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, 2017
Commission File Number 0-10661
TriCo Bancshares
(Exact name of Registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
63 Constitution Drive, Chico, California
(Address of principal executive offices)
94-2792841
(I.R.S. Employer
Identification No.)
95973
(Zip Code)
Registrant’s telephone number, including area code:(530) 898-0300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, without par value
(Title of Class)
Nasdaq Global Select Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. ☐ Yes ☒ No
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ☐ Yes ☒ No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
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. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Emerging growth company ☐
Accelerated filer
☐
Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 2017, was
approximately $712,127,000 (based on the closing sales price of the Registrant’s common stock on the date). This computation
excludes a total of 2,665,409 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 23, 2018, was 22,956,323.
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 2018 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
PART I
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
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
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
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 the current knowledge and belief of
the Company’s management (“Management”) 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 57 traditional
branches, 9 in-store branches and 2 loan production offices in northern and central California and had total assets of approximately
$4.76 billion at December 31, 2017. 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 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, 2017, the total of the Bank’s consumer loans net of deferred fees outstanding was $356,874,000 (11.8%),
the total of commercial loans outstanding was $220,412,000 (7.3%), and the total of real estate loans including construction loans of
$137,557,000 was $2,437,879,000 (80.9%). 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.
Proposed Merger with FNB Bancorp
On December 11, 2017, the Company and FNB Bancorp (“FNBB”), entered into an Agreement and Plan of Merger and Reorganization
(the “Merger Agreement”) pursuant to which FNBB will be merged with and into TriCo, with TriCo as the surviving corporation (the
“Merger”). The Merger Agreement provides that immediately after the Merger, FNBB’s bank subsidiary, First National Bank of
Northern California (“First National Bank”), will merge with and into TriCo’s bank subsidiary, Tri Counties Bank, with Tri Counties
Bank as the surviving bank (the “Bank Merger”). The Merger and Bank Merger are collectively referred to as the “Proposed
Transaction.”
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The Merger Agreement provides that each share of FNBB common stock issued and outstanding immediately prior to the effective time
of the Merger will be canceled and converted into the right to receive 0.98 shares of TriCo common stock (the “Exchange Ratio”), with
cash paid in lieu of fractional shares of TriCo common stock.
Based on the closing price of TriCo common stock of $41.64 on December 8, 2017, the consideration value was $40.81 per share of
FNBB common stock or approximately $315.3 million in aggregate. The value of the merger consideration will fluctuate until closing
based on the value of TriCo’s stock and subject to a trading collar in certain circumstances. Upon consummation of the Merger, the
shareholders of FNBB will own approximately 24% of the combined company.
The consummation of the Merger is subject to a number of conditions, which include: (i) the approval of the Merger Agreement by
FNBB’s shareholders and the approval of the Merger Agreement and the issuance of shares of TriCo common stock by TriCo’s
shareholders; (ii) as of the closing of the Merger, FNBB shall have tangible common equity of not less than $119.0 million, subject to
credit for certain merger-related expenses and certain assumptions and adjustments that are set forth in the Merger Agreement; (iii) the
receipt of all necessary regulatory approvals for the Proposed Transaction, without the imposition of conditions or requirements that the
TriCo Board of Directors reasonably determines in good faith would, individually or in the aggregate, materially reduce the economic
benefits of the Proposed Transaction; (iv) the absence of any regulation, judgment, decree, injunction or other order of a governmental
authority which prohibits the consummation of the Proposed Transaction or which prohibits or makes illegal the consummation of the
Proposed Transaction; (v) the effective registration of the shares of TriCo Common Stock to be issued to FNBB’s shareholders with the
Securities and Exchange Commission (the “SEC”) and the approval of such shares for listing on the Nasdaq Global Select Market;
(vi) all representations and warranties made by TriCo and FNBB in the Merger Agreement must remain true and correct, except for
certain inaccuracies that would not have, or would not reasonably be expected to have, a material adverse effect; and (vii) TriCo and
FNBB must have performed their respective obligations under the Merger Agreement in all material respects.
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 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.
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, 2017, the Company employed 1,023 persons, including six executive officers. Full time equivalent employees were
985. 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.
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Competition
The banking business in California generally, and in the Bank’s primary service area of Northern and Central California specifically, is
highly competitive with respect to both loans and deposits. It is dominated by a relatively small number of national and regional banks
with many offices operating over a wide geographic area. Among the advantages such major banks have over the Bank is their ability to
finance wide ranging advertising campaigns and to allocate their investment assets to regions of high yield and demand. By virtue of
their greater total capitalization such institutions have substantially higher lending limits than does the Bank.
In addition to competing with other banks, the Bank competes with savings institutions, credit unions and the financial markets for
funds. Yields on corporate and government debt securities and other commercial paper may be higher than on deposits, and therefore
affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for available funds with money
market instruments and mutual funds. During past periods of high interest rates, money market funds have provided substantial
competition to banks for deposits and they may continue to do so in the future. Mutual funds are also a major source of competition for
savings dollars.
The Bank relies substantially on local promotional activity, personal contacts by its officers, directors, employees and shareholders,
extended hours, personalized service and its reputation in the communities it services to compete effectively.
Regulation and Supervision
General
The Company and the Bank are subject to extensive regulation under both federal and state law. This regulation is intended primarily
for the protection of depositors, the 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 under the
jurisdiction of the SEC and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities
Exchange Act of 1934, each administered by the SEC. The Company’s common stock is listed on the Nasdaq Global Select market
(“Nasdaq”) under the trading symbol “TCBK” and the Company is, therefore, subject to the rules of Nasdaq for listed companies.
The Bank, as a state chartered bank, is subject to broad federal regulation and oversight extending to all its operations by the FDIC and
to state regulation by the DBO.
The 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,
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 Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),
a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and, under
appropriate circumstances, to commit resources to support the subsidiary bank. Qualified bank holding companies that elect to be
financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is
either (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity, and that does not pose a
substantial risk to the safety and soundness of depository institutions or the financial system generally (as determined solely by the
FRB). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and agency, and making
merchant banking investments. The Company has not elected to become a financial holding company.
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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.
Section 39 to the Federal Deposit Insurance Act requires the agencies to establish safety and soundness standards for insured financial
institutions covering:
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internal controls, information systems and internal audit systems;
loan documentation;
credit underwriting;
interest rate exposure;
asset growth;
compensation, fees and benefits;
asset quality, earnings and stock valuation; and
excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss.
If an agency determines that an institution fails to meet any standard established by the guidelines, the agency may require the financial
institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a
compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require
the institution to correct the deficiency. An institution must file a compliance plan within 30 days of a request to do so from the
institution’s primary federal regulatory agency. The agencies may elect to initiate enforcement action in certain cases rather than rely on
an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the
institution.
Restrictions on Dividends and Distributions
A California corporation such as TriCo may make a distribution to its shareholders to the extent that either the corporation’s retained
earnings meet or exceed the amount of the proposed distribution or the value of the corporation’s assets exceed the amount of its
liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met. It is the FRB’s policy that bank
holding companies should generally pay dividends on common stock only out of income available over the past year, and only if
prospective earnings retention is consistent with the organization’s expected future needs and financial condition.
The primary source of funds for payment of dividends by TriCo to its shareholders has been and will be the receipt of dividends and
management fees from the Bank. TriCo’s ability to receive dividends from the Bank is limited by applicable state and federal law.
Under the California Financial Code, funds available for cash dividend payments by a bank are restricted to the lesser of: (i) retained
earnings or (ii) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such period).
However, with the prior approval of the Commissioner of the DBO, a bank may pay cash dividends in an amount not to exceed the
greatest of the: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) net income of the bank for its
current fiscal year. However, if the DBO finds that the shareholders’ equity of the bank is not adequate or that the payment of a
dividend would be unsafe or unsound, the Commissioner may order the bank not to pay a dividend to shareholders.
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.
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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 (“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.”
Consumer Protection Laws
The Bank is subject to many federal consumer protection statues and regulations, some of which are discussed below.
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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:
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The issuance of final rules for residential mortgage lending, which became effective January 10, 2013, including definitions
for “qualified mortgages” and detailed standards by which lenders must satisfy themselves of the borrower’s ability to repay
the loan and revised forms of disclosure under the Truth in Lending Act and the Real Estate Settlement Procedures Act
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.
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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.
Data Privacy and Cyber Security Regulation
The Company is subject to many U.S. federal, state and international laws and regulations governing requirements for maintaining
policies and procedures to protect the non-public confidential information of customers and employees. The privacy provisions of the
Gramm-Leach-Bliley Act generally prohibit financial institutions, including the Company, from disclosing nonpublic personal financial
information of consumer customers to third parties for certain purposes (primarily marketing) unless customers have the opportunity to
“opt out” of the disclosure. Other laws and regulations, at the international, federal and state level, limit the Company’s ability to share
certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with
marketing offers. The Gramm-Leach-Bliley Act
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also requires banks to implement a comprehensive information security program that includes administrative, technical and physical
safeguards to ensure the security and confidentiality of customer records and information.
Regulatory Capital Requirements
The Company and the Bank are subject to the minimum capital requirements of the FDIC and the FRB, respectively. Capital
requirements may have an effect on 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 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 included: (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
is to 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
(inclusive of the buffer): (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.
7
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 December 31,
2017.
Prompt Corrective Action
Prompt Corrective Action regulations of the federal bank regulatory agencies establish five capital categories in descending order (well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), assignment to
which depends upon the institution’s total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio. The new capital
rules revised the prompt corrective action framework. Under the new prompt corrective action framework, which implements 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’s capital levels have
exceeded the amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action
since its adoption.
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 effect 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
8
well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial
institutions, and foreign individuals and entities.
Transactions with Affiliates
Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors,
principal shareholders (including the Company) or any related interest of such persons. Extensions of credit must be made on
substantially the same terms, including interest rates and collateral as, and follow credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with persons not affiliated with the bank, and must not involve
more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and
restrictions on overdrafts to such persons. Regulation W requires that certain transactions between the Bank and its affiliates, including
its holding company, be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for
comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under
circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies.
Impact of Monetary Policies
Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its
deposits and other borrowings, and the interest rate earned by banks on loans, securities and other interest-earning assets comprises the
major source of banks’ earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions generally,
both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the FRB. The
FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by its open-market dealings in
United States government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements
and through adjustments to the discount rate applicable to borrowings by banks which are members of the FRB. The actions of the FRB
in these areas influence the growth of bank loans, investments and deposits and also affect interest rates. The nature and timing of any
future changes in such policies and their impact on the Company cannot be predicted. In addition, adverse economic conditions could
make a higher provision for loan losses a prudent course and could cause higher loan loss charge-offs, thus adversely affecting the
Company’s net earnings.
ITEM 1A. RISK FACTORS
There are a number of factors that may adversely affect the Company’s business, financial results, or stock price. Information
concerning additional risk factors related to the proposed merger of the Company and FNB Bancorp is available in the Company’s
registration statement on Form S-4 SEC to be filed with the SEC. 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 the loans we make or acquire. 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 and 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 incurred 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
9
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 effect on
our business, financial condition and results of operations.
10
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, 2017, approximately
91.9% of the book value of our loan portfolio consisted of loans collateralized by various types of real estate. Substantially all of our
real estate collateral is located in California. So if there is a significant adverse decline in real estate values in California, the collateral
for our loans will provide less security. Real estate values could also be affected by, among other things, earthquakes, drought and
national disasters in our markets. Any such downturn could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
We depend on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified
persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the
combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel
and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly
dependent upon the abilities of our senior management team of Messrs. Smith, 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 primarily compete in northern and central California for loans, deposits and
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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 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 effect on our financial condition and results of operations.
Severe weather, natural disasters and other external events could adversely affect our business.
Our operations and our customer base are primarily located in northern and central California where natural and other disasters may
occur. These regions are known for being vulnerable to natural disasters and other risks, such as earthquakes, fires, droughts and floods,
the nature and severity of which may be impacted by climate change. These types of natural catastrophic events have at times disrupted
the local economies, our business and customers in these regions. 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. In addition, catastrophic events occurring in other
regions of the world may have an impact on our customers and in turn, on us. Our business continuity and disaster recovery plans may
not be successful upon the occurrence of one of these scenarios, and a significant catastrophic event anywhere in the world could
materially adversely affect our operating results.
The impacts of recent tax reform are not yet fully known, and these and other tax regulations could be subject to potential legislative,
administrative or judicial changes or interpretations.
The tax reform bill enacted on December 22, 2017 has had, and is expected to continue to have, far-reaching and significant effects on
us, our customers and the U.S. economy. The tax reform bill lowered the corporate federal statutory tax rate and eliminated or limited
certain federal corporate deductions. It is too early to evaluate all of the potential consequences of the tax reform bill, but such
consequences could include lower commercial customer borrowings, either due to the increase in cash flows as a result of the reduction
in the corporate statutory tax rate or the utilization by businesses in certain sectors of alternative non-debt financing and/or early
retirement of existing debt. Further, there can be no assurance that any benefits realized by us as a result of the reduction in the
corporate federal statutory tax rate will ultimately result in increased net income, whether due to decreased loan yields as a result of
competition or to other factors. Uncertainty also exists related to state and other taxing jurisdictions’ response to federal tax reform,
which will continue to be monitored and evaluated.
Federal income tax treatment of corporations may be further clarified and modified by other legislative, administrative or judicial
changes or interpretations at any time. Any such changes could adversely affect us.
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Market and Interest Rate Risk
Fluctuations in interest rates could reduce our profitability and affect the value of our assets.
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the
difference between interest earned on loans and leases and investments, and interest paid on deposits and borrowings. We expect that
we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various
interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market
interest rates than our interest-bearing liabilities, or vice-versa. In addition, the individual market interest rates underlying our loan and
lease and deposit products may not change to the same degree over a given time period. If market interest rates should move contrary to
our position, earnings may be negatively affected. In addition, loan and lease volume and quality and deposit volume and mix can be
affected by market interest rates as can the businesses of our clients. Changes in levels of market interest rates could have a material
adverse effect on our net interest spread, asset quality, origination volume, and overall profitability.
Market interest rates are beyond our control, and they fluctuate in response to general economic conditions and the policies of various
governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in
interest rates, may negatively affect our ability to originate loans and leases, the value of our assets and our ability to realize gains from
the sale of our assets, all of which ultimately could affect our earnings.
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 were successful in generating new loans during 2017, 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.
It is difficult to predict the continuing impact that the Dodd-Frank Act and the yet to be written implementing rules and regulations will
have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could
increase our interest expense.
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We operate in a highly regulated environment and we may be adversely affected by 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. We could be subject to regulatory enforcement actions if, any of our regulators
determines for example, that we have violated a law of regulation, engaged in unsafe or unsound banking practice or lack adequate
capital. 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 the
Company. The application of these laws, regulations and standards 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 our internal control over financial reporting 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.
We may be adversely affected by recent changes in U.S. tax laws.
The enactment of the Tax Cuts and Jobs Act (the “TCJA”) on December 22, 2017 made significant changes to the Internal Revenue
Code, many of which are highly complex and may require interpretations and implementing regulations. As a result of the TCJA’s
reduction of the corporate income tax rate from 35% to 21%, we were required to re-measure our net deferred tax assets and to record a
charge to income tax expense in the quarter ended December 31, 2017 of approximately $7.4 million, which amount is subject to
refinement in future periods as further information becomes available. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Income Taxes”. Furthermore, we may incur additional meaningful expenses (including
professional fees) as the TCJA is implemented, and the expected impact of certain aspects of the statute remains unclear and subject to
change.
The TCJA includes a number of provisions that will have an impact on the banking industry, borrowers and the market for residential
real estate. These changes include: (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage
loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense,
and (iv) a limitation on the deductibility of property taxes and state and local
14
income taxes. The TCJA may have an adverse effect on the market for and the valuation of residential properties, as well as on the
demand for such loans in the future, and could make it harder for borrowers to make their loan payments. The value of the properties
securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership. Such an
impact could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely
affect our business, financial condition and results of operations.
Risks Related to Growth and Expansion
Goodwill resulting from acquisitions may adversely affect our results of operations.
Goodwill and other intangible assets have increased substantially as a result of our acquisition of North Valley Bancorp in 2014 and
will further increase following our acquisition of FNBB. Potential impairment of goodwill and amortization of other intangible assets
could adversely affect our financial condition and results of operations. We assess our goodwill and other intangible assets and long-
lived assets for impairment annually and more frequently when required by U.S. GAAP. We are required to record an impairment
charge if circumstances indicate that the asset carrying values exceed their fair values. Our assessment of goodwill, other intangible
assets, or long-lived assets could indicate that an impairment of the carrying value of such assets may have occurred that could result in
a material, non-cash write-down of such assets, which could have a material adverse effect on our results of operations and future
earnings.
If we cannot attract deposits, our growth may be inhibited.
We plan to increase the level of our assets, including our loan portfolio. Our ability to increase our assets depends in large part on our
ability to attract additional deposits at favorable rates. We intend to seek additional deposits by offering deposit products that are
competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our
customers. We cannot assure that these efforts will be successful. Our inability to attract additional deposits at competitive rates could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
Existing and potential acquisitions may disrupt our business and dilute stockholder value.
On December 11, 2017, we entered into the Merger Agreement providing for our acquisition of FNBB and its wholly-owned
subsidiary, First National Bank of Northern California. The Merger is expected to close in the second quarter of 2018, subject to the
satisfaction of customary closing conditions, including the receipt of regulatory and shareholder approvals.
The success of the merger will depend on, among other things, our ability to realize the anticipated revenue enhancements and
efficiencies and to combine the businesses of the Company and FNBB in a manner that does not materially disrupt the existing
customer relationships of FNBB or result in decreased revenues resulting from any loss of customers and that permits growth
opportunities to occur. If we are not able to successfully achieve these objectives, the anticipated benefits of the Merger may not be
realized fully or at all or may take longer to realize than expected.
The Company and FNBB have operated and, until the completion of the Merger, will continue to operate, independently. It is possible
that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients,
customers, depositors and employees or to achieve the anticipated benefits of the Merger. Integration efforts between the two
companies could also divert management attention and resources.
These integration matters could have an adverse effect on each of the Company and FNBB the transition period and on the combined
company following completion of the Merger.
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. As a result, merger or acquisition discussions and, in some cases, negotiations may take place
and future mergers or acquisitions involving cash, debt or equity
15
securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore,
some dilution of our stock’s tangible book value and net income per common share may occur in connection with any future
transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence,
and/or other projected benefits from recent or future acquisitions could have a material adverse effect on our financial condition and
results of operations.
We cannot say with any certainty that we will be able to consummate, or if consummated, successfully integrate future acquisitions or
that we will not incur disruptions or unexpected expenses in integrating such acquisitions. In attempting to make such future
acquisitions, we anticipate competing with other financial institutions, many of which have greater financial and operational
resources. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including,
among other things:
•
•
•
•
•
•
•
incurring substantial expenses in pursuing potential acquisitions without completing such acquisitions,
exposure to potential asset quality issues of the target company,
losing key clients as a result of the change of ownership,
the acquired business not performing in accordance with our expectations,
difficulties and expenses arising in connection with the integration of the operations of the acquired business with our
operations,
difficulty in estimating the value of the target company,
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,
potential changes in banking or tax laws or regulations that may affect the target company,
potential disruption to our business, and
an acquisition may dilute our earnings per share, in both the short and long term, or it may reduce our tangible capital ratios.
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.
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, 2017, the Bank could have paid approximately $85,254,000 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.
16
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, 2017, directors and executive officers beneficially owned approximately 8.9% of our common stock and our
Employee Stock Ownership Plan (“ESOP”) owned approximately 5.1%. 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 beneficially owned by our board of directors, management, and the ESOP could make it difficult or expensive to obtain
majority support for shareholder proposals or potential acquisition proposals of us that our directors and officers oppose.
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing
shareholders.
In order to maintain our capital at desired or regulatory-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, 2017, 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 we can pay any dividends
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. A material weakness is a deficiency, or combination
17
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. A 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 controls, 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 controls. 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.
18
We rely on certain third-party vendors.
We are reliant upon certain third-party vendors to provide products and services necessary to maintain our day-to-day operations.
Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with applicable contractual
arrangements or service level agreements. We maintain a system of policies and procedures designed to monitor vendor risks including,
among other things, (i) changes in the vendor’s organizational structure, (ii) changes in the vendor’s financial condition, (iii) changes in
existing products and services or the introduction of new products and services, and (iv) changes in the vendor’s support for existing
products and services. While we believe these policies and procedures help to mitigate risk, the failure of an external vendor to perform
in accordance with applicable contractual arrangements or the service level agreements could be disruptive to our operations, which
could have a material adverse effect on our business and our financial condition and results of operations.
Our business is highly reliant on technology and our ability and our third party service providers to manage the operational risks
associated with technology.
Our business involves storing and processing sensitive consumer and business customer data. We depend on internal systems, third
party service providers, and outsourced technology to support these data storage and processing operations. Despite our efforts to ensure
the security and integrity of our systems, we may not be able to anticipate, detect or recognize threats to our systems or those of third
party service providers or to implement effective preventive measures against all cyber security breaches. Cyberattack techniques
change regularly and can originate from a wide variety of sources, including third parties who are or may be involved in organized
crime or linked to terrorist organizations or hostile foreign governments, and such third parties may seek to gain access to systems
directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users of our
systems. These risks may increase in the future as we continue to increase our mobile and other internet-based product offerings and
expands our internal usage of web-based products and applications. A cyber security breach or cyberattack could persist for a long time
before being detected and could result in theft of sensitive data or disruption of our transaction processing systems.
Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency
of our business operations. A material breach of customer data security may negatively impact our business reputation and cause a loss
of customers, result in increased expense to contain the event and/or require that we provide credit monitoring services for affected
customers, result in regulatory fines and sanctions and/or result in litigation. Cyber security risk management programs are expensive to
maintain and will not protect us from all risks associated with maintaining the security of customer data and our proprietary data from
external and internal intrusions, disaster recovery and failures in the controls used by our vendors. In addition, Congress and the
legislatures of states in which we operate regularly consider legislation that would impose more stringent data privacy requirements,
resulting in increased compliance costs.
A failure to implement technological advances could negatively impact our business.
The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services.
In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to
reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to
provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources than we do to invest in technological improvements. We may
not be able to effectively implement new technology-driven products and services or successfully market such products and services to
our customers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company is engaged in the banking business through 57 traditional branches, 9 in-store branches and 2 loan production offices in
26 counties in northern and central California including twelve offices in Shasta County, eight in Butte County, six in Humboldt
County, five in Nevada County, four in Sacramento and Stanislaus Counties, three in Placer and Siskiyou Counties, two each in Fresno,
Glenn, Mendocino, Sutter and Trinity Counties, and one each in Colusa, Contra Costa, Del Norte, 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, one administrative building with a branch location, five administrative
buildings, and one other building that it leases out. The Company leases thirty-six 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.
19
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 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 the date of filing the action.
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. This matter was
transferred to the Butte County Superior Court and consolidated with the case above, effective August 25, 2017.
As part of the mediations, which took place concurrently, the Bank agreed in principal to settle the two matters in a consolidated
settlement proceeding. The agreement was preliminarily approved by the court and notices were sent to the members of the purported
classes. After reviewing the received claims, on January 12, 2018, the court approved the final settlement agreement on both matters.
The total cost to the Bank was $1,469,000, of which $1,450,000 was previously accrued as of December 31, 2017 and 2016. These
matters will not be discussed in future filings.
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.
ITEM 4. MINE SAFETY DISCLOSURES
Inapplicable.
20
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:
2017:
Fourth quarter
Third quarter
Second quarter
First quarter
2016:
Fourth quarter
Third quarter
Second quarter
First quarter
High
$43.42
$40.75
$36.77
$37.38
$34.46
$28.40
$28.90
$27.44
Low
$37.86
$33.60
$33.05
$32.84
$25.49
$25.40
$24.60
$23.80
As of February 23, 2018 there were approximately 1,583 shareholders of record of the Company’s common stock. On February 23,
2018, the closing sales price was $38.29.
