sale. The Company leases forty-four branch office locations, and three administrative locations. 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.
16
ITEM 3. LEGAL PROCEEDINGS
The Bank owns 13,396 shares of Class B common stock of Visa Inc. which are convertible into Class A common stock at a
conversion ratio of 0.4121 per Class A share. As of December 31, 2014, the value of the Class A shares was $262.20 per share.
Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was $1,447,000 as of
December 31, 2014, 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 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. On July 31, 2014 the defendants entered into a memorandum of understanding with the plaintiffs regarding the
settlement of this lawsuit. In connection with the settlement contemplated by the memorandum of understanding and in consideration
for the full settlement and release of all claims, TriCo and North Valley Bancorp agreed to make certain additional disclosures related
to the proposed merger, which are contained in a Current Report on Form 8-K filed by each of the companies. The memorandum of
understanding contemplates that the parties will negotiate in good faith and use their reasonable best efforts to enter into a stipulation
of settlement. The stipulation of settlement will be subject to customary conditions, including court approval following notice to
North Valley Bancorp’s shareholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at
which the court will consider the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of
settlement or that the court will approve the settlement even if the parties were to enter into such stipulation. In such event, the
proposed settlement as contemplated by the memorandum of understanding may be terminated.
On September 15, 2014, a former Personal Banker at one of the Bank’s in-store branches filed a Class Action Complaint against the
Bank in Butte County Superior Court, alleging causes of action related to the observance of meal periods. Plaintiff seeks to represent
a class of “current and former hourly-paid or non-exempt ‘personal bankers’, or employees with the same or similar job duties,
employed by Defendants within the State of California during the preceding four years.” The Bank filed an Answer to the Complaint
on November 6, 2014, denies the charges, and the Bank intends to vigorously defend the lawsuit against class certification and
liability.
On January 20, 2015, a current Personal Banker at one of the Bank’s in-store branches filed a First Amended Complaint against Tri
Counties Bank and TriCo Bancshares, dba Tri Counties Bank, in Sacramento County Superior Court, alleging causes of action related
to wage statement violations. Plaintiff seeks to represent a class of current and former exempt and non-exempt employees who
worked for the Bank “during the time period beginning October 18, 2013 through the date of the filing of this action”. The Company
and the Bank have not yet responded to the First Amended Complaint, deny the charges, and intend to vigorously defend the lawsuit
against class certification and liability.
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.
17
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:
2014:
Fourth quarter
Third quarter
Second quarter
First quarter
2013:
Fourth quarter
Third quarter
Second quarter
First quarter
High
Low
$26.37
$24.19
$26.12
$28.37
$28.76
$23.07
$21.75
$17.90
$22.43
$21.70
$22.44
$23.85
$22.50
$20.50
$15.77
$16.31
As of February 27, 2015 there were approximately 1,712 shareholders of record of the Company’s common stock. On February 27,
2015, the closing sales price was $23.90.
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, 2014, $52,798,000 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, 2014, September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, September 30, 2013, June 30, 2013,
and $0.09 per common share in the quarter ended March 31, 2013.
Issuer Repurchase of Common Stock
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, 2014, 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 2014:
Period
Oct. 1-31, 2014
Nov. 1-30, 2014
Dec. 1-31, 2014
Total
(a) Total number
of shares purchased(1)
—
—
37,647
37,647
(b) Average price paid
per share
—
—
24.99
24.99
$
$
(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(2)
333,400
333,400
333,400
333,400
(1)
Includes shares purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive
plans.
(2) Does not include shares that may be purchased pursuant to various equity incentive plans.
18
The following graph presents the cumulative total yearly shareholder return from investing $100 on December 31, 2009, 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
12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14
100.00 99.37 89.77 108.11 186.67 165.54
100.00 116.93 118.13 137.52 183.66 206.72
100.00 113.31 102.37 129.18 181.76 218.14
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, 2014. 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))
—
1,102,850
1,102,850
$
$
—
18.25
18.25
—
822,428
822,428
19
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.
TRICO BANCSHARES
Financial Summary
(in thousands, except per share amounts)
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:
2014
$ 121,115
4,681
116,434
(4,045)
34,516
110,379
44,616
18,508
26,108
$
$
$
$
$
$
1.47
1.46
0.44
18.41
15.31
17,716
17,923
22,715
2013
$ 106,560
4,696
101,864
(715)
36,829
93,604
45,804
18,405
27,399
$
$
$
$
$
$
1.71
1.69
0.42
15.61
14.59
16,045
16,197
16,077
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
$
$
$
$
$
$
1.19
1.18
0.36
14.33
13.30
15,988
16,052
16,001
$
$
$
$
$
1.17
1.16
0.36
13.55
12.49
15,935
16,000
15,979
$
$
$
$
$
0.38
0.37
0.40
12.64
11.62
15,860
16,010
15,860
$2,245,939
3,916,458
3,380,423
9,276
56,272
418,172
$1,633,762
2,744,066
2,410,483
6,335
41,238
250,946
$1,522,175
2,609,269
2,289,702
9,197
41,238
229,359
$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
Return on average assets
Return on average equity
Net interest margin1
Net loan (recoveries) losses to average loans
Efficiency ratio2
Average equity to average assets
At December 31:
Equity to assets
Total capital to risk-adjusted assets
0.87%
8.67%
4.17%
(0.13)%
72.9%
10.00%
10.68%
15.63%
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%
1
2
Fully taxable equivalent.
The sum of fully taxable equivalent net interest income and noninterest income divided by noninterest expense.
20
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, intangible assets and the fair value of acquired assets and liabilities. 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 October 3, 2014, TriCo completed the acquisition of North Valley Bancorp following receipt of shareholder approval from both institutions and
all required regulatory approvals. As part of the acquisition, North Valley Bank, a wholly-owned subsidiary of North Valley Bancorp, merged with
and into Tri Counties Bank. In the acquisition, each share of North Valley common stock was converted into the right to receive 0.9433 shares of
TriCo common stock. TriCo issued an aggregate of approximately 6.58 million shares of TriCo common stock to North Valley Bancorp
shareholders, which was valued at a total of approximately $151 million based on the closing trading price of TriCo common stock on October 3,
2014 of $21.73. TriCo also assumed North Valley Bancorp’s obligations with respect to its outstanding trust preferred securities. Beginning on
October 4, 2014, the effect of revenue and expenses from the operations of North Valley Bancorp, and the TriCo Bancshares common shares
issued in consideration of the merger are included in the results of the Company.
North Valley Bank was a full-service commercial bank headquartered in Redding, California. North Valley conducted a commercial and retail
banking services which included accepting demand, savings, and money market rate deposit accounts and time deposits, and making commercial,
real estate and consumer loans. North Valley Bank had $935 million in assets and 22 commercial banking offices in Shasta, Humboldt, Del Norte,
Mendocino, Yolo, Sonoma, Placer and Trinity Counties in Northern California at June 30, 2014.
On October 25, 2014, North Valley Bank’s electronic customer service and other data processing systems were converted onto Tri Counties Bank’s
systems. Between January 7, 2015 and January 21, 2015, four Tri Counties Bank branches and four former North Valley Bank branches were
consolidated into other Tri Counties Bank or other former North Valley Bank branches. See Note 2 in the financial statements at Item 8 of this
report for a discussion about this transaction.
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.
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
21
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 North Valley Bancorp 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.
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.
Results of Operations
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
2014
$ 116,434
4,045
34,516
(110,379)
(18,508)
$ 26,108
1.46
$
8.67%
0.87%
Year ended December 31,
2013
$101,864
715
36,829
(93,604)
(18,405)
$ 27,399
1.69
$
11.34%
1.04%
2012
$101,372
(9,423)
37,980
(97,998)
(12,937)
$ 18,994
1.18
$
8.44%
0.75%
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)
2014
$121,115
(4,378)
116,737
303
$116,737
Year ended December 31,
2013
$106,560
(4,696)
101,864
350
$102,214
2012
$108,716
(7,344)
101,372
257
$101,629
4.17%
4.18%
4.32%
Net interest income (FTE) for the year ended December 31, 2014 was $116,737,000, an increase of $14,523,000 or 14.2% compared to the year
ended December 31, 2013.
22
The increase in net interest income (FTE) was due primarily to a $353,071,000 (14.4%) increase in the average balance of interest
earning assets to $2,796,571,000, and the use of fed funds sold to purchase higher yielding investments throughout 2014 that were
partially offset by a 44 basis point decrease in the average yield on loans to 5.62% and a 17 basis point decrease in the average yield
on investments to 3.01% during the year ended December 31, 2014 when compared to the year ended December 31, 2013. The
acquisition of North Valley Bancorp on October 3, 2014 contributed approximately $6,730,000, to interest income from loans,
including approximately $480,000 of loan purchase discount accretion, and $1,310,000 to interest income from investments from
October 4, 2014 to December 31, 2014. For the quarter ended December 31, 2014, the average yields on the acquired North Valley
Bancorp loans, including the effect of loan purchase discount accretion, and investments were approximately 5.68% and 2.72%
(FTE), respectively. The “Yield” and “Volume/Rate” tables shown below are useful in illustrating and quantifying the developments
that affected net interest income during 2014 and 2013.
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.
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, 2014
Average
balance
Interest
income/expense
Rates
earned/paid
$1,847,749
527,742
17,024
404,056
2,796,571
216,878
$3,013,449
$ 605,241
926,389
291,515
7,512
44,366
1,875,023
801,056
36,085
301,285
$3,013,449
$
103,887
15,590
808
1,133
121,418
484
1,153
1,637
4
1,403
4,681
5.62%
2.95%
4.75%
0.28%
4.34%
0.08%
0.12%
0.56%
0.05%
3.16%
0.25%
$
116,737
4.09%
4.17%
(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.
23
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, 2013
Average
balance
Interest
income/expense
Rates
earned/paid
$
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%
$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
$
102,214
4.10%
4.18%
Year ended December 31, 2012
Average
balance
Interest
income/expense
Rates
earned/paid
$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
$
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%
$
101,629
4.21%
4.32%
(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.
24
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:
2014 over 2013
Yield/
Rate
Total
2013 over 2012
Yield/
Rate
Volume
Total
Volume
(dollars in thousands)
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) innet interest income
Provision for Loan Losses
$14,364 $(8,025) $ 6,339 $ 3,765 $(6,713) $(2,948)
559
248
78
(2,063)
(168)
(263)
66
(7,078)
9,093
22
(544)
22,935
8,854
(125)
(560)
727
511
12
(239)
(147)
(16)
(8,427) 14,508
5,015
81
167
(142)
—
94
200
(125)
(40)
(112)
—
62
(215)
89
56
(373)
(1,324)
—
(345)
(44)
(242)
127
(156)
(254)
(276)
—
156
(77)
(15) (1,552) (1,096)
$22,735 $(8,212) $14,523 $ 6,567 $(5,982) $
(256)
(186)
(529)
(1,600)
(77)
(2,648)
585
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, 2014 and 2013” 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, 2014 and 2013.
The Company benefited from a $4,045,000 reversal of provision for loan losses during the year ended December 31, 2014 versus a benefit
from reversal of provision for loan losses of $715,000 during the year ended December 31, 2013. As shown in the Table labeled
“Allowance for Loan Losses—year ended December 31, 2014” at Note 5 in Item 8 of Part II of this report, all categories of loans except
residential real estate mortgage loans, home equity loans and other consumer loans experienced a reversal of provision for loan losses
during the year ended December 31, 2014. The level of provision, or reversal of provision, for loan losses of each loan category during
the year ended December 31, 2014 was due primarily to a decrease in the required allowance for loan losses as of December 31, 2014
when compared to the required allowance for loan losses as of December 31, 2013 less net charge-offs during the year ended
December 31, 2014, and the effect of the changes in the allowance methodology during the year ended December 31, 2014 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
home equity loans and other consumer loans experienced a decrease in the required allowance for loan losses during the year ended
December 31, 2014. 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 home equity loans and other consumer 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, 2014. 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, 2014” and “Changes in nonperforming assets during the three months ended December 31, September 30, June 30, and
March 31, 2014” under the heading “Asset Quality and Non-Performing Assets” below. During the year ended December 31, 2014, the
Company made two 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, 2014, the reversal of provision for loan losses during the year ended December 31,
2014 would have been approximately $5,484,000, or $1,438,000 more than the $4,046,000 that was actually recorded, and the allowance
for loan losses at December 31, 2014 would have been approximately $35,177,000, or $1,438,000 less than the $36,585,000 that was
actually recorded.
25
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. The decrease in the provision for loan losses for the year ended
December 31, 2013 as compared to the year ended December 31, 2012 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):
Year ended December 31,
2013
2014
2012
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
Gain on life insurance death benefit
Other noninterest income
Total noninterest income
8,370
2,144
1,774
253
$11,811 $12,716 $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
9,651
2,206
1,869
(1,301)
24,236
2,032
2,995
1,953
(856)
2,153
—
2,003
$34,516
25,257
5,602
2,983
1,727
(1,649)
1,640
—
1,269
$36,829
Noninterest income decreased $2,313,000 (6.3%) to $34,516,000 in 2014. Service charges on deposit accounts were down $905,000
(7.1%) due to reduced customer overdrafts and a resulting decrease in non-sufficient funds fees. ATM fees and interchange revenue
increased $1,281,000 (15.3%) due to increased interchange revenue from the negotiation of a more favorable agreement with the Company’s
interchange service provider, increased sales efforts in this area, and the acquisition of North Valley Bancorp and its customer base. 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 $2,600,000 of noninterest income in the 2014 compared to $7,629,000 in 2013. This $5,029,000 (65.9%) decrease in
mortgage banking related revenue was mainly due to an increase in mortgage rates that occurred in May 2013 that resulted in reduced
mortgage refinance activity and reduced gain on sale of loans in the second half of 2013 and throughout 2014, and a decrease in change in
value of mortgage servicing rights as projected servicing fees were reduced due to reduced mortgage rates at the end of 2014 that are
expected to result in increased refinance activity and shorter lives of existing servicing assets. Increase in cash value of life insurance
improved $226,000 (13.1%) during 2014 due to the addition of life insurance in the North Valley Bancorp acquisition. Change in
indemnification asset improved $793,000 to a negative contribution to revenue of $856,000 in 2014 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. Gain on sale of foreclosed assets
increased $513,000 (31.3%) to $2,153,000 during 2014 primarily due to improved property values.
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
26
interchange income was up $608,000 (7.8%) due to increased customer point-of-sale transactions. 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 Expense
The following table summarizes the Company’s other noninterest expense for the periods indicated (dollars in thousands):
Year ended December 31,
2013
2014
2012
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
$ 39,342
5,068
13,134
57,544
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
Merger expense
Other
Total other noninterest expenses
Total noninterest expense
Merger expense:
Incentive compensation
Benefits and other compensation costs
Data processing and software
Professional fees
Other
Total merger expense
Average full time equivalent staff
Noninterest expense to revenue (FTE)
$34,404
4,694
12,838
51,936
7,405
4,162
4,844
2,248
2,480
1,981
2,707
2,449
786
988
514
209
618
682
(1,200)
339
312
10,144
41,668
$93,604
$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
8,203
4,514
6,512
2,107
2,996
2,413
3,888
2,870
949
1,055
528
446
764
208
(395)
—
4,858
10,919
52,835
$110,379
$ 1,174
94
475
2,390
725
$ 4,858
783
73.0%
—
—
—
312
—
312
733
67.3%
$
$
—
—
—
—
—
—
737
70.2%
Salary and benefit expenses increased $5,608,000 (10.8%) to $57,544,000 in 2014 compared to 2013. Base salaries increased
$4,938,000 (14.4%) to $39,342,000 in 2014 primarily due to the North Valley Bancorp acquisition. The average number of full time
equivalent employees increased 50 (6.8%) to 783 during 2014. The increase in full time equivalent employees is due to the addition
of employees from the North Valley Bancorp acquisition and the addition of operations, compliance, marketing, and administrative
employees, that were partially offset by reductions of employees from the consolidation of three, two, one and one Tri Counties Bank
branches during the three months ended December 31, 2013, and March 31, June 30, and September 30, 2014, respectively. Annual
salary merit increases of approximately 3.0% also contributed to the increase in base salary expense. Incentive and commission
related salary expenses increased $374,000 (14.4%) to
27
$5,068,000 during 2014 due to increases in all types of incentive compensation. Benefits expense, including retirement, medical and workers’
compensation insurance, and taxes, increased $296,000 (2.3%) to $13,134,000 during 2014 due to small to no increases in most benefit types.
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.
