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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, 2020
Commission File Number 0-10661
_____________________
(Exact name of Registrant as specified in its charter)
_____________________
California
(State or other jurisdiction
of incorporation or organization)
63 Constitution Drive, Chico, California
(Address of principal executive offices)
94-2792841
(I.R.S. Employer
Identification No.)
95973
(Zip Code)
Registrant’s telephone number, including area code: (530) 898-0300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Trading
Symbol(s)
TCBK
Name of exchange on which
registered
NASDAQ
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.
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
x Yes o No
o Yes x 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.
x Yes o No
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Indicate by check mark whether the registrant has submitted electronically 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).
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.
x Yes o No
Large accelerated filer
Non-accelerated filer
☒
☐
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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☒ Yes ☐ No
☐ Yes ☒ No
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 2020, was approximately
$893,073,000.
The number of shares outstanding of Registrant’s common stock, as of February 25, 2021, was 29,727,122.
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 annual meeting of shareholders to be held on
May 27, 2021, 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 Registrant’s most recently completed fiscal year, or (ii) included in an amendment to this report
filed with the Commission on Form 10-K/A not later than the end of such 120 day period.
Table of Contents
PART I
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
TABLE OF CONTENTS
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
Signatures
FORWARD-LOOKING STATEMENTS
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Number
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8
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49
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107
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.
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ITEM 1. BUSINESS
PART I
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations,
estimates, and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item
1A of Part I — “Risk Factors.”
As used in this report, “TriCo,” the “Company”, “we,” “our,” and similar terms include TriCo Bancshares and its subsidiaries, unless the context indicates
otherwise.
Overview
TriCo Bancshares is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). TriCo's principal
business is to serve as the holding company for our wholly-owned subsidiary, Tri Counties Bank, a California-chartered commercial bank (the “Bank”)
was established in Chico, California in 1975. TriCo is a California corporation and was incorporated in 1981. Our common stock is traded on the Nasdaq
Global Select Market under the trading symbol "TCBK". 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 Financial Protection & Innovation (the “DFPI”) and the FDIC. See
“Regulation and Supervision.”
In addition, 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 14 – 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. Our website is not incorporated into this report. 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.
Tri Counties Bank
The Bank was organized in 1975 and had total assets of approximately $7.6 billion at December 31, 2020. Based in Chico, California, the Bank offers an
extensive and competitive breadth of consumer, small business and commercial banking services through its network of stand-alone and in-store branches
in communities throughout Northern and Central California. The Bank focuses on relationships and personal contact, emphasizing its Service with
Solutions ®. In addition to its California community bank network, the Bank provides advanced online and mobile banking, a shared nationwide network
of over 32,000 ATMs, and bankers available by phone 7 days per week.
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 at some branches. 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 diverse
number 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, 2020, the Bank’s consumer loans net of deferred fees outstanding were $952,108,000 (20.0%), commercial and industrial loans
(including the Paycheck Protection Program [PPP] loans) outstanding were $526,327,000 (11.1%), real estate construction loans of $284,842,000 (6.0%),
and commercial real estate loans were $2,951,902,000 (62.0%) 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.
Merger with FNB Bancorp
On July 6, 2018, the Company completed its merger with FNB Bancorp (“FNBB”), the bank holding company for First National Bank of Northern
California (“First National Bank”). At July 6, 2018, FNBB had approximately $1.3 billion in assets, $868 million in loans and $995 million in deposits.
FNBB’s results of operations have been included in the Company’s results of operations beginning July 7, 2018.
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Human Capital Resources
At December 31, 2020, we employed 1,068 persons, including five executive officers. Full time equivalent employees were 1,030. Additionally, we at
times will utilize independent contractors and temporary personnel to supplement our workforce. None of our employees are presently represented by a
union or covered under a collective bargaining agreement. Management believes that its employee relations are good.
Our employees are critical to our success and competition for qualified banking personnel has historically been intense. We provide a wide variety of
opportunities for professional growth for all employees with a focus on in-classroom and on-line trainings, on-the-job experience, and education tuition
assistance. We seek to create an engaged workforce through proactive listening, forward looking career conversation and constructive dialogue through
periodic performance discussions as well as employee engagement and exit surveys. In 2020, we launched our diversity, equity and inclusion initiative to
better understand the needs of our employees, customers and communities. It is expected this initiative will continue to develop over time based on our
ongoing dialogue with stakeholders.
We focus on attracting and retaining employees by providing compensation and benefits packages that we believe are competitive within the applicable
market, taking into account the position’s location and responsibilities. We provide competitive health and financial focused benefits such as but not
limited to employer subsidized health insurance, a 401(k) retirement plan and an employee stock ownership plan. In addition, we offer a portfolio of
additional services and tools to support our employees’ health and well-being.
In 2020, in response to COVID-19, we provided administrative paid leave support to employees where operations were closed or impacted, made work
from home options as broadly available as possible, and enhanced safety measures throughout our company, notably for customer-facing employees.
Refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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; with the San Francisco Bay area having a larger number of national and regional banks than the rest of our footprint. Among the
advantages such major banks have over the Bank are their greater ability to finance investments in technology and marketing campaigns and to allocate
their investment assets to regions of high yield and demand. By virtue of their greater total capitalization, such institutions also have substantially higher
lending limits than 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.
As the financial services industry becomes increasingly oriented toward technology-driven delivery systems, we face competition from banks and non-
bank institutions without offices in its primary service area. We also increasingly compete with financial technology or “fin tech” companies for loans
and other financial services customers.
To compete, 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.
Additional Information
Additional information about the Company can be found on our website at www.tcbk.com. Our website is not incorporated into this report. Copies of our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other public filings we make with the Securities and
Exchange Commission (“SEC”) are available free of charge through the investors relations page of our website, www.tcbk.com, as soon as reasonably
practicable after we file these reports with the SEC. The information on our website is not part this annual report.
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.
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Regulatory Agencies
The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. As a bank holding company, the Company is regulated under
the BHC Act, and is subject to supervision, regulation and examination by the FRB. The Company is also under the jurisdiction of the SEC and is subject
to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934, each administered by the SEC. The
Company’s common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol “TCBK” and the Company is, therefore,
subject to the rules of Nasdaq for listed companies.
The Bank 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 DFPI, 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 additional activities that are either (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial
activity, and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, as determined 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. A bank holding company is
required by law 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
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal bank regulatory agencies have established safety and
soundness standards for insured depository institutions covering:
Under FDICIA, the federal ban regulatory agencies have established safety and soundness standards for insured financial institutions covering:
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Internal controls, information systems and internal audit systems;
Loan documentation;
Credit underwriting;
Interest rate exposure;
Asset growth;
Compensation, fees and benefits;
Asset quality, earnings and stock valuation; and
Excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss.
If a federal bank regulatory agency determines that a depository institution fails to meet any standard established by the guidelines, the agency may
require the 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.
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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’s ability to pay dividends on its common stock may be limited 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 DPFI, 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 DPFI 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 Bank’s ability to pay dividends may be limited if the Bank fails to maintain an adequate capital conservation buffer. See “Regulatory Capital
Requirements.”
The FRB, FDIC and the DPFI 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 DPFI could determine that payment of
dividends or other payments by TriCo or the Bank might constitute an unsafe or unsound practice.
The Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires the federal banking regulatory agencies to periodically assess a bank’s record of helping
meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA also requires the agencies to consider a
financial institution’s record of meeting its community credit when evaluating applications for, among other things, domestic branches and mergers or
acquisitions. The federal banking agencies rate depository institutions’ compliance with the CRA. The ratings range from a high of “outstanding” to a low
of “substantial noncompliance.” A less than “satisfactory” rating could result in the suspension of any growth of the Bank through acquisitions or opening
de novo branches until the rating is improved. As of its most recent CRA examination, the Bank’s CRA rating was “Satisfactory.