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, 2017 $85,254,000 was available for payment of dividends by the Bank to the Company, under applicable
laws and regulations. The Company paid cash dividends of $0.17 per common share in each of the quarters ended December 31, 2017,
September 30, 2017, June 30, 2017, and $0.15 per common share in each of the quarters ended March 31, 2017, December 31, 2016,
September 30, 2016, June 30, 2016, March 31, 2016.
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, 2017, 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 2017:
Period
Oct. 1-31, 2017
Nov. 1-30, 2017
Dec. 1-31, 2017
Total
(a) Total number
of shares purchased(1)
—
—
—
—
(b) Average price
paid per share
—
—
—
—
(c) Total number of
shares purchased as of
part of publicly
announced plans or
programs
—
—
—
—
(d) Maximum number
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.
21
The following graph presents the cumulative total yearly shareholder return from investing $100 on December 31, 2012, in each of
TriCo common stock, the Russell 3000 Index, and the SNL Western Bank Index. The SNL Western Bank Index compiled by SNL
Financial includes banks located in California, Oregon, Washington, Montana, Hawaii and Alaska with market capitalization similar to
that of TriCo’s. The amounts shown assume that any dividends were reinvested.
Index
TriCo Bancshares
Russell 3000 Index
SNL Western Bank Index
Equity Compensation Plans
Period Ending
12/31/12
100.00
100.00
100.00
12/31/13
172.66
133.55
140.70
12/31/14
153.12
150.32
168.86
12/31/15
173.61
151.04
174.96
12/31/16
220.88
170.28
193.96
12/31/17
249.10
206.26
216.26
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, 2017. 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
—
567,686
567,686
22
(b)
Weighted average
exercise price of
outstanding options,
warrants and rights
—
16.84
16.84
$
$
(c) Number of securities
remaining available for
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
—
527,039
527,039
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our consolidated financial statements. This data should be read in
connection with our consolidated financial statements and the related notes located at Item 8 of this report.
TRICO BANCSHARES
Financial Summary
(in thousands, except per share amounts)
Year ended December 31,
Interest income
Interest expense
Net interest income
Provision for (benefit from) loan losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Per share:
Dividends paid
Book value at December 31
Tangible book value at December 31
Average common shares outstanding
Average diluted common shares outstanding
Shares outstanding at December 31
At December 31:
Loans, net of allowance
Total assets
Total deposits
Other borrowings
Junior subordinated debt
Shareholders’ equity
Financial Ratios:
For the year:
Return on average assets
Return on average equity
Net interest margin1
Net loan losses (recoveries) to average loans
Efficiency ratio2
Average equity to average assets
Dividend payout ratio
At December 31:
Equity to assets
Total capital to risk-adjusted assets
2017
$ 181,402
6,798
174,604
89
50,021
147,024
77,512
36,958
40,554
$
$
$
$
$
$
1.77
1.74
0.66
22.03
19.01
22,912
23,250
22,956
$2,984,842
4,761,315
4,009,131
122,166
56,858
505,808
2016
$ 173,708
5,721
167,987
2015
$ 161,414
5,416
155,998
2014
$ 121,115
4,681
116,434
2013
$ 106,560
4,696
101,864
(5,970)
44,563
145,997
72,523
27,712
44,811
1.96
1.94
0.60
20.87
17.77
22,814
23,087
22,868
$
$
$
$
$
$
(2,210)
45,347
130,841
72,714
28,896
43,818
1.93
1.91
0.52
19.85
16.81
22,750
22,998
22,775
$
$
$
$
$
$
(4,045)
34,516
110,379
44,616
18,508
26,108
1.47
1.46
0.44
18.41
15.31
17,716
17,923
22,715
$
$
$
$
$
$
(715)
36,829
93,604
45,804
18,405
27,399
1.71
1.69
0.42
15.61
14.59
16,045
16,197
16,077
$
$
$
$
$
$
$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
0.89%
8.10%
4.22%
0.08%
64.7%
10.99%
37.3%
10.62%
14.07%
1.02%
9.46%
4.23%
(0.09)%
67.9%
10.84%
30.6%
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%
1
2
Fully taxable equivalent.
Noninterest expense divided by the sum of fully taxable equivalent net interest income and noninterest income.
23
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
(GAAP). 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.
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.
24
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):
Net interest income
(Provision for) benefit from reversal of 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
(ROAE)
Net income as a percentage of average total assets (ROAA)
2017
$ 174,604
Year ended December 31,
2016
$ 167,987
2015
$ 155,998
(89)
50,021
(147,024)
(36,958)
$ 40,554
1.77
$
5,970
44,563
(145,997)
(27,712)
$ 44,811
1.94
$
2,210
45,347
(130,841)
(28,896)
$ 43,818
1.91
$
8.10%
0.89%
9.46%
1.02%
10.04%
1.11%
The Company uses certain non-GAAP measures to provide supplemental information regarding performance. The Company believes
that presenting net income, effective tax rate, return on average assets (ROAA), return on average equity (ROAE), and earnings per
common share, excluding the impact of merger & acquisition expenses and the effect of changes in tax rates, provides additional clarity
to the users of the financial statements regarding core financial performance. The following table presents a comparison of net income,
effective tax rate, ROAA, ROAE, and earnings per common share as reported, and as adjusted for the impact of merger & acquisition
expenses and changes in tax rates, for the periods indicated:
(amounts in thousands, except per share amounts)
Net income
Effect of merger & acquisition expenses
Effect of income tax rate change
Adjusted net income
Income tax expense
Effect of non-deductible merger & acquisition expenses
Effect of income tax rate change
Adjusted income tax expense
Effective tax rate
Adjusted effective tax rate
ROAA
Adjusted ROAA
ROAE
Adjusted ROAE
Earnings per common share:
Basic
Diluted
Adjusted earnings per common share:
Basic
Diluted
Merger & acquisition expenses
Non-deductible merger & acquisition expenses
Average assets
Average equity
Weighted average shares
Weighted average diluted shares
$
$
$
$
$
$
2017
40,554
491
7,416
48,462
36,958
(184)
(7,416)
29,358
$
Year ended December 31,
2016
44,811
454
—
45,266
27,712
—
—
27,712
$
$
$
47.7%
37.9%
0.89%
1.06%
8.10%
9.68%
1.77
1.74
38.2%
38.2%
1.02%
1.04%
9.46%
9.55%
$
$
1.96
1.94
$
$
$
1.98
1.96
784
—
$4,373,022
$ 473,829
22,814
23,086
2.12
$
2.08
$
530
$
$
438
$4,554,505
$ 500,653
22,912
23,250
25
2015
43,818
340
—
44,158
28,896
—
—
28,896
39.7%
39.7%
1.11%
1.11%
10.04%
10.12%
1.93
1.91
$
$
$
$
$
$
$
$
$
1.94
1.92
586
—
$3,963,998
$ 436,301
22,750
22,998
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,
2016
2015
2017
$181,402
(6,798)
174,604
2,499
$177,103
$173,708
(5,721)
167,987
2,329
$170,316
$161,414
(5,416)
155,998
905
$156,903
4.22%
4.23%
4.32%
Net interest income (FTE) for the year ended December 31, 2017 increased $6,787,000 (4.0%) to $177,103,000 from $170,316,000
during the year ended December 31, 2016. The increase in net interest income (FTE) was due primarily to a $212,930,000 (8.1%)
increase in the average balance of loans to $2,842,659,000, and a 9 basis point increase in the average yield on investments–taxable that
were partially offset by a 21 basis point decrease in the average yield on loans, and a 3 basis point increase in the average rate paid on
interest bearing liabilities. The $212,930,000 increase in average loan balances compared to the prior year was due primarily to net
organic (i.e., not purchased) loan growth that was funded by deposit growth and the use of interest bearing cash at banks and other
borrowings. The 9 basis point increase in the average yield on investments-taxable was due to increased market rates on investment
purchased, and slower prepay speeds on the Company’s mortgage backed securities (“MBS”) investments in 2017 compared to 2016.
Slower prepay speeds for MBS investments with net purchase premiums result in higher yields, as was the case for the Company’s
MBS investments during 2017 compared to 2016. Accounting for 12 basis points of the 21 point decrease in the average yield on loans
from 2016 to 2017 was the recovery of $2,311,000 of loan interest income from the sale of loans in 2016. A decrease in purchased loan
discounts accretion accounted for 5 basis points of the 21 point decrease in average loan yield, and the remaining 4 basis point decrease
in average loan yield was due primarily to lower average yields on new loans compared to existing loans, primarily during the first half
of 2017 that was somewhat alleviated in the second half of 2017 and included the effects of 25 basis point increases in the Federal
Funds Rate and the Prime Lending Rate during each of December 2016, and March, June, and December 2017. The 3 basis point
increase in the average rate paid on interest-bearing liabilities was due primarily to increased rates paid on time deposits, other
borrowings, and junior subordinated debt.
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 $13,264,000 and $5,461,000,
respectively, to net interest income (FTE) while the decreases in average loan and investments taxable yields reduced net interest
income (FTE) during 2016 by $4,104,000 and $1,602,000, respectively, compared to 2015. The increase in average investments
nontaxable yield increased net interest income (FTE) during 2016 by $94,000 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.
26
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.
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 2017 and 2016.
Summary of Average Balances, Yields/Rates and Interest Differential – Yield Tables
The following tables present, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and
shareholders’ equity, the amounts of interest income from average earning assets and resulting yields, and the amount of interest
expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from
loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and
certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current
statutory tax rate (dollars in thousands):
Assets
Loans
Investment securities - taxable
Investment securities - nontaxable
Cash at Federal Reserve and other banks
Total earning assets
Other assets
Total assets
Liabilities and shareholders’ equity
Interest-bearing demand deposits
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Noninterest-bearing demand
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread (1)
Net interest income and interest margin (2)
Year ended December 31, 2017
Interest
income/expense
Rates
earned/paid
Average
balance
$2,842,659
1,087,302
136,240
126,432
4,192,633
361,872
$4,554,505
$ 939,516
1,368,705
317,724
41,252
56,762
2,723,959
1,262,592
67,301
500,653
$4,554,505
$
146,794
29,096
6,664
1,347
183,901
744
1,683
1,531
305
2,535
6,798
5.16%
2.68%
4.89%
1.07%
4.39%
0.08%
0.12%
0.48%
0.74%
4.47%
0.25%
$
177,103
4.14%
4.22%
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing
liabilities.
(2) Net interest margin is computed by dividing net interest income by total average earning assets.
27
Summary of Average Balances, Yields/Rates and Interest Differential – Yield Tables (continued)
Assets
Loans
Investment securities - taxable
Investment securities - nontaxable
Cash at Federal Reserve and other banks
Total earning assets
Other assets
Total assets
Liabilities and shareholders’ equity
Interest-bearing demand deposits
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Noninterest-bearing demand
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread (1)
Net interest income and interest margin (2)
Assets
Loans
Investment securities - taxable
Investment securities - nontaxable
Cash at Federal Reserve and other banks
Total earning assets
Other assets
Total assets
Liabilities and shareholders’ equity
Interest-bearing demand deposits
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Noninterest-bearing demand
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread (1)
Net interest income and interest margin (2)
Year ended December 31, 2016
Interest
income/expense
Rates
earned/paid
Average
balance
$
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%
$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
$
170,316
4.15%
4.23%
Year ended December 31, 2015
Interest
income/expense
Rates
earned/paid
Average
balance
$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%
(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.
28
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:
2017 over 2016
Yield/
Rate
Volume
2016 over 2015
Yield/
Rate
Total
Total
Volume
(dollars in thousands)
Increase (decrease) in interest income:
Loans
Investments - taxable
Investments - nontaxable
Cash at Federal Reserve and other banks
Total
Increase (decrease) in interest expense:
Demand deposits (interest-bearing)
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total
$11,434
593
499
(449)
12,077
$(5,726) $5,708
1,518
454
184
(4,213) 7,864
925
(45)
633
$13,264 $(4,014) $ 9,250
157
(1,602)
3,796
515
(5,061) 13,718
1,759
3,702
54
18,779
94
461
31
32
(99)
11
8
(17)
303
(2)
272
(34)
273
285
298
1,094
174
296
306
1,077
$(5,307) $6,787
42
193
9
5
8
257
(35)
210
(126)
5
251
305
$18,522 $(5,109) $13,413
(77)
17
(135)
—
243
48
Increase (decrease) in net interest income
$12,094
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, 2017 and 2016” 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, 2017 and 2016.
The Company provided $89,000 for loan losses during the year ended December 31, 2017 versus a $5,970,000 reversal of provision for
loan losses during the year ended December 31, 2016. The increase in provision for loan losses for the year ended December 31, 2017
compared to the year ended December 31, 2016 was due primarily to an increase of $4,266,000 (21.2%) in nonperforming loans during
2017 compared to a $16,991,000 (45.8%) decrease in nonperforming loans during 2016, and net charge-offs of $2,269,000 during 2017
compared to net recoveries of $2,462,000 during 2016. As shown in the Table labeled “Allowance for Loan Losses - year ended
December 31, 2017” at Note 5 in Item 8 of Part II of this report residential and commercial 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, 2017. The level of provision, or reversal of provision, for loan losses of each loan category during the year ended
December 31, 2017 was due primarily to a decrease in the required allowance for loan losses as of December 31, 2017 when compared
to the required allowance for loan losses as of December 31, 2016 less net charge-offs during the year ended December 31, 2017. All
categories of loans except C & I loans experienced a decrease in the required allowance for loan losses during the year ended
December 31, 2017. These decreases in required allowance for loan losses were due primarily to improvements in estimated cash flows
and collateral values for impaired loans, and reductions in historical loss factors that were offset by increases in loan balances and
nonperforming loans in some loan categories. For details of the change in nonperforming loans during the year ended December 31,
2017 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2017”
and “Changes in nonperforming assets during the three months ended December 31, September 30, June 30, and March 31, 2017”
under the heading “Asset Quality and Non-Performing Assets” below.
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
29
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.
The provision for loan losses related to Originated and PNCI loans is based on management’s evaluation of inherent risks in these loan
portfolios and a corresponding analysis of the allowance for loan losses. The provision for loan losses related to PCI loan portfolio is
based on changes in estimated cash flows expected to be collected on PCI loans. Additional discussion on loan quality, our procedures
to measure loan impairment, and the allowance for loan losses is provided under the heading “Asset Quality and Non-Performing
Assets” below.
Management re-evaluates the loss ratios and other assumptions used in its calculation of the allowance for loan losses for its Originated
and PNCI loan portfolios on a quarterly basis and makes changes as appropriate based upon, among other things, changes in loss rates
experienced, collateral support for underlying loans, changes and trends in the economy, and changes in the loan mix. Management also
re-evaluates expected cash flows used in its accounting for its PCI loan portfolio, including any required allowance for loan losses, on a
quarterly basis and makes changes as appropriate based upon, among other things, changes in loan repayment experience, changes in
loss rates experienced, and collateral support for underlying loans.
Noninterest Income
The following table summarizes the Company’s noninterest income for the periods indicated (dollars in thousands):
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
Gain on sale of investments
Lease brokerage income
Gain on sale of foreclosed assets
Change in indemnification asset
Sale of customer checks
Life insurance benefit in excess of cash value
Loss on disposal of fixed assets
Other
Total other noninterest income
Total noninterest income
2017
$16,056
16,727
3,282
2,076
(718)
Years Ended December 31,
2016
$14,365
15,859
3,121
2,065
(2,184)
33,226
4,037
2,329
2,717
—
711
262
(493)
408
238
(147)
1,275
11,337
$44,563
37,423
3,109
2,729
2,685
961
782
711
490
372
108
(142)
793
12,598
$50,021
2015
$14,276
13,364
2,977
2,164
(701)
32,080
3,064
3,349
2,786
—
712
991
(207)
492
155
(129)
2,054
13,267
$45,347
Noninterest income increased $5,458,000 (12.2%) to $50,021,000 in 2017 compared to 2016. The increase in noninterest income was
due primarily to an increase in service charges on deposit accounts of $1,691,000 (11.8%) to $16,056,000, an increase in ATM fees and
interchange revenue of $868,000 (5.5%) to $16,727,000, an increase of $1,466,000 in change in value of mortgage servicing rights, a
$961,000 increase in gain on sale of investments, which were partially offset by a $928,000 (23.0%) decrease in gain on sale of loans,
and a $482,000 (37.8%) decrease in other noninterest income. The $1,691,000 increase in service charges on deposit accounts was due
primarily to increased fee generation from both consumer and business checking customers. The $868,000 increase in ATM fees and
interchange revenue was due primarily to the Company’s continued focus in this area, and growth in electronic payments volume. The
$1,466,000 improvement in change in value of mortgage servicing rights (MSRs) was due primarily to a decrease in the market rate of
return for such servicing
30
rights thus increasing their value at December 31, 2017 compared to December 31, 2016. The $961,000 gain on sale of investment
securities was due to the Company’s decision to sell $24,796,000 of investment securities during the three months ended September 30,
2017 while no investment sales were made during 2016. The $983,000 increase in change in indemnification agreement was the result
of the termination of its indemnification agreements with the FDIC during 2017. The $928,000 decrease in gain on sale of loans was
due primarily to reduced residential mortgage refinance activity in 2017 compared to 2016.
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 Expense
The following table summarizes the Company’s other noninterest expense for the periods indicated (dollars in thousands):
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
Data processing and software
Equipment
ATM & POS network charges
Advertising
Professional fees
Telecommunications
Assessments
Operational losses
Intangible amortization
Postage
Courier service
Change in reserve for unfunded commitments
Foreclosed assets expense
Provision for foreclosed asset losses
Legal settlement
Merger & acquisition expense
Miscellaneous other
Total other noninterest expense
Total noninterest expense
31
2017
$ 54,589
9,227
19,114
82,930
10,894
10,448
7,141
4,752
4,101
3,745
2,713
1,676
1,394
1,389
1,296
1,035
445
231
162
—
530
12,142
64,094
$147,024
Years Ended December 31,
2016
$ 53,169
8,872
18,683
80,724
10,139
8,846
6,597
4,999
3,829
5,409
2,749
2,105
1,564
1,377
1,603
998
244
266
140
1,450
784
12,174
65,273
$145,997
2015
$ 46,822
6,964
17,619
71,405
10,126
7,670
5,997
4,190
3,992
4,545
3,007
2,572
737
1,157
1,296
1,154
330
490
502
—
586
11,085
59,436
$130,841
Merger and acquisition expense:
Base salaries, net of loan origination costs
Data processing and software
Professional fees
Other
Total merger expense
Average full time equivalent staff
Noninterest expense to revenue (FTE)
—
—
$ 513
17
$ 530
1,000
64.7%
$ 187
—
342
255
$ 784
999
67.9%
—
$ 108
120
358
$ 586
949
64.7%
Salary and benefit expenses increased $2,206,000 (2.7%) to $82,930,000 during the year ended December 31, 2017 compared to the
year ended December 31, 2016. Base salaries, incentive compensation and benefits & other compensation expense increased
$1,420,000 (2.7%), 355,000 (4.0%), and 431,000 (2.3%), respectively, to $54,589,000, $9,227,000 and $19,114,000, respectively,
during the year ended December 31, 2017. The increases in these categories of salary and benefits expense are primarily due to annual
merit increases. The average number of full-time equivalent staff increased 1 (0.1%) from 999 during the year ended December 31,
2016 to 1,000 for the year ended December 31, 2017.
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.
Other noninterest expense decreased $1,179,000 (1.8%) to $64,094,000 during the year ended December 31, 2017 compared to the year
ended December 31, 2016. The decrease in other noninterest expense was due primarily to a $1,664,000 (30.8%) decrease in
professional fees, and a $1,450,000 decrease in litigation contingent liability expense, that were partially offset by a $1,602,000 (18.1%)
increase in data processing and software expense, a $755,000 (7.4%) increase in occupancy expense, and a $544,000 (8.2%) increase in
equipment expense. The $1,664,000 decrease in professional fees was due primarily to consulting fees related to system conversions
during 2016. The $1,450,000 decrease in litigation contingent liability expense was due to a single specific liability incurred during
2016. The $1,602,000 increase in data processing and software expense was due primarily to data system outsourcing and
enhancements that occurred throughout 2016, and early 2017. The $755,000 increase in occupancy expense was due primarily to
increases in building maintenance and remodel, and lease expense. The $544,000 increase in equipment expense was due primarily to
increased depreciation expense related to technology and other equipment, and furniture.
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.
32
Income Taxes
On December 22, 2017, President Donald Trump signed into law “H.R.1”, commonly known as the “Tax Cuts and Jobs Act”, which
among other items reduces the Federal corporate tax rate from 35% to 21% effective January 1, 2018. While this decrease in the Federal
corporate tax rate is expected to have a positive impact on the Company’s net income beginning January 1, 2018, the enactment of the
law during 2017 required the Company to re-measure its deferred tax assets and liabilities. The Company concluded that this caused the
Company’s net deferred tax asset to be reduced, and Federal income tax expense to be increased by $7,416,000 during the fourth
quarter of 2017. Additionally, amortization expense of the low income housing tax credit investments was accelerated by $226,000.
The provisions for income taxes applicable to income before taxes for the years ended December 31, 2017, 2016 and 2015 differ from
amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory
federal income tax rate are reconciled as follows:
Federal statutory income tax rate
State income taxes, net of federal tax benefit
Tax Cuts and Jobs Act impact on deferred measurement
Tax-exempt interest on municipal obligations
Tax-exempt life insurance related income
Equity compensation
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
Years Ended December 31,
2016
35.0%
6.8
—
(1.8)
(1.3)
—
(1.3)
0.8
0.1
—
(0.1)
38.2%
2017
35.0%
6.9
9.6
(1.9)
(1.3)
(1.2)
(2.3)
2.1
0.1
0.2
0.5
47.7%
2015
35.0%
6.6
—
(0.7)
(1.3)
—
(0.4)
—
0.1
—
0.4
39.7%
The effective tax rate on income was 47.7%, 38.2%, and 39.7% in 2017, 2016, and 2015, respectively. The effective tax rate was
greater than the Federal statutory tax rate due to State tax expense of $8,178,000, $7,576,000, and $7,412,000, respectively, in these
years, and a $7,416,000 Federal tax expense in 2017 due to the re-measurement of the Company’s net deferred tax asset resulting from
the Federal tax law change that occurred in December; and were partially offset by Federal tax-exempt investment income of
$4,165,000, $3,881,000, and $1,509,000, respectively, Federal and State tax-exempt income of $2,792,000, $2,955,000, and
$2,786,000, respectively, from increase in cash value and gain on death benefit of life insurance, low income housing tax credits of
$142,000, $197,000, and $0, respectively, and equity compensation excess tax benefits of $906,000, $0, and $0, respectively. The low
income housing tax credits and the equity compensation excess tax benefits represent direct reductions in tax expense. The items noted
above resulted in an effective combined Federal and State income tax rate that differed from the combined Federal and State statutory
income tax rate of approximately 42.0% during 2017, 2016, and 2015. Based on the Tax Cuts and Jobs Act, the Company expects its
combined statutory income tax rate to be 29.6%.
Financial Condition
Investment Securities
The following table presents the available for sale investment securities portfolio by major type as of the dates indicated:
(In thousands)
Investment securities available for sale (at fair value):
Obligations of US government corporations and agencies
Obligations of states and political subdivisions
Corporate bonds
Marketable equity securities
Total investment securities available for sale
2017
$604,789
123,156
—
2,938
$730,883
Year ended December 31,
2015
2016
2014
$429,678
117,617
—
2,938
$550,233
$313,682
88,218
—
2,985
$404,885
$75,120
3,175
1,908
3,002
$83,205
2013
$ 97,143
5,589
1,915
—
$104,647
Investment securities available for sale increased $180,650,000 to $730,883,000 as of December 31, 2017, compared to December 31,
2016. This increase is attributable to purchases of $265,806,000, maturities and principal repayments of $63,942,000, sales of
investments with a cost basis of $24,796,000, a net increase in the fair value of investments securities available for sale of $5,461,000,
and amortization of net purchase price premiums of $1,879,000.