Other noninterest expense increased $11,167,000 (26.8%) to $52,835,000 during 2014 compared 2013 December 31, 2013. The increase in other
noninterest expense was due primarily to a $4,546,000 increase in merger related expenses to $4,858,000, of which $1,269,000 are not deductible
for tax purposes, a $1,668,000 (34.4%) increase in data processing and software expenses to $6,512,000, and a $1,181,000 (43.6%) increase in
professional fees to $3,888,000. The increase in merger expenses was due to the North Valley Bancorp acquisition and included stay bonuses,
severance pay, and other retention incentives, system conversion and other data processing expenses, professional fees including financial advisor
and other consultant fees. The increase in data processing and software expenses was due primarily to increases in ongoing data processing and
software expenses some of which are due to increased ongoing processing volume as a result of the North Valley Bancorp acquisition. The
increase in professional fees was due primarily to increases in ongoing or non-merger related consulting fees related to compliance, control
systems, and operational improvements. Increases in other areas of noninterest expense are primarily due to the North Valley Bancorp
acquisition.
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.
Income Taxes
The effective tax rate on income was 41.5%, 40.2%, and 40.5% in 2014, 2013, and 2012, respectively. The effective tax rate was greater than the
federal statutory tax rate due to state tax expense of $4,817,000, $4,811,000, and $3,277,000, respectively, in these years, and $1,310,000 of
nondeductible merger expenses in 2014. Tax-exempt income of $505,000, $583,000, and $428,000, respectively, from investment securities, and
$1,953,000, $1,727,000, and $2,495,000, 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
Financial Condition
The following table presents the available for sale investment securities portfolio by major type as of the dates indicated:
(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
Marketable equity securities
Total investment securities available for sale
2014
Year ended December 31,
2012
2011
2013
2010
$75,120 $ 97,143 $151,701 $217,384 $264,181
12,541
549
—
$277,271
10,028
1,811
—
3,175
1,908
3,002
5,589
1,915
—
9,421
1,905
—
$104,647
$229,223
$163,027
$83,205
Investment securities available for sale decreased $21,442,000 to $83,205,000 as of December 31, 2014, as compared to December 31, 2013.
This decrease is attributable to maturities and principal repayments of $24,016,000, a decrease in fair value of investments securities available for
sale of $161,000, amortization of net purchase price premiums of $432,000, acquisition of $17,297,000 from North Valley Bancorp and proceeds
for sale of securities of $14,130,000.
28
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,
2014
2013
2012 2011 2010
$660,836 $227,864 — — —
12,640 — — —
— —
$676,426 $240,504
15,590
—
Investment securities held to maturity increased to $435,922,000 as of December 31, 2014, as compared to December 31, 2013. This
increase is attributable to purchases of $280,692,000, less principal repayments of $34,172,000, amortization of net purchase price
discounts/premiums of $547,000 and the acquisition of $189,949,000 from North Valley Bancorp.
Additional information about the investment portfolio is provided in Note 3 in the financial statements at Item 8 of Part II of this
report.
Restricted Equity Securities
Restricted equity securities were $16,956,000 at December 31, 2014 and $9,163,000 at December 31, 2013. The entire balance of
restricted equity securities at December 31, 2014 and December 31, 2013 represents the Bank’s investment in the Federal Home Loan
Bank of San Francisco (“FHLB”). The increase of $7,793,000 is attributed to acquiring $5,378,000 in FHLB stock from North Valley
Bancorp and the purchase of $2,415,000 in 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.
29
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
2014
2013
Year ended December 31,
2012
$1,615,359 $1,107,863 $1,010,130 $ 965,922 $ 835,471
395,771
143,413
44,916
$1,419,571
417,084
174,945
75,136
383,163
131,878
49,103
386,111
135,528
33,054
406,330
139,131
39,649
$1,672,007
$2,282,524
$1,564,823
$1,551,032
2010
2011
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
2014
70.7%
18.3%
7.7%
3.3%
100.0%
Year ended December 31,
2012
64.5%
24.7%
8.7%
2.1%
100.0%
2013
66.3%
22.9%
7.9%
2.9%
100.0%
2011
62.2%
26.2%
9.0%
2.6%
100.0%
2010
58.8%
27.9%
10.1%
3.2%
100.0%
At December 31, 2014 loans, including net deferred loan costs, totaled $2,282,524,000 which was a 36.5% ($610,517,000) increase over the
balances at the end of 2013. This increase in loans during 2014 included $499,327,000 of loans acquired in the North Valley Bancorp
acquisition on October 3, 2014, and $32,017,000 of purchased single family residential real estate loans. Demand for commercial real estate
(real estate mortgage) loans was moderate during 2014. Demand for home equity loans and lines of credit was weak during 2014.
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
moderate during 2013. Real estate construction loans increased during 2013 primarily due to one large loan that was originated during 2013.
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.
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
30
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.
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.
31
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.
During the three months ended March 31, 2014, the Company modified its methodology used to determine the allowance for changing
environmental factors by adding a new environmental factor based on the California Home Affordability Index (“CHAI”). The CHAI
measures the percentage of households in California that can afford to purchase the median priced home in California based on current home
prices and mortgage interest rates. The use of the CHAI environmental factor consists of comparing the current CHAI to its historical
baseline, and allows management to consider the adverse impact that a lower than historical CHAI may have on general economic activity
and the performance of our borrowers. Based on an analysis of historical data, management believes this environmental factor gives a better
estimate of current economic activity compared to other environmental factors that may lag current economic activity to some extent. This
change in methodology resulted in no change to the allowance for loan losses as of March 31, 2014 compared to what it would have been
without this change in methodology.
During the three months ended June 30, 2014, the Company refined the method it uses to evaluate historical losses for the purpose of
estimating the pool allowance for unimpaired loans. In the third quarter of 2010, the Company moved from a six point grading system
(Grades A-F) to a nine point risk rating system (Risk Ratings 1-9), primarily to allow for more distinction within the “Pass” risk rating.
Initially, there was not sufficient loss experience within the nine point scale to complete a migration analysis for all nine risk ratings, all
loans risk rated Pass or 2-5 were grouped together, a loss rate was calculated for that group, and that loss rate was established as the loss rate
for risk rating 4. The reserve ratios for risk ratings 2, 3 & 5 were then interpolated from that figure. As of June 30, 2014, the Company was
able to compile twelve quarters of historical loss information for all risk ratings, and use that information to calculate the loss rates for each
of the nine risk ratings without interpolation. This refinement led to an increase of $1,438,000 in the reserve requirement for unimpaired
loans, driven primarily by home equity lines of credit with a risk rating of 5 or “Pass-Watch.”
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
32
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.
Interest income on originated nonaccrual loans that would have been recognized during the years ended December 31, 2014, 2013 and
2012, if all such loans had been current in accordance with their original terms, totaled $2,734,000, $1,524,000, and $5,281,000,
respectively. Interest income actually recognized on these originated loans during the years ended December 31, 2014, 2013 and 2012
was $81,000, $273,000, and $936,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during
the years ended December 31, 2014, 2013 and 2012, if all such loans had been current in accordance with their original terms, totaled
$254,000, $295,000, and $284,000. Interest income actually recognized on these PNCI loans during the years ended December 31, 2014,
2013 and 2012 was $4,000, $38,000, and $136,000.
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
33
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
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 77%
Allowance for loan losses, unamortized loan fees,and discounts
2014
$45,072
2,517
47,589
—
47,589
4,449
445
$52,483
2013
$48,112
5,104
53,216
—
53,216
5,588
674
$59,478
December 31,
2012
$49,045
23,471
72,516
—
72,516
5,957
1,541
$80,014
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
$
$
$
$
123
356
1.88%
2.08%
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%
3.92%
5.35%
56%
to loan principal balances owed
3.31%
4.09%
5.30%
6.34%
3.74%
34
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 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 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
n/m – not meaningful
Originated
$ 30,449
2,080
32,529
—
32,529
3,316
—
$ 35,845
PNCI
$1,233
413
1,646
—
1,646
—
—
$1,646
December 31, 2014
PCI - cash basis
5,587
$
24
5,611
—
5,611
—
—
5,611
$
PCI - other
$ 7,803
—
7,803
—
7,803
1,133
445
$ 9,381
Total
$45,072
2,517
47,589
—
47,589
4,449
445
$52,483
$
123
—
1.28%
2.02%
92%
—
—
0.06%
0.27%
200%
—
—
0.20%
99.98%
6%
—
356
$
0.34%
16.50%
39%
$
$
123
356
1.88%
2.08%
77%
2.14%
3.30%
64.45%
21.09%
3.31%
Originated
$ 40,294
4,837
45,131
—
45,131
5,479
—
$ 50,610
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
$
$
101
—
3.04%
69%
—
1.38%
153%
—
$
539
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%
35
The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2014:
(dollars 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,
2014
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
December 31,
2013
$
4,613 $ 1,797 $
26,343 7,931
25 $ (1,216)
(11,706)
1,049
(171)
(110)
(781) — $
967
(3,659)
4,959
31,871
10,376 3,002
1,367
670
18
186
607
2
2 —
330 —
417
2,186 2,797
(2,737)
(179)
(35)
(55)
(881)
2,401
99
4 —
171 —
47,589
4,449
445
16,704
695
—
2,100
462
—
(118)
(135)
(17,062)
(7,391)
(217)
$
52,483 $17,399 $ 2,562 $(24,670) $
(1,094)
(28)
(3)
(120)
(479)
(4)
(69)
(2,078)
(196)
(12)
(2,286)
(350)
(653)
(167)
350
— —
(31) —
(967)
—
—
—
46
(46)
(5,291)
5,291
—
—
—
—
—
— $
11,601
719
54
62
1,299
2,473
178
53,216
5,588
674
59,478
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, 2014. These tables and narratives are presented in chronological
order:
Changes in nonperforming assets during the three months ended December 31, 2014
(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,
2014
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
September 30,
2014
$
4,613
26,343
1,351 — $
6,139 —
(426) $
(2,043)
(4) $
(3)
(675)
—
— $
—
4,367
22,250
10,376
1,367
18
186
2,186
2,401
99
47,589
120
640
524 —
2 —
235 —
2,165 —
— —
— —
11,056
120
4,449
445
695
—
—
(349)
(42)
(4)
(31)
(222)
(36)
(15)
(3,168)
(1,570)
(75)
52,483 $11,751 $
120 $ (4,813) $
(102)
(17)
(3)
(37)
(78)
—
—
(244)
(69)
—
(313)
(111)
—
—
(31)
—
(64)
64
—
—
—
—
—
(817)
—
—
—
817
—
—
—
—
—
$
10,242
838
23
50
321
2,437
114
40,642
4,576
520
45,738
Nonperforming assets increased during the fourth quarter of 2014 by $6,745,000 (14.75%) to $52,483,000 at December 31, 2014
compared to $45,738,000 at September 30, 2014. The increase in nonperforming assets during the fourth quarter of 2014 was
primarily the result of new nonperforming loans of $11,056,000, including $9,411,000 in nonperforming loans from the acquisition of
North Valley Bancorp, new foreclosed assets of $695,000 also from the North Valley Bancorp acquisition, advances on existing
nonperforming loans and capitalized costs on foreclosed assets of $120,000, less pay-downs, sales or upgrades of nonperforming
loans to performing status totaling $3,168,000, less dispositions of foreclosed assets totaling $1,645,000, less loan charge-offs of
$244,000, and less write-downs of foreclosed assets of $70,000.
The $9,411,000 in nonperforming loans from the North Valley Bancorp acquisition was comprised of six residential real estate loans
with total outstanding balances of $853,000, 15 commercial real estate loans with $6,135,000 outstanding, one home equity line of
credit with a balance of $98,000, four home equity loans with $161,000 in outstanding balances, four nonperforming consumer loans
with $64,000 outstanding, and four nonperforming C&I loans with $2,100,000 outstanding.
Other new nonperforming loans of $1,645,000 was comprised of $811,000 on four residential real estate loans, $3,000 on a single
commercial real estate loan, $906,000 on 15 home equity lines and loans, $2,000 on two indirect auto loans, $202,000 on 24
consumer loans, and $64,000 on four C&I loans.
The $853,000 in acquired nonperforming residential real estate loans is primarily made up of two loans totaling $721,000 secured by
single-family residences in Northern California. The $6,135,000 in acquired nonperforming commercial real estate loans is primarily
36
comprised of two loans totaling $600,000 secured by single-family residences in Northern California, a single loan with $792,000 outstanding
secured by a multi-family residence in Northern California, four loans totaling $3,096,000 secured by retail buildings in Northern California, a
single loan with $377,000 outstanding secured by a commercial warehouse in Northern California, a single loan in the amount of $607,000 secured
by a health club in Northern California, and a single loan in the amount of $355,000 secured by a mobile-home park in Northern California. All
other acquired nonperforming loans have less than $250,000 outstanding and are spread throughout the company’s footprint.
Loan charge-offs during the three months ended December 31, 2014
In the fourth quarter of 2014, the Company recorded $244,000 in loan charge-offs and $173,000 in deposit overdraft charge-offs less $406,000 in
loan recoveries and $99,000 in deposit overdraft recoveries resulting in $88,000 of net loan recoveries. Primary causes of the loan charges taken in
the fourth quarter of 2014 were gross charge-offs of $4,000 on a two residential real estate loans, $3,000 on a single commercial real estate loan,
$119,000 on four home equity lines and loans, $3,000 on two indirect auto loans, $37,000 on 17 other consumer loans, and $78,000 on three C&I
loans. During the fourth quarter of 2014, there were no individual charges greater than $250,000.
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, 2014
(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,
2014
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
June 30,
2014
$
4,367 $ 188
861
22,250
1 $
—
(441)
(3,299)
$
$
(31)
(50)
(106)
(47)
—
—
$ 4,756
24,785
10,242
838
23
50
321
345
—
—
18
61
2,437
114
40,642
4,576
520
45,738
—
102
1,575
—
—
$1,575
$
$
34
1
—
—
—
—
—
36
—
—
36
(552)
(53)
(13)
(4)
(173)
(31)
(4)
(4,570)
(949)
—
$ (5,519)
$
(137)
—
—
(13)
(10)
—
—
(241)
(97)
(1)
(339)
$
(205)
—
—
—
—
—
—
(358)
358
—
—
(77)
77
—
—
—
—
—
—
—
—
—
10,834
813
36
49
443
2,468
16
44,200
5,264
521
$ 49,985
Nonperforming assets decreased during the third quarter of 2014 by $4,247,000 (8.50%) to $45,738,000 at September 30, 2014 compared to
$49,985,000 at June 30, 2014. The decrease in nonperforming assets during the third quarter of 2014 was primarily the result of new
nonperforming loans of $1,575,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of $36,000, less pay-
downs, sales or upgrades of nonperforming loans to performing status totaling $4,570,000, less dispositions of foreclosed assets totaling $949,000,
less loan charge-offs of $241,000, and less write-downs of foreclosed assets of $98,000.
The $1,575,000 in new nonperforming loans during the third quarter of 2014 was comprised of increases of $188,000 on two residential real estate
loans, $861,000 on five commercial real estate loans, $345,000 on seven home equity lines and loans, $18,000 on 13 consumer loans, $61,000 on
four C&I loans, and $102,000 on a single commercial construction loan. The $861,000 in new nonperforming commercial real estate loans was
primarily made up of one loan in the amount of $360,000 secured by a multi-family investment property in northern California. Related charge-
offs are discussed below.
Loan charge-offs during the three months ended September 30, 2014
In the third quarter of 2014, the Company recorded $241,000 in loan charge-offs and $105,000 in deposit overdraft charge-offs less $1,211,000 in
loan recoveries and $64,000 in deposit overdraft recoveries resulting in $929,000 of net loan recoveries. Primary causes of the loan charges taken
in the third quarter of 2014 were gross charge-offs of $31,000 on a single residential real estate loan, $50,000 on three commercial real estate loans,
$137,000 on four home equity lines and loans, $13,000 on 12 other consumer loans, and $10,000 on three C&I loans. During the third quarter of
2014, there were no individual charges greater than $250,000.
37
Changes in nonperforming assets during the three months ended June 30, 2014
(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,
2014
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
March 31,
2014
$ 4,756 $ 186 $
24,785
71
24 $
1,045
(182)
(4,643) $
—
(44) $ (3,287) —
— — $ 4,728
31,643
813
10,834 785
46
36 —
49
29
443 170
2,468 —
16 —
1,287
44,200
5,264
521
19
—
—
—
—
—
—
1,088
(485)
(64)
(8)
(13)
(377)
(42)
(3)
(5,817)
(687)
(142)
—
—
$49,985 $1,287 $ 1,088 $ (6,646) $
(677)
(11)
—
(39)
(152)
—
—
(923)
(3)
(1)
(927)
(116) $ (126)
—
126
— —
— —
— —
11,434
716
44
72
802
2,510
— —
19
— —
51,968
—
—
2,551
—
664
— $ 55,183
(3,403)
3,403
—
—
Nonperforming assets decreased during the second quarter of 2014 by $5,198,000 (9.42%) to $49,985,000 at June 30, 2014 compared
to $55,183,000 at March 31, 2014. The decrease in nonperforming assets during the second quarter of 2014 was primarily the result
of new nonperforming loans of $1,287,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of
$1,088,000, less pay-downs, sales or upgrades of nonperforming loans to performing status totaling $5,817,000, less dispositions of
foreclosed assets totaling $829,000, less loan charge-offs of $923,000, and less write-downs of foreclosed assets of $4,000.
