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, 2018
Commission File Number 0-10661
TriCo Bancshares
(Exact name of Registrant as specified in its charter)
California 94-2792841
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
63 Constitution Drive, Chico, California 95973
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (530) 898-0300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, without par value
(Title of Class)
Nasdaq Global Select Market
(Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes No
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 Accelerated filer Non-accelerated filer Smaller reporting
company
Emerging growth 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, 2018, was
approximately $748,354,000 (based on the closing sales price of the Registrant’s common stock on the date).
The number of shares outstanding of Registrant's common stock, as of February 25, 2019, was 30,424,119.
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
Page Number
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
Signatures
FORWARD-LOOKING STATEMENTS
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In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements about TriCo
Bancshares (the “Company,” “TriCo” or “we”) and its subsidiaries for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based
on 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”) established in Chico, California in 1975. The Bank offers a unique
brand of customer Service with Solutions® available in traditional stand-alone and in-store bank branches in communities
throughout Northern and Central California and had total assets of approximately $6.4 billion at December 31, 2018. The
Bank provides an extensive and competitive breadth of consumer, small business and commercial banking services easily
accessed through its California communities branch network, advanced online and mobile banking, a nationwide network
of over 32,000 ATMs, and bankers available by phone 7 days per week. 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 13 – 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 29
counties in Northern and Central California.
The Bank provides a breadth of personal, small business and commercial financial services including accepting demand,
savings and time deposits and making small business, commercial, real estate, and consumer loans, as well as a range of
Treasury Management Services and other customary banking services including safe deposit boxes. 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.
Over 80% of the Bank's customers are personal banking customers. Less than 20% are business and commercial banking
customers serving a diversity of industry types including manufacturing, real estate development, retail, wholesale,
transportation, agriculture, commerce and professional services. 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, 2018, the
Bank's consumer loans net of deferred fees outstanding was $418,982,000 (10.4%), commercial loans outstanding were
$276,548,000 (6.9%), and real estate loans including construction loans of $183,384,000 were $3,326,484,000 (82.7%) of
total loans. 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.
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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 provided 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 “Merger Transaction.”
The Merger Agreement provided that each share of FNBB common stock issued and outstanding immediately prior to the
effective time of the Merger would 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. On July 6, 2018, the Merger
Transaction was completed. Based on the closing price of TriCo’s common stock of $38.41 on July 6, 2018, and based on
the conversion of FNBB outstanding common shares to 7,405,277 shares of TCBK common shares, the share
consideration value was approximately $284.4 million. The Company also paid cash of $6.7 million to settle and retire all
FNBB stock options outstanding as of the acquisition date.
Employees
At December 31, 2018, the Company employed 1,174 persons, including six executive officers. Full time equivalent
employees were 1,141. No employees of the Company are presently represented by a union or covered under a collective
bargaining agreement. Management believes that its employee relations are good.
Competition
The banking business in California generally, and in the Bank's primary service area of Northern and Central California
specifically, is highly competitive with respect to both loans and deposits. It is dominated by a relatively small number of
national and regional banks with many offices operating over a wide geographic area. Among the advantages such major
banks have over the Bank is their ability to finance wide ranging advertising campaigns and to allocate their investment
assets to regions of high yield and demand. By virtue of their greater total capitalization such institutions have
substantially higher lending limits than does the Bank.
In addition to competing with other banks, the Bank competes with savings institutions, credit unions and the financial
markets for funds. Yields on corporate and government debt securities and other commercial paper may be higher than on
deposits, and therefore affect the ability of commercial banks to attract and hold deposits. Commercial banks also
compete for available funds with money market instruments and mutual funds. During past periods of high interest rates,
money market funds have provided substantial competition to banks for deposits and they may continue to do so in the
future. Mutual funds are also a major source of competition for savings dollars. The Bank relies substantially on local
promotional activity, personal contacts by its officers, directors, employees and shareholders, extended hours,
personalized service and its reputation in the communities it services to compete effectively.
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 customers, 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
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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 is subject to regulation, supervision and periodic examination by the FDIC, which is the bank’s primary federal
regulator because the bank is a state-chartered bank that is not a member of the Federal Reserve System and the DBO,
because the bank is a California state chartered bank. This regulation is broad and extends to all of the Bank’s operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) created the Consumer
Financial Protection Bureau (the “CFPB”) as an independent entity with broad rulemaking, supervisory and enforcement
authority over consumer financial products and services. The CFPB’s functions include investigating consumer
complaints, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer
financial products and services. CFPB regulations and guidance apply to all financial institutions, including the Bank.
Banks with $10 billion or more in assets are subject to examination by the CFPB. Banks with less than $10 billion in
assets, including the Bank, 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. 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 currently has not elected to
become a financial holding company.
As a bank holding company, TriCo is required to file reports with the FRB and the FRB periodically examines the
Company. Under the Dodd-Frank Act, a bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support the
subsidiary bank.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The
BHC Act requires a bank holding company to obtain the approval of the FRB prior to directly or indirectly acquiring 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.
Under FDICIA, the federal ban regulatory agencies have establish safety and soundness standards for insured financial
institutions covering:
Internal controls, information systems and internal audit systems;
Loan documentation;
Credit underwriting;
Asset growth;
Interest rate exposure;
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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 actions in certain cases rather than relying on a plan, particularly where failure to meet one or more
of the standards could threaten the safe and sound operation of the institution.
Restrictions on Dividends and Distributions
A California corporation such as TriCo may make a distribution to its shareholders to the extent that either the
corporation’s retained earnings meet or exceed the amount of the proposed distribution or the value of the corporation’s
assets exceed the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions
are met. It is the FRB’s policy that bank holding companies should generally pay dividends on common stock only out of
income available over the past year, and only if prospective earnings retention is consistent with the organization’s
expected future needs and financial condition. In addition, a bank holding company may be unable to pay dividends on its
common stock if it fails to maintain an adequate capital conservation buffer under the new capital rules. See “Regulatory
Capital Requirements.”
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.
The new Capital Rules may restrict dividends by the Bank if the additional capital conservation buffer is not achieved.
See “Regulatory Capital Requirements”.
The FRB, FDIC and the DBO have authority to prohibit a bank holding company or a bank from engaging in practices
which are considered to be unsafe and unsound. Depending on the financial condition of TriCo and the Bank and other
factors, the FRB, FDIC or the DBO could determine that payment of dividends or other payments by TriCo or the Bank
might constitute an unsafe or unsound practice.
The Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires the federal banking regulatory agencies to periodically
assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA also requires the agencies to consider a financial institution’s record of meeting its community
credit when evaluating applications for, among other things, domestic branches and mergers or acquisitions. The federal
banking agencies rate depository institutions’ compliance with the CRA. The ratings range from a high of “outstanding”
to a low of “substantial noncompliance.” A less than “satisfactory” rating could result in the suspension of any growth of
the Bank through acquisitions or opening de novo branches until the rating is improved. As of its most recent CRA
examination, the Bank’s CRA rating was “Satisfactory.”
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Consumer Protection Laws
The Bank is subject to many federal consumer protection statues and regulations, some of which are discussed below.
•
The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction, whether for
consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age
(except in limited circumstances), receipt of income from public assistance programs, or good faith exercise
of any rights under the Consumer Credit Protection Act.
•
The Truth-in-Lending Act is designed to ensure that credit terms are disclosed in a meaningful way so that
consumers may compare credit terms more readily and knowledgeably.
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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.
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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.
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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.
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The issuance of a policy report on arbitration clauses which could result in the restriction or prohibition of
lenders including arbitration clauses in consumer financial services contracts.
•
•
Actions taken to regulate and supervise credit bureaus and debt collections.
Positions taken by CFPB on fair lending, including applying the disparate impact theory in auto financing,
which could make it harder for lenders, such as the Bank, to charge different rates or apply different terms
to loans to different customers.
Penalties for violations of the above laws may include fines, reimbursements, injunctive relief and other penalties.
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 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.
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Regulatory Capital Requirements
The Company and the Bank are subject to the minimum capital requirements of the FRB and FDIC, 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.
For a discussion of the regulatory capital requirements, see “Note 25 – Regulatory Matters” to the consolidated financial
statements at Part II, Item 8 of this report.
We believe that we were in compliance with the requirements of the new capital rules applicable to us as of December 31,
2018.
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 current
prompt corrective action framework, insured depository institutions will be required to meet the following minimum
capital level requirements in order to qualify as “well capitalized:” (i) a common equity Tier 1 capital ratio of 6.5%; (ii) a
Tier 1 capital ratio of 8%; (iii) a total capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%. An institution may be
downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to
be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
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 minimums necessary to be considered well
capitalized under the current regulatory framework for prompt corrective action since 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 is subject to deposit insurance assessments as determined by the FDIC. The amount of the deposit
insurance assessment for institutions with less than $10.0 billion in assets, such as the Bank, is based on its risk category,
with certain adjustments for any unsecured debt or brokered deposits held by the insured bank. Institutions assigned to
higher risk categories (that is, institutions that pose a higher risk of loss to the FDIC’s deposit insurance fund (the “DIF”))
pay assessments at higher rates than institutions that pose a lower risk. An institution’s risk classification is assigned
based on a combination of its financial ratios and supervisory ratings, reflecting, among other things, its capital levels and
the level of supervisory concern that the institution poses to the regulators. In addition, the FDIC can impose special
assessments in certain instances.
The Dodd-Frank Act changed the way that deposit insurance premiums are calculated. The assessment base is no longer
the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. The Dodd-
Frank Act also increased the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount
of total insured deposits by 2020, eliminates the upper limit for the reserve ratio designated by the FDIC each year, and
eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain
thresholds. Continued action by the FDIC to replenish the DIF, as well as the changes contained in the Dodd-Frank Act,
may result in higher assessment rates, which could reduce our profitability or otherwise negatively impact our operations.
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
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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.
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. Today, the Bank Secrecy Act requires that all banking institutions develop and provide for the
continued administration of a program reasonably designed to assure and monitor compliance with certain recordkeeping
and reporting requirements regarding both domestic and international currency transactions. These programs must, at a
minimum, provide for a system of internal controls to assure ongoing compliance, provide for independent testing of such
systems and compliance, designate individuals responsible for such compliance and provide appropriate personnel
training.
Under the USA Patriot Act of 2001, financial institutions are subject to prohibitions against specified financial
transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced
due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial
institutions, and foreign individuals and entities. The act also requires financial institutions, including banks, to establish
anti-money laundering programs, including employee training and independent audit requirements, meet minimum
standards specified by the act, follow minimum standards for customer identification and maintenance of customer
identification records, and regularly compare customer lists against lists of suspected terrorists, terrorist organizations and
money launderers.
Transactions with Affiliates
Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive
officers, directors, principal shareholders (including the Company) or any related interest of such persons. Extensions of
credit must be made on substantially the same terms, including interest rates and collateral as, and follow credit
underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with
persons not affiliated with the bank, and must not involve more than the normal risk of repayment or present other
unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons.
Regulation W requires that certain transactions between the Bank and its affiliates, including its holding company, be on
terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable
transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under
circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated
companies.
Impact of Monetary Policies
Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a
bank on its deposits and other borrowings, and the interest rate earned by banks on loans, securities and other interest-
earning assets comprises the major source of banks’ earnings. Thus, the earnings and growth of banks are subject to the
influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the
United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such as seeking to
curb inflation and combat recession, by its open-market dealings in United States government securities, by adjusting the
required level of reserves for financial institutions subject to reserve requirements and through adjustments to the discount
rate applicable to borrowings by banks which are members of the FRB. The actions of the FRB in these areas influence
the growth of bank loans, investments and deposits and also affect interest rates. The nature and timing of any future
changes in such policies and their impact on the Company cannot be predicted. In addition, adverse economic conditions
could make a higher provision for loan losses a prudent course and could cause higher loan loss charge-offs, thus
adversely affecting the Company’s net earnings.
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ITEM 1A. RISK FACTORS
There are a number of factors that may adversely affect the Company's business, financial results, or stock price. 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 or 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 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.
The Financial Accounting Standards Board has recently issued an accounting standard update that will result in a
significant change in how we recognize credit losses and may have a material impact on our financial condition or results
of operations.
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires banking organizations to
determine the adequacy of their ALLL with an expected loss model, which is referred to as the current expected credit
loss (“CECL”) model. Under the CECL model, banking organizations will be required to present certain financial assets
carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount
expected to be collected. The measurement of expected credit losses is to be based on information about past events,
including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability
of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet
and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which
delays recognition until it is probable a loss has been incurred. ASU 2016-13 is expected to be effective for public
business entities for fiscal years after December 15, 2019. CECL will change the manner in which we determine the
adequacy of our allowance for loan losses. We are evaluating the impact the CECL model will have on our accounting,
but we may recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the
first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any such one-time
cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations. The
federal banking regulators have adopted a rule that gives a banking organization the option to phase in over a three-year
period the day-one adverse effects of CECL on its regulatory capital.
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Our business may be adversely affected by business conditions in northern and central California.
We conduct most of our business in northern and central California. As a result of this geographic concentration, our
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, 2018, approximately 91.7% 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 Wiese, 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.
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Strong competition in California could hurt our profits.
Competition in the banking and financial services industry is intense. Our profitability depends upon our continued
ability to successfully compete. We primarily compete in northern and central California for loans, deposits and
customers with commercial banks, savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage firms and Internet-based marketplace lending platforms. In particular, our competitors
include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to
maintain numerous locations and mount extensive promotional and advertising campaigns. Additionally, banks and other
financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may
have larger lending limits which would allow them to serve the credit needs of larger customers. Areas of competition
include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products
and services provided, including new technology-driven products and services. Technological innovation continues to
contribute to greater competition in domestic and international financial services markets as technological advances
enable more companies, such as Internet-based marketplace lenders, to provide financial services, often without many of
regulatory and capital restrictions that we face. We also face competition from out-of-state financial intermediaries that
have opened loan production offices or that solicit deposits in our market areas. If we are unable to attract and retain
banking customers, we may be unable to continue our loan growth and level of deposits and our business, financial
condition, results of operations and cash flows may be adversely affected.
Our previous results may not be indicative of our future results.
We may not be able to sustain our historical rate of growth and level of profitability or may not even be able to grow our
business or continue to be profitable at all. Various factors, such as economic conditions, regulatory and legislative
considerations and competition, may also impede or prohibit our ability to expand our market presence and financial
performance. If we experience a significant decrease in our historical rate of growth, our results of operations and
financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of clearing, counterparty, or other relationships. We have
exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the
financial services industry, including commercial banks, brokers and dealers, and other institutional clients. Many of
these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk
may be 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.
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. 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
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
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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.
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. While the reform bill lowered the corporate federal statutory tax rate, it also eliminated or
limited certain federal corporate deductions. 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.
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.
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, the value of our loans and investment securities 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 2018, 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.
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Reduction in the value, or impairment of our investment securities, can impact our earnings and common shareholders’
equity.
We maintained a balance of $1.6 billion, or approximately 25% of our assets, in investment securities at December 31,
2018. Changes in market interest rates can affect the value of these investment securities, with increasing interest rates
generally resulting in a reduction of value. Although the reduction in value from temporary increases in market rates does
not affect our income until the security is sold, it does result in an unrealized loss recorded in other comprehensive income
that can reduce our common stockholders’ equity. Further, we must periodically test our investment securities for other-
than-temporary impairment in value. In assessing whether the impairment of investment securities is other-than-
temporary, we consider the length of time and extent to which the fair value has been less than cost, the financial
condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a
period of time sufficient to allow for any anticipated recovery in fair value in the near term.
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.
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
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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.
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 acquisitions of FNB Bancorp in 2018
and North Valley Bancorp in 2014. 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.
Potential acquisitions create risks and may disrupt our business and dilute shareholder value.
We intend to continue to explore opportunities for growth through mergers and acquisitions. Acquiring other banks,
businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:
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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,
potential exposure to unknown or contingent liabilities of the target company,
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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.
Our ability to pay dividends to our shareholders is limited by California law and the policies and regulations of the FRB.
The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the
FRB’s view that a bank holding company should pay cash dividends only to the extent that its net income for the past year
is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s
capital needs, asset quality and overall financial condition. See “Regulation and Supervision – Restrictions on Dividends
and Distributions.”
As a holding company with no significant assets other than the Bank, our ability to continue to pay dividends depends in
large part upon the Bank’s ability to pay dividends to us. The Bank’s ability to pay dividends or make other capital
distributions to us is subject to the restrictions in the California Financial Code.
Our ability to pay dividends to our shareholder and the ability of the Bank to pay in dividends to us are by the
requirements that the we and the Bank maintain a certain minimum amount of capital to be considered a “well
capitalized” institution as well as a separate capital conservation buffer, as further described under “Item 1 – Supervision
and Regulation — Regulatory Capital Requirements” in this report.
From time to time, we may become a party to financing agreements or other contractual arrangements that have the effect
of limiting or prohibiting us or the Bank from declaring or paying dividends. Our holding company expenses and
obligations with respect to our trust preferred securities and corresponding junior subordinated deferrable interest
debentures issued by us may limit or impair our ability to declare or pay dividends.
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
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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, 2018, directors and executive officers beneficially owned approximately 10.37% of our common
stock and our Employee Stock Ownership Plan (“ESOP”) owned approximately 3.9%. 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, 2018, 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 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.
16
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.
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.
17
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company is engaged in the banking business through 69 traditional branches, 9 in-store branches and 2 loan
production offices in 29 counties in northern and central California including the counties of Butte, Colusa, Contra Costa,
Del Norte, Fresno, Glenn, Humboldt, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer, Sacramento, San
Francisco, San Mateo, Santa Clara, Shasta, Siskiyou, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Yolo and
Yuba. All offices are constructed and equipped to meet prescribed security requirements.
As of December 31, 2018, the Company owned 35 branch office locations, two administrative buildings that include
branch locations, and seven other buildings that are used as either administrative, operational, or loan production offices.
The Company leased 32 branch office locations, two loan production offices, and two 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. All of the Company’s existing facilities are considered to be adequate for the
Company’s present and future use. In the opinion of management, all properties are adequately covered by insurance.
See “Note 7 – Premises and Equipment” to the consolidated financial statements at Part II, Item 8 of this report.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are a party to any 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
Not applicable.
18
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:
2018
Fourth quarter
Third quarter
Second quarter
First quarter
2017
Fourth quarter
Third quarter
Second quarter
First quarter
High
$ 38.45
$ 39.63
$ 40.22
$ 39.75
Low
$ 31.96
$ 36.98
$ 36.65
$ 36.35
$ 43.42
$ 40.75
$ 36.77
$ 37.38
$ 37.86
$ 33.60
$ 33.05
$ 32.84
As of February 25, 2019 there were approximately 1,665 shareholders of record of the Company’s common stock. On February
25, 2019, the closing sales price was $40.11.
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, 2018 $98,438,000 was available for payment of dividends by the Bank to the
Company, under applicable laws and regulations. See “Note 26 – Summary of Quarterly Results of Operations (unaudited)” for
the quarterly cash dividends paid by the Company in 2018 and 2017.
Issuer Repurchases of Common Stock
The Company has one previously announced stock repurchase plan under which it is currently authorized to purchase shares of its
common stock. The table that follows provides additional information regarding this plan.
Announcement Date
8/21/2007
Total shares approved
for purchase
Total shares repurchased
under the plan
500,000
193,566
Expiration date
none
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 2018:
Period
October 1-31, 2018
November 1-30, 2018
December 1-31, 2018
Total
(a) Total number of
shares purchased (1)
-
49,173
54,865
(b) Average price
paid per share
-
$
$ 38.24
$ 35.87
(c) Total number of shares
(d) Maximum number
purchased as of part
of shares that may
of publicly announced
plans or programs
yet be purchased under
the plans or programs (2)
-
-
26,966
333,400
333,400
306,434
104,038
$ 38.37
26,966
306,434
(1)
Includes shares purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other
equity incentive plans. See Note 15 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.
19
The following graph presents the cumulative total yearly shareholder return from investing $100 on December 31, 2013, 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.
TriCo Bancshares
Total Return Performance
TriCo Bancshares
Russell 3000 Index
SNL Western Bank Index
200
150
100
l
e
u
a
V
x
e
d
n
I
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Index
TriCo Bancshares
Russell 3000 Index
SNL Western Bank Index
Equity Compensation Plans
Period Ending
12/31/13
100.00
100.00
100.00
12/31/14
88.68
112.56
120.01
12/31/15
100.55
113.10
124.35
12/31/16
127.93
127.50
137.85
12/31/17
144.27
154.44
153.70
12/31/18
131.15
146.34
121.69
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, 2018. All of our equity compensation plans have been approved by
shareholders.
