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, 2016
Commission File Number 0-10661
TriCo Bancshares
(Exact name of Registrant as specified in its charter)
California 94 -2792841
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
63 Constitution Drive, Chico, California 95 973
(Address of principal executive offices) (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.
YES
NO
X
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
YES
NO
X
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 X
NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES X
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of the Form 10-K or any amendment to this Form 10-K.
YES X
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
Accelerated filer
X
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
NO
X
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 2016, was
approximately $530,894,777 (based on the closing sales price of the Registrant’s common stock on the date). This
computation excludes a total of 3,587,007 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 24, 2017, was 22,871,154.
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 the Registrant’s definitive proxy statement for the 2017 annual
meeting of shareholders, 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 Registrants'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
PART II
Item 5
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
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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 15
Exhibits and Financial Statement Schedules
Signatures
FORWARD-LOOKING STATEMENTS
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In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements about TriCo
Bancshares (the “Company,” “TriCo” or “we”) and its subsidiaries for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on
Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future
financial condition and results of operations. When you see any of the words “believes”, “expects”, “anticipates”,
“estimates”, or similar expressions, these generally indicate that we are making forward-looking statements. A number of
factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially
from those contemplated. These factors include those listed at Item 1A Risk Factors, in this report.
Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-
looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made,
whether as a result of new information, future developments or otherwise.
ITEM 1. BUSINESS
Information about TriCo Bancshares’ Business
PART I
TriCo Bancshares is a bank holding company incorporated in California in 1981 and registered under the Bank Holding
Company Act of 1956, as amended (the “BHC Act”). The Company’s principal subsidiary is Tri Counties Bank, a
California-chartered commercial bank (the “Bank”). The Bank offers banking services to retail customers and small to
medium-sized businesses through 68 branch offices in Northern and Central California and had total assets of approximately
$4.5 billion at December 31, 2016. 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 58 traditional branches and 10 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, 2016, the total of the Bank's consumer
loans net of deferred fees outstanding was $362,303,000 (13.1%), the total of commercial loans outstanding was
$217,047,000 (7.9%), and the total of real estate loans including construction loans of $122,419,000 was $2,180,243,000
(79.0%). 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 Three Branch Offices and Deposits from Bank of America
On March 18, 2016, the Bank completed its acquisition of three branch banking offices from Bank of America originally
announced October 28, 2015. The acquired branches are located in Arcata, Eureka and Fortuna in Humboldt County on the
North Coast of California, and have significant overlap compared to the Company's then-existing Northern California
customer base and branch locations. As a result, these branch acquisitions create potential cost savings and future growth
potential. With the levels of capital at the time, the acquisitions fit well into the Company's growth strategy. Also on March
18, 2016, the electronic customer service and other data processing systems of the acquired branches were converted into the
Bank’s systems, and the effect of revenue and expenses from the operations of the acquired branches are included in the
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results of the Company. The Bank paid a premium of $3,204,000 for deposit relationships with balances of $161,231,000
and loans with balances of $289,000, and received cash of $159,520,000 from Bank of America.
The assets acquired and liabilities assumed in the acquisition of these branches 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 March 18, 2016 acquisition date, and the results of operations of the acquired branches 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 the acquired branches. $849,000 of the
goodwill is deductible for income tax purposes because the acquisition was accounted for as a purchase of assets and
assumption of liabilities for tax purposes.
See Note 2 in the financial statements at Item 8 of this report for a discussion about this transaction.
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, the outstanding shares of
North Valley common stock were converted into 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, the outstanding options to purchase shares
of North Valley Bancorp common stock were cancelled and the holders of the options received a total of $1,061,000 in cash.
In connection with the merger, TriCo assumed North Valley Bancorp’s obligations with respect to its outstanding trust
preferred securities.
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.
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, 2016, the Company employed 1,063 persons, including six executive officers. Full time equivalent
employees were 1,013. No employees of the Company 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.
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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 FDIC 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 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 Dodd-Frank Wall Street Reform and Consumer Protection Act (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. The CFPB’s functions include investigating consumer complaints,
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, including the Bank. 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, are subject to the CFPB’s rules but continue to be examined for compliance with federal consumer laws by their
primary federal banking agency.
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 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.
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.
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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
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. In addition, TriCo’s ability to pay dividends may be restricted if it does not maintain an adequate capital
conservation buffer under the FRB’s capital rules. See “—Regulatory Capital Requirements.”
The primary source of funds for payment of dividends by TriCo to its shareholders has been and will continue to 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. In addition, the Bank’s
ability to pay dividends to TriCo may be restricted if the Bank does not maintain an adequate capital conservation buffer
under the FDIC’s capital rules. See “—Regulatory Capital Requirements.”
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.
The Community Reinvestment Act
The Community Reinvestment Act of 1977 (the “CRA”) requires the federal banking regulatory agencies to periodically
assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA also requires the agencies to consider a financial institution's record of meeting its community
credit when evaluating applications for, among other things, domestic branches and mergers or acquisitions. The federal
banking agencies rate depository institutions’ compliance with the CRA. The ratings range from a high of "outstanding" to a
low of "substantial noncompliance." A less than “satisfactory” rating could 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.”
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Consumer Protection Laws
The Bank is subject to many federal consumer protection statues and regulations, some of which are discussed below.
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, which includes a “fair lending” aspect, requires the collection and disclosure
of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns
and enforcing anti-discrimination statutes.
The Real Estate Settlement Procedures Act requires lenders to provide borrowers with disclosures regarding the
nature and cost of real estate settlements and prohibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts.
In addition, the CFPB has taken a number of actions that may affect the Bank's operations and compliance costs, including
the following:
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, such as the Bank, to charge different rates or apply different terms to loans to
different customers.
Penalties for violations of the above laws may include fines, reimbursements, injunctive relief and other penalties.
Regulatory Capital Requirements
The Company and the Bank are subject to the minimum capital requirements of the FDIC and the FRB, respectively. These
capital requirements may restrict the Company’s and the Bank’s profitability and ability to pay dividends. If the Company or
the Bank lacks adequate capital to increase its assets without violating the minimum capital requirements or if it forced to
reduce the level of its assets in order to satisfy regulatory capital requirements, its ability to generate earnings would be
reduced.
The Company’s and the Bank’s primary federal regulators, the FRB and the FDIC, have adopted guidelines utilizing a risk-
based capital structure. Under the risk-based capital rules applicable through December 31, 2014, banking organizations were
required to maintain minimum ratios of Tier 1 capital and total capital to total risk‑ weighted assets (including certain
off‑ balance sheet items, such as letters of credit). Qualifying capital is divided into two tiers. Tier 1 capital consists
generally of common stockholders' equity, retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock (at the holding company level) 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, subordinated debt and intermediate-term preferred stock,
subject to limitations. Tier 2 capital qualifies as part of total capital up to a maximum of 100% of Tier 1 capital. Under these
risk-based capital guidelines, the Company is required to maintain total capital equal to at least 8% of its assets, of which at
least 4% must be in the form of Tier 1 capital. In addition, the Bank is subject to minimum capital ratios under the regulatory
framework for prompt corrective action discussed below under “-- Prompt Corrective Action.”
The Company and the Bank are also required 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 minimum leverage ratio constitutes a minimum requirement for
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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.
In July, 2013, the federal banking agencies approved new capital rules implementing the “Basel III” regulatory capital
reforms and other changes required by the Dodd-Frank Act. “Basel III” refers to capital guidelines adopted by the Basel
Committee on Banking Supervision, which is a committee of central banks and bank supervisors/regulators from the major
industrialized countries. The new capital rules include new risk-based capital and leverage ratios, which are being phased in
from 2015 to 2019, and which refine the definition of what constitutes “capital” for purposes of calculating those ratios. The
new minimum capital level requirements applicable to the Company and the Bank as of January 1, 2015 under the new
capital rules include: (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 new capital 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 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 new capital rules, institutions are subject to limitations on paying dividends, engaging in share repurchases,
and paying discretionary bonuses if its common equity capital level falls below the buffer amount. These limitations establish
a maximum percentage of eligible retained income that could be utilized for such actions.
The new capital rules provide regulators discretion to impose an additional capital 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 countercyclical buffer only applies to larger banks with $250 billion or more in total assets or $10
billion or more in total foreign exposures and is not expected to have an impact on the Company or the Bank.
The new capital 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 including trust
preferred securities that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the
new capital rules provide that depository institution holding companies with less than $15 billion in total assets as of
December 31, 2009, such as the Company, will be able to continue to include non-qualifying instruments that were issued
and included in Tier 1 capital prior to May 19, 2010, such as the Company’s Trust Preferred Securities, as Tier 1. This
treatment is grandfathered and will apply even if the Company exceeds $15 billion assets due to organic growth. However, if
the Company exceeds $15 billion in assets as the result of a merger or acquisition, then the Tier 1 treatment of its outstanding
trust preferred securities will be phased out but may still be treated as Tier 2 capital.
The new capital rules also include changes for the calculation of risk-weighted assets, which are being phased in beginning
January 1, 2015. The new capital rules 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; (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 new capital rules as of
January 1, 2016.
Prompt Corrective Action
(well capitalized, adequately capitalized, undercapitalized,
Prompt Corrective Action regulations of the federal bank regulatory agencies establish five capital categories in descending
significantly undercapitalized and critically
order
undercapitalized), assignment to which depends upon the institution's total risk-based capital ratio, Tier 1 risk-based capital
ratio, and leverage ratio. The new capital rules revised the prompt corrective action framework. Under the new prompt
corrective action framework, which is designed to complement the capital conservation buffer included in the new capital
rules, 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%). 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.
7
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 pays deposit 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. 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 USA Patriot 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.
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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.
As a lender, we face a significant risk 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 appropriately address 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 would
reduce our earnings 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. Determining an appropriate level of
loan loss allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond
our control and these losses may exceed current estimates. Federal and state regulatory agencies, as an integral part of their
examination process, review our loans and allowance for loan losses. While we believe that our allowance for loan losses is
adequate to cover current losses, we cannot assure you that we will not increase the allowance for loan losses further or that
the allowance will be adequate to absorb loan losses we actually incur. Either of these occurrences could have a material
adverse affect on our business, financial condition and results of operations.
Our business may be adversely affected by business conditions in Northern and Central California.
We conduct most of our business in Northern and Central California. As a result of this geographic concentration, our
financial results may be impacted by economic conditions in California. Deterioration in the economic conditions in
California could result in the following consequences, any of which could have a material adverse effect on our business,
financial condition, results of operations and cash flows:
problem assets and foreclosures may increase,
demand for our products and services may decline,
low cost or non-interest bearing deposits may decrease, and
collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers'
borrowing power, and reducing the value of assets and collateral associated with our existing loans.
In view of the concentration of our operations and the collateral securing our loan portfolio in both Northern and Central
California, we may be particularly susceptible to the adverse effects of any of these consequences, any of which could have a
material adverse effect on our business, financial condition, results of operations and cash flows.
A significant majority of the loans in our portfolio are secured by real estate and a downturn in our real estate markets could
hurt our business.
A downturn in our real estate markets in which we conduct our business 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, 2016, approximately 91.0% of the book value of our loan portfolio consisted
of loans collateralized by various types of real estate. Substantially all of our real estate collateral is located in California. So
if there is a significant adversely decline in real estate values in California, the collateral for our loans will provide less
9
security. Real estate values could also be affected by, among other things, earthquakes, drought and national disasters in our
markets. Any such downturn could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
We depend on key personnel and the loss of one or more of those key personnel may materially and adversely affect our
prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of
qualified persons with knowledge of, and experience in, the California community banking industry. The process of
recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our
success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance,
administrative, marketing and technical personnel and upon the continued contributions of our management and personnel.
In particular, our success has been and continues to be highly dependent upon the abilities of our senior management team of
Messrs. Smith, Bailey, Carney, Fleshood, O'Sullivan and Reddish, who have expertise in banking and collective 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 the risk of environmental liabilities with respect to properties to which we take title.
In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities
with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage,
personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination,
or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs
associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner
of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our
business, financial condition, results of operations and cash flows could be materially adversely affected.
Strong competition in California could hurt our profits.
Competition in the banking and financial services industry is intense. Our profitability depends upon our continued ability to
successfully compete. We compete exclusively in Northern and Central California for loans, deposits and customers with
commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies,
brokerage firms and Internet-based marketplace lending platforms. In particular, our competitors include 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, such
as Internet-based marketplace lenders, to provide financial services, often without many of regulatory and capital restrictions
that we face.. 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 execute 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
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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.
Severe weather, natural disasters and other external events could adversely affect our business.
Severe weather, drought, fires, natural disasters such as earthquakes, or acts of war or terrorism and other adverse external
events could have a significant impact on our ability to conduct business. Such events could also affect the stability of the
Bank’s deposit base; impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans
and cause significant property damage, result in losses of revenue and/or cause us to incur additional expenses. Although we
have established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse
effect on our business, financial condition and results of operations.
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 2016, 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 with $10 billion or less in assets, such as the Bank, are subject to the CFPB’s rules but continue to be
examined for compliance with the consumer laws by their primary bank regulators. In addition, the Dodd-Frank Act required
the FDIC and FRB to adopt new, more stringent capital rules that apply to us. 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.
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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.
We operate in a highly regulated environment and we may be adversely affected by new laws and regulations or changes in
existing laws and regulations. Regulations may prevent or impair our ability to pay dividends, engage in acquisitions or
operate in other ways.
We are subject to extensive regulation, supervision and examination by the DBO, FDIC, and the FRB. See Item 1 -
Regulation and Supervision of this report for information on the regulation and supervision which governs our activities.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of
restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses.
Banking regulations, designed primarily for the protection of depositors, may limit our growth and the return to our
shareholders by restricting certain of our activities, such as:
the payment of dividends to our shareholders,
possible mergers with or acquisitions of or by other institutions,
desired investments,
loans and interest rates on loans,
interest rates paid on deposits,
service charges on deposit account transactions,
the possible expansion of branch offices, and
the ability to provide securities or trust services.
We also are subject to regulatory capital requirements and could be subject to enforcement actions to the extent that we don’t
meet these requirements. Federal and state governments and regulators could pass legislation and adopt policies responsive
to current credit conditions that would have an adverse effect on the Company and its financial performance. 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 adverse 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 requires, and will continue to require, the commitment of significant financial and
managerial 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.
Risks Related to Growth and Expansion
Goodwill resulting from the acquisition of North Valley Bancorp may adversely affect our results of operations.
Goodwill and other intangible assets have to increased 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.
12
If we cannot attract deposits, our growth may be inhibited.
We plan to increase the level of our assets, including our loan portfolio. Our ability to increase our assets depends in large
part on our ability to attract additional deposits at favorable rates. We intend to seek additional deposits by offering deposit
products that are competitive with those offered by other financial institutions in our markets and by establishing personal
relationships with our customers. We cannot assure that these efforts will be successful. Our inability to attract additional
deposits at competitive rates could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
There are potential risks associated with future acquisitions and expansions.
We intend to continue to explore expanding our branch system through opening new bank branches and in-store branches in
existing or new markets in Northern and Central California. In the ordinary course of business, we evaluate potential branch
locations that would bolster our ability to cater to the small business, individual and residential lending markets in California.
Any given new branch, if and when opened, will have expenses in excess of revenues for varying periods after opening that
may adversely affect our results of operations or overall financial condition.
In addition, to the extent that we acquire other banks in the future, our business may be negatively impacted by certain risks
inherent with such acquisitions. These risks include:
incurring substantial expenses in pursuing potential acquisitions without completing such acquisitions,
losing key clients as a result of the change of ownership,
the acquired business not performing in accordance with our expectations,
difficulties arising in connection with the integration of the operations of the acquired business with our
operations,
needing to make significant investments and infrastructure, controls, staff, emergency backup facilities or
other critical business functions that become strained by our growth,
management needing to divert attention from other aspects of our business,
potentially losing key employees of the acquired business,
incurring unanticipated costs which could reduce our earnings per share,
assuming potential liabilities of the acquired company as a result of the acquisition, and
an acquisition may dilute our earnings per share, in both the short and long term, or it may reduce our
tangible capital ratios.
As result of these risks, any given acquisition, if and when consummated, may adversely affect our results of operations or
financial condition. In addition, because the consideration for an acquisition may involve cash, debt or the issuance of shares
of our stock and may involve the payment of a premium over book and market values, existing shareholders may experience
dilution in connection with any acquisition.
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 or liabilities 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
13
Community Bank, we may record a loss sharing asset or liability that we consider adequate to absorb future losses or
recoveries which may occur in the acquired loan portfolio. In determining the size of the loss sharing asset or liability, 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 or liability may at any time be insufficient to
cover future loan losses or recoveries, 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, 2016, $3,399,000, or
0.08%, 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.
As a holding company with no significant assets other than the Bank, we depend on dividends from the Bank to fund our
operations and for a substantial portion of our revenues. Our ability to continue to pay dividends depends 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. As of December 31, 2016, the Bank
could have paid approximately $82,615,000 in dividends to TriCo 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 well as a separate capital conservation buffer, as further described
under “Item 1 – Supervision and Regulation -- Regulatory 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.”
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 and the
authority to issue preferred stock by action of the board of directors acting alone, 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, 2016, directors and executive officers beneficially owned approximately 8.9% of our common stock and
our Employee Stock Ownership Plan owned approximately 5.5%. 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.
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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, 2016, 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.
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.
15
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 68 offices in 26 counties in Northern and Central California
including twelve offices in Shasta County, eight in Butte County, six in Humboldt and Nevada Counties, four in Placer and
Sacramento Counties, three in Siskiyou and Stanislaus Counties, two each in Glenn, Mendocino, Sutter 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, and two other buildings that it leases
out. The Company leases thirty-nine branch office locations, two loan production offices, 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.
ITEM 3. LEGAL PROCEEDINGS
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 and rest periods
and seeking 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 the Bank within the State of California during the preceding four years. On or about
June 25, 2015, Plaintiff filed an Amended Complaint expanding the class definition to all current and formerly hourly-paid or
non-exempt branch employees employed by the Bank within the State of California at any time during the period from
September 15, 2010 to final judgment. The Bank responded to the First Amended Complaint, denying the charges, and the
parties engaged in written discovery. The parties engaged in non-binding mediation of this action during the third quarter of
2016.
On January 20, 2015, a then-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 t defendants during the time period beginning October 18, 2013 through the date of
the filing of this action. The Company and the Bank responded to the First Amended Complaint, denying the charges, and
engaged in written discovery with Plaintiff. The parties engaged in non-binding mediation of this action during the third
quarter of 2016.
During the third quarter of 2016, the Bank agreed to settle the two foregoing matters. In connection with the settlement and
in consideration for the full settlement and release of all claims, the Bank would pay up to $1.9 million. The actual cost of
the settlement will depend on the number of claims submitted by purported class members and the Bank estimates that the
actual cost of settlement will be approximately $1,450,000. In the event that the parties enter into a stipulation of settlement,
hearings will be scheduled at which the court will consider the settlement. The settlement is subject to customary conditions,
including court approval following notice to members of the purported classes. 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.
ITEM 4. MINE SAFETY DISCLOSURES
Inapplicable.
16
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:
2016:
Fourth quarter
Third quarter
Second quarter
First quarter
2015:
Fourth quarter
Third quarter
Second quarter
First quarter
High
$34.46
$28.40
$28.90
$27.44
$29.39
$25.55
$24.75
$24.77
Low
$25.49
$25.40
$24.60
$23.80
$24.25
$23.08
$23.18
$22.82
As of February 24, 2017 there were approximately 1,616 shareholders of record of the Company’s common stock. On
February 24, 2017, the closing sales price was $37.18.
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, 2016 $82,615,000 was available for payment of dividends
by the Bank to the Company, under applicable laws and regulations. The Company paid cash dividends of $0.15 per
common share in each of the quarters ended December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016, and
December 31, 2015, and $0.13 per common share in each of the quarters ended September 30, 2015, June 30, 2015, and
$0.11 per common share in the quarter ended March 31, 2015.
Issuer Repurchases 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, 2016, 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 2016:
Period
(a) Total number
of shares purchased(1)
(b) Average price
paid per share
Oct. 1-31, 2016
Nov. 1-30, 2016
Dec. 1-31, 2016
Total
-
176,779
1,407
178,186
-
$30.72
$34.18
$30.74
(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. See Note 19 to the consolidated financial statements at Item 8 of Part II of this report, for a
discussion of the Company’s stock repurchased under equity compensation plans.
(2) Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to
various other equity incentive plans.
17
The following graph presents the cumulative total yearly shareholder return from investing $100 on December 31, 2011, 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.
Equity Compensation Plans
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, 2016. 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))
-
708,126
708,126
-
$17.12
$17.12
-
637,262
637,262
18
TriCo BancsharesPeriod EndingIndex12/31/1112/31/1212/31/1312/31/1412/31/1512/31/16TriCo Bancshares100.00120.43207.94184.41209.08266.01Russell 3000100.00116.42155.47175.00175.84198.23SNL Western Bank100.00126.20177.56213.09220.79244.7710012014016018020022024026028012/31/1112/31/1212/31/1312/31/1412/31/1512/31/16Index ValueTotal Return PerformanceTriCo BancsharesRussell 3000SNL Western Bank
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,
2016
2015
2014
2013
2012
Interest income
Interest expense
$173,708
5,721
$161,414
5,416
$121,115
4,681
$106,560
4,696
$108,716
7,344
Net interest income
(Benefit from) provision for loan losses
Noninterest income
Noninterest expense
167,987
(5,970)
44,563
145,997
155,998
(2,210)
45,347
130,841
116,434
(4,045)
34,516
110,379
101,864
(715)
36,829
93,604
Income before income taxes
Provision for income taxes
72,523
27,712
72,714
28,896
44,616
18,508
45,804
18,405
101,372
9,423
37,980
97,998
31,931
12,937
Net income
$44,811
$43,818
$26,108
$27,399
$18,994
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
$1.96
$1.94
$0.60
$20.87
$17.77
22,814
23,087
22,868
$1.93
$1.91
$0.52
$19.85
$16.81
22,750
22,998
22,775
$1.47
$1.46
$0.44
$18.41
$15.31
17,716
17,923
22,715
$1.71
$1.69
$0.42
$15.61
$14.59
16,045
16,197
16,077
$1.19
$1.18
$0.36
$14.33
$13.30
15,988
16,052
16,001
At December 31:
Loans, net of allowance
Total assets
Total deposits
Other borrowings
Junior subordinated debt
Shareholders’ equity
Financial Ratios:
For the year:
$2,727,090
4,517,968
3,895,560
17,493
56,667
477,347
$2,486,926
4,220,722
3,631,266
12,328
56,470
452,116
$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
1.02%
Return on average assets
9.46%
Return on average equity
Net interest margin1
4.23%
Net loan (recoveries) losses to average loans (0.09)%
Efficiency ratio2
67.9%
10.84%
Average equity to average assets
30.6%
Dividend payout ratio
At December 31:
Equity to assets
Total capital to risk-adjusted assets
10.57%
14.65%
1.11%
10.04%
4.32%
(0.07)%
64.7%
11.01%
27.2%
10.71%
15.09%
0.87%
8.67%
4.17%
(0.13)%
72.9%
10.00%
30.1%
10.68%
15.63%
1.04%
11.34%
4.18%
0.23%
67.3%
9.21%
24.9%
9.15%
14.77%
0.75%
8.44%
4.32%
0.82%
70.2%
8.91%
30.5%
8.79%
14.53%
1 Fully taxable equivalent.
2 The sum of fully taxable equivalent net interest income and noninterest income divided by noninterest expense.
19
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 March 18, 2016, the Bank completed its acquisition of three branch banking offices from Bank of America originally
announced October 28, 2015. The acquired branches are located in Arcata, Eureka and Fortuna in Humboldt County on the
North Coast of California, and have significant overlap compared to the Company's then-existing Northern California
customer base and branch locations. As a result, these branch acquisitions create potential cost savings and future growth
potential. With the levels of capital at the time, the acquisitions fit well into the Company's growth strategy. Also on March
18, 2016, the electronic customer service and other data processing systems of the acquired branches were converted into the
Bank’s systems, and the effect of revenue and expenses from the operations of the acquired branches are included in the
results of the Company. The Bank paid a premium of $3,204,000 for deposit relationships with balances of $161,231,000
and loans with balances of $289,000, and received cash of $159,520,000 from Bank of America.