The $1,287,000 in new nonperforming loans during the second quarter of 2014 was comprised of increases of $186,000 on three
residential real estate loans, $71,000 on two commercial real estate loans, $831,000 on 10 home equity lines and loans, $29,000 on
eight consumer loans, and $170,000 on eight C&I loans.
Loan charge-offs during the three months ended June 30, 2014
In the second quarter of 2014, the Company recorded $923,000 in loan charge-offs and $105,000 in deposit overdraft charge-offs less
$878,000 in loan recoveries and $88,000 in deposit overdraft recoveries resulting in $62,000 of net loan charge-offs. Primary causes
of the loan charges taken in the second quarter of 2014 were gross charge-offs of $44,000 on four commercial real estate loans,
$688,000 on 11 home equity lines and loans, $39,000 on nine other consumer loans, and $170,000 on seven C&I loans. During the
second quarter of 2014, there were no individual charges greater than $250,000.
Changes in nonperforming assets during the three months ended March 31, 2014
(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
Balance at
March 31,
2014
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
December 31,
2013
$ 4,728 $
31,643 860 $
72
— $
4
(167) $
(136)
(1,721)
(13) $
— — $
(325) $ 967
4,959
31,871
11,434 1,232
716 100
44 —
72
48
802 401
2,510
19
4
69
51,968
2,551
664
2,786
—
—
434
1
—
—
417
—
—
856
462
—
(1,351)
(20)
(10)
(7)
(109)
(9)
(113)
(3,507)
(4,186)
—
(178)
—
—
(31)
(239)
(4)
(69)
(670)
(26) $
(10)
(83)
(221)
(167)
83
— —
— —
(967)
—
46
(46)
—
— $
(713)
713
—
—
—
—
11,601
719
54
62
1,299
2,473
178
53,216
5,588
674
Total nonperforming assets
$55,183 $2,786 $ 1,318 $ (7,693) $
(706)
—
— $
59,478
Nonperforming assets decreased during the first quarter of 2014 by $4,295,000 (7.22%) to $55,183,000 at March 31, 2014 compared
to $59,478,000 at December 31, 2013. The decrease in nonperforming assets during the first quarter of 2014 was primarily the result
of new nonperforming loans of $2,786,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of
$1,318,000, less pay-downs, sales or upgrades of nonperforming loans to performing status totaling $3,507,000, less dispositions of
foreclosed assets totaling $4,186,000, less loan charge-offs of $670,000, and less write-downs of foreclosed assets of $36,000.
38
The $2,786,000 in new nonperforming loans during the first quarter of 2014 was comprised of increases of $72,000 on one residential
real estate loan, $860,000 on six commercial real estate loans, $1,332,000 on 17 home equity lines and loans, $48,000 on 14
consumer loans, $401,000 on nine C&I loans, $4,000 on one residential construction loan, and $69,000 on one commercial
construction loan.
The $860,000 in new nonperforming commercial real estate loans was primarily made up of two loans totaling $514,000 secured by
agricultural production land in central California. Related charge-offs are discussed below.
Loan charge-offs during the three months ended March 31, 2014
In the first quarter of 2014, the Company recorded $670,000 in loan charge-offs and $96,000 in deposit overdraft charge-offs less
$2,068,000 in loan recoveries and $130,000 in deposit overdraft recoveries resulting in $1,432,000 of net loan recoveries. Primary
causes of the loan charges taken in the first quarter of 2014 were gross charge-offs of $136,000 on one residential real estate loan,
$13,000 on one commercial real estate loan, $178,000 on 7 home equity lines and loans, $31,000 on 14 other consumer loans,
$239,000 on eight C&I loans, $4,000 on one residential construction loan, and $69,000 on one commercial construction loan. During
the first quarter of 2014, there were no individual charges greater than $250,000.
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.
39
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.
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 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.
During the three months ended June 30, 2014, the Company refined the method it uses to evaluate historical losses for the purpose of
estimating the pool allowance for unimpaired loans. In the third quarter of 2010, the Company moved from a six point grading system
(Grades A-F) to a nine point risk rating system (Risk Ratings 1-9), primarily to allow for more distinction within the “Pass” risk
rating. Initially, there was not sufficient loss experience within the nine point scale to complete a migration analysis for all nine risk
ratings, all loans risk rated Pass or 2-5 were grouped together, a loss rate was calculated for that group, and that loss rate was
established as the loss rate for risk rating 4. The reserve ratios for risk ratings
40
2, 3 and 5 were then interpolated from that figure. As of June 30, 2014, the Company was able to compile twelve quarters of historical loss
information for all risk ratings and use that information to calculate the loss rates for each of the nine risk ratings without interpolation. This
refinement led to an increase of $1,438,000 in the reserve requirement for unimpaired loans, driven primarily by home equity lines of credit
with a risk rating of 5 or “Pass-Watch.”
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.
During the three months ended March 31, 2014, the Company modified its methodology used to determine the allowance for changing
environmental factors by adding a new environmental factor based on the California Home Affordability Index (“CHAI”). The CHAI
measures the percentage of households in California that can afford to purchase the median priced
41
home in California based on current home prices and mortgage interest rates. The use of the CHAI environmental factor consists of
comparing the current CHAI to its historical baseline, and allows management to consider the adverse impact that a lower than
historical CHAI may have on general economic activity and the performance of our borrowers. Based on an analysis of historical
data, management believes this environmental factor gives a better estimate of current economic activity compared to other
environmental factors that may lag current economic activity to some extent. This change in methodology resulted in no change to the
allowance for loan losses as of March 31, 2014 compared to what 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 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
2014
2013
December 31,
2012
2011
2010
$ 4,267
22,076
6,815
33,158
3,427
$36,585
$ 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
Allowance for loan losses to loans
1.60%
2.29%
2.73%
2.96%
3.00%
Based on the current conditions of the loan portfolio, management believes that the $36,585,000 allowance for loan losses at
December 31, 2014 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.
42
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
2013
2014
December 31,
2012
$12,313 $12,854 $12,305 $15,621 $15,707
17,779
18,201 18,238
5,991
4,331
3,094
2,822
$42,571
20,506
6,545
3,242
$45,914
23,461
4,703
2,179
$36,585 $38,245 $42,648
4,226
1,845
2010
2011
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
2014
33.7%
49.7%
11.6%
5.0%
100.0%
2013
33.6%
47.7%
11.3%
7.4%
100.0%
December 31,
2012
28.9%
55.0%
11.0%
5.1%
100.0%
2011
34.0%
44.7%
14.2%
7.1%
100.0%
2010
36.9%
41.8%
14.1%
7.2%
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
2014
0.76%
4.36%
2.42%
2.46%
1.60%
December 31,
2012
1.22%
6.08%
3.47%
6.59%
2.73%
2013
1.16%
4.76%
3.28%
5.75%
2.29%
2011
1.62%
5.05%
4.70%
8.18%
2.96%
2010
1.88%
4.49%
4.18%
6.89%
3.00%
43
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:
2014
2013
Year ended December 31,
2012
2011
2010
$
38,245
(4,045)
$
42,648
(715)
$
45,914
9,423
$
42,571
23,060
$
35,473
37,458
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
(171)
(110)
(1,094)
(29)
(3)
(599)
(479)
(4)
(69)
(2,558)
2
540
960
34
86
495
1,268
1,377
181
(46)
(2,038)
(2,651)
(94)
(68)
(887)
(1,599)
(20)
(140)
(7,543)
345
994
1,053
41
195
759
340
63
65
(1,558)
(3,457)
(8,042)
(385)
(83)
(1,202)
(1,251)
(406)
(100)
(1,655)
(4,451)
(9,746)
(789)
(427)
(1,158)
(2,534)
(634)
(653)
(16,484)
(22,047)
147
1,020
398
100
215
860
643
412
—
126
127
573
45
379
839
173
28
40
(1,498)
(8,281)
(11,221)
(1,339)
(1,403)
(1,687)
(3,539)
(4,666)
(94)
(33,728)
2
1,456
138
15
505
816
205
231
—
Total recoveries of previously charged off
loans
Net charge-offs
Balance at end of period
Reserve for unfunded commitments:
Balance at beginning of period
Provision for losses – unfunded
commitments
Balance at end of period
Balance at end of period:
Allowance for loan losses
Reserve for unfunded commitments
Allowance for loan losses and reserve
for unfunded commitments
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
$
$
$
$
$
4,944
2,386
36,585
$
2014
$
2,415
(270)
2,145
36,585
2,145
38,730
$
$
$
1.60%
0.10%
1.70%
3,855
(3,688)
38,245
3,795
(12,689)
42,648
$
2,330
(19,717)
45,914
$
3,368
(30,360)
42,571
$
2013
Year ended December 31,
2012
2011
2010
3,615
(1,200)
2,415
38,245
2,415
40,660
2.29%
0.14%
2.43%
$
$
$
$
2,740
$
2,640
$
3,640
875
3,615
42,648
3,615
46,263
100
2,740
45,914
2,740
$
$
(1,000)
2,640
42,571
2,640
48,654
$
45,211
$
$
$
2.73%
0.23%
2.96%
0.18%
3.00%
0.18%
2.96%
3.14%
3.18%
Average total loans
$1,847,749
$1,610,725
$1,552,540
$1,442,821
$1,464,606
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
(0.13)%
0.23%
(0.22)%
(0.04)%
1.60%
2.29%
0.82%
0.61%
2.73%
1.37%
1.60%
2.96%
2.07%
2.56%
3.00%
44
Foreclosed Assets, Net of Allowance for Losses
The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the 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
Premises and Equipment
Balance at
December 31,
2014
New
NPA
Advances/
Capitalized
Costs
Sales
Valuation
Adjustments
Transfers
from
Loans
Category
Changes
Balance at
December 31,
2013
$
$
4,449
445
—
—
445
4,894
— $ (603) $
1,974 $204
1,622
853
244 $
247
695
462
—
462
(2,621)
(4,167)
(7,391)
(50) $ 1,845 — $
(87)
(59)
(196)
1,680 —
1,766 —
—
5,291
—
—
—
—
$695
—
—
—
—
462
$
(217)
—
—
(217)
$(7,608) $
(12)
—
—
(12)
—
—
—
—
(208) $ 5,291
—
—
—
—
— $
578
1,944
3,066
5,588
674
—
—
674
6,262
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
— $ (1,107) $
480
—
480
(2,853)
(7,032)
(10,992)
(70) $
(101)
(430)
(601)
79 — $
2,676 —
7,989 —
10,744
—
674
—
—
674
6,262
—
—
—
—
— $
(267)
—
(1,012)
(1,279)
—
—
—
—
480 $(12,271) $
229
—
—
—
264
(81)
(81)
493
(682) $11,237
—
—
—
—
— $
1,676
1,742
2,539
5,957
712
—
829
1,541
7,498
Premises and equipment were comprised of:
December 31,
2014
December 31,
2013
Land & land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
$
$
8,933
39,638
28,446
77,017
(33,570)
43,447
46
43,493
5,975
30,103
27,881
63,959
(32,397)
31,562
50
31,612
$
(In thousands)
$
During the year ended December 31, 2014, premises and equipment increased $11,881,000 due to purchases of $16,841,000, that
were partially offset by depreciation of $4,615,000 and disposals of premises and equipment with net book value of $345,000.
Included in the $16,841,000 of purchases during the year ended December 31, 2014 is $11,936,000 related to the acquisition of North
Valley Bancorp.
Intangible Assets
Intangible assets at December 31, 2014 and 2013 were comprised of the following:
Core-deposit intangible
Goodwill
Total intangible assets
45
December 31,
2014
2013
(In thousands)
$ 7,051 $
63,462
$70,513
883
15,519
$16,402
The core-deposit intangible asset resulted from the Bank’s acquisition of North Valley Bancorp in 2014, Citizens in 2011, and Granite in
2010. The goodwill intangible asset includes $47,943,000 from the North Valley Bancorp acquisition in 2014, and $15,519,000 from the
North State National Bank acquisition in 2003 . Amortization of core deposit intangible assets amounting to $446,000, $209,000, and
$209,000 was recorded in 2014, 2013, and 2012, respectively.
Deposits
Deposits at December 31, 2014 increased $969,940,000 (40.2%) over the 2013 year-end balances to $3,380,423,000. Contributing to the
$969,940,000 increase in deposits during the year ended December 31, 2014 is $801,956,000 of deposits acquired on October 3, 2014
through the acquisition of North Valley Bancorp. Excluding the deposits acquired from North Valley Bancorp, all categories of deposits
were up in 2014 except time certificates. Included in the December 31, 2014 certificate of deposit balance 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, 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 balance 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.
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.
46
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, 2014
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)
(1.11%)
(0.64%)
—
(0.79%)
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, 2014
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)
(0.38%)
0.37%
—
(9.58%)
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 slightly liability sensitive over a twelve month time horizon for rates up, and slightly asset sensitive
over a twelve month time horizon for rates down. “Liability sensitive” implies that net interest income decreases when interest rates rise, and
increase when interest rates decrease. “Asset sensitive” implies that net interest income increases when interest rates rise, and decrease when
interest rates decrease. “Neutral sensitivity” implies that net interest income does not change when interest rates change. 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.
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
47
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, 2014. 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, 2014
(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
Liquidity
Less than 3
months
$
517,578
25,530
558,341
1,101,449
1,938,511
119,271
9,276
56,272
$ 2,123,330
$(1,021,881)
$(1,021,881)
3 - 6 months
—
$ 27,036
118,973
146,009
—
75,800
—
—
$ 75,800
$ 70,209
$(951,672)
Repricing within:
6 - 12
months
1 - 5 years
Over 5 years
—
$ 52,398
207,847
260,245
—
$ 326,087
1,154,392
1,480,479
—
$ 328,580
242,970
$ 571,550
—
87,606
—
—
$ 87,606
$ 172,639
$(779,033)
—
75,335
—
—
$
75,335
$1,405,144
$ 626,111
—
—
—
—
—
$ 571,550
$1,197,661
(28.7%)
(28.7%)
2.0%
(26.7%)
4.8%
(21.9%)
39.5%
17.6%
16.0%
33.6%
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 $178,724,000 in 2014. Net
increases in investment and loan balances used $210,789,000 and $114,095,000 of cash, respectively. The Company acquired $141,405,000 of
cash through the acquisition of North Valley Bancorp on October 3, 2014, and this is classified as an investing source of cash.
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 2014, financing activities provide funds totaling $163,667,000 due to a
$167,984,000 increase in deposit balances, excluding $801,956,000 of deposits from the North Valley Bancorp acquisition. Dividends paid
used $7,807,000 of cash during 2014. The Bank also had available correspondent banking lines of credit totaling $15,000,000 at December 31,
2014. In addition, at December 31, 2014, 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 $865,466,000 and $138,545,000, respectively. As of December 31, 2014, the
Company had $9,276,000 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 2014, operating activities provided cash of $27,417,000.
The Company’s investment securities available for sale plus cash and cash equivalents in excess of reserve requirements totaled $636,317,000
at December 31, 2014, which was 16.2% of total assets at that time. This was down from $664,656,000 and 24.2% at the end of 2013.
48
Loan demand during 2015 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, 2014, 2013 and 2012, 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
2014
2012
$ 66,199
36,166
41,787
36,488
$180,640
$ 61,205
39,580
16,772
40,090
$157,647
$ 73,180
32,384
34,311
40,320
$180,195
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, 2014:
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
$ 45,864 $142,106 $ 763,681 $ 951,651
257,207
91,711
44,761
1,345,330
217,511
18,433
4,693
1,004,318
4,834
35,136
17,394
103,228
34,862
38,142
22,674
237,784
28,618
2,155
35,665
5,717
72,155
$175,383
109,346
19,103
33,121
4,367
165,937
$403,721
525,744
138,619
14,448
20,291
699,102
$1,703,420
663,708
159,877
83,234
30,375
937,194
$2,282,524
49
The maturity distribution and yields of the investment portfolio at December 31, 2014 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.