(a) Number of securities to
(b) Weighted average
be issued upon exercise
exercise price of
(c) Number of securities remaining available for
of outstanding options,
outstanding options,
issuance under equity compensation plans
Plan category
options, warrants and rights
warrants and rights
(excluding securities reflected in column (a))
Equity compensation plans not approved by shareholders
Equity compensation plans approved by shareholders
Total
-
343,000
343,000
$
$
$
-
16.67
-
380,958
16.67
380,958
20
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; unaudited)
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
Share Data
Earnings per share:
Basic
Diluted
Per share:
Dividends paid
Book value at period end
Tangible book value at period end
Average common shares outstanding
Average diluted common shares outstanding
Shares outstanding at period end
Financial Ratios
During the period:
Return on average assets
Return on average equity
Net interest margin(1)
Efficiency ratio
Average equity to average assets
Dividend payout ratio
At period end:
Equity to assets
Total capital to risk-adjusted assets
Balance Sheet Data
Total investments
Total loans
Total assets
Total non-interest bearing deposits
Total deposits
Total other borrowings
Total junior subordinated debt
Total shareholders' equity
Total tangible equity (2)
2018
2017
2016
2015
2014
$
228,218
(12,872)
$
181,402
(6,798)
$
173,708
(5,721)
$
161,414
(5,416)
$
121,115
(4,681)
215,346
(2,583)
49,284
(168,695)
93,352
(25,032)
174,604
(89)
50,021
(147,024)
77,512
(36,958)
167,987
5,970
44,563
(145,997)
72,523
(27,712)
155,998
2,210
45,347
(130,841)
72,714
(28,896)
116,434
4,045
34,516
(110,379)
44,616
(18,508)
$
68,320
$
40,554
$
44,811
$
43,818
$
26,108
$
$
$
$
$
2.57
2.54
0.70
27.20
18.97
$
$
$
$
$
1.77
1.74
0.66
22.03
19.01
$
$
$
$
$
26,593
26,880
30,417
1.24%
10.75%
4.30%
63.75%
11.52%
27.24%
13.02%
14.40%
22,912
23,250
22,956
0.89%
8.10%
4.22%
65.45%
10.99%
37.30%
10.62%
14.07%
$
$
$
$
$
1.96
1.94
0.60
20.87
17.77
22,814
23,087
22,868
1.02%
9.46%
4.23%
68.69%
10.84%
30.60%
10.57%
14.65%
$
$
$
$
$
1.93
1.91
0.52
19.85
16.81
22,750
22,998
22,775
1.11%
10.04%
4.32%
64.98%
11.01%
27.20%
10.71%
15.09%
1.47
1.46
0.44
18.41
15.31
17,716
17,923
22,715
0.87%
8.67%
4.17%
73.12%
10.00%
30.10%
10.68%
15.63%
$
$
1,562,846
4,022,014
6,352,441
1,760,580
5,366,466
15,839
57,042
827,373
577,121
$
$
1,245,727
3,015,165
4,761,315
1,368,218
4,009,131
122,166
56,858
505,808
436,323
$
$
1,152,769
2,759,593
4,517,968
1,275,745
3,895,560
17,493
56,667
477,347
406,473
$
$
1,131,415
2,522,937
4,220,722
1,155,695
3,631,266
12,328
56,470
452,116
382,760
$
$
759,631
2,282,524
3,916,458
1,083,900
3,380,423
9,276
56,272
418,172
347,659
(1) Fully taxable equivalent (FTE)
(2) Tangible equity is calculated by subtracting goodwill and other intangible assets from total shareholders' equity. Management believes that tangible equity is meaningful
because it is a measure that the Company and investors commonly use to assess capital adequacy.
21
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 within Item 7 of 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 July 6, 2018 the Bank completed its acquisition of FNBB originally announced on December 11, 2017 for an aggregate
transaction value of $291,132,000. Through this business combination assets acquired, including core deposit intangibles of
$27,605,000, totaled $1,306,539,000 and liabilities assumed totaled $1,172,068. Goodwill recognized totaled $156,661,000 and
the merger expenses incurred during the year ended December 31, 2018 totaled $5,227,000.
From time to time the Bank may be presented with the opportunity to purchase individual or pools of loans in whole or in part
outside of a transaction that would be considered a business combination. As of December 31, 2018 and 2017 the outstanding
carrying value of purchased loans that were not acquired in a business combination totaled $56,023,000 and $69,599,000,
respectively.
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 FNB Bancorp (FNBB) 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 operations, the Company has defined northern
California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as
that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west;
and southern California as that area of the state south of Bakersfield and San Luis Obispo.
22
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 loan losses
Noninterest income
Noninterest expense
Provision for income taxes
Net income
2018
Year ended December 31,
2017
2016
$
215,346
(2,583)
49,284
(168,695)
(25,032)
$
174,604
(89)
50,021
(147,024)
(36,958)
$
167,987
5,970
44,563
(145,997)
(27,712)
$
68,320
$
40,554
$
44,811
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)
$
2.54
10.75%
1.24%
$
1.74
8.10%
0.89%
$
1.94
9.46%
1.02%
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):
Interest income
Interest expense
Net interest income (not FTE)
FTE adjustment
Net interest income (FTE)
Net interest margin (FTE)
Acquired loans discount accretion:
Year ended December 31,
2017
2016
2018
$
228,218
(12,872)
215,346
1,304
$
181,402
(6,798)
174,604
2,499
$
173,708
(5,721)
167,987
2,329
$
216,650
$
177,103
$
170,316
4.30%
4.22%
4.23%
Purchased loan discount accretion
Effect on average loan yield
Effect of purchased loan discount accretion on net interest margin (FTE)
$
5,271
0.14%
0.10%
$
6,564
0.23%
0.16%
$
7,399
0.29%
0.18%
Net interest income (FTE) for the year ended December 31, 2018 increased $39,547,000 (22.3%) to $216,650,000 from
$177,103,000 during the year ended December 31, 2017. The increase in net interest income (FTE) was due primarily to a
$705,839,000 (24.8%) increase in the average balance of loans to $3,548,498,000 and a $160,433,000 (13.1%) increase in the
average balance of investment securities to $1,383,975,000. Increases in average yields for earnings assets from 4.39% during
2017 to 4.55% during 2018 were offset by increases in the average rates paid on interest-bearing liabilities, primarily time
deposits and other borrowings. The average rate paid on time deposits increased by 38 basis points from 0.48% during 2017 to
0.86% during 2018. Additionally, the average rate paid on other borrowings increased by 104 basis points, from 0.74% during
2017 to 1.78% during 2018. Also offsetting increases in net interest income was an increase in the average balance of other
borrowings, which increased by $113,120,000 (274%) from $41,252,000 during the year ended December 31, 2017 to
$154,372,000 during the year ended December 31, 2018. Despite the increase in average balance of other borrowings during the
2018 year as compared to 2017, the outstanding balance of other borrowings decreased to $15,839,000 at December 31, 2018 as
compared to $122,166,000 at December 31, 2017. The decrease in other borrowings of $106,327,000 was primarily made
possible through deposit growth. See Deposit Portfolio Composition below. The $705,839,000 increase in average loan balances
23
compared to the prior year was due primarily to the merger of FNBB during the third quarter of 2018. The increase in the average
yield on loans and investments-taxable was due to increases in the prime lending rate and market rates on investment purchased.
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 securities 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.
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 26 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 2018 and 2017.
24
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 statutory tax rate applicable
during the period presented (dollars in thousands):
2018
Interest
Income/
Expense
$
186,117
35,702
5,649
41,351
2,054
Rates
Earned
/Paid
5.24 %
2.87 %
3.97 %
2.99 %
1.88 %
229,522
4.55 %
$
Average
Balance
3,548,498
1,241,829
142,146
1,383,975
109,352
5,041,825
474,301
Year ended December 31,
2017
Interest
Income/
Expense
Average
Balance
146,794
29,096
6,664
35,760
1,347
$
2,842,659
1,087,302
$
136,240
1,223,542
126,432
4,192,633
361,872
Rates
Earned
/Paid
5.16 %
2.68 %
4.89 %
2.92 %
1.07 %
2016
Interest
Income/
Expense
141,086
27,578
6,210
33,788
1,163
Rates
Earned
/Paid
5.37 %
2.59 %
4.92 %
2.84 %
0.57 %
176,037
4.37 %
Average
Balance
$
2,629,729
1,064,410
$
126,099
1,190,509
205,263
4,025,501
347,521
183,901
4.39 %
$
5,516,126
$
4,554,505
$
4,373,022
$
1,075,331
1,610,202
378,058
3,063,591
154,372
56,950
3,274,913
1,531,383
74,113
635,717
945
2,803
3,248
6,996
2,745
3,131
$
0.09 %
0.17 %
0.86 %
0.23 %
1.78 %
5.50 %
12,872
0.39 %
939,516
1,368,705
317,724
2,625,945
41,252
56,762
2,723,959
1,262,592
67,301
500,653
744
1,683
1,531
3,958
305
2,535
$
0.08 %
0.12 %
0.48 %
0.15 %
0.74 %
4.47 %
6,798
0.25 %
878,436
1,344,304
342,511
2,565,251
18,873
56,566
2,640,690
1,193,297
65,206
473,829
441
1,685
1,357
3,483
9
2,229
0.05 %
0.13 %
0.40 %
0.14 %
0.05 %
3.94 %
5,721
0.22 %
Assets:
Loans
Investment securities - taxable
Investment securities - nontaxable (1)
Total investments
Cash at Federal Reserve and other banks
Total interest-earning assets
Other assets
Total assets
Liabilities and shareholders’ equity:
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
$
5,516,126
$
4,554,505
$
4,373,022
Net interest spread (2)
Net interest income and interest margin (3)
$
216,650
4.16 %
4.30 %
$
177,103
4.14 %
4.22 %
$
170,316
4.15 %
4.23 %
(1)
The fully-taxable equivalent (FTE) adjustment for interest income of non-taxable investment securities was $1,304, $2,499 and $2,329 for the years ended December 31,
2018, 2017 and 2016, respectively.
(2) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.
25
Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields
Earned and Rates Paid – Volume/Rate Tables
The following table sets forth a summary of the changes in the Company’s interest income and interest expense from changes in
average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes applicable to
both rate and volume have been included in the rate variance. Amounts are calculated on a fully taxable equivalent basis:
Volume
2018 over 2017
Rate
Total
Volume
2017 over 2016
Rate
Total
Increase in interest income:
Loans
Investment securities - taxable
Investment securities - nontaxable
Cash at Federal Reserve and other banks
$
36,421
4,141
289
(183)
$
2,902 $
2,465
(1,304)
890
39,323
6,606
(1,015)
707
$
11,434
593
499
(449)
$ (5,726) $
925
(45)
633
5,708
1,518
454
184
Total interest-earning assets
40,668
4,953
45,621
12,077
(4,213)
7,864
Increase in interest expense:
Interest-bearing demand deposits
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
109
290
290
837
8
92
830
1,427
1,603
588
201
1,120
1,717
2,440
596
31
32
(99)
11
8
272
(34)
273
285
298
303
(2)
174
296
306
Total interest-bearing liabilities
1,534
4,540
6,074
(17)
1,094
1,077
Increase in net interest income
$
39,134
$
413 $
39,547
$
12,094
$ (5,307) $
6,787
The change in volume of interest earning assets and interest bearing liabilities during the year ended December 31, 2018 was
significantly impacted by the acquisition of FNBB which was completed on July 6, 2018. The following is a summary of the
certain consolidated assets and deposits as of the dates indicated:
Ending balances
($'s in thousands)
Total assets
Total loans
Total investments
Total deposits
Annual average balances
($'s in thousands)
Total assets
Total loans
Total investments
Total deposits
As of December 31,
2018
6,352,441
4,022,014
1,580,096
5,366,466
2017
$
$
4,761,315
3,015,165
1,262,683
4,009,131
As of December 31,
2018
5,516,126
3,548,498
1,383,975
4,594,974
2017
$
$
4,554,505
2,842,659
1,223,542
3,888,537
$
$
$
$
$ Change
1,591,126
1,006,849
317,413
1,357,335
$ Change
961,621
705,839
160,433
706,437
$
$
$
$
Acquired
Balances
1,463,200
834,683
335,667
991,935
$
$
$
Average Acquired
Balances *
713,561
407,051
163,695
483,738
$
Organic
$ Change
127,926
172,166
(18,254)
365,400
Organic
$ Change
248,060
298,788
(3,262)
222,699
$
$
$
$
Organic
% Change
2.69%
5.71%
(1.45%)
9.11%
Organic
% Change
5.45%
10.51%
(0.27%)
5.73%
* Average acquired amounts calculated by computing the annualized balance outstanding during the year based on the acquisition date of July 6, 2018 and
a 365 day calendar year.
26
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, 2018 and 2017” 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, 2018 and 2017.
The Company provided $2,583,000 for loan losses during the year ended December 31, 2018 versus an $89,000 provision for loan
losses during the year ended December 31, 2017. The increase in provision for loan losses for the year ended December 31, 2018
compared to the year ended December 31, 2017 was due primarily to estimated losses related to the Camp Fire that occurred in the
4th quarter of 2018. As of December 31, 2018, the Company had established reserves totaling $3,250,000 related to the Camp Fire.
As shown in the Table labeled “Allowance for Loan Losses - year ended December 31, 2018” at Note 5 in Item 8 of Part II of this
report residential and commercial real estate loans, other consumer loans, commercial, and construction loans experienced
provision for loan losses during the year ended December 31, 2018. The level of provision for loan losses of each loan category
during the year ended December 31, 2018 was due primarily to increases in the required allowance for loan losses as of December
31, 2018 when compared to the required allowance for loan losses as of December 31, 2017 less net charge-offs during the year
ended December 31, 2018. All categories of loans except consumer home equity lines of credit and commercial loans experienced
an increase in the required allowance for loan losses during the year ended December 31, 2018. These increases in required
allowance for loan losses were due primarily to the estimated losses related to the Camp Fire, as mentioned above, which were
offset by improvements in historical loss factors and decreases in nonperforming loans as a total percentage of loans. Total net
charge-offs for the year ended December 31, 2018 were $324,000 as compared to total net charge offs for the year ended
December 31, 2017 of $2,269,000. Total nonperforming loans decreased from 0.81% of total loans at December 31, 2017 to
0.68% of total loans at December 31, 2018. 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,
2018” and “Changes in nonperforming assets during the three months ended December 31, 2018” under the heading “Asset
Quality and Non-Performing Assets” below.
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, 2017” under the heading “Asset Quality and Non-Performing Assets” below.
The provision for loan losses related to Originated and PNCI loans is based on management’s evaluation of inherent risks in these
loan portfolios and a corresponding analysis of the allowance for loan losses. The provision for loan losses related to PCI loan
portfolio is based on changes in estimated cash flows expected to be collected on PCI loans. Additional discussion on loan quality,
our procedures to measure loan impairment, and the allowance for loan losses is provided under the heading “Asset Quality and
Non-Performing Assets” below.
Management re-evaluates the loss ratios and other assumptions used in its calculation of the allowance for loan losses for its
Originated and PNCI loan portfolios on a quarterly basis and makes changes as appropriate based upon, among other things,
changes in loss rates experienced, collateral support for underlying loans, changes and trends in the economy, and changes in the
loan mix. Management also re-evaluates expected cash flows used in its accounting for its PCI loan portfolio, including any
required allowance for loan losses, on a quarterly basis and makes changes as appropriate based upon, among other things, changes
in loan repayment experience, changes in loss rates experienced, and collateral support for underlying loans.
27
Noninterest Income
The following table summarizes the Company’s noninterest income for the periods indicated (dollars in thousands):
ATM and interchange fees
Service charges on deposit accounts
Other service fees
Mortgage banking service fees
Change in value of mortgage loan servicing rights
2018
Year Ended December 31,
2017
$
18,249 $
15,467
2,852
2,038
(146)
16,727 $
16,056
3,282
2,076
(718)
2016
15,859
14,365
3,121
2,065
(2,184)
Total service charges and fees
38,460
37,423
33,226
Commissions on sale of non-deposit investment products
Increase in cash value of life insurance
Gain on sale of loans
Lease brokerage income
Sale of customer checks
Gain on sale of foreclosed assets
Gain on sale of investment securities
Loss on disposal of fixed assets
Loss on marketable equity securities
Other
Total other noninterest income
Total noninterest income
3,151
2,718
2,371
678
449
408
207
(185)
(64)
1,091
2,729
2,685
3,109
782
372
711
961
(142)
-
1,391
2,329
2,717
4,037
711
408
262
-
(147)
-
1,020
10,824
12,598
11,337
$
49,284
$
50,021
$
44,563
Noninterest income decreased $737,000 (1.5%) to $49,284,000 in 2018 compared to $50,021,000 in 2017. The decrease in
noninterest income was due primarily to an decrease in service charges on deposit accounts and other service fees of $1,019,000
(5.3%) to $18,319,000, a decrease in gain on sale of loans of $738,000 (23.7%) to $2,371,000, a decrease in gain on sale of
investment securities of $754,000 (78.5%), which were partially offset by an increase of $1,522,000 (9.1%) increase in ATM fees
and interchange revenue, and a $422,000 (15.5%) increase in commissions on non-depository products. The $1,522,000 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 $738,000 decrease in gain on sale of loans was due primarily to reduced residential mortgage refinance
activity in 2018 compared to 2017.
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 $371,000 (36.4%) 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 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.
28
Noninterest Expense
The following table summarizes the Company’s other noninterest expense for the periods indicated (dollars in thousands):
Base salaries, net of deferred loan origination costs
Incentive compensation
Benefits and other compensation costs
2018
Year Ended December 31,
2017
2016
$
62,422
11,147
20,373
$
$
54,589
9,227
19,114
53,169
8,872
18,683
Total salaries and benefits expense
93,942
82,930
80,724
Occupancy
Data processing and software
Equipment
ATM and POS network charges
Merger and acquisition expense
Advertising
Professional fees
Intangible amortization
Telecommunications
Regulatory assessments and insurance
Courier service
Operational losses
Postage
Legal settlement
Foreclosed assets expense
Provision for foreclosed asset losses
Other miscellaneous expense
Total other noninterest expense
Total noninterest expense
12,139
11,021
6,651
5,271
5,227
4,578
3,546
3,499
3,023
1,906
1,287
1,260
1,154
-
382
89
13,720
10,894
10,448
7,141
4,752
530
4,101
3,745
1,389
2,713
1,676
1,035
1,394
1,296
-
231
162
12,587
10,139
8,846
6,597
4,999
784
3,829
5,409
1,377
2,749
2,105
998
1,564
1,603
1,450
266
140
12,418
74,753
64,094
65,273
$
168,695
$
147,024
$
145,997
Average full-time equivalent staff
1,071
1,000
999
Salary and benefit expenses increased $11,012,000 (13.3%) to $93,942,000 during the twelve months ended December 31, 2018
compared to $82,930,000 during the prior twelve months ended December 31, 2017. Base salaries, net of deferred loan origination
costs increased $7,833,000 (14.3%) to $62,422,000. The increase in base salaries was due primarily to a 7.1% increase in average
full time equivalent employees to 1,071 from 1,000 in the prior year-to-date period. Also affecting the increase in base salaries
were annual merit increases and a higher wage base per employee resulting from the employees associated with the FNBB merger
transaction due to the Bay Area region’s higher cost of living. Commissions and incentive compensation increased $1,920,000
(20.8%) to $11,147,000 during 2018 compared to 2017 primarily due to organic growth of loans and deposits. Benefits & other
compensation expense increased $1,259,000 (6.6%) to $20,373,000 during the year ended December 31, 2018 due primarily to
increases in the average full time equivalent employees, as mentioned above, and to a lesser extent, annual increases in healthcare
and benefits costs.
Other noninterest expense increased $10,659,000 (16.6%) to $74,753,000 during the year ended December 31, 2018 compared to
the year ended December 31, 2017. The increase in other noninterest expense was due primarily to increased costs related to the
merger of FNBB. Highlighting some of those increases were merger expenses, increases in intangible amortization, occupancy,
data processing, and advertising, which increased by $4,697,000, $2,110,000, $1,245,000, $573,000, and $477,000, respectively,
as compared to the prior year. The increases in noninterest expenses were partially offset by decreased equipment expenses and
professional fees of $490,000 and $199,000, respectively.
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
29
$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.
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.
Income Taxes
The provisions for income taxes applicable to income before taxes for the years ended December 31, 2018, 2017 and 2016 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 of federal rate change
Tax-exempt interest on municipal obligations
Tax-exempt life insurance related income
Low income housing tax credits
Low income housing tax credit amortization
Equity compensation
Non-deductible joint beneficiary agreement expense
Non-deductible merger expenses
Other
Year Ended December 31,
2018
2017
2016
21.0 %
8.6
-
(1.0)
(0.6)
(2.2)
2.0
(0.5)
0.1
0.2
(0.8)
35.0 %
6.9
9.6
(1.9)
(1.3)
(2.3)
2.1
(1.2)
0.1
0.2
0.5
35.0 %
6.8
-
(1.8)
(1.3)
(1.3)
0.8
-
0.1
-
(0.1)
Effective Tax Rate
26.8 %
47.7 %
38.2 %
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. This decrease in the
Federal corporate tax rate had a positive impact on the Company’s net income beginning January 1, 2018. However, the enactment
of the law during 2017 required the Company to re-measure its deferred tax assets and liabilities as of December 31, 2017. 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 effective tax rate on income was 26.8%, 47.7%, and 38.2% in 2018, 2017, and 2016, respectively. The effective tax rate was
greater than the Federal statutory rates of 21% in 2018 and 35% in 2017 and 2016 due to the combination of state tax expenses of
8.6% in 2018, 6.9% in 2017, and 6.8% in 2016. Tax provision expense for 2017 was increased further by $7,416,000 due to the
remeasurement of the Company’s net deferred tax asset resulting from the Federal tax law change. These increases in tax expense
were partially offset by Federal tax-exempt investment income of $4,345,000, $4,165,000, and $3,881,000, respectively, Federal
and State tax-exempt income of $2,718,000, $2,792,000, and $2,955,000, respectively, from increase in cash value and gain on
death benefit of life insurance, low income housing tax credits and losses, net of amortization of $179,000, $142,000, and
$197,000, respectively, and equity compensation excess tax benefits of $499,000, $916,000, 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 29.6% during 2018 and 42.0% during 2017 and 2016.