33
The following table presents the held to maturity investment securities portfolio by major type as of the dates indicated:
(In thousands)
Investment securities held to maturity (at cost):
Obligations of US government corporations and agencies
Obligations of states and political subdivisions
Total investment securities held to maturity
2017
Year ended December 31,
2015
2016
2014
2013
$500,271 $597,982 $711,994 $660,836 $227,864
12,640
14,536
$514,844 $602,536 $726,530 $676,426 $240,504
15,590
14,573
14,554
Investment securities held to maturity decreased $87,692,000 to $514,844,000 as of December 31, 2017, compared to December 31,
2016. This decrease is attributable to principal repayments of $86,371,000 and amortization of net purchase price discounts/premiums
of $1,321,000.
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, 2017 and December 31, 2016. The entire balance of restricted equity
securities at December 31, 2017 and December 31, 2016 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 fees, at the dates indicated:
(dollars in thousands)
Real estate mortgage
Consumer
Commercial
Real estate construction
Total loans, net of fees
2017
$2,300,322
356,874
220,412
137,557
$3,015,165
34
2016
$2,057,824
362,303
217,047
122,419
$2,759,593
Year ended December 31,
2015
$1,811,832
395,283
194,913
120,909
$2,522,937
2014
$1,615,359
417,084
174,945
75,136
$2,282,524
2013
$1,107,863
383,163
131,878
49,103
$1,672,007
The following table shows the Company’s loan balances, including net deferred loan fees, as a percentage of total loans at the dates
indicated:
Real estate mortgage
Consumer
Commercial
Real estate construction
Total loans, net of fees
2017
76.3%
11.8%
7.3%
4.6%
100.0%
Year ended December 31,
2015
71.8%
15.7%
7.7%
4.8%
100.0%
2016
74.6%
13.1%
7.9%
4.4%
100.0%
2014
70.7%
18.3%
7.7%
3.3%
100.0%
2013
66.3%
22.9%
7.9%
2.9%
100.0%
At December 31, 2017 loans, including net deferred loan costs, totaled $3,015,165,000 which was a 9.3% ($255,572,000) increase over
the balances at the end of 2016. Demand for all categories of loans was strong to moderate during 2017.
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.
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 original 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
35
until the borrower demonstrates a sustained period of performance which the Company generally believes to be six consecutive months
of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with
respect to their restructured principal balance.
Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses
inherent in the Company’s originated loan portfolio. This is maintained through periodic charges to earnings. These charges are
included in the Consolidated Statements of Income as provision for loan losses. All specifically identifiable and quantifiable losses are
immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company
and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company’s
allowance for originated loan losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio.
The Company formally assesses the adequacy of the allowance for originated loan losses on a quarterly basis. Determination of the
adequacy is based on ongoing assessments of the probable risk in the outstanding originated loan portfolio, and to a lesser extent the
Company’s originated loan commitments. These assessments include the periodic re-grading of credits based on changes in their
individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors,
changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are
initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when
identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at
least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants
specifically hired for this purpose and by various bank regulatory agencies.
The Company’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for
impaired originated loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental factors
(e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools were based on historical loss experience by
product type and prior risk rating.
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
Community Bank, N.A. (“Granite”) in 2010 and Citizens Bank of Northern California (“Citizens”) in 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
36
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.
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, 2017, 2016, and
2015, if all such loans had been current in accordance with their original terms, totaled $1,067,000, $783,000, and $1,840,000,
respectively. Interest income actually recognized on these originated loans during the years ended December 31, 2017, 2016, and 2015
was $530,000, $377,000, and $170,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized
during the years ended December 31, 2017, 2016, and 2015, if all such loans had been current in accordance with their original terms,
totaled $73,000, $178,000, and $386,000, respectively. Interest income actually recognized on these PNCI loans during the years ended
December 31, 2017, 2016, and 2015 was $18,000, $11,000, and $205,000, respectively.
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.
37
The following table set 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
2017
$20,937
3,176
24,113
281
24,394
3,226
—
$27,620
2016
$17,677
2,451
20,128
—
20,128
3,763
223
$24,114
December 31,
2015
$31,033
6,086
37,119
—
37,119
5,369
—
$42,488
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
U.S. government, including its agencies and its government-
sponsored agencies, guaranteed portion of nonperforming loans
$
Indemnified portion of covered foreclosed assets
Nonperforming assets to total assets
Nonperforming loans to total loans
Allowance for loan losses to nonperforming loans
Allowance for loan losses, unamortized loan fees, and discounts to
358
—
0.58%
0.81%
124%
$
$
911
218
0.53%
0.73%
161%
$
28
—
1.01%
1.47%
97%
$
$
123
356
1.88%
2.08%
77%
$
$
101
539
2.30%
3.18%
72%
loan principal balances owed
0.77%
2.09%
2.69%
3.31%
4.09%
The following tables set forth the amount of the Bank’s nonperforming assets as of the dates indicated. For purposes of the following
tables, “PCI – other” loans that are 90 days past due and still accruing are not considered nonperforming loans. “Performing nonaccrual
loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment
in full of both principal and interest is not expected, and are not well secured and in the process of collection:
(dollars in thousands)
Performing nonaccrual loans
Nonperforming nonaccrual loans
Total nonaccrual loans
Originated loans 90 days past due and still accruing
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
U.S. government, including its agencies and its
Originated
$ 12,942
2,520
15,462
—
15,462
1,836
—
$ 17,298
PNCI
$1,305
158
1,463
281
1,744
—
—
$1,744
December 31, 2017
PCI – cash basis
2,056
$
13
2,069
—
2,069
—
—
2,069
$
PCI - other
$ 4,634
485
5,119
—
5,119
1,390
—
$ 6,509
Total
$20,937
3,176
24,113
281
24,394
3,226
—
$27,620
government-sponsored agencies, guaranteed portion of
nonperforming loans
$
Indemnified portion of covered foreclosed assets
Nonperforming assets to total assets
Nonperforming loans to total loans
Allowance for loan losses to nonperforming loans
Allowance for loan losses, unamortized loan fees, and
discounts to loan principal balances owed
358
—
0.36%
0.57%
188%
—
—
0.04%
0.56%
53%
—
—
0.04%
100.0%
1%
—
—
0.14%
37.94%
5%
$
358
—
0.58%
0.81%
124%
0.32%
2.22%
64.71%
22.10%
0.77%
38
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
PNCI
$2,131
703
2,834
—
2,834
—
—
$2,834
$
December 31, 2016
PCI – cash basis
2,983
$
—
2,983
—
2,983
—
—
2,983
$
$
PCI - other
$ 1,417
—
$ 1,417
—
$ 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
Nonperforming assets to total assets
Nonperforming loans to total loans
Allowance for loan losses to nonperforming loans
Allowance for loan losses, unamortized loan fees, and
discounts to loan principal balances owed
911
—
0.34%
0.55%
218%
—
—
0.06%
0.75%
59%
—
—
0.07%
100.00%
1%
$
—
218
0.07%
6.42%
189%
$
$
911
218
0.53%
0.73%
161%
1.48%
2.98%
64.18%
24.44%
2.09%
The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2017:
(dollars in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial
Construction:
Residential
Commercial
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
Balance at
December 31,
2017
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
December 31,
2016
$
3,739 $ 3,416 $
1 $
(123) $
11,820
11,715
45
(10,439)
(60) $
(186)
(127) $ 183
258
(466)
$
449
10,893
3,482
1,636
11
3,706
—
—
24,394
3,226
—
1,234
1,701
653
5,292
1,118
—
25,129
—
—
$
27,620 $25,129 $
424
54
—
42
(2,139)
(660)
(43)
(2,712)
(25)
—
—
—
566
—
—
566 $(18,301) $
(16,141)
(1,938)
(223)
(98)
(332)
(637)
(1,444)
(1,104)
—
(3,861)
(26)
—
(3,886)
(550)
(140)
—
(144)
—
—
(1,427)
1,427
—
—
(326)
143
—
(258)
—
—
—
—
—
—
$
4,937
870
38
2,930
11
—
20,128
3,763
223
24,114
The table above does not include deposit overdraft charge-offs.
39
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, 2017. These tables and narratives are presented in chronological order:
Changes in nonperforming assets during the three months ended December 31, 2017
(dollars in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial (C&I)
Construction:
Residential
Commercial
Total nonperforming loans
Noncovered foreclosed assets
Total nonperforming assets
$
Balance at
December 31,
2017
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
September 30,
2017
$
3,739
11,820
$
830
6,318
$
1
38
$
(31)
(6,488)
$
$
—
(16)
3,482
1,636
11
3,706
—
—
24,394
3,226
27,620
701
510
198
2,290
—
—
10,847
—
$10,847
$
64
54
—
39
—
—
196
—
196
(157)
(386)
(4)
(224)
—
—
(7,290)
(683)
$ (7,973)
$
—
(1)
(202)
(256)
—
—
(475)
—
(475)
(127)
(381)
(88)
(98)
—
(144)
—
—
(838)
838
—
—
—
$
3,066
12,349
$
(57)
57
—
—
—
—
—
—
—
$
3,019
1,500
19
2,001
—
—
21,954
3,071
25,025
The table above does not include deposit overdraft charge-offs.
Nonperforming assets increased during the fourth quarter of 2017 by $2,595,000 (10.4%) to $27,620,000 at December 31, 2017
compared to $25,025,000 at September 30, 2017. The increase in nonperforming assets during the fourth quarter of 2017 was primarily
the result of new nonperforming loans of $10,847,000, and advances on nonperforming loans of $196,000, that were partially offset by
sales or upgrades of nonperforming loans to performing status totaling $7,290,000, dispositions of foreclosed assets totaling $683,000,
and loan charge-offs of $475,000.
The $10,847,000 in new nonperforming loans during the fourth quarter of 2017 was comprised of increases of $830,000 on four
residential real estate loans, $6,318,000 on four commercial real estate loans, $1,211,000 on nine home equity lines and loans, $198,000
on 30 consumer loans, and $2,290,000 on 11 C&I loans.
The $830,000 in new nonperforming residential real estate loans was primarily made up of one loan in the amount of $345,000 secured
by a single family property in northern California. The $6,318,000 in new nonperforming CRE loans was primarily comprised of two
loans in the amount of $5,178,000 secured by commercial office properties in northern California, one loan in the amount of $793,000
secured by a medical office building in northern California, one loan in the amount of $381,000 secured by residential development
land in northern California, and one loan in the amount of $347,000 secured by commercial retail real estate in northern California. The
$2,290,000 in new nonperforming C&I loans was primarily comprised of two loans totaling $1,865,000 within a single relationship
secured by general business assets in central California, and one loan in the amount of $290,000 secured by general business assets in
northern California. Related charge-offs are discussed below.
Loan charge-offs during the three months ended December 31, 2017
In the fourth quarter of 2017, the Company recorded $475,000 in loan charge-offs and $153,000 in deposit overdraft charge-offs less
$461,000 in loan recoveries and $66,000 in deposit overdraft recoveries resulting in $101,000 of net charge-offs. Primary causes of the
loan charges taken in the fourth quarter of 2017 were gross charge-offs of $16,000 on a single commercial real estate loan, $1,000 on
one equity loan, $202,000 on 33 other consumer loans, and $256,000 on twelve C&I loans.
Total charge-offs were comprised of individual charges of less than $250,000 each. Generally losses are triggered by non-performance
by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying
collateral less any estimated costs associated with the disposition of the collateral.
40
Changes in nonperforming assets during the three months ended September 30, 2017
(dollars in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial (C&I)
Construction:
Residential
Commercial
Balance at
September 30,
2017
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
June 30,
2017
$
3,066
12,349
$1,144
3,323
$
137
709
143
1,189
33
3,019
1,500
19
2,001
—
—
21,954
3,071
25,025
—
7
—
—
—
3
$
(43)
(486)
$
(448)
(103)
(24)
(332)
—
—
(1,436)
(325)
$ (1,761)
$
$
(60)
(20)
(13)
(94)
(174)
(291)
(33)
—
(685)
(135)
(820)
—
—
—
(42)
—
—
—
—
(42)
42
—
183
123
$ 1,842
9,402
(210)
27
—
(123)
—
—
—
—
—
3,553
1,003
74
1,555
—
—
17,429
3,489
$ 20,918
Total nonperforming loans
Noncovered foreclosed assets
Total nonperforming assets
$
6,678
—
$6,678
$
10
—
10
The table above does not include deposit overdraft charge-offs.
Nonperforming assets increased during the third quarter of 2017 by $4,107,000 (19.6%) to $25,025,000 at September 30, 2017
compared to $20,918,000 at June 30, 2017. The increase in nonperforming assets during the third quarter of 2017 was primarily the
result of new nonperforming loans of $6,678,000, and advances on nonperforming loans of $10,000, that were partially offset by sales
or upgrades of nonperforming loans to performing status totaling $1,436,000, dispositions of foreclosed assets totaling $325,000, loan
charge-offs of $685,000, and write-downs on foreclosed assets of $135,000.
The $6,678,000 in new nonperforming loans during the third quarter of 2017 was comprised of increases of $1,144,000 on three
residential real estate loans, $3,323,000 on five commercial real estate loans, $846,000 on 10 home equity lines and loans, $143,000 on
21 consumer loans, $1,189,000 on 15 C&I loans, and $33,000 on one residential construction loan.
The $1,144,000 in new nonperforming residential real estate loans was primarily made up of one loan in the amount of $939,000
secured by a single family property in northern California. The $3,323,000 in new nonperforming CRE loans was primarily comprised
of two loans secured by commercial office properties in northern California. The $1,189,000 in new nonperforming C&I loans was
primarily comprised of four loans within a single relationship secured by general business assets in northern California. Related charge-
offs are discussed below.
Loan charge-offs during the three months ended September 30, 2017
In the third quarter of 2017, the Company recorded $685,000 in loan charge-offs and $176,000 in deposit overdraft charge-offs less
$646,000 in loan recoveries and $55,000 in deposit overdraft recoveries resulting in $161,000 of net charge-offs. Primary causes of the
loan charges taken in the third quarter of 2017 were gross charge-offs of $60,000 on two residential real estate loans, $20,000 on a
single commercial real estate loan, $107,000 on six home equity lines and loans, $174,000 on 19 other consumer loans, $291,000 on
four C&I loans and $33,000 on a single pool of Purchased Credit Impaired residential construction loans.
Total charge-offs were comprised of individual charges of less than $250,000 each. Generally losses are triggered by non-performance
by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying
collateral less any estimated costs associated with the disposition of the collateral.
41
Changes in nonperforming assets during the three months ended June 30, 2017
(dollars in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial (C&I)
Construction:
Residential
Commercial
Total nonperforming loans
Noncovered foreclosed assets
Total nonperforming assets
Balance at
June 30,
2017
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
March 31,
2017
$ 1,842
9,402
$1,097
362
3,553
1,003
74
1,555
—
—
17,429
3,489
$ 20,918
396
283
255
1,684
1,071
—
5,148
—
$5,148
$
$
—
—
360
—
—
—
—
—
360
—
360
$
(16)
(3,085) $
—
(150)
—
—
—
$ 135
$
761
12,140
(428)
(35)
(6)
(1,139)
(13) $
(206)
(190)
(764)
(25)
—
(4,734)
(545)
$ (5,279) $
(1,071)
—
(2,394)
43
$
(2,351)
(462)
—
—
—
—
—
(462)
462
—
—
—
—
$ (135)
3,700
961
15
1,909
—
—
—
—
—
25
—
19,511
3,529
$ 23,040
The table above does not include deposit overdraft charge-offs.
Nonperforming assets decreased during the second quarter of 2017 by $2,122,000 (9.2%) to $20,918,000 at June 30, 2017 compared to
$23,040,000 at March 31, 2017. The decrease in nonperforming assets during the second quarter of 2017 was primarily the result of
sales or upgrades of nonperforming loans to performing status totaling $4,734,000, dispositions of foreclosed assets totaling $545,000,
and loan charge-offs of $2,394,000, that were partially offset by new nonperforming loans of $5,148,000, advances on nonperforming
loans of $360,000, and an increase in foreclosed asset valuation of $43,000, the net result of $6,000 of write-downs and $49,000 of
positive adjustments to foreclosed asset valuations.
The $5,148,000 in new nonperforming loans during the second quarter of 2017 was comprised of increases of $1,097,000 on two
residential real estate loans, $362,000 on two commercial real estate loans, $679,000 on 11 home equity lines and loans, $255,000 on 27
consumer loans, $1,684,000 on 12 C&I loans, and $1,071,000 residential construction loans.
The $1,097,000 in new nonperforming residential real estate loans was primarily made up of one loan in the amount of $959,000
secured by a single family property in southern California. The $1,684,000 in new nonperforming C&I loans was primarily comprised
of one loan in the amount of $361,000 secured by crop proceeds in northern California, and one loan in the amount of $363,000 secured
by general business assets in northern California. Also, included in these new nonperforming assets during the three months ended
June 30, 2017 were residential construction loans of $1,071,000, commercial loans of $424,000, and commercial real estate loans of
$150,000; all of which were classified as PCI – other loans and accounted for using the pool method of accounting under ASC Topic
310-30; and for which the related pools were resolved during the three months ended June 30, 2017 resulting in these fully reserved
loan balances to be deemed uncollectable and simultaneously charged off. Related charge-offs are discussed below.
Loan charge-offs during the three months ended June 30, 2017
In the second quarter of 2017, the Company recorded $2,394,000 in loan charge-offs and $118,000 in deposit overdraft charge-offs less
$377,000 in loan recoveries and $56,000 in deposit overdraft recoveries resulting in $2,079,000 of net charge-offs. Primary causes of
the loan charges taken in the first quarter of 2017 were gross charge-offs of $150,000 on a single pool of PCI - other commercial real
estate loans, $219,000 on five home equity lines and loans, $190,000 on 24 other consumer loans, $764,000 on five C&I loans and
$1,071,000 on a single pool of Purchased Credit Impaired residential construction loans.
Total charge-offs were generally comprised of individual charges of less than $250,000 each with the exception of two during the
quarter. Each of these charges was related to the resolution of a pool of Purchased Credit Impaired loans. One charge in the amount of
$424,000 was related to C&I loans secured by general business assets in northern California, and the second in the amount of
$1,071,000 was related to a pool of residential construction loans in northern California. 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.
42
Changes in nonperforming assets during the three months ended March 31, 2017
(dollars in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial (C&I)
Construction:
Residential
Commercial
Total nonperforming loans
Noncovered foreclosed assets
Covered foreclosed assets
Total nonperforming assets
Balance at
March 31,
2017
New
NPA
Advances/
Capitalized
Costs
Pay-downs
/Sales
/Upgrades
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
$
761
12,140
$ 345
1,712
3,700
961
15
1,909
25
—
19,511
3,529
—
$ 23,040
—
199
57
129
14
—
2,456
—
—
$2,456
—
—
—
—
—
—
—
—
—
—
—
—
$
(33)
(380)
—
—
$
—
(85)
(1,107)
(136)
(9)
(1,017)
—
—
(2,682)
(385)
(223)
$ (3,290)
$
$
(71)
(31)
(71)
(133)
—
—
(306)
66
—
240
$
—
—
—
—
—
—
(85)
85
—
—
—
(59)
59
—
—
—
—
—
—
—
—
Balance at
December 31,
2016
$
449
10,893
4,937
870
38
2,930
11
—
20,128
3,763
223
24,114
$
The table above does not include deposit overdraft charge-offs.
Nonperforming assets decreased during the first quarter of 2017 by $1,074,000 (4.5%) to $23,040,000 at March 31, 2017 compared to
$24,114,000 at December 31, 2016. The decrease in nonperforming assets during the first quarter of 2017 was primarily the result of
sales or upgrades of nonperforming loans to performing status totaling $2,682,000, dispositions of foreclosed assets totaling $608,000,
loan charge-offs of $306,000, and write-downs on foreclosed assets totaling $22,000, that were partially offset by new nonperforming
loans of $2,456,000, and an increase in foreclosed asset valuation of $66,000, the net result of $22,000 of write-downs and $88,000 of
positive adjustments to foreclosed asset valuations.
The $2,456,000 in new nonperforming loans during the first quarter of 2017 was comprised of increases of $345,000 on three
residential real estate loans, $1,712,000 on one commercial real estate loan, $199,000 on three home equity lines and loans, $57,000 on
10 consumer loans, $129,000 on two C&I loans, and $14,000 on a single residential construction loan.
The $1,712,000 in new nonperforming commercial real estate loans was entirely comprised of one loan secured by a commercial mini
storage facility in central California. Related charge-offs are discussed below.
Loan charge-offs during the three months ended March 31, 2017
In the first quarter of 2017, the Company recorded $306,000 in loan charge-offs and $103,000 in deposit overdraft charge-offs less
$406,000 in loan recoveries and $74,000 in deposit overdraft recoveries resulting in $71,000 of net recoveries. Primary causes of the
loan charges taken in the first quarter of 2017 were gross charge-offs of $102,000 on five home equity lines and loans, $71,000 on 12
other consumer loans, and $133,000 on five C&I loans.
Total charge-offs were generally comprised 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.
43
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 incurred
losses inherent in the Company’s originated and PNCI loan portfolios. These are maintained through periodic charges to earnings.
These charges are included in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and
quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately
known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance
of the Company’s allowances for originated and PNCI loan losses are meant to be an estimate of these unknown but probable losses
inherent in these portfolios.
The Company formally assesses the adequacy of the allowance for originated and PNCI loan losses on a quarterly basis. Determination
of the adequacy is based on ongoing assessments of the probable risk in the outstanding originated and PNCI loan portfolios, and to a
lesser extent the Company’s originated and PNCI loan commitments. These assessments include the periodic re-grading of credits based
on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower,
economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as
warranted. Loans are initially graded when originated or acquired. They are re-graded as they are renewed, when there is a new loan to
the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of
larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit
reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.
The Company’s method for assessing the appropriateness of the allowance for originated and PNCI loan losses includes specific
allowances for impaired loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental
factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on historical loss experience
by product type and prior risk rating. Allowances for impaired loans are based on analysis of individual credits. Allowances for
changing environmental factors are Management’s best estimate of the probable impact these changes have had on the originated or
PNCI loan portfolio as a whole. The allowances for originated and PNCI loans are included in the allowance for loan losses.
As noted above, the allowances for originated and PNCI loan losses consists of a specific allowance, a formula allowance, and an
allowance for environmental factors. The first component, the specific allowance, results from the analysis of identified credits that
meet management’s criteria for specific evaluation. These loans are reviewed individually to determine if such loans are considered
impaired. Impaired loans are those where management has concluded that it is probable that the borrower will be unable to pay all
amounts due under the original 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.
44
The third component of the allowances for originated and PNCI loan losses, the environmental factor allowance, is a component that is
not allocated to specific loans or groups of loans, but rather is intended to absorb losses that may not be provided for by the other
components.
There are several primary reasons that the other components discussed above might not be sufficient to absorb the losses present in the
originated and PNCI loan portfolios, and the environmental factor allowance is used to provide for the losses that have occurred
because of them.
The first reason is that there are limitations to any credit risk grading process. The volume of originated and PNCI loans makes it
impractical to re-grade every loan every quarter. Therefore, it is possible that some currently performing originated or PNCI loans not
recently graded will not be as strong as their last grading and an insufficient portion of the allowance will have been allocated to them.
Grading and loan review often must be done without knowing whether all relevant facts are at hand. Troubled borrowers may
deliberately or inadvertently omit important information from reports or conversations with lending officers regarding their financial
condition and the diminished strength of repayment sources.
The second reason is that the loss estimation factors are based primarily on historical loss totals. As such, the factors may not give
sufficient weight to such considerations as the current general economic and business conditions that affect the Company’s borrowers
and specific industry conditions that affect borrowers in that industry. The factors might also not give sufficient weight to other
environmental factors such as changing economic conditions and interest rates, portfolio growth, entrance into new markets or products,
and other characteristics as may be determined by Management.