Consumer Protection Laws
The Bank is subject to many federal consumer protection statues and regulations, some of which are discussed below.
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The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on
the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public
assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
The Truth-in-Lending Act is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit
terms more readily and knowledgeably.
The Fair Housing Act regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin, sex, handicap or familial status.
The Home Mortgage Disclosure Act, which includes a “fair lending” aspect, requires the collection and disclosure of data about applicant and
borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
The Real Estate Settlement Procedures Act requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate
settlements and prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.
In addition, the CFPB has taken a number of actions that may affect the Bank’s operations and compliance costs, including the following:
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The issuance of final rules for residential mortgage lending, which became effective January 10, 2013, including definitions for “qualified
mortgages” and detailed standards by which lenders must satisfy themselves of the borrower’s ability to repay the loan and revised forms of
disclosure under the Truth in Lending Act and the Real Estate Settlement Procedures Act.
Actions taken to regulate and supervise credit bureaus and debt collections.
Positions taken by the 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.
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Data Privacy and Cybersecurity 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.
Data privacy and data protection are areas of increasing state legislative focus. For example, the California Consumer Privacy Act of 2018 (the “CCPA”),
which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection
thresholds. The CCPA gives consumers the right to request disclosure of information collected about them and, whether that information has been sold or
shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s
personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including an
exemption applicable to information that is collected, processed, sold or disclosed pursuant to the Gramm-Leach-Bliley Act. In addition, the California
Attorney General has adopted regulations implementing the CCPA; and the California State Legislature and California voters (through ballot initiative)
have modified the CCPA since its passage. All of the Bank’s branches are in California and are required to comply with the CCPA. In addition, similar
laws may be adopted by other states where we do business. The federal government may also pass additional data privacy or data protection legislation.
Like other lenders, the Bank uses credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act
(“FCRA”), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between
affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on the Company and the Bank.
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 is forced to reduce the level of its assets in order to satisfy regulatory capital requirements, its
ability to generate earnings would be reduced.
We are subject to the capital framework for U.S. banking organizations known as Basel III. Basel III defines several measures of capital and establishes
capital ratios based on a banking organizations levels of capital relative to risk-weighted assets. The risk-weighting of the asset depends on the nature of
the asset but generally ranges from 0% for U.S. government and agency securities, to 1,250% for certain trading securitization exposures, resulting in
higher risk weights for a variety of asset classes than previous regulations.
Under Basel III, we are subject to the following minimum capital ratios (1) common equity Tier 1 capital or “CET1” to risk‑weighted assets of 4.5%; Tier
1 capital (that is, CET1 plus Additional Tier 1 capital) to risk‑weighted assets of 6.0%; Total capital (that is, Tier 1 capital plus Tier 2 capital) to
risk‑weighted assets of 8%; and a leverage ratio (Tier 1 capital to average consolidated assets as reported on regulatory financial statements) of 4.0%. The
Basel III capital framework includes a “capital conservation buffer” of 2.5%, composed entirely of CET1, on top of the minimum risk‑weighted asset
ratios. Banking institutions that fail to maintain a full capital conservation buffer face constraints on dividends, equity repurchases and compensation
based on the amount of the shortfall and the institution’s “eligible retained income” (that is, four quarter trailing net income, net of distributions and tax
effects not reflected in net income). The 2.5% capital conservation buffer effectively results in minimum ratios of (i) CET1 to risk‑weighted assets of at
least 7%, (ii) Tier 1 capital to risk‑weighted assets of at least 8.5%, and (iii) total capital to risk‑weighted assets of at least 10.5%.
We believe that we were in compliance with the requirements of the Basel III capital rules applicable to us as of December 31, 2020. For a discussion of
the regulatory capital requirements, see “Note 26 – Regulatory Matters” to the consolidated financial statements at Part II, Item 8 of this report.
Prompt Corrective Action
Prompt Corrective Action regulations of the federal bank regulatory agencies establish five capital categories in descending order based on an institution’s
regulatory capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the
Prompt Corrective Action framework, insured depository institutions are 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
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Deposit Insurance
Deposit accounts in the Bank are insured by the FDIC, generally up to a maximum of $250,000 per separately insured depositor. The Bank pays deposit
insurance assessments as determined by the FDIC. The assessment rate for an institution 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 bank. The assessment base against which the
assessment rate is applied to determine the total assessment due for a given period is the depository institution’s average total consolidated assets during
the assessment period less average tangible equity during that assessment period. 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.
During 2018, the DIF’s reserves exceeded minimum set by the Dodd-Frank Act and banks with total assets of less than $10 billion, such as the Bank, were
entitled to receive credits to offset the portion of their assessments that helped to raise the DIF reserve ratio. The Bank is generally unable to control the
amount of premiums that it is required to pay for FDIC insurance or the amount of credit, if any, that it may be allowed to offset such assessments. If
there are additional bank or financial institution failures or if the FDIC otherwise determines, the Bank may be required to pay even higher FDIC
premiums than the recently increased levels. Increases in FDIC insurance premiums may have a material and adverse effect on the Company’s earnings
and could have a material adverse effect on the value of, or market for, the Company’s common stock.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that
the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The
termination of deposit insurance for the Bank would also result in the revocation of the Bank’s charter by the DPFI.
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. The 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 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
An investment in our securities is subject to certain risks. Current and prospective investors should carefully consider the following discussion of
significant factors, events, and uncertainties before making investment decisions about our securities. The events and consequences discussed in these risk
factors could, in circumstances we may or may not be able to accurately predict, recognize, or control, have a material adverse effect on our business,
growth, reputation, prospects, financial condition, operating results (including components of our financial results), cash flows, liquidity, and stock price.
These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently
known to us or that we currently do not consider to present significant risks to our operations. In addition to the effects of the COVID-19 pandemic and
resulting disruptions on our business and operations discussed in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and in the risk factors below, additional or unforeseen effects from the COVID-19 pandemic and the global economic climate may
give rise to or amplify many of the risks discussed below.
Risks Related to Our Business and Industry
The COVID-19 pandemic will likely continue to adversely affect our business, financial condition, results of operations and our liquidity.
In response to the COVID-19 pandemic, governments and municipalities around the world have instituted measures in an effort to control the spread of
COVID-19, including quarantines, shelter-in-place orders, physical distancing requirements, and similar government orders and restrictions in order to
control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur, have resulted in non-essential
business closures, work-from-home policies, school closings, travel restrictions, and cancellation or postponement of events, among other effects that
could negatively impact productivity and disrupt our operations and those of our customers. The impacts of the pandemic on our business continue to
evolve, are unpredictable and may continue to adversely affect our business, operations, and financial performance. The pandemic and its effects have
negatively impacted certain areas of consumer and business spending. Businesses nationwide and in the regions and communities in which we operate
have laid off and furloughed significant numbers of employees, leading to record levels of unemployment. These conditions have significantly adversely
affected our customers, including many small and mid-sized businesses, particularly those in the gas station, retail, hotel, hospitality and food, beverage,
and elective healthcare industries, among many others. The United States government has taken steps to attempt to mitigate some of the more severe
anticipated economic effects of the pandemic, including the passage of the Coronavirus Relief and Economic Security Act (“CARES Act”) and
subsequent legislation, but there can be no assurance that such steps or others will be effective or achieve their desired results in a timely fashion.
As a result of the scale of the ongoing pandemic, our revenue growth rate and expense as a percentage of our revenues in future periods may differ
significantly from our historical rate, and our future operating results may fall below expectations.