30
Financial Condition
Investment Securities
The following table presents the available for sale debt securities and marketable equity investment securities portfolio by major
type as of the dates indicated:
(dollars in thousands)
2018
2017
2016
2015
2014
Year ended December 31,
Marketable equity securities
$ 2,874
$ 2,938
$ 2,938
$ 2,985
$ 3,002
Debt securities available for sale:
Obligations of U.S. government and agencies
Obligations of states and political subdivisions
Corporate bonds
Asset backed securities
$ 629,981
126,072
4,478
354,505
$ 604,789
123,156
-
-
$ 429,678
117,617
-
-
$ 313,682
88,218
-
-
$ 75,120
3,175
1,908
-
Total debt securities available for sale
$ 1,115,036
$ 727,945
$ 547,295
$ 401,900
$ 80,203
Debt securities held to maturity:
Obligations of U.S. government agencies
Obligations of states and political subdivisions
$
430,343
14,593
$
500,271
14,573
Total debt securities held to maturity
$
444,936
514,844
$
$
597,982
14,554
612,536
$
$
711,994
14,536
726,530
$
$
660,836
15,590
676,426
Debt securities available for sale increased $387,091,000 to $1,115,036,000 as of December 31, 2018, compared to December 31,
2017. This increase is attributable to purchases of $436,678,000 that were primarily funded with proceeds from sales of securities
of $293,279,000 acquired in the FNBB merger, maturities and principal repayments of $73,014,000, a decrease in fair value of
investments securities available for sale of $17,267,000 and amortization of net purchase price premiums of $1,541,000.
Debt securities held to maturity decreased $69,908,000 to $444,936,000 as of December 31, 2018, compared to December 31,
2017. This decrease is attributable to principal repayments of $68,937,000 and amortization of net purchase price
discounts/premiums of $971,000.
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 $17,250,000 and $16,956,000 at December 31, 2018 and December 31, 2017, respectively. The
entire balance of restricted equity securities at December 31, 2018 and 2017 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.
31
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 Composition
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
$
2018
3,143,100
418,982
276,548
183,384
2017
Year ended December 31,
2016
$
2,300,322
356,874
220,412
137,557
$
2,057,824
362,303
217,047
122,419
$
2015
1,811,832
395,283
194,913
120,909
$
2014
1,615,359
417,084
174,945
75,136
$
4,022,014
$
3,015,165
$
2,759,593
$
2,522,937
$
2,282,524
The following table shows the Company’s loan balances, including net deferred loan fees, as a percentage of total loans at the
dates indicated:
(dollars in thousands)
Real estate mortgage
Consumer
Commercial
Real estate construction
Total loans
2018
2017
Year ended December 31,
2016
2015
2014
78.1%
10.4%
6.9%
4.6%
100%
76.3%
11.8%
7.3%
4.6%
100%
74.6%
13.1%
7.9%
4.4%
100%
71.8%
15.7%
7.7%
4.8%
100%
70.8%
18.2%
7.7%
3.3%
100%
At December 31, 2018 loans, including net deferred loan costs, totaled $4,022,014,000 which was a 33.4% ($1,006,849,000)
increase over the balances at the end of 2017. Included in the increase in loans in 2018 is acquired loans, net of discount, of
$834,683,000 from the acquisition of FNBB.
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.
32
Asset Quality and Nonperforming Assets
Nonperforming Assets
The following tables set forth the amount of the Bank’s nonperforming assets as of the dates indicated. “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
2018
$ 22,689
4,805
2017
$ 20,937
3,176
December 31,
2016
$ 17,677
2,451
2015
$ 31,033
6,086
$
2014
45,072
2,517
Total nonaccrual loans
Originated and PNCI loans 90 days past due and still accruing
27,494
-
24,113
281
20,128
-
37,119
-
47,589
-
Total nonperforming loans
Foreclosed assets
27,494
2,280
24,394
3,226
20,128
3,986
37,119
5,369
47,589
4,894
Total nonperforming assets
$ 29,774
$ 27,620
$ 24,114
$ 42,488
$
52,483
U.S. government, including its agencies and its government-sponsored
agencies, guaranteed portion of nonperforming loans
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
$
1,173
$
358
$
911
$
28
$
123
0.47%
0.68%
119%
2.11%
0.58%
0.81%
124%
1.77%
0.53%
0.73%
161%
2.09%
1.01%
1.47%
97%
2.69%
1.34%
2.08%
77%
3.31%
(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
Foreclosed assets
December 31, 2018
Originated
PNCI
PCI
Total
$ 16,573
2,843
$ 1,269
1,589
$ 4,847
373
$ 22,689
4,805
19,416
-
2,858
-
5,220
-
19,416
1,490
2,858
-
5,220
790
27,494
-
27,494
2,280
Total nonperforming assets
$ 20,906
$ 2,858
$ 6,010
$ 29,774
U.S. government, including its agencies and its government-sponsored
agencies, guaranteed portion of nonperforming loans
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
$ 800
$
-
$ 373
$ 1,173
0.34%
0.65%
164%
1.39%
0.04%
0.28%
23.3%
3.48%
0.09%
36.70%
2.34%
33.69%
0.47%
0.68%
118.51%
2.11%
(dollars in thousands)
Performing nonaccrual loans
Nonperforming nonaccrual loans
December 31, 2017
Originated
PNCI
PCI
Total
$ 12,942
2,520
$ 1,305
158
$ 6,690
498
$ 20,937
3,176
Total nonaccrual loans
Originated loans 90 days past due and still accruing
15,462
-
1,463
281
7,188
-
Total nonperforming loans
Foreclosed assets
15,462
1,836
1,744
-
7,188
1,390
24,113
281
24,394
3,226
Total nonperforming assets
$ 17,298
$ 1,744
$ 8,578
$ 27,620
U.S. government, including its agencies and its government-sponsored
agencies, guaranteed portion of nonperforming loans
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
$
-
$
-
$ 358
0.36%
0.57%
188%
1.32%
0.04%
0.56%
53.27%
2.22%
0.18%
46.20%
3.78%
34.05%
0.58%
0.81%
124%
1.77%
33
Changes in nonperforming assets during the year ended December 31, 2018
The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2018:
(in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial
Construction:
Residential
Commercial
Balance at
December 31,
2018
$ 2,854
15,046
2,749
2,963
7
3,875
-
-
Additions
Advances/
Paydowns, net
Charge-offs/
Write-downs
$ 2,007
6,204
-
3,048
2,434
114
3,209
-
-
-
$ (1,793)
(3,455)
$ (51)
(15)
-
-
(3,401)
(724)
(31)
(1,975)
-
-
-
(104)
(51)
(87)
(967)
-
-
-
Transfers to
Foreclosed
Assets
$
-
(580)
-
(49)
(633)
-
-
-
-
-
Category
Changes
$ (1,048)
1,072
-
(227)
301
-
(98)
-
-
-
Balance at
December 31,
2017
$ 3,739
11,820
3,482
1,636
11
3,706
-
-
Total nonperforming loans
Foreclosed assets
27,494
2,280
17,016
-
(11,379)
(2,119)
(1,275)
(89)
(1,262)
1,262
-
-
24,394
3,226
Total nonperforming assets
$ 29,774
$ 17,016
$ (13,498)
$ (1,364)
$
-
$
-
$ 27,620
The table above does not include deposit overdraft charge-offs.
Nonperforming assets increased by $2,154,000 (7.8%) to $29,774,000 at December 31, 2018 from $27,620,000 at December 31,
2017. The increase in nonperforming assets during 2018 was the result of new nonperforming loans of $17,016,000, that were
partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $11,379,000, dispositions
of foreclosed assets totaling $2,119,000, and net charge-offs of $1,364,000.
Changes in nonperforming assets during the year ended December 31, 2017
The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2017:
(in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial
Construction:
Residential
Commercial
Balance at
December 31,
2017
New
NPA
Advances/
Paydowns, net
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
December 31,
2016
$ 3,739
11,820
$ 3,416
11,715
$ (122)
(10,394)
$ (60)
(186)
$ (127)
(466)
$ 183
258
$ 449
10,893
3,482
1,636
11
3,706
1,234
1,701
653
5,292
(1,715)
(606)
(43)
(2,670)
(98)
(332)
(637)
(1,444)
(550)
(140)
-
(144)
-
-
1,118
-
(25)
-
(1,104)
-
-
-
(326)
143
-
(258)
-
-
-
-
4,937
870
38
2,930
11
-
20,128
3,986
Total nonperforming loans
Foreclosed assets
24,394
3,226
25,129
-
(15,575)
(2,161)
(3,861)
(26)
(1,427)
1,427
Total nonperforming assets
$ 27,620
$ 25,129
$ (17,736)
$ (3,887)
$
-
$
-
$ 24,114
The table above does not include deposit overdraft charge-offs.
Nonperforming assets increased by $3,506,000 (14.5%) to $27,620,000 at December 31, 2018 from $24,114,000 at December 31,
2017. The increase in nonperforming assets during 2018 was the result of new nonperforming loans of $25,129,000, that were
partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $15,575,000, dispositions
of foreclosed assets totaling $2,161000, and net charge-offs of $3,887,000.
34
Changes in nonperforming assets during the three months ended December 31, 2018
The following table shows the activity in the balance of nonperforming assets for the quarter ended December 31, 2018:
(in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial
Construction:
Residential
Commercial
Balance at
December 31,
2018
Additions
Advances/
Paydowns, net
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
September 30,
2018
$ 2,854
15,046
$ 1,104
1,947
$ (1,288)
(1,450)
$
-
-
$
-
$
(580)
-
-
$ 3,038
15,129
2,749
2,963
7
3,875
895
461
-
1,338
(230)
(489)
(1)
(990)
-
(1)
-
(224)
(49)
(97)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,133
3,089
8
3,751
-
-
27,148
1,832
Total nonperforming loans
Foreclosed assets
27,494
2,280
5,745
-
(4,448)
(278)
(225)
-
(726)
726
Total nonperforming assets
$ 29,774
$ 5,745
$ (4,726)
$ (225)
$
-
$
-
$ 28,980
The table above does not include deposit overdraft charge-offs.
Nonperforming assets increased during the fourth quarter of 2018 by $794,000 (2.7%) to $29,774,000 at December 31, 2018
compared to $28,980,000 at September 30, 2018. The increase in nonperforming assets during the fourth quarter of 2018 was
primarily the result of new nonperforming loans of $5,745,000, that were partially offset by net paydowns, sales or upgrades of
nonperforming loans to performing status totaling $4,448,000, dispositions of foreclosed assets totaling $278,000, and loan
charge-offs of $225,000.
The $5,745,000 in new nonperforming loans during the fourth quarter of 2018 was comprised of increases of $1,104,000 on three
residential real estate loans, $1,947,000 on seven commercial real estate loans, $1,356,000 on 14 home equity lines and loans, and
$1,338,000 on 18 C&I loans.
The $1,104,000 in new nonperforming residential real estate loans was primarily made up of one loan in the amount of $624,000
secured by a single family property in northern California. The $1,947,000 in new nonperforming CRE loans was primarily
comprised of three loans in the amount of $1,084,000 secured by agricultural real estate in northern California, one loan in the
amount of $454,000 secured by a commercial building in northern California, and three smaller loans totaling $410,000. The
$1,338,000 in new nonperforming C&I loans was primarily comprised of two loans totaling $740,000 within a single relationship
secured by general business assets in northern California, and three loans within a single relationship in the amount of $209,000
also secured by general business assets in northern California.
Changes in nonperforming assets during the three months ended December 31, 2017
The following table shows the activity in the balance of nonperforming assets for the quarter ended December 31, 2017:
(in thousands):
Real estate mortgage:
Residential
Commercial
Consumer
Home equity lines
Home equity loans
Other consumer
Commercial
Construction:
Residential
Commercial
Balance at
December 31,
2017
New
NPA
Advances/
Paydowns, net
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Category
Changes
Balance at
September 30,
2017
$ 3,739
11,820
$ 830
6,318
$ (30)
(6,450)
$
-
(16)
$ (127)
(381)
$
-
-
$ 3,066
12,349
3,481
1,435
(43)
3,962
701
510
198
2,290
(93)
(332)
(4)
(185)
(1)
(202)
(256)
(88)
(98)
-
-
(144)
-
-
-
-
-
-
-
-
-
-
(57)
57
-
-
-
-
-
-
3,019
1,500
19
2,001
-
-
21,954
3,071
Total nonperforming loans
Foreclosed assets
24,394
3,226
10,847
-
(7,094)
(683)
(475)
-
(838)
838
Total nonperforming assets
$ 27,620
$ 10,847
$ (7,777)
$ (475)
$
-
$
-
$ 25,025
The table above does not include deposit overdraft charge-offs.
35
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.
Allowance for Loan Losses
The Company’s method for assessing the appropriateness of the allowance for originated and PNCI loan losses includes specific
allowances for impaired 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.
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.
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.
36
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.
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):
(dollars in thousands)
2018
2017
December 31,
2016
2015
2014
Allowance for non-impaired originated
and PNCI loan losses:
Environmental factors allowance
Formula allowance
Total allowance for non-impaired
originated and PNCI loan losses
Allowance for impaired loans
Allowance for PCI loan losses
$
11,577
18,689
$
10,252
17,100
$
10,275
17,485
$
9,625
20,603
$
6,815
22,076
30,266
2,194
122
27,352
2,699
272
27,760
2,046
2,697
30,228
2,890
2,893
28,891
4,267
3,427
Total allowance for loan losses
$
32,582
$
30,323
$
32,503
$
36,011
$
36,585
Allowance for loan losses to loans
0.81%
1.01%
1.18%
1.43%
1.60%
Based on the current conditions of the loan portfolio, management believes that the $32,582,000 allowance for loan losses at
December 31, 2018 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:
(in thousands)
Real estate mortgage
Consumer
Commercial
Real estate construction
$
2018
15,620
8,375
6,090
2,497
$
2017
13,758
8,227
6,512
1,826
December 31,
2016
$
14,265
10,310
5,831
2,096
$
2015
13,911
15,118
5,271
1,711
$
2014
12,313
18,201
4,226
1,845
Total allowance for loan losses
$
32,582
$
30,323
$
32,502
$
36,011
$
36,585
37
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
2018
2017
47.9%
25.7%
18.7%
7.7%
December 31,
2016
43.9%
31.7%
17.9%
6.5%
45.4%
27.1%
21.5%
6.0%
2015
2014
38.6%
42.0%
14.6%
4.8%
100.0%
100.0%
100.0%
100.0%
33.7%
49.7%
11.6%
5.0%
99.9%
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
2018
2017
December 31,
2016
2015
2014
0.50%
2.00%
2.20%
1.36%
0.81%
0.60%
2.31%
2.95%
1.33%
1.01%
0.69%
2.84%
2.69%
1.71%
1.18%
0.77%
3.81%
2.70%
1.42%
1.43%
0.76%
4.36%
2.42%
2.46%
1.60%
38
The following tables summarize the activity in the allowance for loan losses for the years indicated (dollars in thousands):
2018
2017
Year ended December 31,
2016
2015
2014
Allowance for loan losses:
Balance at beginning of period
Provision for (benefit from) loan
losses
Loans charged off:
Real estate mortgage:
Residential
Commercial
Consumer:
Home equity lines
Home equity loans
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
Other consumer
Commercial
Construction:
Residential
Commercial
Total recoveries of previously
charged off loans
$
30,323
$ 32,503
$
36,011
$
36,585
$ 38,245
2,583
89
(5,970)
(2,210)
(4,045)
(77)
(15)
(60)
(186)
(321)
(827)
(224)
-
(171)
(110)
(277)
(24)
(783)
(1,188)
(98)
(332)
(1,186)
(1,444)
(585)
(219)
(823)
(455)
(694)
(242)
(976)
(680)
(1,094)
(29)
(602)
(479)
-
-
(1,104)
-
-
-
-
-
(4)
(69)
(2,364)
(4,410)
(3,230)
(2,816)
(2,558)
-
68
-
397
880
920
204
243
2
540
846
297
288
541
698
242
375
428
2,317
590
449
404
666
252
542
677
960
34
581
1,268
-
-
-
1
54
78
1,728
140
1,377
181
2,040
2,141
5,692
4,452
4,943
Net (charge-offs) recoveries
(324)
(2,269)
2,462
1,636
2,385
Balance at end of period
$
32,582
$ 30,323
$
32,503
$
36,011
$ 36,585
Average total loans
Ratios:
Net charge-offs (recoveries) during
period to average loans outstanding
during period
Provision for (benefit from) loan
losses to average loans outstanding
during period
Allowance for loan losses to loans at
year-end
$
3,548,498
$ 2,842,659
$
2,629,729
$
2,389,437
$ 1,847,749
0.01 %
0.08 %
(0.09) %
(0.07) %
(0.13) %
0.07
%
0.00 %
(0.23) %
(0.09) %
(0.22) %
0.81 %
1.01 %
1.18
%
1.43 %
1.60 %
Generally losses are triggered by non-performance by the borrower and calculated based on any difference between the current
loan amount and the current value of the underlying collateral less any estimated costs associated with the disposition of the
collateral.
39
Foreclosed Assets, Net of Allowance for Losses
The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the
years indicated (dollars in thousands):
Balance at
December 31,
2018
Additions
Advances/
Capitalized
Costs/Other
Sales
Valuation
Adjustments
Balance at
December 31,
2017
Land & Construction
Residential real estate
Commercial real estate
$ 445 $
1,742
93
- $
1,262
-
- $ (1,341)
(634)
-
(144)
-
$
- $ 1,786
1,186
254
(72)
(17)
Total foreclosed assets
$ 2,280 $ 1,262 $
- $ (2,119)
$ (89)
$ 3,226
Balance at
December 31,
2017
Additions
Advances/
Capitalized
Costs/Other
Sales
Valuation
Adjustments
Balance at
December 31,
2016
Land & Construction
Residential real estate
Commercial real estate
$ 1,786 $ 381 $
1,186
254
865
317
- $ (15)
(1,294)
-
(852)
-
$ (92)
(49)
(21)
$ 1,512
1,664
810
Total foreclosed assets
$ 3,226 $ 1,563 $
- $ (2,161)
$ (162)
$ 3,986
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
As of December 31,
2018
2017
(In thousands)
$
29,065
64,478
45,228
$
9,959
50,340
35,939
138,771
(50,125)
96,238
(40,644)
88,646
701
55,594
2,148
$
89,347
$
57,742
During the year ended December 31, 2018, premises and equipment, net of depreciation, increased $31,605,000 and includes
premises and equipment from the FNBB merger with a fair value of $30,522,000. In addition to the merger, the Company had
purchases of $7,435,000 that were partially offset by depreciation of $6,104,000 and disposals of premises and equipment with
net book value of $248,000. Depreciation expense for the years ended December 31, 2017 and 2016 was $5,686,000 and
$5,314,000, respectively. Purchases of fixed assets during the years ended December 31, 2017 and 2016 totaled $15,164,000 and
$10,930,000, respectively.
40
Intangible Assets
Intangible assets were comprised of the following:
Core-deposit intangible
Goodwill
Total intangible assets
December 31,
2018
December 31,
2017
$
(In thousands)
$
29,280
220,972
5,174
64,311
$
250,252
$
69,485
The core-deposit intangible assets resulted from the Company’s acquisition of FNBB on July 6, 2018, three bank branches from
Bank of America on March 18, 2016, North Valley Bancorp in 2014, and Citizens in 2011. The goodwill intangible asset
includes $156,661,000 from the FNBB acquisition on July 6, 2018, $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 $3,499,000,
$1,389,000, and $1,377,000 was recorded in 2018, 2017, and 2016, respectively.
Deposit Portfolio Composition
The following table shows the Company’s deposit balances at the dates indicated:
(dollars in thousands)
Noninterest-bearing demand
Interest-bearing demand
Savings
Time certificates, over $250,000
Other time certificates
$
2018
1,760,580
1,252,366
1,921,324
132,429
299,767
2017
Year ended December 31,
2016
$
1,368,218
971,459
1,364,518
73,596
231,340
$
1,275,745
887,625
1,397,036
75,184
259,970
$
2015
1,155,695
853,961
1,281,540
74,647
265,423
$
2014
1,083,900
782,385
1,156,126
38,217
319,795
Total deposits
$
5,366,466
$
4,009,131
$
3,895,560
$
3,631,266
$
3,380,423
Long-Term Debt
See Note 12 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 13 to the consolidated financial statements at Item 8 of this report for information about the Company’s junior
subordinated debt.
Equity
See Note 15 and Note 25 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.
41
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 which establishes and monitors guidelines to control the sensitivity of earnings and the fair value of certain assets and
liabilities as may be caused by changes in interest rates. The Company does not hold any financial instruments that are not
maintained in US dollars and is not party to any contracts that may be settled or repaid in a denomination other than US dollars.
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 and 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 ramp and or shock scenarios including -200, -100, +100, and +200 basis points around the flat scenario. These
scenarios assume that 1) interest rates increase or decrease evenly (in a “ramp” fashion) over a twelve-month period and remain at
the new levels beyond twelve months or 2) that interest rates change instantaneously (“shock”). The simulation results shown
below assume no changes in the structure of the Company’s balance sheet over the twelve months being measured.
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 following twelve month period.
Interest Rate Risk Simulation of Net Interest Income as of December 31, 2018:
Change in Interest
Rates (Basis Points)
+200 (shock)
+100 (shock)
+ 0 (flat)
-100 (shock)
-200 (shock)
Estimated Change in
Net Interest Income (NII)
(as % of “flat” NII)
(0.6%)
(0.1%)
-
(4.3%)
(9.2%)
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, 2018:
Change in Interest
Rates (Basis Points)
+200 (shock)
+100 (shock)
+ 0 (flat)
-100 (shock)
-200 (shock)
Estimated Change in
Market Value of Equity (MVE)
(as % of “flat” MVE)
(0.2%)
1.1%
-
(8.8%)
(22.8%)
42
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 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, 2018. 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.