Specifically, in assessing how much environmental factor allowance needed to be provided, management considered the following:
• with respect to the economy, management considered the effects of changes in GDP, unemployment, CPI, debt statistics,
housing starts, 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, and
• with respect to concentrations within the portfolio, management considered the risk introduced by concentrations among
specific segments of the portfolio, underlying collateral types, borrowers or group of borrowers, and geographic areas.
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 their 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
45
loan loss would be established through a provision for loan losses charged to expense to decrease the present value to the required level.
If the estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully reversed
depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be
increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans are charged off when
evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with
the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics
and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan.
The Components of the Allowance for Loan Losses
The following table sets forth the Bank’s allowance for loan losses as of the dates indicated (dollars in thousands):
Allowance for originated and PNCI loan losses:
Specific allowance
Formula allowance
Environmental factors allowance
Allowance for originated and PNCI loan losses
Allowance for PCI loan losses
Allowance for loan losses
2017
2016
December 31,
2015
2014
2013
$ 2,699
17,100
10,252
30,051
272
$30,323
$ 2,046
17,485
10,275
29,806
2,697
$32,503
$ 2,890
20,603
9,625
33,118
2,893
$36,011
$ 4,267
22,076
6,815
33,158
3,427
$36,585
$ 3,975
24,611
5,619
34,205
4,040
$38,245
Allowance for loan losses to loans
1.01%
1.18%
1.43%
1.60%
2.29%
Based on the current conditions of the loan portfolio, management believes that the $30,323,000 allowance for loan losses at
December 31, 2017 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however,
that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The following table summarizes the allocation of the allowance for loan losses between loan types:
(dollars in thousands)
Real estate mortgage
Consumer
Commercial
Real estate construction
Total allowance for loan losses
2017
$13,758
8,227
6,512
1,826
$30,323
2016
$14,292
10,284
5,831
2,096
$32,503
December 31,
2015
$13,950
15,079
5,271
1,711
$36,011
2014
$12,313
18,201
4,226
1,845
$36,585
2013
$12,854
18,238
4,331
2,822
$38,245
The following table summarizes the allocation of the allowance for loan losses between loan types as a percentage of the total
allowance for loan losses:
Real estate mortgage
Consumer
Commercial
Real estate construction
Total allowance for loan losses
2017
45.4%
27.1%
21.5%
6.0%
100.0%
2016
44.0%
31.6%
17.9%
6.5%
100.0%
December 31,
2015
38.7%
41.9%
14.6%
4.8%
100.0%
2014
33.7%
49.7%
11.6%
5.0%
100.0%
2013
33.6%
47.7%
11.3%
7.4%
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
Total allowance for loan losses
2017
0.60%
2.31%
2.95%
1.33%
1.01%
December 31,
2015
0.77%
3.81%
2.70%
1.42%
1.43%
2016
0.69%
2.84%
2.69%
1.71%
1.18%
2014
0.76%
4.36%
2.42%
2.46%
1.60%
2013
1.16%
4.76%
3.28%
5.75%
2.29%
46
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):
2017
Year ended December 31,
2015
2016
2014
2013
Allowance for loan losses:
Balance at beginning of period
(Benefit from) provision for loan losses
Loans charged off:
Real estate mortgage:
Residential
Commercial
Consumer:
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total loans charged off
Recoveries of previously charged-off loans:
Real estate mortgage:
Residential
Commercial
Consumer:
Home equity lines
Home equity loans
Auto indirect
Other consumer
Commercial
Construction:
Residential
Commercial
Total recoveries of previously charged off loans
Net (charge-offs) recoveries
Balance at end of period
$32,503
89
$36,011
$36,585
$38,245
$42,648
(5,970)
(2,210)
(4,045)
(715)
(60)
(186)
(98)
(332)
—
(1,186)
(1,444)
(1,104)
(4,410)
(321)
(827)
(585)
(219)
—
(823)
(455)
(224)
—
(694)
(242)
(4)
(972)
(680)
—
—
(3,230)
—
—
(2,816)
—
397
698
242
—
375
428
880
920
2,317
590
—
449
404
204
243
666
252
42
500
677
(171)
(110)
(46)
(2,038)
(1,094)
(29)
(3)
(599)
(479)
(4)
(69)
(2,558)
2
540
960
34
86
495
1,268
(2,651)
(94)
(68)
(887)
(1,599)
(20)
(140)
(7,543)
345
994
1,053
41
195
759
340
—
1
2,141
(2,269)
$30,323
54
78
5,692
2,462
$32,503
1,728
140
4,452
1,636
$36,011
1,377
181
4,943
2,385
$36,585
63
65
3,855
(3,688)
$38,245
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
2017
2016
Year ended December 31,
2015
2014
2013
$
$
$
2,719
445
3,164
30,323
3,164
$
$
$
2,475
244
2,719
32,503
2,719
$
$
$
2,145
330
2,475
36,011
2,475
$
$
$
2,415
(270)
2,145
36,585
2,145
$
$
$
3,615
(1,200)
2,415
38,245
2,415
for unfunded commitments
$
33,487
35,222
$
38,486
$
38,730
$
40,660
As a percentage of total loans at end of period:
Allowance for loan losses
Reserve for unfunded commitments
Allowance for loan losses and reserve
1.01%
0.10%
1.18%
0.10%
1.43%
0.10%
1.60%
0.10%
for unfunded commitments
1.11%
1.28%
1.53%
1.70%
2.29%
0.14%
2.43%
Average total loans
Ratios:
Net charge-offs during period to average
loans outstanding during period
Provision for loan losses to average loans
outstanding
Allowance for loan losses to loans at year
end
$2,842,659
$2,629,729
$2,389,437
$1,847,749
$1,610,725
0.08%
(0.09)%
(0.07)%
(0.13)%
0.23%
0.00%
(0.21)%
(0.09)%
(0.22)%
(0.04)%
1.01%
1.18%
1.43%
1.60%
2.29%
47
Foreclosed Assets, Net of Allowance for Losses
The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the years
indicated (dollars in thousands):
(dollars in thousands):
Noncovered:
Land & Construction
Residential real estate
Commercial real estate
Total noncovered
Covered:
Land & Construction
Residential real estate
Commercial real estate
Total covered
Total foreclosed assets
(dollars in thousands):
Noncovered:
Land & Construction
Residential real estate
Commercial real estate
Total noncovered
Covered:
Land & Construction
Residential real estate
Commercial real estate
Total covered
Total foreclosed assets
Balance at
December 31,
2017
New
NPA
Advances/
Capitalized
Costs
Sales
Valuation
Adjustments
Transfers
from Loans
Category
Changes
Balance at
December 31,
2016
$
1,786 —
1,186 —
254 —
3,226 —
— —
— —
— —
—
$
3,226 —
—
—
—
—
—
—
—
—
$
(15)
(1,071)
(852)
(1,938)
—
$ (223)
—
(223)
$(2,161)
$
(92)
(49)
(21)
(162)
—
—
—
$
381
865
317
1,563
—
—
—
$
—
—
—
—
—
—
—
$
(162)
$ 1,563
—
$
1,512
1,441
810
3,763
—
223
—
223
3,986
Balance at
December 31,
2016
New
NPA
Advances/
Capitalized
Costs
Sales
Valuation
Adjustments
Transfers
from Loans
Category
Changes
Balance at
December 31,
2015
$
$
1,512 —
1,441 —
810 —
3,763 —
— —
223 —
— —
223 —
3,986 —
—
—
—
—
—
—
—
—
—
$ (979)
(2,380)
(389)
(3,748)
—
—
—
—
$(3,748)
$
$
—
(56)
(84)
(140)
—
—
—
—
(140)
—
$ 2,090
192
2,282
—
223
—
223
$ 2,505
—
—
—
—
—
—
—
—
—
$
$
2,491
1,787
1,091
5,369
—
—
—
—
5,369
Premises and Equipment
Premises and equipment were comprised of:
December 31,
2017
December 31,
2016
Land & land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
$
$
9,959
50,340
35,939
96,238
(40,644)
55,594
2,148
57,742
9,522
42,345
31,428
83,295
(37,412)
45,883
2,523
48,406
$
(In thousands)
$
During the year ended December 31, 2017, premises and equipment increased $9,336,000 due to purchases of $15,164,000, that were
partially offset by depreciation of $5,686,000 and disposals of premises and equipment with net book value of $142,000.
48
Intangible Assets
Intangible assets were comprised of the following:
Core-deposit intangible
Goodwill
Total intangible assets
December 31,
2017
2016
(In thousands)
$ 5,174
64,311
$69,485
$ 6,563
64,311
$70,874
The core-deposit intangible assets resulted from the Company’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 $1,389,000, $1,377,000, and $1,157,000 was recorded in 2017, 2016, and 2015, 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. The Bank estimated the potential impact of changing interest rates on net interest margin and market value of equity
using computer modeling techniques. 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.
49
The following table summarizes the estimated 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, 2017
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)
(1.91%)
(0.92%)
—
(1.81%)
In the simulation of market value of equity, the forecast balance sheet is processed against various interest rate scenarios. These various
interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and rate shock scenarios
including -100, +100, and +200 basis points around the flat scenario. These rate shock scenarios assume that interest rates increase or
decrease immediately (in a “shock” fashion) and remain at the new level in the future.
The following table summarizes the estimated 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, 2017
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)
(9.6%)
(3.2%)
—
(7.3%)
These simulations 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
50
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, 2017. 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, 2017
(dollars in thousands)
Interest-earning assets:
Cash at Federal Reserve and other banks
Securities
Loans
Total interest-earning assets
Interest-bearing liabilities
Transaction deposits
Time
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Interest sensitivity gap
Cumulative sensitivity gap
As a percentage of earning assets:
Interest sensitivity gap
Cumulative sensitivity gap
Liquidity
Less than 3
months
3 - 6
months
Repricing within:
6 - 12
months
1 - 5
years
Over
5 years
$
99,460
37,018
574,331
710,809
2,335,978
134,187
122,166
56,858
$ 2,649,188
$(1,938,379)
$(1,938,379)
$
—
36,051
149,722
185,773
—
56,147
—
—
56,147
129,626
$
$
$(1,808,753)
$
—
77,504
263,213
340,717
—
60,055
—
—
60,055
280,662
$
$
$(1,528,091)
—
$ 476,587
1,371,093
1,847,680
—
54,542
—
—
$
54,542
$1,793,138
$ 265,047
—
$ 618,567
656,806
1,275,373
—
5
—
—
5
$1,275,368
$1,540,415
(44.5%)
(44.5%)
3.0%
(41.5%)
6.4%
(35.1%)
41.1%
6.0%
29.3%
35.3%
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
$357,445,000 in 2017. Net increases in investment and loan balances used $89,736,000 and $259,404,000 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 2017, financing activities provided funds totaling $201,880,000 due to a
$113,571,000 increase in deposit balances, and a $104,673,000 increase in other borrowings. Dividends paid used $15,131,000 of cash
during 2017. The Bank also had available correspondent banking lines of credit totaling $20,000,000 at December 31, 2017. In addition,
at December 31, 2017 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 $1,260,596,000 and $134,660,000, respectively. As of December 31, 2017, the
Company had $122,166,000 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 2017, operating activities provided cash of $55,381,000.
The Company’s investment securities available for sale plus cash and cash equivalents in excess of reserve requirements totaled
$854,243,000 at December 31, 2017, which was 17.9% of total assets at that time. This was an increase of $76,581,000 from
$777,662,000 and an increase from 17.2% of total assets as of December 31, 2016.
51
Loan demand during 2018 will depend in part on economic and competitive conditions. The Company emphasized the solicitation of
non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to interest rates. The growth of
deposit balances is subject to heightened competition, the success of the Company’s sales efforts, delivery of superior customer service
and market conditions. 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, 2017, 2016 and 2015, the Bank had $50,000,000, $50,000,000 and $50,000,000, 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,
2016
2017
2015
$101,552
28,832
29,196
29,144
$188,724
$116,791
31,984
23,525
26,850
$199,150
$104,368
31,327
34,722
26,747
$197,164
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, 2017:
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
After One
But Within
5 Years
After 5
Years
Total
(dollars in thousands)
$ 26,831
4,063
4,364
8,665
43,923
25,909
2,090
54,236
20,147
102,382
$146,305
$102,469
26,645
94,910
1,875
225,899
159,731
1,190
16,395
4,647
181,963
$407,862
$ 707,234
82,480
17,865
15,025
822,604
1,278,148
240,406
32,642
87,198
1,638,394
$2,460,998
$ 836,534
113,188
117,139
25,565
1,092,426
1,463,788
243,686
103,273
111,992
1,922,739
$3,015,165
52
The maturity distribution and yields of the investment portfolio at December 31, 2017 is presented in the following tables. The timing
of the maturities indicated in the tables below is based on final contractual maturities. Most mortgage-backed securities return principal
throughout their contractual lives. As such, the weighted average life of mortgage-backed securities based on outstanding principal
balance is usually significantly shorter than the final contractual maturity indicated below. Yields on tax exempt securities are shown on
a tax equivalent basis.
Within
One Year
Amount Yield
After One Year
but Through
Five Years
Amount Yield
After Five Years
but Through Ten
Years
Amount Yield
After Ten
Years
Total
Amount
Yield
Amount
Yield
(dollars in thousands)
$
2
5.15% $
11
6.24% $ 614
6.97% $604,162
2.55% $604,789
2.55%
— —
— —
6.72%
200
— —
1,667
5.63%
121,289
4.96%
123,156
4.97%
— —
2,938 —
2,938 —
$
2
5.15% $ 211
6.70% $2,281
5.97% $728,389
2.93% $730,883
2.94%
Within
One Year
After One Year
but Through
Five Years
After Five Years
but Through Ten
Years
After Ten
Years
Total
Amount Yield Amount Yield
Amount
Yield
Amount
Yield
Amount
Yield
(dollars in thousands)
— —
— —
$12,326
2.31% $487,945
2.68% $501,271
2.68%
— — $1,207
— — $1,207
4.13% $ 1,685
4.13% $14,011
5.26%
11,681
2.66% $499,626
4.10%
14,573
2.72% $514,844
4.24%
2.72%
Securities Available for Sale
Obligations of US government
corporations and agencies
Obligations of states and political
subdivisions
Marketable equity securities
Total securities available for sale
Securities Held to Maturity
Obligations of US government
corporations and agencies
Obligations of states and political
subdivisions
Total securities held to maturity
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases. See Note 18 of the financial statements at Item 8 of this
report for the terms. These commitments do not significantly impact operating results. As of December 31, 2017 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 $946,617,000, and $780,037,000 at December 31, 2017 and 2016, respectively,
and represent 31.40% of the total loans outstanding at year-end 2017 versus 28.3% at December 31, 2016. Commitments related to the
Bank’s deposit overdraft privilege product totaled $98,260,000 and $98,583,000 at December 31, 2017 and 2016, respectively.
53
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of December 31, 2017:
(dollars in thousands)
Time deposits
FHLB collateralized borrowing, fixed rate of 1.38% payable on January 2,
2018
Other collateralized borrowings, fixed rate of 0.05% payable on January 2,
2018
Junior subordinated:
TriCo Trust I(1)
TriCo Trust II(2)
North Valley Trust II(3)
North Valley Trust III(4)
North Valley Trust IV(5)
Operating lease obligations
Deferred compensation(6)
Supplemental retirement plans(6)
Total contractual obligations
Total
$304,936
Less than
one year
$250,277
1-3
years
$41,276
3-5
years
$13,377
More than
5 years
$
6
104,729
104,729
17,437
17,437
—
—
—
—
—
—
20,619
20,619
6,186
5,155
10,310
10,667
3,857
7,320
$511,835
—
—
—
—
—
3,278
839
1,107
$377,667
—
—
—
—
—
4,346
1,454
1,636
$48,712
—
—
—
—
—
2,245
867
1,161
$17,650
20,619
20,619
6,186
5,155
10,310
798
697
3,416
$67,806
(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, 2017 and 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
Notes to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
54
Page
55
56
56
57
58
59
103
104
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
Assets:
Cash and due from banks
Cash at Federal Reserve and other banks
Cash and cash equivalents
Investment securities:
Available for sale
Held to maturity
Restricted equity securities
Loans held for sale
Loans
Allowance for loan losses
Total loans, net
Foreclosed assets, net
Premises and equipment, net
Cash value of life insurance
Accrued interest receivable
Goodwill
Other intangible assets, net
Mortgage servicing rights
Other assets
Total assets
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand
Interest-bearing
Total deposits
Accrued interest payable
Reserve for unfunded commitments
Other liabilities
Other borrowings
Junior subordinated debt
Total liabilities
Commitments and contingencies (Note 18)
Shareholders’ equity:
Common stock, no par value: 50,000,000 shares authorized; issued and outstanding:
22,955,963 at December 31, 2017
22,867,802 at December 31, 2016
Retained earnings
Accumulated other comprehensive loss, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
55
At December 31,
2017
2016
(in thousands, except share data)
$
105,968
99,460
205,428
$
92,197
213,415
305,612
730,883
514,844
16,956
4,616
3,015,165
550,233
602,536
16,956
2,998
2,759,593
(30,323)
(32,503)
2,984,842
3,226
57,742
97,783
13,772
64,311
5,174
6,687
55,051
$ 4,761,315
2,727,090
3,986
48,406
95,912
12,027
64,311
6,563
6,595
74,743
$ 4,517,968
$ 1,368,218
2,640,913
4,009,131
930
3,164
63,258
122,166
56,858
4,255,507
$ 1,275,745
2,619,815
3,895,560
818
2,719
67,364
17,493
56,667
4,040,621
255,836
255,200
(5,228)
252,820
232,440
(7,913)
505,808
$ 4,761,315
477,347
$ 4,517,968
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
Interest and dividend income:
Loans, including fees
Debt securities:
Taxable
Tax exempt
Dividends
Interest bearing cash at
Federal Reserve and other banks
Total interest and dividend income
Interest expense:
Deposits
Other borrowings
Junior subordinated debt
Total interest expense
Net interest income
Provision (benefit from reversal of provision previously provided) for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges and fees
Gain on sale of loans
Commissions on sale of non-deposit investment products
Increase in cash value of life insurance
Other
Total noninterest income
Noninterest expense:
Salaries and related benefits
Other
Total noninterest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
25,303
1,509
2,118
648
161,414
3,434
4
1,978
5,416
155,998
Years ended December 31,
2017
2015
2016
(in thousands, except per share data)
$146,794
$141,086
$131,836
27,772
4,165
1,324
25,397
3,881
2,181
1,347
181,402
1,163
173,708
3,958
305
2,535
6,798
174,604
89
174,515
37,423
3,109
2,729
2,685
4,075
50,021
3,483
9
2,229
5,721
167,987
(5,970)
(2,210)
173,957
158,208
33,226
4,037
2,329
2,717
2,254
44,563
32,080
3,064
3,349
2,786
4,068
45,347
82,930
64,094
147,024
77,512
36,958
$ 40,554
80,724
65,273
145,997
72,523
27,712
$ 44,811
71,405
59,436
130,841
72,714
28,896
$ 43,818
$
$
1.77
1.74
$
$
1.96
1.94
$
$
1.93
1.91
The accompanying notes are an integral part of these consolidated financial statements.
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss), net of tax:
Unrealized holding gain (losses) on securities arising during the period
Change in minimum pension liability
Change in joint beneficiary agreement liability
Other comprehensive income (loss)
Comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
56
Years ended December 31,
2017
2015
2016
(in thousands, except per share data)
$44,811
$43,818
$40,554
3,165
(370)
(110)
2,685
$43,239
(6,384)
592
(343)
(6,135)
$38,676
(1,098)
1,246
277
425
$44,243
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2017, 2016 and 2015
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)
Balance at December 31, 2016
Net income
Other comprehensive income
Stock option vesting
RSU vesting
PSU vesting
Stock options exercised
RSUs released
PSUs released
Repurchase of common stock
Dividends paid ($0.66 per share)
Balance at December 31, 2017
Accumulated
Other
Comprehensive
Income (Loss)
Total
Common
Stock
Retained
Earnings
(in thousands, except share data)
$176,057
43,818
$
$244,318
Shares of
Common
Stock
22,714,964
154,500
12,064
734
457
179
3,116
(83)
15
(106,355)
(1,149)
22,775,173
$247,587
(1,719)
(11,849)
$206,307
44,811
$
580
616
271
6,506
154
1
336,900
20,529
(264,800)
(2,895)
22,867,802
$252,820
(4,983)
(13,695)
$232,440
40,554
$
259
895
432
2,621
145,850
30,896
18,805
(107,390)
425
(2,203) $418,172
43,818
425
734
457
179
3,116
(83)
15
(2,868)
(11,849)
(6,135)
(1,778) $452,116
44,811
(6,135)
580
616
271
6,506
154
1
(7,878)
(13,695)
2,685
(7,913) $477,347
40,554
2,685
259
895
432
2,621
(1,191)
(2,663)
(15,131)
(3,854)
(15,131)
22,955,963
$255,836
$255,200
$
(5,228) $505,808
The accompanying notes are an integral part of these consolidated financial statements.
57
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization
Amortization of intangible assets
Provision for (benefit from reversal of) loan losses
Amortization of investment securities premium, net
Gain on sale of investment securities
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 on disposal of fixed assets
Gain on sale of premises held for sale
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
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
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
Proceeds from the sale of premises held for sale
Purchases of premises and equipment
Life insurance proceeds
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:
2017
Years Ended December 31,
2016
(in thousands)
2015
$ 40,554
$ 44,811
$ 43,818
6,787
1,389
89
3,200
(961)
(114,107)
114,788
6,474
1,377
(5,970)
4,926
—
5,906
1,157
(2,210)
3,458
—
(142,619)
144,062
(111,640)
115,469
(3,109)
718
162
(711)
—
142
(3)
(2,685)
(108)
1,586
—
12,473
445
(1,745)
112
(3,635)
55,381
63,942
25,757
(265,806)
86,371
—
(247,837)
(11,567)
—
—
—
2,872
3,338
(15,164)
649
—
(357,445)
(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)
113,571
104,673
—
(1,629)
(15,131)
396
201,880
(100,184)
305,612
$ 205,428
103,063
5,165
155
(1,890)
(13,695)
518
93,316
2,151
303,461
$ 305,612
(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
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
5,461
1,563
—
2,225
5,609
21,170
—
—
$ (11,015)
$
2,505
—
5,988
5,677
27,575
161,231
161,231
(1,895)
5,240
17,072
2,868
5,620
24,315
—
—
The accompanying notes are an integral part of these consolidated financial statements.
58
TRICO BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2017, 2016 and 2015
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. The Bank operates from 57 traditional branches, 9
in-store branches and 2 loan production offices. 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 $1,721,000 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. Management has determined that because all of the banking products
and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic
environment and management does not allocate resources based on the performance of different lending or transaction activities, it is
appropriate to aggregate the Bank branches and report them as a single operating segment.
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 using the specific
identification method. During the year ended December 31, 2017, the Company sold $24,796,000 of available for sale classified
investment securities for $25,757,000 realizing a gain of $961,000. During the year ended December 31, 2016, the Company did not
sell any investment securities. At December 31, 2017 and 2016, 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 the years ended December 31, 2017,
2016, and 2015.
59
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
original 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 specific reserve allocation within the
allowance for loan losses.
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.
60
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.
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.
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
61
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 shorter of 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 business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment
at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment.
The Company has an identifiable intangible asset consisting of core deposit intangibles (CDI). CDI are amortized over their respective
estimated useful lives, and reviewed for impairment.
Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and
are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the consolidated balance sheet.
As of December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value. This determination is made at the reporting unit level. The Company may choose to first assess
qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not
that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the
Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then goodwill is
deemed not to be impaired. However, if the Company concludes otherwise, or if the Company elected not to first assess qualitative
factors, then the Company performs the first step of a two-step
62
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, 2017 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 credit and other loans, standby letters of credit, and
unused deposit account overdraft privileges. 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.