The future impacts of the ongoing pandemic on our business, operations and future financial performance could include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
increased loan deferrals, loan delinquencies and subsequent credit losses resulting from the weakened financial condition of our borrowers as a
result of the outbreak and related governmental actions;
the negative effect on earnings resulting from the Bank modifying loans and agreeing to loan payment deferrals due to the COVID-19 crisis;
declines in the value of collateral securing loans we have made;
court closures and temporary foreclosure and eviction protection laws, even when a customer is in breach of its obligations to us, are likely to
restrict our ability to realize the value of collateral;
disruption in the businesses of third parties upon who we rely, including outages at network providers and other service providers and suppliers;
increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;
decreased loan growth as a result of diminished demand or increased levels of prepayments;
decreased interest and non-interest income;
continued decreased demand for certain bank products and services;
declines in the value of securities we own, credit ratings downgrades, deterioration in issuers’ financial condition or a decline in the liquidity for
debt securities;
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions;
reduced workforce numbers or capacity which may be caused by, but not limited to, illness, quarantine, stay at home or other government
mandates, or difficulties transitioning back to an in-office environment;
continued high levels of unemployment due to decreased operations or closures of businesses could have a negative impact on our customer’s
ability to repay their loans as well as a decrease in the customer deposit base as they use their savings to pay current expenses;
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•
•
•
•
•
•
laws related to benefits and the treatment of employees, for example, mandating coverage of certain COVID-19 related testing and treatment,
mandating additional paid or unpaid leave or expanding workers compensation coverage;
volatile market prices of investment securities, including the valuation of our common stock;
unavailability of key personnel or a significant number of our employees due to the effects and restrictions of a COVID-19 outbreak within our
market area;
the protracted COVID-19 pandemic could further negatively affect the carrying amount of our goodwill, indefinite-lived intangibles and long-
lived assets and result in realized losses on our financial assets, which would adversely impact our results of operations and the ability of our
bank subsidiary to pay dividends to us;
increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic on market and
economic conditions and actions governmental authorities take in response to those conditions; and
additional costs to remedy damages, losses or disruption caused by such events.
The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and
social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the
best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by
the virus or will otherwise be satisfactory to government authorities.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments,
which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to
contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. The longer the public
health crisis lasts, and the greater its severity, the greater the likely material adverse impact on the economy, our customers and our business and financial
performance. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the
virus’s economic impact and any recession that has occurred or may occur in the future.
The prolonged and broad-based shift to a remote working environment continues to create inherent productivity, connectivity, and oversight challenges
and could affect our ability to enhance, develop and support existing products and services, conduct marketing events, and generate new customers,
among others. In addition, the changed environment under which we are operating could have an effect on our internal controls over financial reporting as
well as our ability to meet a number of our compliance requirements in a timely or quality manner.
We believe the effects of the pandemic will have (at least in the short term) a material impact on our results of operations and heighten many of our known
risks described in the “Risk Factors” section of this Annual Report on Form 10-K.
Our participation in the Paycheck Protection Program (“PPP”) could expose us to additional risks.
Federal and state governments have enacted laws intending to stimulate the economy in light of the business and market disruptions related to COVID-19.
Since March 2020, the federal government has enacted a number of economic stimulus packages, including the $2.0 trillion CARES Act, which, among
other things, initiated the PPP. On April 16, 2020, the original $349.0 billion of funding under the PPP was exhausted, and on April 24, 2020, the Federal
Government allocated an additional $310.0 billion to the program. Our Bank participated as a lender in both the initial and second rounds of the PPP,
which was designed to help small businesses maintain their workforce during the COVID-19 pandemic. Effective January 19, 2021 the new round of PPP
loans became available pursuant to the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act, making an additional $284.5 billion
available to qualified borrowers. The Bank is participating in the newest round.
PPP loans are fully guaranteed by the SBA and we believe a significant majority of these loans will be forgiven under the terms of the PPP program.
However, there can be no assurance that the borrowers will use or have used the funds appropriately or will have satisfied the staffing or payment
requirements to qualify for forgiveness in whole or in part. Any portion of the loan that is not forgiven must be repaid by the borrower. In the event of a
loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was
originated, funded or serviced by us, which may or may not be related to an ambiguity in the laws, rules or guidance regarding operation of the PPP, the
SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if we have already been paid under the guaranty, seek recovery from
us of any loss related to the deficiency.
Several large banks have been subject to litigation regarding the process and procedures they used in processing applications for the PPP. We may be
exposed to the risk of similar litigation, from both customers and non-customers that approached us regarding PPP loans. If any such litigation is filed
against us and is not resolved in a manner favorable to the Bank, it may result in significant financial liability or adversely affect our reputation. In
addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation
could have a material adverse impact on our business, financial condition and results of operations.
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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 credit losses may not be adequate to cover actual losses.
Like other financial institutions, we maintain an allowance for credit losses to provide for loan defaults and non-performance. Our allowance for credit
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. Our allowance for credit 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 actual and forecast economic factors. Determining
an appropriate level of allowance is an inherently difficult process and is based on numerous assumptions. The actual amount of future losses is
susceptible to changes in economic, operating and other conditions, including changes in interest rates, unemployment and gross domestic product that
may be beyond our control and these losses may exceed current estimates. Further impacting the sufficiency of our allowance for loan losses is the
implementation of a new accounting standard, “Measurement of Credit Losses on Financial Instruments,” commonly referred to as the “Current Expected
Credit Losses” standard, or “CECL,” which was effective on January 1, 2020. CECL changed the allowance methodology from an incurred loss concept
to an expected loss concept, which is more dependent on future economic forecasts, assumptions and models than previous methodology, which could
result in increases and add volatility to our allowance for credit losses and future provisions for loan losses. These forecasts, assumptions and models are
inherently uncertain and are based upon our management’s reasonable judgment in light of information currently available.
In addition to periodic reviews completed by independent third parties retained by the Bank, Federal and state bank regulatory agencies, as an integral part
of their examination process, review our loans and allowance for credit losses. While we believe that our allowance for credit losses is adequate to cover
these estimated future losses, we cannot assure you that we will not increase the allowance for credit losses further or that the allowance will be adequate
to absorb credit losses we actually incur. Either of these occurrences could have a material adverse effect on our business, financial condition and results
of operations.
Our business may be adversely affected by business conditions in northern and central California.
We conduct most of our business in northern and central California. As a result of this geographic concentration, our financial results may be impacted by
economic conditions in California. Deterioration in the economic conditions in California could result in the following consequences, any of which could
have a material adverse effect on our business, financial condition, results of operations and cash flows:
•
•
•
•
problem assets and foreclosures may increase,
demand for our products and services may decline,
low cost or non-interest bearing deposits may decrease, and
collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the
value of assets and collateral associated with our existing loans.
In view of the concentration of our operations and the collateral securing our loan portfolio in both northern and central California, we may be particularly
susceptible to the adverse effects of any of these consequences, any of which could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
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 obtain adequate insurance or 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.
A significant majority of the loans in our portfolio are secured by California real estate and a decline in real estate values could hurt our business.
A downturn in real estate values in the markets 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
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in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies. Real
estate values could also be affected by, among other things, earthquakes, drought and national disasters. 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, 2020, approximately 86.3% 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. Any such
decline 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. When applicable, we establish contingent liability reserves for this purpose based on future reasonable and
estimable costs developed by qualified soil and chemical engineering consultants. If we become subject to significant environmental liabilities or if our
contingency reserve estimates are incorrect, our business, financial condition, results of operations and cash flows could be materially adversely affected.
We face strong competition from financial services companies and other companies that offer banking services, which could materially and adversely
affect our business.
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 that are 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, financial technology (or “fintech”) companies that rely on technology to provide financial services, often without many of the
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.