43
Repricing Analysis as of – December 31, 2018
(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
Less than 3
months
3 - 6
months
Repricing within:
6 - 12
months
1 - 5
months
Over
5 years
$ 107,752
176,611
824,193
$
-
256,707
199,828
$
-
70,291
381,087
$
-
438,062
2,174,494
$
-
639,275
442,412
1,108,556
456,535
451,378
2,612,556
1,081,687
3,173,690
102,763
15,839
57,042
-
116,787
-
-
-
79,305
-
-
-
133,335
-
-
-
6
-
-
Total interest-bearing liabilities
$ 3,349,334
$ 116,787
$ 79,305
$ 133,335
6
Interest sensitivity gap
Cumulative sensitivity gap
As a percentage of earning assets:
Interest sensitivity gap
Cumulative sensitivity gap
$ (2,240,778)
$ (2,240,778)
$ 339,748
$ (1,901,030)
$ 372,073
$ (1,528,957)
$ 2,479,221
$ 950,264
$ 1,081,681
$ 2,031,945
(39.2) %
(39.2) %
5.9 %
(33.3) %
6.5 %
(26.8) %
43.4 %
16.6 %
18.9 %
35.6 %
Liquidity
Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as
well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from
either the asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and maturities of loans,
selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale
portfolio. These activities are generally summarized as investing activities in the Consolidated Statement of Cash Flows. Net
cash used by investing activities totaled $142,003,000,000 in 2018. Net increases in investment and loan balances used
$436,679,000 and $173,752,000 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 2018, financing activities provided funds totaling
$73,039,000 due to a $365,400,000 increase in deposit balances, which was offset by a decrease of $271,327,000 in other
borrowings. Dividends paid used $18,769,000 of cash during 2018. The Company also had available correspondent banking
lines of credit totaling $22,000,000 at December 31, 2018. In addition, at December 31, 2018 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 $2,063,815,000 and $142,272,000, respectively. As of December 31, 2018, the Company had $15,839,000 of other borrowings
as described in Note 12 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 2018, operating activities provided cash of $91,069,000.
The Company’s investment securities, excluding held-to-maturity securities, plus cash and cash equivalents in excess of reserve
requirements totaled $1,226,126,000 at December 31, 2018, which was 19.3% of total assets at that time. This was an increase of
$406,122,000 from $854,243,000 and an increase from 17.9% of total assets as of December 31, 2017.
Loan demand during 2019 will depend in part on economic and competitive conditions. The Company emphasizes 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
44
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, 2018, 2017 and 2016, the Bank had $65,000,000, $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
Amounts as of December 31,
2018
2017
2016
$
70,473
85,781
47,254
77,912
$
101,552
28,832
29,196
29,144
$
116,791
31,984
23,525
26,850
Total
$
281,420
$
188,724
$
199,150
Loan maturities
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, 2018:
Loans with predetermined interest rates:
Real estate mortgage
Consumer
Commercial
Real estate construction
Within
One Year
After One
But Within
5 Years
After 5
Years
Total
(dollars in thousands)
$
22,843
2,609
6,204
7,946
$
195,906
29,063
109,015
3,789
$
864,408
85,291
16,659
34,445
$
1,083,157
116,963
131,878
46,180
Total loans with predetermined interest rates
39,602
337,773
1,000,803
1,378,178
Loans with floating interest rates:
Real estate mortgage
Consumer
Commercial
Real estate construction
40,737
4,349
79,912
34,456
268,390
19,937
30,533
25,553
1,750,816
277,733
34,225
77,195
2,059,943
302,019
144,670
137,204
Total loans with floating interest rates
159,454
344,413
2,139,969
2,643,836
Total loans
$
199,056
$
682,186
$
3,140,772
$
4,022,014
45
Investment maturities
The maturity distribution and yields of the investment portfolio at December 31, 2018 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
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
Debt Securities Available for Sale
Obligations of US government agencies
Obligations of states and political subdivisions
Corporate bonds
Asset backed securities
$ 1
431
1,981
-
0.93 %
1.81 %
3.04 %
-
$ 6,688
1,609
2,497
-
3.19 %
2.85 %
6.14 %
-
(dollars in thousands)
$ 11,823
5,799
-
-
3.73 %
4.05 %
-
-
$
611,469
118,233
-
354,505
2.67 %
4.03 %
-
3.62 %
$
629,981
126,072
4,478
354,505
2.69 %
4.00 %
4.77 %
3.62 %
Total debt securities available for sale
$ 2,413
2.82 %
$ 10,794
3.81 %
$ 17,622
3.83 %
$
1,084,207
3.12 %
$
1,115,036
3.14 %
Debt Securities Held to Maturity
Obligations of US government agencies
Obligations of states and political subdivisions
$
-
-
-
-
$
-
1,238
-
3.33 %
$ 23,018
2,021
2.28 %
4.13 %
$
407,325
11,334
2.72 %
3.31 %
$
430,343
14,593
2.70 %
3.42 %
Total debt securities held to maturity
$
-
-
$ 1,238
3.33 %
$ 25,039
2.43 %
$
418,659
2.74 %
$
444,936
2.72 %
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases. See Note 18 of the financial statements at Item 8
of this report for the terms. These commitments do not significantly impact operating results. As of December 31, 2018
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 $1,203,400,000, and $946,617,000 at
December 31, 2018 and 2017, respectively, and represent 29.92% of the total loans outstanding at year-end 2018 versus 31.40%
at December 31, 2017. Commitments related to the Bank’s deposit overdraft privilege product totaled $111,956,000 and
$98,260,000 at December 31, 2018 and 2017, respectively.
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of December 31, 2018:
(dollars in thousands)
Time deposits
Other collateralized borrowings, fixed rate of
0.05% payable on January 2, 2019
Junior subordinated debt:
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
$ 432,196
Less than
one year
$ 298,855
1-3
years
$ 112,256
3-5
years
$ 21,079
More than
5 years
$ 6
15,839
15,839
20,619
20,619
5,135
4,041
6,444
19,600
3,022
13,033
4,639
785
1,557
7,680
1,327
2,206
4,645
390
2,002
20,619
20,619
5,135
4,041
6,444
2,636
520
7,268
Total contractual obligations
$ 540,548
$ 321,675
$ 123,469
$ 28,116
$ 67,288
(1)
(2)
(3)
(4)
(5)
(6)
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.
These amounts represent known certain payments to participants under the Company’s deferred compensation and supplemental retirement plans. See
Note 21 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.
46
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, 2018 and 2017
Consolidated Statements of Income for
the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows for the years ended
December 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm – Moss Adams LLP
Report of Independent Registered Public Accounting Firm – Crowe LLP
Page
48
49
50
50
51
52
97
98
99
47
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Assets:
Cash and due from banks
Cash at Federal Reserve and other banks
Cash and cash equivalents
Investment securities:
Marketable equity securities
Available for sale debt securities
Held to maturity debt securities
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
Other liabilities
Other borrowings
Junior subordinated debt
Total liabilities
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred stock, no par value: 1,000,000 shares authorized;
zero issued and outstanding at December 31, 2018 and 2017
Common stock, no par value: 50,000,000 shares authorized;
issued and outstanding: 30,417,223 and 22,955,963 at
December 31, 2018 and 2017, respectively
Retained earnings
Accumulated other comprehensive loss, net of tax
Total shareholders’ equity
At December 31,
2018
At December 31,
2017
$ 119,781
107,752
$ 105,968
99,460
227,533
205,428
2,874
1,115,036
444,936
17,250
3,687
4,022,014
(32,582)
3,989,432
2,280
89,347
117,318
19,412
220,972
29,280
7,098
65,986
2,938
727,945
514,844
16,956
4,616
3,015,165
(30,323)
2,984,842
3,226
57,742
97,783
13,772
64,311
5,174
6,687
55,051
$ 6,352,441
$ 4,761,315
$ 1,760,580
3,605,886
$ 1,368,218
2,640,913
5,366,466
1,997
83,724
15,839
57,042
4,009,131
930
66,422
122,166
56,858
5,525,068
4,255,507
-
-
541,762
303,490
(17,879)
255,836
255,200
(5,228)
827,373
505,808
Total liabilities and shareholders’ equity
$ 6,352,441
$ 4,761,315
The accompanying notes are an integral part of these consolidated financial statements.
48
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees
Investments:
Taxable securities
Tax exempt securities
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
2018
Year ended December 31,
2017
2016
$
186,117
$
146,794
$
141,086
33,997
4,345
1,705
27,772
4,165
1,324
25,397
3,881
2,181
2,054
1,347
1,163
228,218
181,402
173,708
6,996
2,745
3,131
3,958
305
2,535
3,483
9
2,229
12,872
6,798
5,721
215,346
174,604
167,987
Provision for (benefit from) loan losses
2,583
89
(5,970)
Net interest income after provision for (benefit from)
loan losses
Noninterest income:
Service charges and fees
Commissions on sale of non-deposit investment products
Increase in cash value of life insurance
Gain on sale of loans
Gain on sale of investment securities
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
212,763
174,515
173,957
38,460
3,151
2,718
2,371
207
2,377
37,423
2,729
2,685
3,109
961
3,114
33,226
2,329
2,717
4,037
-
2,254
49,284
50,021
44,563
93,942
74,753
82,930
64,094
80,724
65,273
168,695
147,024
145,997
93,352
25,032
77,512
36,958
72,523
27,712
$
68,320
$
40,554
$
44,811
$
$
2.57
2.54
$
$
1.77
1.74
$
$
1.96
1.94
The accompanying notes are an integral part of these consolidated financial statements.
49
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on available for sale securities arising during
the period, after reclassifications
Change in minimum pension liability, after reclassifications
Change in joint beneficiary agreement liability
Other comprehensive (loss) income
Comprehensive income
2018
Year ended
2017
2016
$
68,320 $
40,554
$
44,811
(12,434)
388
426
3,165
(370)
(110)
(6,384)
592
(343)
(11,620)
2,685
(6,135)
$
56,700 $
43,239
$
38,676
The accompanying notes are an integral part of these consolidated financial statements.
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data)
Balance at January 1, 2016
Net income
Other comprehensive loss
Stock option vesting
Service condition RSU vesting
Market plus service condition RSU vesting
Stock options exercised
Tax effect of stock options exercised
Service condition RSUs released
Tax benefit from release of service condition RSUs
Repurchase of common stock
Dividends paid ($ 0.60 per share)
Balance at December 31, 2016
Net income
Other comprehensive income
Stock option vesting
Service condition RSU vesting
Market plus service condition RSU vesting
Stock options exercised
Service condition RSUs released
Market plus service condition RSUs released
Repurchase of common stock
Dividends paid ($ 0.66 per share)
Balance at December 31, 2017
Net income
Adoption ASU 2016-01
Adoption ASU 2018-02
Other comprehensive loss
Stock option vesting
Service condition RSU vesting
Market plus service condition RSU vesting
Service condition RSUs released
Market plus service condition RSUs released
Stock options exercised
Issuance of common stock
Repurchase of common stock
Dividends paid ($ 0.70 per share)
Shares of
Common
Stock
Common
Stock
22,775,173
$
247,587
$
Retained
Earnings
206,307
44,811
Accumulated
Other
Comprehensive
Income (loss)
$ (1,778)
$
(6,135)
580
616
271
6,506
154
1
(2,895)
336,900
20,529
(264,800)
22,867,802
$
252,820
$
259
895
432
2,621
(1,191)
145,850
30,896
18,805
(107,390)
22,955,963
$
255,836
$
75
1,017
370
1,704
284,437
(1,677)
35,060
25,512
100,400
7,405,277
(104,989)
(4,983)
(13,695)
232,440
40,554
(2,663)
(15,131)
255,200
68,320
(62)
1,093
(2,292)
(18,769)
$ (7,913)
$
2,685
$ (5,228)
$
62
(1,093)
(11,620)
Total
452,116
44,811
(6,135)
580
616
271
6,506
154
-
1
(7,878)
(13,695)
477,347
40,554
2,685
259
895
432
2,621
-
-
(3,854)
(15,131)
505,808
68,320
-
-
(11,620)
75
1,017
370
-
-
1,704
284,437
(3,969)
(18,769)
Balance at December 31, 2018
30,417,223
$
541,762
$
303,490
$ (17,879)
$
827,373
The accompanying notes are an integral part of these consolidated financial statements.
50
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
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) 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
Loss on disposal of fixed assets
Gain on sale of premises held for sale
Increase in cash value of life insurance
Life insurance proceeds in excess of cash value
Loss on marketable equity securities
Equity compensation vesting expense
Equity compensation tax effect
Deferred income tax expense
Change in:
Interest receivable
Interest payable
Other assets and liabilities, net
Net cash from operating activities
Investing activities:
Cash aquired in acquisition, net of consideration paid
Proceeds from maturities of securities available for sale
Proceeds from maturities of securities held to maturity
Proceeds from sale of available for sale securities
Purchases of securities available for sale
Net redemption of restricted equity securities
Loan origination and principal collections, net
Loans purchased
Proceeds from sale of loans other than loans originated for resale
Proceeds from sale of foreclosed assets
Proceeds from sale of premises held for sale
Proceeds from sale of premises and equipment
Purchases of premises and equipment
Life insurance proceeds
2018
Years ended December 31,
2017
2016
$ 68,320
$ 40,554
$ 44,811
7,014
3,499
2,583
2,512
(207)
(84,245)
86,988
(2,371)
146
89
(408)
185
-
(2,718)
-
64
1,462
-
2,600
6,787
1,389
89
3,200
(961)
(114,107)
114,788
(3,109)
718
162
(711)
142
(3)
(2,685)
(108)
-
1,586
-
12,473
6,474
1,377
(5,970)
4,926
-
(142,619)
144,062
(4,037)
2,184
140
(262)
929
-
(2,717)
(238)
-
1,467
(155)
3,190
(5,640)
1,067
10,129
(1,745)
112
(3,190)
(1,241)
44
(4,139)
91,069
55,381
48,226
30,613
73,014
68,937
293,279
(436,678)
7,429
(173,752)
-
-
2,527
-
63
(7,435)
-
-
63,942
86,371
25,757
(265,806)
-
(247,837)
(11,567)
-
2,872
3,338
-
(15,164)
649
156,316
71,684
121,666
-
(247,717)
-
(251,479)
(22,503)
37,880
4,010
-
1,682
(10,930)
-
Net cash from investing activities
(142,003)
(357,445)
(139,391)
Financing activities:
Net change in deposits
Net change in other borrowings
Equity compensation tax effect
Repurchase of common stock
Dividends paid
Exercise of stock options
365,400
(271,327)
-
(2,483)
(18,769)
218
113,571
104,673
-
(1,629)
(15,131)
396
103,063
5,165
155
(1,890)
(13,695)
518
Net cash from financing activities
73,039
201,880
93,316
Net change in cash and cash equivalents
22,105
(100,184)
2,151
Cash and cash equivalents at beginning of year
205,428
305,612
303,461
Cash and cash equivalents at end of year
$ 227,533
$ 205,428
$ 305,612
Supplemental disclosure of noncash activities:
Unrealized (loss) gain on securities available for sale
Loans transferred to foreclosed assets
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 and goodwill, net
Liabilities assumed in acquisition
$ (17,627)
$ 1,262
$ 5,461
$ 1,563
$ (11,015)
$ 2,505
$ 1,486
$ 2,225
$ 5,988
$ 11,805
$ 14,525
$ 1,463,200
$ 1,172,068
$ 5,609
$ 21,170
-
$
-
$
$ 5,677
$ 27,575
$ 161,231
$ 161,231
The accompanying notes are an integral part of these consolidated financial statements.
51
TRICO BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018, 2017 and 2016
Note 1 –Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank
(the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is
engaged in the general commercial banking business in 29 California counties. The Company has five capital subsidiary business trusts
(collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by the Company and three acquired with
the acquisition of North Valley Bancorp.
The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of
America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial
statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company.
All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s
investments in the Capital Trusts of $1,713,000 are accounted for under the equity method and, accordingly, are included in other assets
on the consolidated balance sheets. 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 sheets.
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.
Segment and Significant Group Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout Northern and Central
California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company
currently classifies all its operation into one business segment that it denotes as community banking.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that
area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of
Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of
the state south of Bakersfield and San Luis Obispo.
Business Combinations
The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets
acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various
valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over
amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.
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.
Marketable Equity Securities
As of December 31, 2017, marketable equity securities with a fair value of $2,938,000 were recorded within investment securities
available for sale on the consolidated balance sheets with changes in the fair value recorded through other comprehensive income and
accumulated other comprehensive income (loss). As of January 1, 2018, the Company adopted the new accounting standard for Financial
Instruments using a prospective transition approach, which requires equity investments to be measured at fair value with changes in fair
value recognized in net income. The adoption of this guidance resulted in a $62,000 decrease to beginning retained earnings and a
decrease to the deferred tax of $18,000. During the twelve months ended December 31, 2018, the Company recognized $64,000 of
unrealized losses in the consolidated statements of income related to changes in the fair value of marketable equity securities.
Debt Securities
The Company classifies its debt 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 and changes in the value of these securities are recorded through
earnings. 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
52
method. Dividend and interest income are recognized when earned. Realized gains and losses are derived from the amortized cost of the
security sold. The Company did not have any debt securities classified as trading during 2018, 2017 or 2016.
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, 2018, 2017 or 2016.
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. Both cash and stock dividends are
reported as income when received.
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 to 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 considered
probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and
when, in the judgment of Management, the loan is estimated to be fully collectible as to both principal and interest.
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
53
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, if any, certain repayment terms before their loan reaches nonaccrual status. These modified terms may
include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid
foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that result in the loan being
classified as a TDR, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are
classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans,
remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to
be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies
as noted above with respect to their restructured principal balance.
Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb probable
incurred losses inherent in the Company’s originated loan portfolio. This is maintained through periodic charges to earnings. These
charges are included in the Consolidated Statements of Income as provision for loan losses. All specifically identifiable and quantifiable
losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the
Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the
Company’s allowance for originated loan losses is 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 changes in the risk of repayment, 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 periodic 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 are 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 measured and recorded at
their fair value as of the acquisition date. 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
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. 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 estimated proceeds less selling costs from the collateral securing the loan. PCI loans with similar risk
characteristics and acquisition time frame may be “pooled” and have their cash flows aggregated as if they were one loan or accounted for
individually.
Acquired loans that are not PCI loans are referred to as purchased not credit impaired (PNCI) loans and interest income is accrued on a
level-yield basis. 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. The loss
estimate for acquired loans is measured based on the probable shortfall in relation to the contractual note requirements, consistent with our
allowance for loan loss policy for similar loans.
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Throughout these financial statements, reference to “Loans” or “Allowance for loan losses” relates to all categories of loans, including
Originated, PNCI, and PCI. When not referring to all categories of loans, specific reference to Originated, PNCI, or PCI is made.
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.
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.
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.
Company Owned Life Insurance
The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount
that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or
other amounts due that are probable at settlement.
Goodwill, Other Intangible and Long-Lived Assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired from a business combination. The Company
has an identifiable intangible asset consisting of core deposit intangibles (“CDI”). CDI are amortized over their respective estimated
useful lives, and reviewed periodically for impairment. 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. Other intangible assets
with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed
periodically for impairment.
As of September 30 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.
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.
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, when earned, and changes in fair value of the MSR, are recorded in noninterest income.
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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.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is established through a provision for losses – unfunded commitments, the changes of which are
recorded in 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.
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.
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.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Interest
and/or penalties related to income taxes are reported as a component of noninterest income.
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. There are no unvested share-based payment awards that contain rights to nonforfeitable dividends
(participating securities). 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 restricted stock units, and are
determined using the treasury stock method.
Revenue Recognition
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606,
“Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer,
identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance
obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.
Most of our revenue-generating transactions are not subject to Topic 606, including revenue generated from financial instruments, such as our
loans and investment securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights,
financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. The Company’s noninterest revenue
streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-
end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue
is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience
significant contract balances. As of December 31, 2018 and December 31, 2017, the Company did not have any significant contract balances.
The Company has evaluated the nature of its revenue streams and determined that further disaggregation of revenue into more granular
categories beyond what is presented in Note 17 was not necessary. The following are descriptions of revenues within the scope of ASC 606.
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Deposit service charges
The Company earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance
fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation
is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are
charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees.
The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to
the customer.
Debit and ATM interchange fee income and expenses
Debit and ATM interchange income represent fees earned when a debit card issued by the Company is used. The Company earns interchange
fees from debit cardholder transactions through the Visa payment network. Interchange fees from cardholder transactions represent a
percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the
cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' debit
card. Certain expenses directly associated with the credit and debit card are recorded on a net basis with the interchange income.
Commissions on sale of non-deposit investment products
Commissions on sale of non-deposit investment products consist of fees earned from advisory asset management, trade execution and
administrative fees from investments. Advisory asset management fees are variable, since they are based on the underlying portfolio value,
which is subject to market conditions and asset flows. Advisory asset management fees are recognized quarterly and are based on the
portfolio values at the end of each quarter. Brokerage accounts are charged commissions at the time of a transaction and the commission
schedule is based upon the type of security and quantity. In addition, revenues are earned from selling insurance and annuity policies. The
amount of revenue earned is determined by the value and type of each instrument sold and is recognized at the time the policy or contract is
written.
Merchant fee income
Merchant fee income represents fees earned by the Company for card payment services provided to its merchant customers. The Company
outsources these services to a third party to provide card payment services to these merchants. The third party provider passes the payments
made by the merchants through to the Company. The Company, in turn, pays the third party provider for the services it provides to the
merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition, a portion of
the payment received represents interchange fees which are passed through to the card issuing bank. Income is primarily earned based on the
dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment
is accepted by the processing network.