Within One
Year
AmountYield
After One Year
but Through
Five Years
AmountYield
After Five Years
but Through Ten
Years
AmountYield
(dollars in thousands)
After Ten Years
AmountYield
Total
AmountYield
Securities Available for Sale
Obligations of US government
corporations and agencies
Obligations of states and political
subdivisions
Corporate bonds
Marketable equity securities
Total securities available for sale
$
34 2.97% $ 812 4.61% $29,464 2.98% $ 44,810 3.70% $75,120 3.42%
— —
1,908 1.78% — —
— —
— —
322 6.32%
2,853 6.97%
— —
— —
— —
— —
3,002 —
3,175 6.90%
1,908 1.78%
3,002 —
$1,942
1.80% $1,134 5.11% $32,317 3.34% $ 47,812
3.46% $83,205 3.39%
Within One
Year
After One Year
but Through
Five Years
After Five Years
but Through Ten
Years
AmountYield AmountYield AmountYield
After Ten
Years
AmountYield
(dollars in thousands)
Total
AmountYield
— — — — — — $660,836 2.71% $660,836 2.71%
— — — — $1,118 4.13%
— —
— — $1,118 4.13% $675,308
14,472 4.38% 15,590 4.36%
2.74% $676,426 2.75%
Securities Held to Maturity
Obligations of US government corporations
and agencies
Obligations of states and political
subdivisions
Total securities held to maturity
Off-Balance Sheet Items
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, 2014 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 $673,706,000 and $557,987,000 at December 31, 2014and 2013,
respectively, and represent 29.5% of the total loans outstanding at year-end 2014 versus 33.4% at December 31, 2013. Commitments
related to the Bank’s deposit overdraft privilege product totaled $101,060,000 and $68,932,000 at December 31, 2014 and 2013,
respectively.
50
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of December 31, 2014:
(dollars in thousands)
Time deposits
Other collateralized borrowings, fixed rate of 0.05% payable on
January 2, 2015
Junior subordinated:
TriCo Trust I(1)
TriCo Trust II(2)
North Valley Trust II(3)
North Valley Trust III(4)
North Valley Trust IV(5)
Operating lease obligations
Deferred compensation(6)
Supplemental retirement plans(6)
Total contractual obligations
Total
Less than
one year 1-3 years 3-5 years
$358,012 $282,629 $63,623 $11,757 $
More than
5 years
3
9,276
9,276 — —
—
20,619
20,619
6,186
5,155
10,310
11,147
6,990
8,750
20,619
20,619
6,186
5,155
10,310
1,180
2,233
3,719
$457,064 $297,709 $71,943 $17,388 $70,024
— — —
— — —
— — —
— — —
— — —
3,419 4,366 2,182
1,240 1,917 1,600
1,145 2,037 1,849
(1)
(2)
(3)
(4)
(5)
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.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.25%, callable in whole or in part by the Company on a
quarterly basis beginning April 24, 2008, matures April 24, 2033.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.80%, callable in whole or in part by the Company on a
quarterly basis beginning July 23, 2009, matures July 23, 2034.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 1.33%, callable in whole or in part by the Company on a
quarterly basis beginning March 15, 2011, matures March 15, 2036.
(6) 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.
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, 2014 and 2013
Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Page
52
53
54
54
55
56
101
102
51
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
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
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:
22,714,964 at December 31, 2014
16,076,662 at December 31, 2013
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.
52
At December 31,
2014
2013
(in thousands, except share data)
$
93,150 $
517,578
610,728
76,915
521,453
598,368
83,205
676,426
16,956
3,579
2,282,524
(36,585)
2,245,939
4,894
43,493
92,337
9,275
63,462
7,051
7,378
51,735
$ 3,916,458
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
36,086
$ 2,744,066
$ 1,083,900
2,296,523
3,380,423
978
2,145
49,192
9,276
56,272
3,498,286
$
789,458
1,621,025
2,410,483
938
2,415
31,711
6,335
41,238
2,493,120
244,318
176,057
(2,203)
418,172
$ 3,916,458
89,356
159,733
1,857
250,946
$ 2,744,066
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
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.
53
Years ended December 31,
2014
2012
2013
(in thousands, except per share data)
$103,887 $ 97,548 $100,496
14,753
505
837
6,349
583
387
6,072
428
105
1,133
121,115
1,693
106,560
1,615
108,716
3,274
4
1,403
4,681
116,434
(4,045)
120,479
24,236
2,032
2,995
1,953
3,300
34,516
57,544
52,835
110,379
44,616
18,508
$ 26,108
3,445
4
1,247
4,696
101,864
(715)
102,579
25,257
5,602
2,983
1,727
1,260
36,829
51,936
41,668
93,604
45,804
18,405
$ 27,399
4,416
1,604
1,324
7,344
101,372
9,423
91,949
23,925
6,810
3,209
1,820
2,216
37,980
49,952
48,046
97,998
31,931
12,937
$ 18,994
$
$
1.47
1.46
$
$
1.71
1.69
$
$
1.19
1.18
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,
2014
2012
2013
(in thousands, except per share data)
$26,108 $27,399 $18,994
(94)
(4,114)
148
(4,060)
$22,048
(2,452)
1,750
400
(302)
$27,097
(1,216)
(2)
(434)
(1,652)
$17,342
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2014, 2013 and 2012
Shares of
Common
Stock
Common
Stock
Retained
Earnings
(in thousands, except share data)
Accumulated
Other
Comprehensive
Income
Total
Balance at December 31, 2011
Net income
Other comprehensive loss
Stock option vesting
Stock options exercised
Tax benefit of stock options exercised
Repurchase of common stock
Dividends paid ($ 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
Net income
Other comprehensive loss
Stock option vesting
RSU vesting
PSU vesting
Stock options exercised
Tax benefit of stock options exercised
Issuance of common stock
Repurchase of common stock
Dividends paid ($ 0.44 per share)
Balance at December 31, 2014
15,978,958
$ 84,079
$128,551 $
18,994
36,000
(14,120)
1,083
430
44
(75)
16,000,838
$ 85,561
1,151
(22)
3,240
356
(930)
248,765
(172,941)
16,076,662
$ 89,356
965
126
42
2,875
225
151,303
(574)
166,020
6,575,550
(103,268)
22,714,964
$244,318
(149)
(5,757)
$141,639
27,399
(2,560)
(6,745)
$159,733
26,108
$
$
(1,977)
(7,807)
$176,057
$
The accompanying notes are an integral part of these consolidated financial statements.
54
(302)
2,159
(1,652)
3,811 $216,441
18,994
(1,652)
1,083
430
44
(224)
(5,757)
$229,359
27,399
(302)
1,151
(22)
3,240
356
(3,490)
(6,745)
$250,946
26,108
(4,060)
965
126
42
2,875
225
151,303
(2,551)
(7,807)
(2,203) $418,172
(4,060)
1,857
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
Equity compensation vesting expense
Stock option excess tax benefits
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
Proceeds from sale 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
(Purchase) 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 acquisition, net
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:
2014
Years Ended December 31,
2013
(in thousands)
2012
$ 26,108 $ 27,399 $ 18,994
5,735
446
(4,045)
970
(49,241)
49,394
(2,032)
1,301
208
(2,153)
(49)
(1,953)
—
1,133
(225)
(993)
(395)
(619)
(67)
3,894
27,417
24,016
14,130
—
34,172
(280,692)
(2,415)
(82,079)
(32,017)
121
(462)
9,762
(4,665)
—
141,405
(178,724)
167,984
2,941
225
(292)
(7,807)
616
163,667
12,360
598,368
$ 610,728
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)
120,781
(2,862)
356
(501)
(6,745)
251
111,280
(150,531)
748,899
$ 598,368
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)
(383)
875
676
(638)
9,602
52,063
76,764
—
(13,815)
—
—
963
(44,601)
—
30
(983)
17,257
(10,792)
4,423
—
29,246
99,166
(63,344)
44
—
(5,757)
206
30,315
111,624
637,275
$ 748,899
Unrealized (loss) gain on securities available for sale
$
(162) $ (4,232) $ (2,096)
Loans transferred to foreclosed assets
Loans transferred to held-for-sale
Market value of shares tendered in-lieu of cash 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
5,291
—
11,717
—
8,382
9,739
2,259
2,989
224
4,641
22,685
978,682
827,372
4,794
$ 17,395
—
—
7,982
$ 10,995
—
—
The accompanying notes are an integral part of these consolidated financial statements.
55
TRICO BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
Note 1 – Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TriCo Bancshares (the “Company”) is a California corporation organized to act as a bank holding company for Tri Counties Bank
(the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is
engaged in the general commercial banking business in 26 California counties. Tri Counties Bank currently operates from 57
traditional branches and 16 in-store branches. The Company has five capital subsidiary business trusts (collectively, the Capital
Trusts) that issued trust preferred securities, including two organized by TriCo and three acquired with the acquisition of North Valley
Bancorp. See Note 17 – Junior Subordinated Debt.
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 Capital Trusts of $1,690,000 are accounted for under the equity method and, accordingly, are not consolidated and
are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company
and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. 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 Company acquired North Valley Bancorp on October 3, 2014. 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 acquisition. 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. Land and building were valued based on appraised
values. 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, 2014 and 2013, the Company did not have any securities classified as trading.
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
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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, 2014 and 2013.
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
incurred 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.
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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 probable
incurred 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, 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.
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During the three months ended March 31, 2014, the Company modified its methodology used to determine the allowance for
changing environmental factors by adding a new environmental factor based on the California Home Affordability Index (“CHAI”).
The CHAI measures the percentage of households in California that can afford to purchase the median priced home in California
based on current home prices and mortgage interest rates. The use of the CHAI environmental factor consists of comparing the
current CHAI to its historical baseline, and allows management to consider the adverse impact that a lower than historical CHAI may
have on general economic activity and the performance of our borrowers. Based on an analysis of historical data, management
believes this environmental factor gives a better estimate of current economic activity compared to other environmental factors that
may lag current economic activity to some extent. This change in methodology resulted in no change to the allowance for loan losses
as of March 31, 2014 compared to what it would have been without this change in methodology.
During the three months ended June 30, 2014, the Company refined the method it uses to evaluate historical losses for the purpose of
estimating the pool allowance for unimpaired loans. In the third quarter of 2010, the Company moved from a six point grading system
(Grades A-F) to a nine point risk rating system (Risk Ratings 1-9), primarily to allow for more distinction within the “Pass” risk
rating. Initially, there was not sufficient loss experience within the nine point scale to complete a migration analysis for all nine risk
ratings, all loans risk rated Pass or 2-5 were grouped together, a loss rate was calculated for that group, and that loss rate was
established as the loss rate for risk rating 4. The reserve ratios for risk ratings 2, 3 and 5 were then interpolated from that figure. As of
June 30, 2014, the Company was able to compile twelve quarters of historical loss information for all risk ratings and use that
information to calculate the loss rates for each of the nine risk ratings without interpolation. This refinement led to an increase of
$1,438,000 in the reserve requirement for unimpaired loans, driven primarily by home equity lines of credit with a risk rating of 5 or
“Pass-Watch.”
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. The Company refers to PCI loans on nonaccrual status that are accounted for using the cash
basis method of income recognition as “PCI – cash basis” loans; and the Company refers to all other PCI loans as “PCI – other” loans
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, N.A. (“Granite”) during 2010 and Citizens Bank of Northern California (“Citizens”)
during 2011.
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
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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.
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
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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,
2014 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 and commercial 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.
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/Liability
The Company accounts for amounts receivable or payable 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 or pay to 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.
61
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 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. ASU 2014-04 is effective
for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.
ASU 2014-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360):
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 improves the definition
of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent
strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 requires expanded
disclosures for discontinued operations that provide users of financial statements with more information about the assets, liabilities,
revenues, and expenses of discontinued operations. ASU 2014-08 also requires an entity to disclose the pretax profit or loss of an
individually significant component of an entity that does not qualify for discontinued operations reporting, and provide users with
information about the financial effects of significant disposals that do not qualify for discontinued operations reporting. The
amendments in ASU 2014-08 include several changes to the Accounting Standards Codification to improve the organization and
readability of Subtopic 205-20 and Subtopic 360-10, Property, Plant, and Equipment—Overall. ASU 2014-08 is effective for public
business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. ASU 2014-
08 is not expected to have a significant impact on the Company’s consolidated financial statements.
FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance under ASU
2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective
for a public entity for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting
period. Early application is not permitted. The Company is currently evaluating the effects of ASU 2014-09 on its financial
statements and disclosures, if any.
FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase
Financings, and Disclosures. ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings
consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for
repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with
the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in
transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to
collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions
and repurchase-to-maturity transactions. ASU 2014-11 is effective for public business entities for the first interim or annual period
beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the
effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application
for a public business entity is prohibited. ASU 2014-11 is not expected to have a significant impact on the Company’s consolidated
financial statements.
FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the
Terms of an Award Provide That a Performance Target Could Be achieved after the Requisite Service Period. ASU 2014-12 requires
that a performance target that affects the vesting of a share-based payment award and that could be achieved after the requisite service
period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards
with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in
estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable
that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the
requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the
requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining
requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect
the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite
service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target
is achieved. The stated vesting period (which includes the period in which the performance target could be achieved) may differ from
the requisite service period. Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that
could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that
affects the grant-date fair value of an award. ASU 2014-12 provides explicit guidance for those awards. For all entities, ASU 2014-12
is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is
permitted.
FASB issued ASU No. 2014-14, Receivables—Troubled Debt Restructurings by Creditors (Topic 310): Classification of Certain
Government Mortgage Loans upon Foreclosure. ASU 2014-14 requires that a mortgage loan be derecognized and that a separate
other receivable be
62
recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the
loan before foreclosure, 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and
make a claim on the guarantee, and the creditor has the ability to recover under that claim, and 3) at the time of foreclosure, any
amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other
receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the
guarantor. For public business entities, ASU 2014-14 is effective for annual periods and interim periods within those annual periods
beginning after December 15, 2014. Earlier adoption is permitted.
Note 2 - Business Combinations
On October 3, 2014, TriCo completed its acquisition of North Valley Bancorp originally announced January 21, 2014. Based on a
fixed exchange ratio of 0.9433 shares of TriCo common stock for each share of North Valley Bancorp common stock, North Valley
Bancorp shareholders received 6,575,550 shares of TriCo common stock and $6,823 of cash in-lieu of fractional shares. The
6,575,550 shares of TriCo common stock issued to North Valley Bancorp shareholders represented, on a pro forma basis,
approximately 28.9% of the 22,714,964 shares of the combined company outstanding on October 3, 2014. Based on TriCo’s closing
stock price of $23.01 on October 3, 2014, North Valley Bancorp shareholders received consideration valued at $151,310,000 or
approximately $21.71 per share of North Valley common stock outstanding.
The acquisition of North Valley Bancorp was to expand the Company’s market presence in Northern California. The customer base
and locations of North Valley Bancorp’s branches had significant overlap when compared to the Company’s Northern California
customer base and branch locations. This made North Valley Bancorp a very good fit in terms of potential cost savings and future
growth potential. With the levels of excess capital at the time, the acquisitions fit well into the Company’s growth strategy.
North Valley Bancorp, was headquartered in Redding, California, and was the parent of North Valley Bank that had approximately
$935 million in assets and 22 commercial banking offices in Shasta, Humboldt, Del Norte, Mendocino, Yolo, Sonoma, Placer and
Trinity Counties in Northern California at June 30, 2014. In connection with the acquisition, North Valley Bank was merged into Tri
Counties Bank on October 3, 2014.
On October 25, 2014, North Valley Bank’s electronic customer service and other data processing systems were converted into Tri
Counties Bank’s systems. Between January 7, 2015 and January 21, 2015, four Tri Counties Bank branches and four former North
Valley Bank branches were consolidated into other Tri Counties Bank or other former North Valley Bank branches.
Beginning on October 4, 2014, the effect of revenue and expenses from the operations of North Valley Bancorp, and the issuance of
TriCo Bancshares common shares as consideration in the merger are included in the results of the Company.
The assets acquired and liabilities assumed from North Valley Bancorp were accounted for in accordance with ASC 805 “Business
Combinations,” using the acquisition method of accounting and were recorded at their estimated fair values on the October 3, 2014
acquisition date, and its results of operations are included in the Company’s consolidated statements of income since that date. The
excess of the fair value of consideration transferred over total identifiable net assets was recorded as goodwill. The goodwill arising
from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company
and North Valley Bancorp. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a tax-
free exchange. The fair value estimate for loans is considered provisional as additional information related to the fair value of such
loans as of October 3, 2014 may become available in the future. Management may adjust the fair value of loans acquired from North
Valley Bancorp for a period of up to one year from the date of the acquisition. Any adjustment to the fair value of loans acquired from
North Valley Bancorp would have residual effects on deferred tax assets and goodwill.