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.
We may need to raise additional capital in the future and such capital may not be available when needed or at all.
We are required by federal and state regulators to maintain adequate levels of capital. We may need to raise additional capital in the future to meet
regulatory or other internal requirements. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital
markets at that time, which are outside of our control, and our financial performance.
We cannot provide any assurance that access to such capital will be available to us on acceptable terms or at all. Any occurrence that may limit our access
to the capital markets, such as a decline in the confidence of investors or counter-parties participating in the capital markets, may materially and adversely
affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so
when many other financial institutions are also seeking to raise capital and we would then have to compete with those institutions for investors. The
inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition, or results
of operations.
Economic uncertainty or instability caused by political developments can hurt our businesses.
The economic environment and market conditions in which we operate continue to be uncertain due to political developments in the U.S. and other
countries. Certain policy initiatives and proposals could cause a contraction in U.S. and global economic growth and higher volatility in the financial
markets, including:
•
inability to reach political consensus to keep the U.S. government open and funded,
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the introduction of tariffs and other protectionist trade policies, or
the possible withdrawal or reduction of government support for the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation (together, the “GSEs”).
•
•
These types of political developments, and uncertainty about the possible outcomes of these developments, could:
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•
•
erode investor confidence in the U.S. economy and financial markets, which could potentially undermine the status of the U.S. dollar as a safe
haven currency,
provoke retaliatory countermeasures by other countries and otherwise heighten tensions in diplomatic relations,
increase concerns about whether the U.S. government will be funded, and its outstanding debt serviced, at any particular time, and
result in periodic shutdowns of the U.S. government or governments in other countries.
These factors could lead to:
•
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•
•
•
•
greater market volatility,
large-scale sales of government debt and other debt and equity securities in the U.S. and other countries,
the widening or narrowing of credit spreads,
inflationary pressures,
lower investment growth, and
other market dislocations.
Additional areas of uncertainty include, among others, geopolitical tensions and conflicts, pandemics and electorate volatility.
Any of these potential outcomes could cause us to suffer losses in our investment securities portfolio, reduce our liquidity and capital levels, hamper our
ability to deliver products and services to our clients and customers, and weaken our results of operations and financial condition.
Risks Related to Interest Rates
Historically low interest rates may make it difficult for us to improve or maintain our current interest income spread and could result in reduced earnings.
Our earnings are largely derived from net interest income, which is interest income earned on loans and investments, less interest paid on deposits and
other borrowings.
Interest rates are highly sensitive to many factors that are beyond the control of our management, including general economic conditions and the policies
of various governmental and regulatory authorities. The actions of the Federal Reserve influence the rates of interest that we charge on loans and that we
pay on borrowings and interest-bearing deposits. The Federal Reserve lowered the primary credit rate by 50 and 100 basis points on March 3 and March
15, 2020, respectively, for a total of 150 basis points to 0.25% to mitigate the effects of the COVID-19 pandemic and to support the liquidity and stability
of banking institutions as they serve the increased demand for credit. We cannot predict the nature or timing of future changes in monetary, tax and other
policies or the effects that they may have on our activities and financial results.
Historically low rates for an extended period of time could result in reduced returns from our investment and loan portfolio. If short-term interest rates
remain at their historically low levels for a prolonged period and assuming longer-term interest rates fall further, we could experience further net interest
margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in
tandem. Such an occurrence would have an adverse effect on our net interest income and could have an adverse effect on our business, financial condition
and results of operations.
We expect a long duration of reduced interest rates to negatively impact our net interest income, margin, cost of borrowing and future profitability and
continue to have a material adverse effect on our financial results for at least through 2021.
Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.
Like other financial institutions, we are subject to risks resulting from changes in interest rates. 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. Because of the
differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates may not
produce matching changes in interest income we earn on interest-earning assets and interest we pay on interest-bearing liabilities. Accordingly,
fluctuations in interest rates could adversely affect our interest rate spread and, in turn, our profitability.
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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.
Although we were successful in generating new loans during 2020, 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. To
supplement our organic loan growth, we from time-to-time will purchase loans from third parties that may have lower yields than those loans that we
originate on our own.
Additionally, interest rate increases often result in larger payment requirements for our borrowers with variable rate loans, which increases the potential
for default and could result in a decrease in the demand for loans. At the same time, the marketability of the property securing a loan may be adversely
affected by any reduced demand resulting from higher interest rates. An increase in interest rates that adversely affects the ability of borrowers to pay the
principal or interest on loans may lead to an increase in nonperforming assets and a reversal of income previously recognized, which could have an
adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest
receivable, which decreases interest income. At the same time, we continue to incur costs to fund the loan, which is reflected as interest expense, without
any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on
net interest income. Furthermore, 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. Furthermore, 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.
Reduction in the value, or impairment of our investment securities, can impact our earnings and common shareholders’ equity.
We maintained a balance of $1.7 billion, or approximately 22.3% of our assets, in investment securities at December 31, 2020. 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.
Changes to LIBOR may adversely affect the value of, and the return on, our financial instruments that are indexed to LIBOR.
In July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates
for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement indicates that the continuation of LIBOR on the current basis
cannot and will not be guaranteed after 2021. In November 2020, the LIBOR administrator published a consultation regarding its intention to delay the
date on which it will cease publication of U.S. dollar LIBOR from December 31, 2021 to June 30, 2023 for the most common tenors of U.S. dollar
LIBOR, including the three-month LIBOR, but indicated no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021.
Publication of non-U.S. dollar LIBOR would continue to cease after December 31, 2021. Notwithstanding the publication of this consultation, there is no
assurance of how long LIBOR of any currency or tenor will continue to be published. It is impossible to predict whether and to what extent banks will
continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published before December 31, 2021 or
June 30, 2023, as applicable, or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Although the Alternative
Reference Rates Committee has announced Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR, SOFR may not gain
market acceptance or be widely used as a benchmark. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or
replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our financial instruments.
Risks Related to Regulatory and Legal Matters
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.
Any additional regulations are expected to increase our cost of operations. Furthermore, 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 DPFI, FDIC, and the FRB. See Item 1—Regulation and Supervision of this
report for information on the regulation and supervision which governs our activities. Regulatory authorities have extensive discretion in their supervisory
and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our
allowance for loan losses. Banking regulations, designed primarily for the protection of depositors, may limit our growth and the return to our
shareholders by restricting certain of our activities, such as:
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the payment of dividends to our shareholders,
possible mergers with or acquisitions of or by other institutions,
desired investments,
loans and interest rates on loans,
interest rates paid on deposits,
service charges on deposit account transactions,
the possible expansion or reduction of branch offices, and
the ability to provide new products or 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 us and our financial
performance. We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes
may have on our future business and earnings prospects. Any change in such regulation and oversight, whether in the form of regulatory policy,
regulations, legislation or supervisory action, may have a material adverse impact on our operations, including the cost to conduct business.
Risks Related to Our Growth and Expansion
Goodwill resulting from acquisitions may adversely affect our results of operations.
Our 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,
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,
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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 Ownership of Our Common Stock
Our ability to pay dividends is subject to legal and regulatory 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 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, 2020, directors and executive officers beneficially owned approximately 4.0% of our common stock and our Employee Stock
Ownership Plan (“ESOP”) owned approximately 4.1%. Agreements with our senior management also provide for significant payments under certain
circumstances following a change in control. These compensation arrangements, together with the common stock beneficially owned by our board of
directors, management, and the ESOP, could make it difficult or expensive to obtain majority support for shareholder proposals or potential acquisition
proposals of us that our directors and officers oppose.
Holders of our junior subordinated debentures have rights that are senior to those of our common stockholders.