Gain/loss on other real estate owned, net
The Company records a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which
generally occurs at the time of an executed deed of trust. When the Company finances the sale of other real estate owned to the buyer, the
Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction
price is probable. Once these criteria are met, the other real estate owned asset is derecognized and the gain or loss on sale is recorded upon
the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and
related gain or loss on sale if a significant financing component is present.
Reclassifications
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 assets or total shareholders’ equity.
Accounting Standards Adopted in 2018
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. Since there
was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not
deemed necessary.
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In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”
This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted
improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or
those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of
the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a
qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to
measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at
amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the
method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at
amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of
financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the
total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to
measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of
financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables)
on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a
valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax
assets. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial
Statements. In accordance with (1) above, the Company recorded a reclassification of cumulative unrealized losses of its marketable
equity securities from accumulated other comprehensive income (loss) to retained earnings as of January 1, 2018. Additionally, the
Company recognized changes in the fair value of its marketable equity securities in the condensed consolidated statements of net income
for the year ended December 31, 2018. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of
December 31, 2018 using an exit price notion (see Note 23 Fair Value Measurement).
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. 2017-07, 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 2017-09, 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.
Accounting Standards Pending Adoption
FASB issued 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. FASB has
issued incremental guidance to the new leasing standard through ASU No. 2018-10 and 2018-11. The Company estimates that the
adoption of this standard will result in an increase in assets of approximately $31,500,000 to recognize the present value of the lease
obligations with a corresponding increase in liabilities. The Company does not expect this to have a material impact on the Company’s
results of operations or cash flows.
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
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held to maturity (‘‘HTM’’) debt securities. ASU 2016-13 amends the accounting for credit losses on available-for-sale securities (‘‘AFS’’),
whereby credit losses will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for
purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans.
Lastly, ASU 2016-13 requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on
the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently
required credit quality disclosures disaggregated by the year of origination or vintage. ASU 2016-13 allows for a modified retrospective
approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement).
ASU 2016-13 will be effective for the Company on January 1, 2020, and early adoption is permitted. 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. 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 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.
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Note 2 - Business Combinations
Merger with FNB Bancorp
On July 6, 2018, the Company completed the acquisition of FNB Bancorp (“FNBB”) for an aggregate transaction value of $291,132,000.
FNBB was merged into the Company, and the Company issued 7,405,277 shares of common stock to the former shareholders of FNBB.
FNBB’s subsidiary, First National Bank of Northern California, merged into the Bank on the same day. The Company also paid $6.7
million to settle and retire all FNBB stock options outstanding as of the acquisition date. Upon the consummation of the merger, the
Company added 12 branches within San Mateo, San Francisco, and Santa Clara counties.
In accordance with accounting for business combinations, the Company recorded $156,661,000 of goodwill and $27,605,000 of core
deposit intangibles on the acquisition date. The core deposit intangibles will be amortized over the weighted average remaining life of 6.2
years with no significant residual value. For tax purposes, purchase prices accounting adjustments including goodwill are all non-taxable
and /or non-deductible. Acquisition related costs of $5,227,000, $530,000 and $784,000 are included in the income statement for each of
the years ended December 31, 2018, 2017 and 2016, respectively.
The acquisition was consistent with the Company’s strategy to expand into the Bay Area market. The acquisition offers the Company the
opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new
customers in the expanded region. Goodwill arising from the acquisition consisted largely of the estimated cost savings resulting from the
combined operations.
The following table summarizes the consideration paid for FNBB and the amounts of assets acquired and liabilities assumed that were
recorded at the acquisition date (in thousands).
Fair value of consideration transferred:
Fair value of shares issued
Cash consideration
Total fair value of consideration transferred
Assets acquired:
Cash and cash equivalents
Securities available for sale
Restricted equity securities
Loans
Premises and equipment
Cash value of life insurance
Core deposit intangible
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Other liabilities
Short-term borrowings - Federal Home Loan Bank
Total liabilities assumed
Total net assets acquired
Goodwill recognized
FNB Bancorp
July 6, 2018
$
284,437
6,695
291,132
37,308
335,667
7,723
834,683
30,522
16,817
27,605
16,214
1,306,539
991,935
15,133
165,000
1,172,068
134,471
$
156,661
60
A summary of the estimated fair value adjustments resulting in the goodwill recorded in the FNB Bancorp acquisition are presented below
(in thousands):
Value of stock consideration paid to FNB Bancorp Shareholders
Cash consideration
Less:
Cost basis net assets acquired
Fair value adjustments:
Investments
Loans
Premises and Equipment
Core deposit intangible
Deferred income taxes
Other
Goodwill
FNB Bancorp
July 6, 2018
284,437
6,695
$
114,030
(1,081)
(22,390)
21,590
27,327
(6,394)
1,389
$
156,661
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired (PNCI loans) as of
the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. As such, these loans were not
considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans (PCI loans),
which have shown evidence of credit deterioration since origination. The gross contractual amounts receivable and fair value for PNCI
loans as of the acquisition date was $866,189,000 and $833,381,000, respectively. The gross contractual amounts receivable and fair
value for PCI loans as of the acquisition date was $1,683,000 and $1,302,000, respectively. At the acquisition date, the Company was
unable to estimate the expected contractual cash flows to be collected from the purchased credit impaired loans.
The table below presents the unaudited proforma information as if the acquisition of FNB Bancorp had occurred on January 1, 2017 after
giving effect to certain acquisition accounting adjustments. The proforma information for the years ended December 31, 2018 and 2017
includes acquisition adjustments for the amortization/accretion on loans, core deposit intangibles, and related income tax effects. The
proforma financial information also includes one-time costs associated with the acquisitions but does not include expected costs savings
synergies that we expect to achieve. The unaudited pro forma financial information is not necessarily indicative of the results of
operations that would have occurred had the transaction been effected on the assumed date.
Year ended
December 31, 2018
December 31, 2017
( in thousands, except per share data)
Summarized proforma income statement data:
Net interest income
(Provision for) benefit from loan losses
Noninterest income
Noninterest expense
Income before taxes
Income taxes
Net income
$ 242,793
(2,180)
51,152
(180,884)
110,881
(30,337)
$ 80,544
$ 227,795
271
53,881
(181,833)
100,114
(47,352)
$ 52,762
Basic earnings per share
Diluted earnings per share
$ 2.65
$ 2.63
$ 1.74
$ 1.72
It is impracticable to separately provide information regarding the revenue and earnings of FNB Bancorp included in the Company’s
consolidated income statement from the July 6, 2018 acquisition date to December 31, 2018 because the operations of FNBB were
substantially comingled with the operations of the Company as of the system conversion date of July 22, 2018.
61
Note 3 - Investment Securities
The amortized cost and estimated fair values of investment securities classified as available for sale and held to maturity are summarized
in the following tables:
Debt Securities Available for Sale
Obligations of U.S. government agencies
Obligations of states and political subdivisions
Corporate bonds
Asset backed securities
Amortized
Cost
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair
Value
$
647,288
128,890
4,381
355,451
771
294
97
73
(18,078) $
(3,112)
-
(1,019)
629,981
126,072
4,478
354,505
Total debt securities available for sale
$
1,136,010 $
1,235 $ (22,209) $
1,115,036
Debt Securities Held to Maturity
Obligations of U.S. government agencies
Obligations of states and political subdivisions
$
430,343 $
14,593
327 $ (7,745) $
82
(230)
422,925
14,445
Total debt securities held to maturity
$
444,936 $
409 $ (7,975) $
437,370
Amortized
Cost
December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair
Value
Debt Securities Available for Sale
Obligations of U.S. government agencies
Obligations of states and political subdivisions
$
609,695 $
121,597
695 $ (5,601) $
1,888
(329)
604,789
123,156
Total debt securities available for sale
$
731,292 $
2,583 $ (5,930) $
727,945
Debt Securities Held to Maturity
Obligations of U.S. government agencies
Obligations of states and political subdivisions
$
500,271 $
14,573
5,101 $ (1,889) $
146
(37)
503,483
14,682
Total debt securities held to maturity
$
514,844 $
5,247 $ (1,926) $
518,165
During 2018, proceeds from sales of debt securities were $293,279,000, resulting in gross gains of $207,000. 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 with an aggregate carrying value of $597,591,000 and $285,596,000 at December 31, 2018 and
2017, 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, 2018 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, 2018, obligations of U.S. government and agencies with an amortized cost basis totaling
$1,077,631 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, 2018, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government
corporations and agencies to be approximately 5.8 years. Average remaining life is defined as the time span after which the principal
balance has been reduced by half.
Debt 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
Available for Sale
Held to Maturity
Amortized
Cost
Estimated
Fair Value
$
2,410
10,625
17,381
1,105,594
$
2,413
10,794
17,622
1,084,207
$
Amortized
Cost
-
1,238
25,039
418,659
Estimated
Fair Value
$
-
1,250
24,744
411,376
Totals
$
1,136,010
$
1,115,036
$
444,936
$
437,370
62
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:
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(in thousands)
December 31, 2018
Debt Securities Available for Sale
Obligations of U.S. government agencies
Obligations of states and political subdivisions
Asset backed securities
$
171,309
63,738
101,386
$ (3,588)
(1,541)
(1,019)
Total debt securities available for sale
$
336,433
$ (6,148)
Debt Securities Held to Maturity
Obligations of U.S. government agencies
Obligations of states and political subdivisions
$
223,810
5,786
$ (2,619)
(114)
$
$
$
394,630
20,719
-
$ (14,490) $
(1,571)
-
$
565,939
84,457
101,386
(18,078)
(3,112)
(1,019)
415,349
$
(16,061)
$
751,782
$
(22,209)
158,648
4,042
$
$
(5,126)
(116)
382,458
9,828
$
(7,745)
(230)
Total debt securities held to maturity
$
229,596
$ (2,733)
$
162,690
$ (5,242) $
392,286 $ (7,975)
December 31, 2017
Debt Securities Available for Sale
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(in thousands)
Obligations of U.S. government agencies
Obligations of states and political subdivisions
$
284,367
4,904
$ (2,176)
(35)
$
166,338
17,085
$
(3,425)
(294)
$
450,705
21,989
$
(5,601)
(329)
Total securities available for sale
$
289,271
$ (2,211)
$
183,423
$
(3,719)
$
472,694
$
(5,930)
Debt Securities Held to Maturity
Obligations of U.S. government agencies
Obligations of states and political subdivisions
$
93,017
1,488
$ (567)
(7)
$
95,367
2,637
$
(1,322)
(30)
$
188,384
4,125
$
(1,889)
(37)
Total debt securities held to maturity
$
94,505
$ (574)
$
98,004
$ (1,352)
$
192,509 $ (1,926)
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, 2018, 145 debt securities representing obligations of U.S. government
corporations and agencies had unrealized losses with aggregate depreciation of 2.65% 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, 2018, 105 debt securities representing obligations of states and
political subdivisions had unrealized losses with aggregate depreciation of 3.42% from the Company’s amortized cost basis.
Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by
investors in these types of securities. At the time of purchase, each of these securities were rated AA or AAA and through December 31,
2018 have not experienced any deterioration in credit rating. The Company continues to monitor these securities for changes in credit
rating or other indications of credit deterioration. Because management believes the decline in fair value is attributable to changes in
interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell,
these investments are not considered other-than-temporarily impaired. At December 31, 2018, 6 asset backed securities had unrealized
losses with aggregate depreciation of 1.0% from the Company’s amortized cost basis.
Marketable equity securities: All unrealized losses recognized during the reporting period were for equity securities still held at
December 31, 2018.
63
Note 4 – Loans
A summary of loan balances follows (in thousands):
Mortgage loans on real estate:
Residential 1-4 family
Commercial
December 31, 2018
Originated
PNCI
PCI
Total
$ 343,796
1,910,981
$ 169,792
708,401
$ 1,674
8,456
$
515,262
2,627,838
Total mortgage loans on real estate
2,254,777
878,193
10,130
3,143,100
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
284,453
32,660
34,020
351,133
228,635
40,957
3,585
21,659
66,201
45,468
1,167
439
42
1,648
2,445
326,577
36,684
55,721
418,982
276,548
90,703
56,208
146,911
30,593
5,880
36,473
-
-
-
121,296
62,088
183,384
Total loans, net of deferred loan fees and discounts
$ 2,981,456
$ 1,026,335
$ 14,223
$
4,022,014
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
$ 2,991,324
(9,868)
$ 1,062,655
-
$ 21,265
-
-
(36,320)
(7,042)
$
4,075,244
(9,868)
(43,362)
Total loans, net of deferred loan fees and discounts
$ 2,981,456
$ 1,026,335
$ 14,223
$
4,022,014
Allowance for loan losses
$ (31,793)
$ (667)
$ (122)
$ (32,582)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
December 31, 2017
Originated
PNCI
PCI
Total
$ 320,522
1,690,510
$ 63,519
215,823
$ 1,385
8,563
$
385,426
1,914,896
Total mortgage loan on real estate
2,011,032
279,342
9,948
2,300,322
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
269,942
39,848
22,859
332,649
209,437
16,248
2,698
2,251
21,197
8,391
2,498
485
45
3,028
2,584
288,688
43,031
25,155
356,874
220,412
67,920
69,364
137,284
10
263
273
-
-
-
67,930
69,627
137,557
Total loans, net of deferred loan fees and discounts
$ 2,690,402
$ 309,203
$ 15,560
$
3,015,165
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
$ 2,699,053
(8,651)
$ 316,238
-
$ 23,181
-
-
(7,035)
(7,621)
$
3,038,472
(8,651)
(14,656)
Total loans, net of unamortized deferred loan fees and discounts
$ 2,690,402
$ 309,203
$ 15,560
$
3,015,165
Allowance for loan losses
$ (29,122)
$ (929)
$ (272)
$ (30,323)
The following is a summary of the change in accretable yield for PCI 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
Year ended December 31,
2018
2017
2016
$ 6,137
(787)
709
$ 7,670
(2,809)
1,276
$
13,255
(4,011)
(1,574)
Balance at end of period
$ 6,059
$ 6,137
$
7,670
64
Note 5 – Allowance for Loan Losses
The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the
periods indicated.
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
Allowance for Loan Losses –Year Ended December 31, 2018
Beginning
Balance
Charge-offs
Recoveries
Provision
(benefit)
Ending Balance
$ 2,317
11,441
13,758
$ (77)
(15)
(92)
$
-
68
68
$ 436
1,450
1,886
$ 2,676
12,944
15,620
5,800
1,841
586
8,227
6,512
(277)
(24)
(783)
(1,084)
(1,188)
846
297
288
1,431
541
(327)
(574)
702
(199)
225
6,042
1,540
793
8,375
6,090
1,184
642
1,826
$ 30,323
-
-
-
$ (2,364)
-
-
-
$ 2,040
650
21
671
$ 2,583
1,834
663
2,497
$ 32,582
Allowance for Loan Losses – As of December 31, 2018
Loans pooled
for evaluation
Individually
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
Total allowance
for loan losses
$ 2,620
12,737
15,357
$ 56
91
147
$
-
116
116
$ 2,676
12,944
15,620
5,838
1,486
779
8,103
4,309
198
54
14
266
1,781
6
-
-
6
-
6,042
1,540
793
8,375
6,090
1,834
663
2,497
$ 30,266
-
-
-
-
-
-
$ 2,194
$ 122
1,834
663
2,497
$ 32,582
Loans, Net of Unearned fees – As of December 31, 2018
Loans pooled
for evaluation
Individually
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
Total loans, net
of unearned fees
$ 509,267
2,606,819
3,116,086
$ 4,321
12,563
16,884
$ 1,674
8,456
10,130
$ 515,262
2,627,838
3,143,100
322,764
33,142
55,483
411,389
268,885
2,646
3,103
196
5,945
5,218
1,167
439
42
1,648
2,445
326,577
36,684
55,721
418,982
276,548
121,296
62,088
183,384
$ 3,979,744
-
-
-
$ 28,047
-
-
-
$ 14,223
121,296
62,088
183,384
$ 4,022,014
65
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
Allowance for Loan Losses – Year Ended December 31, 2017
Beginning
Balance
Charge-offs
Recoveries
Provision
(benefit)
Ending Balance
$
$
2,748
11,517
14,265
7,044
2,644
622
10,310
5,831
1,417
680
2,097
32,503
$
$
$
(60)
(186)
(246)
(98)
(332)
(1,186)
(1,616)
(1,444)
(1,104)
-
(1,104)
(4,410)
$
-
397
397
698
242
375
1,315
428
-
1
1
2,141
$
$
$
(371)
(287)
(658)
(1,844)
(713)
775
(1,782)
1,697
871
(39)
832
89
$
2,317
11,441
13,758
5,800
1,841
586
8,227
6,512
1,184
642
1,826
30,323
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
Allowance for Loan Losses – As of December 31, 2017
Loans pooled
for evaluation
Individually
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
Total allowance
for loan losses
$
$
1,932
11,351
13,283
5,356
1,734
529
7,619
4,624
1,184
642
1,826
27,352
$
$
230
30
260
427
107
57
591
1,848
-
-
-
2,699
$
$
155
60
215
17
-
-
17
40
-
-
-
272
$
$
2,317
11,441
13,758
5,800
1,841
586
8,227
6,512
1,184
642
1,826
30,323
Loans, Net of Unearned fees – As of December 31, 2017
Loans pooled
for evaluation
Individually
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
Total loans, net
of unearned fees
$ 378,743
1,892,422
2,271,165
$ 5,298
13,911
19,209
$ 1,385
8,563
9,948
$ 385,426
1,914,896
2,300,322
283,502
41,076
24,853
349,431
213,358
2,688
1,470
257
4,415
4,470
2,498
485
45
3,028
2,584
288,688
43,031
25,155
356,874
220,412
67,790
69,627
137,417
2,971,371
140
-
140
28,234
$
-
-
-
15,560
$
67,930
69,627
137,557
3,015,165
$
$
66
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
Allowance for Loan Losses – Year Ended December 31, 2016
Beginning
Balance
Charge-offs
Recoveries
Provision
(benefit)
Ending Balance
$ 2,896
11,015
13,911
$ (321)
(827)
(1,148)
$ 880
920
1,800
$ (707)
409
(298)
$ 2,748
11,517
14,265
11,253
3,177
688
15,118
5,271
(585)
(219)
(823)
(1,627)
(455)
2,317
590
449
3,356
404
(5,941)
(904)
308
(6,537)
611
7,044
2,644
622
10,310
5,831
899
812
1,711
$ 36,011
-
-
-
$ (3,230)
54
78
132
$ 5,692
464
(210)
254
$ (5,970)
1,417
680
2,097
$ 32,503
Allowance for Loan Losses – As of December 31, 2016
Loans pooled
for evaluation
Individually
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
Total allowance
for loan losses
$
$
2,304
10,064
12,368
6,616
2,365
594
9,575
3,765
1,372
680
2,052
27,760
$
$
258
4
262
411
215
28
654
1,130
-
-
-
2,046
$
$
186
1,449
1,635
17
64
-
81
936
45
-
45
2,697
$
$
2,748
11,517
14,265
7,044
2,644
622
10,310
5,831
1,417
680
2,097
32,503
Loans, Net of Unearned fees – As of December 31, 2016
Loans pooled
for evaluation
Individually
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
Total Loans
$ 362,780
1,657,238
2,020,018
$ 4,094
15,081
19,175
$ 1,469
12,802
14,271
$ 368,343
1,685,121
2,053,464
282,159
42,992
30,547
355,698
208,960
3,196
1,508
154
4,858
4,096
4,360
1,682
65
6,107
3,991
289,715
46,182
30,766
366,663
217,047
54,743
66,990
121,733
$ 2,706,409
11
-
11
$ 28,140
675
-
675
$ 25,044
55,429
66,990
122,419
$ 2,759,593
67
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.
The following tables present ending loan balances by loan category and risk grade for the periods indicated:
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total loans
Credit Quality Indicators Originated Loans– As of December 31, 2018
Pass
Special
Mention
Substandard
Doubtful / Loss
Total Originated
Loans
$ 337,189
1,861,627
2,198,816
$ 1,724
33,483
35,207
$ 4,883
15,871
20,754
$
-
-
-
$ 343,796
1,910,981
2,254,777
279,491
29,289
33,606
342,386
217,126
2,309
1,054
341
3,704
6,127
2,653
2,317
73
5,043
5,382
-
-
-
-
-
284,453
32,660
34,020
351,133
228,635
90,412
55,863
146,275
2,904,603
32
345
377
45,415
$
$
259
-
259
31,438
$
-
-
-
-
$
90,703
56,208
146,911
2,981,456
$
68
Credit Quality Indicators PNCI Loans – As of December 31, 2018
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Pass
v
$ 167,908
701,868
869,776
Special
Mention
Substandard
Doubtful / Loss
Total PNCI
Loans
$ 1,086
3,085
4,171
$ 798
3,448
4,246
$
-
-
-
$ 169,792
708,401
878,193
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total loans
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total loans
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
38,780
3,413
21,481
63,674
45,027
1,124
74
173
1,371
321
1,053
98
5
1,156
120
-
-
-
-
-
40,957
3,585
21,659
66,201
45,468
30,593
5,880
36,473
1,014,950
$
-
-
-
5,863
$
-
-
-
5,522
$
-
-
-
-
$
30,593
5,880
36,473
1,026,335
$
Credit Quality Indicators Originated Loans – As of December 31, 2017
Pass
Special
Mention
Substandard
Doubtful / Loss
Total Originated
Loans
$ 315,120
1,649,333
1,964,453
$ 2,234
18,434
20,668
$ 3,168
22,743
25,911
$
-
-
-
$ 320,522
1,690,510
2,011,032
265,345
37,428
22,432
325,205
195,208
2,558
800
272
3,630
9,492
2,039
1,620
155
3,814
4,737
-
-
-
-
-
269,942
39,848
22,859
332,649
209,437
67,813
64,492
132,305
2,617,171
$
-
4,872
4,872
38,662
$
107
-
107
34,569
$
-
-
-
-
$
67,920
69,364
137,284
2,690,402
$
Credit Quality Indicators PNCI Loans – As of December 31, 2017
Pass
Special
Mention
Substandard
Doubtful / Loss
Total PNCI
Loans
$ 61,411
203,751
265,162
$ 218
11,513
11,731
v
$ 1,890
559
2,449
$
-
-
-
$ 63,519
215,823
279,342
14,866
2,433
2,207
19,506
8,390
450
188
38
676
1
932
77
6
1,015
-
-
-
-
-
-
16,248
2,698
2,251
21,197
8,391
10
263
273
293,331
$
-
-
-
12,408
$
-
-
-
3,464
$
-
-
-
-
$
10
263
273
309,203
$
69
Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are susceptible to three primary
risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value.