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.
63
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
During the three months ended September 30, 2017, the Company changed its classification of 1st lien and 2nd lien non-owner occupied
1-4 residential real estate mortgage loans from commercial real estate mortgage loans to residential real estate mortgage loans and
consumer home equity loans, respectively. This change in loan category classification was made to better align the Company’s financial
reporting classifications with regulatory reporting classifications, and to properly classify these loans for regulatory risk-based capital
ratio calculations. As a result of these reclassifications, at September 30, 2017, loans with balances of $60,957,000, and $5,620,000, that
would have been classified as commercial real estate mortgage loans prior to this change, were classified as residential real estate
mortgage loans, and consumer home equity loans, respectively; and the Company’s, and the Bank’s, Total risk based capital ratios, Tier
1 capital ratios, and Tier 1 common equity ratios were all recalculated to be 0.10%-0.20% higher than they would have been prior to
this change. Certain amounts reported in previous consolidated financial statements have been reclassified and recalculated to conform
to the presentation in this report. These reclassifications did not affect previously reported net income, total loans or total shareholders’
equity.
Recent Accounting Pronouncements
FASB Accounting Standards Update (ASU) No.2014-09, Revenue from Contracts with Customers (Topic 606): ASU 2014-09 is
intended to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that
would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing
revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets;
(4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation of
financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity that either
enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core
principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps
to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to
understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and
quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets
recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after
December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15,
2016. ASU 2014-09 does not apply to revenue associated with financial instruments such as loans and investments, which are
accounted for under other provisions of GAAP. The Company adopted ASU 2014-09 on January 1, 2018 utilizing the modified
retrospective approach, and the adoption of ASU 2014-09 did not have a significant impact on the Company’s consolidated financial
statements.
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 provisions of ASU No. 2016-02 and has determined that the adoption of this
standard will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in
liabilities; however, the Company does not expect this to have a material impact on the Company’s results of operations or cash flows.
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 due to options exercised and restricted stock units
released during the year ended December, 2017, the Company recognized excess tax benefits totaling $906,000 during the year ended
December 31, 2017.
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
64
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. While the
Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the
Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as
forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems.
Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting
period in which the new standard is effective, but cannot yet estimate the magnitude of the one-time adjustment or the overall impact of
the new guidance on the Company’s financial position, results of operations or cash flows.
FASB issued ASU No. 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 was effective for the Company on January 1, 2018 and did not 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 was effective for the Company on January 1, 2018 and did not have a significant
impact on the Company’s consolidated financial statements.
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.
FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715). ASU 2017-07 requires that an employer report the
service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent
employees during the period. The other components of net benefit cost are required to be presented in the income statement separately
from the service cost component. ASU 2017-07 was effective for the Company on January 1, 2018 and did not have a significant impact
on the Company’s consolidated financial statements.
FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Topic 310). ASU 2017-08 shortens the amortization
period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless
applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities
were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the
contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount.
ASU 2017-08 will be effective for the Company on January 1, 2019, and is not expected to have a significant impact on the Company’s
consolidated financial statements.
FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). ASU 2017-09 clarifies when changes to the terms or
conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply
modification accounting to a share-based payment award if all of the following are the same immediately before and after the change:
(i) the award’s fair value, (ii) the award’s vesting conditions and (iii) the award’s classification as an equity or liability instrument.
ASU 2017-09 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated
financial statements.
FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). ASU 2018-02 allows, but does not
require, entities to reclassify certain income tax effects in accumulated other comprehensive income (AOCI) to retained earnings that
resulted from the Tax Cuts and Jobs Act (Tax Act) that was enacted on December 22, 2017. The Tax Act included a reduction to the
Federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be
the difference between the income tax effects in AOCI calculated using the historical Federal corporate income tax rate of 35 percent
and the income tax effects in AOCI calculated using the newly enacted 21 percent Federal corporate income tax rate. The amendments
in ASU 2018-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption is permitted. The Company adopted ASU 2018-02 on January 1, 2018, and elected to reclassify certain income tax
effects in AOCI to retained earnings. This change in accounting principle was accounted for as a cumulative-effect adjustment to the
balance sheet resulting in a $1,093,000 increase to retained earnings and a corresponding decrease to AOCI on January 1, 2018.
65
Note 2 – Business Combinations
Proposed Merger with FNB Bancorp
On December 11, 2017, the Company and FNB Bancorp, a California corporation (“FNBB”), entered into an Agreement and Plan of
Merger and Reorganization (the “Merger Agreement”) pursuant to which FNBB will be merged with and into the Company, with the
Company as the surviving corporation (the “Merger”). Management expects the acquisition to close in the second quarter of 2018,
subject to the satisfaction of customary closing conditions, including regulatory and shareholder approvals. The Merger Agreement
provides that immediately after the Merger, FNBB’s bank subsidiary, First National Bank of Northern California (“First National
Bank”), will merge with and into the Company’s bank subsidiary, Tri Counties Bank, with Tri Counties Bank as the surviving bank (the
“Bank Merger”). The Merger and Bank Merger are collectively referred to as the “Proposed Transaction.”
The Merger Agreement provides that each share of FNBB common stock issued and outstanding immediately prior to the effective time
of the Merger will be canceled and converted into the right to receive 0.98 shares of the Company’s common stock (the “Exchange
Ratio”), with cash paid in lieu of fractional shares of the Company’s common stock.
Based on the closing price of the Company’s common stock of $41.64 on December 8, 2017, the consideration value was $40.81 per
share of FNBB common stock or approximately $315.3 million in aggregate. The value of the merger consideration will fluctuate until
closing based on the value of the Company’s stock and subject to a trading collar in certain circumstances. Upon consummation of the
Merger, the shareholders of FNBB will own approximately 24% of the combined company.
The Merger Agreement includes a trading collar that could result in termination of the Merger Agreement or a change to the Exchange
Ratio. First, The Company can elect to terminate the Merger Agreement if both (i) the average share price of the Company’s common
stock for the 20 day period up to and including the fifth day prior to the closing date (the “Average Closing Share Price”) is greater than
$49.78, which equals 120% of the average share price of the Company’s Stock for the 20 trading-day period up to and including
December 8, 2017, which was $41.48 (the “Initial Price”) and (ii) the Company’s common stock outperforms the KBW Regional
Banking Index by more than 20%, unless FNBB agrees that the Exchange Ratio will be reduced and fewer shares of the Company’s
common stock will be issued to FNBB shareholders on a per share basis. Conversely, FNBB can terminate the Merger Agreement if
both (i) the Average Closing Share Price is less than $33.18, which is equivalent to 80% of the Initial Price, and (ii) the Company’s
common stock underperforms the KBW Regional Banking Index by more than 20%, unless the Company agrees that the Exchange
Ratio will be increased and more shares of the Company common stock will be issued to FNBB shareholders on a per share basis.
Upon consummation of the Merger, each outstanding and unexercised option to acquire shares of FNBB common stock held by
FNBB’s employees and directors will be canceled and, in exchange, the holder of the option will be entitled to receive, whether or not
the option is fully vested, a lump sum cash payment equal to the product of (1) the number of shares of FNBB common stock remaining
under the option multiplied by (2) the Exchange Ratio multiplied by (3) the amount, if any, by which the Average Closing Share Price
exceeds the exercise price of the option.
The consummation of the Merger is subject to a number of conditions, which include: (i) the approval of the Merger Agreement by
FNBB’s shareholders and the approval of the Merger Agreement and the issuance of shares of the Company common stock by the
Company’s shareholders; (ii) as of the closing of the Merger, FNBB shall have tangible common equity of not less than $119.0 million,
subject to credit for certain merger-related expenses and certain assumptions and adjustments that are set forth in the Merger
Agreement; (iii) the receipt of all necessary regulatory approvals for the Proposed Transaction, without the imposition of conditions or
requirements that the Company’s Board of Directors reasonably determines in good faith would, individually or in the aggregate,
materially reduce the economic benefits of the Proposed Transaction; (iv) the absence of any regulation, judgment, decree, injunction or
other order of a governmental authority which prohibits the consummation of the Proposed Transaction or which prohibits or makes
illegal the consummation of the Proposed Transaction; (v) the effective registration of the shares of the Company’s Common Stock to
be issued to FNBB’s shareholders with the Securities and Exchange Commission (the “SEC”) and the approval of such shares for listing
on the Nasdaq Global Select Market; (vi) all representations and warranties made by the Company and FNBB in the Merger Agreement
must remain true and correct, except for certain inaccuracies that would not have, or would not reasonably be expected to have, a
material adverse effect; and (vii) the Company and FNBB must have performed their respective obligations under the Merger
Agreement in all material respects.
66
Note 2 – Business Combinations (continued)
Acquisition of Three Bank Branches and Associated Deposits
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.
67
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
December 31, 2017
Gross
Unrealized
Losses
Gross
Unrealized
Gains
(in thousands)
Estimated
Fair
Value
$
695
1,888
—
$ 2,583
$ 5,101
146
$ 5,247
$ (5,601)
(329)
(62)
$ (5,992)
$604,789
123,156
2,938
$730,883
$ (1,889)
(37)
$ (1,926)
$503,483
14,682
$518,165
December 31, 2016
Gross
Unrealized
Losses
Gross
Unrealized
Gains
(in thousands)
Estimated
Fair
Value
$ 1,949
267
—
$ 2,216
$ 5,001
56
$ 5,057
$ (6,628)
(4,396)
(62)
$(11,086)
$429,678
117,617
2,938
$550,233
$ (4,199)
(191)
$ (4,390)
$588,784
14,419
$603,203
Amortized
Cost
$609,695
121,597
3,000
$734,292
$500,271
14,573
$514,844
Amortized
Cost
$434,357
121,746
3,000
$559,103
$587,982
14,554
$602,536
During 2017 investment securities with cost basis of $24,796,000 were sold for $25,757,000, resulting in a gain of $961,000 on sale. 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 with an aggregate carrying value of $285,596,000 and $292,737,000 at December 31, 2017 and 2016,
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, 2017 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, 2017, obligations of U.S. government corporations and agencies with a cost basis totaling
$1,109,966,000 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, 2017, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S.
government corporations and agencies to be approximately 5.9 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
$
2
211
2,231
731,848
$734,292
Estimated
Fair Value
2
$
211
2,281
728,389
$730,883
Amortized
Cost
$
—
1,207
14,011
499,626
$514,844
$
Estimated
Fair Value
—
1,226
14,067
502,872
$518,165
68
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, 2017:
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
Fair
Value
Unrealized
Loss
12 months or more
Fair
Value
Unrealized
Loss
(in thousands)
Total
Fair
Value
Unrealized
Loss
$284,367
4,904
—
$289,271
$ (2,176) $166,338
17,085
2,938
$ (2,211) $186,361
(35)
—
$ (3,425) $450,705
21,989
2,938
$ (3,781) $475,632
(294)
(62)
$ (5,601)
(329)
(62)
$ (5,992)
$ 93,017
1,488
$ 94,505
$
$
(567) $ 95,367
2,637
(574) $ 98,004
(7)
$ (1,322) $188,384
4,125
$ (1,352) $192,509
(30)
$ (1,889)
(37)
$ (1,926)
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
Less than 12 months
Fair
Value
Unrealized
Loss
12 months or more
Unrealized
Fair
Loss
Value
(in thousands)
Total
Fair
Value
Unrealized
Loss
$370,389
90,825
2,938
$464,152
$ (6,628) —
(4,396) —
(62) —
$(11,086) —
$280,497
9,984
$290,481
$ (4,199) —
(191) —
$ (4,390) —
—
—
—
—
—
—
—
$370,389
90,825
2,938
$464,152
$ (6,628)
(4,396)
(62)
$(11,086)
$280,497
9,984
$290,481
$ (4,199)
(191)
$ (4,390)
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, 2017, 69 debt securities representing obligations of U.S.
government corporations and agencies had unrealized losses with aggregate depreciation of 1.16% 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, 2017, 29 debt securities representing obligations of
states and political subdivisions had unrealized losses with aggregate depreciation of 1.38% from the Company’s amortized cost basis.
Marketable equity securities: At December 31, 2017, marketable equity securities had unrealized losses representing aggregate
depreciation of 2.07% from the Company’s amortized cost basis. Because the Company has the ability to hold these equity investment
securities and management does not intend to sell and more likely than not will not be required to sell these securities prior to the
recovery of value, management does not believe these securities to be other than temporarily impaired.
69
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
Allowance for loan losses
70
Originated
PNCI
December 31, 2017
PCI -
Cash basis
PCI -
Other
Total
$ 320,522
1,690,510
2,011,032
$ 63,519
215,823
279,342
—
—
—
$ 1,385
8,563
9,948
$ 385,426
1,914,896
2,300,322
269,942
39,848
22,859
332,649
209,437
67,920
69,364
137,284
$2,690,402
$2,699,053
(8,651)
—
$2,690,402
$2,690,402
—
$2,690,402
$ (29,122) $
16,248
2,698
2,251
21,197
8,391
2,069
—
—
2,069
—
429
485
45
959
2,584
288,688
43,031
25,155
356,874
220,412
10
263
273
$309,203
$316,238
—
(7,035)
$309,203
$309,203
—
$309,203
—
—
—
$ 2,069
$ 5,863
—
(3,794)
$ 2,069
$ 2,069
—
$ 2,069
—
—
—
$13,491
$17,318
—
(3,827)
$13,491
$13,491
—
$13,491
67,930
69,627
137,557
$3,015,165
$3,038,472
(8,651)
(14,656)
$3,015,165
$3,015,165
—
$3,015,165
(929) $
(17) $ (255) $ (30,323)
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
Allowance for loan losses
263,590
40,736
28,167
332,493
200,735
54,613
58,119
112,732
$2,356,327
$2,363,243
Originated
PNCI
December 31, 2016
PCI -
Cash basis
PCI -
Other
Total
$ 284,539
1,425,828
1,710,367
$ 82,335
246,491
328,826
—
—
—
$ 1,469
12,802
14,271
$ 368,343
1,685,121
2,053,464
21,765
3,764
2,534
28,063
12,321
2,983
—
—
2,983
—
1,377
1,682
65
3,124
3,991
289,715
46,182
30,766
366,663
217,047
141
8,871
9,012
$378,222
$388,139
—
(9,917)
(6,916)
—
$2,356,327
$2,356,327
—
$2,356,327
$ (28,141) $ (1,665) $
$378,222
$378,222
—
$378,222
—
—
—
$ 2,983
$ 8,280
—
(5,297)
$ 2,983
$ 2,983
—
$ 2,983
675
—
675
$22,061
$25,650
—
(3,589)
$22,061
$18,885
3,176
$22,061
55,429
66,990
122,419
$2,759,593
$2,785,312
(6,916)
(18,803)
$2,759,593
$2,756,417
3,176
$2,759,593
(17) $ (2,680) $ (32,503)
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
71
Year ended December 31,
2017
2016
$ 10,348
(2,809)
(3,277)
$ 4,262
$ 13,255
(4,011)
1,104
$ 10,348
Note 5 – Allowance for Loan Losses
The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the
periods indicated.
RE Mortgage
Allowance for Loan Losses - Year Ended December 31, 2017
Home Equity
Other
Auto
Construction
(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
$
$
$
$
$
Resid.
Comm.
Lines
Loans
Indirect Consum.
2,748 $
(60)
—
(371)
2,317 $
11,517 $
(186)
397
(287)
11,441 $
7,044 $ 2,644 — $
622 $
(98)
698
(1,844)
5,800 $ 1,841 — $
(332) —
242 —
(713) —
(1,186)
375
775
586 $
Resid.
C&I
5,831 $ 1,417 $
(1,444)
428
1,697
6,512 $ 1,184 $
(1,104)
—
871
Comm.
680 $
—
1
(39)
642 $
Total
32,503
(4,410)
2,141
89
30,323
230 $
30 $
427 $
107 — $
57 $
1,848
—
— $
2,699
1,932 $
11,351 $
5,356 $ 1,734 — $
529 $
4,624 $ 1,184 $
642 $
27,352
155 $
60 $
17
— —
— $
40
—
— $
272
(in thousands)
Ending balance:
Total loans
Individ. evaluated for
impairment
Loans pooled for
evaluation
Loans acquired with
deteriorated credit
quality
RE Mortgage
Home Equity
Auto
Other
Construction
Resid.
Comm.
Lines
Loans
Indirect Consum.
C&I
Resid.
Comm.
Total
Loans, net of unearned fees – As of December 31, 2017
$385,426 $1,914,896 $288,688 $43,031 — $25,155 $220,412 $67,930 $69,627 $3,015,165
$
5,298 $
13,911 $
2,688 $ 1,470 — $
257 $
4,470 $
140
— $
28,234
$378,743 $1,892,422 $283,502 $41,076 — $24,853 $213,358 $67,790 $69,627 $2,971,371
$
1,385 $
8,563 $
2,498 $
485 — $
45 $
2,584
—
— $
15,560
RE Mortgage
Allowance for Loan Losses - Year Ended December 31, 2016
Home Equity
Other
Auto
Construction
(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
$
$
$
$
$
Resid.
Comm.
Lines
Loans
Indirect Consum.
2,896 $
(321)
880
(707)
2,748 $
11,015 $ 11,253 $ 3,177 — $
(827)
920
409
11,517 $
(585)
2,317
(5,941)
7,044 $ 2,644 — $
(219) —
590 —
(904) —
688 $
(823)
449
308
622 $
C&I
5,271 $
(455)
404
611
Resid.
Comm.
899 $
—
54
464
812 $
—
78
(210)
680 $
5,831 $ 1,417 $
Total
36,011
(3,230)
5,692
(5,970)
32,503
258 $
4 $
411 $
215 — $
28 $
1,130
—
— $
2,046
2,304 $
10,064 $
6,616 $ 2,365 — $
594 $
3,765 $ 1,372 $
680 $
27,760
186 $
1,449 $
17 $
64 —
— $
936 $
45
— $
2,697
(in thousands)
Ending balance:
Total loans
Individ. evaluated for
impairment
Loans pooled for
evaluation
Loans acquired with
deteriorated credit
quality
RE Mortgage
Home Equity
Auto
Other
Construction
Resid.
Comm.
Lines
Loans
Indirect Consum.
C&I
Resid.
Comm.
Total
Loans, net of unearned fees – As of December 31, 2016
$368,343 $1,685,121 $289,715 $46,182 — $30,766 $217,047 $55,429 $66,990 $2,759,593
$
4,094 $
15,081 $
3,196 $ 1,508 — $
154 $
4,096 $
11
— $
28,140
$362,780 $1,657,238 $282,159 $42,992 — $30,547 $208,960 $54,743 $66,990 $2,706,409
$
1,469 $
12,802 $
4,360 $ 1,682 — $
65 $
3,991 $
675
— $
25,044
72
Note 5 – Allowance for Loan Losses (continued)
RE Mortgage
Resid.
Comm.
Lines
Loans
Allowance for Loan Losses - Year Ended December 31, 2015
Home Equity
Auto
Indirect
Other
Consum.
3,086 $
(224)
204
(170)
2,896 $
9,227 $ 15,676 $ 1,797 $
(694)
666
(4,395)
(242)
252
1,370
—
243
1,545
9 $
(4)
42
(47)
11,015 $ 11,253 $ 3,177 — $
719 $
(972)
500
441
688 $
Construction
Comm.
Resid.
C&I
4,226 $ 1,434 $
(680)
677
1,048
5,271 $
—
1,728
(2,263)
899 $
411 $
—
140
261
812 $
Total
36,585
(2,816)
4,452
(2,210)
36,011
$
$
$
$
$
(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
335 $
396 $
605 $
294 — $
74 $
1,187
—
— $
2,891
2,501 $
9,167 $ 10,423 $ 2,883 — $
614 $
2,983 $
844 $
812 $
30,227
60 $
1,452 $
225
— —
— $
1,101 $
55
— $
2,893
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Loans, net of unearned fees – As of December 31, 2015
$314,265 $1,497,567 $322,492 $40,362 — $32,429 $194,913 $46,135 $74,774 $2,522,937
$
6,767 $
32,407 $
5,747 $ 1,731 — $
288 $
2,671 $
4 $
490 $
50,105
$305,353 $1,442,100 $309,007 $37,004 — $32,077 $187,393 $45,410 $74,284 $2,432,628
$
2,145 $
23,060 $
7,738 $ 1,627 — $
64 $
4,849 $
721
— $
40,204
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.
73
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
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Credit Quality Indicators – As of December 31, 2017
$315,120 $1,649,333 $265,345 $37,428 — $22,432 $195,208 $67,813 $64,492 $2,617,171
38,662
34,569
—
$320,522 $1,690,510 $269,942 $39,848 — $22,859 $209,437 $67,920 $69,364 $2,690,402
800 —
1,620 —
— —
18,434
22,743
—
2,558
2,039
—
2,234
3,168
—
9,492
4,737
—
4,872
—
—
—
107
—
272
155
—
218
1,890
—
11,513
559
—
$ 61,411 $ 203,751 $ 14,866 $ 2,433 — $ 2,207 $
450
932
—
$ 63,519 $ 215,823 $ 16,248 $ 2,698 — $ 2,251 $
$
45 $
2,498 $
$385,426 $1,914,896 $288,688 $43,031 —
263 $ 293,331
10 $
12,408
—
—
3,464
—
—
—
—
—
263 $ 309,203
10 $
15,560
— $
—
25,155 $220,412 $67,930 $69,627 $3,015,165
8,390 $
1
—
—
8,391 $
2,584
188 —
77 —
— —
485 — $
38
6
—
1,385 $
8,563 $
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Credit Quality Indicators – As of December 31, 2016
$278,635 $1,399,936 $258,024 $37,844 — $27,542 $190,902 $54,602 $57,808 $2,305,293
27,571
23,463
—
$284,539 $1,425,828 $263,590 $40,736 — $28,167 $200,735 $54,613 $58,119 $2,356,327
891 —
2,001 —
— —
14,341
11,551
—
2,992
2,912
—
2,518
3,048
—
6,133
3,700
—
311
—
—
—
11
—
385
240
—
5,925
7,240
—
1,849
1,486
—
$ 79,000 $ 233,326 $ 20,442 $ 3,506 — $ 2,437 $ 12,320 $
141 $ 8,871 $ 360,043
8,549
—
9,630
—
—
—
$ 82,335 $ 246,491 $ 21,765 $ 3,764 — $ 2,534 $ 12,321 $
141 $ 8,871 $ 378,222
25,044
3,991 $
$
— $
675
$368,343 $1,685,121 $289,715 $46,182 — $30,766 $217,047 $55,429 $66,990 $2,759,593
173 —
85 —
— —
4,360 $ 1,682 — $
—
—
—
1
—
—
509
814
—
92
5
—
12,802 $
1,469 $
65 $
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.
74
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:
(in thousands)
Originated loan balance:
Past due:
30-59 Days
60-89 Days
> 90 Days
Total past due
Current
Total orig. loans
> 90 Days and still
accruing
Nonaccrual loans
Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2017
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect Consum.
Other
Construction
C&I
Resid.
Comm.