We have supported our growth through the prior issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated
debentures. At December 31, 2020, 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
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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 Operations, Technology 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.
A failure or breach, including cyberattacks, of our operational or security systems, could disrupt our business, result in the disclosure of confidential
information, damage our reputation, and create significant financial and legal exposure.
Although we devote significant resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our
computer systems, software, networks, and other technology assets and the confidentiality, integrity, and availability of information belonging to us and
our customers, there is no assurance that our security measures will provide absolute security. Further, to access our products and services our customers
may use computers and mobile devices that are beyond our security control systems. In fact, many other financial services institutions and companies
engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and
targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often
through the introduction of computer viruses or malware, ransomware, cyberattacks, and other means. Certain financial institutions in the United States
have also experienced attacks from technically sophisticated and well-resourced third parties that were intended to disrupt normal business activities by
making internet banking systems inaccessible to customers for extended periods. These “denial-of-service” attacks have not breached our data security
systems, but require substantial resources to defend, and may affect customer satisfaction and behavior.
Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures
against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because
security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or associated with external service
providers or who may be linked to terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce
employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients.
We have implemented employee and customer awareness training around phishing, malware, and other cyber risks. These risks may increase in the future
as we continue to increase our electronic payments and other internet-based product offerings and expand our internal usage of web-based products and
applications.
If our security systems were penetrated or circumvented, it could cause serious negative consequences for us, including significant disruption of our
operations, misappropriation of our confidential information or that of our customers, or damage our computers or systems and those of our customers and
counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our
security measures, customer dissatisfaction, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect
on us.
Our reliance on third-party vendors exposes us to risks, including additional cybersecurity risks.
Third-party vendors provide key components of our business infrastructure, including certain data processing and information services. On our behalf,
third-parties may transmit confidential, propriety information. Although we require third-party providers to maintain certain levels of information security,
such providers may remain vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious attacks that could ultimately
compromise sensitive information. While we may contractually limit our liability in connection with attacks against third-party providers, we remain
exposed to the risk of loss associated with such vendors.
In addition, a number of our vendors are large national entities with dominant market presence in their respective fields. Their services could prove
difficult to replace in a timely manner if a failure or other service interruption were to occur. Failures of certain vendors to provide contracted services
could adversely affect our ability to deliver products and services to our customers and cause us to incur significant expense.
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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, cloud services 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 cybersecurity 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, digital
and other internet-based product offerings and expands our internal usage of web-based products and applications. A cybersecurity 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. Cybersecurity 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.
Cybersecurity and data privacy are areas of heightened legislative and regulatory focus.
As cybersecurity and data privacy risks for banking organizations and the broader financial system have significantly increased in recent years,
cybersecurity and data privacy issues have become the subject of increasing legislative and regulatory focus. The federal bank regulatory agencies have
proposed enhanced cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service
providers, including TriCo and its bank subsidiary, and would focus on cyber risk governance and management, management of internal and external
dependencies, and incident response, cyber resilience and situational awareness. Several states have also proposed or adopted cybersecurity legislation and
regulations, which require, among other things, notification to affected individuals when there has been a security breach of their personal data. For more
information regarding cybersecurity regulation, refer to the “Supervision and Regulation” section of this report.
We receive, maintain and store non-public personal information of our customers and counterparties, including, but not limited to, personally identifiable
information and personal financial information. The sharing, use, disclosure, and protection of this information are governed by federal and state law.
Both personally identifiable information and personal financial information is increasingly subject to legislation and regulation, the intent of which is to
protect the privacy of personal information that is collected and handled. For example, the CCPA, as amended, applies to for-profit businesses that
conduct business in California and meet certain revenue or data collection thresholds, including TriCo. For more information regarding data privacy
regulation, refer to the “Supervision and Regulation” section of this report.
We may become subject to new legislation or regulation concerning cybersecurity or the privacy of personally identifiable information and personal
financial information or of any other information we may store or maintain. We could be adversely affected if new legislation or regulations are adopted
or if existing legislation or regulations are modified such that we are required to alter our systems or require changes to our business practices or privacy
policies. If cybersecurity, data privacy, data protection, data transfer or data retention laws are implemented, interpreted or applied in a manner
inconsistent with our current practices, we may be subject to fines, litigation or regulatory enforcement actions or ordered to change our business
practices, policies or systems in a manner that adversely impacts our operating results. In addition, any additional laws will result 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. In addition, advances in technology such as digital, mobile, telephone, text, and on-line banking; e-
commerce; and self-service automatic teller machines and other equipment, as well as changing customer preferences to access our products and services
through digital channels, could decrease the value of our store network and other assets. We may close or sell certain branches and restructure or reduce
our remaining branches and work force. These actions could lead to losses on assets, expense to reconfigure branches and loss of customers in certain
markets. As a result, our business, financial condition or results of operations may be adversely affected.
We can be negatively affected if we fail to identify and address operational risks associated with the introduction of or changes to products, services and
delivery platforms.
When we launch a new product or service, introduce a new platform for the delivery or distribution of products or services (including mobile connectivity
and cloud computing), or make changes to an existing product, service or delivery platform, it may not fully appreciate or identify new operational risks
that may arise from those changes, or may fail to implement adequate controls to mitigate the risks associated with those changes. Any significant failure
in this regard could diminish our ability to operate one or more of our businesses or result in:
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potential liability to clients, counterparties and customers
increased operating expenses
higher litigation costs, including regulatory fines, penalties and other sanctions
damage to our reputation
impairment of our liquidity
regulatory intervention, or
weaker competitive standing.
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Any of the foregoing consequences could materially and adversely affect our businesses and results of operations.
TriCo’s risk management framework may not be effective in identifying and mitigating every risk to us.
Any inadequacy or lapse in our risk management framework, governance structure, practices, models or reporting systems could expose it to unexpected
losses, and our financial condition or results of operations could be materially and adversely affected. Any such inadequacy or lapse could:
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hinder the timely escalation of material risk issues to TriCo’s senior management and the Board of Directors
lead to business decisions that have negative outcomes for us
require significant resources and time to remediate
lead to non-compliance with laws, rules and regulations
attract heightened regulatory scrutiny
expose us to regulatory investigations or legal proceedings
subject us to litigation or regulatory fines, penalties or other sanctions
harm our reputation, or
otherwise diminish confidence in TriCo.
We rely on data to assess many of our various risk exposures. Any deficiencies in the quality or effectiveness of our data gathering, analysis and validation
processes could result in ineffective risk management practices. These deficiencies could also result in inaccurate risk reporting.
General Risk Factors
We depend on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
Our future operating results depend substantially upon the continued service of our executive officers and key personnel. Our future operating results also
depend in significant part upon our ability to attract and retain qualified management, financial, technical, marketing, sales and support personnel.
Competition for qualified personnel is intense, and we cannot ensure success in attracting or retaining qualified personnel. There may be only a limited
number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time.
Our business, financial condition or results of operations could be materially adversely affected by the loss of any of our key employees, or our inability to
attract and retain skilled employees.
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.
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, have created 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
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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 our 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.
Tax regulations could be subject to potential legislative, administrative or judicial changes or interpretations.
Federal income tax treatment of corporations may be clarified and/or modified by legislative, administrative or judicial changes or interpretations at any
time. Given the current economic and political environment, and ongoing budgetary pressures, the enactment of new federal or state tax legislation or new
interpretations of existing tax laws could occur. The enactment of such legislation, or changes in the interpretation of existing law may have a material
adverse effect on our financial condition, results of operations, and liquidity.