On October 3, 2014, TriCo completed the acquisition of North Valley Bancorp. 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 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. See Note 2 in the financial statements at Item 8 of Part II 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
20
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
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.
Results of Operations
Overview
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends
related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and
capital resources and should be read in conjunction with the consolidated financial statements of the Company and the related
notes at Item 8 of this report.
Following is a summary of the components of net income for the periods indicated (dollars in thousands):
Components of Net Income
Net interest income
Benefit from (provision for) loan losses
Noninterest income
Noninterest expense
Taxes
Net income
Net income per average fully-diluted share
Net income as a percentage of average shareholders’ equity
Net income as a percentage of average total assets
2016
$167,987
5,970
44,563
(145,997)
(27,712)
$44,811
$1.94
Year ended December 31,
2015
$155,998
2,210
45,347
(130,841)
(28,896)
$43,818
$1.91
10.04%
1.11%
2014
$116,434
4,045
34,516
(110,379)
(18,508)
$26,108
$1.46
9.46%
1.02%
8.67%
0.87%
Included in the Company’s results of operations for the year ended December 31, 2016 is the ongoing impact of the
Company’s acquisition, on March 18, 2016, of three branch offices from Bank of America that included the acquisition of
deposit relationships with balances totaling $161,231,000. Interest expense associated with the acquired deposit relationships
was $5,000 from March 18, 2016 to March 31, 2016, and interest income from the net cash received in the transaction was
estimated to be $27,000, assuming it was invested in Fed funds at an annualized earnings rate of 0.50%. Direct noninterest
income and expense related to these branches from March 18, 2016 to March 31, 2016 were $14,000 and $659,000,
respectively. Included in the $659,000 of noninterest expense related to these branches for the three months ended March 31,
2016 was $10,000 of core deposit intangible amortization, and $622,000 of nonrecurring acquisition expenses such as system
conversion and customer communication related expenses. Other (indirect) noninterest income and expenses related to these
branches and associated deposits, such as, increased data processing expense, are not readily distinguishable on a branch by
branch basis. On June 8, 2016, the Company consolidated a preexisting branch into one of the branches acquired from Bank
of America.
21
Also included in the Company’s results of operations for the year ended December 31, 2016 is the impact of the sale on
December 28, 2016, of twenty performing loans with recorded book value of $1,975,000, and 49 nonperforming loans with
recorded book value, including pre-sale write downs and purchase discounts, of approximately $2,709,000. The loans sold
on December 28, 2016 had contractual amounts outstanding of $7,100,000. Net sale proceeds of $5,851,000 resulted in the
recovery of loan balances previously charged off of $692,000, additional loan charge offs of $316,000, interest income of
$586,000 from the recovery of interest payments previously applied to principal balances, and gain on sale of $205,000. In
addition, associated with the loans sold on December 28, 2016 were specific allowances for loan loss of $503,000 on
September 30, 2016 that were no longer necessary at December 31, 2016; and had these loans not been sold, it is expected
that the allowance for loan losses would have been approximately $503,000 higher than reported at December 31, 2016, and
the reversal of provision for loan losses for the year ended December 31, 2016 would have been approximately $503,000 less
than reported.
Also included in the Company’s results of operations for the year ended December 31, 2016 is the impact of the sale on
August 22, 2016, of two performing loans with recorded book value of $166,000, and 48 nonperforming loans with recorded
book value, including pre-sale write downs and purchase discounts, of approximately $2,757,000. The loans sold on August
22, 2016 had contractual amounts outstanding of $6,558,000. Net sale proceeds of $4,980,000 resulted in the recovery of
loan balances previously charged off of $1,727,000, additional loan charge offs of $159,000, and interest income of $488,000
from the recovery of interest payments previously applied to principal balances.
Also included in the Company’s results of operations for the year ended December 31, 2016 is the impact of the purchase, on
May 19, 2016 of seven performing multi-family commercial real estate loans valued at $22,503,000.
Also included in the Company’s results of operations for the year ended December 31, 2016 is the impact of the sale, on
March 31, 2016, of twenty-seven nonperforming loans, nine substandard performing loans, and three purchased credit
impaired loans with total contractual principal balances outstanding of $31,487,000, and recorded book value, including pre-
sale write downs and purchase discounts, of approximately $24,810,000. Net proceeds from the sale of these loans were
$27,049,000, and resulted in additional net loan write downs of $21,000, the recovery of $1,237,000 of interest income that
was previously applied to the principal balance of loans in nonaccrual status, and a gain on sale of loans of $103,000. The
twenty-seven nonperforming loans that were sold had a total recorded value of $13,058,000, and were sold for net proceeds
of $14,973,000, resulting in the recovery of $575,000 of previously charged off principal balances, the recognition of
$1,237,000 of interest income from interest payments previously applied to principal balances on nonaccrual loans, and a
gain on sale of $103,000. The $13,058,000 recorded value of these nonperforming loans was the result of contractual
principal balances outstanding of $17,169,000, less $1,578,000 of principal balances previously charged off, less $2,684,000
of interest payments previously applied to principal balances on nonaccrual loans, and the addition of $151,000 of
unamortized loan purchase premiums net of unearned deferred loan fees. The nine substandard performing loans that were
sold had a total recorded value of $9,508,000, and were sold for net proceeds of $8,912,000, resulting in a net loan principal
write down and charge off of $596,000. The $9,508,000 recorded value of these performing loans was the result of
contractual principal balances outstanding of $10,438,000, less $930,000 of unamortized loan purchase discounts and
unearned deferred loan fees. Prior to their sale, the three loans with deteriorated credit quality acquired in a business
combination were accounted for under Accounting Standards Codification Topic 310-30 using the “pooled method” of
accounting for loans acquired with deteriorated credit quality. The Company classifies these types of loans in a category of
loan it refers to as Purchased Credit Impaired-other (PCI-other) loans. The combined contractual principal balance of the
three PCI-other loans sold on March 31, 2016 was $3,880,000, and they were sold for net proceeds of $3,164,000. The net
sale proceeds of $3,164,000, along with other cash flows received on these loans during the three months ended March 31,
2016, represented a $446,000 decrease in estimated cash flows over their estimated remaining lives when compared to their
previous estimated cash flows as of December 31, 2015. Previously, these three PCI-other loans were expected to be
resolved by September 30, 2017. As a result of the magnitude and timing of the decrease in estimated cash flows for these
three PCI-other loans, the loan pools associated with these PCI-other loans experienced an increase in interest income of
$23,000 during the three months ended March 31, 2016, but are expected to realize a decrease in interest income of $469,000
over the remaining lives of the associated loan pools when compared to projected interest income under the previous
(December 31, 2015) estimated cash flows for these three PCI-other loans.
Also included in the Company’s results of operations for the year ended December 31, 2016 is a $1,450,000 litigation
contingent liability expense accrual recorded during the three months ended June 30, 2016, and representing the Company’s
estimate of probable incurred losses associated with the legal proceedings originally brought against the Company on
September 15, 2014 and January 20, 2015, and described further under the heading “Legal Proceedings” at Note 18 in Item
1 of Part I of this report.
Also included in the Company’s results of operations for the year ended December 31, 2016 was a $716,000 valuation
allowance expense (recorded in miscellaneous other noninterest expense) related to a closed branch building held for sale, the
value of which was written down to current market value, and subsequently sold during the three months ended September
22
30, 2016. Net proceeds from the sale of this building were $1,218,000, and resulted in no gain or additional loss being
recorded upon the sale of this building.
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)
Year ended December 31,
2015
$161,414
(5,416)
155,998
905
$156,903
2014
$121,115
(4,681)
116,434
303
$116,737
2016
$173,708
(5,721)
167,987
2,329
$170,316
4.23%
4.32%
4.17%
Net interest income (FTE) for the year ended December 31, 2016 increased $13,413,000 (8.6%) to $170,316,000 from
$156,903,000 during the year ended December 31, 2015. The increase in net interest income (FTE) was due primarily to a
$240,292,000 (10.1%) increase in the average balance of loans to $2,629,729,000, a $140,526,000 (13.4%) increase in the
average balance of investments to $1,190,509,000, and a seven basis point increase in the average yield of nontaxable
investments from 4.85% during the year ended December 31, 2015 to 4.92% during the year ended December 31, 2016 , that
were partially offset by a 15 basis point decrease in the average yield on loans from 5.52% during the year ended December
31, 2015 to 5.37% during the year ended December 31, 2016, and a 15 basis point decrease in the average yield on
investments taxable from 2.74% during the year ended December 31, 2015 to 2.59% during the year ended December 31,
2016. The $240,292,000 increase in average loan balances during 2016 compared to 2015 was due primarily to organic loan
growth. The $140,526,000 increase in average investment balances during 2016 compared to 2015 was due primarily to
investment purchases in excess of investment maturities. The increases in average loan and investment balances during 2016
were funded primarily by a $350,461,000 increase in the average balance of deposits, and a $37,528,000 increase in the
average balance of shareholders’ equity during 2016. The $350,461,000 increase in the average balance of deposits during
2016 compared to 2015 included the effect of the purchase of three branches and $161,231,000 of deposits from Bank of
America on March 18, 2016. The seven basis point increase in the average yield of investments nontaxable was due to
purchases of investments nontaxable with higher average tax-equivalent yields during 2016 compared to the yields on
investments nontaxable that the Company owned during 2015. The 15 basis point decrease in average loan yields was due
primarily to declines in market yields on new and renewed loans compared to yields on repricing, maturing, and paid off
loans. The 15 basis point decrease in the average yield of investments taxable was due to purchases of investments taxable
with lower average tax-equivalent yields during 2016 compared to the yields on investments taxable that the Company
owned during 2015, and increased amortization of purchase premiums on mortgage backed securities during 2016 compared
to 2015. The increased amortization of purchase premiums on mortgage backed securities during 2016 was due primarily to
faster prepayment of existing mortgages caused by higher mortgage refinance activity that was caused by reduced mortgage
rates during most of 2016 compared to 2015. The increases in average loan and investment balances added $9,948,000 and
$4,096,000, respectively, to net interest income (FTE) while the decreases in average loan and investments taxable yields
reduced net interest income (FTE) during 2016 by $698,000 and $1,162,000, respectively, compared to 2015. The increase
in average investments nontaxable yield increased net interest income (FTE) during 2016 by $1,019,000 compared to 2015.
Included in investment interest income during the years ended December 31, 2016 and 2015 were special cash dividend of
$578,000 and $626,000, respectively, from the Company’s investment in Federal Home Loan Bank of San Francisco stock.
Included in loan interest income during the year ended December 31, 2016 was discount accretion from purchased loans of
$7,399,000 compared to $10,056,000 during the year ended December 31, 2015. Also included in loan interest income
during the year ended December 31, 2016 was interest income of $2,311,000 from the recovery of interest payments
previously applied to principal balances of nonperforming loans sold during 2016. Included in loan interest income during
the year ended December 31, 2015 was the recovery of $728,000 of loan interest income from the payoff of a single
originated loan that was in interest nonaccrual status; and while recoveries of loan interest income from paid off nonaccrual
loans occur from time to time, a single recovery of this magnitude is unusual.
Net interest income (FTE) for the year ended December 31, 2015 increased $40,166,000 (34.4%) to $156,903,000 from
$116,737,000 during. The increase in net interest income (FTE) was due primarily to a $541,688,000 (29.3%) increase in the
average balance of loans to $2,389,437,000, and a $505,217,000 (93%) increase in the average balance of investments to
$1,049,983,000 that were partially offset by a 10 basis point decrease in the average yield on loans from 5.62% during the
year ended December 31, 2014 to 5.52% during the year ended December 31, 2015, and a 17 basis point decrease in the
average yield on investments from 3.01% during the year ended December 31, 2014 to 2.84% during the year ended
December 31, 2015. The $541,688,000 increase in average loan balances compared to the prior year was due primarily to the
addition of $499,327,000 of loans through the acquisition of North Valley Bancorp on October 4, 2014, and net loan growth
23
of $240,414,000 (10.5%) during the year ended December 31, 2015. The $505,217,000 increase in average investment
balances from the prior year was due primarily to the addition of $212,616,000 of investments through the acquisition of
North Valley Bancorp on October 4, 2014, and $371,784,000 of investment purchases in excess of investment maturities and
paydowns during 2015. The 10 basis point decrease in average loan yields was due primarily to declines in market yields on
new and renewed loans compared to yields on repricing, maturing, and paid off loans. The decrease in average investment
yields was due primarily to declines in market yields on new investments compared to yields on existing investments. The
increases in average loan and investment balances added $30,443,000 and $15,493,000, respectively, to net interest income
(FTE) while the decreases in average loan and investment yields reduced net interest income (FTE) during 2015 by
$2,494,000 and $2,056,000, respectively, when compared to 2014. Included in investment interest income during the year
ended December 31, 2015 was a special cash dividend of $626,000 from the Company’s investment in Federal Home Loan
Bank of San Francisco stock. Included in loan interest income during the year ended December 31, 2015 was discount
accretion from purchased loans of $10,056,000 compared to $6,437,000 of discount accretion from purchased loans during
the year ended December 31, 2014. Also included in loan interest income during the year ended December 31, 2015 was the
recovery of $728,000 of loan interest income from the payoff of a single originated loan that was in interest nonaccrual
status; and while recoveries of loan interest income from paid off nonaccrual loans occur from time to time, a single recovery
of this magnitude is unusual.
For more information related to loan interest income, including loan purchase discount accretion, see the Summary of
Average Balances, Yields/Rates and Interest Differential and Note 30 to the consolidated financial statements at Part II, Item
8 of this report. The “Yield” and “Volume/Rate” tables shown below are useful in illustrating and quantifying the
developments that affected net interest income during 2016 and 2015.
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):
Year ended December 31, 2016
Interest
income/expense
Average
balance
Rates
earned/paid
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)
$2,629,729
1,064,410
126,099
205,263
4,025,501
347,521
$4,373,022
$878,436
1,344,304
342,511
18,873
56,566
2,640,690
1,193,297
65,206
473,829
$4,373,022
$141,086
27,578
6,210
1,163
176,037
441
1,685
1,357
9
2,229
5,721
5.37%
2.59%
4.92%
0.57%
4.37%
0.05%
0.13%
0.40%
0.05%
3.94%
0.22%
$170,316
4.15%
4.23%
(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 Average Balances, Yields/Rates and Interest Differential – Yield Tables (continued)
Year ended December 31, 2015
Interest
income/expense
Average
balance
Rates
earned/paid
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)
$2,389,437
1,000,221
49,762
189,506
3,628,926
335,072
$3,963,998
$808,281
1,183,201
340,443
8,668
56,345
2,396,938
1,076,162
54,597
436,301
$3,963,998
$131,836
27,421
2,414
648
162,319
476
1,475
1,482
4
1,979
5,416
5.52%
2.74%
4.85%
0.34%
4.47%
0.06%
0.12%
0.44%
0.05%
3.51%
0.23%
$156,903
4.24%
4.32%
Year ended December 31, 2014
Interest
income/expense
Average
balance
Rates
earned/paid
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)
$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.
25
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:
Increase (decrease) in
interest income:
Loans
Investments - taxable
Investments - nontaxable
Cash at Federal Reserve and other banks
Total
Increase (decrease) in
interest expense:
Demand deposits (interest-bearing)
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total
Increase (decrease) in
net interest income
2016 over 2015
Yield/
Rate
Volume
2015 over 2014
Yield/
Rate
Total
Volume
Total
(dollars in thousands)
$9,948
1,319
2,777
40
$(698)
(1,162)
1,019
475
$9,250
157
3,796
515
$30,443
13,938
1,555
(601)
$(2,494)
(2,107)
51
116
$27,949
11,831
1,606
(485)
14,084
(366)
13,718
45,335
(4,434)
40,901
32
145
7
4
6
194
(67)
65
(133)
1
245
(35)
210
(126)
5
251
162
308
274
1
379
(170)
14
(428)
(1)
196
(8)
322
(154)
-
575
111
305
1,124
(389)
735
$13,890
$(477)
$13,413
$44,211
$(4,045)
$40,166
Provision for Loan Losses
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, 2016
and 2015” 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, 2016 and 2015.
The Company benefited from a $5,970,000 reversal of provision for loan losses during the year ended December 31, 2016
versus a $2,210,000 reversal of provision for loan losses during the year ended December 31, 2015. The increase in the
reversal of provision for loan losses for the year ended December 31, 2016 compared to the year ended December 31, 2015
was primarily the result of an increase in net loan recoveries from 0.07% of average loans during 2015 to 0.09% of average
loans during 2016, a decrease in nonperforming loans from $37,119,000 at December 31, 2015 to $20,128,000 at December
31, 2016, continued improvement in loan portfolio loss history, and improvements in collateral values and estimated cash
flows related to nonperforming loans and purchased credit impaired loans. As shown in the Table labeled “Allowance for
Loan Losses - year ended December 31, 2016” at Note 5 in Item 8 of Part II of this report, residential real estate loans, home
equity lines of credit, home equity loans, and commercial construction loans experienced a reversal of provision for loan
losses during the year ended December 31, 2016. The level of provision, or reversal of provision, for loan losses of each loan
category during the year ended December 31, 2016 was due primarily to a decrease in the required allowance for loan losses
as of December 31, 2016 when compared to the required allowance for loan losses as of December 31, 2015 less net charge-
offs during the year ended December 31, 2016. All categories of loans except commercial real estate mortgage loans, C & I
loans, and residential construction loans experienced a decrease in the required allowance for loan losses during the year
ended December 31, 2016. These decreases in required allowance for loan losses were due primarily to reduced impaired
loans, improvements in estimated cash flows and collateral values for the remaining and newly impaired loans, and
reductions in historical loss factors that, in part, determine the required loan loss allowance for performing loans in
accordance with the Company’s allowance for loan losses methodology as described under the heading “Loans and
Allowance for Loan Losses” at Note 1 in Item 8 of Part II of this report. These same factors were also present, to some
extent, for commercial real estate mortgage loans, C & I loans, and residential construction loans, but were more than offset
by the effect of increased loan balances in these loan categories resulting in net provisions for loan losses in these categories
during the year ended December 31, 2016. For details of the change in nonperforming loans during the year ended December
31, 2016 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the year ended
December 31, 2016” and “Changes in nonperforming assets during the three months ended December 31, September 30,
June 30, and March 31, 2016” under the heading “Asset Quality and Non-Performing Assets” below.
26
The Company benefited from a $2,210,000 reversal of provision for loan losses during the year ended December 31, 2015
versus a $4,045,000 reversal of provision for loan losses during the year ended December 31, 2014. The decrease in the
reversal of provision for loan losses for the year ended December 31, 2015 as compared to the year ended December 31, 2014
was primarily the result of increased loan originations during 2015 compared to 2014, and a decrease in net loan recoveries
from 0.13% of average loans during 2014 to 0.07% of average loans during 2015. During 2015, improvements in collateral
values and estimated cash flows related to nonperforming loans and purchased credit impaired loans, and reductions in
nonperforming loans contributed to the reversal of provision for loan losses. As shown in the Table labeled “Allowance for
Loan Losses - year ended December 31, 2015” at Note 5 in Item 8 of Part II of this report, residential real estate loans, home
equity lines of credit, auto indirect loans, and residential construction loans experienced a reversal of provision for loan losses
during the year ended December 31, 2015. The level of provision, or reversal of provision, for loan losses of each loan
category during the year ended December 31, 2015 was due primarily to a decrease in the required allowance for loan losses
as of December 31, 2015 when compared to the required allowance for loan losses as of December 31, 2014 less net charge-
offs during the year ended December 31, 2015, and the effect of the changes in the allowance methodology during the year
ended December 31, 2015 as described under the heading “Loans and Allowance for Loan Losses” at Note 1 in Item 8 of
Part II of this report. All categories of loans except commercial real estate mortgage loans, C & I loans, and commercial
construction loans experienced a decrease in the required allowance for loan losses during the year ended December 31,
2015. These decreases in required allowance for loan losses were due primarily to reduced impaired loans, improvements in
estimated cash flows and collateral values for the remaining and newly impaired loans, and reductions in historical loss
factors that, in part, determine the required loan loss allowance for performing loans in accordance with the Company’s
allowance for loan losses methodology as described under the heading “Loans and Allowance for Loan Losses” at Note 1 in
Item 8 of Part II of this report. These same factors were also present, to some extent, for commercial real estate mortgage
loans, C & I loans, and commercial construction loans, but were more than offset by the effect of increased loan balances in
these loan categories resulting in net provisions for loan losses in these categories during the year ended December 31, 2015.
For details of the change in nonperforming loans during the year ended December 31, 2015 see the Tables, and associated
narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2015” and “Changes in
nonperforming assets during the three months ended December 31, September 30, June 30, and March 31, 2015” under the
heading “Asset Quality and Non-Performing Assets” below. During the year ended December 31, 2015, the Company made
one change to its allowance for loan loss methodology. The change in methodology is described under the heading
“Allowance for loan losses” in the section below labeled “Financial Condition”. Excluding the effect of the change in
allowance methodology during the year ended December 31, 2015, the reversal of provision for loan losses during the year
ended December 31, 2015 would have been approximately $3,528,000, or $1,318,000 more than the $2,210,000 that was
actually recorded, and the allowance for loan losses at December 31, 2015 would have been approximately $34,693,000, or
$1,318,000 less than the $36,011,000 that was actually recorded.