63
The following table discloses the calculation of the fair value of consideration transferred, the total identifiable net assets acquired and
the resulting goodwill relating to the North Valley Bancorp acquisition:
(in thousands)
Fair value of consideration transferred:
Fair value of shares issued
Cash consideration
Total fair value of consideration transferred
Asset acquired:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Restricted equity securities
Loans
Foreclosed assets
Premises and equipment
Cash value of life insurance
Core deposit intangible
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Other liabilities
Junior subordinated debt
Total liabilities assumed
Total net assets acquired
Goodwill recognized
North Valley Bancorp
October 3, 2014
$
$
151,303
7
151,310
141,412
17,297
189,949
5,378
499,327
695
11,936
38,075
6,614
20,056
930,739
801,956
10,429
14,987
827,372
103,367
47,943
A summary of the estimated fair value adjustments resulting in the goodwill recorded in the North Valley Bancorp acquisition are
presented below:
(in thousands)
Value of stock consideration paid to North Valley Bancorp
North Valley Bancorp
October 3, 2014
Shareholders
Cash payments to North
Valley Bancorp Shareholders
Cost basis net assets acquired
Fair value adjustments:
Loans
Premises and Equipment
Core deposit intangible
Deferred income taxes
Junior subordinated debt
Other
Goodwill
151,303
7
(98,040)
5,832
(4,785)
(6,283)
6,293
(6,664)
280
47,943
$
$
The loan portfolio of North Valley Bancorp was recorded at fair value at the date of each acquisition. A valuation of North Valley
Bancorp’s loan portfolio was performed as of the acquisition date to assess the fair value of the loan portfolio. The North Valley
Bancorp loan portfolio was segmented into two groups; loans with credit deterioration (PCI loans) and loans without credit
deterioration (PNCI). For North Valley Bancorp PNCI loans, the present value of estimated future cash flows, based primarily on
contractual cash flows, was used to determine fair value. For North Valley Bancorp PCI loans, the present value of estimated future
cash flows, based primarily on liquidation value of collateral, was used to determine fair value.
North Valley Bancorp PNCI loans were grouped into pools based on similar loan characteristics such as loan type, payment
amortization method, and fixed or variable interest rates. A discounted cash flow schedule was prepared for each pool in which the
present value of all estimated future cash flows was calculated using a specifically calculated discount rate for each pool. The
discount rate used to estimate the fair value of each loan pool was composed of the sum of: an estimated cost of funds rate, an
estimated capital charge reflecting the market participant required return on capital, estimated loan servicing costs, and a liquidity
premium. All PNCI loan pools included some estimate regarding prepayment rates, and estimated principal default and loss rates,
based primarily on North Valley Bancorp’s historical loss experience. The difference between the sum of recorded balances of the
North Valley Bancorp PNCI loans in each pool and the present value of each pool represented the total discount (if the recorded value
exceeded the present value) or premium (if the present value exceeded the
64
recorded value) for each pool. The total discount, or premium, for each pool was then allocated to the individual loans within each
pool based on outstanding loan balance, individual loan risk rating as compared to the weighted average risk rating of the pool, and
the contractual payments remaining for the individual loan as compared to the pool.
North Valley Bancorp PCI loans were fair valued on an individual basis. A discounted cash flow schedule was prepared for each loan
in which the present value of all future estimated cash flows was calculated using a specifically calculated discount rate, estimated
liquidation value and estimated liquidation timing for each loan. The discount rate used in the calculation of the present value of
North Valley Bancorp PCI loans was composed of the sum of: an estimated cost of funds rate, an estimated capital charge reflecting
the market participant required return on capital, estimated loan servicing costs, and a liquidity premium. The difference between the
recorded balance and the present value of each North Valley Bancorp PCI loan represented the discount for each PCI loan. All North
Valley Bancorp PCI loans had recorded values in excess of their present value of estimated future cash flows.
The Company identified the North Valley Bancorp PCI loans as having cash flows that were not reasonably estimable and placed
these loans in nonaccrual status under ASC 310-30 and included them in the category of loans the Company refers to as “PCI – other”
loans.
The following table presents the cost basis, fair value discount, and fair value of loans acquired from North Valley Bancorp on
October 3, 2014:
(in thousands)
PNCI
PCI – other
Total
North Valley Bancorp Acquired Loans
October 3, 2014
Discount
$(12,721)
(2,077)
$(14,798)
Cost Basis
$502,637
11,488
$514,125
Fair Value
$489,916
9,411
$499,327
Although the discount on PNCI loans is completely accretable to interest income over the remaining life of such loans, the discount
on PCI – other loans from the North Valley Bancorp acquisition are not accretable into interest income until the loan principal
balance has been reduced to the loan’s fair value recorded at acquisition. This method of accounting for the PCI – other loans from
the North Valley Bancorp acquisition is often referred to as the “cost recovery” method of income recognition.
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 PNCI and PCI—other categories of North Valley Bancorp loans
as of the acquisition date. For North Valley Bancorp PCI – other loans, the purchase discount does not necessarily represent cash
flows to be collected:
(in thousands)
Undiscounted contractual cash flows
Undiscounted cash flows not expected to 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
North Valley Bancorp Loans – October 3, 2014
PNCI
PCI—other
$ 15,706
$ 718,731
(6,295)
—
9,411
718,731
—
(228,815)
9,411
489,916
2,077
12,721
$ 11,488
$ 502,637
Total
$ 734,437
(6,295)
728,142
(228,815)
499,327
14,798
$ 514,125
As part of the acquisition of North Valley Bancorp, the Company performed a valuation of premises and equipment acquired. This
valuation resulted in a $4,785,000 increase in the net book value of land and buildings acquired, and was based on current appraisals
of such land and buildings.
The Company recognized a core deposit intangible of $6,614,000 related to the acquisition of North Valley Bancorp’s core deposits.
The recorded core deposit intangibles represented approximately 0.97% of core deposits for North Valley Bancorp and will be
amortized over their useful lives of 7 years.
A valuation of time deposits for North Valley Bancorp was also performed as of the acquisition date. Time deposits were split into
similar pools based on size, type of time deposits, and maturity. A discounted cash flow analysis was performed on the pools based on
current market rates currently paid on similar time deposits. The valuation resulted in no material fair value discount or premium, and
none was recorded.
The fair value of junior subordinated debentures assumed from North Valley Bancorp was estimated using a discounted cash flow
method based on the current market rates for similar liabilities. As a result a discount of $6,664,000 was recorded on the junior
subordinated debentures acquired from North Valley Bancorp. The discount on the subordinated debentures will be amortized using
the effective yield method the remaining life to maturity of the debentures at acquisition which range from 18 years to 21 years.
65
The Company assumed 13 lease contracts from North Valley Bancorp. The fair value measurements of theses leasehold interests were
performed to determine whether the lease terms were favorable or unfavorable relative to current market rates of similar leases. The
fair value of leasehold interests was recorded based on estimated future cash flow projections using market rates for similar leases. As
a result, on the acquisition dates, we recorded unfavorable leasehold interests of $293,000.
The Company recorded a $6,293,000 reduction in deferred tax assets due to the tax effects of the other acquisition accounting fair
value adjustments noted above, and a $1,341,000 decrease in the North Valley Bancorp deferred tax asset related to net operating loss
carryforwards that the Company determined will not be realizable.
During the 2014, the Company recorded approximately $4,858,000 in one-time costs associated with the acquisition of North Valley
Bancorp, including $1,269,000 that was not tax deductible. These costs included expense related to severance and other salaries and
benefits expenses, consulting fees, legal fees, contract termination fees, and other expense. The system integration and conversion for
North Valley Bancorp was completed during the fourth quarter of 2014. The Company consolidated four former North Valley Bank,
and four Tri Counties Bank branches into other Tri Counties Bank branches or other former North Valley Bank branches during
January 2015.
The table below presents the unaudited proforma information as if the acquisition of North Valley Bancorp had occurred on
January 1, 2013 after giving effect to certain acquisition accounting adjustments. The proforma information for the years ended
December 31, 2014 and 2013 includes acquisition adjustments for the amortization/accretion on loans, core deposit intangibles, junior
subordinated debt and related income tax effects. The proforma financial information also includes one-time costs associated with the
acquisitions but does not include expected costs savings synergies that we expect to achieve. The unaudited pro forma financial
information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the
assumed date.
(Unaudited, in thousands, except per share data)
Summarized Income Statement Data:
Net interest income
Provision for (benefit from) loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
Proforma for the
Year Ended December 31,
2014
2013
$139,520 $132,635
(715)
50,966
133,073
51,243
20,091
$ 31,152
1.38
$
1.37
$
(4,045)
43,587
147,295
39,857
16,453
$ 23,404
1.03
$
1.02
$
It is impracticable to separately provide information regarding the revenue and earnings of North Valley Bancorp included in the
Company’s consolidated income statement from the October 3, 2014 acquisition date to December 31, 2014 because the operations of
North Valley Bancorp were substantially comingled with the operations of the Company as of the system conversion date of
October 25, 2014.
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:
Securities Available for Sale
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Corporate debt securities
Marketable equity 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
Securities Held to Maturity
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Total securities held to maturity
December 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
Amortized
Cost
$ 71,144
3,130
1,891
3,000
4,001
45 —
17 —
2 —
(25) $ 75,120
3,175
1,908
3,002
(25) $ 83,205
$ 79,165 $ 4,065 $
$660,836
15,590
13,055
130
$676,426 $ 13,185 $
(677) $673,214
(155)
15,565
(832) $688,779
Amortized
Cost
December 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair
Value
$ 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)
Investment securities totaling $14,130,000 were sold in 2014 resulting in no gain or loss on sale. No investment securities were sold
during 2013, or 2012. Investment securities with an aggregate carrying value of $143,992,000 and $62,064,000 at December 31, 2014
and 2013, 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, 2014 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, 2014, obligations of U.S. government corporations and agencies with a cost basis
totaling $755,591,000 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, 2014, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S.
government corporations and agencies to be approximately 5.3 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
Estimated
Fair Value
Amortized
Cost
Amortized
Cost
Estimated
Fair Value
$ 1,924 $ 1,942 —
1,135 —
—
—
32,316 $ 1,118 $ 1,106
47,812 675,308 687,673
$ 79,165 $ 83,205 $676,426 $688,779
1,095
30,977
45,169
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, 2014
Securities Available for Sale:
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Corporate debt securities
Marketable equity 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 held-to-maturity
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 held-to-maturity
Less than 12 months
Fair
Value
Unrealized
Loss
12 months or more
Fair
Value
Unrealized
Loss
(in thousands)
Total
Fair
Value
Unrealized
Loss
$6,774
—
—
—
$6,774
$ 335
1,600
—
$1,935
(25)
—
—
—
(25)
(1)
(26)
—
(27)
Less than 12 months
Fair Value
Unrealized
Loss
— —
— —
— —
— —
—
—
6,774
—
—
—
6,774
56,288
1,858
—
58,146
(676)
(129)
—
(805)
56,623
3,458
—
60,081
(25)
—
—
—
(25)
(677)
(155)
—
(832)
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
—
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, 2014, 8 debt securities representing obligations of
U.S. government corporations and agencies had unrealized losses with aggregate depreciation of 1.10% 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, 2014, 5 debt securities
representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of 4.26% from the
Company’s amortized cost basis.
Corporate debt securities: At December 31, 2014, no corporate debt securities had unrealized losses.
Marketable equity securities: At December 31, 2014, no marketable equity 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
69
Originated
PNCI
December 31, 2014
PCI -
Cash basis
PCI -
Other
Total
$ 154,594 $120,821
376,225
497,046
928,797
1,083,391
— $ 4,005 $ 279,420
1,335,939
—
1,615,359
—
30,917
34,922
305,166
23,559
112
28,230
357,067
126,611
38,397 $ 5,478
125
—
—
5,603
8
6,985
—
4,770
50,152
40,899
3,543
645
—
74
4,262
7,427
352,584
31,314
112
33,074
417,084
174,945
—
—
—
21,135
24,545
45,680
16,808
11,973
28,781
675
—
675
38,618
36,518
75,136
$1,612,749 $616,878 $ 5,611 $47,286 $2,282,524
$1,617,542 $634,490 $ 14,805 $56,016 $2,322,853
(4,793)
(35,536)
$1,612,749 $616,878 $ 5,611 $47,286 $2,282,524
$1,612,749 $616,878 $ 5,611 $25,018 $2,260,256
22,268
$1,612,749 $616,878 $ 5,611 $47,286 $2,282,524
(348) $ (3,081) $ (36,585)
$ (29,860) $ (3,296) $
—
(8,730)
—
(17,612)
—
(9,194)
(4,793)
—
22,268
—
—
—
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
—
—
—
The following is a summary of the change in accretable yield for PCI – other loans during the periods indicated (in thousands):
Year ended December 31,
2014
2013
Change in accretable yield:
Balance at beginning of period
Accretion to interest income
Reclassification (to) from nonaccretable difference
Balance at end of period
70
$ 18,232 $ 22,337
(6,305)
2,201
$ 18,232
(4,368)
1,009
$ 14,873
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.
RE Mortgage
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Allowance for Loan Losses - Year Ended December 31, 2014
Home Equity
Construction
Resid.
$ 3,154 $
(171)
2
101
$ 3,086 $
9,700 $ 16,375 $ 1,208 $ 66 $
(1,094)
(110)
960
540
(565)
(903)
9,227 $ 15,676 $ 1,797 $
(3)
86
(140)
(29)
34
584
9 $
C&I
Comm.
Resid.
589 $ 4,331 $ 1,559 $ 1,263 $
(479)
(4)
(69)
(599)
181
1,268 1,377
495
(964)
(894) (1,498)
234
411 $
719 $ 4,226 $ 1,434 $
Total
38,245
(2,558)
4,943
(4,045)
36,585
$
974 $
410 $ 1,974 $
284 — $
142 $
423 $
60 — $
4,267
$ 1,915 $
8,408 $ 13,251 $ 1,513 $
9 $
572 $ 2,569 $
332 $
322 $
28,891
$
197 $
409 $
451 — — $
5 $ 1,234 $ 1,042 $
89 $
3,427
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, 2014
$279,420 $1,335,939 $352,584 $31,314 $ 112 $33,074 $174,945 $38,618 $35,518 $2,282,524
$ 7,188 $
41,932 $ 6,968 $ 1,278 $ 18 $
323 $ 1,757 $ 2,683 $
99 $
62,246
$268,227 $1,263,090 $336,595 $29,266 $ 94 $32,677 $165,753 $35,260 $36,419 $2,167,381
$ 4,005 $
30,917 $ 9,021 $
770 — $
74 $ 7,435 $
675 — $
52,897
RE Mortgage
Allowance for Loan Losses - Year Ended December 31, 2013
Home Equity
Construction
Auto
Indirect
Other
Consum.
Resid.
$ 3,523 $
(46)
345
(668)
$ 3,154 $
Comm.
Lines
Loans
C&I
Resid.
Comm.
8,782 $ 21,367 $ 1,155 $ 243 $
(2,038)
994
1,962
9,700 $ 16,375 $ 1,208 $ 66 $
(2,651)
1,053
(3,394)
(68)
195
(304)
(94)
41
106
779 $
696 $ 4,703 $ 1,400 $
(140)
(20)
(1,599)
(887)
65
63
340
759
559
116
887
21
589 $ 4,331 $ 1,559 $ 1,263 $
Total
42,648
(7,543)
3,855
(715)
38,245
$
775 $
1,198 $ 1,140 $
169 $
1 $
8 $
585 $
91 $
8 $
3,975
$ 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
(in thousands)
Beginning balance
Charge-offs
Recoveries
(Benefit) provision
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
(Benefit) provision
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
$ 7,342 $
59,936 $ 6,918 $
778 $ 60 $
90 $ 3,177 $ 2,756 $
178 $
81,235
$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
$
$
$
$
(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
Resid.
$
RE Mortgage
Home Equity
Auto
Other
Construction
Allowance for Loan Losses - Year Ended December 31, 2012
Comm.
Lines
Loans
Indirect
Consum.
2,404 $ 13,217 $ 18,258 $ 1,101 $ 215 $
(8,042)
(1,558)
(3,457)
1,020
(1,998) 10,753
8,782 $ 21,367 $ 1,155 $ 243 $
(385)
100
339
(83)
215
(104)
398
147
2,530
3,523 $
(1,202)
C&I
Comm.
Resid.
932 $ 6,545 $ 1,817 $ 1,425 $
(406)
(100)
(1,251)
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 $
2,526 $
515 $ 2,264 $
8,026 $ 17,862 $
81 $
5 $
995 $ 238 $
47 $
840 $
649 $ 2,342 $
11 $
430 $
111 $
165 $
4,505
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 $
$
607 $ 101,330
$120,082 $776,137 $318,403 $12,825 $3,619 $26,560 $117,429 $ 8,281 $10,589 $1,393,925
121 $ 8,562 $ 3,596 $
528 $ 197 $
deteriorated credit quality
$
5,016 $ 31,232 $ 13,566 $
204 — $
32 $ 9,537 $ 6,582 $ 3,399 $
69,568
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators
including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans,
and (iv) delinquency within the portfolio.
The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss.
A description of the general characteristics of the risk grades is as follows:
•
Pass – This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all
policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working
capital.
•
Special Mention – This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes
loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the
asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention.
•
Substandard – This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically
exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident.