In the normal course of business, we are routinely subjected to examinations and audits from federal, state, and local taxing authorities regarding tax
positions taken by us and the determination of the amount of tax due. These examinations may relate to income, franchise, gross receipts, payroll,
property, sales and use, or other tax returns. The challenges made by taxing authorities may result in adjustments to the amount of taxes due, and may
result in the imposition of penalties and interest. If any such challenges are not resolved in our favor, they could have a material adverse effect on our
financial condition, results of operations, and liquidity.
Claims, Litigation, Government Investigations, and Other Proceedings May Adversely Affect Our Business and Results of Operations
As a community financial institution, we are at times subject to actual and threatened claims, litigation, reviews, investigations, and other proceedings,
including proceedings by governments and regulatory authorities, involving a wide range of issues, including labor and employment, data protection, data
security, network security, consumer protection, commercial disputes, goods and services offered by us and by third parties, and other matters. Any of
these types of proceedings can have an adverse effect on us because of legal costs, disruption of our operations, diversion of management resources,
negative publicity, and other factors. The outcomes of these matters are inherently unpredictable and subject to significant uncertainties. Determining legal
reserves for possible losses from such matters involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. Until the
final resolution of such matters, we may be exposed to losses in excess of the amount recorded, and such amounts could be material. Should any of our
estimates and assumptions change or prove to have been incorrect, it could have a material effect on our business, consolidated financial position, results
of operations, or cash flows. In addition, it is possible that a resolution of one or more such proceedings, including as a result of a settlement, could
involve licenses, sanctions, consent decrees, or orders requiring us to make substantial future payments, preventing us from offering certain products or
services, requiring us to change our business practices in a manner materially adverse to our business, requiring development of non-infringing or
otherwise altered products or technologies, damaging our reputation, or otherwise having a material effect on our operations.
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.
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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company is engaged in the banking business through 66 traditional branches, 7 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, 2020, the Company owned 32 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, 7 in-store branch
locations, and two loan production offices. 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.
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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:
2020
Fourth quarter
Third quarter
Second quarter
First quarter
2019
Fourth quarter
Third quarter
Second quarter
First quarter
High
Low
35.70 $
30.88 $
32.80 $
40.81 $
41.25 $
39.06 $
41.23 $
40.36 $
24.58
23.43
24.40
24.49
35.05
34.81
37.30
33.79
$
$
$
$
$
$
$
$
As of February 25, 2021, there were approximately 1,679 shareholders of record of the Company’s common stock. On February 25, 2021, the closing
market price was $44.12 per share.
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, 2020, there was $111,492,000
available for payment of dividends by the Bank to the Company, under applicable laws and regulations. See “Note 27 – Summary of Quarterly Results of
Operations (unaudited)” for the quarterly cash dividends paid by the Company in 2020 and 2019.
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
11/12/2019
Total shares
approved
for purchase
Total shares
repurchased
under the plan
Expiration
date
1,525,000
858,717
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 2020:
Period
October 1-31, 2020
November 1-30, 2020
December 1-31, 2020
Total
(a) Total
number of
shares
purchased
(b) Average
price
paid per share
— $
17,714 $
27,141 $
44,855 $
—
33.58
34.15
33.92
(c) Total number
of shares
purchased as of
part
of publicly
announced
plans or
programs
(d) Maximum
number
of shares that
may
yet be
purchased under
the plans
or programs (1)
—
17,714
27,141
44,855
711,138
693,424
666,283
666,283
(1) Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive
plans.
21
Table of Contents
TriCo Bancshares Stock Performance
The following graph presents the cumulative total yearly shareholder return from investing $100 on December 31, 2015, in each of TriCo common stock,
the Russell 3000 Index, and the SNL Western Bank Index. The SNL Western Bank Index compiled by SNL Financial includes banks located in
California, Oregon, Washington, Montana, Hawaii and Alaska with market capitalization similar to that of TriCo’s. The amounts shown assume that any
dividends were reinvested.
Index
TriCo Bancshares
Russell 3000 Index
SNL Western Bank Index
Equity Compensation Plans
Period Ending
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
100.00
100.00
100.00
127.23
112.74
110.86
143.48
136.56
123.61
130.42
129.40
97.86
160.92
169.54
119.35
143.26
204.95
88.08
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, 2020. All of our equity compensation plans have been approved by shareholders.
Plan category
Equity compensation plans not approved by shareholders
Equity compensation plans approved by shareholders
Total
(a) Number of
securities to
be issued upon
exercise
of outstanding
options,
options, warrants and
rights
(b) Weighted
average
exercise price of
outstanding
options,
warrants and
rights
(c) Number of securities
remaining available
for issuance under future
equity compensation plans
(excluding securities
reflected in column (a))
— $
128,500 $
128,500 $
—
17.72
17.72
—
1,222,011
1,222,011
22
Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our consolidated financial statements. This data should be read in
connection with our consolidated financial statements and the related notes located at Item 8 of this report.
Year ended December 31,
Interest income
Interest expense
Net interest income
(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
TRICO BANCSHARES
Financial Summary
(In thousands, except per share amounts; unaudited)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2020
267,184
(9,457)
257,727
(42,813)
55,194
(182,758)
87,350
(22,536)
64,814
2.17
2.16
0.88
31.12
23.09
29,917
30,028
29,727
$
$
$
$
$
$
$
2019
272,444
(15,375)
257,069
1,690
53,520
(185,457)
126,822
(34,750)
92,072
3.02
3.00
0.82
29.70
21.69
30,478
30,645
30,524
$
$
$
$
$
$
$
2018
228,218
(12,872)
215,346
(2,583)
49,061
(168,472)
93,352
(25,032)
68,320
2.57
2.54
0.70
27.20
18.97
26,593
26,880
30,417
$
$
$
$
$
$
$
2017
181,402
(6,798)
174,604
(89)
49,452
(146,455)
77,512
(36,958)
40,554
1.77
1.74
0.66
22.03
19.01
22,912
23,250
22,956
0.91 %
7.18 %
3.96 %
58.40 %
12.66 %
40.58 %
12.11 %
15.20 %
1.43 %
10.49 %
4.47 %
59.71 %
13.97 %
27.15 %
14.01 %
15.10 %
1.24 %
10.75 %
4.30 %
63.72 %
11.52 %
27.24 %
13.02 %
14.40 %
0.89 %
8.10 %
4.22 %
65.37 %
10.99 %
37.30 %
10.62 %
14.07 %
2016
173,708
(5,721)
167,987
5,970
44,678
(146,112)
72,523
(27,712)
44,811
1.96
1.94
0.60
20.87
17.77
22,814
23,087
22,868
1.02 %
9.46 %
4.23 %
68.71 %
10.84 %
30.60 %
10.57 %
14.65 %
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)
$
$
1,719,102
4,763,127
7,639,529
2,581,517
6,505,934
26,914
57,635
925,114
686,409
$
$
1,345,954
4,307,366
6,471,181
1,832,665
5,366,994
18,484
57,232
906,570
662,141
$
$
1,580,096
4,022,014
6,352,441
1,760,580
5,366,466
15,839
57,042
827,373
577,121
$
$
1,262,683
3,015,165
4,761,315
1,368,218
4,009,131
122,166
56,858
505,808
436,323
$
$
1,162,769
2,759,593
4,517,968
1,275,745
3,895,560
17,493
56,667
477,347
406,473
(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.
23
Table of Contents
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 may be
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 and Item 8 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 credit 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 credit 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.
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, 2020 and 2019, the outstanding carrying value of purchased loans that were not
acquired in a business combination totaled $96,621,000 and $52,678,000, respectively.
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.