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.
27
Noninterest Income
The following table summarizes the Company’s noninterest income for the periods indicated (dollars in thousands):
Components of Noninterest Income:
Service charges on deposit accounts
ATM fees and interchange
Other service fees
Mortgage banking service fees
Change in value of mortgage servicing rights
Total service charges and fees
Gain on sale of loans
Commissions on sale of nondeposit investment products
Increase in cash value of life insurance
Change in indemnification asset
Gain on disposition of foreclosed assets
Gain on life insurance death benefit
Lease brokerage income
Other noninterest income
Total noninterest income
Year ended December 31,
2015
$14,276
13,364
2,977
2,164
(701)
32,080
3,064
3,349
2,786
(207)
991
155
712
2,417
$45,347
2014
$11,811
9,651
2,206
1,869
(1,301)
24,236
2,032
2,995
1,953
(856)
2,153
-
504
1,499
$34,516
2016
$14,365
15,859
3,121
2,065
(2,184)
33,226
4,037
2,329
2,717
(493)
262
238
711
1,536
$44,563
Noninterest income decreased $784,000 (1.7%) to $44,563,000 in 2016 compared to 2015. The decrease in noninterest
income was due primarily to $870,000 of recoveries of loans from acquired institutions that were charged off prior to
acquisition of those institutions by the Company that were recorded in other noninterest income during the year ended
December 31, 2015, a $1,483,000 decrease in change in value of mortgage servicing rights, a $1,020,000 decrease in
commissions on sale of nondeposit investment products, and a $729,000 decrease in gain on sale of foreclosed assets that
were partially offset by a $2,495,000 increase in ATM fees and interchange income and a $973,000 increase in gain on sale
of loans. The decrease in change in value of mortgage servicing rights (MSRs) is primarily due to a change in the required
rate of return on MSRs by market participants and a decrease in estimated future MSR cash flows as a result of reduced
mortgage rates and higher rates of early mortgage payoffs from mortgage refinancing, both of which reduced the value of
such MSRs during the year ended December 31, 2016 compared to a smaller decrease in the value of MSRs during the year
ended December 31, 2015 that was primarily due to a decrease in estimated future MSR cash flows as a result of reduced
mortgage rates and higher rates of early mortgage payoffs from mortgage refinancing. The decrease in gain on sale of
foreclosed assets was due to decreased foreclosed asset sales during the year ended December 31, 2016, and the uniqueness
of individual foreclosed asset sales when compared to the year-ago period. The $2,495,000 increase in ATM fees and
interchange revenue was primarily due to the Company’s increased focus in this area, including the introduction of new
services in this area during the quarter ended March 31, 2016. The $973,000 increase in gain on sale of loans was due to
continued high levels of refinance and home purchase activity, and increased focus in this area by the Company. The
$4,037,000 of gain on sale of loans during 2016 included $3,729,000 of gain on sale of residential real estate loans originated
for sale, and $308,000 of gain on sale of loans not originated for sale. The changes in noninterest income include the effects
from the operation of three branches, including $161,231,000 of deposits, acquired from Bank of America on March 18,
2016.
Noninterest income increased $10,831,000 (31.4%) to $45,347,000 in 2015 compared to 2014. The increase in noninterest
income was due primarily to an increase in service charges on deposit accounts of $2,465,000 (20.9%) to $14,276,000, an
increase in ATM fees and interchange revenue of $3,454,000 (35.8%) to $13,105,000, and an increase of $1,032,000 (50.8%)
in gain on sale of loans to $3,064,000 compared to the year-ago period. These increases and the increases in other categories
of noninterest income noted in the table above are primarily the result of the acquisition of North Valley Bancorp on October
4, 2014, and $870,000 of recoveries of loans from acquired institutions that were charged off prior to acquisition of those
institutions by the Company that were recorded in other noninterest income during the year ended December 31, 2015.
Partially offsetting these increases was a decrease of $1,162,000 in gain on sale of foreclosed assets to $991,000 during the
year ended December 31, 2015. The decrease in gain on sale of foreclosed assets is due to decreased foreclosed asset sales
during the year ended December 31, 2015, and the uniqueness of individual foreclosed asset sales when compared to the
year-ago period.
28
Noninterest Expense
The following table summarizes the Company’s other noninterest expense for the periods indicated (dollars in thousands):
Components of Noninterest Expense
Salaries and related benefits:
Base salaries, net of deferred loan origination costs
Incentive compensation
Benefits and other compensation costs
Total salaries and related benefits
Other noninterest expense:
Occupancy
Equipment
Data processing and software
Assessments
ATM & POS network charges
Advertising & marketing
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 & acquisition expense
Miscellaneous other
Total other noninterest expenses
Total noninterest expense
Merger & acquisition expense:
Base salaries, net of loan origination costs
Incentive compensation
Benefits and other compensation costs
Data processing and software
Professional fees
Miscellaneous other
Total merger expense
Year ended December 31,
2016
2015
2014
$53,169
8,872
18,683
80,724
10,139
6,597
8,846
2,105
4,999
3,829
5,409
2,749
1,603
998
266
1,377
1,564
140
244
1,450
784
12,174
65,273
$145,997
$187
-
-
-
342
255
$784
$46,822
6,964
17,619
71,405
10,126
5,997
7,670
2,572
4,190
3,992
4,545
3,007
1,296
1,154
490
1,157
737
502
330
-
586
11,085
59,436
$130,841
-
-
-
$108
120
358
$586
$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
Average full time equivalent staff
Noninterest expense to revenue (FTE)
999
67.9%
949
64.7%
783
72.9%
Salary and benefit expenses increased $9,319,000 (13.1%) to $80,724,000 during the year ended December 31, 2016
compared to the year ended December 31, 2015. Base salaries, incentive compensation and benefits & other compensation
expense increased $6,347,000 (13.6%), 1,908,000 (27.4%), and 1,064,000 (6.0%), respectively, to $53,169,000, $8,872,000
and $18,683,000, respectively, during the year ended December 31, 2016. The average number of full-time equivalent staff
increased 50 (5.3%) from 949 during the year ended December 31, 2015 to 999 for the year ended December 31, 2016. The
increase in base salaries was due primarily to annual pay raises, an increase in average full-time equivalent staff, and a
$1,409,000 increase in temporary help expense from $63,000 during 2015 to $1,472,000 during 2016. The increase in
temporary help expense was due primarily to an expansion of the Bank’s customer call center capacity during 2016. All
categories of incentive compensation expense increased during 2016 compared to 2015 due to related production and
profitability measures, and the general increase in staff, except for commissions on sale of nondeposit investment products
for which production was down compared to 2015. The increase in benefits and other compensation expense was due
primarily to the increase in full-time equivalent staff during 2016.
Salary and benefit expenses increased $13,861,000 (24.1%) to $71,405,000 during the year ended December 31, 2015
compared to the year ended December 31, 2014. Base salaries, incentive compensation and benefits & other compensation
expense increased $7,480,000 (19.0%), 1,896,000 (37.4%), and 4,485,000 (34.1%), respectively, to $46,822,000, $6,964,000
and $17,619,000, respectively, during the year ended December 31, 2015. The increases in these categories of salary and
benefits expense are primarily due to the Company’s acquisition of North Valley Bancorp on October 4, 2014. The average
29
number of full-time equivalent staff increased 166 (21.2%) from 783 during the year ended December 31, 2014 to 949 for the
year ended December 31, 2015.
Other noninterest expense increased $5,837,000 (9.8%) to $65,273,000 during the year ended December 31, 2016 compared
to the year ended December 31, 2015. The increase in other noninterest expense was primarily due to system conversion and
capacity expansion expenses during 2016. Expense categories including equipment, data processing and software, ATM &
POS network charges and professional (consulting) experienced significant increases due primarily to system conversion and
capacity expansion during 2016. The Company recorded a litigation contingency expense of $1,450,000 during 2016. The
details of this contingency can be found at Note 18 in Item 8 of Part II of this report. Assessments expense decrease
$467,000 (18.2%) to $2,105,000 during 2016 compared to $2,572,000 during 2015 due to a decrease in FDIC insurance
premiums during the three months ended September 30, 2016. Nonrecurring expenses related to the acquisition of three
branches from Bank of America in March 2016 totaling $784,000 and the acquisition of North Valley Bancorp in October
2014 are included in other noninterest expense for the years ended December 31, 2016 and 2015, respectively. Included in
miscellaneous other noninterest expense during 2016 were $782,000 valuation allowance expenses on fixed assets transferred
to held for sale including a $716,000 valuation allowance expense related to a closed branch building held for sale, the value
of which was written down to current market value, and subsequently sold during the three months ended September 30,
2016. Net proceeds from the sale of this building were $1,218,000, and resulted in no gain or additional loss being recorded
upon the sale of this building.
Other noninterest expense increased $6,601,000 (12.5%) to $59,436,000 during the year ended December 31, 2015 compared
to the year ended December 31, 2014. The increase in other noninterest expense was primarily due to the Company’s
acquisition of North Valley Bancorp on October 4, 2014. Nonrecurring merger expenses related to the North Valley Bancorp
acquisition totaling $586,000 and $4,858,000 are included in other noninterest expense for the years ended December 31,
2015 and 2014, respectively, of which $0 and $1,269,000 were not deductible for income tax purposes, respectively.
Income Taxes
The effective tax rate on income was 38.2%, 39.7%, and 41.5% in 2016, 2015, and 2014, respectively. The effective tax rate
was greater than the federal statutory tax rate due to state tax expense of $7,576,000, $7,412,000, and $4,817,000,
respectively, in these years, and $1,310,000 of nondeductible merger expenses in 2014. Federal tax-exempt income of
$3,881,000, $1,509,000, and $505,000, respectively, from investment securities, Federal and State tax-exempt income of
$2,955,000, $2,786,000, and $1,953,000, respectively, from increase in cash value and gain on death benefit of life
insurance, and tax credits of $197,000, $0, and $0 in these years helped to reduce the effective tax rate.
Investment Securities
The following table presents the available for sale investment securities portfolio by major type as of the dates indicated:
Financial Condition
(In thousands)
Investment securities available for sale (at fair value):
Obligations of US government corporations and agencies $429,678
117,617
Obligations of states and political subdivisions
-
Corporate bonds
2,938
Marketable equity securities
$550,233
Total investment securities available for sale
2016
Year ended December 31,
2014
2015
2013
$313,682
88,218
-
2,985
$404,885
$75,120
3,175
1,908
3,002
$83,205
$97,143
5,589
1,915
-
$104,647
2012
$151,701
9,421
1,905
-
$163,027
Investment securities available for sale increased $145,348,000 to $550,233,000 as of December 31, 2016, compared to
December 31, 2015. This increase is attributable to purchases of $247,717,000, maturities and principal repayments of
$71,684,000, a decrease in fair value of investments securities available for sale of $11,015,000, and amortization of net
purchase price premiums of $2,598,000.
The following table presents the held to maturity investment securities portfolio by major type as of the dates indicated:
(In thousands)
Investment securities held to maturity (at cost):
Obligations of US government corporations and agencies $597,982
14,554
Obligations of states and political subdivisions
$602,536
Total investment securities held to maturity
2016
30
Year ended December 31,
2014
2015
2013
$711,994
14,536
$726,530
$660,836
15,590
$676,426
$227,864
12,640
$240,504
2012
-
-
-
Investment securities held to maturity decreased $123,994,000 to $602,536,000 as of December 31, 2016, compared to
December 31, 2015. This decrease is attributable to principal repayments of $121,666,000 and amortization of net purchase
price discounts/premiums of $2,328,000.
Additional information about the investment portfolio is provided in Note 3 in the financial statements at Item 8 of Part II of
this report.
Restricted Equity Securities
Restricted equity securities were $16,956,000 at December 31, 2016 and December 31, 2015. The entire balance of restricted
equity securities at December 31, 2016 and December 31, 2015 represents the Bank’s investment in the Federal Home Loan
Bank of San Francisco (“FHLB”).
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 Bank 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 Bank may request redemption at par
value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.
Loans
The Bank concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial
loans), consumer loans, commercial loans (including agricultural loans), and real estate construction loans. The interest rates
charged for the loans made by the Bank vary with the degree of risk, the size and maturity of the loans, the borrower’s
relationship with the Bank and prevailing money market rates indicative of the Bank’s cost of funds.
The majority of the Bank’s loans are direct loans made to individuals, farmers and local businesses. The Bank relies
substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with
other financial institutions. The Bank makes loans to borrowers whose applications include a sound purpose, a viable
repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.
Loan Portfolio Composite
The following table shows the Company’s loan balances, including net deferred loan costs, at the dates indicated:
(dollars in thousands)
Real estate mortgage
Consumer
Commercial
Real estate construction
2016
$2,057,824
362,303
217,047
122,419
2015
$1,811,832
395,283
194,913
120,909
Year ended December 31,
2014
$1,615,359
417,084
174,945
75,136
2013
$1,107,863
383,163
131,878
49,103
2012
$1,010,130
386,111
135,528
33,054
Total loans
$2,759,593
$2,522,937
$2,282,524
$1,672,007
$1,564,823
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
2016
74.6%
13.1%
7.9%
4.4%
Year ended December 31,
2014
70.7%
18.3%
7.7%
3.3%
2015
71.8%
15.7%
7.7%
4.8%
2013
66.3%
22.9%
7.9%
2.9%
2012
64.5%
24.7%
8.7%
2.1%
Total loans
100.0%
100.0%
100.0%
100.0%
100.0%
31
At December 31, 2016 loans, including net deferred loan costs, totaled $2,759,593,000 which was a 9.4% ($236,656,000)
increase over the balances at the end of 2015. Demand for commercial real estate (real estate mortgage) loans was strong
during 2016. Demand for residential mortgage loans was strong during 2016. Demand for home equity loans and lines of
credit was moderate during 2016.
At December 31, 2015 loans, including net deferred loan costs, totaled $2,522,937,000 which was a 10.5% ($240,413,000)
increase over the balances at the end of 2014. Demand for commercial real estate (real estate mortgage) loans was strong
during 2015. Demand for home equity loans and lines of credit was weak during 2015.
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.
Asset Quality and Nonperforming Assets
Nonperforming Assets
Loans originated by the Company, i.e., not purchased or acquired in a business combination, are referred to as originated
loans. Originated loans are reported at the principal amount outstanding, net of deferred loan fees and costs. Loan
origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an
adjustment of the related loan’s yield over the actual life of the loan. Originated loans on which the accrual of interest has
been discontinued are designated as nonaccrual loans.
Originated loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or
principal, or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well
secured and in the process of collection. When an originated loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and
where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought
fully current with respect to interest and principal and when, in the judgment of management, the loan is estimated to be fully
collectible as to both principal and interest.
An allowance for loan losses for originated loans is established through a provision for loan losses charged to expense.
Originated loans and deposit related overdrafts are charged against the allowance for loan losses when management believes
that the collectability of the principal is unlikely or, with respect to consumer installment loans, according to an established
delinquency schedule. The allowance is an amount that management believes will be adequate to absorb probable losses
inherent in existing loans and leases, based on evaluations of the collectability, impairment and prior loss experience of loans
and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall
portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower’s
ability to pay. The Company defines an originated loan as impaired when it is probable the Company will be unable to collect
all amounts due according to the contractual terms of the loan agreement. Impaired originated loans are measured based on
the present value of expected future cash flows discounted at the loan’s original effective interest rate. As a practical
expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the
loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance.
In situations related to originated loans where, for economic or legal reasons related to a borrower’s financial difficulties, the
Company grants a concession for other than an insignificant period of time to the borrower that the Company would not
otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify
borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches
nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other
actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the
Company grants the borrower new terms that result in the loan being classified as a TDR, the Company measures any
impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully
paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in nonaccrual status
until the borrower demonstrates a sustained period of performance which the Company generally believes to be six
consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off
policies as noted above with respect to their restructured principal balance.
Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb
losses inherent in the Company’s originated loan portfolio. This is maintained through periodic charges to earnings. These
charges are included in the Consolidated Statements of Income as provision for loan losses. All specifically identifiable and
quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are
32
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.
Loans purchased or acquired in a business combination are referred to as acquired loans. Acquired loans are valued as of
acquisition date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB
ASC”) Topic 805, Business Combinations. Loans acquired with evidence of credit deterioration since origination for which it
is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI)
loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated
Credit Quality. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at
acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for
loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future
estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing
the estimated effective yield of the loan. Default rates, loss severity, and prepayment speed assumptions are periodically
reassessed and our estimate of future payments is adjusted accordingly. The difference between contractual future payments
and estimated future payments is referred to as the nonaccretable difference. The difference between estimated future
payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable yield
represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after
acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be more than the
originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable
yield would be recognized, on a level yield basis, over the remaining estimated life of the loan. If, after acquisition, the
Company determines that the estimated future cash flows of a PCI loan are expected to be less than the previously estimated,
the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous present
value however, the discount rate may not be lowered below its original level at acquisition. If the discount rate has been
lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be
established through a provision for loan losses charged to expense to decrease the present value to the required level. If the
estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully
reversed depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may
the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI
loans on nonaccrual status are accounted for using the cost recovery method or cash basis method of income recognition.
PCI loans are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are
recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing cash flow from the loan.
ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and have their cash
flows aggregated as if they were one loan. The Company elected to use the “pooled” method of ASC 310-30 for PCI – other
loans in the acquisition of certain assets and liabilities of Granite and Citizens.
Acquired loans that are not PCI loans are referred to as purchased not credit impaired (PNCI) loans. PNCI loans are
accounted for under FASB ASC Topic 310-20, Receivables – Nonrefundable Fees and Other Costs, in which interest income
is accrued on a level-yield basis for performing loans. For income recognition purposes, this method assumes that all
contractual cash flows will be collected, and no allowance for loan losses is established at the time of acquistion. Post-
acquisition date, an allowance for loan losses may need to be established for acquired loans through a provision charged to
earnings for credit losses incurred subsequent to acquisition. Under ASC 310-20, the loss would be measured based on the
probable shortfall in relation to the contractual note requirements, consistent with our allowance for loan loss policy for
similar loans.
33
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, 2016,
2015 and 2014, if all such loans had been current in accordance with their original terms, totaled $783,000, $1,840,000, and
$2,734,000, respectively. Interest income actually recognized on these originated loans during the years ended December 31,
2016, 2015 and 2014 was $377,000, $170,000, and $81,000, respectively. Interest income on PNCI nonaccrual loans that
would have been recognized during the years ended December 31, 2016, 2015 and 2014, if all such loans had been current in
accordance with their original terms, totaled $178,000, $386,000, and $254,000. Interest income actually recognized on
these PNCI loans during the years ended December 31, 2016, 2015 and 2014 was $11,000, $205,000, and $4,000.
The Company’s policy is to place originated loans and PNCI loans 90 days or more past due on nonaccrual status. In some
instances when an originated loan is 90 days past due Management does not place it on nonaccrual status because the loan is
well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable
specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not
exceed 30 days. Loans where the collateral has been repossessed are classified as foreclosed assets. Management considers
both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect
nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or
collection lawsuits.
34
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 agencies
and its government-sponsored agencies,
guaranteed portion of nonperforming loans
Indemnified portion of
covered foreclosed assets
2016
$17,677
2,451
20,128
-
20,128
3,763
223
$24,114
$911
$218
0.53%
Nonperforming assets to total assets
Nonperforming loans to total loans
0.73%
Allowance for loan losses to nonperforming loans 161%
Allowance for loan losses, unamortized loan fees,
and discounts to loan principal balances owed
2.09%
2015
$31,033
6,086
37,119
-
37,119
5,369
-
$42,488
December 31,
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
2012
$49,045
23,471
72,516
-
72,516
5,957
1,541
$80,014
$28
-
1.01%
1.47%
97%
$123
$356
1.88%
2.08%
77%
$101
$539
2.30%
3.18%
72%
$131
$1,233
3.07%
4.63%
59%
2.69%
3.31%
4.09%
5.30%
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
Originated
$11,146
1,748
12,894
-
12,894
2,277
-
$15,171
December 31, 2016
PNCI
$2,131
703
2,834
PCI – cash basis PCI - other
$1,417
-
$1,417
$2,983
-
$2,983
-
2,834
-
-
$2,834
-
$2,983
-
-
$2,983
-
$1,417
1,486
223
$3,126
Total
$17,677
2,451
20,128
-
20,128
3,763
223
$24,114
U.S. government, including its agencies
and its government-sponsored agencies,
guaranteed portion of nonperforming loans
Indemnified portion of
covered foreclosed assets
$911
-
0.34%
Nonperforming assets to total assets
Nonperforming loans to total loans
0.55%
Allowance for loan losses to nonperforming loans 218%
Allowance for loan losses, unamortized loan fees,
and discounts to loan principal balances owed
1.48%
-
-
-
-
0.06%
0.75%
59%
0.07%
100.00%
1%
-
$218
0.07%
6.42%
189%
$911
$218
0.53%
0.73%
161%
2.98%
64.18%
24.44%
2.09%
35
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
Originated
$18,483
4,341
22,824
-
22,824
4,195
-
$27,019
December 31, 2015
PNCI
$3,747
1,651
5,398
PCI – cash basis PCI - other
$3,748
70
3,818
$5,055
24
5,079
-
5,398
-
-
$5,398
-
5,079
-
-
$5,079
-
3,818
1,174
-
$4,992
U.S. government, including its agencies
and its government-sponsored agencies,
guaranteed portion of nonperforming loans
Indemnified portion of
covered foreclosed assets
$28
-
0.64%
Nonperforming assets to total assets
Nonperforming loans to total loans
1.15%
Allowance for loan losses to nonperforming loans 137%
Allowance for loan losses, unamortized loan fees,
and discounts to loan principal balances owed
1.90%
-
-
-
-
-
-
0.13%
1.09%
34%
0.12%
100.00%
2%
0.12%
10.87%
73%
3.11%
60.92%
18.49%
2.69%
The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2016:
Total
$31,033
6,086
37,119
-
37,119
5,369
-
$42,488
$28
-
1.01%
1.47%
97%
Advances/ Pay-downs
Capitalized
Costs
/Sales
Charge-offs/
/Upgrades Write-downs
Transfers to
Foreclosed Category December 31,
Changes
Balance at
Assets
2015
$(3,512)
(18,041)
(5,048)
(1,447)
-
(41)
(2,059)
(1)
(490)
(30,639)
(3,748)
-
$(34,387)
$(320)
(827)
(585)
(220)
-
(298)
(455)
-
-
(2,705)
(140)
-
$(2,845)
$(219)
(539)
(1,177)
(570)
-
-
-
-
-
(2,505)
2,282
$223
-
-
-
$3,702
21,251
$(353)
$353
-
-
-
9,216
1,414
-
55
979
-
-
-
-
-
-
12
490
37,119
5,369
-
$42,488
Balance at
December 31,
2016
$449
10,978
(dollars in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
11
Residential
Commercial
-
Total nonperforming loans 20,128
Noncovered foreclosed assets 3,763
Covered foreclosed assets
223
Total nonperforming assets $24,114
4,937
785
-
38
2,930
New
NPA
$795
8,862
2,326
863
-
321
4,120
$3
272
558
392
-
1
345
-
-
17,287
-
-
$17,287
-
-
1,571
-
-
$1,571
The table above does not include deposit overdraft charge-offs.