The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and
accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well defined
workout/rehabilitation program.
•
Doubtful – This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the
weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include
proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans.
•
Loss – This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible
and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has
absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some
recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the
quarter in which the loss is identified.
72
The following tables present ending loan balances by loan category and risk grade for the periods indicated:
(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
Loss
Total originated
PNCI loans:
Pass
Special mention
Substandard
Loss
Total PNCI
PCI loans
Total loans
RE Mortgage
Home Equity
Auto
Other
Construction
Resid.
Comm.
Lines
Loans
Indirect
Consum.
C&I
Resid.
Comm.
Total
Credit Quality Indicators – As of December 31, 2014
$146,949 $ 883,102 $292,244 $20,976 $ 66 $27,396 $124,707 $18,112 $24,436 $1,537,988
18,836
1,122
55,925
6,523
—
—
$154,594 $ 928,797 $305,166 $23,559 $ 112 $28,230 $126,611 $21,135 $24,545 $1,612,749
11
35
— — — —
622 —
109
— — —
11,521
34,174
1,268 2,401
591
243
—
3,590
9,332
743
1,840
636
12,979
3,709
936
930
— —
$119,643 $ 359,537 $ 36,531 $ 6,813 — $ 4,399 $ 40,628 $16,808 $11,973 $ 596,332
15,107
547
631
5,439
—
—
$120,821 $ 376,225 $ 38,397 $ 6,985 — $ 4,770 $ 40,899 $16,808 $11,973 $ 616,878
$ 4,005 $
52,897
$279,420 $1,335,939 $352,584 $31,314 $ 112 $33,074 $174,945 $38,618 $36,518 $2,282,524
268 — —
3 — —
— — —
147 —
25 —
— —
30,917 $ 9,021 $
74 $ 7,435 $
675 — $
230
141
—
770 — $
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
24,411
1,265
64,684
6,648
—
13
$129,882 $ 824,912 $316,207 $13,849 $ 946 $25,608 $124,650 $30,367 $17,125 $1,483,546
118
111
— — — —
343
211
10 — —
96
2,122 4,435
15,862
40,454
756
196
3
4,529
9,446
504
1,061
938
48,548 $ 12,716 $
5,810
3,320
380 — — $ 123,715
$ 59,798 $
6,336
313 — —
—
677
4,698
— — —
— — —
—
—
693 — — $ 134,749
$ 60,475 $
$ 4,656 $
53,712
$195,013 $ 912,850 $339,866 $14,588 $ 946 $27,763 $131,878 $31,933 $17,170 $1,672,007
253 — $ 2,020 $
— —
— —
— —
253 — $ 2,074 $
486 — $
195
665
— —
57,678 $ 13,576 $
30,260 $ 10,083 $
81 $ 6,535 $ 1,566 $
18
36
—
45 $
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.
73
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:
(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
Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2014
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
4 $
$ 1,296 $
296
754
919
100
615 $
192 —
17
202
735 $ 2,066 $
—
900
5,519
1,530
2,080
9,129
$ 2,315 $ 1,635 $ 3,116 $ 1,009 $ 21 $
152,279 927,162 302,050 22,550
91 28,096 125,712 21,135 24,545 1,603,620
$154,594 $928,797 $305,166 $23,559 $ 112 $28,230 $126,611 $21,135 $24,545 $1,612,749
—
—
32,529
$ 3,430 $ 20,736 $ 4,336 $ 1,197 $ 18 $
739 — — $
99 — —
61 — —
899 — — $
— — —
99 $
246 $ 2,401 $
64 $
24
46
134 $
— —
— —
66 $
—
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, 2014
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Other
Indirect
Consum.
Construction
C&I
Resid.
Comm.
Total
$ 2,041 $
25 $
24
239
260 $
—
—
260 $
275 — — $
118 — —
25 —
25 — $ 104 $
67 — — $ 2,668
145
413
— $ 3,226
$ 2,304 $
11,973 $613,652
118,517
$120,821 $376,225 $38,397 $6,985 — $4,770 $40,899 $16,808 $11,973 $616,878
—
—
—
— $ 1,646
$
3 — — —
76 — — —
—
25 — $ 110
— — —
—
—
—
16,808
—
366 $
73
466 $
67
40,832
6,960 —
—
—
37,931
375,965
346 $
799 $
4,666
74
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
Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2013
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
284
447
—
2,213
$ 2,272 $ 2,304 $ 3,121 $
8,321
1,661
4,824
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 $
1,070
1,050
1
33
—
$ 4,697 $ 30,732 $ 4,972 $
— —
— —
719 $ 54 $
—
26 $ 1,280 $ 2,473 $
— — —
178 $
—
45,131
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
RE Mortgage
Resid.
Comm.
Analysis of Past Due and Nonaccrual PNCI Loans – As of December 31, 2013
Construction
C&I Resid. Comm.
Home Equity
Lines
Other
Consum.
Auto
Indirect
Loans
Total
799 $ 1,081 $
512 $
352
217
313 — — $
38 — — — — — —
— — — — — — —
351 — — $
49 — — — $ 1,673
$
799 $
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 — — $
262 $ 1,139 $
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, 2014
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid. Comm.
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
$3,287 $38,477 $3,001 $ 750 $ 14 $
$5,138 $41,949 $6,094 $1,187 $ 49 $
$3,826 $45,915 $3,355 $ 651 $ 35 $
6 — $
$
995 $
38 $
26 $
25 $ 412 $2,401 $ 99 $48,466
32 $ 433 $6,588 $ 190 $61,660
21 $1,030 $2,437 $ 84 $57,354
3 $ 1,095
— $
1 $
26
$2,724 $ 2,943 $3,185 $ 504 $
$2,865 $ 3,101 $3,533 $ 597 $
$ 797 $
$2,677 $ 4,119 $2,982 $ 365 $
$
4 $
6 $
302 $1,769 $ 284 — $
4 $
13 — — $
— $11,021
41 $1,338 $ 282
— $11,863
41 $1,438 $ 282
11 $ 423 $
— $ 3,646
60
25 $1,428 $ 283 $ 55 $11,938
409
19
— $
144 $
71 $
91 $
71 $
75
(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
RE Mortgage
Home Equity
Auto
Other
Construction
Impaired PNCI Loans – As of December 31, 2014
Resid.
Comm.
Lines
Loans
Indirect
Consum.
C&I
Resid. Comm.
Total
$ 343 $
366 $ 346 $
$ 353 $ 2,620 $ 374 $
753 $ 287 $
$ 246 $
14
$
37 $
25 — $
54 $
25 — $
36 $
12 — $
(1) — — — $
— $
7 — — $ 1,124
— $ 3,433
7
— $ 1,344
10
14
— $
1
—
—
—
$ 834 $
$ 852 $
$ 177 $
$ 516 $
8 $
$
146 $ 436 — — $ 220 —
146 $ 436 — — $ 220 —
108 $ 205 — — $ 131 —
148 $ 319 — — $ 124 —
12 —
20 — — $
8 $
—
—
—
—
—
— $ 1,636
— $ 1,654
— $
621
— $ 1,107
48
— $
RE Mortgage
Home Equity
Auto
Other
Construction
Impaired Originated Loans – As of December 31, 2013
Resid.
Comm.
Lines
Loans
Indirect
Consum.
C&I
Resid. Comm.
Total
$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 $
36 $ 12 $
$ 336 $ 3,361 $ 352 $
16 $1,648 $2,473 $ 69 $66,241
21 $1,665 $6,611 $ 138 $82,489
18 $2,154 $1,567 $ 83 $71,116
7 $ 4,326
1 $ 113 $ 108 $
$2,630 $ 5,296 $2,779 $ 226 $
$2,689 $ 5,659 $3,053 $ 291 $
4 $
6 $
10 $1,517 $ 284 $ 109 $12,855
10 $1,616 $ 284 $ 288 $13,896
recorded
Investment
Interest income Recognized
$ 648 $ 1,084 $ 968 $ 169 $
1 $
$2,245 $ 6,077 $3,064 $ 141 $ 12 $
1 $
$ 124 $
287 $ 146 $
18 $
5 $ 585 $
7 $ 3,558
91 $
7 $1,817 $1,499 $ 188 $15,050
707
2 $
19 $ 15 $
95 $
RE Mortgage
Home Equity
Auto
Other
Construction
Impaired PNCI Loans – As of December 31, 2013
Resid.
Comm.
Lines
Loans
Indirect
Consum.
C&I
Resid. Comm.
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
$ 148 $ 1,139 $ 227 — — $
$ 158 $ 3,323 $ 287 — — $
37 $ 1,005 $ 333 — — $
$
21 — — $
11 $
$
233 $
36 $
45 $
39 $
5 $
12 — — $ 1,562
— $ 3,825
12
— $ 1,421
7
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
Impaired Originated Loans – As of December 31, 2012
RE Mortgage
Resid. Comm.
Home Equity
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
Resid. Comm.
C&I
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
6 $
1 $ 100 $
5 $
RE Mortgage
Resid. Comm.
Home Equity
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid. Comm.
Total
Impaired PNCI Loans – As of December 31, 2012
— $ 1,468 $ 365 — — — — — — $ 1,833
— $ 3,452 $ 586 — — — — — — $ 4,038
11 — — $ 2,474
16 $ 2,097 $ 308 $ 11 — $
138
— $
5 — — — — — — $
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
At December 31, 2014, $45,676,000 of Originated loans were TDRs and classified as impaired. The Company had obligations to lend
$54,000 of additional funds on these TDRs as of December 31, 2014. At December 31, 2014, $1,307,000 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, 2014.
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.
77
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, 2014
(dollars in thousands)
Number
Pre-mod outstanding principal balance
Post-mod outstanding principal balance
Financial impact due to TDR taken as
additional provision
Number that defaulted during the period
Recorded investment of TDRs that
RE Mortgage
Resid. Comm.
5
Home Equity
Loans
Lines
Auto
Indirect
2 —
Other
Consum.
C&I
Construction
Resid. Comm.
1
7
31
$1,048 $1,980 $940 $100 — $ 147 $218 $102 $ 219 $4,754
$1,050 $1,890 $967 $102 — $ 147 $219 $ 85 $ 196 $4,656
7
1
6
2
Total
$
91 $
2
22 — $ (1) — $
2
1 — — —
66 $101 — — $ 279
6
1 — —
defaulted during the period
$ 344 $ 423 $ 20 — — — $116 — — $ 903
Financial impact due to the default of
previous TDR taken as charge-offs or
additional provisions
— — — — — — $ (8) — — $
(8)
TDR Information for the Year Ended December 31, 2013
Construction
Resid. Comm.
8 — —
RE Mortgage
Auto
Other
Home Equity
Lines Loans
12
(dollars 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.
Indirect
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
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.
78
Note 6 – Foreclosed Assets
A summary of the activity in the balance of foreclosed assets follows (dollars in thousands):
Year ended December 31, 2014
Year ended December 31, 2013
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:
Noncovered
$
5,588 $ 674 $ 6,262 $
Covered
Total
Noncovered Covered
Total
695
5,753
(7,391)
(196)
4,449
(208)
28
9,517
2,125
—
—
(217)
(12)
$ 445
—
1
$ 245
28
$
695
5,753
(7,608)
(208)
$ 4,894
$ (208)
29
$ 9,762
$ 2,153
$
$
$
$
5,957 $ 1,541 $ 7,498
—
—
11,717
493
(12,271)
(1,279)
(682)
(81)
$ 6,262
$
674
(414)
$
—
32
4
$ 13,910
$ 1,427
$ 1,640
148
$
—
11,224
(10,992)
(601)
5,588
(414)
28
$ 12,483
1,492
$
$
$
December 31,
2014
December 31,
2013
(In thousands)
$
Land & land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
$
$
8,933
39,638
28,446
77,017
(33,570)
43,447
46
43,493
5,975
30,103
27,881
63,959
(32,397)
31,562
50
31,612
$
Depreciation expense for premises and equipment amounted to $4,648,000, $3,635,000, and $3,250,000 in 2014, 2013, and 2012, respectively.
Note 8 – Cash Value of Life Insurance
A summary of the activity in the balance of cash value of life insurance follows (dollars in thousands):
Beginning balance
Acquisitions
Increase in cash value of life insurance
Ending balance
End of period death benefit
Number of policies owned
Insurance companies used
Current and former employees and directors covered
2014
$ 52,309
38,075
1,953
Year ended December 31,
2013
$50,582
—
1,727
$52,309
$95,513
133
6
36
$ 92,337
$165,966
189
14
60
As of December 31, 2014, the Bank was the owner and beneficiary of 189 life insurance policies, issued by 14 life insurance companies, covering
60 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.
79
Note 9 - Goodwill and Other Intangible Assets
The following table summarizes the Company’s goodwill intangible as of the dates indicated:
(Dollar in Thousands)
Goodwill
December 31,
2014
63,462
$
Additions
$47,943
Reductions
—
December 31,
2013
15,519
$
The following table summarizes the Company’s core deposit intangibles as of the dates indicated:
(Dollar in Thousands)
Core deposit intangibles
Accumulated amortization
Core deposit intangibles, net
December 31,
2014
$
$
8,074
(1,023)
7,051
Additions
$ 6,614
—
$ 6,614
Reductions/
Amortization
—
(446)
(446)
$
$
Fully
Depreciated
—
—
—
December 31,
2013
$
$
1,460
(577)
883
The Company recorded additions to CDI of $6,614,000 in conjunction with the North Valley Bancorp acquisition on October 3, 2014,
$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
2015
2016
2017
2018
2019
Thereafter
Estimated Core Deposit
Intangible Amortization
1,157
$
1,157
1,109
1,044
948
1,636
$
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
Acquisition
Originations
Change in fair value
Balance at end of period
Contractually specified servicing fees, 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
2014
$ 6,165
1,944
570
(1,301)
$ 7,378
Years ended December 31,
2013
$ 4,552
—
1,360
253
$ 6,165
2012
$ 4,603
—
1,965
(2,016)
$ 4,552
$ 1,869
$ 1,774
$ 1,666
$680,197
$840,288
$666,512
$680,197
$598,185
$666,512
12.0%
10.0%
10.3%
10.0%
20.3%
10.0%
The changes in fair value of MSRs that occurred during 2014 and 2013 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 (liability) included in other assets is follows (in thousands):
Beginning balance
Year ended December 31,
2014
$ 206
2013
$ 1,997
2012
$ 4,405
Effect of actual covered losses (recoveries) and increase (decrease) in
estimated future covered losses
Reimbursable (revenue) expenses incurred
Payments made (received)
Ending balance
(869)
69
245
$(349)
(1,419)
(159)
(213)
206
$
(245)
69
(2,232)
$ 1,997
80
Note 12 – Other Assets
Other assets were comprised of (in thousands):
Deferred tax asset, net (Note 22)
Prepaid expense
Software
Advanced compensation
Capital Trusts
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, $250,000 and over
Other time certificates
Total deposits
As of December 31,
2013
2014
$37,706 $26,781
2,131
1,318
1,175
1,238
3,443
$36,086
2,034
1,327
908
1,690
8,070
$51,735
December 31,
2014
2013
$1,083,900 $ 789,458
533,351
798,986
31,542
257,146
$2,410,483
782,385
1,156,126
38,217
319,795
$3,380,423
Certificate of deposit balances of $5,000,000 and $5,000,000 from the State of California were included in time certificates, $250,000
and over, at December 31, 2014 and 2013, 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 $1,216,000 and $1,212,000 were classified as consumer loans at December 31, 2014 and 2013, respectively.
At December 31, 2014, the scheduled maturities of time deposits were as follows (in thousands):
2015
2016
2017
2018
2019
Thereafter
Total
Scheduled
Maturities
$282,629
46,606
17,017
6,241
5,516
3
$358,012
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
Acquisitions
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,
2014
$2,415
125
(395)
$2,145
2013
$ 3,615
—
(1,200)
$ 2,415
2012
$2,740
—
875
$3,615
Deferred compensation
Pension liability
Joint beneficiary agreements
Miscellaneous other liabilities
Total other liabilities
81
December 31,
2014
2013
$ 7,408 $ 7,357
14,634
2,623
7,097
$31,711
26,798
2,728
12,258
$49,192
Note 16 - Other Borrowings
A summary of the balances of other borrowings follows:
Other collateralized borrowings, fixed rate, as of December 31, 2014 of
0.05%, payable on January 2, 2014
Total other borrowings
December 31,
2014
2013
(in thousands)
$9,276
$9,276
$6,335
$6,335
The Company did not enter into any other borrowings or repurchase agreements during 2014 or 2013.