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
Reversal of (provision for) loan losses
Noninterest income
Noninterest expense
Provision for income taxes
Net income
Net income per average fully-diluted share
Net income as a percentage of average shareholders’ equity (ROAE)
Net income as a percentage of average total assets (ROAA)
Year ended December 31,
2019
2018
2020
$
257,727
$
257,069
$
215,346
(42,813)
55,194
(182,758)
(22,536)
64,814
2.16
7.18 %
0.91 %
$
$
1,690
53,520
(185,457)
(34,750)
$
$
92,072
3.00
$
$
(2,583)
49,061
(168,472)
(25,032)
68,320
2.54
10.49 %
1.43 %
10.75 %
1.24 %
24
Table of Contents
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:
Purchased loan discount accretion
Effect on average loan yield
Effect of purchased loan discount accretion on net interest margin (FTE)
Year ended December 31,
2019
2018
2020
$
267,184
$
272,444
$
228,218
(9,457)
257,727
1,069
(15,375)
257,069
1,201
(12,872)
215,346
1,304
$
258,796
$
258,270
$
216,650
3.96 %
4.47 %
4.30 %
$
8,171
$
8,137
$
5,271
0.19 %
0.13 %
0.20 %
0.11 %
0.15 %
0.10 %
Net interest income (FTE) during the year ended December 31, 2020 increased $526,000 or 0.2% to $258,796,000 compared against $258,270,000 during
the year ended December 31, 2019. The relatively unchanged amount of net interest income is reflective of the declining rate environment during the year
ended December 31, 2020, as total average loan balances increased by approximately $534,912,000 in 2020, and excluding PPP loans, average loan
balances increased by approximately $250,586,000 compared to December 31, 2019. The yield on interest earning assets was 4.11% and 4.74% for the
year ended December 31, 2020 and 2019, respectively. This 63 basis point decrease in total earning asset yield was primarily attributable to a 33 basis
point decrease in non-PPP loan yields and a 75 basis point decrease in yields on total investments. Of the 33 basis point decrease in yields on loans, a 32
basis point decline was attributable to decreases in market rates, offset partially by 1 basis point from the accretion of purchased loans. The decreases in
yields on earning assets are consistent with decreased funding expenses as the costs of total interest bearing liabilities decreased 17 basis points to 0.25%
during the year ended December 31, 2020, as compared to 0.42% for the year ended December 31, 2019. During the same period, costs associated with
interest bearing deposits decreased by 15 basis points to 0.18% as compared to 0.33% in the prior year. The decrease in interest expense for the year
ended December 31, 2020, as compared to the trailing year, was due largely to the decreased rate environment benefiting both the interest-bearing deposit
expense and other borrowings interest expense.
Net interest income (FTE) during the year ended December 31, 2019 increased $41,620,000 or 19.2% to $258,270,000 compared to $216,650,000 during
the year ended December 31, 2018. The increase was substantially attributable to changes in volume of earning assets from the acquisition of FNB
Bancorp in July 2018, in addition to organic loan growth experienced during 2019. The yield on interest earning assets was 4.74% and 4.55% for the year
ended December 31, 2019 and 2018, respectively. This 19 basis point increase in total earning asset yield was primarily attributable to a 20 basis point
increase in loan yields and a 11 basis point increase in yields on total investments. Of the 20 basis point increase in yields on loans, 15 basis points was
attributable to increases in market rates while 5 basis points was from accretion of purchased loans. The increases in yields on earning assets were partially
offset by increased funding expenses as the costs of total interest bearing liabilities increased 3 basis points to 0.42% during the year ended December 31,
2019, as compared to 0.39% for the year ended December 31, 2018. During the same period, costs associated with interest bearing deposits increased by
10 basis points to 0.33% as compared to 0.23% in the prior year. The increase in interest expense for the year ended December 31, 2019 as compared to
the prior period was due largely to the increases in the average balances of interest-bearing liabilities associated with the acquisition of FNB Bancorp,
offset partially by reductions in the average balance of other borrowings.
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 27 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 2020 and 2019.
25
Table of Contents
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):
Year ended December 31,
2020
Interest
Income/
Expense
Average
Balance
Rates
Earned
/Paid
Average
Balance
2019
Interest
Income/
Expense
Rates
Earned
/Paid
Average
Balance
2018
Interest
Income/
Expense
Rates
Earned
/Paid
$ 4,361,679 $ 223,086
5.11 % $ 4,111,093 $ 223,750
5.44 % $ 3,548,498 $ 186,117
5.24 %
284,326
10,635
3.74 %
—
—
— %
—
—
— %
Assets:
Loans
PPP Loans
Investment securities—taxable
1,302,367
28,659
2.20 %
1,360,793
41,095
3.02 %
1,241,829
35,702
2.87 %
Investment securities—nontaxable (1)
116,717
4,636
3.97 %
133,733
5,203
3.89 %
142,146
5,649
3.97 %
Total investments
1,419,084
33,295
2.35 %
1,494,526
46,298
3.10 %
1,383,975
41,351
2.99 %
Cash at Federal Reserve and other
banks
467,376
1,237
0.26 %
171,021
3,597
2.10 %
109,352
2,054
1.88 %
Total interest-earning assets
6,532,465
268,253
4.11 %
5,776,640
273,645
4.74 %
5,041,825
229,522
4.55 %
Other assets
Total assets
Liabilities and shareholders’ equity:
590,966
$ 7,123,431
660,455
$ 6,437,095
496,323
$ 5,538,148
Interest-bearing demand deposits
$ 1,313,804
332
0.03 % $ 1,254,375
0.09 % $ 1,075,331
945
0.09 %
Savings deposits
Time deposits
Total interest-bearing deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
2,015,134
397,216
3,726,154
28,863
57,426
3,812,443
2,289,168
119,710
902,110
Total liabilities and shareholders’ equity
$ 7,123,431
1,089
4,892
5,735
2,595
3,958
6,885
2,555
9,457
0.13 %
1,883,964
1.00 %
446,142
0.26 %
1,610,202
1.29 %
378,058
0.18 %
3,584,481
11,716
0.33 %
3,063,591
17
0.06 %
4.45 %
15,484
57,133
387
2.50 %
154,372
3,272
5.73 %
56,950
2,803
3,248
6,996
2,745
3,131
0.17 %
0.86 %
0.23 %
1.78 %
5.50 %
0.25 %
3,657,098
15,375
0.42 %
3,274,913
12,872
0.39 %
1,780,746
121,933
877,318
$ 6,437,095
1,531,383
74,113
657,739
$ 5,538,148
Net interest spread (2)
3.86 %
4.32 %
4.16 %
Net interest income and interest margin (3)
$ 258,796
3.96 %
$ 258,270
4.47 %
$ 216,650
4.30 %
(1) The fully-taxable equivalent (FTE) adjustment for interest income of non-taxable investment securities was $1,069, $1,200, and $1,304 for the years
ended December 31, 2020, 2019 and 2018, 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.
26
Table of Contents
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
2020 over 2019
Rate
Total
Volume
2019 over 2018
Rate
Total
Increase in interest income:
Loans
$
Investment securities—taxable
Investment securities—nontaxable
Cash at Federal Reserve and other banks
Total interest-earning assets
Increase in interest expense:
Interest-bearing demand deposits
Savings deposits
Time deposits
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
29,099
(1,764)
(662)
6,223
32,896
53
341
(631)
(37)
17
(257)
(19,128) $
9,971 $
29,480 $
8,153 $
(10,672)
(12,436)
95
(8,583)
(38,288)
(810)
(2,638)
(1,146)
(333)
(734)
(5,661)
(567)
(2,360)
(5,392)
(757)
(2,297)
(1,777)
(370)
(717)
(5,918)
3,414
(334)
1,159
33,719
161
465
586
(2,472)
10
(1,250)
1,979
(112)
384
10,404
(17)
1,624
1,901
114
131
3,753
37,633
5,393
(446)
1,543
44,123
144
2,089
2,487
(2,358)
141
2,503
Increase in net interest income
$
33,153 $
(32,627) $
526 $
34,969 $
6,651 $
41,620
Ending balances
($’s in thousands)
Total assets
Total loans
Total loans, excluding PPP
Total investments
Total deposits
Provision for Credit Losses
As of December 31,
2020
2019
$ Change
% Change
$
$
7,639,529 $
6,471,181 $
1,168,348
4,763,127
4,436,357
1,719,102
4,307,366
4,307,366
1,345,954
455,761
128,991
373,148
6,505,934 $
5,366,994 $
1,138,940
18.1 %
10.6 %
3.0 %
27.7 %
21.2 %
The provision for credit losses during any period is the sum of the allowance for credit losses required at the end of the period and any charge offs during
the period, less the allowance for credit losses required at the beginning of the period, and less any recoveries during the period. See the Tables labeled
“Allowance for Credit Losses – December 31, 2020 and 2019” at Note 5 in Item 8 of Part II of this report for the components that make up the provision
for credit losses for the years ended December 31, 2020 and 2019.