36
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, 2016. These tables and narratives are presented
in chronological order:
Changes in nonperforming assets during the three months ended December 31, 2016
Balance at
December 31,
2016
$449
10,978
4,937
785
38
2,930
(In thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial (C&I)
Construction:
Residential
Commercial
11
-
Total nonperforming loans 20,128
Foreclosed assets
3,986
Total nonperforming assets $24,114
New
NPA
$72
1,639
867
127
141
1,719
-
-
4,565
-
$4,565
Advances/ Pay-downs
Capitalized
Costs
/Sales
Charge-offs/
/Upgrades Write-downs
Transfers to
Foreclosed Category September 30,
Changes
Balance at
Assets
2016
-
$1
-
165
-
345
-
-
511
-
$511
$(1,097)
(778)
(1,681)
(1,050)
(5)
(206)
-
-
(4,817)
(591)
$(5,408)
$(108)
(34)
(134)
(101)
(119)
(34)
-
-
(530)
(100)
$(630)
-
$(346)
-
(207)
-
-
-
-
(553)
$553
-
-
-
-
-
-
-
-
-
-
-
-
$1,582
10,496
5,885
1,851
21
1,106
11
-
20,952
4,124
$25,076
Nonperforming assets decreased during the fourth quarter of 2016 by $962,000 (3.8%) to $24,114,000 at December 31, 2016
compared to $25,076,000 at September 30, 2016. The decrease in nonperforming assets during the fourth quarter of 2016
was primarily the result of new nonperforming loans of $4,565,000, advances on existing nonperforming loans and
capitalized costs on foreclosed assets of $511,000, less pay-downs, sales or upgrades of nonperforming loans to performing
status totaling $4,817,000, less dispositions of foreclosed assets totaling $591,000, less loan charge-offs of $530,000, and less
write-downs of foreclosed assets of $100,000.
The $4,565,000 in new nonperforming loans during the fourth quarter of 2016 was comprised of increases of $72,000 on
three residential real estate loans, $1,639,000 on four commercial real estate loans, $994,000 on 15 home equity lines and
loans, $141,000 on 15 other consumer loans, and $1,719,000 on 21 C&I loans.
The $1,639,000 in new nonperforming commercial real estate loans was primarily made up of one loan in the amount of
$346,000 secured by a commercial office property in northern California and two loans totaling $1,259,000 secured by
agricultural production land in northern California. Related charge-offs are discussed below.
The $1,719,000 in new C&I loans was primarily comprised of three loans totaling $1,191,000 secured by rice crop proceeds
in northern California. Related charge-offs are discussed below.
The $4,817,000 in pay-downs, sales or upgrades of loans in the fourth quarter of 2016 was comprised of decreases of
$1,097,000 on 15 residential real estate loans, $778,000 on 17 commercial real estate loans, $2,731,000 on 124 home equity
lines and loans, $5,000 on four consumer loans, and 206,000 on five C&I loans.
Loan charge-offs during the three months ended December 31, 2016
In the fourth quarter of 2016, the Company recorded $530,000 in loan charge-offs and $104,000 in deposit overdraft charge-
offs less $1,021,000 in loan recoveries and $67,000 in deposit overdraft recoveries resulting in $452,000 of net recoveries.
Primary causes of the loan charges taken in the fourth quarter of 2016 were gross charge-offs of $108,000 on six residential
real estate loans, $34,000 on one commercial real estate loan, $235,000 on 20 home equity lines and loans, $119,000 on 12
other consumer loans, and $34,000 on six C&I loans. During the fourth quarter of 2016, there were no individual charges
greater than $250,000.
37
Changes in nonperforming assets during the three months ended September 30, 2016
Balance at
September 30, New
NPA
2016
Advances/ Pay-downs
Capitalized
Costs
/Sales
Charge-offs/
/Upgrades Write-downs
Transfers to
Foreclosed Category
Changes
Assets
Balance at
June 30,
2016
(In thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial (C&I)
Construction:
$1,582
10,496
5,885
1,851
21
1,106
Residential
Commercial
11
-
Total nonperforming loans 20,952
Foreclosed assets
4,124
Total nonperforming assets $25,076
$37
5,456
806
247
43
996
-
-
7,585
-
$7,585
$1
232
185
164
-
-
-
-
582
-
$582
$(1,350)
(2,136)
(1,907)
(126)
(4)
(27)
-
-
(5,550)
(810)
$6,360
$(51)
-
(122)
(26)
(35)
(307)
-
-
(541)
(9)
$(550)
$(219)
(193)
(455)
(234)
-
-
-
-
(1,101)
$1,101
-
-
-
$3,164
7,137
$(258)
$258
-
-
7,636
1,568
17
444
-
-
-
-
-
11
-
19,977
3,842
$23,819
Nonperforming assets increased during the third quarter of 2016 by $1,257,000 (5.3%) to $25,076,000 at September 30, 2016
compared to $23,819,000 at June 30, 2016. The increase in nonperforming assets during the third quarter of 2016 was
primarily the result of new nonperforming loans of $7,585,000, advances on existing nonperforming loans and capitalized
costs on foreclosed assets of $582,000, less pay-downs, sales or upgrades of nonperforming loans to performing status
totaling $5,550,000, less dispositions of foreclosed assets totaling $810,000, less loan charge-offs of $541,000, and less
write-downs of foreclosed assets of $9,000.
The $7,585,000 in new nonperforming loans during the third quarter of 2016 was comprised of increases of $37,000 on one
residential real estate loan, $5,456,000 on two commercial real estate loans, $1,053,000 on 15 home equity lines and loans,
$43,000 on 10 other consumer loans, and $996,000 on 12 C&I loans.
The $5,456,000 in new nonperforming commercial real estate loans was primarily made up of one loan in the amount of
$5,209,000 secured by a commercial warehouse property in central California. Related charge-offs are discussed below.
The $996,000 in new C&I loans was primarily comprised of one loan in the amount of $347,000 secured by crop proceeds in
northern California. Related charge-offs are discussed below.
The $5,550,000 in pay-downs, sales or upgrades of loans in the third quarter of 2016 was comprised of decreases of
$1,350,000 on 22 residential real estate loans, $2,136,000 on 17 commercial real estate loans, $2,033,000 on 124 home equity
lines and loans, $4,000 on four consumer loans, and 27,000 on six C&I loans.
The $2,136,000 reduction in nonperforming commercial real estate loans was primarily made up of one payoff in the amount
of $744,000 on one loan secured by a commercial multifamily residential property in central California, a payoff on two
loans secured by agricultural production land in central California totaling $816,000, and a payoff on one loan secured by a
commercial retail property in northern California in the amount of $375,000.
Loan charge-offs during the three months ended September 30, 2016
In the third quarter of 2016, the Company recorded $541,000 in loan charge-offs and $123,000 in deposit overdraft charge-
offs less $2,541,000 in loan recoveries and $71,000 in deposit overdraft recoveries resulting in $1,948,000 of net recoveries.
Primary causes of the loan charges taken in the third quarter of 2016 were gross charge-offs of $51,000 on three residential
real estate loans, $148,000 on nine home equity lines and loans, $35,000 on nine other consumer loans, and $307,000 on
eight C&I loans. During the third quarter of 2016, there were no individual charges greater than $250,000.
38
Changes in nonperforming assets during the three months ended June 30, 2016
(In thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial (C&I)
Construction:
Balance at
June 30,
2016
$3,164
7,137
7,636
1,568
17
444
Residential
Commercial
11
-
Total nonperforming loans 19,977
Foreclosed assets
3,842
Total nonperforming assets $23,819
New
NPA
$306
729
193
429
58
95
-
-
1,810
-
$1,810
Advances/ Pay-downs
Capitalized
Costs
/Sales
Charge-offs/
/Upgrades Write-downs
Transfers to
Balance at
Foreclosed Category March 31,
Changes
Assets
2016
$1
-
120
63
-
-
-
-
184
-
$184
$(925)
(1,153)
(1,036)
(228)
(26)
(1,779)
(1)
-
(5,148)
(1,023)
$(6,171)
$(124)
-
(115)
(93)
(58)
(76)
-
-
(466)
(43)
$(509)
-
-
$(307)
(130)
-
-
-
-
(437)
$437
-
-
-
$3,906
7,561
$(21)
$21
-
-
8,802
1,506
43
2,204
-
-
-
-
-
12
-
24,034
4,471
$28,505
Nonperforming assets decreased during the second quarter of 2016 by $4,686,000 (16.4%) to $23,819,000 at June 30, 2016
compared to $28,505,000 at March 31, 2016. The decrease in nonperforming assets during the second quarter of 2016 was
primarily the result of new nonperforming loans of $1,810,000, advances on existing nonperforming loans and capitalized
costs on foreclosed assets of $184,000, less pay-downs, sales or upgrades of nonperforming loans to performing status
totaling $5,148,000, less dispositions of foreclosed assets totaling $1,023,000, less loan charge-offs of $466,000, and less
write-downs of foreclosed assets of $43,000.
The $1,810,000 in new nonperforming loans during the second quarter of 2016 was comprised of increases of $306,000 on
two residential real estate loans, $729,000 on three commercial real estate loans, 622,000 on 10 home equity lines and loans,
58,000 on 12 other consumer loans, and $95,000 on three C&I loans.
The $306,000 in new nonperforming residential real estate loans was primarily comprised of one loan in the amount of
$258,000 secured by a single family residence in northern California. Related charge-offs are discussed below.
The $729,000 in new nonperforming commercial real estate loans was primarily made up of one loan in the amount of
$286,000 secured by a commercial restaurant property in central California. Related charge-offs are discussed below.
The $5,148,000 in pay-downs, sales or upgrades of loans in the second quarter of 2016 was comprised of decreases of
$925,000 on 35 residential real estate loans, $1,153,000 on 18 commercial real estate loans, $1,264,000 on 128 home equity
lines and loans, $26,000 on eight consumer loans, $1,779,000 on seven C&I loans, and $1,000 on a single residential
construction loan.
The $1,153,000 reduction in nonperforming commercial real estate loans was primarily made up of one payoff in the amount
of $491,000 on one loan secured by a commercial manufacturing property in northern California, and a payoff on one loan
secured by a commercial retail property in northern California in the amount of $478,000.
The $1,779,000 in reduction in nonperforming C&I loans was primarily made up of the payoff of one loan in northern
California in the amount of $1,273,000 secured by crop proceeds and a pay-down in the amount of $498,000 on a single loan
in northern California secured by general business assets.
Loan charge-offs during the three months ended June 30, 2016
In the second quarter of 2016, the Company recorded $466,000 in loan charge-offs and $176,000 in deposit overdraft charge-
offs less $456,000 in loan recoveries and $80,000 in deposit overdraft recoveries resulting in $106,000 of net charge-offs.
Primary causes of the loan charges taken in the second quarter of 2016 were gross charge-offs of $124,000 on one residential
real estate loan, $208,000 on seven home equity lines and loans, $58,000 on 12 other consumer loans, and $95,000 on two
C&I loans. During the second quarter of 2016, there were no individual charges greater than $250,000.
39
Changes in nonperforming assets during the three months ended March 31, 2016
(In thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial (C&I)
Construction:
Balance at
March 31,
2016
$3,906
7,561
8,802
1,506
43
2,204
Residential
Commercial
12
-
Total nonperforming loans 24,034
Foreclosed assets
4,471
Total nonperforming assets $28,505
New
NPA
$380
1,038
460
60
79
1,310
-
-
3,327
-
$3,327
Advances/ Pay-downs
Capitalized
Costs
/Sales
Charge-offs/
/Upgrades Write-downs
Transfers to
Foreclosed Category December 31,
Changes
Balance at
Assets
2015
$1
39
253
-
1
-
-
-
294
-
$294
$(140)
(13,974)
(423)
(42)
(6)
(47)
-
(490)
(15,122)
(1,325)
$(16,447)
$(37)
(793)
(214)
-
(86)
(38)
-
-
(1,168)
11
$(1,157)
-
-
$(416)
-
-
-
-
-
(416)
$416
-
-
-
$3,702
21,251
$(74)
$74
-
-
9,216
1,414
55
979
-
-
-
-
-
12
490
37,119
5,369
$42,488
Nonperforming assets decreased during the first quarter of 2016 by $13,983,000 (32.9%) to $28,505,000 at March 31, 2016
compared to $42,488,000 at December 31, 2015. The decrease in nonperforming assets during the first quarter of 2016 was
primarily the result of sales or upgrades of nonperforming loans to performing status totaling $15,122,000, dispositions of
foreclosed assets totaling $1,325,000, and loan charge-offs of $1,168,000, that were partially offset by new nonperforming
loans of $3,327,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of $294,000, and an
increase in foreclosed asset valuation of $11,000, the net result of $60,000 of write-downs and $71,000 of positive
adjustments to foreclosed asset valuations.
On March 31, 2016, the Company sold 27 nonperforming loans with total recorded value of $13,058,000 for net proceeds of
$14,973,000, resulting in the recovery of $575,000 of previously charged off principal balances, the recognition of
$1,237,000 of interest income from interest payments previously applied to principal balances on nonaccrual loans, and a
gain on sale of $103,000. The $13,058,000 recorded value of these nonperforming loans was the result of contractual
principal balances outstanding of $17,169,000, less $1,578,000 of principal balances previously charged off, less $2,684,000
of interest payments previously applied to principal balances on nonaccrual loans, and the addition of $151,000 of
unamortized loan purchase premiums net of unearned deferred loan fees.
Of the 27 nonperforming loans sold during the quarter, one was a commercial real estate loan with a recorded value of
$94,000 secured by unimproved real estate in northern California, one was a commercial real estate loan with a recorded
value of $630,000 secured by multifamily real estate in northern California, one was a commercial real estate loan with a
recorded value of $78,000 secured by a commercial office building in central California, six were commercial real estate
loans with a total recorded value of $5,897,000 secured by commercial retail buildings in northern California, seven were
commercial real estate loans with a total recorded value of $4,393,000 secured by commercial warehouse buildings in central
California, three were commercial real estate loans with a total recorded value of $478,000 secured by commercial
manufacturing buildings in central California, one was a commercial real estate loan with a recorded value of $162,000
secured by a commercial manufacturing building in northern California, one was a commercial real estate loan with a
recorded value of $516,000 secured by a fitness center in northern California, two were commercial real estate loans with a
total recorded value of $659,000 secured by hospitality real estate in northern California, two were commercial real estate
loans with a total recorded value of $144,000 secured by multi-use properties in northern California, one was a home equity
line of credit with a recorded value of $1,000 secured by a single family residence in central California, and one was a
commercial and industrial loan with a recorded value of $6,000 secured by miscellaneous non real estate business assets in
central California.
The $3,327,000 in new nonperforming loans during the first quarter of 2016 was comprised of increases of $380,000 on three
residential real estate loans, $1,038,000 on seven commercial real estate loans, $520,000 on seven home equity lines and
loans, $79,000 on 10 consumer loans, and $1,310,000 on four C&I loans.
The $380,000 in new nonperforming residential real estate loans was primarily comprised of a single loan in the amount of
$343,000 secured by a single family residence in northern California.
The $1,038,000 in new nonperforming commercial real estate loans was primarily made up of one loan in the amount of
$491,000 secured by a commercial manufacturing property in northern California.
The $1,310,000 in new nonperforming commercial and industrial loan was primarily comprised of a single loan in the
amount of $1,273,000 secured by various non-real estate business assets in northern California. Related charge-offs are
discussed below.
40
Loan charge-offs during the three months ended March 31, 2016
In the first quarter of 2016, the Company recorded $1,168,000 in loan charge-offs and $120,000 in deposit overdraft charge-
offs less $1,364,000 in loan recoveries and $92,000 in deposit overdraft recoveries resulting in $168,000 of net recoveries.
Primary causes of the loan charges taken in the first quarter of 2016 were gross charge-offs of $37,000 on two residential real
estate loans, $793,000 on 14 commercial real estate loans, $214,000 on four home equity lines and loans, $86,000 on 12 other
consumer loans, and $38,000 on five C&I loans.
The $793,000 in charge-offs the bank incurred in its commercial real estate portfolio was primarily the result of $495,000 in
charge-offs incurred on a single relationship secured by commercial office and single family real estate properties in central
California. The remaining $298,000 was spread over 10 loans spread throughout the Company’s footprint.
Differences between the amounts explained in this section and the total charge-offs listed for a particular category are
generally made up of individual charges of less than $250,000 each. Generally losses are triggered by non-performance by
the borrower and calculated based on any difference between the current loan amount and the current value of the underlying
collateral less any estimated costs associated with the disposition of the collateral.
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
41
heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly.
Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants
specifically hired for this purpose and by various bank regulatory agencies.
The Company’s method for assessing the appropriateness of the allowance for originated and PNCI loan losses includes
specific allowances for impaired loans and leases, formula allowance factors for pools of credits, and allowances for
changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are
based on historical loss experience by product type and prior risk rating. Allowances for impaired loans are based on
analysis of individual credits. Allowances for changing environmental factors are Management’s best estimate of the
probable impact these changes have had on the originated or PNCI loan portfolio as a whole. The allowances for originated
and PNCI loans are included in the allowance for loan losses.
As noted above, the allowances for originated and PNCI loan losses consists of a specific allowance, a formula allowance,
and an allowance for environmental factors. The first component, the specific allowance, results from the analysis of
identified credits that meet management’s criteria for specific evaluation. These loans are reviewed individually to determine
if such loans are considered impaired. Impaired loans are those where management has concluded that it is probable that the
borrower will be unable to pay all amounts due under the contractual terms. Impaired loans are specifically reviewed and
evaluated individually by management for loss potential by evaluating sources of repayment, including collateral as
applicable, and a specified allowance for loan losses is established where necessary.
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.
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.
42
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, home affordability, 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 loans that have not yet been identified as impaired, management considered the volume and severity of
past due loans.
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.
Acquired loans are valued as of acquisition date in accordance with 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.
43
The Components of the Allowance for Loan Losses
The following table sets forth the Bank’s allowance for loan losses as of the dates indicated (dollars in thousands):
Allowance for originated and
PNCI loan losses:
Specific allowance
Formula allowance
Environmental factors allowance
Allowance for originated and
PNCI loan losses
Allowance for PCI loan losses
Allowance for loan losses
Allowance for loan losses to loans
2016
2015
December 31,
2014
2013
2012
$2,046
17,485
10,275
$2,890
20,603
9,625
$4,267
22,076
6,815
$3,975
24,611
5,619
$4,505
29,314
3,919
29,806
2,697
$32,503
1.18%
33,118
2,893
$36,011
1.43%
33,158
3,427
$36,585
1.60%
34,205
4,040
$38,245
2.29%
37,738
4,910
$42,648
2.73%
Based on the current conditions of the loan portfolio, management believes that the $32,503,000 allowance for loan losses at
December 31, 2016 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given,
however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The following table summarizes the allocation of the allowance for loan losses between loan types:
(dollars in thousands)
Real estate mortgage
Consumer
Commercial
Real estate construction
2016
$14,292
10,284
5,831
2,096
2015
$13,950
15,079
5,271
1,711
December 31,
2014
$12,313
18,201
4,226
1,845
2013
$12,854
18,238
4,331
2,822
2012
$12,305
23,461
4,703
2,179
Total allowance for loan losses
$32,503
$36,011
$36,585
$38,245
$42,648
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
2016
44.0%
31.6%
17.9%
6.5%
2015
38.7%
41.9%
14.6%
4.8%
December 31,
2014
33.7%
49.7%
11.6%
5.0%
2013
33.6%
47.7%
11.3%
7.4%
2012
28.9%
55.0%
11.0%
5.1%
Total allowance for loan losses
100.0%
100.0%
100.0%
100.0%
100.0%
The following table summarizes the allocation of the allowance for loan losses between loan types as a percentage of total
loans and as a percentage of total loans in each of the loan categories listed:
Real estate mortgage
Consumer
Commercial
Real estate construction
2016
2015
0.69%
2.84%
2.69%
1.71%
0.77%
3.81%
2.70%
1.42%
December 31,
2014
0.76%
4.36%
2.42%
2.46%
2013
2012
1.16%
4.76%
3.28%
5.75%
1.22%
6.08%
3.47%
6.59%
Total allowance for loan losses
1.18%
1.43%
1.60%
2.29%
2.73%
44
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):
2016
Year ended December 31,
2014
2013
2015
2012
Allowance for loan losses:
Balance at beginning of period
(Benefit from) provision for loan losses
Loans charged off:
Real estate mortgage:
$36,011
(5,970)
$36,585
(2,210)
$38,245
(4,045)
$42,648
(715)
$45,914
9,423
Residential
Commercial
Consumer:
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total loans charged off
Recoveries of previously
charged-off loans:
Real estate mortgage:
Residential
Commercial
Consumer:
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total recoveries of
previously charged off loans
Net charge-offs
Balance at end of period
(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)
(16,484)
147
1,020
398
100
215
860
643
412
-
4,943
2,385
$36,585
3,855
(3,688)
$38,245
3,795
(12,689)
$42,648
(321)
(827)
(585)
(219)
-
(823)
(455)
(224)
-
(694)
(242)
(4)
(972)
(680)
-
-
(3,230)
-
-
(2,816)
204
243
666
252
42
500
677
1,728
140
4,452
1,636
$36,011
880
920
2,317
590
-
449
404
54
78
5,692
2,462
$32,503
2016
Year ended December 31,
2014
2013
2015
2012
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
$2,475
$2,145
$2,415
$3,615
$2,740
244
$2,719
330
$2,475
(270)
$2,145
(1,200)
$2,415
875
$3,615
$32,503
2,719
$36,011
2,475
$36,585
2,145
$38,245
2,415
$42,648
3,615
$35,222
$38,486
$38,730
$40,660
$46,263
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
1.18%
0.10%
1.43%
0.10%
1.60%
0.10%
2.29%
0.14%
2.73%
0.23%
1.28%
1.53%
1.70%
2.43%
2.96%
Average total loans
$2,629,729
$2,389,437
$1,847,749
$1,610,725
$1,552,540
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
(0.09)%
(0.07)%
(0.13)%
0.23%
0.82%
(0.21)%
1.18%
(0.09)%
1.43%
45
(0.22)%
1.60%
(0.04)%
2.29%
0.61%
2.73%
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):
Balance at
December 31,
2016
(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
$1,512
1,441
810
3,763
-
223
-
223
$3,986
Balance at
December 31,
2015
(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
$2,491
1,787
1,091
5,369
-
-
-
-
$5,369
New
NPA
Advances/
Capitalized
Costs
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
New
NPA
Advances/
Capitalized
Costs
-
-
-
-
-
-
-
-
-
-
$195
-
195
-
-
-
-
$195
Sales
$(979)
(2,380)
(389)
(3,748)
-
-
-
-
$(3,748)
Sales
$(61)
(3,374)
(1,023)
(4,458)
-
-
-
-
$(4,458)
Valuation
Adjustments
-
$(56)
(84)
(140)
-
-
-
-
$(140)
Valuation
Adjustments
$(20)
(276)
(206)
(502)
-
-
-
-
$(502)
Transfers
from Loans Changes
Category December 31,
Balance at
2015
$2,491
1,787
1,091
5,369
-
-
-
-
$5,369
Balance at
2014
$1,974
1,622
853
4,449
445
-
-
445
$4,894
-
$2,090
192
2,282
-
223
-
223
$2,505
-
-
-
-
-
-
-
-
-
$153
3,620
1,467
5,240
-
-
-
-
$5,240
$445
-
-
445
(445)
-
-
(445)
-
Transfers
from Loans Changes
Category December 31,
Premises and Equipment
Premises and equipment were comprised of:
Land & land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
December 31,
2016
December 31,
2015
(In thousands)
$9,522
42,345
31,428
83,295
(37,412)
45,883
2,523
$48,406
$8,909
38,643
31,081
78,633
(35,518)
43,115
696
$43,811
During the year ended December 31, 2016, premises and equipment increased $4,595,000 due to purchases of $10,930,000,
that were partially offset by depreciation of $5,314,000 and disposals of premises and equipment with net book value of
$2,611,000.