The Company had $9,276,000 and $6,335,000 of other collateralized borrowings at December 31, 2014 and 2013, 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, 2014, the Company has pledged as collateral and sold under agreements to
repurchase investment securities with fair value of $29,298,000 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, 2014, this line provided for maximum borrowings of $865,466,000 of which none was outstanding,
leaving $865,466,000 available. As of December 31, 2014, the Company had designated investment securities with a fair value of
$108,917,000 and loans totaling $1,217,944,000 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, 2014,
this line provided for maximum borrowings of $138,545,000 of which none was outstanding, leaving $138,545,000 available. As of
December 31, 2014, the Company has designated investment securities with fair value of $451,000 and loans totaling $200,282,000
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 $15,000,000 for federal
funds transactions at December 31, 2014.
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.
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.
As a result of the Company’s acquisition of North Valley Bancorp on October 3, 2014, the Company assumed the junior subordinated
debentures issued by North Valley Bancorp to North Valley Capital Trusts II, III & IV with face amounts of $6,186,000, $5,155,000
and $10,310,000, respectively. Also, as a result of the North Valley Bancorp acquisition, the Company acquired common stock
interests in North Valley Capital Trusts II, III and IV with face valley of $186,000, $155,000, and $310,000, respectively. At the
acquisition date of October 3, 2014, the junior subordinated debentures associated with North Valley Capital Trust II, III and IV were
recorded on the Company’s books at their fair values of $5,006,000, $3,918,000, and $6,063,000, respectively. The related fair value
discounts to face value of these debentures will be amortized over the remaining time to maturity for each of these debentures using
the effective interest method. Similar, and proportional, discounts were applied to the acquired common stock interest in North Valley
Capital Trusts II, III and IV, and these discounts will be proportionally amortized over the remaining time to maturity for each related
debenture.
82
TriCo Capital Trusts I and II, and North Valley Capital Trusts II, III and IV are collectively referred to as the Capital Trusts. The
recorded book values of the junior subordinated debentures issued by the Capital Trusts are reflected as junior subordinated debt in the
Company’s consolidated balance sheets. The common stock issued by the Capital Trusts and owned by the Company is recorded in
other assets in the Company’s consolidated balance sheets. The recorded book value of the debentures issued by the Capital Trusts, less
the recorded book value of the common stock of the Capital Trusts owned by the Company, continues to qualify as Tier 1 or Tier 2
capital under interim guidance issued by the Board of Governors of the Federal Reserve System.
The following table summarizes the terms and recorded balance of each subordinated debenture as of the date indicated (dollars in
thousands):
Subordinated
Debt Series
TriCo Cap Trust I
TriCo Cap Trust II
North Valley Trust II
North Valley Trust III
North Valley Trust IV
Maturity
Date
10/7/2033
7/23/2034
4/24/2033
4/24/2034
3/15/2036
Face
Value
$20,619
20,619
6,186
5,155
10,310
$62,889
Coupon Rate
(Variable)
3 mo. LIBOR +
3.05%
2.55%
3.25%
2.80%
1.33%
As of December 31, 2014
Current
Coupon Rate
3.28%
2.78%
3.48%
3.03%
1.57%
Recorded
Book Value
$ 20,619
20,619
5,015
3,927
6,092
$ 56,272
Note 18 - Commitments and Contingencies
Restricted Cash Balances— Reserves (in the form of deposits with the San Francisco Federal Reserve Bank) of $57,616,000 and
$38,359,000 were maintained to satisfy Federal regulatory requirements at December 31, 2014 and 2013. These reserves are included in
cash and due from banks in the accompanying consolidated balance sheets.
Lease Commitments— The Company leases 53 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, 2014, future minimum commitments under non-cancelable operating leases with initial or remaining terms of one year
or more are as follows:
2015
2016
2017
2018
2019
Thereafter
Future minimum lease payments
Operating
Leases
(in thousands)
3,419
$
2,510
1,856
1,323
859
1,180
11,147
$
Rent expense under operating leases was $4,786,000 in 2014, $4,300,000 in 2013, and $4,332,000 in 2012. Rent expense was offset by
rent income of $225,000 in 2014, $216,000 in 2013, and $138,000 in 2012.
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.
83
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,
2014
December 31,
2013
$ 177,557
392,705
36,139
49,774
17,531
101,060
$ 136,986
360,194
35,309
22,897
2,601
68,932
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.
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 13,396 shares of Class B common stock of Visa Inc. which are convertible into Class A
common stock at a conversion ratio of 0.4121 per Class A share. As of December 31, 2014, the value of the Class A shares was
$262.20 per share. Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was
$1,447,000 as of December 31, 2014, 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 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. On July 31, 2014 the defendants entered into a memorandum of understanding with the plaintiffs regarding the
settlement of this lawsuit. In connection with the settlement contemplated by the memorandum of understanding and in consideration
for the full settlement and release of all claims, TriCo and North Valley Bancorp agreed to make certain additional disclosures related
to the proposed merger, which are contained in a Current Report on Form 8-K filed by each of the companies. The memorandum of
understanding contemplates that the parties will negotiate in good faith and use their reasonable best efforts to enter into a stipulation
of settlement. The stipulation of settlement will be subject to customary conditions, including court approval following notice to
North Valley Bancorp’s shareholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at
which the court will consider the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of
settlement or that the court will approve the settlement even if the parties were to enter into such stipulation. In such event, the
proposed settlement as contemplated by the memorandum of understanding may be terminated.
On September 15, 2014, a former Personal Banker at one of the Bank’s in-store branches filed a Class Action Complaint against the
Bank in Butte County Superior Court, alleging causes of action related to the observance of meal periods. Plaintiff seeks to represent
a class of “current and former hourly-paid or non-exempt ‘personal bankers’, or employees with the same or similar job duties,
employed by Defendants within the State of California during the preceding four years.” The Bank filed an Answer to the Complaint
on November 6, 2014, denies the charges, and the Bank intends to vigorously defend the lawsuit against class certification and
liability.
84
On January 20, 2015, a current Personal Banker at one of the Bank’s in-store branches filed a First Amended Complaint against Tri
Counties Bank and TriCo Bancshares, dba Tri Counties Bank, in Sacramento County Superior Court, alleging causes of action related
to wage statement violations. Plaintiff seeks to represent a class of current and former exempt and non-exempt employees who
worked for the Bank “during the time period beginning October 18, 2013 through the date of the filing of this action”. The Company
and the Bank have not yet responded to the First Amended Complaint, deny the charges, and intend to vigorously defend the lawsuit
against class certification and liability.
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.
Note 19 – Shareholders’ Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of $8,270,000, $8,175,000, and $8,522,000 in 2014, 2013,
and 2012, 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, 2014, the Bank may pay dividends
of $52,798,000.
Shareholders’ Rights Plan
On June 25, 2001, the Company announced that its Board of Directors adopted and entered into a Shareholder Rights Agreement
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 Agreement to protect
shareholders from coercive or otherwise unfair takeover tactics. In general terms, the Rights Plan would have imposed a significant
penalty upon any person or group that acquired 15% or more of the Company’s outstanding common stock without approval of the
Company’s Board of Directors.
On June 4, 2014, the Company entered into an amendment to its Rights Agreement that accelerated the expiration of the Rights from
July 10, 2021 to July 1, 2014 and had the effect of terminating the Rights Agreement as of that date. At the time of the termination, all
Rights distributed to holders of the Company’s common stock pursuant to the Rights Agreement expired.
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, 2014, 2013, and 2012, employees tendered 103,268, 172,941, and 14,120, respectively, of the
Company’s common stock with market value of $2,551,000, $3,490,000, and $224,000, 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 (RSU) awards and stock appreciation rights.
RSUs that vest based solely on the grantee remaining in the service of the Company for a certain amount of time, are referred to as
“service condition vesting RSUs”. RSUs that vest based on the grantee remaining in the service of the Company for a certain amount
of time and a market condition such as the total return of the Company’s common stock versus the total return of an index of bank
stocks, are referred to as “market plus service condition vesting RSUs”. 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
85
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, 2014, 706,000 options for
the purchase of common shares, and 46,286 restricted stock units were outstanding, and 822,428 shares remain available for issuance,
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,
2014, 396,850 options for the purchase of common shares were 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.
Stock option activity is summarized in the following table for the dates indicated:
Outstanding at December 31, 2013
Options granted
Options exercised
Options forfeited
Outstanding at September 30, 2014
Number of
Shares
Option Price
per Share
Weighted
Average
Exercise
Price
1,246,370 $12.63
22,500 $23.21
(166,020) $14.54
—
1,102,850 $12.63
—
to $25.91 $ 18.04
to $23.21 $ 23.21
to $20.58 $ 17.32
-
to
to $25.91 $ 18.25
—
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, 2014:
Number of options
Weighted average exercise price
Intrinsic value (in thousands)
Weighted average remaining contractual term (yrs.)
Currently
Exercisable
818,350
$ 18.62
$ 5,007
4.5
Currently Not
Exercisable
284,500
17.19
2,136
7.6
$
$
Total
Outstanding
1,102,850
18.25
$
7,143
$
5.3
The 284,500 options that are currently not exercisable as of December 31, 2014 are expected to vest, on a weighted-average basis,
over the next 2.6 years, and the Company is expected to recognize $1,783,000 of pre-tax compensation costs related to these options
as they vest. The Company did not modify any option grants during 2013 or 2014.
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)
2014
$1,209,000
$ 965,000
$ 965,000
Years Ended December 31,
2013
$1,777,000
$1,150,000
$1,150,000
2012
$ 138,000
$1,083,000
$1,083,000
$ 378,000
8.17
$
$ 484,000
8.91
$
$ 455,000
6.63
$
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:
Years Ended December 31,
Assumptions used to value option grants:
Average expected terms (years)
Volatility
Annual rate of dividends
Discount rate
86
2014
2013
2012
6.3
42.1%
1.90%
1.69%
7.0
56.2%
1.87%
1.26%
8.8
51.5%
2.36%
1.49%
Restricted stock unit (RSU) activity is summarized in the following table for the dates indicated:
Service Condition Vesting RSUs
Market Plus Service Condition Vesting RSUs
Outstanding at December 31, 2013
RSUs granted
RSUs added through dividend
credits
RSUs released
RSUs forfeited/expired
Outstanding at December 31, 2014
Number
of RSUs
—
30,642
278
—
—
30,920
Weighted
Average Fair
Value on
Date of Grant
—
22.54
$
Weighted
Average Fair
Value on
Date of Grant
$
—
21.39
Number
of RSUs
—
15,366
—
—
—
15,366
The 30,642 of service condition vesting RSUs granted during 2014 include a feature whereby each RSU outstanding is credited with a
dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price
of the Company’s stock on the dividend payable date to arrive at an additional amount of RSUs outstanding under the original grant.
The 30,920 of service condition vesting RSUs that are currently outstanding as of December 31, 2014 are expected to vest, and be
released, on a weighted-average basis, over the next 2.8 years. The Company is expected to recognize $566,000 of pre-tax
compensation costs related to these service condition vesting RSUs between December 31, 2014 and their vesting dates. During the
three months ended December 31, 2014, the Company modified 13,749 service condition vesting RSUs that were granted on
August 11, 2014 such that their vesting schedule was changed from 100% vesting on August 11, 2018 to 25% vesting on each of
August 11, 2015, 2016, 2017 and 2018.
The 15,366 of market plus service condition vesting RSUs that are currently outstanding as of December 31, 2014 are expected to
vest, and be released, on a weighted-average basis, over the next 2.6 years. The Company is expected to recognize $286,000 of pre-
tax compensation costs related to these RSUs between December 31, 2014 and their vesting dates. As of December 31, 2014, the
number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or
increased to 23,049 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks
from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 2014.
87
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
Sale of customer checks
Lease brokerage income
Gain (loss) on disposal of fixed assets
Commission rebates
Gain on life insurance death benefit
Other
Total other noninterest income
Total noninterest income
2012
2014
8,370
2,144
1,774
253
Years Ended December 31,
2013
$11,811 $12,716 $14,290
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
$37,980
9,651
2,206
1,869
(1,301)
24,236
2,032
2,995
1,953
(856)
2,153
450
504
49
—
—
1,000
10,280
$34,516
25,257
5,602
2,983
1,727
(1,649)
1,640
377
337
(39)
—
—
594
11,572
$36,829
Mortgage loan servicing fees, net of change in fair value of mortgage loan servicing rights, totaling $568,000, $2,027,000, and ($350,000) were
recorded in service charges and fees noninterest income for the years ended December 31, 2014, 2013, and 2012, respectively.
The components of noninterest expense were as follows (in thousands):
Years Ended December 31,
2013
2014
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
Merger expense
Other
Total other noninterest expense
Total noninterest expense
Merger expense:
Incentive compensation
Benefits and other compensation costs
Data processing and software
Professional fees
Other
Total merger expense
88
$ 39,342
5,068
13,134
57,544
8,203
4,514
6,512
2,107
2,996
2,413
3,888
2,870
949
1,055
528
446
764
208
(395)
—
4,858
10,919
52,835
$110,379
$
$
1,174
94
475
2,390
725
4,858
$34,404
4,694
12,838
51,936
7,405
4,162
4,844
2,248
2,480
1,981
2,707
2,449
786
988
514
209
618
682
(1,200)
339
312
10,144
41,668
$93,604
—
—
—
$
312
—
312
$
2012
$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
—
—
—
—
—
—
Note 22 - Income Taxes
The components of consolidated income tax expense are as follows:
2014
2013
(in thousands)
2012
Current tax expense
Federal
State
Deferred tax expense (benefit)
Federal
State
Total tax expense
$14,485 $11,618 $ 9,895
3,425
13,320
4,261
15,879
5,016
19,501
(794)
(199)
(993)
$18,508
1,976
550
2,526
$18,405
(235)
(148)
(383)
$12,937
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 $(2,984,000) in 2014, $1,269,000 in 2013, and $(2,000) in 2012,
taxes (benefits) related to unrealized gains and losses on available-for-sale investment securities amounting to $(68,000) in 2014,
$(1,780,000) in 2013, and $(880,000) in 2012, taxes (benefits) related to employee stock options of $97,000 in 2014, $138,000 in
2013, and $13,000 in 2012, and taxes (benefits) related to changes in joint beneficiary agreement liability of $0 in 2014, $0 in 2013,
and $64,000 in 2012, 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
OREO write downs
Acquisition cost basis
Tax credits
Net operating loss carryforwards
Other
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
Core deposit intangible
Junior subordinated debt
Prepaid expenses and other
Total deferred tax liability
2014
2013
(in thousands)
$ 16,284
3,115
7,925
1,149
124
3,315
1,713
2,534
2,714
198
6,017
490
7,128
625
53,331
(1,362)
(1,699)
(3,072)
(54)
(287)
(2,977)
147
(2,802)
(2,782)
(737)
(15,625)
$17,096
3,093
5,817
1,037
—
331
1,390
2,225
1,840
331
699
—
—
—
33,859
(986)
(1,767)
(392)
(379)
(256)
(2,416)
(87)
(193)
—
(602)
(7,078)
Net deferred tax asset
$ 37,706
$26,781
As part of the merger with North Valley, TriCo acquired federal and state net operating loss carryforwards, capital loss carryforwards,
and tax credit carryforwards. These tax attribute carryforwards will be subject to provisions of the tax law that limit the use of such
losses and credits generated by a company prior to the date certain ownership changes occur. The amount of the Company’s net
operating loss carryforwards that would be subject to these limitations as of December 31, 2014 are $13.7 million and $35.2 million
for federal and California, respectively. The amount of the Company’s capital loss carryforwards that would be subject to these
limitations as of December 31, 2014 are $131,000 and $404,000 for federal and California, respectively. The amount of the
Company’s tax credits that would be subject to these limitations as of December 31, 2014 are $69,000 and $2.7 million for federal
and California, respectively. Due to the limitation, a significant
89
portion of the state tax credits will expire regardless of whether the Company generates future taxable income. As such, the Company has recorded
the future benefit of these tax credits at the value which is more likely than not to be realized. These tax loss and tax credit carryforwards expire at
various dates beginning in 2015.
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, including the tax attribute carryforwards acquired as part
of the North Valley merger.
As part of the North Valley merger, TriCo inherited an unrecognized tax benefit for tax positions claimed on prior year tax returns filed by North
Valley. The Company had an unrecognized tax benefit of $245,000 as of December 31, 2014, the recognition of which would reduce the
Company’s tax expense by $158,000. Management does not expect the unrecognized tax benefit will materially change in the next 12 months. A
summary of changes in the Company’s unrecognized tax benefit (including interest and penalties) in 2014 is as follows:
(in thousands)
As of December 31, 2013
Additions for tax positions for prior years
As of December 31, 2014
UTB
—
227
227
Interest/Penalties
—
18
18
Total
—
245
245
During the years ended December 31, 2014 and 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. 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 2011 and 2010, respectively.