Typically non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the
unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of the two.
Problem consumer loans are generally identified by payment history of the borrower (delinquency). The Bank manages its consumer loan
portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggest modifications if appropriate, and, when
continued scheduled payments become unrealistic, initiate repossession or foreclosure through appropriate channels. Collateral values
may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value
information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at initiation of
the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable and the loan has been
classified.
Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner
occupied real estate are primarily susceptible to changes in the business conditions of the related business. This may be driven by, among
other things, industry changes, geographic business changes, changes in the individual fortunes of the business owner, and general
economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by equipment or other
personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally
are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues
related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss.
Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results
in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings
in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often these shifts are a result of changes in
general economic or market conditions or overbuilding and resultant over-supply. Losses are dependent on value of underlying collateral
at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as
well as changes in occupancy costs.
Construction loans, whether owner occupied or non-owner occupied commercial real estate loans or residential development loans, are
not only susceptible to the related risks described above but the added risks of construction itself including cost over-runs,
mismanagement of the project, or lack of demand or market changes experienced at time of completion. Again, losses are primarily
related to underlying collateral value and changes therein as described above.
Problem C&I loans are generally identified by periodic review of financial information which may include financial statements, tax
returns, rent rolls and payment history of the borrower (delinquency). Based on this information the Bank may decide to take any of
several courses of action including demand for repayment, additional collateral or guarantors, and, when repayment becomes unlikely
through borrower’s income and cash flow, repossession or foreclosure of the underlying collateral.
Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third
parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are
obtained at initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable and
the loan has been classified.
Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with the
borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its
probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to
the estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue the underlying
collateral and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months depending on the
underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is
known. Unpaid balances on loans after or during collection and liquidation may also be pursued through lawsuit and attachment of wages
or judgment liens on borrower’s other assets.
The following tables show the ending balance of current and past due originated and PNCI loans by loan category as of the date indicated:
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
30-59 days
60-89 days
> 90 days
Total Past
Due Loans
Current
Total
> 90 Days and
Still Accruing
v
$ 1,675
431
2,106
$ 132
1,200
1,332
$ 478
296
774
$ 2,285
1,927
4,212
$ 341,511
1,909,054
2,250,565
$ 343,796
1,910,981
2,254,777
$
-
-
-
Analysis of Originated Past Due Loans - As of December 31, 2018
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total originated loans
908
1,043
298
2,249
1,053
47
24
17
88
579
609
214
-
823
1,247
1,564
1,281
315
3,160
2,879
282,889
31,379
33,705
347,973
225,756
284,453
32,660
34,020
351,133
228,635
209
-
209
5,617
$
-
-
-
1,999
$
-
-
-
2,844
$
209
-
209
10,460
$
90,494
56,208
146,702
2,970,996
$
90,703
56,208
146,911
2,981,456
$
$
-
-
-
-
-
-
-
-
-
70
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
30-59 days
60-89 days
> 90 days
Total Past
Due Loans
Current
Total
> 90 Days and
Still Accruing
v
$ 1,009
1,646
2,655
$ 133
1,136
1,269
$ 156
1,082
1,238
$ 1,298
3,864
5,162
$ 168,494
704,537
873,031
$ 169,792
708,401
878,193
$
-
-
Analysis of PNCI Past Due Loans - As of December 31, 2018
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total PNCI loans
304
74
160
538
678
35
-
-
35
145
237
-
-
237
113
576
74
160
810
936
40,381
3,511
21,499
65,391
44,532
-
-
-
3,871
$
-
-
-
1,449
$
-
-
-
1,588
$
-
-
-
6,908
$
30,593
5,880
36,473
1,019,427
$
$
40,957
3,585
21,659
66,201
45,468
30,593
5,880
36,473
1,026,335
$
-
-
-
-
-
-
-
-
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
30-59 days
60-89 days
> 90 days
Total Past
Due Loans
Current
Total
> 90 Days and
Still Accruing
v
$ 1,740
158
1,898
$ 510
987
1,497
$ 243
-
243
$ 2,493
1,145
3,638
$ 318,029
1,689,365
2,007,394
$ 320,522
1,690,510
2,011,032
$
-
-
-
Analysis of Originated Past Due Loans - As of December 31, 2017
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total loans
528
511
56
1,095
956
48
107
36
191
738
372
373
3
748
1,527
948
991
95
2,034
3,221
268,994
38,857
22,764
330,615
206,216
269,942
39,848
22,859
332,649
209,437
34
-
34
3,983
$
-
-
-
2,426
$
-
-
-
2,518
$
34
-
34
8,927
$
67,886
69,364
137,250
2,681,475
$
67,920
69,364
137,284
2,690,402
$
$
-
-
-
-
-
-
-
-
-
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
30-59 days
60-89 days
> 90 days
Total Past
Due Loans
Current
Total
> 90 Days and
Still Accruing
$ 1,495
70
1,565
$ 90
-
90
v
$ 109
-
109
$ 1,694
70
1,764
$ 61,825
215,753
277,578
$ 63,519
215,823
279,342
$
81
-
81
Analysis of PNCI Past Due Loans - As of December 31, 2017
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total loans
298
30
6
334
-
228
-
26
254
-
330
-
-
330
-
856
30
32
918
-
15,392
2,668
2,219
20,279
8,391
16,248
2,698
2,251
21,197
8,391
-
-
-
1,899
$
-
-
-
344
$
-
-
-
439
$
-
-
-
2,682
$
10
263
273
306,521
$
10
263
273
309,203
$
$
200
-
-
200
-
-
-
-
281
The following table shows the ending balance of nonaccrual loans by loan category as of the date indicated:
As of December 31, 2018
As of December 31, 2017
Non Accrual Loans
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total non accrual loans
Originated
PNCI
Total
Originated
PNCI
Total
$ 3,244
9,263
12,507
$ 334
1,468
1,802
$ 3,578
10,731
14,309
$ 1,725
8,144
9,869
$ 1,012
-
1,012
$ 2,737
8,144
10,881
1,429
1,722
3
3,154
3,755
885
47
4
936
120
-
-
-
19,416
$
-
-
-
2,858
$
2,314
1,769
7
4,090
3,875
-
-
-
$ 22,274
$
811
1,106
7
1,924
3,669
402
44
5
451
-
1,213
1,150
12
2,375
3,669
-
-
-
15,462
$
-
-
-
1,463
-
-
-
$ 16,925
71
Interest income on originated nonaccrual loans that would have been recognized during the years ended December 31, 2018, 2017, and
2016, if all such loans had been current in accordance with their original terms, totaled $1,584,000, $1,067,000, and $783,000,
respectively. Interest income actually recognized on these originated loans during the years ended December 31, 2018, 2017, and 2016
was $486,000, $530,000, and $377,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during
the years ended December 31, 2018, 2017, and 2016, if all such loans had been current in accordance with their original terms, totaled
$1,122,000, $73,000, and $178,000, respectively. Interest income actually recognized on these PNCI loans during the years ended
December 31, 2018, 2017, and 2016 was $989,000, $18,000, and $11,000, respectively.
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)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2018
Unpaid
principal
balance
Recorded
investment with
no related
allowance
Recorded
investment with
related
allowance
Total recorded
investment
Related
Allowance
Average
recorded
investment
Interest income
recognized
$ 4,594
13,081
17,675
$ 3,663
10,676
14,339
$ 308
1,765
2,073
$ 3,971
12,441
16,412
$ 56
42
98
$ 3,517
13,115
16,632
$
90
137
227
1,900
2,374
3
4,277
5,433
1,749
1,892
-
3,641
2,924
111
65
3
179
2,287
1,860
1,957
3
3,820
5,211
71
2
3
76
1,774
1,885
1,520
17
3,422
4,654
43
23
2
68
91
-
-
-
27,385
$
-
-
-
20,904
-
-
-
$ 4,539
$
-
-
-
25,443
$
-
-
-
1,948
$
5
-
5
24,713
$
-
-
-
386
$
Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2018
Unpaid
principal
balance
Recorded
investment with
no related
allowance
Recorded
investment with
related
allowance
Total recorded
investment
Related
Allowance
Average
recorded
investment
Interest income
recognized
$ 375
3,110
3,485
$ 334
1,468
1,802
$
-
-
-
$ 334
1,468
1,802
$
-
-
-
$ 529
1,713
2,242
$
5
183
188
1,027
252
106
1,385
120
587
47
21
655
113
367
197
85
649
7
954
244
106
1,304
120
127
101
11
239
7
1,120
155
114
1,389
60
18
-
-
18
1
-
-
-
4,990
$
-
-
-
2,570
$
-
-
-
$ 656
$
-
-
-
3,226
$
-
-
-
246
$
-
-
-
3,691
$
-
-
-
207
72
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2017
Unpaid
principal
balance
Recorded
investment with
no related
allowance
Recorded
investment with
related
allowance
Total recorded
investment
Related
Allowance
Average
recorded
investment
Interest income
recognized
$ 4,023
14,186
18,209
$ 2,058
13,101
15,159
$ 1,881
810
2,691
$ 3,939
13,911
17,850
$ 230
30
260
$ 3,501
13,851
17,352
$
143
645
788
1,581
1,627
55
3,263
4,566
1,093
1,107
4
2,204
575
401
198
3
602
3,895
1,494
1,305
7
2,806
4,470
111
10
3
124
1,848
1,702
1,193
20
2,915
4,283
47
24
-
71
184
140
-
140
26,178
$
140
-
140
18,078
-
-
-
$ 7,188
$
140
-
140
25,266
$
-
-
-
2,232
$
76
-
76
24,626
$
9
-
9
1,052
$
Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2017
Unpaid
principal
balance
Recorded
investment with
no related
allowance
Recorded
investment with
related
allowance
Total recorded
investment
Related
Allowance
Average
recorded
investment
Interest income
recognized
$ 1,404
$ 1,359
$
-
1,404
-
1,359
1,216
178
250
1,644
-
591
44
-
635
-
-
-
-
603
121
250
974
-
$ 1,359
$
-
1,359
1,194
165
250
1,609
-
-
-
-
$ 1,041
979
2,020
$
24
-
24
316
97
54
467
-
1,240
117
186
1,543
-
48
6
11
65
-
-
-
-
3,048
$
-
-
-
1,994
-
-
-
$ 974
$
-
-
-
2,968
$
-
-
-
467
$
-
-
-
3,563
$
-
-
-
89
$
Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2016
Unpaid
principal
balance
Recorded
investment with
no related
allowance
Recorded
investment with
related
allowance
Total recorded
investment
Related
Allowance
Average
recorded
investment
Interest income
recognized
$ 3,381
13,503
16,884
$ 1,820
12,898
14,718
$ 1,551
357
1,908
$ 3,371
13,255
16,626
$ 180
4
184
$ 4,632
20,891
25,523
$
157
592
749
2,001
1,730
48
3,779
4,311
1,480
715
15
2,210
762
430
594
19
1,043
3,334
1,910
1,309
34
3,253
4,096
110
107
13
230
1,130
3,297
1,465
26
4,788
3,383
49
37
3
89
125
16
-
16
24,990
$
11
-
11
17,701
$
-
-
-
$ 6,285
$
11
-
11
23,986
$
-
-
-
1,544
$
7
-
7
33,701
$
-
-
-
963
73
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2016
Unpaid
principal
balance
Recorded
investment with
no related
allowance
Recorded
investment with
related
allowance
Total recorded
investment
Related
Allowance
Average
recorded
investment
Interest income
recognized
$ 745
2,031
2,776
$ 463
1,826
2,289
$ 259
-
259
$ 722
1,826
2,548
$ 79
-
79
$ 799
2,853
3,652
$
17
-
17
1,297
206
122
1,625
-
735
67
3
805
-
551
132
118
801
-
1,286
199
121
1,606
-
300
108
15
423
-
1,173
154
194
1,521
1
36
8
5
49
-
-
-
-
4,401
$
-
-
-
3,094
-
-
-
$ 1,060
$
-
-
-
4,154
$
-
-
-
502
$
-
245
245
5,419
$
-
-
-
66
$
Originated loans classified as TDRs and impaired were $10,253,000, $12,517,000 and $12,371,000 at December 31, 2018, 2017 and
2016, respectively. PNCI loans classified as TDRs and impaired were $615,000, $1,352,000 and $1,324,000 at December 31, 2018, 2017
and 2016, respectively. The Company had no significant obligations to lend additional funds on Originated or PNCI TDRs as of
December 31, 2018, 2017, or 2016.
The following tables show certain information regarding Troubled Debt Restructurings that occurred during the periods indicated:
TDR Information for the Year Ended December 31, 2018
Pre-mod
outstanding
principal
balance
Post-mod
outstanding
principal
balance
Number
Financial
impact due to
TDR taken as
additional
provision
Number that
defaulted during
the period
Recorded
investment of
TDRs that
defaulted during
the period
Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
1
7
8
$ 156
1,782
1,938
$ 156
1,779
1,935
$
-
491
491
-
1
1
$
-
169
169
$
-
-
-
1
2
-
3
6
133
599
-
732
1,098
138
599
-
737
1,083
-
(35)
-
(35)
325
2
-
-
2
3
248
-
-
248
148
-
-
-
-
-
-
-
-
17
$
-
-
-
3,768
-
-
-
$ 3,755
$
-
-
-
781
-
-
-
6
$
-
-
-
565
$
-
-
-
-
(dollars in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
74
TDR Information for the Year Ended December 31, 2017
Pre-mod
outstanding
principal
balance
Post-mod
outstanding
principal
balance
Number
Financial
impact due to
TDR taken as
additional
provision
Number that
defaulted during
the period
Recorded
investment of
TDRs that
defaulted during
the period
Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
1
8
9
$ 939
3,721
4,660
$ 939
3,695
4,634
$ 169
(111)
58
2
1
3
$ 223
219
442
$
-
-
-
3
1
1
5
11
187
252
14
453
1,854
187
252
14
453
1,747
27
-
11
38
37
1
1
-
2
-
127
55
-
182
-
(5)
-
-
(5)
-
1
-
1
26
$
144
-
144
7,111
144
-
144
$ 6,978
$
-
-
-
133
-
-
-
5
$
-
-
-
624
-
-
-
(5)
$
TDR Information for the Year Ended December 31, 2016
Pre-mod
outstanding
principal
balance
Post-mod
outstanding
principal
balance
Number
Financial
impact due to
TDR taken as
additional
provision
Number that
defaulted during
the period
Recorded
investment of
TDRs that
defaulted during
the period
Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
3
5
8
$ 650
423
1,073
$ 656
461
1,117
$ 50
46
96
2
-
2
$ 101
-
101
$
-
-
-
9
1
2
12
4
707
105
27
839
77
709
105
27
841
77
-
-
-
24
$
-
-
-
1,989
-
-
-
$ 2,035
$
205
-
2
207
23
-
-
-
326
1
-
-
1
229
-
-
229
-
-
-
-
-
-
-
-
3
$
-
-
-
330
$
-
-
-
-
(dollars in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
(dollars in thousands)
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total mortgage loans on real estate
Consumer:
Home equity lines of credit
Home equity loans
Other
Total consumer loans
Commercial
Construction:
Residential
Commercial
Total construction
Total
Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only
modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions.
For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of
impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan.
This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral
dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and
the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional
provision to the reserve. The effect of these required provisions for the period are indicated above.
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.
75
Note 6 – Foreclosed Assets
A summary of the activity in the balance of foreclosed assets follows (dollars in thousands):
Beginning balance, net
Additions/transfers from loans
Dispositions/sales
Valuation adjustments
Ending balance, net
Ending valuation allowance
Ending number of foreclosed assets
Proceeds from sale of foreclosed assets
Gain on sale of foreclosed assets
Year ended December 31,
2018
2017
3,226
1,262
(2,119)
(89)
2,280
(116)
11
2,527
408
$
$
$
$
$
3,986
1,563
(2,161)
(162)
3,226
(200)
16
2,872
711
$
$
$
$
$
At December 31, 2018, the balance of real estate owned includes $1,218,000 of foreclosed residential real estate properties recorded as a
result of obtaining physical possession of the property. At December 31, 2018, the recorded investment of consumer mortgage loans
secured by residential real estate properties for which formal foreclosure proceedings are underway is $453,000.
Note 7 - Premises and Equipment
Land & land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
As of December 31,
2018
2017
(In thousands)
$
29,065
64,478
45,228
$
9,959
50,340
35,939
138,771
(50,125)
96,238
(40,644)
88,646
701
55,594
2,148
$
89,347
$
57,742
Depreciation expense for premises and equipment amounted to $6,104,000, $5,686,000, and $5,314,000 in 2018, 2017, and 2016,
respectively.
Note 8 – Cash Value of Life Insurance
A summary of the activity in the balance of cash value of life insurance follows (dollars in thousands):
Beginning balance
Acquired policies from business combination
Increase in cash value of life insurance
Gain on death benefit
Insurance proceeds receivable reclassified to other assets
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,
2018
$
97,783
16,817
$
2,718
-
-
2017
95,912
-
2,685
108
(922)
$
117,318 $
97,783
$
200,249 $
196
14
66
165,587
182
14
57
As of December 31, 2018, the Bank was the owner and beneficiary of 196 life insurance policies, issued by 14 life insurance companies,
covering 66 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
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.
76
Note 9 - Goodwill and Other Intangible Assets
The following table summarizes the Company’s goodwill intangible as of the dates indicated:
(in thousands)
Goodwill
December 31,
2018
Additions
$
220,972
$
156,661
Reductions
-
$
December 31,
2017
$
64,311
Impairment exists when a Company’s carrying value exceeds its fair value. Goodwill is evaluated for impairment annually. At September
30, 2018, the Company had positive equity and the Company elected to perform a qualitative assessment to determine if it was more
likely than not that the fair value of the Company exceeded its carrying value, including goodwill. The qualitative assessment indicated
that it was more likely than not that the fair value of the reporting unit exceeds its carrying value, resulting in no impairment. For each of
the years in the three year period ended December 31, 2018, there were no impairment charges recognized.
The following table summarizes the Company’s core deposit intangibles (“CDI”) as of the dates indicated:
(in thousands)
Core deposit intangibles
Accumulated amortization
December 31,
2018
Additions
Reductions/
Amortization
December 31,
2017
$
37,163
(7,883)
$
$
27,605
-
-
(3,499)
$
9,558
(4,384)
Core deposit intangibles, net
$
29,280
27,605
$ (3,499)
$
5,174
The Company recorded additions to its CDI of $27,605,000 in conjunction with the FNBB acquisition on July 6, 2018, $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, and $898,000 in conjunction with the Citizens acquisition on September 23, 2011.
The following table summarizes the Company’s estimated core deposit intangible amortization (dollars in thousands):
Years Ended
2019
2020
2021
2022
2023
Thereafter
Estimated Core Deposit
Intangible Amortization
$
5,723
5,723
5,465
4,776
4,269
3,324
Note 10 - Mortgage Servicing Rights
The following tables summarize the activity in, and the main assumptions we used to determine the fair value of mortgage servicing rights
for the periods indicated (dollars in thousands):
Balance at beginning of period
Additions
Change in fair value
Balance at end of period
Contractually specified servicing fees, late fees
and ancillary fees earned
Balance of loans serviced at:
Beginning of period
End of period
Period end:
Weighted-average prepayment speed (CPR)
Weighted-average discount rate
2018
Year ended December 31,
2017
2016
$
6,687
557
(146)
$
6,595
810
(718)
$
7,618
1,161
(2,184)
$
7,098
$
6,687
$
6,595
$
2,038
$
$
811,065
785,138
$
$
$
7.6%
12.0%
$
$
$
2,076
816,623
811,065
8.9%
13.0%
2,065
817,917
816,623
8.8%
14.0%
The changes in fair value of MSRs during 2018 were primarily due to changes in principal balances and mortgage prepayment speeds of
the MSRs. 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.
77
Note 11 - Deposits
A summary of the balances of deposits follows (in thousands):
Noninterest-bearing demand
Interest-bearing demand
Savings
Time certificates, over $250,000
Other time certificates
Total deposits
December 31,
$
2018
1,760,580
1,252,366
1,921,324
132,429
299,767
$
2017
1,368,218
971,459
1,364,518
73,596
231,340
$
5,366,466
$
4,009,131
Certificate of deposit balances of $60,000,000 and $50,000,000 from the State of California were included in time certificates over
$250,000 at December 31, 2018 and 2017. 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
$1,469,000 and $1,366,000 were classified as consumer loans at December 31, 2018 and 2017, respectively.
At December 31, 2018, the scheduled maturities of time deposits were as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
Scheduled
maturities
298,855
75,989
36,267
18,542
2,537
6
$
432,196
Note 12 - 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, 2018 and December 31,
2017 of 0.05%, payable on January 2, 2019 and January 2, 2018, respectively
Total other borrowings
December 31,
2018
2017
(in thousands)
$
-
$
104,729
15,839
17,437
$
15,839
$
122,166
The Company did not enter into any other borrowings or repurchase agreements during 2018 or 2017.