Total
$
1,740 $
510
243
2,493 $
158 $
987
—
1,145 $
528
48
372
948
268,994
1,689,365
318,029
$320,522 $1,690,510 $269,942
$
$
511
107
373
991
38,857
$39,848
$
56 $
36
3
95 $
— $
956
—
738
—
1,527
— $
3,221
206,216
—
— $22,859 $209,437
22,764
$
34
—
—
34
67,886
$67,920
$
—
—
—
—
$69,364
$69,364
$
3,983
2,426
2,518
$
8,927
2,681,475
$2,690,402
—
1,725 $
$
—
8,144 $
—
811
—
$ 1,106
—
— $
—
7 $
—
3,669
—
—
—
—
$
—
15,462
The following table shows the ending balance of current, past due, and nonaccrual PNCI loans by loan category as of the date indicated:
Analysis of Past Due and Nonaccrual PNCI Loans – As of December 31, 2017
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
(in thousands)
PNCI loan balance:
Past due:
30-59 Days $ 1,495
90
60-89 Days
109
> 90 Days
$ 1,694
61,825
$ 63,519
Total past due
Current
Total PNCI loans
> 90 Days and still
accruing
Nonaccrual loans
81
$
$ 1,012
$
70
—
—
70
215,753
$ 215,823
$
$
298
228
330
856
15,392
$ 16,248
$
$
30
—
—
30
2,668
$2,698
$
—
—
$
$
200
402
—
44
$
75
—
—
—
—
—
—
—
—
$
6
26
—
32
2,219
$ 2,251
$
—
—
—
—
$8,391
$8,391
—
5
$
—
—
—
—
—
—
$ 10
$ 10
—
—
—
—
—
—
$ 263
$ 263
$
1,899
344
439
2,682
306,521
$ 309,203
$
—
—
$
$
281
1,463
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:
Analysis of Past Due and Nonaccrual 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
$
317 $
552 $
269
—
821 $
646
395
184
1,441 $ 1,225
283,718
39,511
$284,539 $1,425,828 $263,590 $40,736
1,387
216
1,920 $
754 $
—
687
1,423,908
262,149
$
921
16 $
30
15
61 $
4,354
— $
2,586
—
1,747
—
8,687
— $
—
2,347,640
— $28,167 $200,735 $54,613 $58,119 $2,356,327
1,148 $
84
634
1,866 $
— $
421
—
421 $
— $
11
932 $
198,869
57,698
53,681
28,106
(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
$
—
255 $
—
7,651 $
—
1,211 $
—
803
—
— $
—
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
73 $
—
81
154 $
274 $
—
589
863 $
$ 1,510 $
—
21
$ 1,531 $
80,804
39
—
13
52
3,712
$82,335 $246,491 $21,765 $ 3,764
—
67
—
1,826 $
—
194 $
—
742 $
246,337
20,902
$
—
—
—
—
—
—
—
—
—
—
—
—
— $ 2,534 $12,321 $
— $ 2,534 $12,321 $
—
— $
—
5
—
—
— $
—
—
— $
1,896
—
—
—
704
—
2,600
—
375,622
141 $ 8,871
141 $ 8,871 $378,222
—
—
—
2,834
— $
—
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
RE Mortgage
Home Equity
Resid.
Comm.
Lines
Loans
Auto
Indirect
Other
Consum.
Construction
C&I
Resid.
Comm.
Total
Impaired Originated Loans – As of December 31, 2017
$ 2,058 $13,101 $ 1,093 $ 1,107
$ 2,109 $13,360 $ 1,175 $ 1,429
852
$ 1,875 $13,123 $ 1,287 $
14
39 $
$
609 $
85 $
$ 1,881 $
$ 1,914 $
$
230 $
$ 1,626 $
58 $
$
810 $
826 $
30 $
728 $
36 $
198
198
10
341
10
401 $
406 $
111 $
415 $
8 $
76
— $
— $
— $
—
— $
— $
— $
— $
—
4 $
52 $
10 $
— $
575 $
585 $
668 $
18 $
3 $ 3,895
3 $ 3,981
3 $ 1,848
10 $ 3,615
166
— $
140
140
76
9
—
—
—
—
—
— $18,078
— $18,850
— $17,891
774
— $
— $ 7,188
— $ 7,328
— $ 2,232
— $ 6,735
278
— $
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
RE Mortgage
Home Equity
Auto
Other
Resid.
Comm.
Lines
Loans
Indirect Consum.
C&I
Construction
Resid. Comm.
Total
Impaired PNCI Loans – As of December 31, 2017
$1,359
$1,404
$ 911 $
24
$
— $ 591 $
— $ 612 $
913 $ 663 $
— $
22
44 —
57 —
56 — $
— —
—
—
2
—
— — — $ 1,994
— — — $ 2,073
— — — $ 2,545
46
— — — $
—
—
—
$ 130 $
—
— $ 603 $ 121 — $ 250
— $ 604 $ 121 — $ 250
— $ 316 $
54
97 — $
61 — $ 184
66 $ 577 $
11
26 $
6 — $
— $
974
— — — $
975
— — — $
— — — $
467
— — — $ 1,018
43
— — — $
RE Mortgage
Impaired Originated Loans – As of December 31, 2016
Home Equity
Other
Auto
Resid.
Comm.
Lines
Loans
Indirect Consum.
C&I
Construction
Resid. Comm.
Total
$1,820 $12,898 $1,480 $ 715 — $
$1,829 $13,145 $1,561 $1,135 — $
1 $
$2,853 $20,003 $2,221 $ 831 $
6 — $
$
570 $
92 $
40 $
15 $ 762 $ 11 — $17,701
29 $ 926 $ 16 — $18,641
7 — $26,601
16 $ 669 $
757
1 $
48 — — $
$1,551 $
$1,552 $
$ 180 $
$1,779 $
65 $
$
357 $ 430 $ 594 — $
358 $ 440 $ 595 — $
4 $ 110 $ 107 — $
888 $1,076 $ 634 — $
31 — $
22 $
9 $
19 $3,334 — — $ 6,285
19 $3,385 — — $ 6,349
13 $1,130 — — $ 1,544
9 $2,714 — — $ 7,100
206
77 — — $
2 $
RE Mortgage
Home Equity
Auto
Other
Resid.
Comm.
Lines
Loans
Indirect Consum.
C&I
Construction
Resid. Comm.
Total
Impaired PNCI Loans – As of December 31, 2016
$ 463 $ 1,826 $ 735 $
$ 486 $ 2,031 $ 746 $
$ 669 $ 1,479 $ 594 $
9 $
$
— $
7
67 — $
74 — $
69 — $
1 —
3
4
18 $
—
— — — $ 3,094
— — — $ 3,341
1 — $ 245 $ 3,075
17
— — — $
$ 259
$ 259
$
79
$ 130 $ 1,374 $ 579 $
27 $
$
— $ 551 $ 132 — $ 118
— $ 551 $ 132 — $ 118
15
— $ 300 $ 108 — $
85 — $ 176
5
7 — $
— $
10
— — — $ 1,060
— — — $ 1,060
— — — $
502
— — — $ 2,344
49
— — — $
77
Note 5 – Allowance for Loan Losses (continued)
At December 31, 2017, $12,517,000 of Originated loans were TDRs and classified as impaired. The Company had obligations to lend
$1,000 of additional funds on these TDRs as of December 31, 2017. At December 31, 2017, $1,352,000 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, 2017.
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.
The following tables show certain information regarding Troubled Debt Restructurings (TDRs) that occurred during the periods
indicated:
(dollars in thousands)
Number
Pre-mod outstanding principal balance
Post-mod outstanding principal balance
Financial impact due to
TDR taken as additional provision
Number that defaulted during the period
Recorded investment of TDRs that subsequently
defaulted during the 12 month period after
modification
Financial impact due to the default of previous
TDR taken as charge-offs or additional
RE Mortgage
Resid.
1
Comm.
8
$939 $3,721
$939 $3,695
Auto
TDR Information for the Year Ended December 31, 2017
Home Equity
Lines
3
$187
$187
Indirect Consum.
1
—
— $
— $
Loans
1
$252
$252
Other
C&I
11
26
14 $1,854 $144 — $7,111
14 $1,747 $144 — $6,978
Construction
Resid. Comm.
1 —
Total
$169 $ (111) $ 27 —
1
1
1
2
— $
—
11 $
—
37 — — $ 133
5
— — —
$223 $ 219
$127
$ 55
—
—
— — — $ 624
provisions
—
—
$ (5) —
—
—
— — — $
(5)
(dollars in thousands)
Number
Pre-mod outstanding principal balance
Post-mod outstanding principal balance
Financial impact due to
TDR taken as additional provision
Number that defaulted during the period
Recorded investment of TDRs that subsequently
defaulted during the 12 month period after
modification
Financial impact due to the default of previous
TDR taken as charge-offs or additional
RE Mortgage
Resid.
3
Comm.
5
$650 $ 423
$656 $ 461
Auto
TDR Information for the Year Ended December 31, 2016
Home Equity
Lines
9
$707
$709
Indirect Consum.
2
27 $
27 $
—
— $
— $
Loans
1
$105
$105
Other
C&I
Construction
Resid. Comm.
4 — —
24
77 — — $1,989
77 — — $2,035
Total
$ 50 $
2
46
—
$205 —
1 —
— $
—
2 $
—
23 — — $ 326
3
— — —
$101
—
$229 —
—
—
— — — $ 330
provisions
—
— — —
—
—
— — —
—
(dollars in thousands)
Number
Pre-mod outstanding principal balance
Post-mod outstanding principal balance
Financial impact due to TDR taken as additional
provision
Number that defaulted during the period
Recorded investment of TDRs that subsequently
defaulted during the 12 month period after
modification
Financial impact due to the default of previous
TDR taken as charge-offs or additional
provisions
RE Mortgage
Resid.
4
Comm.
5
$800 $1,518
$801 $1,517
Auto
TDR Information for the Year Ended December 31, 2015
Home Equity
Lines
2
$301
$301
Construction
Resid. Comm.
23
8 — —
89 $ 956 — — $3,979
89 $ 944 — — $3,973
Indirect Consum.
2
—
— $
— $
Loans
2
$315
$321
Other
Total
C&I
$
8 $
4
(5) —
3
2
$ 38
1
$
—
5 $ 405 — — $ 451
10
— — —
—
$221 $ 280
$182
$ 53
—
—
— — — $ 736
—
— —
$ (9) —
—
— — — $
(9)
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.
78
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):
Year ended December 31, 2017
Year ended December 31, 2016
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
Noncovered
3,763
$
1,563
(1,938)
(162)
3,226
(200)
16
2,656
718
$
$
$
$
Covered
$ 223
—
$ (223)
—
—
—
—
$ 216
$
(7)
Total
$ 3,986
1,563
(2,161)
(162)
$ 3,226
$ (200)
16
$ 2,872
711
$
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
$
At December 31, 2017, the balance of real estate owned includes $1,186,000 of foreclosed residential real estate properties recorded as
a result of obtaining physical possession of the property. At December 31, 2017, the recorded investment of consumer mortgage loans
secured by residential real estate properties for which formal foreclosure proceedings are underway is $178,000.
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,
2017
December 31,
2016
(In thousands)
$
$
$
9,959
50,340
35,939
96,238
(40,644)
55,594
2,148
57,742
9,522
42,345
31,428
83,295
(37,412)
45,883
2,523
48,406
$
Depreciation expense for premises and equipment amounted to $5,686,000, $5,314,000, and $5,043,000 in 2017, 2016, and 2015,
respectively.
79
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,
2017
$ 95,912
2,685
108
(922)
$ 97,783
$165,587
182
14
57
2016
$ 94,560
2,717
238
(1,603)
$ 95,912
$165,669
185
14
58
As of December 31, 2017, the Bank was the owner and beneficiary of 182 life insurance policies, issued by 14 life insurance
companies, covering 57 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,
2017
64,311
$
Additions
—
Reductions
—
December 31,
2016
64,311
$
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,
2017
$
$
9,558
(4,384)
5,174
Additions
—
—
—
Reductions/
Amortization
—
(1,389)
(1,389)
$
$
Fully
Depreciated
$
$
(562)
562
—
$
December 31,
2016
10,120
(3,557)
6,563
$
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
2018
2019
2020
2021
2022
Thereafter
Estimated Core Deposit
Intangible Amortization
1,324
$
1,228
1,228
969
280
145
80
Note 10 – Mortgage Servicing Rights
The following tables summarize the activity in, and the main assumptions we used to determine the fair value of mortgage servicing
rights for the periods indicated (dollars in thousands):
Balance at beginning of period
Acquisition
Originations
Change in fair value
Balance at end of period
Contractually specified servicing fees, late fees and ancillary fees
earned
Balance of loans serviced at:
Beginning of period
End of period
Weighted-average prepayment speed (CPR)
Weighted-average discount rate
$
Years ended December 31,
2016
7,618
—
1,161
(2,184)
6,595
$
2017
6,595
—
810
(718)
6,687
2,076
$
2,065
2015
7,378
—
941
(701)
7,618
2,164
$
$
$
$
$
$
$816,623
$811,065
$817,917
$816,623
$840,288
$817,917
8.9%
13.0%
8.8%
14.0%
9.8%
10.0%
The changes in fair value of MSRs during 2017 were primarily due to changes in investor required rate of return, or discount rate, of the
MSRs. The changes in fair value of MSRs during 2016 were primarily 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 were primarily 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 expenses, net
Payments made (received)
Gain on termination of loss share agreement
Ending balance
Amount of indemnification asset (liability) recorded in other assets
Amount of indemnification liability recorded in other liabilities
Ending balance
Year ended December 31,
2016
$(521)
2017
$(744)
2015
$(349)
(192)
(32)
—
256
712
—
—
—
—
(412)
(86)
2
273
—
$(744)
$ (60)
(684)
$(744)
(93)
(71)
4
(12)
—
$(521)
$ 77
(598)
$(521)
During May 2015, the indemnification portion of the Company’s agreement with the FDIC related to the Company’s acquisition of
certain nonresidential real estate loans of Granite in May 2010 expired. The indemnification portion of the Company’s agreement with
the FDIC related to the Company’s acquisition of certain residential real estate loans of Granite in May 2010 was set to expire in May
2018. The agreement specified that recoveries of losses that are claimed by the Company and indemnified by the FDIC under the
agreement that are recovered by the Company through May 2020 are to be shared with the FDIC in the same proportion as they were
indemnified by the FDIC. In addition, the agreement specified that at the end of the agreement in May 2020, to the extent that total
claimed losses plus servicing expenses, net of recoveries, claimed under the agreement over the entire ten year period of the agreement
did not meet a certain threshold, the Company would have been required to pay to the FDIC a “true up” amount equal to fifty percent of
the difference of the threshold and actual claimed losses plus servicing expenses, net of recoveries. On May 9, 2017, the Company and
the FDIC terminated their loss sharing agreements. As part of the termination agreement, the Company paid the FDIC $184,000, and
recorded a $712,000 gain representing the difference between the Company’s payment to the FDIC and the recorded payable balance on
May 9, 2017.
81
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
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
As of December 31,
2016
2017
$36,199
$21,697
3,045
4,111
2,039
1,126
249
16
1,702
1,706
18,465
16,854
2,120
2,242
6,460
4,754
2,896
—
1,568
2,545
$74,743
$55,051
December 31,
2017
$1,368,218
971,459
1,364,518
73,596
231,340
$4,009,131
2016
$1,275,745
887,625
1,397,036
75,184
259,970
$3,895,560
Certificate of deposit balances of $50,000,000 from the State of California were included in time certificates over $250,000 at
December 31, 2017 and 2016. 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 $1,366,000
and $1,191,000 were classified as consumer loans at December 31, 2017 and 2016, respectively.
At December 31, 2017, the scheduled maturities of time deposits were as follows (in thousands):
2018
2019
2020
2021
2020
Thereafter
Total
Scheduled
Maturities
$250,277
23,577
17,699
8,887
4,496
$304,936
Note 14 – Reserve for Unfunded Commitments
The following tables summarize the activity in reserve for unfunded commitments for the periods indicated (dollars in thousands):
Balance at beginning of period
Provision for losses – Unfunded commitments
Balance at end of period
82
Years ended December 31,
2016
$2,475
244
$2,719
2017
$2,719
445
$3,164
2015
$2,145
330
$2,475
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
Litigation contingency
Miscellaneous other liabilities
Total other liabilities
Note 16 – Other Borrowings
A summary of the balances of other borrowings follows:
FHLB collateralized borrowing, fixed rate, as of December 31, 2017 of
1.38%, payable on January 2, 2018
Other collateralized borrowings, fixed rate, as of December 31, 2017 of
0.05%, payable on January 2, 2018
Total other borrowings
December 31,
2017
$ 6,605
28,472
3,365
8,554
6,619
1,958
1,228
1,450
5,007
$63,258
2016
$ 6,525
26,645
3,007
15,176
5,704
2,146
726
1,450
5,985
$67,364
December 31,
2017
2016
(in thousands)
$104,729
—
17,437
$122,166
$17,493
$17,493
The Company did not enter into any other borrowings or repurchase agreements during 2017 or 2016.
The Company maintains a collateralized line of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2017,
this line provided for maximum borrowings of $1,365,325,000 of which $104,729,000 was outstanding, leaving $1,260,596,000
available. As of December 31, 2017, the Company had designated investment securities with a fair value of $67,325,000 and loans
totaling $1,992,980,000 as potential collateral under this collateralized line of credit with the FHLB.
The Company had $17,437,000 and $17,493,000 of other collateralized borrowings at December 31, 2017 and 2016, 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, 2017, the Company has pledged as collateral and sold under agreements to
repurchase investment securities with fair value of $33,531,000 under these other collateralized borrowings.
The Company maintains a collateralized line of credit with the Federal Reserve Bank of San Francisco (“FRB”). As of December 31,
2017, this line provided for maximum borrowings of $134,660,000 of which none was outstanding, leaving $134,660,000
available. As of December 31, 2017, the Company has designated investment securities with fair value of $17,000 and loans totaling
$245,532,000 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, 2017.
Note 17 – Junior Subordinated Debt
At December 31, 2017, 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.
83
Note 17 – Junior Subordinated Debt (continued)
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.
The following table summarizes the terms and recorded balance of each subordinated debenture as of the date indicated (dollars in
thousands):
Subordinated
Debt Series
TriCo Cap Trust I
TriCo Cap Trust II
North Valley Trust II
North Valley Trust III
North Valley Trust IV
Maturity
Date
Face
Value
10/7/2033 $20,619
20,619
7/23/2034
6,186
4/24/2033
5,155
4/24/2034
10,310
3/15/2036
$62,889
Coupon Rate
(Variable)
Current
As of December 31, 2017
Recorded
Book Value
3 mo. LIBOR + Coupon Rate
3.05%
2.55%
3.25%
2.80%
1.33%
4.41% $
3.91%
4.63%
4.16%
2.92%
$
20,619
20,619
5,135
4,041
6,444
56,858
Note 18 – Commitments and Contingencies
Restricted Cash Balances— Reserves (in the form of deposits with the San Francisco Federal Reserve Bank) of $82,068,000 and
$78,183,000 were maintained to satisfy Federal regulatory requirements at December 31, 2017 and 2016. These reserves are included in
cash and due from banks in the accompanying consolidated balance sheets.
Lease Commitments— The Company leases 48 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, 2017, future minimum commitments under
non-cancelable operating leases with initial or remaining terms of one year or more are as follows:
2018
2019
2020
2021
2022
Thereafter
Future minimum lease payments
Operating Leases
(in thousands)
$
$
3,278
2,499
1,847
1,488
757
798
10,667
Rent expense under operating leases was $5,885,000 in 2017, $6,082,000 in 2016, and $6,241,000 in 2015. Rent expense was offset by
rent income of $44,000 in 2017, $220,000 in 2016, and $217,000 in 2015.
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.
84
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,
2017
December 31,
2016
$ 257,220
422,958
66,267
187,097
13,075
98,260
$ 220,836
406,855
42,184
97,399
12,763
98,583
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 the date of filing the action.
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. This matter was
transferred to the Butte County Superior Court and consolidated with the case above, effective August 25, 2017.
As part of the mediations, which took place concurrently, the Bank agreed in principal to settle the two matters in a consolidated
settlement proceeding. The agreement was preliminarily approved by the court and notices were sent to the members of the purported
classes. After reviewing the received claims, on January 12, 2018, the final settlement agreement was approved by the court. The total
cost to the bank was $1,469,000, as compared to the balance accrued for litigation contingencies as of December 31, 2017 and 2016 of
$1,450,000.
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.
85
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, 2017, the value of the Class A shares was $114.02 per share. Utilizing the
conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was $2,518,000 as of December 31, 2017, 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 $19,236,000, $16,758,000, and $13,304,000 in 2017, 2016,
and 2015, 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, 2017, the Bank could have paid dividends
of $85,254,000 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, 2017, the Company had repurchased 166,600 shares under this plan. During the year ended December 31, 2017, there
were no shares of common stock repurchased under this plan.
Stock Repurchased Under Equity Compensation Plans
During the years ended December 31, 2017, 2016, and 2015, employees tendered 107,390, 264,800, and 106,355 of the Company’s
common stock with market value of $3,854,000, $7,879,000, and $2,868,000, 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.
86
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 RSU. 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, 2017,
411,900 options for the purchase of common shares, and 121,286 RSUs were outstanding, and 527,039 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, 2017, 34,500
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, 2016
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2017
Number of
Shares
592,250
—
(145,850)
—
446,400
Option Price
per Share
to
to
to
to
to
$12.63
—
$14.54
—
$12.63
$23.21
—
$22.54
—
$23.21
Weighted
Average
Exercise
Price
$ 17.12
—
$ 17.97
—
$ 16.84
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, 2017:
Number of options
Weighted average exercise price
Intrinsic value (in thousands)
Weighted average remaining contractual term (yrs.)
Currently
Exercisable
422,100
16.65
$
8,953
$
3.8
Currently Not
Exercisable
24,300
20.21
429
5.7
$
$
Total
Outstanding
446,400
16.84
9,382
3.9
$
$
The 24,300 options that are currently not exercisable as of December 31, 2017 are expected to vest, on a weighted-average basis, over
the next 0.7 years, and the Company is expected to recognize $108,000 of pre-tax compensation costs related to these options as they
vest. The Company did not modify any option grants during 2017 or 2016.
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
Excess tax benefit recognized in income
During 2017, 2016 and 2015, the Company granted no options.
87
2017
$2,657,000
$ 259,000
$ 259,000
Years Ended December 31,
2016
$3,483,000
$ 580,000
$ 580,000
2015
$969,000
$734,000
$734,000
$ 109,000
$ 906,000
$ 244,000
—
$380,000
—
Note 20 – Stock Options and Other Equity-Based Incentive Instruments (continued)
Restricted stock unit (RSU) activity is summarized in the following table for the dates indicated:
Outstanding at December 31, 2016
RSUs granted
Additional market plus service
condition RSUs vested
RSUs added through dividend
credits
RSUs released
RSUs forfeited/expired
Outstanding at December 31, 2017
Service Condition Vesting RSUs
Weighted
Average Fair
Value on
Date of Grant
Number
of RSUs
68,450
29,669
$35.36
1,245
(30,896)
(11)
68,457
Market Plus Service Condition Vesting RSUs
Weighted
Average Fair
Value on
Date of Grant
$32.95
Number
of RSUs
47,426
17,939
6,269
—
(18,805)
—
52,829
The 68,457 of service condition vesting RSUs outstanding as of December 31, 2017 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 68,457 of service condition vesting RSUs outstanding as of December 31, 2017 are expected to vest, and be
released, on a weighted-average basis, over the next 1.2 years. The Company expects to recognize $1,448,000 of pre-tax compensation
costs related to these service condition vesting RSUs between December 31, 2017 and their vesting dates. The Company did not modify
any service condition vesting RSUs during 2017 or 2016.
The 52,829 of market plus service condition vesting RSUs outstanding as of December 31, 2017 are expected to vest, and be released,
on a weighted-average basis, over the next 1.4 years. The Company expects to recognize $724,000 of pre-tax compensation costs
related to these RSUs between December 31, 2017 and their vesting dates. As of December 31, 2017, 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 79,243 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 2017 or 2016.