46
Intangible Assets
Intangible assets at December 31, 2016 and 2015 were comprised of the following:
Core-deposit intangible
Goodwill
Total intangible assets
December 31,
2016
2015
(In thousands)
$6,563
64,311
$70,874
$5,894
63,462
$69,356
The core-deposit intangible assets resulted from the Bank’s acquisition of three bank branches from Bank of America on March 18, 2016,
North Valley Bancorp in 2014, Citizens in 2011, and Granite in 2010. The goodwill intangible asset includes $849,000 from the
acquisition of three bank branches from Bank of America on March 18, 2016, $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 $1,377,000, $1,157,000, and $446,000 was recorded in 2016, 2015, and 2014, respectively.
Deposits
See Note 13 to the consolidated financial statements at Item 8 of this report for information about the Company’s deposits.
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.
47
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, 2016
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)
(1.65%)
(0.82%)
-
(1.59%)
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, 2016
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)
(12.0%)
(4.6%)
-
(4.8%)
These results indicate that given a “flat” balance sheet scenario, and if interest-bearing checking, savings and time deposit
interest rates track general interest rate changes by approximately 25%, 50%, and 75%, respectively, 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
48
repricing or maturing in each of a number of periods. Another aspect of these repricing characteristics is the relative
magnitude of the repricing for each category of interest earning asset and interest-bearing liability given various changes in
market interest rates. Gap analysis gives no indication of the relative magnitude of repricing given various changes in
interest rates. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during
periods of changes in market interest rates. Interest rate sensitivity gaps are measured as the difference between the volumes
of assets and liabilities in the Company’s current portfolio that are subject to repricing at various time horizons.
The following interest rate sensitivity table shows the Company’s repricing gaps as of December 31, 2016. 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, 2016
(dollars in thousands)
Less than 3
months
3 - 6
months
Repricing within:
6 - 12
months
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
$213,415
31,665
573,361
818,441
2,284,661
157,431
17,493
56,667
$2,516,252
-
$31,767
151,917
183,684
-
64,127
-
-
$64,127
-
$65,055
266,945
332,000
-
57,501
-
-
$57,501
1 - 5
years
-
$407,150
1,386,695
1,793,845
-
56,084
-
-
$56,084
Over
5 years
-
$617,132
380,675
997,807
-
11
-
-
11
Interest sensitivity gap
Cumulative sensitivity gap
As a percentage of earning assets:
Interest sensitivity gap
Cumulative sensitivity gap
$(1,697,811)
$(1,697,811)
$119,557
$(1,578,254)
$274,499
$(1,303,755)
$1,737,761
$434,006
$997,796
$1,431,802
(41.2%)
(41.2%)
2.9%
(38.3%)
6.7%
(31.6%)
42.1%
10.5%
24.2%
34.7%
Liquidity
Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit
withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives
can be met from either the asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and
maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities
from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Consolidated
Statement of Cash Flows. Net cash used by investing activities totaled $139,391,000 in 2016. Net increases in investment
and loan balances used $54,367,000 and $236,102,000 of cash, respectively.
Liquidity may also be generated from liabilities through deposit growth and borrowings. These activities are included under
financing activities in the Consolidated Statement of Cash Flows. In 2016, financing activities provide funds totaling
$93,316,000 due to a $103,063,000 increase in deposit balances. Dividends paid used $13,695,000 of cash during 2016.
The Bank also had available correspondent banking lines of credit totaling $20,000,000 at December 31, 2016. In addition,
at December 31, 2016 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 $1,304,136,000 and $133,655,000, respectively. As of December
31, 2016, the Company had $17,493,000 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 2016,
operating activities provided cash of $48,226,000.
The Company’s investment securities available for sale plus cash and cash equivalents in excess of reserve requirements
totaled $777,662,000 at December 31, 2016, which was 17.2% of total assets at that time. This was an increase of
$139,976,000 from $637,686,000 and an increase from 15.1% of total assets as of December 31, 2015.
Loan demand during 2017 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
49
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, 2016, 2015 and 2014, the Bank had $50,000,000, $50,000,000 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,
2015
2016
2014
$116,791
31,984
23,525
26,850
$199,150
$104,368
31,327
34,722
26,747
$197,164
$66,199
36,166
41,787
36,488
$180,640
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, 2016:
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
Within
One Year
$28,824
2,914
7,806
7,560
47,104
29,366
3,956
65,974
15,138
114,434
$161,538
After One
But Within
5 Years
After 5
Years
(dollars in thousands)
$81,996
37,192
82,812
2,363
204,363
125,684
1,812
15,114
8,123
150,733
$355,096
$647,112
92,095
14,583
13,664
767,454
1,144,842
224,334
30,758
75,571
1,475,505
$2,242,959
Total
$757,932
132,201
105,201
23,587
1,018,921
1,299,892
230,102
111,846
98,832
1,740,672
$2,759,593
50
The maturity distribution and yields of the investment portfolio at December 31, 2016 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.
Securities Available for Sale
Obligations of US government
corporations and agencies
Obligations of states and
political subdivisions
Marketable equity securities
After One Year After Five Years
Within
One Year
but Through
Five Years
but Through
Ten Years
After Ten
Years
Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
$1 5.97% $9,650 2.60% $13,266 3.70% $406,761 2.54% $429,678 2.58%
-
-
-
-
-
-
-
-
1,866 5.75% 115,751 4.96% 117,617 4.97%
-
2,938
2,938
-
-
-
Total securities available for sale
$1 2.97% $9,650 2.60% $15,132 3.96% $525,450 3.07% $550,233 3.08%
Securities Held to Maturity
Obligations of US government
corporations and agencies
Obligations of states and
political subdivisions
After One Year After Five Years
Within
One Year
but Through
Five Years
but Through
Ten Years
After Ten
Years
Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
-
-
-
-
$3,916 2.11%$584,066 2.70% $587,982 2.68%
-
-
$1,177 4.13%
$860 5.80% 12,517 4.14%
14,554 4.24%
Total securities held to maturity
-
-
$1,177 4.13% $4,776 2.77% $596,583 2.73% $602,536 2.72%
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,
2015 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 $780,037,000, and
$713,646,000 at December 31, 2016 and 2015, respectively, and represent 28.3% of the total loans outstanding at year-end
2016 versus 28.4% at December 31, 2015. Commitments related to the Bank’s deposit overdraft privilege product totaled
$98,583,000 and $94,473,000 at December 31, 2016 and 2015, respectively.
51
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of December 31, 2016:
(dollars in thousands)
Time deposits
Other collateralized borrowings, fixed
rate of 0.05% payable on January 2, 2017
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
Less than
one year
1-3
years
3-5
years
More than
5 years
$335,154
$279,015
$35,374
$20,746
17,493
17,493
-
-
20,619
20,619
6,186
5,155
10,310
11,751
4,694
7,359
-
-
-
-
-
3,320
835
1,067
-
-
-
-
-
4,447
1,624
1,777
-
-
-
-
-
2,288
1,325
1,304
$19
-
20,619
20,619
6,186
5,155
10,310
1,696
910
3,211
Total contractual obligations
$439,340
$301,730
$43,222
$25,663
$68,725
(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, 2016 and 2015
Consolidated Statements of Income for
the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the years ended
December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Page
53
54
54
55
56
57
100
101
52
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
At December 31,
2016
2015
(in thousands, except share data)
$92,197
213,415
$94,305
209,156
305,612
303,461
550,233
602,536
16,956
2,998
2,759,593
(32,503)
2,727,090
3,986
48,406
95,912
12,027
64,311
6,563
6,595
74,743
404,885
726,530
16,956
1,873
2,522,937
(36,011)
2,486,926
5,369
43,811
94,560
10,786
63,462
5,894
7,618
48,591
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
$4,517,968
$4,220,722
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
$1,275,745
2,619,815
$1,155,695
2,475,571
3,895,560
818
2,719
67,364
17,493
56,667
3,631,266
774
2,475
65,293
12,328
56,470
Total liabilities
4,040,621
3,768,606
Commitments and contingencies (Note 18)
Shareholders’ equity:
Common stock, no par value: 50,000,000 shares authorized;
issued and outstanding:
22,867,802 at December 31, 2016
22,775,173 at December 31, 2015
Retained earnings
Accumulated other comprehensive income (loss), net of tax
252,820
232,440
(7,913)
247,587
206,307
(1,778)
Total shareholders’ equity
477,347
452,116
Total liabilities and shareholders’ equity
$4,517,968
$4,220,722
The accompanying notes are an integral part of these consolidated financial statements.
53
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
2016
2014
2015
(in thousands, except per share data)
$141,086
$131,836
$103,887
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 reversal of previously provided 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
25,397
3,881
2,181
1,163
173,708
3,483
9
2,229
5,721
167,987
(5,970)
173,957
33,226
4,037
2,329
2,717
2,254
44,563
80,724
65,273
145,997
72,523
27,712
$44,811
25,303
1,509
2,118
648
161,414
3,434
4
1,978
5,416
155,998
(2,210)
158,208
32,080
3,064
3,349
2,786
4,068
45,347
71,405
59,436
130,841
72,714
28,896
$43,818
14,753
505
837
1,133
121,115
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
$1.96
$1.94
$1.93
$1.91
$1.47
$1.46
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
TRICO BANCSHARES
Net income
Other comprehensive (loss) income, net of tax:
Unrealized holding losses on
securities arising during the period
Change in minimum pension liability
Change in joint beneficiary agreement liability
Other comprehensive (loss) income
Comprehensive income
2016
Years ended December 31,
2014
2015
(in thousands, except per share data)
$44,811
$43,818
$26,108
(6,384)
592
(343)
(6,135)
$38,676
(1,098)
1,246
277
425
$44,243
(94)
(4,114)
148
(4,060)
$22,048
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
54
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2016, 2015 and 2014
Shares of
Common
Stock
Accumulated
Other
Common
Stock
Retained Comprehensive
Income (Loss)
Earnings
(in thousands, except share data)
Total
Balance at December 31, 2013
Net income
Other comprehensive loss
Stock option vesting
RSU vesting
PSU vesting
Stock options exercised
Tax effect of stock options exercised
Issuance of common stock
Repurchase of common stock
Dividends paid ($0.44 per share)
Balance at December 31, 2014
Net income
Other comprehensive income
Stock option vesting
RSU vesting
PSU vesting
Stock options exercised
Tax effect of stock options exercised
RSUs released
Tax benefit from release of RSUs
Repurchase of common stock
Dividends paid ($0.52 per share)
Balance at December 31, 2015
Net income
Other comprehensive loss
Stock option vesting
RSU vesting
PSU vesting
Stock options exercised
Tax effect of stock options exercised
RSUs released
Tax benefit from release of RSUs
Repurchase of common stock
Dividends paid ($0.60 per share)
16,076,662
$89,356
$159,733
26,108
$1,857
(4,060)
965
126
42
2,875
225
151,303
(574)
166,020
6,575,550
(103,268)
22,714,964
$244,318
734
457
179
3,116
(83)
15
(1,149)
154,500
12,064
(106,355)
22,775,173
$247,587
580
616
271
6,506
154
1
(2,895)
336,900
20,529
(264,800)
(1,977)
(7,807)
$176,057
43,818
$(2,203)
425
(1,719)
(11,849)
$206,307
44,811
$(1,778)
(6,135)
(4,983)
(13,695)
$250,946
26,108
(4,060)
965
126
42
2,875
225
151,303
(2,551)
(7,807)
$418,172
43,818
425
734
457
179
3,116
(83)
15
(2,868)
(11,849)
$452,116
44,811
(6,135)
580
616
271
6,506
154
1
(7,878)
(13,695)
Balance at December 31, 2016
22,867,802
$252,820
$232,440
$(7,913)
$477,347
The accompanying notes are an integral part of these consolidated financial statements.
55
CONSOLIDATED STATEMENTS OF CASH FLOWS
TRICO BANCSHARES
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
Provision for losses on fixed assets
Loss (gain) on disposal of fixed assets
Increase in cash value of life insurance
Gain on life insurance death benefit
Equity compensation vesting expense
Equity compensation tax effect
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 loans other than loans originated for resale
Proceeds from sale of premises and equipment
Improvement of foreclosed assets
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Cash received from acquisition, net
Net cash used by investing activities
Financing activities:
Net increase in deposits
Net change in other borrowings
Equity compensation tax effect
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:
Unrealized loss on securities available for sale
Loans transferred to foreclosed assets
Due to broker
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
The accompanying notes are an integral part of these consolidated financial statements.
2016
$44,811
6,474
1,377
(5,970)
4,926
(142,619)
144,062
(4,037)
2,184
140
(262)
782
147
(2,717)
(238)
1,467
(155)
3,190
244
(1,241)
44
(4,383)
48,226
71,684
-
(247,717)
121,666
-
-
(251,479)
(22,503)
37,880
1,682
-
4,010
(10,930)
156,316
(139,391)
103,063
5,165
155
(1,890)
(13,695)
518
93,316
2,151
303,461
$305,612
$(11,015)
2,505
-
5,988
5,677
27,575
161,231
161,231
Years Ended December 31,
2015
(in thousands)
$43,818
2014
$26,108
5,906
1,157
(2,210)
3,458
(111,640)
115,469
(3,064)
701
502
(991)
-
129
(2,786)
(155)
1,370
68
681
330
(1,511)
(204)
3,789
54,817
33,552
2
(341,303)
93,784
(146,100)
-
(244,018)
-
-
8
(195)
5,449
(5,489)
-
(604,310)
250,843
3,052
(68)
(412)
(11,849)
660
242,226
(307,267)
610,728
$303,461
$(1,895)
5,240
17,072
2,868
5,620
24,315
-
-
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
$(162)
5,291
-
2,551
4,641
22,685
978,682
827,372
56
TRICO BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2016, 2015 and 2014
Note 1 –Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank
(the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in
the general commercial banking business in 26 California counties. Tri Counties Bank currently operates from 58 traditional branches and 10
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
$1,702,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the
consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected
as debt on the Company’s consolidated balance sheet.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The
Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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 year ended December 31, 2016 and throughout 2015, 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
debt securities, if we intend to sell the security or it is more likely than not 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 2016 and 2015.
57
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 Bank 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 Bank 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, based on evaluations of the collectability, impairment and prior loss experience of loans. 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.
58
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 probable incurred 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, 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 September 30, 2015, the Company modified its methodology used to determine the allowance for home equity
lines of credit that are about to exit their revolving period, or have recently entered into their amortization period and are now classified as
home equity loans. This change in methodology increased the required allowance for such lines and loans by $859,000, and $459,000,
respectively, and represents the increase in estimated incurred losses in these lines and loans as of September 30, 2015 due to higher required
contractual principal and interest payments of such lines and loans.
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, thereafter, the Company determines that the
estimated future cash flows of a PCI loan are expected to be less than previously estimated, 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.
59
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 use the terms “nonaccretable difference”, “accretable yield”, or “purchase discount”.
Nonaccretable difference is the difference between undiscounted contractual cash flows due and undiscounted cash flows we expect to
collect, or put another way, it is the undiscounted contractual cash flows we do not expect to collect. Accretable yield is the difference
between undiscounted cash flows we expect to collect and the value at which we have recorded the loan on our financial statements. On the
date of acquisition, all purchased loans are recorded on our consolidated financial statements at estimated fair value. Purchase discount is the
difference between the estimated fair value of loans on the date of acquisition and the principal amount owed by the borrower, net of charge
offs, on the date of acquisition. We may also refer to “discounts to principal balance of loans owed, net of charge-offs”. Discounts to
principal balance of loans owed, net of charge-offs is the difference between principal balance of loans owed, net of charge-offs, and loans as
recorded on our financial statements. Discounts to principal balance of loans owed, net of charge-offs arise from purchase discounts, and
equal the purchase discount on the acquisition date.
Loans are also categorized as “covered” or “noncovered”. Covered loans refer to loans covered by a Federal Deposit Insurance Corporation
(“FDIC”) loss sharing agreement. Noncovered loans refer to loans not covered by a FDIC loss sharing agreement.
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. Physical possession of residential real estate
property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower
conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
Any write-downs based on the asset's fair value less costs to sell at the date of acquisition are charged to the allowance for loan and lease
losses. Any recoveries based on the asset's fair value less estimated costs to sell in excess of the recorded value of the loan at the date of
acquisition are recorded to the allowance for loan and lease losses. These assets are subsequently accounted for at lower of cost or fair value
less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating
costs after acquisition are expensed. 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.
60
As of December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances
indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair
value. This determination is made at the reporting unit level. The Company may choose to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then goodwill is deemed not to be impaired. However, if the Company
concludes otherwise, or if the Company elected not to first assess qualitative factors, then the Company performs the first step of a two-step
impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit.
Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying
amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill. Currently, and historically, the Company is comprised of only one reporting unit that
operates within the business segment it has identified as “community banking”. Goodwill was not impaired as of December 31, 2016 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.
Low Income Housing Tax Credits
The Company accounts for low income housing tax credits and the related qualified affordable housing projects using the proportional
amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to
the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of
income tax expense (benefit). Upon entering into a qualified affordable housing project, the Company records, in other liabilities, the entire
amount that it has agreed to invest in the project, and an equal amount, in other assets, representing its investment in the project. As the
Company disburses cash to satisfy its investment obligation, other liabilities are reduced. Over time, as the tax credits and other tax benefits
of the project are realized by the Company, the investment recorded in other assets is reduced using the proportional amortization method.
61
Income Taxes
The Company's accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes
payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in
its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. A
valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax
assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although
realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. Interest and/or
penalties related to income taxes are reported as a component of noninterest income.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that area of
California north of, and including, Stockton; central California as that area of the state south of Stockton, to and including, Bakersfield; and
southern California as that area of the state south of Bakersfield.
Reclassifications
Certain amounts reported in previous consolidated financial statements have been reclassified to conform to the presentation in this report.
These reclassifications did not affect previously reported net income or total shareholders’ equity.
Recent Accounting Pronouncements
FASB issued Accounting Standard Update (ASU) No. 2016-02, Leases (Topic 842). ASU 2016-2, among other things, requires lessees to
recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current
U.S. GAAP. ASU 2016-02 will be effective for the Company on January 1, 2019, utilizing the modified retrospective transition approach.
The Company is currently evaluating the impact of adopting ASU 2016-02 on the Company’s consolidated financial statements.
FASB issued Accounting Standard Update (ASU) No. 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09, among
other things, requires: (i) that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards)
should be recognized as income tax expense or benefit in the income statement, (ii) the tax effects of exercised or vested awards should be
treated as discrete items in the reporting period in which they occur, (iii) an entity also should recognize excess tax benefits regardless of
whether the benefit reduces taxes payable in the current period, (iv) excess tax benefits should be classified along with other income tax cash
flows as an operating activity, (v) an entity can make an entity-wide accounting policy election to either estimate the number of awards that
are expected to vest (current GAAP) or account for forfeitures when they occur, (vi) the threshold to qualify for equity classification permits
withholding up to the maximum statutory tax rates in the applicable jurisdictions, and (vii) cash paid by an employer when directly
withholding shares for tax withholding purposes should be classified as a financing activity. ASU 2016-09 was effective for the Company on
January 1, 2017 and will not have a significant impact on the Company’s consolidated financial statements.
FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 is the final guidance on the new current
expected credit loss (‘‘CECL’’) model. ASU 2016-13, among other things, requires the incurred loss impairment methodology in current GAAP
be replaced with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the
requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held
to maturity (‘‘HTM’’) debt securities. ASU 2016-13 amends the accounting for credit losses on available-for-sale securities (‘‘AFS’’), whereby
credit losses will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans with
credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, ASU 2016-13
requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and
underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality
disclosures disaggregated by the year of origination or vintage. ASU 2016-13 allows for a modified retrospective approach with a cumulative
effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). ASU 2016-13 will be effective
for the Company on January 1, 2020, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-
13 on the Company’s consolidated financial statements.
FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230). ASU 2016-18 requires that a statement of cash
flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with
cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
ASU 2016-18 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s
consolidated financial statements.
FASB issued ASU No. 2017-01, Business Combinations - Clarifying the Definition of a Business (Topic 805). ASU 2017-01 clarifies the
definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-
01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or
businesses. ASU 2017-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial
statements.