The Company maintains a collateralized line of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2018, this
line provided for maximum borrowings of $2,063,815,000 of which zero was outstanding. As of December 31, 2018, the Company had
designated investment securities with a fair value of $188,559,000 and loans totaling $2,832,945,000 as potential collateral under this
collateralized line of credit with the FHLB.
The Company had $15,839,000 and $17,437,000 of other collateralized borrowings at December 31, 2018 and 2017, 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, 2018, the Company has pledged as collateral and sold under agreements to repurchase
investment securities with fair value of $37,688,000 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,
2018, this line provided for maximum borrowings of $142,272,000 of which none was outstanding. As of December 31, 2018, the
Company has designated investment securities with fair value of $12,000 and loans totaling $256,364,000 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, 2018.
78
Note 13 – Junior Subordinated Debt
At December 31, 2018, 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 in 2014. The acquired Debentures were recorded on the Company’s
books at their fair values on the acquisition date. 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.
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 $
7/23/2034
4/24/2033
4/24/2034
3/15/2036
$
20,619
20,619
6,186
5,155
10,310
62,889
Coupon Rate
(Variable)
3 mo. LIBOR +
3.05%
2.55%
3.25%
2.80%
1.33%
As of December 31, 2018
Current
Coupon Rate
5.49%
5.03%
5.79%
5.28%
4.12%
Recorded
Book Value
$
$
20,619
20,619
5,174
4,079
6,551
57,042
December 31, 2017
Recorded
Book Value
$ 20,619
20,619
5,135
4,041
6,444
$ 56,858
Note 14 - Commitments and Contingencies
Restricted Cash Balances — Reserves (in the form of deposits with the San Francisco Federal Reserve Bank) of $119,317,000 and
$82,068,000 were maintained to satisfy Federal regulatory requirements at December 31, 2018 and 2017. 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, 2018, future minimum commitments under non-
cancelable operating leases with initial or remaining terms of one year or more are as follows:
2019
2020
2021
2022
2023
Thereafter
Future minimum lease payments
Operating Leases
(in thousands)
$
4,639
4,036
3,644
2,814
1,831
2,636
$
19,600
Rent expense under operating leases was $6,348,000 in 2018, $5,885,000 in 2017, and $6,082,000 in 2016. Rent expense was offset by
rent income of $42,000 in 2018, $44,000 in 2017, and $220,000 in 2016.
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.
79
The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for commitments to extend
credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company’s exposure
to loss in the event of nonperformance by the other party to the financial instrument for deposit account overdraft privilege is represented
by the overdraft privilege amount disclosed to the deposit account holder.
The following table presents a summary of the Bank’s commitments and contingent liabilities:
(in thousands)
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans
Consumer loans
Real estate mortgage loans
Real estate construction loans
Standby letters of credit
Deposit account overdraft privilege
December 31,
2018
2017
$
$
306,191
496,575
140,292
248,996
11,346
111,956
257,220
422,958
66,267
187,097
13,075
98,260
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 — 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.
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 1.6298 per Class B share. As of December 31, 2018, the value of the Class A shares was $131.94 per share. Utilizing the
conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was $2,881,000 as of December 31, 2018, and
has not been reflected in the accompanying consolidated 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.
80
Note 15 – Shareholders’ Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of $26,432,000, $19,236,000, and $16,758,000 in 2018, 2017,
and 2016, 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, 2018, the Bank could have paid dividends of
$98,438,000 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, 2018, the Company had repurchased 196,566 shares under this plan. During the year ended December 31, 2018, there were
26,966 shares of common stock with a fair value of $968,000 were repurchased under this plan. There were no shares of common stock
repurchased during 2017 or 2016.
Stock Repurchased Under Equity Compensation Plans
During the years ended December 31, 2018, 2017, and 2016, employees tendered 78,023, 107,390, and 264,800 of the Company’s
common stock with market value of $3,001,000, $3,854,000, and $7,879,000, 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.
Note 16 - 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, 2018, 343,000 options for the
purchase of common shares, and 112,483 RSUs were outstanding, and 380,958 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, 2018, 10,000 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 stock awards may be granted under the 2001 Plan.
Stock option activity is summarized in the following table for the dates indicated:
Outstanding at January 1, 2018
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2018
Number
of Shares
446,400
-
(100,400)
(3,000)
343,000
Option Price
per Share
Weighted
Average
Exercise
Price
$12.63 to $23.21
$
16.84
— to —
$12.63 to $23.21
$23.21
$12.63 to $23.21
-
$
$
$
16.97
23.21
16.67
81
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, 2018:
Number of options
Weighted average exercise price
Intrinsic value (in thousands)
Weighted average remaining contractual term (yrs.)
Currently
Exercisable
Currently Not
Exercisable
Total
Outstanding
$
$
341,875
16.65
5,860
3.2
$
$
1,125
23.21
12
5.8
$
$
343,000
16.67
5,872
3.3
The 1,125 options that are currently not exercisable as of December 31, 2018 are expected to vest, on a weighted-average basis, over the
next 0.8 years. The Company did not modify any option grants during 2018 or 2017.
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, total tax benefit and excess tax benefits 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
2018
2,109,000
75,000
75,000
22,000
623,000
$
$
$
$
$
Year Ended December 31,
2017
$
$
$
$
$
2,657,000
259,000
259,000
109,000
600,000
$
$
$
$
$
2016
3,483,000
580,000
580,000
244,000
-
During 2018, 2017 and 2016, the Company granted no options.
Restricted stock unit activity is summarized in the following table for the dates indicated:
Outstanding at January 1, 2018
RSUs granted
Additional market plus service condition RSUs vested
RSUs added through dividend credits
RSUs released through vesting
RSUs forfeited/expired
Outstanding at December 31, 2018
Service Condition Vesting RSUs
Weighted Average
Fair Value on
Date of Grant
$
39.08
Number
of RSUs
68,457
38,605
-
1,188
(35,060)
(6,243)
66,947
Market Plus Service
Condition Vesting RSUs
Number
of RSUs
Weighted Average
Fair Value on
Date of Grant
36.40
52,829
16,939 $
8,506
-
(25,512)
(7,226)
45,536
The 66,947 of service condition vesting RSUs outstanding as of December 31, 2018 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. Additional RSUs credited through dividends are subject to the same vesting requirements as the original grant. The
66,947 of service condition vesting RSUs outstanding as of December 31, 2018 are expected to vest, and be released, on a weighted-
average basis, over the next 1.4 years. The Company expects to recognize $2,319,000 of pre-tax compensation costs related to these
service condition vesting RSUs between December 31, 2018 and their vesting dates. The Company did not modify any service condition
vesting RSUs during 2018 or 2017.
The 45,536 of market plus service condition vesting RSUs outstanding as of December 31, 2018 are expected to vest, and be released, on
a weighted-average basis, over the next 1.4 years. The Company expects to recognize $848,000 of pre-tax compensation costs related to
these RSUs between December 31, 2018 and their vesting dates. As of December 31, 2018, 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 68,304 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 2018 or 2017.
The following table shows the compensation costs and excess tax benefits for RSUs recognized in income for the periods indicated:
Total compensation costs recognized in income
Service condition vesting RSUs
Market plus service condition vesting RSUs
Excess tax benefit recognized in income
Service condition vesting RSUs
Market plus service condition vesting RSUs
2018
Year Ended December 31,
2017
2016
$
$
$
$
1,017,000
370,000
104,000
191,000
$
$
$
$
895,000
432,000
131,000
175,000
$
$
$
$
616,000
271,000
-
-
82
Note 17 - Noninterest Income and Expense
The components of other noninterest income were as follows (in thousands):
ATM and interchange fees
Service charges on deposit accounts
Other service fees
Mortgage banking service fees
Change in value of mortgage loan servicing rights
2018
Year Ended December 31,
2017
$
18,249 $
15,467
2,852
2,038
(146)
16,727 $
16,056
3,282
2,076
(718)
2016
15,859
14,365
3,121
2,065
(2,184)
Total service charges and fees
38,460
37,423
33,226
Commissions on sale of non-deposit investment products
Increase in cash value of life insurance
Gain on sale of loans
Lease brokerage income
Sale of customer checks
Gain on sale of foreclosed assets
Gain on sale of investment securities
Loss on disposal of fixed assets
Loss on marketable equity securities
Other
Total other noninterest income
Total noninterest income
3,151
2,718
2,371
678
449
408
207
(185)
(64)
1,091
2,729
2,685
3,109
782
372
711
961
(142)
-
1,391
2,329
2,717
4,037
711
408
262
-
(147)
-
1,020
10,824
12,598
11,337
$
49,284
$
50,021
$
44,563
Mortgage banking servicing fees, net of change in value of mortgage loan servicing rights, totaling $1,892,000, $1,358,000, and
($119,000) were recorded within service charges and fees for the years ended December 31, 2018, 2017, and 2016, 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
2018
Year Ended December 31,
2017
2016
$
62,422
11,147
20,373
$
$
54,589
9,227
19,114
53,169
8,872
18,683
Total salaries and benefits expense
93,942
82,930
80,724
Occupancy
Data processing and software
Equipment
ATM and POS network charges
Merger and acquisition expense
Advertising
Professional fees
Intangible amortization
Telecommunications
Regulatory assessments and insurance
Courier service
Operational losses
Postage
Legal settlement
Foreclosed assets expense
Provision for foreclosed asset losses
Other miscellaneous expense
Total other noninterest expense
Total noninterest expense
12,139
11,021
6,651
5,271
5,227
4,578
3,546
3,499
3,023
1,906
1,287
1,260
1,154
-
382
89
13,720
10,894
10,448
7,141
4,752
530
4,101
3,745
1,389
2,713
1,676
1,035
1,394
1,296
-
231
162
12,587
10,139
8,846
6,597
4,999
784
3,829
5,409
1,377
2,749
2,105
998
1,564
1,603
1,450
266
140
12,418
74,753
64,094
65,273
$
168,695
$
147,024
$
145,997
83
Note 18 - Income Taxes
The components of consolidated income tax expense are as follows (in thousands):
Current tax expense
Federal
State
Deferred tax expense
Federal
State
2018
Year Ended December 31,
2017
2016
$
13,109
9,323
$
17,835
6,650
$
17,401
7,121
$
22,432
24,485
24,522
1,842
758
11,418
1,055
2,735
455
2,600
12,473
3,190
Total tax expense
$
25,032
$
36,958
$
27,712
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 reduced the Federal corporate tax rate from 35% to 21%. The Company’s deferred tax expense as of December 31,
2017 included $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.
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 follows for the periods indicated (in thousands):
2018
Year Ended December 31,
2017
2016
Tax credits and other tax benefits – decrease in tax expense
Amortization – increase in tax expense
$
$
(1,993)
1,814
$
$
(1,753)
1,611
$
$
(954)
757
The carrying value of Low Income Housing Tax Credit Funds was $23,885,000 and $16,854,000 as of December 31, 2018 and 2017,
respectively. As of December 31, 2018, the Company has committed to make additional capital contributions to the Low Income Housing
Tax Credit Funds in the amount of $9,032,000, 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, 2018, 2017 and 2016 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 of federal rate change
Tax-exempt interest on municipal obligations
Tax-exempt life insurance related income
Low income housing tax credits
Low income housing tax credit amortization
Equity compensation
Non-deductible joint beneficiary agreement expense
Non-deductible merger expenses
Other
Year Ended December 31,
2018
2017
2016
21.0 %
8.6
-
(1.0)
(0.6)
(2.2)
2.0
(0.5)
0.1
0.2
(0.8)
35.0 %
6.9
9.6
(1.9)
(1.3)
(2.3)
2.1
(1.2)
0.1
0.2
0.5
35.0 %
6.8
-
(1.8)
(1.3)
(1.3)
0.8
-
0.1
-
(0.1)
Effective Tax Rate
26.8 %
47.7 %
38.2 %
84
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 (in thousands):
Deferred tax assets:
Allowance for losses and reserve for unfunded commitments
Deferred compensation
Accrued pension liability
Accrued bonus
Other accrued expenses
Additional unfunded status of the supplemental retirement plans
State taxes
Share based compensation
Nonaccrual interest
OREO write downs
Acquisition cost basis
Unrealized loss on securities
Tax credits
Net operating loss carryforwards
Other
December 31,
2018
2017
$
10,394
2,780
9,734
709
466
1,420
1,864
1,132
814
34
6,714
6,201
623
2,442
389
$
9,900
1,953
6,835
171
522
1,582
1,397
1,322
282
59
2,187
1,008
581
1,801
508
Total deferred tax assets
45,716
30,108
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
(1,020)
(5,572)
(26)
(426)
(2,073)
(8,234)
(1,729)
(582)
(958)
(1,987)
(30)
(315)
(1,943)
(916)
(1,783)
(479)
(19,662)
(8,411)
$
26,054
$
21,697
As part of the merger with FNB Bancorp in 2018 and 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, 2018 were
$1,292,000 for federal and $23,877,000 for California. The amount of the Company’s tax credits that would be subject to these limitations
as of December 31, 2018 are $123,000 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 2019.
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 FNB Bancorp and North Valley Bancorp merger.
Disclosure of unrecognized tax benefits at December 31, 2018 and 2017 were not considered significant for disclosure purposes.
Management does not expect the unrecognized tax benefit will materially change in the next 12 months. During the years ended
December 31, 2018 and December 31, 2017 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 2015 and 2014, respectively.
85
Note 19 – Earnings per Share
Earnings per share have been computed based on the following:
(in thousands)
Net income
Average number of common shares outstanding
Effect of dilutive stock options and restricted stock
2018
Year Ended December 31,
2017
2016
$
68,320
26,593
287
$
$
40,554
22,912
338
44,811
22,814
273
Average number of common shares outstanding used to calculate diluted
earnings per share
26,880
23,250
23,087
Options excluded from diluted earnings per share because the effect of these
options was antidilutive
10,056
-
13,825
Note 20 – 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:
(in thousands)
Unrealized holding (losses) gains on available for sale
securities before reclassifications
Amounts reclassified out of accumulated other comprehensive income:
Realized gains on debt securities
Adoption ASU 2016-01
Adoption ASU 2018-02
Total amounts reclassified out of accumulated
other comprehensive income
Unrealized holding (losses) gains on available for sale
securities after reclassifications
Tax effect
2018
Year Ended December 31,
2017
2016
$ (17,057)
$
6,422
$ (11,015)
(207)
62
(425)
(961)
-
-
-
-
-
(570)
(961)
-
(17,627)
5,193
5,461
(2,296)
(11,015)
4,631
Unrealized holding (losses) gains on available for sale
securities, net of tax
(12,434)
3,165
(6,384)
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
Adoption ASU 2018-02
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
762
(1,016)
511
(54)
510
(668)
(12)
390
-
(40)
550
-
(212)
378
510
550
(162)
(638)
268
1,021
(429)
388
(370)
592
Change in joint beneficiary agreement liability before reclassifications
Tax effect
Change in unfunded status of the supplemental
retirement plans, net of tax
426
-
(110)
-
(343)
-
426
(110)
(343)
Total other comprehensive (loss) income
$ (11,620)
$
2,685
$ (6,135)
86
The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:
(in thousands)
Net unrealized loss on available for sale securities
Stranded OCI from tax rate change
Tax effect
Year Ended December 31,
2018
2017
$ (20,974)
-
6,201
(3,409)
425
1,008
Unrealized holding loss on available for sale securities, net of tax
(14,773)
(1,976)
Unfunded status of the supplemental retirement plans
Stranded OCI from tax rate change
Tax effect
(4,802)
-
1,420
(5,352)
668
1,582
Unfunded status of the supplemental retirement plans, net of tax
(3,382)
(3,102)
Joint beneficiary agreement liability
Tax effect
Joint beneficiary agreement liability, net of tax
Accumulated other comprehensive loss
Note 21 - Retirement Plans
276
-
(150)
-
276
(150)
$ (17,879)
$ (5,228)
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 salaries & benefits
expense attributable to the 401(k) Plan matching contributions and 401(k) Plan matching contributions for the years ended:
(in thousands)
401(k) Plan benefits expense
401(k) Plan contributions made by the Company
2018
Year Ended December 31,
2017
2016
$
$
879
872
$
$
776
767
$
$
678
811
Employee Stock Ownership Plan
Substantially all employees with at least one year of service are covered by a discretionary employee stock ownership plan (ESOP).
Company shares owned by the ESOP are paid dividends and included in the calculation of earnings per share as common shares
outstanding. Contributions are made to the plan at the discretion of the Board of Directors. Expenses related to the Company’s ESOP,
included in benefits and other compensation costs under salaries and benefits expense, and contributions to the plan for the years ended
were:
(in thousands)
ESOP benefits expense
ESOP contributions made by the Company
2018
Year Ended December 31,
2017
2016
$
$
1,887
1,952
$
$
2,149
2,073
$
$
1,831
1,368
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 $9,402,000 and $6,605,000 at December 31, 2018 and 2017, respectively. Earnings credits on deferred balances included
in noninterest expense are included in the following table:
(in thousands)
Deferred compensation earnings credits included in noninterest
expense
2018
Year Ended December 31,
2017
2016
$
462
$
478
$
487
87
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 $117,318,000 and $97,783,000 at December
31, 2018 and 2017, respectively.
The Company recorded in other liabilities the additional unfunded status of the supplemental retirement plans of $4,802,000 and
$5,352,000 related to the supplemental retirement plans as of December 31, 2018 and 2017, respectively. These amounts represent the
amount by which the projected benefit obligations for these retirement plans exceeded the fair value of plan assets plus amounts
previously accrued related to the plans. The projected benefit obligation is recorded in other liabilities.
At December 31, 2018 and 2017, the additional unfunded status of the supplemental retirement plans of $4,802,000 and $5,352,000 were
offset by a reduction of shareholders’ equity accumulated other comprehensive loss of $3,382,000 and $3,102,000, respectively,
representing the after-tax impact of the additional unfunded status of the supplemental retirement plans, and the related deferred tax asset
of $1,420,000 and $1,582,000, 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 $408,000 of the net actuarial loss reported in the
following table as of December 31, 2018 as a component of net periodic benefit cost during 2019.
(in thousands)
Transition obligation
Prior service cost
Net actuarial loss
December 31,
2018
2017
$
3
(194)
4,993
$
4
(248)
5,596
Amount included in accumulated other comprehensive loss
Stranded OCI from tax rate change
Deferred tax benefit
4,802
-
(1,420)
5,352
(668)
(1,582)
Amount included in accumulated other comprehensive loss,
net of tax
$
3,382
$
3,102
Information pertaining to the activity in the supplemental retirement plans, using a measurement date of December 31, is as follows:
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (loss)/gain
Plan amendments
Benefits paid
December 31,
2018
2017
$ (28,472)
(973)
(949)
92
-
1,106
$ (26,645)
(941)
(991)
(1,203)
185
1,123
Benefit obligation at end of year
$ (29,196)
$ (28,472)
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
$ (29,196)
3
4,993
(194)
(4,802)
$ (28,472)
4
5,596
(248)
(5,352)
Accrued benefit cost
$ (29,196)
$ (28,472)
Accumulated benefit obligation
$ (27,544)
$ (26,432)
88
The following table sets forth the net periodic benefit cost recognized for the supplemental retirement plans:
(in thousands)
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
2018
Year Ended December 31,
2017
2016
$
973
949
2
(54)
510
$
941
991
2
(12)
390
$
1,042
1,025
2
(41)
549
Net periodic pension cost
$
2,380
$
2,312
$
2,577
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
2018
Year Ended December 31,
2017
3.96%
3.40%
3.25%
0.00%
3.40%
3.80%
3.25%
0.00%
2016
3.80%
4.00%
2.50%
2.50%
The following table sets forth the expected benefit payments to participants and estimated contributions to be made by the Company under
the supplemental retirement plans for the years indicated:
2019
2020
2021
2022
2023
2024-2028
Expected Benefit
Payments to
Participants
Estimated
Company
Contributions
(in thousands)
$
1,254
$
1,254
1,668
2,192
2,161
2,153
10,928
1,668
2,192
2,161
2,153
10,928
Note 22 - 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 January 1, 2017
Advances/new loans
Removed/payments
Balance December 31, 2017
Advances/new loans
Removed/payments
Balance December 31, 2018
$
2,432
437
(721)
2,148
8,854
(1,799)
$
9,203
Deposits of directors, officers and other related parties to the Bank totaled $43,881,000 and $46,025,000 at December 31, 2018 and 2017,
respectively.
89
Note 23 - Fair Value Measurement
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value
disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income
approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing
an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale
or use of an asset and the risk of nonperformance. Securities available-for-sale and mortgage servicing rights are recorded at fair value on
a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring
basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically
involve application of lower of cost or market accounting or impairment write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded
and the observable nature of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are
observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
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.
90
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, 2018
Marketable equity securities
Debt securities available for sale:
Obligations of U.S. government agencies
Obligations of states and political subdivisions
Corporate bonds
Asset backed securities
Loans held for sale
Mortgage servicing rights
Total assets measured at fair value
Fair value at December 31, 2017
Marketable equity securities
Debt securities available for sale:
Total
Level 1
Level 2
Level 3
$
2,874
$
2,874
$
-
$
629,981
126,072
4,478
354,505
3,687
7,098
-
-
-
-
-
-
629,981
126,072
4,478
354,505
3,687
-
$
$
1,128,695
Total
2,938
$
$
2,874
$
1,118,723
Level 1
Level 2
2,938
$
-
$
$
Level 3
Obligations of U.S. government agencies
Obligations of states and political subdivisions
Loans held for sale
Mortgage servicing rights
604,789
123,156
4,616
6,687
-
-
-
-
604,789
123,156
4,616
-
Total assets measured at fair value
$
742,186
$
2,938
$
732,561
$
-
-
-
-
-
-
7,098
7,098
-
-
-
-
6,687
6,687
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
2018 or 2017.