The provisions for income taxes applicable to income before taxes for the years ended December 31, 2014, 2013 and 2012 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
Non-deductible merger expense
Other
Effective Tax Rate
Years Ended December 31,
2013
35.0%
6.8
(0.4)
(1.3)
0.2
—
(0.1)
40.2%
2014
35.0%
7.0
(0.4)
(1.5)
0.2
1.0
0.2
41.5%
2012
35.0%
6.7
(0.5)
(2.0)
0.3
—
1.0
40.5%
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)
Years ended December 31,
2013
$27,399
2014
$26,108
2012
$18,994
(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
17,716
207
16,045
152
15,988
64
17,923
16,197
16,052
Based on an average of quarterly computations, there were 95,600, 407,985 and 967,120 options and restricted stock units excluded from the
computation of annual diluted earnings per share for the years ended December 31, 2014, 2013 and 2012, respectively, because the effect of these
options and restricted stock units were 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
2012
2014
Years Ended December 31,
2013
(in thousands)
$ (162) $(4,232) $(2,096)
—
— —
(2,096)
(162) (4,232)
880
68
1,780
(1,216)
(94) (2,452)
(445)
(7,253) 2,575
138
17
155
153
291
444
(7,098) 3,019
2,984
(1,269)
(4,114) 1,750
400
—
400
—
400
153
288
441
(4)
2
(2)
(370)
—
(370)
(64)
(434)
$(4,060) $ (302) $(1,652)
148
—
148
—
148
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
December 31,
2014
2013
(in thousands)
$ 4,040
(1,699)
2,341
(7,885)
3,315
(4,570)
26
—
26
$(2,203)
$ 4,202
(1,767)
2,435
(787)
331
(456)
(122)
—
(122)
$ 1,857
Note 25 – Retirement Plans
401(k) Plan
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. During 2014, 2013,
and 2012 the Company did not contribute to the 401(k) Plan. The Company did not incur any material expenses attributable to the
401(k) Plan during 2014, 2013, and 2012.
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 $1,294,000 in 2014,
$1,648,000 in 2013, and $1,229,000 in 2012, 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 $7,408,000 and $7,357,000 at December 31, 2014 and 2013, respectively. Earnings credits on
deferred balances totaling $551,000 in 2014, $568,000 in 2013, and $599,000 in 2012.
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 $92,337,000 and
$52,309,000 at December 31, 2014 and 2013, respectively.
The Company recorded in other liabilities the unfunded status of the supplemental retirement plans of $7,885,000 and $787,000
related to the supplemental retirement plans as of December 31, 2014 and 2013, 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, 2014 and 2013, the unfunded status of the supplemental retirement plans of $7,885,000 and $787,000 were offset by
a reduction of shareholders’ equity accumulated other comprehensive loss of $4,570,000 and $456,000, respectively, representing the
after-tax impact of the unfunded status of the supplemental retirement plans, and the related deferred tax asset of $3,315,000 and
$331,000, 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 $823,000 of the net actuarial loss reported in the
following table as of December 31, 2014 as a component of net periodic benefit cost during 2015.
(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,
$
2014
9
(173)
8,049
$ 7,885
(3,315)
$ 4,570
2013
$ 11
(35)
811
787
(331)
$ 456
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
Acquisition
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,
2014
2013
(in thousands)
$(14,634) $(16,345)
—
(742)
(643)
2,573
523
$(14,634)
(4,150)
(652)
(739)
(7,254)
631
$(26,798)
$ —
$ —
$(26,798)
9
8,049
(173)
(7,885)
$(26,798)
$(24,739)
$ —
$ —
$(14,634)
11
811
(35)
(787)
$(14,634)
$(12,954)
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,
2014
2013
(in thousands)
2012
$ 652
739
2
138
16
$1,547
$ 743
643
2
153
291
$1,832
$ 680
687
2
153
288
$1,810
Years Ended December 31,
2013
4.85%
4.85%
2.50%
2.50%
2014
3.65%
3.65%
2.50%
2.50%
2012
4.00%
4.00%
2.50%
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
2015
2016
2017
2018
2019
2020-2024
Expected Benefit
Payments to
Participants
Estimated
Company
Contributions
(in thousands)
$
$
1,145
1,036
1,001
1,330
519
3,719
$
$
1,145
1,036
1,001
1,330
519
3,719
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 the periods indicated (in thousands):
Balance December 31, 2012
Advances/new loans
Removed/payments
Balance December 31, 2013
Advances/new loans
Removed/payments
Balance December 31, 2014
$ 2,368
1,154
(886)
$ 2,636
2,106
(1,610)
$ 3,132
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 $1,181,000, $4,261,000, and $3,587,000 during 2014,
2013 and 2012, 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.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the
market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the
asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar
techniques.
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, 2014
Securities available-for-sale:
Total
Level 1
Level 2
Level 3
Obligations of U.S. government corporations and agencies
Obligations of states and political subdivisions
Corporate debt securities
Marketable equity securities
Mortgage servicing rights
Total assets measured at fair value
—
$75,120
— $75,120
—
3,175
3,175
—
—
1,908
—
1,908
—
3,002 $3,002
—
— $7,378
—
7,378
$7,378
$80,203
$3,002
$90,583
94
Fair value at December 31, 2013
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
Total
Level 1
Level 2
Level 3
$ 97,143 — $ 97,143
5,589
5,589
—
1,915
1,915 —
—
6,165 —
$110,812
—
$104,647
—
—
—
6,165
$6,165
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 2014 or
2013.
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, 2014 and 2013. Had there been any transfer into or out of Level 3 during 2014 or 2013,
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,
2014: Mortgage servicing rights
2013: Mortgage servicing rights
Beginning
Balance
$ 6,165
$ 4,552
Transfers
into (out of)
$
Level 3
1,944
—
Change
Included
in Earnings
$ (1,301)
253
$
Issuances
$
570
$ 1,360
Ending
Balance
$7,378
$6,165
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, 2014:
Mortgage Servicing Rights
Fair Value
(in thousands)
7,378
$
Valuation
Technique
Unobservable
Inputs
Discounted cash flow
Constant prepayment rate
Discount rate
Range,
Weighted Average
5.7%-23.4%, 12.0%
10.0%-12.0%, 10.0%
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, 2014
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total assets measured at fair value
Year ended December 31, 2013
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total assets measured at fair value
Total
Level 1 Level 2
Level 3
Total Gains
(Losses)
$ 2,480 —
2,611
—
$ 5,091 —
— $ 2,480 $
2,611 $
—
$
$ 5,091
—
(636)
(137)
(773)
Total
Level 1 Level 2
Level 3
Total Gains
(Losses)
$20,334
948
$21,282
—
—
—
— $20,334 $ (2,539)
(397)
948
—
$ (2,936)
$21,282
—
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, 2014:
Impaired Originated & PNCI
loans
Fair Value
(in thousands)
2,480
$
Foreclosed assets
$
2,611
Valuation Technique
Sales comparison
approach
Income approach
Sales comparison
approach
Unobservable Inputs
Adjustment for differences
between comparable sales (5.0)%-(42.5)%, (10.1)%
Range, Weighted Average
Capitalization rate
Adjustment for differences
between comparable sales
9.09%-9.09 %, 9.09%
(5.0)%-(29.4)%, (8.2)%
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—It is not practical to determine the fair value of restricted equity securities due to restrictions placed on
its transferability.
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, 2014
December 31, 2013
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
$
93,150
517,578
$
93,150
517,578
76,915 $
$
521,453
76,915
521,453
Level 2 inputs:
Securities held to maturity
Restricted equity securities
Loans held for sale
Level 3 inputs:
Loans, net
Indemnification (liability) asset
Financial liabilities:
Level 2 inputs:
Deposits
Other borrowings
Level 3 inputs:
Junior subordinated debt
Off-balance sheet:
Level 3 inputs:
Commitments
Standby letters of credit
Overdraft privilege commitments
676,426
16,956
3,579
688,779
N/A
3,579
240,504
9,163
2,270
233,807
N/A
2,270
2,282,524
(349)
2,379,155
(349)
1,672,007
206
1,760,274
206
3,380,423
9,276
3,380,486
9,276
2,410,483
6,335
2,411,402
6,335
56,272
45,053
41,238
25,774
Contract
Amount
Fair
Value
Contract
Amount
Fair
Value
$ 656,175
17,531
101,060
$
6,562
175
1,011
$ 555,386 $
2,601
68,932
5,554
26
689
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 22,714,964 and
16,076,662 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
December 31,
2014
2013
(in thousands)
$ 2,229 $ 2,520
288,746
1,280
$292,546
470,797
1,902
$474,928
$
484
56,272
56,756
$
362
41,238
41,600
244,318
176,057
(2,203)
418,172
$474,928
89,356
159,733
1,857
250,946
$292,546
2014
Years ended December 31,
2013
(in thousands)
$ (1,403) $ (1,247) $ (1,325)
(669)
(1,994)
(2,720)
(4,123)
(862)
(2,109)
2012
8,270
20,720
1,241
8,522
11,632
834
$ 26,108 $ 27,399 $ 18,994
8,175
20,446
887
2014
Years ended December 31,
2013
(in thousands)
$ 26,108 $ 27,399 $ 18,994
2012
(94)
(4,114)
148
(4,060)
(1,216)
(2)
(434)
(1,652)
$ 22,048 $ 27,097 $ 17,342
(2,452)
1,750
400
(302)
2014
Years ended December 31,
2013
(in thousands)
2012
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$ 26,108 $ 27,399 $ 18,994
Undistributed equity in earnings of Tri Counties Bank
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
(decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
98
(20,720)
1,133
(225)
671
6,967
(20,446)
1,151
(356)
(1,100)
6,648
(11,632)
1,083
(44)
(1,089)
7,312
616
225
(292)
(7,807)
(7,258)
(291)
2,520
206
44
—
(5,757)
(5,507)
1,805
706
$ 2,229 $ 2,520 $ 2,511
251
356
(501)
(6,745)
(6,639)
9
2,511
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, 2014, that the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2014, 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, 2014:
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, 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
Actual
Amount
Ratio
Minimum
Capital Requirement
Ratio
Amount
(dollars in thousands)
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$436,955 15.63% $ 223,603 8.0%
$433,286 15.51% $ 223,449 8.0% $279,311 10.0%
N/A N/A
$401,971 14.38% $ 111,801 4.0%
$398,325 14.26% $ 111,724 4.0% $167,587
N/A N/A
6.0%
$401,971 10.80% $ 148,819 4.0%
$398,325 10.71% $ 148,734 4.0% $185,918
N/A N/A
5.0%
$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%
99
Note 30 - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters of 2014 and 2013, 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
(Benefit from) 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
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
100
2014 Quarters Ended
December 31,
September 30,
June 30, March 31,
(dollars in thousands, except per share data)
$
$
$
$
107
919
796
28,914
30,736
5,671
36,407
1,437
34,970
(1,421)
36,391
9,755
36,566
9,580
3,930
5,650
0.25
0.11
$
$
$
$
290
822
402
23,466
24,980
4,151
29,131
1,082
28,049
(2,977)
31,026
8,589
25,380
14,235
6,001
8,234
$
69
811
624
22,929
24,433
3,985
28,418
1,075
27,343
1,708
25,635
7,877
25,116
8,396
3,537
$ 4,859
$
203
984
379
22,172
23,738
3,421
27,159
1,087
26,072
(1,355)
27,427
8,295
23,317
12,405
5,040
$ 7,365
0.50
0.11
$ 0.30
$ 0.11
$
$
0.45
0.11
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
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 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company has excluded the current year acquisition of North Valley Bancorp representing approximately 24% of
total assets at December 31, 2014 from the scope of management’s report on internal control over financial reporting. Based on this
evaluation under the framework in the 2013 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, 2014.
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, 2014, and the Company’s effectiveness of internal control over financial reporting as of
December 31, 2014, 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 13, 2015
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying balance sheets of TriCo Bancshares as of December 31, 2014 and 2013, and the related
statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014.
We also have audited TriCo Bancshares’s internal control over financial reporting as of December 31, 2014, based on criteria
established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). TriCo Bancshares’s 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.
As permitted, the Company has excluded the operations of North Valley Bank acquired during 2014, which is described in Note 2 of
the consolidated financial statements, from the scope of management’s report on internal control over financial reporting. As such, it
has also been excluded from the scope of our audit of internal control over financial reporting.
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, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three-
year period ended December 31, 2014 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, 2014, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
/s/ Crowe Horwath LLP
Sacramento, California
March 13, 2015
102
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, 2014, 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, 2014, 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, 2014 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, 2014, 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 2014 was so disclosed.
103
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 shall either be incorporated herein by reference from the Company’s Proxy Statement for the
2015 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or included in an amendment
to this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 shall either be incorporated herein by reference from the Company’s Proxy Statement for the
2015 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or 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 incorporated herein by reference from the Company’s Proxy Statement for the
2015 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or 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 incorporated herein by reference from the Company’s Proxy Statement for the
2015 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or 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 incorporated herein by reference from the Company’s Proxy Statement for the
2015 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or 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.
104
SIGNATURES
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.
Date: March 13, 2015
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 13, 2015
/s/ Richard P. Smith
Richard P. Smith, President, Chief Executive
Officer and Director (Principal Executive Officer)
Date: March 13, 2015
/s/ Thomas J. Reddish
Thomas J. Reddish, Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
Date: March 13, 2015
/s/ Donald J. Amaral
Donald J. Amaral, Director
Date: March 13, 2015
/s/ William J. Casey
William J. Casey, Director and Chairman of the Board
Date: March 13, 2015
Date: March 13, 2015
/s/ Craig S. Compton
Craig S. Compton, Director
/s/ L. Gage Chrysler
L. Gage Chrysler, Director
Date: March 13, 2015
/s/ Cory W. Giese
Cory W. Giese, Director
Date: March 13, 2015
Date: March 13, 2015
/s/ John S.A. Hasbrook
John S.A. Hasbrook, Director
/s/ Patrick A. Kilkenny
Patrick A. Kilkenny, Director
Date: March 13, 2015
/s/ Michael W. Koehnen
Michael W. Koehnen, Director
Date: March 13, 2015
Date: March 13, 2015
/s/ Martin A. Mariani
Martin A. Mariani, Director
/s/ W. Virginia Walker
W. Virginia Walker, Director
Date: March 13, 2015
/s/ J. M. “Mike” Wells, Jr.
J. M. “Mike” Wells, Jr., Director
105
Exhibit
No.
2.1
2.2
2.3
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
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 17, 2009).
Bylaws of TriCo, as amended (incorporated by reference to Exhibit 3.1 to TriCo’s Current Report on Form 8-K filed
February 17, 2011).
Instruments defining the rights of holders of the long-term debt securities of the TriCo and its subsidiaries are omitted
pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. TriCo hereby agrees to furnish copies of these
instruments to the Securities and Exchange Commission upon request.
Form of Change of Control Agreement dated as of July 17, 2013, among TriCo, Tri Counties Bank and each of Dan
Bailey, 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 TriCo’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 TriCo’s Current Report on Form 8-K filed April 3, 2013).
Transaction Bonus Agreement between TriCo Bancshares and Richard P. Smith dated as of August 7, 2014 (incorporated
by reference to Exhibit 10.4 to TriCo’s Form 8-K filed on August 13, 2014).
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).
Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated
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).
10.13*
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).
10.14*
10.15*
10.16*
10.17*
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).
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).
106
Exhibit
No.
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
Exhibit
Form of Indemnification Agreement between TriCo 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 TriCo’s Current Report on Form 8-K filed September 10, 2013).
Form of Stock Option Agreement and Grant Notice pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed May 25, 2010).
Form of Restricted Stock Unit Agreement and Grant Notice for Non-Employee Executives pursuant to TriCo’s 2009
Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed
November 14, 2014).
Form of Restricted Stock Unit Agreement and Grant Notice for Directors pursuant to TriCo’s 2009 Equity Incentive
Plan (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed November 14, 2014).
Form of 2014 Performance Award Agreement and Grant Notice pursuant to TriCo’s 2009 Equity Incentive Plan
(incorporated by reference to Exhibit 10.3 to TriCo’s Current Report on Form 8-K filed August 13, 2014).
21.1
List of Subsidiaries
23.1
Independent Registered Public Accounting Firm’s Consent
31.1
Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2
Rule 13a-14(a)/15d-14(a) Certification of CFO
32.1
Section 1350 Certification of CEO
32.2
Section 1350 Certification of CFO
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan or arrangement
107
Exhibit 21.1
List of Subsidiaries of TriCo Bancshares
Name
Tri Counties Bank
TriCo Capital Trust I
TriCo Capital Trust II
North Valley Capital Trust II
North Valley Capital Trust III
North Valley Capital Trust IV
State of Organization
California state-chartered Bank
Delaware
Delaware
Connecticut
Connecticut
Connecticut
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-190047, 333-66064, 333-115455 and 333-160405
on Form S-8 of TriCo Bancshares of our report dated March 13, 2015 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 13, 2015
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 13, 2015
/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 13, 2015
/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, 2014 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, 2014 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.