The following table shows the compensation costs for RSUs recognized in income for the periods indicated:
Total compensation costs for RSUs recognized in income:
Service condition vesting RSUs
Market plus service condition vesting RSUs
88
Year Ended December 31,
2016
2017
2015
$895,000
$432,000
$616,000
$271,000
$458,000
$179,000
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
Gain on sale of investments
Lease brokerage income
Gain on sale of foreclosed assets
Change in indemnification asset
Sale of customer checks
Life insurance benefit in excess of cash value
Loss on disposal of fixed assets
Other
Total other noninterest income
Total noninterest income
2017
$16,056
16,727
3,282
2,076
(718)
Years Ended December 31,
2016
$14,365
15,859
3,121
2,065
(2,184)
33,226
4,037
2,329
2,717
—
711
262
(493)
408
238
(147)
1,275
11,337
$44,563
37,423
3,109
2,729
2,685
961
782
711
490
372
108
(142)
793
12,598
$50,021
2015
$14,276
13,364
2,977
2,164
(701)
32,080
3,064
3,349
2,786
—
712
991
(207)
492
155
(129)
2,054
13,267
$45,347
Mortgage loan servicing fees, net of change in fair value of mortgage loan servicing rights, totaling $1,358,000, $(119,000), and
$1,463,000 were recorded in service charges and fees noninterest income for the years ended December 31, 2017, 2016, and 2015,
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
Data processing and software
Equipment
ATM & POS network charges
Advertising
Professional fees
Telecommunications
Assessments
Operational losses
Intangible amortization
Postage
Courier service
Change in reserve for unfunded commitments
Foreclosed assets expense
Provision for foreclosed asset losses
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
Data processing and software
Professional fees
Other
Total merger expense
2017
$ 54,589
9,227
19,114
82,930
10,894
10,448
7,141
4,752
4,101
3,745
2,713
1,676
1,394
1,389
1,296
1,035
445
231
162
—
530
12,142
64,094
$147,024
Years Ended December 31,
2016
$ 53,169
8,872
18,683
80,724
10,139
8,846
6,597
4,999
3,829
5,409
2,749
2,105
1,564
1,377
1,603
998
244
266
140
1,450
784
12,174
65,273
$145,997
2015
$ 46,822
6,964
17,619
71,405
10,126
7,670
5,997
4,190
3,992
4,545
3,007
2,572
737
1,157
1,296
1,154
330
490
502
—
586
11,085
59,436
$130,841
—
—
513
17
530
$
$
187
—
342
255
784
—
108
120
358
586
$
$
$
$
89
Note 22 – Income Taxes
The components of consolidated income tax expense are as follows:
Current tax expense
Federal
State
Deferred tax expense
Federal
State
Total tax expense
2017
2016
(in thousands)
2015
$17,835
6,650
$24,485
11,418
1,055
12,473
$36,958
$
$
17,401
7,121
24,522
2,735
455
3,190
27,712
$21,076
7,139
28,215
408
273
681
$28,896
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.
On December 22, 2017, President Donald Trump signed into law “H.R.1”, commonly known as the “Tax Cuts and Jobs Act”, which
among other items reduces the Federal corporate tax rate from 35% to 21%. The Company’s deferred tax expense as of December 31,
2017 includes $7,416,000 from the re-measurement of deferred taxes and $226,000 from an acceleration of amortization expense on the
low income housing tax credit investments.
Taxes recorded directly to shareholders’ equity are not included in the preceding table. These taxes relating to changes in unfunded
status of the supplemental retirement plans amounting to $400,000 in 2017, $429,000 in 2016, and $904,000 in 2015, taxes (benefits)
related to unrealized gains and losses on available-for-sale investment securities amounting to $2,722,000 in 2017, $(4,631,000) in
2016, and $(797,000) in 2015, taxes (benefits) related to equity compensation of $0 in 2017, $(170,000) in 2016, and $(28,000) in 2015,
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,
Tax credits and other tax benefits – decrease in tax expense
Amortization – increase in tax expense
2017
$(1,753)
$ 1,611
2016
(in thousands)
$
$
(954)
757
2015
$(354)
$ 277
The carrying value of Low Income Housing Tax Credit Funds was $16,854,000 and $18,465,000 as of December 31, 2017 and 2016,
respectively. As of December 31, 2017, the Company has committed to make additional capital contributions to the Low Income
Housing Tax Credit Funds in the amount of $8,554,000, 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, 2017, 2016 and 2015 differ from
amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory
federal income tax rate are reconciled as follows:
Federal statutory income tax rate
State income taxes, net of federal tax benefit
Tax Cuts and Jobs Act impact on deferred re-measurement
Tax-exempt interest on municipal obligations
Tax-exempt life insurance related income
Equity compensation
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
90
Years Ended December 31,
2016
35.0%
6.8
—
(1.8)
(1.3)
—
(1.3)
0.8
0.1
—
(0.1)
38.2%
2017
35.0%
6.9
9.6
(1.9)
(1.3)
(1.2)
(2.3)
2.1
0.1
0.2
0.5
47.7%
2015
35.0%
6.6
—
(0.7)
(1.3)
—
(0.4)
—
0.1
—
0.4
39.7%
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
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
2017
2016
(in thousands)
$ 9,900
1,953
6,835
171
522
1,582
1,397
1,322
282
59
—
2,187
1,008
581
1,801
508
30,108
(958)
(1,987)
(30)
(315)
(1,943)
(916)
(1,783)
(479)
(8,411)
$ 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)
$21,697
$ 36,199
As part of the merger with North Valley Bancorp 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, 2017 were $21.4 million for California.
The amount of the Company’s tax credits that would be subject to these limitations as of December 31, 2017 are $69,000 and $648,000
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 Bancorp merger.
As part of the North Valley Bancorp merger, TriCo inherited an unrecognized tax benefit for tax positions claimed on prior year tax
returns filed by North Valley Bancorp. The Company had an unrecognized tax benefit of $60,000 as of December 31, 2017, the
recognition of which would reduce the Company’s tax expense by $34,000. 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 2017 is as follows:
(in thousands)
As of December 31, 2016
Lapse of the applicable statute of limitations
As of December 31, 2017
UTB
$114
(54)
$ 60
Interest/Penalties
7
$
(5)
2
$
Total
$121
(59)
$ 62
During the years ended December 31, 2017 and December 31, 2016 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 2014 and 2013, respectively.
91
Note 23 – Earnings per Share
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if
dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance.
Potential common shares that may be issued by the Company relate solely from outstanding stock options, and are determined using the
treasury stock method. Earnings per share have been computed based on the following:
Net income (in thousands)
Years ended December 31,
2016
$44,811
2017
$40,554
2015
$43,818
(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
22,912
338
22,814
273
22,750
248
23,250
23,087
22,998
Based on an average of quarterly computations, there were 0, 13,825, and 20,625 options and restricted stock units excluded from the
computation of annual diluted earnings per share for the years ended December 31, 2017, 2016 and 2015, 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:
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)
$ 2,685
92
2017
Years Ended December 31,
2016
(in thousands)
2015
$ 6,422
$(11,015)
(961)
—
$(1,895)
—
5,461
(2,296)
3,165
(11,015)
4,631
(6,384)
(1,895)
797
(1,098)
(1,016)
511
1,384
(12)
390
378
(638)
268
(370)
(110)
—
(110)
—
(110)
(40)
550
510
(57)
823
766
1,021
(429)
2,150
(904)
592
(343)
—
(343)
—
(343)
$ (6,135)
1,246
277
—
277
—
277
425
$
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
December 31,
2017
2016
(in thousands)
$(3,409)
1,008
(2,401)
(5,352)
2,250
(3,102)
(150)
—
(150)
$(5,228)
$(8,870)
3,729
(5,141)
(4,714)
1,982
(2,732)
(40)
—
(40)
$(7,913)
Note 25 – Retirement Plans
401(k) Plan
The Company sponsors a 401(k) Plan whereby substantially all employees age 21 and over with 90 days of service may participate.
Participants may contribute a portion of their compensation subject to certain limits based on federal tax laws. 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 $776,000,
$678,000, and $300,000, of salaries & benefits expense attributable to the 401(k) Plan matching contribution during the years 2017,
2016, and 2015, respectively. The Company made $767,000, $811,000, and $0, of 401(k) Plan matching contributions during the years
2017, 2016, and 2015, 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 $2,073,000, $1,368,000,
and $2,651,000 were made during 2017, 2016, and 2015, respectively. Expenses related to the Company’s ESOP, are included in
benefits and other compensation costs under salaries and benefits expense, and were $2,149,000, $1,831,000, and $2,282,000 during
2017, 2016, and 2015, 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 $6,605,000, and $6,525,000 at December 31, 2017 and 2016, respectively. Earnings credits on deferred
balances totaling $478,000 in 2017, $487,000 in 2016, and $538,000 in 2015 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 $97,783,000 and $95,912,000 at
December 31, 2017 and 2016, respectively.
The Company recorded in other liabilities the unfunded status of the supplemental retirement plans of $5,352,000 and $4,714,000
related to the supplemental retirement plans as of December 31, 2017 and 2016, 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.
93
Note 25 – Retirement Plans (continued)
At December 31, 2017 and 2016, the unfunded status of the supplemental retirement plans of $5,352,000 and $4,714,000 were offset by
a reduction of shareholders’ equity accumulated other comprehensive loss of $3,102,000 and $2,732,000, respectively, representing the
after-tax impact of the unfunded status of the supplemental retirement plans, and the related deferred tax asset of $2,250,000 and
$1,982,000, 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 $509,000 of the net actuarial loss reported in the following
table as of December 31, 2017 as a component of net periodic benefit cost during 2018.
(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,
$
2017
4
(248)
5,596
5,352
(2,250)
$
2016
7
(75)
4,782
4,714
(1,982)
$ 3,102
$ 2,732
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
Plan amendments
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Fair value of plan assets at end of year
Funded status
Unrecognized net obligation existing at January 1, 1986
Unrecognized net actuarial loss
Unrecognized prior service cost
Accumulated other comprehensive income
Accrued benefit cost
Accumulated benefit obligation
December 31,
2017
2016
(in thousands)
$(26,645)
—
(941)
(991)
(1,203)
185
1,123
$(28,472)
$ —
$ —
$(28,472)
4
5,596
(248)
(5,352)
$(28,472)
$(26,432)
$(26,184)
—
(1,042)
(1,025)
511
—
1,095
$(26,645)
$ —
$ —
$(26,645)
7
4,782
(75)
(4,714)
$(26,645)
$(25,241)
The following table sets forth the net periodic benefit cost recognized for the supplemental retirement plans:
2017
Years Ended December 31,
2016
(in thousands)
2015
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
94
$ 941
991
2
(12)
390
$2,312
$1,042
1,025
2
(41)
549
$2,577
$1,023
957
2
(57)
823
$2,748
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
Years Ended December 31,
2016
3.80%
4.00%
2.50%
2.50%
2017
3.40%
3.84%
3.25%
0.00%
2015
4.00%
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
2018
2019
2020
2021
2022
2023-2027
Expected Benefit
Payments to
Participants
Estimated
Company
Contributions
(in thousands)
$
$
$
1,106
1,067
1,233
1,859
2,008
10,169
1,106
1,067
1,233
1,859
2,008
10,169
$
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, 2015
Advances/new loans
Removed/payments
Balance December 31, 2016
Advances/new loans
Removed/payments
Balance December 31, 2017
$ 4,201
730
(2,499)
$ 2,432
437
(721)
$ 2,148
Deposits of directors, officers and other related parties to the Bank totaled $46,025,000 and $69,755,000 at December 31, 2017 and
2016, 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 -
Level 3 -
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions
are observable in the market.
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the
market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing
the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar
techniques.
95
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, 2017
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, 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
96
Total
Level 1
Level 2
Level 3
$604,789
123,156
2,938
6,687
$737,570
—
—
$2,938
—
$2,938
$604,789
123,156
—
—
$727,945
—
—
—
$6,687
$6,687
Total
Level 1
Level 2
Level 3
$429,678
117,617
2,938
6,595
$556,828
—
—
$2,938
—
$2,938
$429,678
117,617
—
—
$547,295
—
—
—
$6,595
$6,595
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 2017 or 2016.
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, 2017, 2016, and 2015. Had there been any transfer into or out of Level 3
during 2017, 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,
2017: Mortgage servicing rights
2016: Mortgage servicing rights
2015: Mortgage servicing rights
Ending
Balance
$6,687
$6,595
$7,618
Transfers
into (out of)
Level 3
Change
Included
in Earnings
—
—
—
$
(718)
$ (2,184)
(701)
$
Issuances
$
810
$ 1,161
941
$
Beginning
Balance
$ 6,595
$ 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, 2017 and 2016:
Fair Value
(in thousands)
Valuation
Technique
Unobservable
Inputs
Range,
Weighted Average
December 31, 2017
Mortgage Servicing Rights
December 31, 2016
Mortgage Servicing Rights
$
$
6,687
Discounted cash flow
Constant prepayment rate
Discount rate
6.2%-22.0%, 8.9%
13.0%-15.0%, 13.0%
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, 2017
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total assets measured at fair value
Year ended December 31, 2016
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total assets measured at fair value
Total
Level 1
Level 2
Level 3
Total Gains
(Losses)
$2,767
2,217
$4,984
—
—
—
—
$2,767
2,217
$4,984
$ (1,452)
(135)
$ (1,587)
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)
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.
97
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, 2017 and 2016:
December 31, 2017
Impaired Originated & PNCI loans
Fair Value
(in thousands)
$
2,767
Foreclosed assets (Land &
$
1,341
construction)
Foreclosed assets (residential
(Residential real estate)
Foreclosed assets (Commercial real
$
$
622
254
estate)
December 31, 2016
Impaired Originated & PNCI loans
Fair Value
(in thousands)
$
1,107
Foreclosed assets (Land &
$
15
construction)
Foreclosed assets (residential
(Residential real estate)
Foreclosed assets (Commercial real
$
$
1,564
674
estate)
Valuation
Technique
Sales comparison
approach
Income approach
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach
Valuation
Technique
Sales comparison
approach
Income approach
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach
Unobservable
Inputs
Adjustment for differences
between comparable sales
Capitalization rate
Adjustment for differences
between comparable sales
Adjustment for differences
between comparable sales
Adjustment for differences
between comparable sales
Unobservable
Inputs
Adjustment for differences
between comparable sales
Capitalization rate
Adjustment for differences
between comparable sales
Adjustment for differences
between comparable sales
Adjustment for differences
between comparable sales
Range,
Weighted Average
Not meaningful
N/A
Not meaningful
Not meaningful
Not meaningful
Range,
Weighted Average
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.
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.
98
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.
Accrued Interest Receivable and Payable - Specific identification of the carrying value and fair value of accrued interest receivable and
payable are not considered significant for financial reporting purposes, however, their fair value hierarchy would be based on the of the
related asset or liability.
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
$ 105,968
99,460
$ 105,968
99,460
$
92,197
213,415
$
92,197
213,415
December 31, 2017
December 31, 2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
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:
514,844
16,956
4,616
518,165
N/A
4,616
602,536
16,596
2,998
603,203
N/A
2,998
2,984,842
2,992,225
2,727,090
2,763,473
4,009,131
122,166
4,006,620
122,166
3,895,560
17,493
3,893,941
17,493
Junior subordinated debt
$
56,858
$
58,466
$
56,667
$
49,033
Off-balance sheet:
Level 3 inputs:
Commitments
Standby letters of credit
Overdraft privilege commitments
Contract
Amount
Fair
Value
Contract
Amount
Fair
Value
$ 933,542
13,075
$
98,260
$
$
$
$
9,335
131
983
$ 767,274
12,763
$
98,583
$
$
$
$
7,673
128
986
99
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 22,955,963 and 22,867,802 shares, respectively
Retained earnings
Accumulated other comprehensive loss, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Income
2017
December 31,
2017
2016
(in thousands)
$
3,924
557,538
1,721
$563,183
$
517
56,858
57,375
$
2,802
529,907
1,711
$534,420
$
406
56,667
57,073
255,836
255,200
(5,228)
505,808
$563,183
252,820
232,440
(7,913)
477,347
$534,420
Interest expense
Administration expense
Loss before equity in net income of Tri Counties Bank
Equity in net income of Tri Counties Bank:
Distributed
Undistributed
Income tax benefit
Net income
Condensed Statements of Comprehensive Income
2017
Net income
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities arising during the
period
Change in minimum pension liability
Change in joint beneficiary agreement liability
Other comprehensive income (loss)
Comprehensive 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
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
100
Years ended December 31,
2016
(in thousands)
$ (2,229)
(725)
(2,954)
$ (2,535)
(915)
(3,450)
2015
$ (1,977)
(814)
(2,791)
19,236
23,359
1,409
$ 40,554
16,758
29,764
1,243
$ 44,811
13,304
32,131
1,174
$ 43,818
Years ended December 31,
2016
(in thousands)
$ 44,811
2015
$ 43,818
$ 40,554
3,165
(370)
(110)
2,685
$ 43,239
(6,384)
592
(343)
(6,135)
$ 38,676
(1,098)
1,246
277
425
$ 44,243
2017
Years ended December 31,
2016
(in thousands)
2015
$ 40,554
$ 44,811
$ 43,818
(23,359)
1,586
—
(1,295)
17,486
(29,764)
1,467
(155)
(1,210)
15,149
(32,131)
1,370
68
(1,120)
12,005
396
—
(1,629)
(15,131)
(16,364)
1,122
2,802
$ 3,924
518
155
(1,890)
(13,695)
(14,912)
237
2,565
$ 2,802
660
(68)
(412)
(11,849)
(11,669)
336
2,229
$ 2,565
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 present actual and required capital ratios as of December 31, 2017 and 2016 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, 2017
and 2016 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.
As of December 31, 2017:
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
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
Actual
Amount
Ratio
Minimum Capital
Required – Basel III
Phase-in Schedule
Ratio
Amount
Minimum Capital
Required – Basel III
Fully Phased In
Amount
Ratio
(dollars in thousands)
Required to be
Considered Well
Capitalized
Amount
Ratio
$528,805
$525,384
14.07% $347,694
13.98% $347,535
9.250% $394,679
9.250% $394,499
10.50%
N/A
10.50% $375,713
N/A
10.00%
$495,318
$491,897
13.18% $272,517
13.09% $272,392
7.250% $319,502
7.250% $319,356
N/A
8.50%
8.50% $300,570
N/A
8.00%
$440,643
$491,897
11.72% $216,134
13.09% $216,035
5.750% $263,120
5.750% $262,999
N/A
7.00%
7.00% $244,214
$495,318
$491,897
10.80% $183,400
10.73% $183,394
4.000% $183,400
4.000% $183,394
4.00%
N/A
4.00% $229,243
N/A
6.50%
N/A
5.00%
$503,283
$500,876
14.77% $293,854
14.71% $293,706
8.625% $357,735
8.625% $357,556
N/A
10.50%
10.50% $340,529
N/A
10.00%
$468,061
$465,654
13.74% $225,714
13.67% $225,601
6.625% $289,595
6.625% $289,450
N/A
8.50%
8.50% $274,725
N/A
8.00%
$414,632
$465,654
12.17% $174,609
13.66% $174,521
5.125% $238,490
5.125% $238,370
7.00%
N/A
7.00% $221,344
$468,061
$465,654
10.62% $176,346
10.56% $176,341
4.000% $176,346
4.000% $176,341
4.00%
N/A
4.00% $220,426
N/A
6.50%
N/A
5.00%
As of December 31, 2017, 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, 2017 and December 31, 2016, the Bank’s capital levels exceeded the
minimum amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action.
Beginning January 1, 2016, the Basel III Capital Rules implemented a requirement for all banking organizations to maintain a capital
conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions,
stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of
common equity tier 1 capital, and it applies to each of the risk-based capital ratios but not the leverage ratio. At December 31, 2017 and
2016, the Company and the Bank were in compliance with the capital conservation buffer requirements, which were 1.25% and
0.625%, respectively. The three risk-based capital ratios will increase by 0.625% each year through 2019, at which point, the common
equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratio minimums will be 7.0%, 8.5% and 10.5%, respectively.
101
Note 30 – Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters of 2017 and 2016, and is unaudited; however, in the opinion
of Management, it reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the
summarized results for such periods.
Interest and dividend income:
Loans:
Discount accretion PCI – cash basis
Discount accretion PCI – other
Discount accretion PNCI
All other loan interest income
Total loan interest income
Debt securities, dividends and interest bearing cash at Banks
(not FTE)
Total interest income
Interest expense
Net interest income
Provision for (benefit from 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 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
102
2017 Quarters Ended
December 31,
September 30,
June 30,
March 31,
(dollars in thousands, except per share data)
$
$
$
$
516
445
528
36,705
38,194
8,767
46,961
1,868
45,093
1,677
43,416
12,478
38,076
17,818
14,829
2,989
0.13
0.17
$
$
$
$
398
407
559
35,904
37,268
8,645
45,913
1,829
44,084
765
43,319
12,930
37,222
19,027
7,130
11,897
0.51
0.17
$
386
797
987
34,248
36,418
8,626
45,044
1,610
43,434
(796)
44,230
12,910
35,904
21,236
7,647
$13,589
$
$
0.58
0.17
$
112
631
798
33,373
34,914
8,570
43,484
1,491
41,993
(1,557)
43,550
11,703
35,822
19,431
7,352
$12,079
$
$
0.52
0.15
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
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, 2017.
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.
In addition to management’s assessment, 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, 2017, and the Company’s effectiveness of
internal control over financial reporting as of December 31, 2017, dated March 1, 2018, 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 1, 2018
103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
TriCo Bancshares
Chico, California
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of TriCo Bancshares (the “Company”) as of December 31, 2017 and
2016, 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, 2017, and the related notes (collectively referred to as the “financial
statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as
of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
We have served as the Company’s auditor since 2012.
Sacramento, California
March 1, 2018
104
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, 2017, 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, 2017, 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 103 of this report and is incorporated herein by
reference. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by
Crowe Horwath LLP, an independent registered public accounting firm, as stated in its report, which is set forth on page 104 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, 2017, 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 2017 was so disclosed.
105
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 shall either be incorporated herein by reference from the Company’s Proxy Statement for the
2018 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
2018 annual meeting of shareholders, which will be filed with the Commission pursuant to Regulation 14A or included in an
amendment to this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 12 shall either be incorporated herein by reference from the Company’s Proxy Statement for the
2018 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
2018 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
2018 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.
106
Exhibit
No.
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19
10.20*
EXHIBIT INDEX
Exhibit
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).
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).
Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George Barstow,
Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Richard O’Sullivan, Thomas Reddish, Jerald
Sax, and Richard Smith (incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003).
Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral,
William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Vereschagin
(incorporated by reference to Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2003).
Form of Tri Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and
each of Craig Carney, Richard Miller, Richard O’Sullivan, and Thomas Reddish (incorporated by reference to Exhibit
10.16 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
Form of Tri Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and
each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Carroll Taresh, and Alex
Vereschagin (incorporated by reference to Exhibit 10.17 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
Form of Indemnification Agreement between TriCo and its directors and executive officers (incorporated by reference to
Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed September 10, 2013).
Form of Indemnification Agreement between Tri Counties Bank its directors and executive officers (incorporated by
reference to Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed September 10, 2013).
Form of Stock Option, Stock Appreciation Right, Restricted Stock Unit Award, and Performance Share Award
Agreements, and Notice of Grant of Stock Option pursuant to TriCo’s 2009 Equity Incentive Plan.
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).
107
Item 6 – Exhibits (continued)
10.21*
10.22*
10.23*
10.24*
21.1
23.1
31.1
31.2
32.1
32.2
Form of Restricted Stock Unit Agreement and Grant Notice for Directors pursuant to TriCo’s 2009 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed November 14, 2014).
Form of Performance Award Agreement and Grant Notice pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated
by reference to Exhibit 10.3 to TriCo’s Current Report on Form 8-K filed August 13, 2014).
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).
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
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan or arrangement
108
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 1, 2018
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 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
Date: March 1, 2018
/s/ Richard P. Smith
Richard P. Smith, President, Chief Executive
Officer and Director (Principal Executive Officer)
/s/ Thomas J. Reddish
Thomas J. Reddish, Executive Vice President and Chief
Financial Officer (Principal Financial and Accounting
Officer)
/s/ Donald J. Amaral
Donald J. Amaral, Director
/s/ William J. Casey
William J. Casey, Director and Chairman of the Board
/s/ Craig S. Compton
Craig S. Compton, Director
/s/ L. Gage Chrysler
L. Gage Chrysler, Director
/s/ Cory W. Giese
Cory W. Giese, Director
/s/ John S.A. Hasbrook
John S.A. Hasbrook, Director
/s/ 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
109
Exhibit 10.19
Form of Stock Option, Stock Appreciation Right, Restricted Stock Unit Award, and Performance Share Award Agreements,
and Notice of Grant of Stock Option pursuant to TriCo’s 2009 Equity Incentive Plan
Trico Bancshares
2009 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)
Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Stock Option Agreement, Trico Bancshares (the
“Company”) has granted you an option under its 2009 Equity Incentive Plan (the “Plan”) to purchase the number of shares of the
Company’s Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not
explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that
vesting will cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your
exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments.