62
FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350): ASU 2017-04
eliminates step two of the goodwill impairment test (the hypothetical purchase price allocation used to determine the implied fair value of
goodwill) when step one (determining if the carrying value of a reporting unit exceeds its fair value) is failed. Instead, entities simply will
compare the fair value of a reporting unit to its carrying amount and record goodwill impairment for the amount by which the reporting unit’s
carrying amount exceeds its fair value. ASU 2017-04 will be effective for the Company on January 1, 2020 and is not expected to have a
significant impact on the Company’s consolidated financial statements.
63
Note 2 - Business Combinations
On March 18, 2016, the Bank completed its acquisition of three branch banking offices from Bank of America originally announced October
28, 2015. The acquired branches are located in Arcata, Eureka and Fortuna in Humboldt County on the North Coast of California, and have
significant overlap compared to the Company's then-existing Northern California customer base and branch locations. As a result, these
branch acquisitions create potential cost savings and future growth potential. With the levels of capital at the time, the acquisitions fit well
into the Company's growth strategy. Also on March 18, 2016, the electronic customer service and other data processing systems of the
acquired branches were converted into the Bank’s systems, and the effect of revenue and expenses from the operations of the acquired
branches are included in the results of the Company. The Bank paid a premium of $3,204,000 for deposit relationships with balances of
$161,231,000 and loans with balances of $289,000, and received cash of $159,520,000 from Bank of America.
The assets acquired and liabilities assumed in the acquisition of these branches 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 March 18, 2016 acquisition
date, and the results of operations of the acquired branches 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 the
acquired branches. $849,000 of the goodwill is deductible for income tax purposes because the acquisition was accounted for as a purchase
of assets and assumption of liabilities for tax purposes.
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 acquisition of three branch banking offices and certain deposits from Bank of America on March 18, 2016:
(in thousands)
Fair value of consideration transferred:
Cash consideration
Total fair value of consideration transferred
Asset acquired:
Cash and cash equivalents
Loans
Premises and equipment
Core deposit intangible
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Total liabilities assumed
Total net assets acquired
Goodwill recognized
March 18, 2016
$3,204
3,204
159,520
289
1,590
2,046
141
163,586
161,231
161,231
2,355
$849
A summary of the cash paid and estimated fair value adjustments resulting in the goodwill recorded in the acquisition of three branch banking
offices and certain deposits from Bank of America on March 18, 2016 are presented below:
(in thousands)
Cash paid
Cost basis net assets acquired
Fair value adjustments:
Loans
Premises and Equipment
Core deposit intangible
Goodwill
March 18, 2016
$3,204
-
-
(309)
(2,046)
$849
As part of the acquisition of three branch banking offices from Bank of America, the Company performed a valuation of premises and
equipment acquired. This valuation resulted in a $309,000 increase in the net book value of the land and buildings acquired, and was based
on current appraisals of such land and buildings.
The Company recognized a core deposit intangible of $2,046,000 related to the acquisition of the core deposits. The recorded core deposit
intangibles represented approximately 1.50% of the core deposits acquired and will be amortized over their estimated useful lives of 7 years.
A valuation of the time deposits acquired 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.
64
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
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
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
Amortized
Cost
$434,357
121,746
3,000
$559,103
$587,982
14,554
$602,536
Amortized
Cost
$312,917
86,823
3,000
$402,740
$711,994
14,536
$726,530
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
$(6,628)
(4,396)
(62)
Estimated
Fair
Value
$429,678
117,617
2,938
$1,949
267
-
$2,216
$5,001
56
$5,057
$2,761
1,428
-
$4,189
$8,394
277
$8,671
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
$(11,086)
$550,233
$(4,199)
(191)
$(4,390)
$588,784
14,419
$603,203
Estimated
Fair
Value
$313,682
88,218
2,985
$(1,996)
(33)
(15)
$(2,044)
$404,885
$(2,882)
(110)
$(2,992)
$717,506
14,703
$732,209
No investment securities were sold during 2016. Investment securities totaling $2,000 were sold in 2015 resulting in no gain or loss on sale.
Investment securities sold during 2014 totaled $14,130,000. Investment securities with an aggregate carrying value of $292,737,000 and
$297,547,000 at December 31, 2016 and 2015, 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, 2016 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, 2016, obligations of U.S. government corporations and agencies with a cost basis totaling
$1,022,339,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal
repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of
these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At
December 31, 2016, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government
corporations and agencies to be approximately 6.1 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
Available for Sale
Held to Maturity
Amortized
Cost
$1
9,392
14,548
535,162
$559,103
Estimated
Fair Value
$1
9,650
15,132
525,450
$550,233
Amortized
Cost
-
$1,177
4,776
596,583
$602,536
Estimated
Fair Value
-
$1,185
4,762
597,256
$603,203
65
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, 2016
Securities Available for Sale:
Obligations of U.S. government
corporations and agencies
Obligations of states and political subdivisions
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
December 31, 2015
Securities Available for Sale:
Obligations of U.S. government
corporations and agencies
Obligations of states and political subdivisions
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
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(in thousands)
$370,389
90,825
2,938
$(6,628)
(4,396)
(62)
$464,152 $(11,086)
$280,497
9,984
$(4,199)
(191)
$290,481
$(4,390)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$370,389
90,825
2,938
$(6,628)
(4,396)
(62)
$464,152 $(11,086)
$280,497
9,984
$(4,199)
(191)
$290,481
$(4,390)
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(in thousands)
$193,306
6,469
2,985
$(1,996)
(33)
(15)
$202,760
$(2,044)
-
-
-
-
-
-
-
-
$193,306
6,469
2,985
$(1,996)
(33)
(15)
$202,760
$(2,044)
$198,481
497
$(2,882)
(11)
$198,978
$(2,893)
-
$1,121
$1,121
-
$(99)
$198,481
1,618
$(2,882)
(110)
$(99)
$200,099
$(2,992)
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, 2016, 62 debt securities representing obligations of U.S. government corporations and agencies
had unrealized losses with aggregate depreciation of 1.64% 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, 2016, 107 debt securities representing obligations of states and political
subdivisions had unrealized losses with aggregate depreciation of 4.35% from the Company’s amortized cost basis.
Marketable equity securities: At December 31, 2016, marketable equity securities had unrealized losses representing aggregate depreciation
of 2.07% from the Company’s amortized cost basis.
66
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
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
December 31, 2016
PCI -
Cash basis
PNCI
PCI -
Other
Total
$78,935
250,037
328,972
21,765
3,618
2,534
27,917
12,321
141
8,871
9,012
-
-
-
2,983
-
-
2,983
-
-
-
-
$1,363
13,460
14,823
$309,907
1,747,917
2,057,824
1,377
1,130
65
2,572
3,991
675
-
675
289,715
41,822
30,766
362,303
217,047
55,429
66,990
122,419
Originated
$229,609
1,484,420
1,714,029
263,590
37,074
28,167
328,831
200,735
54,613
58,119
112,732
$2,356,327
$378,222
$2,983
$22,061
$2,759,593
$2,363,243
(6,916)
$388,139
-
$8,280
-
$25,650
-
$2,785,312
(6,916)
-
(9,917)
(5,297)
(3,589)
(18,803)
$2,356,327
$378,222
$2,983
$22,061
$2,759,593
$2,356,327
-
$378,222
-
$2,983
-
$18,885
3,176
$2,756,417
3,176
$2,356,327
$378,222
$2,983
$22,061
$2,759,593
Allowance for loan losses
$(28,141)
$(1,665)
$(17)
$(2,680)
$(32,503)
67
Note 4 – Loans (continued)
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
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
Originated
December 31, 2015
PCI -
Cash basis
PNCI
PCI -
Other
Total
$207,585
1,163,643
1,371,228
$104,535
310,864
415,399
-
-
-
$2,145
23,060
25,205
$314,265
1,497,567
1,811,832
285,419
34,717
28,998
349,134
170,320
31,778
66,285
98,063
29,335
4,018
3,367
36,720
19,744
13,636
8,489
22,125
$4,954
124
-
5,078
1
-
-
-
2,784
1,503
64
4,351
4,848
721
-
721
322,492
40,362
32,429
395,283
194,913
46,135
74,774
120,909
$1,988,745
$493,988
$5,079
$35,125
$2,522,937
$1,995,296
(6,551)
$507,935
-
$12,686
-
$39,693
-
$2,555,610
(6,551)
-
(13,947)
(7,607)
(4,568)
(26,122)
$1,988,745
$493,988
$5,079
$35,125
$2,522,937
$1,988,745
-
$493,988
-
$5,079
-
$29,890
5,235
$2,517,702
5,235
$1,988,745
$493,988
$5,079
$35,125
$2,522,937
Allowance for loan losses
$(31,271)
$(1,848)
$(121)
$(2,771)
$(36,011)
The following is a summary of the change in accretable yield for PCI – other loans during the periods indicated (in thousands):
Change in accretable yield:
Balance at beginning of period
Accretion to interest income
Reclassification (to) from
nonaccretable difference
Balance at end of period
Year ended December 31,
2016
2015
$13,255
(4,011)
$14,159
(6,323)
1,104
$10,348
5,419
$13,255
68
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.
(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
Allowance for Loan Losses - Year Ended December 31, 2016
RE Mortgage
Home Equity
Resid.
$2,507
(321)
880
(679)
$2,387
Comm.
$11,443
(827)
920
369
$11,905
Lines
$11,253
(585)
2,317
(5,941)
$7,044
Loans
$3,138
(219)
590
(892)
$2,617
Auto
Indirect
-
-
-
-
-
Other
Consum.
$688
(823)
449
308
$622
Construction
C&I
$5,271
(455)
404
611
$5,831
Resid.
$899
-
54
464
$1,417
Comm.
$812
-
78
(210)
$680
Total
$36,011
(3,230)
5,692
(5,970)
$32,503
$249
$127
$410
$102
$1,952
$10,329
$6,618
$2,451
$186
$1,449
$17
$64
-
-
-
$28
$1,130
-
-
$2,046
$594
$3,765
$1,371
$680
$27,760
-
$936
$45
-
$2,697
Loans, net of unearned fees – As of December 31, 2016
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$309,907 $1,747,917
$289,715
$41,822
$3,785
$15,748
$3,196
$1,150
$304,759 $1,718,709
$282,159
$39,542
$1,363
$13,460
$4,360
$1,130
-
-
-
-
$30,766
$217,047 $55,429
$66,990
$2,759,593
$154
$4,096
$11
-
$28,140
$30,547
$208,960 $54,743
$66,990
$2,706,409
$65
$3,991
$675
-
$25,044
Allowance for Loan Losses - Year Ended December 31, 2015
RE Mortgage
Home Equity
Resid.
$3,086
(224)
204
(559)
$2,507
Comm.
$9,227
-
243
1,973
$11,443
Lines
$15,676
(694)
666
(4,395)
$11,253
Loans
$1,797
(242)
252
1,331
$3,138
Auto
Indirect
$9
(4)
42
(47)
-
Other
Consum.
$719
(972)
500
441
$688
C&I
$4,226
(680)
677
1,048
$5,271
Construction
Resid.
$1,434
-
1,728
(2,263)
$899
Comm.
$411
-
140
261
$812
Total
$36,585
(2,816)
4,452
(2,210)
$36,011
$335
$395
$605
$294
$2,112
$9,596
$10,423
$2,844
$60
$1,452
$225
-
-
-
-
$74
$1,187
-
-
$2,890
$614
$2,983
$844
$812
$30,228
-
$1,101
$55
-
$2,893
Loans, net of unearned fees – As of December 31, 2015
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$314,265 $1,497,567
$322,492
$40,362
$6,767
$32,407
$5,747
$1,731
$305,353 $1,442,100
$309,007
$37,004
$2,145
$23,060
$7,738
$1,627
-
-
-
-
$32,429
$194,913 $46,135
$74,774
$2,522,937
$288
$2,671
$4
$490
$50,105
$32,077
$187,393 $45,410
$74,284
$2,432,628
$64
$4,849
$721
-
$40,204
69
Note 5 – Allowance for Loan Losses (continued)
(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
Allowance for Loan Losses - Year Ended December 31, 2014
RE Mortgage
Home Equity
Resid.
$3,154
(171)
2
101
$3,086
Comm.
$9,700
(110)
540
(903)
$9,227
Lines
$16,375
(1,094)
960
(565)
$15,676
Loans
$1,208
(29)
34
584
$1,797
Auto
Indirect
$66
(3)
86
(140)
$9
Other
Consum.
$589
(599)
495
234
$719
C&I
$4,331
(479)
1,268
(894)
$4,226
Construction
Resid.
$1,559
(4)
1,377
(1,498)
$1,434
Comm.
$1,263
(69)
181
(964)
$411
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
Loans, net of unearned fees – As of December 31, 2014
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$279,420 $1,335,939
$352,584
$31,314
$112
$33,074
$174,945 $38,618
$36,518
$2,282,524
$7,188
$41,932
$6,968
$1,279
$18
$323
$1,757
$2,683
$99
$62,247
$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
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.
70
Note 5 – Allowance for Loan Losses (continued)
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
Credit Quality Indicators – As of December 31, 2016
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$224,988 $1,457,128
15,108
12,184
-
$229,609 $1,484,420
2,225
2,396
-
$75,600
1,849
1,486
-
$78,935
$1,363
$236,740
6,057
7,240
-
$250,037
$13,460
$309,907 $1,747,917
$258,024
2,518
3,048
-
$263,590
$20,442
509
814
-
$21,765
$4,360
$289,715
$34,299
891
1,884
-
$37,074
$3,492
41
85
-
$3,618
$1,130
$41,822
-
-
-
-
-
-
-
-
-
-
-
-
$27,542
385
240
-
$28,167
$2,437
92
5
-
$2,534
$65
$30,766
$190,902 $54,602
-
11
-
$200,735 $54,613
6,133
3,700
-
$12,320
1
-
-
$12,321
$3,991
$141
-
-
-
$141
$675
$217,047 $55,429
$57,808
311
-
-
$58,119
$8,871
-
-
-
$8,871
-
$66,990
$2,305,293
27,571
23,463
-
$2,356,327
$360,043
8,549
9,630
-
$378,222
$25,044
$2,759,593
Credit Quality Indicators – As of December 31, 2015
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$199,837 $1,118,868
10,321
34,454
-
$207,585 $1,163,643
2,018
5,730
-
$102,895
600
1,040
-
$104,535
$2,145
$293,935
10,795
6,134
-
$310,864
$23,060
$314,265 $1,497,567
$275,251
2,494
7,674
-
$285,419
$27,378
445
1,512
-
$29,335
$7,738
$322,492
$31,427
1,027
2,263
-
$34,717
$3,789
80
149
-
$4,018
$1,627
$40,362
-
-
-
-
-
-
-
-
-
-
-
-
$28,339
415
244
-
$28,998
$3,164
74
129
-
$3,367
$64
$32,429
$166,559 $31,440
334
4
-
$170,320 $31,778
1,037
2,724
-
-
78
-
$19,666 $13,636
-
-
-
$19,744 $13,636
$721
$194,913 $46,135
$4,849
$66,285
-
-
-
$66,285
$8,489
-
-
-
$8,489
-
$74,774
$1,918,006
17,646
53,093
-
$1,988,745
$472,952
11,994
9,042
-
$493,988
$40,204
$2,522,937
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.
71
Note 5 – Allowance for Loan Losses (continued)
Construction loans, whether owner occupied or non-owner occupied commercial real estate loans or residential development loans, are not
only susceptible to the related risks described above but the added risks of construction itself including cost over-runs, mismanagement of the
project, or lack of demand or market changes experienced at time of completion. Again, losses are primarily related to underlying collateral
value and changes therein as described above.
Problem C&I loans are generally identified by periodic review of financial information which may include financial statements, tax returns,
rent rolls and payment history of the borrower (delinquency). Based on this information the Bank may decide to take any of several courses of
action including demand for repayment, additional collateral or guarantors, and, when repayment becomes unlikely through borrower’s
income and cash flow, repossession or foreclosure of the underlying collateral.
Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties,
public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at
initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable and the loan has
been classified.
Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with the
borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its
probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to the
estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue the underlying collateral
and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral
and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is known. Unpaid balances on
loans after or during collection and liquidation may also be pursued through lawsuit and attachment of wages or judgment liens on borrower’s
other assets.
The following table shows the ending balance of current, past due, and nonaccrual originated loans by loan category as of the date indicated:
RE Mortgage
Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2016
Construction
Home Equity
Resid.
Comm.
Lines
Loans
C&I
Resid.
Comm.
Total
Auto
Indirect
Other
Consum.
(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
$552
139
-
$691
$317
1,517
216
$2,050
228,918 1,482,370
$229,609 $1,484,420
$754
-
687
$1,441
262,149
$263,590
$646
395
184
$1,225
35,849
$37,074
-
$255
-
$7,736
-
$1,211
-
$718
-
-
-
-
-
-
-
-
$16
30
15
$61
28,106
$28,167
$1,148
$921
84
-
634
11
$1,866
$932
53,681
198,869
$200,735 $54,613
-
$421
-
$421
57,698
$58,119
$4,354
2,586
1,747
$8,687
2,347,640
$2,356,327
-
$33
-
$2,930
-
$11
-
-
-
$12,894
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, 2016
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$1,510
-
21
$1,531
77,404
$78,935
$73
-
81
$154
249,883
$250,037
$274
-
589
$863
20,902
$21,765
$39
-
13
$52
3,566
$3,618
-
$194
-
$1,826
-
$742
-
$67
-
-
-
-
-
-
-
-
-
-
-
-
$2,534
$2,534
-
$5
-
-
-
-
$12,321
$12,321
-
-
-
-
-
-
$141
$141
-
-
-
-
-
-
$8,871
$8,871
-
-
$1,896
-
704
$2,600
375,622
$378,222
-
$2,834
72
Note 5 – Allowance for Loan Losses (continued)
The following table shows the ending balance of current, past due, and nonaccrual originated loans by loan category as of the date indicated:
RE Mortgage
Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2015
Construction
Home Equity
Resid.
Comm.
Lines
Loans
C&I
Resid.
Comm.
Total
Auto
Indirect
Other
Consum.
(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
$791
-
271
$1,062
$200
491
3,425
$4,116
206,523 1,159,527
$207,585 $1,163,643
$1,033
324
520
$1,877
283,542
$285,419
$402
341
82
$825
33,892
$34,717
-
$3,045
-
$14,196
-
$3,379
-
$1,195
-
-
-
-
-
-
-
-
$12
40
19
$71
28,927
$28,998
-
$2,197
-
-
-
24
-
$2,221
168,099
-
$170,320 $31,778
-
-
-
-
-
$66,285
$4,635
1,196
4,341
$10,172
1,978,573
$1,988,745
-
$21
-
$976
-
$12
-
-
-
$22,824
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, 2015
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$3,106
-
58
$3,164
101,371
$104,535
$4,037
-
748
$4,785
306,079
$310,864
$92
-
275
$367
28,968
$29,335
$23
-
71
$94
3,924
$4,018
-
$348
-
$3,742
-
$676
-
$109
-
-
-
-
-
-
-
-
-
$13
10
$23
3,344
$3,367
-
$33
$1
-
-
$1
-
-
-
-
19,743 $13,636
$19,744 $13,636
-
-
$490
$490
7,999
$8,489
-
-
-
-
-
$490
$7,259
13
1,652
$8,924
485,064
$493,988
-
$5,398
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.
(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, 2016
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$1,691
$1,699
$13,144
$13,488
$1,480
$1,561
$598
$922
$2,788
$20,126
$2,221
$773
$83
$581
$40
$4
$1,372
$1,372
$170
$646
$646
$19
$430
$440
$110
$485
$487
$102
$1,689
$1,032
$1,077
$579
$56
$37
$9
$25
-
-
$1
-
-
-
-
-
-
$15
$29
$16
$1
$18
$19
$13
$9
$2
$762
$926
$669
$48
$3,334
$3,385
$1,130
$2,714
$77
$11
$16
$7
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$17,701
$18,641
$26,601
$757
$6,285
$6,349
$1,544
$7,100
$206
73
Note 5 – Allowance for Loan Losses (continued)
(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
(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 PNCI Loans – As of December 31, 2016
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$463
$486
$1,826
$2,031
$735
$746
$669
$1,479
$594
$7
-
$9
$259
$259
$79
$132
$132
$108
$551
$551
$300
$67
$74
$69
$1
-
-
-
$130
$1,440
$579
$19
$10
$7
$27
-
-
-
-
-
-
-
-
-
-
$3
$4
$18
-
$118
$118
$15
$176
$5
-
-
$1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$3,094
$3,341
$245
$3,075
-
-
-
-
-
-
$17
$1,060
$1,060
$502
$2,344
$49
Impaired Originated Loans – As of December 31, 2015
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$3,886
$5,998
$27,109
$29,678
$2,963
$6,079
$947
$1,349
$3,586
$32,793
$2,982
$848
$81
$893
$23
$5
$2,006
$2,073
$335
$1,418
$1,453
$146
$1,724
$1,904
$525
$674
$701
$256
$2,365
$2,180
$2,455
$589
$49
$74
$31
$26
-
-
-
-
-
-
-
-
-
$20
$35
$29
$576
$688
$4
$65
-
-
$35,505
$43,892
$494
$1,202
$50
$41,984
-
$29
$1
$1
$1
$2,094
$2,117
$1,187
-
-
-
-
$23
$1,716
$141
-
$122
-
-
-
-
-
-
-
$1,031
$7,917
$8,249
$2,450
$9,469
$302
Impaired PNCI Loans – As of December 31, 2015
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
$875
$908
$1,132
$1,248
$454
$505
$609
$749
$400
$31
$32
$3
-
-
-
$2,748
$2,858
$248
$606
$612
$80
$417
$1,447
$521
-
$149
$14
-
-
-
-
-
-
-
-
-
$33
$52
$35
$1
$234
$234
$73
$227
$11
$71
$73
$48
$2
$39
$40
$39
$19
-
74
$1
$1
$4
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$490
$490
$245
$18
-
-
-
-
-
$3,056
$3,277
$2,090
$87
$3,627
$3,744
$440
$2,631
$174
Note 5 – Allowance for Loan Losses (continued)
At December 31, 2016, $12,371,000 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, 2016. At December 31, 2016, $1,324,000 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, 2016.
At December 31, 2015, $29,269,000 of Originated loans were TDRs and classified as impaired. The Company had obligations to lend
$35,000 of additional funds on these TDRs as of December 31, 2015. At December 31, 2015, $1,396,000 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, 2015.
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.
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, 2016
Auto
Indirect
-
Other
Consum.
2
C&I
4
Resid.