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, 2018, 2017, and 2016. Had there been any transfer into or out of Level 3
during 2018, 2017, or 2016, 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,
2018: Mortgage servicing rights
2017: Mortgage servicing rights
2016: Mortgage servicing rights
Beginning
Balance
6,687
6,595
7,618
$
$
$
Transfers
into (out of)
Level 3
Change
Included
in Earnings
(146)
(718)
(2,184)
-
-
-
$
$
$
Issuances
557
810
1,161
$
$
$
Ending
Balance
$
$
$
7,098
6,687
6,595
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, 2018 and 2017:
December 31, 2018
Mortgage Servicing Rights
December 31, 2017
Mortgage Servicing Rights
Fair Value
(in thousands)
$
7,098
$
6,687
Valuation
Technique
Discounted
cash flow
Discounted
cash flow
Unobservable
Inputs
Constant
prepayment rate
Discount rate
Constant
prepayment rate
Discount rate
Range,
Weighted
Average
5.0%-27.3%, 7.6%
12%-13%, 12%
6.2%-22.0%, 8.9%
13.0%-
15.0%, 13.0%
91
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, 2018
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total
Level 1
Level 2
Level 3
Total Gains
(Losses)
$ 281
1,311
-
-
-
-
$ 281
1,311
$ (294)
(8)
Total assets measured at fair value
$ 1,592
-
-
$ 1,592
$ (302)
Year ended December 31, 2017
Fair value:
Impaired Originated & PNCI loans
Foreclosed assets
Total
Level 1
Level 2
Level 3
Total Gains
(Losses)
$ 2,767
2,217
-
-
-
-
$ 2,767
2,217
$ (1,452)
(135)
Total assets measured at fair value
$ 4,984
-
-
$ 4,984
$ (1,587)
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.
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, 2018 and 2017:
December 31, 2018
Fair Value
(in thousands)
Impaired Originated & PNCI loans
$ 281
Foreclosed assets (Residential real estate)
$ 693
Foreclosed assets (Commercial real estate)
$ 618
December 31, 2017
Fair Value
(in thousands)
Impaired Originated & PNCI loans
$ 2,767
Foreclosed assets (Land & construction)
$ 1,341
Foreclosed assets (Residential real estate)
$ 622
Foreclosed assets (Commercial real estate)
$ 254
Valuation
Technique
Sales comparison
approach
Income approach
Sales comparison
approach
Sales comparison
approach
Valuation
Technique
Sales comparison
approach
Income approach
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach
92
Unobservable Inputs
Adjustment for differences between
comparable sales;
Capitalization rate
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
Range,
Weighted Average
(16.3%) - 35.14%;
10.45%
N/A
(21.83%) - 7.25%;
(3.75%)
(65%) - 20%; (45%)
Range,
Weighted Average
(74%) - 23%;
(19.76%)
N/A
(53%) - 283%;
167%
(47%) - 39%;
(3.13%)
Adjustment for differences between
comparable sales
(84%) - 19%; (84%)
The estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets,
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in
thousands):
December 31, 2018
December 31, 2017
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Financial assets:
Level 1 inputs:
Cash and due from banks
Cash at Federal Reserve and other banks
$
119,781
107,752
$ 119,781
107,752
$
105,968
99,460
$
105,968
99,460
Level 2 inputs:
Securities held to maturity
Restricted equity securities
Level 3 inputs:
Loans, net (1)
Financial liabilities:
Level 2 inputs:
Deposits
Other borrowings
Level 3 inputs:
444,936
17,250
437,370
N/A
514,844
16,956
518,165
N/A
3,989,432
4,006,986
2,984,842
2,992,225
5,366,466
15,839
5,362,173
15,839
4,009,131
122,166
4,006,620
122,166
Junior subordinated debt
57,042
62,610
56,858
58,466
Contract
Amount
Fair
Value
Contract
Amount
Fair
Value
Off-balance sheet:
Level 3 inputs:
Commitments
Standby letters of credit
Overdraft privilege commitments
$
1,192,054
11,346
111,956
$ 11,921
113
1,120
$
933,542
13,075
98,260
$
9,335
131
983
(1) The estimated fair value of loans for December 31, 2018 reflects an exit price assumption. The December 31, 2017 fair value estimate
is not based on an exit price assumption.
Note 24 - 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:
Preferred stock, no par value: 1,000,000 shares authorized, zero issued
and outstanding at December 31, 2018 and 2017
Common stock, no par value: authorized 50,000,000 shares; issued and
outstanding 30,417,223 and 22,955,963 shares at December 31, 2018 and
2017, respectively
Retained earnings
Accumulated other comprehensive loss, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2018
December 31,
2017
(In thousands)
$
2,374
880,907
1,723
$
3,924
557,538
1,721
$
885,004
$
563,183
$
589
57,042
$
517
56,858
57,631
57,375
-
-
541,762
303,490
(17,879)
255,836
255,200
(5,228)
827,373
505,808
$
885,004
$
563,183
93
Condensed Statements of Income
Interest expense
Administration expense
Loss before equity in net income of Tri Counties Bank
Equity in net income of Tri Counties Bank:
Distributed
Undistributed
Income tax benefit
Net income
2018
2016
Year ended December 31,
2017
(In thousands)
$ (2,535)
(915)
$ (3,131)
(1,489)
$ (2,229)
(725)
(4,620)
(3,450)
(2,954)
26,432
45,315
1,193
19,236
23,359
1,409
16,758
29,764
1,243
$
68,320
$
40,554
$
44,811
Condensed Statements of Comprehensive Income
2018
Net income
Other comprehensive income (loss), net of tax:
$
Increase (decrease) in unrealized gains on available for sale securities
arising during the period
Change in minimum pension liability
Change in joint beneficiary agreement liablity
Other comprehensive income (loss)
Comprehensive income
Condensed Statements of Cash Flows
Operating activities:
Net income
Year ended December 31,
2017
(In thousands)
$
40,554
$
2016
44,811
68,320
(12,434)
388
426
3,165
(370)
(110)
(6,384)
592
(343)
(11,620)
2,685
(6,135)
$
56,700
$
43,239
$
38,676
2018
Year ended December 31,
2017
(In thousands)
2016
$
68,320
$
40,554
$
44,811
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
(45,315)
1,462
-
(4,983)
(23,359)
1,586
-
(1,295)
(29,764)
1,467
(155)
(1,210)
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
Net change in cash and cash equivalents
19,484
17,486
15,149
218
-
(2,483)
(18,769)
396
-
(1,629)
(15,131)
518
155
(1,890)
(13,695)
(21,034)
(16,364)
(14,912)
(1,550)
1,122
237
Cash and cash equivalents at beginning of year
3,924
2,802
2,565
Cash and cash equivalents at end of year
$
2,374
$
3,924
$
2,802
94
Note 25 - 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, 2018 and 2017 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, 2018
and 2017 based on the phased-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019
when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon
prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
Actual
(dollars in thousands)
As of December 31, 2018:
Total Capital (to Risk Weighted Assets):
Amount
Consolidated
Tri Counties Bank
$
$
682,419
680,624
Tier 1 Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
$
$
647,262
645,467
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital (to Average Assets):
Consolidated
Tri Counties Bank
$
$
$
$
591,933
645,467
647,262
645,467
Minimum Capital
Required – Basel III
Phase-in Schedule
Minimum Capital
Required – Basel III
Fully Phased In
Required to be
Considered Well
Capitalized
Ratio
Amount
Ratio
(dollars in thousands)
Amount
Ratio
Amount
Ratio
14.40
14.37
13.66
13.63
12.49
13.63
10.68
10.65
%
%
%
%
%
%
%
%
$
$
$
$
$
$
$
$
467,874
467,704
373,115
372,979
302,045
301,935
242,452
242,447
9.875
9.875
7.875
7.875
6.375
6.375
4.000
4.000
%
%
%
%
%
%
%
%
$
$
$
$
$
$
$
$
497,486
497,305
402,727
402,581
331,658
331,537
242,452
242,447
10.50
10.50
8.50
8.50
7.00
7.00
4.00
4.00
%
%
%
%
%
%
%
%
N/A
473,624
N/A
378,899
N/A
307,856
N/A
303,059
$
$
$
$
N/A
10.00
N/A
8.00
N/A
6.50
N/A
5.00
Actual
Minimum Capital
Required – Basel III
Phase-in Schedule
Minimum Capital
Required – Basel III
Fully Phased In
Required to be
Considered Well
Capitalized
(dollars in thousands)
As of December 31, 2017:
Total Capital (to Risk Weighted Assets):
Amount
Consolidated
Tri Counties Bank
$
$
528,805
525,384
Tier 1 Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
$
$
495,318
491,897
Common equity Tier 1 Capital (to Risk Weighted As
Consolidated
Tri Counties Bank
Tier 1 Capital (to Average Assets):
Consolidated
Tri Counties Bank
$
$
$
$
440,643
491,897
495,318
491,897
Ratio
Amount
Ratio
(dollars in thousands)
Amount
Ratio
Amount
Ratio
14.07
13.98
13.18
13.09
11.72
13.09
10.80
10.73
%
%
%
%
%
%
%
%
$
$
$
$
$
$
$
$
347,694
347,535
272,517
272,392
216,134
216,035
183,400
183,394
9.250
9.250
7.250
7.250
5.750
5.750
4.000
4.000
%
%
%
%
%
%
%
%
$
$
$
$
$
$
$
$
394,679
394,499
319,502
319,356
263,120
262,999
183,400
183,394
10.50
10.50
8.50
8.50
7.00
7.00
4.00
4.00
%
%
%
%
%
%
%
%
N/A
375,713
N/A
300,570
N/A
244,214
N/A
229,243
$
$
$
$
N/A
10.00
N/A
8.00
N/A
6.50
N/A
5.00
%
%
%
%
%
%
%
%
As of December 31, 2018, 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, 2018 and December 31, 2017, 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, 2018 and 2017, the
Company and the Bank were in compliance with the capital conservation buffer requirements, which were 1.875% and 1.25%,
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.
95
Note 26 - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters of 2018 and 2017, 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
All other loan interest income
Total loan interest income
Debt securities, dividends and interest bearing cash at banks
Total interest income
Interest expense
Net interest income
(Benefit from reversal of) provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per common share:
Net income (diluted)
Dividends
Interest and dividend income:
Loans:
Discount accretion
All other loan interest income
Total loan interest income
Debt securities, dividends and interest bearing cash at banks
Total interest income
Interest expense
2018 Quarters Ended
December 31,
September 30,
June 30,
March 31,
(dollars in thousands, except per share data)
$ 1,982
53,680
$ 2,098
51,004
$ 559
38,745
$ 632
37,417
55,662
12,403
68,065
4,063
64,002
806
63,196
12,634
45,285
30,545
7,334
53,102
11,452
64,554
4,065
60,489
2,651
57,838
12,186
47,378
22,646
6,476
39,304
9,174
48,478
2,609
38,049
9,072
47,121
2,135
45,869
(638)
44,986
(236)
46,507
12,174
37,870
20,811
5,782
45,222
12,290
38,162
19,350
5,440
$ 23,211
$ 16,170
$ 15,029
$ 13,910
$ 0.76
$ 0.19
$ 0.53
$ 0.17
$ 0.65
$ 0.17
$ 0.60
$ 0.17
2017 Quarters Ended
December 31,
September 30,
June 30,
March 31,
(dollars in thousands, except per share data)
$ 1,489
36,705
$ 1,364
35,904
$ 2,170
34,248
$ 1,541
33,373
38,194
8,767
37,268
8,645
36,418
8,626
34,914
8,570
46,961
1,868
45,913
1,829
45,044
1,610
43,484
1,491
Net interest income
Provision for (benefit from reversal of provision for) loan losses
45,093
1,677
44,084
765
43,434
(796)
41,993
(1,557)
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
43,416
12,478
38,076
43,319
12,930
37,222
44,230
12,910
35,904
43,550
11,703
35,822
17,818
14,829
19,027
7,130
21,236
7,647
19,431
7,352
$ 2,989
$ 11,897
$ 13,589
$ 12,079
$ 0.13
$ 0.17
$ 0.51
$ 0.17
$ 0.58
$ 0.17
$ 0.52
$ 0.15
96
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, 2018.
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, Moss Adams LLP, an independent registered public accounting firm, has audited the Company’s
consolidated financial statements as of and for the year ended December 31, 2018, and the Company’s effectiveness of internal control
over financial reporting as of December 31, 2018, dated March 1, 2019, as stated in its report, which is included herein.
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
/s/ Peter G. Wiese
Peter G. Wiese
Executive Vice President and Chief Financial Officer
March 1, 2019
97
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
TriCo Bancshares
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of TriCo Bancshares (the “Company”) as of December 31, 2018, the
related consolidated statement of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then
ended, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s
internal control over financial reporting as of December 31, 2018, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2018, and the consolidated results of its operations and its cash flows for the year then
ended, 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, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s consolidated 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 consolidated 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 consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated 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 consolidated 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 consolidated 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.
/s/ Moss Adams LLP
Sacramento, California
March 1, 2019
We have served as the Company’s auditor since 2018.
98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
TriCo Bancshares
Chico, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of TriCo Bancshares (the "Company") as of December 31, 2017, the
related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the
years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). 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 the results of its operations and its cash flows for each of the years in the two-year period ended December
31, 2017 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on the
Company’s financial statements 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.
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. We believe that our audits provide a reasonable basis for our opinion.
/s/ Crowe LLP
We served as the Company’s auditor from 2012 through 2018.
Sacramento, California
March 1, 2018
99
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, 2018, 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, 2018, 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 96 of this report and is incorporated herein by
reference. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by
Moss Adams LLP, an independent registered public accounting firm, as stated in its report, which is set forth on page 97 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,
2018, 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 2018 was so disclosed.
100
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item 10 shall either be incorporated herein by reference from the Company’s Proxy Statement for the
2019 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
2019 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
2019 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
2019 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
2019 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.
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 1, 2019
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, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
Date: March 1, 2019
/s/ Richard P. Smith
Richard P. Smith, President, Chief Executive
Officer and Director (Principal Executive Officer)
/s/ Peter G. Wiese
Peter G. Wiese, Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
/s/ Donald J. Amaral
Donald J. Amaral, Director
/s/ Thomas G. Atwood
Thomas G. Atwood, Director
/s/ William J. Casey
William J. Casey, Director and Chairman of the Board
/s/ Craig S. Compton
Craig S. Compton, Director
/s/ L. Gage Chrysler
L. Gage Chrysler, Director
/s/ Cory W. Giese
Cory W. Giese, Director
/s/ John S.A. Hasbrook
John S.A. Hasbrook, Director
/s/ Michael W. Koehnen
Michael W. Koehnen, Director
/s/ Martin A. Mariani
Martin A. Mariani, Director
/s/ Thomas C. McGraw
Thomas C. McGraw, Director
/s/ W. Virginia Walker
W. Virginia Walker, Director
102
Exhibit No.
EXHIBIT INDEX
Exhibit
2.1
2.2
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*
Agreement and Plan of Merger and Reorganization, dated as of January 21, 2014 by and between TriCo Bancshares and
North Valley Bancorp (incorporated by reference to Exhibit 2.1 to TriCo’s Current Report on Form 8-K filed on January
21, 2014).
Agreement and Plan of Reorganization dated as of December 11, 2017, by and between TriCo Bancshares and FNB
Bancorp (incorporated by reference to Exhibit 2.1 to TriCo’s Current Report on Form 8-K filed on December 11, 2017).
Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to TriCo’s Current Report on Form 8-K filed
on March 17, 2009).
Bylaws of TriCo, as amended (incorporated by reference to Exhibit 3.1 to TriCo’s Current Report on Form 8-K filed
February 17, 2011).
Instruments defining the rights of holders of the long-term debt securities of the TriCo and its subsidiaries are omitted
pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. TriCo hereby agrees to furnish copies of these instruments
to the Securities and Exchange Commission upon request.
Form of Change of Control Agreement among TriCo, Tri Counties Bank and each of Dan Bailey, Craig Carney, John
Fleshood, Richard O'Sullivan, and Thomas Reddish (incorporated by reference to Exhibit 10.2 to TriCo's Current Report
on Form 8-K filed on July 23, 2013).
TriCo's 2001 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to TriCo’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005).
TriCo’s 2009 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to TriCo’s Current Report on
Form 8-K filed April 3, 2013).
Amended Employment Agreement between TriCo and Richard Smith dated as of March 28, 2013 (incorporated by
reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed April 3, 2013).
Transaction Bonus Agreement between TriCo Bancshares and Richard P. Smith dated as of August 7, 2014 (incorporated
by reference to Exhibit 10.4 to TriCo’s Form 8-K filed on August 13, 2014).
Tri Counties Bank Executive Deferred Compensation Plan restated April 1, 1992, and January 1, 2005 (incorporated by
reference to Exhibit 10.9 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
Tri Counties Bank Deferred Compensation Plan for Directors effective January 1, 2005 (incorporated by reference to
Exhibit 10.10 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
2005 Tri Counties Bank Deferred Compensation Plan for Executives and Directors effective January 1, 2005 (incorporated
by reference to Exhibit 10.11 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, and
amended and restated January 1, 2004 (incorporated by reference to Exhibit 10.12 to TriCo's Quarterly Report on Form 10-
Q for the quarter ended June 30, 2004).
2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 (incorporated by reference
to Exhibit 10.13 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.11* Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January
10.12*
1, 2004 (incorporated by reference to Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).
2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January 1, 2004 (incorporated by reference to
Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.13* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George Barstow,
Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Richard O’Sullivan, Thomas Reddish, Jerald
Sax, and Richard Smith (incorporated by reference to Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003).
10.14* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral,
William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Vereschagin
(incorporated by reference to Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30,
2003).
10.15* Form of Tri Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and
each of Craig Carney, Richard Miller, Richard O’Sullivan, and Thomas Reddish (incorporated by reference to Exhibit
10.16 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
10.16* Form of Tri Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and
each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Carroll Taresh, and Alex
Vereschagin (incorporated by reference to Exhibit 10.17 to TriCo's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
10.17* Form of Indemnification Agreement between TriCo and its directors and executive officers (incorporated by reference to
Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed September 10, 2013).
10.18* Form of Indemnification Agreement between Tri Counties Bank its directors and executive officers (incorporated by
reference to Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed September 10, 2013).
10.19* Form of Stock Option, 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 (incorporated by
reference to Exhibit 10.19 to TriCo’s Annual Report on Form 10-K for the year ended December 31, 2017).
10.20* Form of Restricted Stock Unit Agreement and Grant Notice for Non-Employee Executives pursuant to TriCo’s 2009
Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed November
14, 2014).
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Item 6 – Exhibits (continued)
10.21* Form of Restricted Stock Unit Agreement and Grant Notice for Directors pursuant to TriCo’s 2009 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed November 14, 2014).
10.22* Form of Performance Award Agreement and Grant Notice pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated
10.23*
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).
10.24* Amendment to John Fleshood Offer Letter dated December 19, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s
Current Report on Form 8-K filed on November 30, 2016).
10.25* Peter Wiese Offer Letter dated August 9, 2018 (incorporated by reference to Exhibit 10.1 to TriCo’s current report on
Form 8-K filed on August 9, 2018).
List of Subsidiaries
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm
Consent of Crowe LLP, Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of CEO
Rule 13a-14(a)/15d-14(a) Certification of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO
21.1
23.1
23.2
31.1
31.2
32.1
32.2
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan or arrangement
104
Exhibit 21.1
List of Subsidiaries of TriCo Bancshares
Name
Tri Counties Bank
TriCo Capital Trust I
TriCo Capital Trust II
North Valley Capital Trust II
North Valley Capital Trust III
North Valley Capital Trust IV
State of Organization
California state-chartered Bank
Delaware
Delaware
Connecticut
Connecticut
Connecticut
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of TriCo Bancshares (the “Company”) of
our report dated March 1, 2019, relating to the consolidated financial statements of the Company and the effectiveness of
internal control over financial reporting of the Company appearing in this Annual Report (Form 10-K) for the year ended
December 31, 2018.
Registration Statement Form S-8 No. 333-190047,
Registration Statement Form S-8 No. 333-160405,
Registration Statement Form S-8 No. 333-115455,
Registration Statement Form S-8 No. 333-66064, and
Registration Statement Form S-3 No. 333-218577
/s/ Moss Adams LLP
Sacramento, California
March 1, 2019
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-190047, 333-66064, 333-115455, and 333-
160405 on Form S-8 and No. 333-218577 on Form S-3 of TriCo Bancshares of our report dated March 1, 2018 relating to the
consolidated financial statements as of December 31, 2017 and each of the two years in the period ended December 31, 2017
appearing in this Annual Report on Form 10-K.
/s/ Crowe LLP
Sacramento, California
March 1, 2019
105
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. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluations; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
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. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2019
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
106
Exhibit 31.2
Rule 13a-14/15d-14 Certification of CFO
I, Peter G. Wiese, 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. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluations; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
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. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2019
/s/ Peter G. Wiese
Peter G. Wiese
Executive Vice President and Chief Financial Officer
107
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, 2018 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard P. Smith, President and Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo
Bancshares and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Section 1350 Certification of CFO
In connection with the Annual Report of TriCo Bancshares (the “Company”) on Form 10-K for the year ended December 31, 2018 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter G. Wiese, Executive Vice President and
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ Peter G. Wiese
Peter G. Wiese
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.
108