3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You
may elect to make payment of the exercise price in cash or by check or in any other manner permitted by your Grant Notice, which
may include one or more of the following:
(a) Bank draft or money order payable to the Company.
(b) In the Company’s sole discretion at the time your option is exercised and provided that at the time of exercise the
Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T
as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales
proceeds (“Cashless Exercise”).
(c) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to
the Company’s reported earnings (generally six (6) months) or that you did not acquire, directly or indirectly from the Company, that
are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of
exercise. “Delivery” for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include
delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company.
Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender
would violate the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.
(d) Provided that at the time of exercise the Company has adopted FAS 123, as revised, by a “net exercise” arrangement
pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise of your option by the largest
whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the
Company shall accept a cash or other payment from you to the
extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be
issued; provided further, however, that shares of Common Stock will no longer be outstanding under your option and will not be
exercisable thereafter to the extent that (1) shares are used to pay the exercise price pursuant to the “net exercise,” (2) shares are
delivered to you as a result of such exercise, and (3) shares are withheld to satisfy tax withholding obligations.
4. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your
option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of
Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the
registration requirements of the Securities Act. The exercise of your option also must comply with other applicable laws and regulations
governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material
compliance with such laws and regulations.
6. TERM. You may not exercise your option before the commencement or after the expiration of its term. The term of your option
commences on the Date of Grant and expires upon the earliest of the following:
(a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death,
provided that if during any part of such three (3) month period your option is not exercisable solely because of the condition set forth in
the above section “Securities Law Compliance,” your option shall not expire until the earlier of the Expiration Date or until it shall have
been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service;
(b) three (3) months after the termination of your Continuous Service due to your Disability;
(c) three (3) months after your death if you die either during your Continuous Service or within three (3) months after your
Continuous Service terminates;
(d) the Expiration Date indicated in your Grant Notice; or
(e) the day before the tenth (10th) anniversary of the Date of Grant.
If your option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive
Stock Option, the Code requires that at all times beginning on the date of grant of your option and ending on the day three (3) months
before the date of your option’s exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or
Disability. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but
cannot guarantee that your option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the
Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more
than three (3) months after the date your employment with the Company or an Affiliate terminates.
7. EXERCISE.
(a) You may exercise the vested portion of your option during its term by delivering a Notice of Exercise (in a form
designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company
may designate, during regular business hours, together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to
enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising
by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are
subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise.
(c) If your option is an Incentive Stock Option, by exercising your option you agree that you will notify the Company in
writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your
option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are
transferred upon exercise of your option.
8. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is
exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form
satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise
your option.
9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option
shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate,
or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as
a Director or Consultant for the Company or an Affiliate.
10. WITHHOLDING OBLIGATIONS.
(a) At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you
hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for
(including by means of a “cashless exercise” pursuant to a program developed under Regulation T as promulgated by the Federal
Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax
withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option.
(b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable
legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon
the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of
the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be
necessary to avoid variable award accounting). If the date of determination of any tax withholding obligation is deferred to a date later
than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a
proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon
such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding
obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld
solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you
upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole
responsibility.
(c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are
satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company
shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any
escrow provided for herein unless such obligations are satisfied.
11. NOTICES. Any notices provided for in your option or the Plan shall be given in writing or shall be delivered electronically,
and shall be deemed effectively given or delivered upon receipt or, in the case of notices delivered by mail by the Company to you, five
(5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.
12. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time
to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of
the Plan, the provisions of the Plan shall control.
This Stock Option Agreement shall be deemed to be signed by the Company and the Participant upon the electronic acceptance by
the Participant of the applicable Stock Option Grant Notice.
* * * * *
Trico Bancshares
2009 EQUITY INCENTIVE PLAN
STOCK APPRECIATION RIGHT AGREEMENT
Pursuant to your Stock Appreciation Grant Notice (“Grant Notice”) and this Stock Appreciation Right Agreement, Trico
Bancshares (the “Company”) has granted you an stock appreciation right under its 2009 Equity Incentive Plan (the “Plan”) to purchase
the number of shares of the Company’s Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant
Notice. Defined terms not explicitly defined in this Stock Appreciation Right Agreement but defined in the Plan shall have the same
definitions as in the Plan.
The details of your stock appreciation right are as follows:
1. VESTING. Subject to the limitations contained herein, your stock appreciation right will vest as provided in your Grant Notice,
provided that vesting will cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your stock
appreciation right and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for
Capitalization Adjustments.
3. CALCULATION OF APPRECIATION. The appreciation distribution payable on the exercise of a Stock Appreciation Right
will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Stock
Appreciation Right) of a number of shares of Common Stock equal to the number of shares of Common Stock equivalents in which the
Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock
Appreciation Right on such date, over (B) the strike price that will be determined by the Board at the time of grant of the Stock
Appreciation Right.
4. WHOLE SHARES. You may exercise your stock appreciation right only for whole shares of Common Stock.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your
stock appreciation right unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or,
if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Securities Act. The exercise of your stock appreciation right also must comply with
other applicable laws and regulations governing your stock appreciation right, and you may not exercise your stock appreciation right if
the Company determines that such exercise would not be in material compliance with such laws and regulations.
6. TERM. You may not exercise your stock appreciation right before the commencement or after the expiration of its term. The
term of your stock appreciation right commences on the Date of Grant and expires upon the earliest of the following:
(a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death,
provided that if during any part of such three (3) month period your stock appreciation right is not exercisable solely because of the
condition set forth in the above section “Securities Law Compliance,” your stock appreciation right shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your
Continuous Service;
(b) three (3) months after the termination of your Continuous Service due to your Disability;
(c) three (3) months after your death if you die either during your Continuous Service or within three (3) months after your
Continuous Service terminates;
(d) the Expiration Date indicated in your Grant Notice; or
(e) the day before the tenth (10th) anniversary of the Date of Grant.
7. EXERCISE.
(a) You may exercise the vested portion of your stock appreciation right during its term by delivering a Notice of Exercise
(in a form designated by the Company) together with this Grant Notice to the Secretary of the Company, or to such other person as the
Company may designate, during regular business hours, together with such additional documents as the Company may then require.
(b) Upon exercising this Stock Appreciation Right, the Participant shall receive an amount equal to the Calculation of
Appreciation for every stock appreciation right exercised. Until Shares are issued in respect of the exercise of this Stock Appreciation
Right in accordance with the Plan, the Participant shall not have any of the rights or privileges of a shareholder of the Company in
respect of any of the Shares covered by this Stock Appreciation Right.
(c) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to
enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising
by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are
subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise.
8. TRANSFERABILITY. Your stock appreciation right is not transferable, except by will or by the laws of descent and
distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be
entitled to exercise your stock appreciation right.
9. STOCK APPRECIATION RIGHT NOT A SERVICE CONTRACT. Your stock appreciation right is not an employment or
service contract, and nothing in your stock appreciation right shall be deemed to create in any way whatsoever any obligation on your
part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In
addition, nothing in your stock appreciation right shall obligate the Company or an Affiliate, their respective shareholders, Boards of
Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an
Affiliate.
10. WITHHOLDING OBLIGATIONS.
(a) At the time you exercise your stock appreciation right, in whole or in part, or at any time thereafter as requested by the
Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate
provision for (including by means of a “cashless exercise” pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax
withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your stock appreciation
right.
(b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable
legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon
the exercise of your stock appreciation right a number of whole shares of Common Stock having a Fair Market Value, determined by
the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower
amount as may be necessary to avoid variable award accounting). If the date of determination of any tax withholding obligation is
deferred to a date later than the date of exercise of your stock appreciation right, share withholding pursuant to the preceding sentence
shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of
shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the
determination of such tax withholding obligation to the date of exercise of your stock appreciation right. Notwithstanding the filing of
such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of
exercise of your stock appreciation right that are otherwise issuable to you upon such exercise. Any adverse consequences to you
arising in connection with such share withholding procedure shall be your sole responsibility.
(c) You may not exercise your stock appreciation right unless the tax withholding obligations of the Company and/or any
Affiliate are satisfied. Accordingly, you may not be able to exercise your stock appreciation right when desired even though your stock
appreciation right is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release
such shares of Common Stock from any escrow provided for herein unless such obligations are satisfied.
11. NOTICES. Any notices provided for in your stock appreciation right or the Plan shall be given in writing or shall be delivered
electronically, and shall be deemed effectively given or delivered upon receipt or, in the case of notices delivered by mail by the
Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided
to the Company.
12. GOVERNING PLAN DOCUMENT. Your stock appreciation right is subject to all the provisions of the Plan, the provisions
of which are hereby made a part of your stock appreciation right, and is further subject to all interpretations, amendments, rules and
regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the
provisions of your stock appreciation right and those of the Plan, the provisions of the Plan shall control.
This Stock Appreciation Right Agreement shall be deemed to be signed by the Company and the Participant upon the electronic
acceptance by the Participant of the applicable Stock Appreciation Grant Notice.
* * * * *
Trico Bancshares
2009 EQUITY INCENTIVE PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT
Pursuant to the Restricted Stock Unit Award Grant Notice (“Grant Notice”) and this Restricted Stock Unit Award Agreement
(“Award Agreement”), Trico Bancshares (the “Company”) has awarded you a Restricted Stock Unit Award under its 2009 Equity
Incentive Plan (the “Plan”) for the number of restricted stock units (“Restricted Stock Units”) as indicated in the Grant Notice
(collectively, the “Award”). Except where indicated otherwise, defined terms not explicitly defined in this Award Agreement but
defined in the Plan shall have the same definitions as in the Plan.
The details of your Award are as follows:
1. NUMBER OF RESTRICTED STOCK UNITS AND SHARES OF COMMON STOCK. The number of Restricted Stock
Units subject to your Award is set forth in the Grant Notice. Each Restricted Stock Unit shall represent the right to receive one (1) share
of Common Stock. The number of Restricted Stock Units subject to your Award and the number of shares of Common Stock
deliverable with respect to such Restricted Stock Units may be adjusted from time to time for capitalization adjustments as described in
Section 11(a) of the Plan.
2. VESTING. The Restricted Stock Units shall vest, if at all, as provided in the vesting schedule set forth in your Grant Notice;
provided, however, that vesting shall cease upon the termination of your Continuous Service.
3. DIVIDENDS. You will be entitled to receive payments equal to any cash dividends and other distributions paid with respect to
a corresponding number of shares subject to your Award, provided that any such dividends or distributions will be converted into
additional shares covered by the Award (on the basis of the Fair Market Value of shares of Common Stock at the time of such dividend
payment or other distribution), and further provided that such additional shares will be subject to the same forfeiture restrictions,
restrictions on transferability, and time and manner of delivery as apply to the other Restricted Stock Units and Common Stock subject
to your Award.
4. PAYMENT. This Award was granted in consideration of your services to the Company. Subject to Section 10 below, you will
not be required to make any payment to the Company (other than your past and future services with the Company) with respect to your
receipt of the Award, vesting of the Restricted Stock Units, or the delivery of the shares of Common Stock subject to the Restricted
Stock Units.
5. DELIVERY OF SHARES. Subject to Section 10 below, your vested Restricted Stock Units shall be converted into shares of
Common Stock, and the Company will deliver to you a number of shares of the Company’s Common Stock equal to the number of
vested shares subject to your Award, on the applicable vesting date or as soon as practicable thereafter. The form of delivery (e.g., a
stock certificate or electronic entry evidencing such shares) shall be determined by the Company.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you will not be issued any
shares of Common Stock under your Award unless either (a) such shares are then registered under the Securities Act or (b) the
Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award also
must comply with other applicable laws and regulations governing the Award, and you will not receive any shares of Common Stock
under your Award if the Company determines that such receipt would not be in material compliance with such laws and regulations.
7. TRANSFER RESTRICTIONS. Prior to the time that the shares of Common Stock subject to your Award have been delivered
to you, you may not transfer, pledge, sell or otherwise dispose of such shares. For example, you may not use shares of Common Stock
that may be issued in respect of your Restricted Stock Units as security for a loan, nor may you transfer, pledge, sell or otherwise
dispose of such shares. This restriction on transfer will lapse upon delivery to you of shares of Common Stock in respect of your vested
Restricted Stock Units. Your Award is not transferable, except by will or by the laws of descent and distribution. Notwithstanding the
foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in
the event of your death, shall thereafter be entitled to receive any distribution of shares of Common Stock in respect of vested Restricted
Stock Units pursuant to this Agreement.
8. AWARD NOT A SERVICE CONTRACT. Your Award is not an employment or service contract, and nothing in your Award
shall be deemed to create in any way whatsoever any obligation on your part to continue in the service of the Company or any Affiliate,
or on the part of the Company or any Affiliate to continue such service. In addition, nothing in your Award shall obligate the Company
or any Affiliate, their respective shareholders, boards of directors or employees to continue any relationship that you might have as an
Employee or Consultant of the Company or any Affiliate.
9. UNSECURED OBLIGATION. Your Award is unfunded, and even as a holder of vested Restricted Stock Units, you shall be
considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to distribute shares of Common
Stock pursuant to this Agreement. You shall not have voting or any other rights as a shareholder of the Company with respect to the
Common Stock acquired pursuant to this Agreement until such Common Stock is issued to you. Nothing contained in this Agreement,
and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship
between you and the Company or any other person.
10. WITHHOLDING OBLIGATIONS.
(a) At the time you receive a distribution of shares of Common Stock pursuant to your Award, or at any time thereafter as
requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree
to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the
Company or an Affiliate, if any, which arise in connection with such distribution.
(b) You may elect to satisfy the tax withholding obligations of the Company and/or any Affiliate by tendering a cash
payment prior to the date determined by the Company and/or any Affiliate. In the event that you do not elect to make such a cash
payment, (i) the Company shall withhold from fully vested shares of Common Stock otherwise issuable to you pursuant to your Award
a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of distribution, not
in excess of the minimum amount of tax required to be withheld by law (or such lesser amount as may be necessary to avoid variable
award accounting), in compliance with any applicable legal conditions or restrictions, and (ii) any remaining amount of the tax
withholding obligations of the Company and/or any Affiliate shall be considered and reported as an additional payment from the
Company and/or any Affiliate to you.
(c) Unless the tax withholding obligations of the Company and/or any Affiliate thereof are satisfied, the Company shall have
no obligation to deliver to you any shares of Common Stock pursuant to your Award.
11. NOTICES. Any notices provided for in your Award or the Plan shall be given in writing or shall be delivered electronically,
and shall be deemed effectively given or delivered upon receipt or, in the case of notices delivered by mail by the Company to you, five
(5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.
12. MISCELLANEOUS.
(a) The rights and obligations of the Company with respect to your Award shall be transferable to any one or more persons
or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors
and assigns.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination
of the Company to carry out the purposes or intent of your Award.
(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the
advice of counsel prior to executing and/or accepting your Award and fully understand all provisions of your Award.
(d) This Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental
agencies or national securities exchanges as may be required.
(e) All obligations of the Company under the Plan and this Agreement will be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
13. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
14. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be
unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while
remaining lawful and valid.
15. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time
to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those
of the Plan, the provisions of the Plan shall control.
This Restricted Stock Unit Award Agreement shall be deemed to be signed by the Company and the Participant upon the
electronic acceptance by the Participant of the applicable Restricted Stock Unit Grant Notice.
* * * * *
Trico Bancshares
2009 EQUITY INCENTIVE PLAN
PERFORMANCE SHARE AWARD AGREEMENT
Pursuant to the Target Award Grant Notice (“Grant Notice”) and this Performance Share Award Agreement (“Agreement”)
(collectively, the “Award”), Trico Bancshares (the “Company”) has awarded you, pursuant to its Performance Share Award Program
(the “Program”) under its Equity Incentive Plan (the “Plan”), the number of shares of the Company’s Common Stock as indicated in
the Grant Notice, provided that (i) the Performance Goals specified in Exhibit A to the Program are met during the Performance Period
beginning on , and ending on , and (ii) you remain continuously employed by the
Company during the entire Performance Period. Defined terms not explicitly defined in this Agreement but defined in the Plan shall
have the same definitions as in the Plan or Program document.
The details of your Award are as follows.
1. ENTITLEMENT TO SHARES. Subject to the limitations contained herein, you shall be entitled to receive a percentage of the
shares of Common Stock specified in your Grant Notice if (i) a specified target level of certain Performance Goals is met during the
applicable Performance Period and (ii) you remain continuously employed by the Company during the entire Performance Period. If the
level of Performance Goals that is met during the Performance Period is less than or exceeds the specified target level, you will be
awarded a pro-rata percentage of shares specified in your Grant Notice; provided, however, that (i) if a specified threshold level of
Performance Goals is not met during the Performance Period, you will not receive any shares, and (ii) the maximum number of shares
that you may receive will be 200% of the shares specified in your Grant Notice. The applicable threshold, target, and maximum award
levels for the applicable Performance Period are set forth in Exhibit A to the Program.
2. DIVIDENDS. Prior to your receipt of any shares subject to your Award, you shall not receive any payment or other adjustment
in the number of shares subject to your Award for dividends or other distributions that may be made in respect of the shares of Common
Stock to which your Award relates.
3. DISTRIBUTION OF SHARES. Provided that you become entitled to the shares of Common Stock subject to your Award in
accordance with Section 1 of this Agreement, the Company will distribute such shares to you within thirty (30) days following the
completion of an independent audit and certification by the Committee, as described in Section 4(a) of the Program; provided, however,
that in the event that the Company determines that you are subject to its Policy Against Trading on the Basis of Inside Information and
any shares of Common Stock in respect of your Award are scheduled to be delivered on a day (the “Original Distribution Date”) that
does not occur during a “window period” applicable to you, as determined by the Company in accordance with such policy, then such
shares shall not be delivered on such Original Distribution Date and shall instead be delivered as soon as practicable within the next
“window period” applicable to you pursuant to such policy; and provided further, that if you elect to defer issuance of the shares of
Common Stock as provided in Section 4 of this Agreement, the shares of Common Stock shall be issued as set forth in your Deferral
Election Form.
4. DEFERRAL ELECTION. You may elect to defer issuance of the shares of Common Stock that would otherwise be issued by
virtue of the vesting of your Award as set forth in the Grant Notice. If such deferral election is made, it shall be made in accordance
with the following requirements:
(a) No deferral period shall exceed five (5) years from the original vesting date of the Award; and
(b) You must complete and submit a Deferral Election Form (in substantially the form attached to the Grant Notice) to the
Company by , .
5. ADJUSTMENTS. The number of shares of Common Stock subject to your Award may be adjusted from time to time for
capitalization adjustments, as provided in Section 11(a) of the Plan. In addition, the Committee is authorized to make certain
adjustments in the method of calculating the attainment of Performance Goals, as provided in Section 2(ff) of the Plan.
6. SECURITIES LAW COMPLIANCE. You may not be issued any shares of Common Stock under your Award unless the
shares are either (i) then registered under the Securities Act or (ii) the Company has determined that such issuance would be exempt
from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations
governing the Award, and you shall not receive such shares if the Company determines that such receipt would not be in material
compliance with such laws and regulations.
7. RESTRICTIVE LEGENDS. The shares of Common Stock issued under your Award shall be endorsed with appropriate
legends, if any, determined by the Company.
8. TRANSFERABILITY. Your Award is not transferable, except by will or by the laws of descent and distribution.
Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate
a third party who, in the event of your death, shall thereafter be entitled to receive any distribution of shares of Common Stock pursuant
to Section 3 of this Agreement.
9. AWARD NOT A SERVICE CONTRACT. Your Award is not an employment or service contract, and nothing in your Award
shall be deemed to create in any way whatsoever any obligation on your part to continue in the service of the Company or an Affiliate,
or on the part of the Company or an Affiliate to continue such service. In addition, nothing in your Award shall obligate the Company
or an Affiliate, their respective shareholders, boards of directors, Officers or Employees to continue any relationship that you might
have as an Employee, Director or Consultant for the Company or an Affiliate.
10. UNSECURED OBLIGATION. Your Award is unfunded, and as the holder of an Award, you shall be considered an
unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue shares of Common Stock pursuant to
Section 3 of this Agreement.
11. WITHHOLDING OBLIGATIONS.
(a) At the time you receive a distribution of shares of Common Stock pursuant to your Award, or at any time thereafter as
requested by the Company, you hereby authorize any required withholding from payroll and any other amounts payable to you and
otherwise agree to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection with your Award.
(b) Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no
obligation to issue a certificate for such shares.
12. NOTICES. Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively
given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail,
postage prepaid, addressed to you at the last address you provided to the Company.
13. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
14. AMENDMENT. Nothing in this Agreement shall restrict the Company’s ability to exercise its discretionary authority
pursuant to Section 3 of the Plan; provided, however, that no such action may, without your consent, adversely affect your rights under
your Award and this Agreement.
15. MISCELLANEOUS.
(a) The rights and obligations of the Company under your Award shall be transferable to any one or more persons or entities,
and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination
of the Company to carry out the purposes or intent of your Award.
(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the
advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
16. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time
to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those
of the Plan, the provisions of the Plan shall control.
17. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of the
state of California without regard to such state’s conflicts of laws rules.
TRICO BANCSHARES
NOTICE OF GRANT OF STOCK OPTION
The Participant has been granted an option (the “Option”) to purchase certain shares of Stock of Trico Bancshares pursuant to the Trico
Bancshares 2009 Equity Incentive Plan (the “Plan”), as follows:
Employee ID:
Participant:
Date of Grant:
Number of Option Shares:
Exercise Price Per Share:
$
Vesting Commencement Date:
Option Expiration Date:
The tenth anniversary of the Date of Grant.
Tax Status of Option:
Nonstatutory Stock Option
Vested Shares:
Except as provided in the Stock Option Agreement and provided the Participant’s
Service has not terminated prior to the applicable date, the number of Vested Shares
(disregarding any resulting fractional share) as of any date is determined by multiplying
the Number of Option Shares by the “Vested Ratio” determined as of such date as
follows:
Prior to first anniversary of Vesting Commencement Date
On first anniversary of Vesting Commencement Date (the “Initial
Vesting Date”)
Plus
For each additional full month of Participant’s Service from Initial
Vesting Date until the Vested Ratio equals 1/1, an additional
Vested Ratio
0
1/4
1/48
By their signatures below, the Company and the Participant agree that the Option is governed by this Grant Notice and by the
provisions of the Plan and the Stock Option Agreement, both of which are attached to and made a part of this document. The Participant
acknowledges receipt of copies of the Plan and the Stock Option Agreement, represents that the Participant has read and is familiar with
their provisions, and hereby accepts the Option subject to all of their terms and conditions.
TRICO BANCSHARES
PARTICIPANT
By:
Its:
Signature
Date
Exhibit 21.1
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
List of Subsidiaries of TriCo Bancshares
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 Nos. 333-190047, 333-66064, 333-115455, and 333-160405 on
Form S-8 and No. 333-218577 on Form S-3 of TriCo Bancshares of our report dated March 1, 2018 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 1, 2018
Exhibit 31.1
Rule 13a-14/15d-14 Certification of CEO
I, Richard P. Smith, certify that;
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of TriCo Bancshares;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluations; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2018
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
Exhibit 31.2
Rule 13a-14/15d-14 Certification of CFO
I, Thomas J. Reddish, certify that;
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of TriCo Bancshares;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluations; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2018
/s/ Thomas J. Reddish
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
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, 2017 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard P. Smith, President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
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, 2017 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Reddish, Executive Vice President
and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
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.