-
Construction
RE Mortgage
Home Equity
$650
$656
(dollars in thousands) Resid.
Number
3
Pre-mod outstanding
principal balance
Post-mod outstanding
principal balance
Financial impact due to
TDR taken as
additional provision
Number that defaulted
during the period
Recorded investment of
TDRs that defaulted
during the period
Financial impact due to
the default of previous
TDR taken as charge-offs
or additional provisions
$101
$50
2
-
Comm.
5
Lines
9
Loans
1
$423
$707
$105
$461
$709
$105
$46
$205
-
-
-
1
$229
-
-
-
-
-
RE Mortgage
Home Equity
$801
$800
(dollars in thousands) Resid.
4
Number
Pre-mod outstanding
principal balance
Post-mod outstanding
principal balance
Financial impact due to
TDR taken as
additional provision
Number that defaulted
during the period
Recorded investment of
TDRs that defaulted
during the period
Financial impact due to
the default of previous
TDR taken as charge-offs
or additional provisions
$221
$8
4
-
Comm.
5
Lines
2
Loans
2
$1,518
$301
$315
$1,517
$301
$321
$(5)
2
-
3
$38
1
$280
$182
$53
-
-
$(9)
-
-
-
-
-
-
$27
$27
$77
$77
$2
$23
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$89
$956
$89
$944
$5
$405
-
-
-
-
-
-
-
-
-
-
-
-
Comm.
Total
-
-
-
-
-
-
-
24
$1,989
$2,035
$326
3
$330
-
Comm.
Total
-
-
-
-
-
-
-
23
$3,979
$3,973
$451
10
$736
$(9)
TDR Information for the Year Ended December 31, 2015
Auto
Indirect
-
Other
Consum.
2
C&I
8
Resid.
-
Construction
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.
75
Note 5 – Allowance for Loan Losses (continued)
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.
Note 6 – Foreclosed Assets
A summary of the activity in the balance of foreclosed assets follows (dollars in thousands):
Beginning balance, net
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
Year ended December 31, 2016
Year ended December 31, 2015
Noncovered
$5,369
2,282
(3,748)
(140)
$3,763
$(314)
14
$4,010
$262
Covered
-
$223
-
-
$223
-
1
-
-
Total
$5,369
2,505
(3,748)
(140)
$3,986
$(314)
15
$4,010
$262
Noncovered
$4,449
5,880
(4,458)
(502)
$5,369
$(572)
26
$5,449
$991
Covered
$445
(445)
-
-
-
-
-
-
-
Total
$4,894
5,435
(4,458)
(502)
$5,369
$(572)
26
$5,449
$991
At December 31, 2016, the balance of real estate owned includes $1,750,000 of foreclosed residential real estate properties recorded as a
result of obtaining physical possession of the property. At December 31, 2016, the recorded investment of consumer mortgage loans secured
by residential real estate properties for which formal foreclosure proceedings are underway is $301,000.
Note 7 - Premises and Equipment
Premises and equipment were comprised of:
Land & land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
December 31,
2016
December 31,
2015
(In thousands)
$9,522
42,345
31,428
83,295
(37,412)
45,883
2,523
$48,406
$8,909
38,643
31,081
78,633
(35,518)
43,115
696
$43,811
Depreciation expense for premises and equipment amounted to $5,314,000, $5,043,000, and$4,648,000 in 2016, 2015, and 2014, respectively.
76
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
Increase in cash value of life insurance
Death benefit receivable in excess of cash value
Death benefit receivable
Ending balance
End of period death benefit
Number of policies owned
Insurance companies used
Current and former employees and directors covered
Year ended December 31,
2016
$94,560
2,717
238
(1,603)
$95,912
$165,669
185
14
58
2015
$92,337
2,786
155
(718)
$94,560
$166,299
187
14
59
As of December 31, 2016, the Bank was the owner and beneficiary of 185 life insurance policies, issued by 14 life insurance companies,
covering 58 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.
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,
2016
$64,311
Additions
$849
Reductions
-
December 31,
2015
$63,462
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,
2016
$10,120
(3,557)
$6,563
Additions
$2,046
-
$2,046
Reductions/
Amortization
Fully
Depreciated
-
$(1,377)
$(1,377)
-
-
-
December 31,
2015
$8,074
(2,180)
$5,894
The Company recorded additions to its CDI of $2,046,000 in conjunction with the acquisition of three branch offices from Bank of America
on March 18, 2016, $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
2017
2018
2019
2020
2021
Thereafter
Estimated Core Deposit
Intangible Amortization
$1,389
1,324
1,228
1,228
969
425
77
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
Years ended December 31,
2015
$7,378
-
941
(701)
$7,618
2016
$7,618
-
1,161
(2,184)
$6,595
2014
$6,165
1,944
570
(1,301)
$7,378
$2,065
$2,164
$1,869
Weighted-average prepayment speed (CPR)
Weighted-average discount rate
8.8%
14.0%
9.8%
10.0%
$817,917
$816,623
$840,288
$817,917
$680,197
$840,288
12.0%
10.0%
The changes in fair value of MSRs that occurred during 2016 were mainly due to changes in principal balances, changes in mortgage
prepayment speeds, and changes in investor required rate of return, or discount rate, of the MSRs. The changes in fair value of MSRs that
occurred during 2015 and 2014 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
Effect of actual covered losses (recoveries) and
increase (decrease) in estimated future covered losses
Change in estimated “true up” liability
Reimbursable (revenue) expenses, net
Payments made (received)
Ending balance
Amount of indemnification asset (liability) recorded in other assets
Amount of indemnification liability recorded in other liabilities
Ending balance
Note 12 – Other Assets
Other assets were comprised of (in thousands):
Deferred tax asset, net (Note 22)
Prepaid expense
Software
Advanced compensation
Capital Trusts
Investment in Low Housing Tax Credit Funds
Life insurance proceeds receivable
Prepaid Taxes
Premises held for sale
Miscellaneous other assets
Total other assets
Year ended December 31,
2015
$(349)
2016
$(521)
2014
$206
(412)
(86)
2
273
$(744)
$(60)
(684)
$(744)
(93)
(71)
4
(12)
$(521)
$77
(598)
$(521)
(853)
(100)
85
313
$(349)
$(349)
-
$(349)
As of December 31,
2015
2016
$36,440
$36,199
3,062
3,045
1,290
2,039
673
249
1,696
1,702
4,223
18,465
-
2,120
-
6,460
-
2,896
1,207
1,568
$48,591
$74,743
78
Note 13 - Deposits
A summary of the balances of deposits follows (in thousands):
Noninterest-bearing demand
Interest-bearing demand
Savings
Time certificates, over $250,000
Other time certificates
Total deposits
December 31,
2016
$1,275,745
887,625
1,397,036
75,184
259,970
$3,895,560
2015
$1,155,695
853,961
1,281,540
74,647
265,423
$3,631,266
Certificate of deposit balances of $50,000,000 from the State of California were included in time certificates over $250,000 at December 31,
2016 and 2015. 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 $1,191,000 and $796,000 were
classified as consumer loans at December 31, 2016 and 2015, respectively.
At December 31, 2016, the scheduled maturities of time deposits were as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
Scheduled
Maturities
$279,015
26,097
9,277
10,611
10,135
19
$335,154
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
Years ended December 31,
2015
$2,145
-
2016
$2,475
-
2014
$2,415
125
244
$2,719
330
$2,475
(395)
$2,145
Note 15 – Other Liabilities
Other liabilities were comprised of (in thousands):
Deferred compensation
Pension liability
Joint beneficiary agreements
Low income housing tax credit fund commitments
Accrued salaries and benefits expense
Loan escrow and servicing payable
Deferred revenue
Unsettled investment security purchases
Litigation contingency
Miscellaneous other liabilities
Total other liabilities
December 31,
2016
$6,525
26,645
3,007
15,176
5,704
2,146
726
-
1,450
5,985
$67,364
2015
$6,725
26,182
2,529
3,330
3,851
2,037
1,082
17,072
-
2,485
$65,293
79
Note 16 - Other Borrowings
A summary of the balances of other borrowings follows:
Other collateralized borrowings, fixed rate, as of
December 31, 2016 of 0.05%, payable on January 2, 2017
Total other borrowings
December 31,
2016
2015
(in thousands)
$17,493
$17,493
$12,328
$12,328
The Company did not enter into any other borrowings or repurchase agreements during 2016 or 2015.
The Company had $17,493,000 and $12,328,000 of other collateralized borrowings at December 31, 2016 and 2015, 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, 2016, the Company has pledged as collateral and sold under agreements to repurchase
investment securities with fair value of $37,723,000 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, 2016, this line provided for maximum borrowings of $1,304,136,000 of which none was outstanding, leaving
$1,304,136,000 available. As of December 31, 2016, the Company had designated investment securities with a fair value of $78,985,000 and
loans totaling $1,884,580,000 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, 2016, this line
provided for maximum borrowings of $133,655,000 of which none was outstanding, leaving $133,655,000 available. As of December 31,
2016, the Company has designated investment securities with fair value of $47,000 and loans totaling $228,542,000 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 $20,000,000 for federal funds
transactions at December 31, 2016.
Note 17 – Junior Subordinated Debt
At December 31, 2016, the Company had five wholly-owned subsidiary business trusts that had issued $62.9 million of trust preferred
securities (the “Capital Trusts”). Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in
the indentures. The trusts used the net proceeds from the offering to purchase a like amount of subordinated debentures (the “Debentures”) of
the Company. The Debentures are the sole assets of the trusts. The Company’s obligations under the subordinated debentures and related
documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred
securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The
Company has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the
indentures plus any accrued but unpaid interest to the redemption date. The Company also has a right to defer consecutive payments of
interest on the debentures for up to five years.
The Company organized two of the Capital Trusts. The Company acquired its three other Capital Trusts and assumed their related
Debentures as a result of its acquisition of North Valley Bancorp. At the acquisition date of October 3, 2014, the Debentures associated with
North Valley Bancorp’s three Capital Trusts 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 interests in each of the acquired Capital Trusts and these discounts will be proportionally amortized over the remaining time to
maturity for each related debenture.
The recorded book values of the 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.
80
Note 17 – Junior Subordinated Debt (continued)
The following table summarizes the terms and recorded balance of each subordinated debenture as of the date indicated (dollars in
thousands):
Subordinated
Debt Series
Maturity
Date
Face
Value
10/7/2033
TriCo Cap Trust I
7/23/2034
TriCo Cap Trust II
North Valley Trust II
4/24/2033
North Valley Trust III 4/24/2034
North Valley Trust IV 3/15/2036
$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, 2016
Recorded
Current
Book Value
Coupon Rate
$20,619
3.93%
20,619
3.43%
5,095
4.14%
4,005
3.68%
6,329
2.29%
$56,667
Note 18 - Commitments and Contingencies
Restricted Cash Balances— Reserves (in the form of deposits with the San Francisco Federal Reserve Bank) of $78,183,000 and $70,660,000
were maintained to satisfy Federal regulatory requirements at December 31, 2016 and 2015. These reserves are included in cash and due
from banks in the accompanying consolidated balance sheets.
Lease Commitments— The Company leases 44 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, 2016, future minimum commitments under non-cancelable operating
leases with initial or remaining terms of one year or more are as follows:
2017
2018
2019
2020
2021
Thereafter
Future minimum lease payments
Operating Leases
(in thousands)
$3,320
2,523
1,924
1,325
963
1,696
$11,751
Rent expense under operating leases was $6,082,000 in 2016, $6,241,000 in 2015, and $4,786,000 in 2014. Rent expense was offset by rent
income of $220,000 in 2016, $217,000 in 2015, and $225,000 in 2014.
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.
81
Note 18 - Commitments and Contingencies (continued)
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,
2016
December 31,
2015
$220,836
406,855
42,184
97,399
12,763
98,583
$196,399
394,278
42,793
71,846
8,330
94,473
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 — 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 and rest periods and
seeking to represent a class of current and former branch employees with the same or similar job duties, employed by the Bank within the
State of California during the preceding four years. On or about June 25, 2015, Plaintiff filed an Amended Complaint expanding the class
definition to include all current and former non-exempt branch employees employed by the Bank within the State of California at any time
during the period of September 15, 2010 to the entry of judgment. The Bank responded to the First Amended Complaint by denying the
charges and the parties engaged in written discovery. The parties then engaged in non-binding mediation during the third quarter of 2016.
In addition to this, on January 20, 2015, a then-current Personal Banker at one of the Bank’s in-store branches filed a First Amended
Complaint against the Bank and the Company in Sacramento County Superior Court, alleging causes of action related to wage statement
violations. As part of the Complaint Plaintiff is seeking to represent a class of current and former exempt and non-exempt employees who
worked for the Company and/or the Bank during the time period of December 12, 2013 to October 21, 2016. The Company and the Bank
responded to the First Amended Complaint by denying the charges and engaging in written discovery with Plaintiff. The parties then engaged
in non-binding mediation of the action during the third quarter of 2016 as well.
As part of the mediations, which took place concurrently, the Bank agreed in principal to settle the two matters. In connection with the
settlement and in consideration of a full release of all claims raised in both the actions, the Bank has agreed to pay up to $1.9 million though
the actual cost of the settlement will depend on the number of claims submitted by the members of the purported classes. As a result, the Bank
estimates the actual cost of the settlement may be approximately $1,450,000, and recorded such estimate. The settlement is subject to
customary conditions, including court approval following notice to the members of the purported classes. Provided the parties can agree on
the language to be included in the settlement agreement and then enter into a stipulation regarding the settlement, court hearings will be
scheduled where the court will consider the terms of the settlement. But it should be noted there are no assurances the court will approve the
settlement even if the parties enter into such a stipulation.
Neither the Company nor its subsidiaries are a party to any other pending legal proceedings that are material, nor is their property the subject
of any other material pending legal proceeding at this time. All other legal proceedings are routine and arise out of the ordinary course of the
Bank’s business. None of those proceedings are currently expected to have a material adverse impact upon the Company’s and the Bank’s
business, their consolidated financial position nor their operations in any material amount not already accrued, after taking into consideration
any applicable insurance.
82
Note 18 - Commitments and Contingencies (continued)
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.
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 1.648265 per Class B share. As of December 31, 2016, the value of the Class A shares was $78.02 per share. Utilizing the conversion ratio,
the value of unredeemed Class A equivalent shares owned by the Bank was $1,723,000 as of December 31, 2016, 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.
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 $16,758,000, $13,304,000, and $8,270,000 in 2016, 2015, and
2014, 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 the 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, 2016, the Bank could have paid dividends of $82,615,000 to the
Company without the approval of the Commissioner of the Department of Business Oversight,
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, 2016,
the Company had repurchased 166,600 shares under this plan.
Stock Repurchased Under Equity Compensation Plans
During the years ended December 31, 2016, 2015, and 2014, employees tendered 264,800, 106,355, and 103,268 of the Company’s common
stock with market value of $7,879,000, $2,868,000, and $2,551,000, 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 included in the total of stock repurchased under the stock
repurchase plan announced August 21, 2007.
83
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
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, 2016, 481,900 options for the purchase of common shares, and 115,876 restricted
stock units were outstanding, and 637,262 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, 2016, 110,350 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, 2015
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2016
Number
of Shares
948,350
-
(336,900)
(19,200)
592,250
Option Price
per Share
$12.63
-
$14.54
$14.76
$12.63
-
to $25.91
to
to $25.91
to $23.21
to $23.21
Weighted
Average
Exercise
Price
$17.94
-
$19.31
$19.14
$17.12
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, 2016:
Number of options
Weighted average exercise price
Intrinsic value (in thousands)
Weighted average remaining contractual term (yrs.)
Currently
Exercisable
520,650
$16.91
$8,991
4.1
Currently Not
Exercisable
71,600
$18.64
$1,112
6.3
Total
Outstanding
592,250
$17.12
$10,103
4.3
The 71,600 options that are currently not exercisable as of December 31, 2016 are expected to vest, on a weighted-average basis, over the
next 1.3 years, and the Company is expected to recognize $368,000 of pre-tax compensation costs related to these options as they vest. The
Company did not modify any option grants during 2016 or 2015.
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)
2016
$3,483,000
$580,000
$580,000
Years Ended December 31,
2015
$969,000
$734,000
$734,000
2014
$1,209,000
$965,000
$965,000
$244,000
n/a
$380,000
n/a
$378,000
$8.17
84
Note 20 - Stock Options and Other Equity-Based Incentive Instruments (continued)
The fair value of the Company’s stock option grants is estimated on the measurement date, which, for the Company, is the date of grant. The
fair value of stock options is estimated using the Black-Scholes option-pricing model. The Company estimated expected market price
volatility and expected term of the options based on historical data and other factors. The weighted-average assumptions used to determine
the fair value of options granted are detailed in the table below:
Assumptions used to value option grants:
Average expected terms (years)
Volatility
Annual rate of dividends
Discount rate
2016
n/a
n/a
n/a
n/a
Year Ended December 31,
2015
n/a
n/a
n/a
n/a
2014
6.3
42.1%
1.90%
1.69%
Restricted stock unit (RSU) activity is summarized in the following table for the dates indicated:
Outstanding at December 31, 2015
RSUs granted
RSUs added through dividend credits
RSUs released
RSUs forfeited/expired
Outstanding at December 31, 2016
Service Condition Vesting RSUs
Weighted
Average Fair
Value on
Date of Grant
$28.01
Number
of RSUs
46,286
47,020
1,292
(20,529)
(5,619)
68,450
Market Plus Service Condition Vesting RSUs
Weighted
Average Fair
Value on
Date of Grant
$24.41
Number
of RSUs
32,097
19,402
-
-
(4,073)
47,426
The 68,450 of service condition vesting RSUs outstanding as of December 31, 2016 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 68,450 of service condition vesting RSUs that are currently outstanding as of December 31, 2016 are expected to vest, and be
released, on a weighted-average basis, over the next 1.4 years. The Company is expected to recognize $1,296,000 of pre-tax compensation
costs related to these service condition vesting RSUs between December 31, 2016 and their vesting dates. During the 2016 and 2015, the
Company did not modify any service condition vesting RSUs.
The 47,426 of market plus service condition vesting RSUs outstanding as of December 31, 2016 are expected to vest, and be released, on a
weighted-average basis, over the next 1.5 years. The Company is expected to recognize $564,000 of pre-tax compensation costs related to
these RSUs between December 31, 2016 and their vesting dates. As of December 31, 2016, 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 71,139 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 2016 or 2015.
The following table shows the compensation costs for RSUs recognized in income for the periods indicated:
Year Ended December 31,
2015
$458,000
$179,000
$126,000
$42,000
2014
Total compensation costs for RSUs recognized in income:
Service condition vesting RSUs
Market plus service condition vesting RSUs
2016
$616,000
$271,000
85
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
Gain on life insurance death benefit
Other
Total other noninterest income
Total noninterest income
2016
$14,365
15,859
3,121
2,065
(2,184)
33,226
4,037
2,329
2,717
(493)
262
408
711
(147)
238
1,275
11,337
$44,563
Years Ended December 31,
2015
$14,276
13,364
2,977
2,164
(701)
32,080
3,064
3,349
2,786
(207)
991
492
712
(129)
155
2,054
13,267
$45,347
2014
$11,811
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
Mortgage loan servicing fees, net of change in fair value of mortgage loan servicing rights, totaling $(119,000), $1,463,000, and $568,000,
were recorded in service charges and fees noninterest income for the years ended December 31, 2016, 2015, and 2014, respectively.
The components of noninterest expense were as follows (in thousands):
Base salaries, net of deferred loan origination costs
Incentive compensation
Benefits and other compensation costs
Total salaries and benefits expense
Occupancy
Equipment
Data processing and software
Assessments
ATM & POS 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 & acquisition expense
Miscellaneous other
Total other noninterest expense
Total noninterest expense
Merger and acquisition expense:
Base salaries, net of loan origination costs
Incentive compensation
Benefits and other compensation costs
Data processing and software
Professional fees
Other
Total merger expense
86
2016
$53,169
8,872
18,683
80,724
10,139
6,597
8,846
2,105
4,999
3,829
5,409
2,749
1,603
998
266
1,377
1,564
140
244
1,450
784
12,174
65,273
$145,997
$187
-
-
-
342
255
$784
Years Ended December 31,
2015
$46,822
6,964
17,619
71,405
2014
$39,342
5,068
13,134
57,544
10,126
5,997
7,670
2,572
4,190
3,992
4,545
3,007
1,296
1,154
490
1,157
737
502
330
-
586
11,085
59,436
$130,841
-
-
-
$108
120
358
$586
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
Note 22 - Income Taxes
The components of consolidated income tax expense are as follows:
Current tax expense
Federal
State
Deferred tax expense (benefit)
Federal
State
Total tax expense
2016
$17,401
7,121
$24,522
2,735
455
3,190
$27,712
2015
(in thousands)
$21,076
7,139
28,215
408
273
681
$28,896
2014
$14,485
5,016
19,501
(794)
(199)
(993)
$18,508
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 $429,000 in 2016, $904,000 in 2015, and $(2,984,000) in 2014, taxes (benefits)
related to unrealized gains and losses on available-for-sale investment securities amounting to $(4,631,000) in 2016, $(797,000) in 2015, and
$(68,000) in 2014, taxes (benefits) related to employee stock options of $(170,000) in 2016, $(28,000) in 2105, and $(293,000) in 2014, were
recorded directly to shareholders' equity.
The Company recognized, as components of tax expense, tax credits and other tax benefits, and amortization expense relating to our
investments in Qualified Affordable Housing Projects as followers for the periods indicated:
Year ended December 31,
2016
2015
(in thousands)
2014
Tax credits and other tax benefits –
decrease in tax expense
Depreciation – increase in tax expense
$(954)
$757
$(354)
$277
-
-
Prior to 2015, the Company had no investments in Qualified Affordable Housing Projects.
The carrying value of Low Income Housing Tax Credit Funds was $18,465,000 and $4,223,000 as of December 31, 2016 and 2015,
respectively. As of December 31, 2016, the Company has committed to make additional capital contributions to the Low Income Housing
Tax Credit Funds in the amount of $15,176,000, and these contributions are expected to be made over the next several years.
The provisions for income taxes applicable to income before taxes for the years ended December 31, 2016, 2015 and 2014 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:
Years Ended December 31,
2015
35.0%
6.6
(0.7)
(1.3)
(0.4)
-
0.1
-
0.4
39.7%
2016
35.0%
6.8
(1.8)
(1.3)
(1.3)
0.8
0.1
-
(0.1)
38.2%
2014
35.0%
7.0
(0.4)
(1.5)
-
-
0.2
1.0
0.2
41.5%
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
Low income housing tax credit benefits
Low income housing tax credit amortization
Non-deductible joint beneficiary agreement expense
Non-deductible merger expense
Other
Effective Tax Rate
87
Note 22 - Income Taxes (continued)
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 and reserve for unfunded commitments
Deferred compensation
Accrued pension liability
Accrued bonus
Other accrued expenses
Unfunded status of the supplemental retirement plans
State taxes
Share based compensation
Nonaccrual interest
OREO write downs
Indemnification asset
Acquisition cost basis
Unrealized loss on securities
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
Core deposit intangible
Junior subordinated debt
Prepaid expenses and other
Total deferred tax liability
Net deferred tax asset
2016
2015
(in thousands)
$14,809
2,743
9,220
1,727
781
1,982
2,257
2,063
408
132
313
3,996
3,730
491
3,354
981
48,987
(1,362)
-
(3,032)
(54)
(478)
(2,710)
(1,813)
(2,616)
(723)
(12,788)
$36,199
$16,182
2,827
8,597
1,326
143
2,411
2,297
2,701
1,979
241
219
5,118
-
491
5,252
889
50,673
(1,362)
(902)
(2,654)
(54)
(485)
(3,118)
(2,331)
(2,699)
(628)
(14,233)
$36,440
As part of the merger with North Valley in 2014, 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, 2016 were $4.6 million and $26.0 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, 2016 were $111,000 and $388,000 for federal and California, respectively. The amount of the Company’s tax credits that would be
subject to these limitations as of December 31, 2016 are $69,000 and $2.7 million for federal and California, respectively. Due to the
limitation, a significant 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 on the books 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 2018.
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 $114,000 as of December 31, 2016, the recognition of which would reduce
the Company’s tax expense by $73,000. 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 2016 is as follows:
(in thousands)
As of December 31, 2015
Lapse of the applicable statute of limitations
As of December 31, 2016
UTB
$168
(54)
$114
Interest/Penalties
$14
(7)
7
Total
$182
(61)
121
During the years ended December 31, 2016 and December 31, 2015 the Company recognized no interest and penalties related to taxes. The
Company files income tax returns in the U.S. federal jurisdiction, and California. With few exceptions, the Company is no longer subject to
U.S. federal and state/local income tax examinations by tax authorities for years before 2013 and 2012, respectively.
88
Note 23 – Earnings per Share
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common
shares that may be issued by the Company relate solely from outstanding stock options, and are determined using the treasury stock method.
Earnings per share have been computed based on the following:
Net income (in thousands)
(number of shares in thousands)
Average number of common shares outstanding
Effect of dilutive stock options
Average number of common shares outstanding
used to calculate diluted earnings per share
2016
$44,811
Years ended December 31,
2015
$43,818
2014
$26,108
22,814
273
23,087
22,750
248
22,998
17,716
207
17,923
Based on an average of quarterly computations, there were 13,825, 20,625, and 95,600 options and restricted stock units excluded from the
computation of annual diluted earnings per share for the years ended December 31, 2016, 2015 and 2014, respectively, because the effect of
these options and restricted stock units were antidilutive.
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:
2016
$(11,015)
-
(11,015)
4,631
(6,384)
Years Ended December 31,
2015
(in thousands)
$(1,895)
-
(1,895)
797
(1,098)
511
(40)
550
510
1,021
(429)
592
(343)
-
(343)
-
(343)
$(6,135)
1,384
(57)
823
766
2,150
(904)
1,246
277
-
277
-
277
$425
2014
$(162)
-
(162)
68
(94)
(7,253)
138
17
155
(7,098)
2,984
(4,114)
148
-
148
-
148
$(4,060)
Unrealized holding losses on available for sale securities before reclassifications
Amounts reclassified out of accumulated other comprehensive income
Unrealized holding losses on available for sale securities after reclassifications
Tax effect
Unrealized holding losses 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 income (loss)
89
Note 24 – Comprehensive Income (continued)
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 loss
Note 25 - Retirement Plans
December 31,
2016
2015
(in thousands)
$(8,870)
3,729
(5,141)
(4,714)
1,982
(2,732)
(40)
-
(40)
$(7,913)
$2,145
(902)
1,243
(5,735)
2,411
(3,324)
303
-
303
$(1,778)
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. Prior to July 1, 2015, the
Company did not contribute to the 401(k) Plan. Effective July 1, 2015, the Company initiated a discretionary matching contribution equal to
50% of participant’s elective deferrals each quarter, up to 4% of eligible compensation. The Company recorded $678,000, $300,000, and $0,
of salaries & benefits expense attributable to the 401(k) Plan matching contribution during the years 2016, 2015, and 2014, respectively.
The Company made $811,000, $0, and $0, of 401(k) Plan matching contributions during the years 2016, 2015, and 2014, respectively.
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 $1,368,000, $2,651,000, and
$1,294,000 were made during 2016, 2015, and 2014, respectively. Expenses related to the Company’s ESOP, are included in benefits and
other compensation costs under salaries and benefits expense, and were $1,831,000, $2,282,000, and $1,467,000 during 2016, 2015, and
2014, respectively. 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 $6,525,000, and $6,725,000 at December 31, 2016 and 2015, respectively. Earnings credits on deferred balances totaling $487,000 in
2016, $538,000 in 2015, and $551,000 in 2014, respectively, are included in noninterest expense.
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 $95,912,000 and $94,560,000 at December 31, 2016 and
2015, respectively.
The Company recorded in other liabilities the unfunded status of the supplemental retirement plans of $4,714,000 and $5,735,000 related to
the supplemental retirement plans as of December 31, 2016 and 2015, 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.
90
Note 25 - Retirement Plans (continued)
At December 31, 2016 and 2015, the unfunded status of the supplemental retirement plans of $4,714,000 and $5,735,000 were offset by a
reduction of shareholders’ equity accumulated other comprehensive loss of $2,732,000 and $3,324,000, respectively, representing the after-
tax impact of the unfunded status of the supplemental retirement plans, and the related deferred tax asset of $1,982,000 and $2,411,000,
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 $381,000 of the net actuarial loss reported in the following table as of December 31, 2016 as a
component of net periodic benefit cost during 2017.
(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,
2016
$7
(75)
4,782
4,714
(1,982)
$2,732
2015
$7
(115)
5,843
5,735
(2,411)
$3,324
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
December 31,
2016
2015
(in thousands)
$(26,184)
-
(1,042)
(1,025)
511
1,095
$(26,798)
-
(1,023)
(957)
1,382
1,212
$(26,645)
$(26,184)
$ —
$ —
$(26,645)
7
4,782
(75)
(4,714)
$(26,645)
$ —
$ —
$(26,184)
7
5,843
(115)
(5,735)
$(26,184)
Accumulated benefit obligation
$(25,241)
$(24,469)
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
2016
$1,042
1,025
2
(41)
549
$2,577
Years Ended December 31,
2015
(in thousands)
$1,023
957
2
(57)
823
$2,748
2014
$652
739
2
138
16
$1,547
91
Note 25 - Retirement Plans (continued)
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
2016
3.80%
3.80%
2.50%
2.50%
Years Ended December 31,
2015
4.00%
4.00%
2.50%
2.50%
2014
3.65%
3.65%
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
2017
2018
2019
2020
2021
2022-2026
Expected Benefit
Payments to
Participants
Estimated
Company
Contributions
(in thousands)
$ 1,067
958
823
701
520
$3,212
$1,067
958
823
701
520
$3,212
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, 2014
Advances/new loans
Removed/payments
Balance December 31, 2015
Advances/new loans
Removed/payments
Balance December 31, 2016
3,132
3,098
(2,029)
$4,201
730
(2,499)
$2,432
Until the end of 2015, Director Chrysler was a principal owner and CEO of Modern Building Inc., a construction company, where he
continues to be employed in a nonexecutive position. Modern Building Inc. provided construction services to the Company related to new
and existing Bank facilities for aggregate payments of $2,289,000, $1,030,000, and $1,181,000, during 2016, 2015 and 2014, 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.
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.
92
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, 2016
Securities available-for-sale:
Obligations of U.S. government
corporations and agencies
Obligations of states and
political subdivisions
Marketable equity securities
Mortgage servicing rights
Total assets measured at fair value
Fair value at December 31, 2015
Securities available-for-sale:
Obligations of U.S. government
corporations and agencies
Obligations of states and
political subdivisions
Marketable equity securities
Mortgage servicing rights
Total assets measured at fair value
Total
Level 1
Level 2
Level 3
$429,678
117,617
2,938
6,595
$556,828
-
$429,678
-
-
$2,938
-
$2,938
117,617
-
-
$547,295
-
-
$6,595
$6,595
Total
Level 1
Level 2
Level 3
$313,682
88,218
2,985
7,618
$412,503
-
$313,682
-
-
$2,985
-
$2,985
88,218
-
-
$401,900
-
-
$7,618
$7,618
93
Note 27 - Fair Value Measurement (continued)
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 2016 or
2015.
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, 2016 and 2015. Had there been any transfer into or out of Level 3 during 2016 or
2015, 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,
2016: Mortgage servicing rights
2015: Mortgage servicing rights
Ending
Balance
$6,595
$7,618
Transfers
into (out of)
Level 3
-
-
Change
Included
in Earnings
$(2,184)
$(701)
Issuances
$1,161
$941
Beginning
Balance
$7,618
$7,378
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, 2016:
Fair Value
(in thousands)
Valuation
Technique
Unobservable
Inputs
Range,
Weighted Average
Mortgage Servicing Rights
$6,595
Discounted cash flow
Constant prepayment rate
Discount rate
6.9%-16.6%, 8.8%
14.0%-16.0%, 14.0%
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, 2016
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total assets measured at fair value
Year ended December 31, 2015
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total assets measured at fair value
Total
Level 1
Level 2
Level 3
Total Gains
(Losses)
$1,107
2,253
$3,360
-
-
-
-
$1,107
2,253
$3,360
$(409)
(86)
$(495)
Total
Level 1
Level 2
Level 3
Total Gains
(Losses)
$4,649
1,839
$6,488
-
-
-
-
$4,649
1,839
$6,488
$(663)
(418)
$(1,081)
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.
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
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.
94
Note 27 - Fair Value Measurement (continued)
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, 2016:
Fair Value
(in thousands)
Valuation
Technique
Unobservable
Inputs
Range,
Weighted Average
Impaired Originated & PNCI loans
$1,107
Foreclosed assets
(Land & construction)
Foreclosed assets (residential
(Residential real estate)
Foreclosed assets
(Commercial real estate)
$15
$1,564
$674
Sales comparison Adjustment for differences
between comparable sales
Capitalization rate
approach
Income approach
Sales comparison Adjustment for differences
between comparable sales
Sales comparison Adjustment for differences
between comparable sales
Sales comparison Adjustment for differences
between comparable sales
approach
approach
approach
Not meaningful
N/A
Not meaningful
Not meaningful
Not meaningful
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 their
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.
95
Note 27 - Fair Value Measurement (continued)
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):
Financial assets:
Level 1 inputs:
Cash and due from banks
Cash at Federal Reserve and other banks
Level 2 inputs:
Securities held to maturity
Restricted equity securities
Loans held for sale
Level 3 inputs:
Loans, net
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
December 31, 2016
Fair
Value
Carrying
Amount
December 31, 2015
Carrying
Amount
Fair
Value
$92,197
213,415
$92,197
213,415
602,536
16,956
2,998
603,203
N/A
2,998
$94,305
209,156
$94,305
209,156
726,530
16,596
1,873
732,208
N/A
1,873
2,727,090
2,763,473
2,486,926 2,555,297
3,895,560
17,493
3,893,941
17,493
3,631,266 3,630,129
12,328
12,328
$56,667
$49,033
$56,470
$44,527
Contract
Amount
Fair
Value
Contract
Amount
Fair
Value
$767,274
$12,763
$98,583
$7,673
$128
$986
$705,316
$8,330
$94,473
$7,053
$83
$945
96
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 22,867,802 and 22,775,173 shares, respectively
Retained earnings
Accumulated other comprehensive loss, net
Total shareholders' equity
Total liabilities and shareholders' equity
December 31,
2016
2015
(in thousands)
$2,802
529,907
1,711
$534,420
$406
56,667
57,073
252,820
232,440
(7,913)
477,347
$534,420
$2,565
504,655
1,714
$508,934
$348
56,470
56,818
247,587
206,307
(1,778)
452,116
$508,934
Condensed Statements of Income
Years ended December 31,
Condensed Statements of Comprehensive Income
Years ended December 31,
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
2016
$(2,229)
(725)
(2,954)
16,758
29,764
1,243
$44,811
Net income
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains on securities arising during the period
Change in minimum pension liability
Change in joint beneficiary agreement liability
Other comprehensive (loss) income
Net income
Condensed Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed equity in earnings of Tri Counties Bank
Equity compensation vesting expense
Equity compensation tax effect
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
Equity compensation tax effect
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
97
2016
$44,811
(6,384)
592
(343)
(6,135)
$38,676
2016
$44,811
(29,764)
1,467
(155)
(1,210)
15,149
518
155
(1,890)
(13,695)
(14,912)
237
2,565
$2,802
2015
(in thousands)
$(1,977)
(814)
(2,791)
2014
$(1,403)
(2,720)
(4,123)
13,304
32,131
1,174
$43,818
2015
(in thousands)
$43,818
(1,098)
1,246
277
425
$44,243
8,270
20,720
1,241
$26,108
2014
$26,108
(94)
(4,114)
148
(4,060)
$22,048
Years ended December 31,
2015
(in thousands)
$43,818
2014
$26,108
(32,131)
1,370
68
(1,120)
12,005
660
(68)
(412)
(11,849)
(11,669)
336
2,229
$2,565
(20,720)
1,133
(225)
671
6,967
616
225
(292)
(7,807)
(7,258)
(291)
2,520
$2,229
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, Tier 1, and common equity Tier 1capital to risk-weighted assets, and of Tier 1 capital to average assets.
The following tables presents actual and required capital ratios as of December 31, 2016 and 2015 for the Company and the Bank under Basel
III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of December 31, 2016 and 2015
based on the phased-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the
Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective
action regulations, as amended to reflect the changes under the Basel III Capital Rules.
Actual
Amount
Ratio
Minimum Capital
Required – Basel III
Phase-in Schedule
Amount
Ratio
Minimum Capital
Required – Basel III
Fully Phased In
Ratio
Amount
(dollars in thousands)
Required to be
Considered Well
Capitalized
Amount
Ratio
$503,283
$500,876
14.65%
14.59%
$274,862
$274,725
8.00%
8.00%
$360,756
$360,577
10.50%
10.50%
N/A
$343,407
N/A
10.00%
$468,061
$465,654
13.62%
13.56%
$206,147
$206,044
6.00%
6.00%
$292,041
$291,896
8.50%
8.50%
N/A
$274,725
N/A
8.00%
As of December 31, 2016:
Total Capital
(to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Common equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital (to Average Assets):
Consolidated
Tri Counties Bank
$414,632
$465,654
$468,061
$465,654
12.07%
13.56%
10.62%
10.56%
$154,610
$154,533
$176,346
$176,341
4.50%
4.50%
4.00%
4.00%
$240,504
$240,385
$176,346
$176,341
7.00%
7.00%
4.00%
4.00%
N/A
$223,214
N/A
6.50%
N/A
$220,426
N/A
5.00%
As of December 31, 2015:
Total Capital
(to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Common equity Tier 1 Capital
(to Risk Weighted Assets):
$474,436
$473,327
15.09%
15.06%
$251,555
$251,418
8.00%
8.00%
$330,165
$329,985
10.50%
10.50%
N/A
$314,272
N/A
10.00%
$435,950
$434,841
13.86%
13.84%
$188,666
$188,563
6.00%
6.00%
$267,277
$267,131
8.50%
8.50%
N/A
$251,418
N/A
8.00%
Consolidated
Tri Counties Bank
Tier 1 Capital (to Average Assets):
Consolidated
Tri Counties Bank
$385,747
$434,841
$435,950
$434,841
12.27%
13.84%
10.79%
10.76%
$141,499
$141,422
$161,562
$161,601
4.50%
4.50%
4.00%
4.00%
$220,110
$219,990
$161,562
$161,601
7.00%
7.00%
4.00%
4.00%
N/A
$204,277
N/A
6.50%
N/A
$202,002
N/A
5.00%
As of December 31, 2016, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital
Rules on a fully phased-in basis. Also, at December 31, 2016 and 2015, the most recent regulatory notifications categorize the Bank as well
capitalized under the regulatory framework for prompt corrective action.
98
Note 30 - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters of 2015 and 2014, 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 reversal of) 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
(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
2016 Quarters Ended
December 31,
September 30,
June 30,
March 31,
(dollars in thousands, except per share data)
$483
658
637
34,463
36,241
8,374
44,615
1,460
43,155
(1,433)
44,588
12,462
36,563
20,487
7,954
$ 12,533
$ 0.54
$ 0.15
$777
569
883
33,540
35,769
7,940
43,709
1,439
42,270
3,973)
46,243
11,066
37,416
19,893
7,694
$ 12,199
$ 0.53
$ 0.15
$426
415
1,459
32,038
34,338
8,252
42,590
1,430
41,160
(773)
41,933
11,245
38,267
14,911
5,506
$ 9,405
$ 0.41
$ 0.15
$269
(45)
868
33,646
34,738
8,056
42,794
1,392
41,402
209
41,193
9,790
33,751
17,232
6,558
$ 10,674
$ 0.46
$ 0.15
2015 Quarters Ended
December 31,
September 30,
June 30,
March 31,
(dollars in thousands, except per share data)
$172
1,274
1,348
28,371
31,165
6,560
37,725
1,382
36,343
197
36,146
10,180
32,282
14,044
5,708
$ 8,336
$ 0.36
$ 0.11
$302
1,392
573
32,571
34,838
7,652
42,490
1,349
41,141
(908)
42,049
11,445
34,684
18,810
7,388
$ 11,422
$ 0.50
$ 0.15
$445
1,090
1,590
30,689
33,814
7,518
41,332
1,339
39,993
(866)
40,859
11,642
31,439
21,062
8,368
$ 12,694
$ 0.55
$ 0.13
$404
907
822
29,886
32,019
7,848
39,867
1,346
38,521
(633)
39,154
12,080
32,436
18,798
7,432
$ 11,366
$ 0.49
$ 0.13
99
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. 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, 2016.
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, 2016, and the Company’s effectiveness of internal control over financial reporting as of December 31,
2016, 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 14, 2017
100
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
TriCo Bancshares
Chico, California
We have audited the accompanying consolidated balance sheets of TriCo Bancshares as of December 31, 2016 and 2015, and the related
consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 2016. We also have audited TriCo Bancshares’s internal control over financial reporting as of December 31,
2016, 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 consolidated 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 consolidated financial statements and an opinion on the company's internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TriCo
Bancshares as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2016 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, 2016,
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 14, 2017
101
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, 2016, 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, 2016, 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 100 of this report and is incorporated herein by
reference. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by Crowe
Horwath LLP, an independent registered public accounting firm, as stated in its report, which is set forth on page 101 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,
2016, 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 2016 was so disclosed.
102
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item 10 shall either be incorporated herein by reference from the Company’s Proxy Statement for the 2017
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
2017annual 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 2017
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 2017
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 2017
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
PART IV
(a) Documents filed as part of this report:
1. All Financial Statements.
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.
103
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 14, 2017
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 14, 2017
Date: March 14, 2017
/s/ Richard P. Smith
Richard P. Smith, President, Chief Executive
Officer and Director (Principal Executive Officer)
/s/ Thomas J. Reddish
Thomas J. Reddish, Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
Date: March 14, 2017
/s/ Donald J. Amaral
Donald J. Amaral, Director
Date: March 14, 2017
Date: March 14, 2017
Date: March 14, 2017
Date: March 14, 2017
Date: March 14, 2017
Date: March 14, 2017
Date: March 14, 2017
Date: March 14, 2017
Date: March 14, 2017
/s/ William J. Casey
William J. Casey, Director and Chairman of the Board
/s/ Craig S. Compton
Craig S. Compton, Director
/s/ L. Gage Chrysler
L. Gage Chrysler, Director
/s/ Cory W. Giese
Cory W. Giese, Director
/s/ John S.A. Hasbrook
John S.A. Hasbrook, Director
/s/ Patrick A. Kilkenny
Patrick A. Kilkenny, Director
/s/ Michael W. Koehnen
Michael W. Koehnen, Director
/s/ Martin A. Mariani
Martin A. Mariani, Director
/s/ W. Virginia Walker
W. Virginia Walker, Director
104
Exhibit No.
Exhibit
EXHIBIT INDEX
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*
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 among TriCo, Tri Counties Bank and each of Dan Bailey, Craig Carney, John
Fleshood, Richard O'Sullivan, and Thomas Reddish (incorporated by reference to Exhibit 10.2 to TriCo's Current Report on
Form 8-K filed on July 23, 2013).
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).
10.11* 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).
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).
10.12*
10.13* 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).
10.14* 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).
10.15* 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).
10.16* 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, 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).
10.17* 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).
10.18* 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).
10.19* 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).
10.20* 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).
`
105
Item 6 – Exhibits (continued)
10.21* 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).
10.22* Form of Performance Award Agreement and Grant Notice pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by
10.23*
reference to Exhibit 10.3 to TriCo’s Current Report on Form 8-K filed August 13, 2014).
John Fleshood Offer Letter dated November 3, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on
Form 8-K filed on November 30, 2016).
10.24* Amendment to John Fleshood Offer Letter dated December 19, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s
Current Report on Form 8-K filed on November 30, 2016).
List of Subsidiaries
Independent Registered Public Accounting Firm’s Consent
Rule 13a-14(a)/15d-14(a) Certification of CEO
Rule 13a-14(a)/15d-14(a) Certification of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO
21.1
23.1
31.1
31.2
32.1
32.2
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
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
Exhibit 23.1
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 14, 2017 relating to the consolidated financial statements and effectiveness of internal
control over financial reporting, appearing in this Annual Report on Form 10-K.
/s/ Crowe Horwath LLP
Sacramento, California
March 14, 2017
106
Exhibit 31.1
Rule 13a-14/15d-14 Certification of CEO
I, Richard P. Smith, certify that;
1.
2.
3.
4.
5.
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. 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;
b. 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;
c. 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
d. 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
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. 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
b. 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 14, 2017
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
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Exhibit 31.2
Rule 13a-14/15d-14 Certification of CFO
I, Thomas J. Reddish, certify that;
1.
2.
3.
4.
5.
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. 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;
b. 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;
c. 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
d. 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
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. 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
b. 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 14, 2017
/s/ Thomas J. Reddish
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
108
Exhibit 32.1
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, 2016 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)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
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.
Exhibit 32.2
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, 2016 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)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
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.
109