The Company adopted and implemented ASU 2016-13, referred to as the Current Expected Credit Loss (CECL), on January 1, 2020 which resulted in an
increase to the allowance for credit losses of approximately $18,913,000, and a decrease to retained earnings of $12,983,000, net of taxes. Management
also separately evaluated its held-to-maturity investment securities from obligations of state and political subdivisions utilizing the historical loss data
represented by similar securities over a period of time spanning nearly 50 years, and based on this evaluation, no loss reserves were recorded for these
securities at the time of adoption.
The Company recorded a provision of $42,813,000 for credit losses during the year ended December 31, 2020, versus a reversal of $1,690,000 provision
for credit losses during the year ended December 31, 2019. The increased provision for credit losses for the year ended December 31, 2020 compared to
the year ended December 31, 2019 was primarily attributable to the portfolio-wide qualitative indicators associated with actual changes and forecast levels
of California unemployment, and gross domestic product and, to a lesser extent, loan concentration risks. The qualitative factors associated with these two
measures contributed to the level of calculated required reserves by approximately $60,563,000 as of December 31, 2020. As of December 31, 2020, the
Company had established reserves totaling $1,600,000 related to the Camp Fire, compared to $2,500,000 as of December 31, 2019. As shown in the
Table labeled “Allowance for Credit Losses - December 31, 2020” at Note 5 in Item 8 of Part II of this report, for the aforementioned reasons above, both
the adoption of CECL on January 1, 2020 and provisions recorded during 2020 increased ending reserve balances year over year for all loan categories,
with the exception of commercial and industrial loans and leases. The commercial and industrial loans benefited from changes to the risk pool allocation
during adoption of CECL, leading to a reduction in beginning reserves that offset provisioning during 2020. Net recoveries for the year ended
December 31, 2020 totaled $130,000 as compared to $276,000 net charge offs for the year ended December 31, 2019. Total nonperforming loans
increased from 0.39% of total loans at December 31, 2019 to 0.56% of total loans at December 31, 2020. For further details of the change in
nonperforming loans during the year ended December 31, 2020 see the Tables, and associated narratives, labeled “Changes in nonperforming assets
during the year ended December 31, 2020” and “Changes in nonperforming assets during the three months ended December 31, 2020” under the heading
“Asset Quality and Non-Performing Assets” below.
27
Table of Contents
The Company recorded a benefit of $1,690,000 from loan losses during the year ended December 31, 2019, versus a $2,583,000 provision for loan losses
during the year ended December 31, 2018. The reduced provision for loan losses for the year ended December 31, 2019 compared to the year ended
December 31, 2018 was primarily attributable to a $1,375,000 decrease in the amount of specific reserves required on impaired loans subsequent to the
sale or repayment of the outstanding balances owed. In addition, while the Company remains cautious about the risks associated with trends in California
real estate prices and the affordability of housing in the markets served by the Company, changes in home affordability and energy related index rates
improved during the year ended December 31, 2019. The qualitative factors associated with these two measures reduced the level of calculated required
reserves by approximately $1,059,000. These decreases were partially offset by the provisions to the allowance for loan losses necessitated by net loan
growth during the year. As of December 31, 2019, the Company had established reserves totaling $2,500,000 related to the Camp Fire, compared to
$3,250,000 as of December 31, 2018. As shown in the Table labeled “Allowance for Loan Losses - December 31, 2019” at Note 5 in Item 8 of Part II of
this report residential and commercial real estate loans, home equity lines, home equity loans, and commercial construction loans all experienced a benefit
from reversal of provision for losses during the year ended December 31, 2019. The benefit from reversal of provision for loan losses of each loan
category during the year ended December 31, 2019 was due primarily to improvements in historical loss factors and decreases in nonperforming loans as a
total percentage of loans. The remaining other consumer, commercial and residential construction loans experienced a provision for losses during the year
ended December 31, 2019 due primarily to loan growth. Net charge-offs for the year ended December 31, 2019 were $276,000 as compared to $324,000
net charge offs for the year ended December 31, 2018. Total nonperforming loans decreased from 0.68% of total loans at December 31, 2018 to 0.39% of
total loans at December 31, 2019. For details of the change in nonperforming loans during the year ended December 31, 2018 see the Tables, and
associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2019” and “Changes in nonperforming assets
during the three months ended December 31, 2019” under the heading “Asset Quality and Non-Performing Assets” below.
(dollars in thousands)
Provision (benefit) to allowance for credit losses
Change in reserve for unfunded loan commitments
Year ended December 31,
2020
2019
2018
42,188
$
(1,690)
$
2,583
625
$
200 1 $
(589) 1
$
$
1 Changes to the reserve for unfunded commitments was recorded in other noninterest expense prior to adoption of CECL on January 1, 2020.
The provision for credit losses is based on management’s evaluation of inherent risks in the loan portfolio and a corresponding analysis of the allowance
for credit losses. Additional discussion on loan quality, our procedures to measure loan impairment, and the allowance for credit losses is provided under
the heading “Asset Quality and Non-Performing Assets” below.
Non-interest Income
The following table summarizes the Company’s non-interest 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
Total service charges and fees
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 investment securities
Gain (loss) on marketable equity securities
Other
Total other non-interest income
Total non-interest income
28
Year Ended December 31,
2019
2018
2020
$
21,660 $
20,639 $
13,944
3,156
1,855
(2,634)
37,981
2,989
2,949
9,122
668
414
7
64
1,000
17,213
16,657
3,015
1,917
(1,811)
40,417
2,877
3,029
3,282
878
529
110
86
2,312
13,103
$
55,194 $
53,520 $
18,249
15,467
2,852
2,038
(146)
38,460
3,151
2,718
2,371
678
449
207
(64)
1,091
10,601
49,061
Table of Contents
Non-interest income increased $1,674,000 or 3.1% to $55,194,000 during the twelve months ended December 31, 2020, compared to $53,520,000 during
the equivalent period in 2019. This increase was primarily attributed to an increase in gains from the sale of mortgage loans, which resulted from
increased volume, and contributed $5,840,000 to the overall increase in non-interest income during the year ended December 31, 2020 as compared to
December 31, 2019. Non-interest income was negatively impacted by changes in the fair value of the Company’s mortgage servicing assets, as noted
above, which contributed to a $823,000 decline for the year. Both the increased gains from the sale of mortgage loans and the decline in fair value of
mortgage servicing assets are directly correlated with the elevated levels of mortgage origination volume, which was motivated by the historically low
interest rate environment. Further, fee generative deposit account activity was impacted by reductions in the volume of returned check fees, declining by
$2,713,000 to $13,944,000 for the twelve months ended December 31, 2020. Other non-interest income also declined by $1,312,000 during 2020,
partially from decreases in the fair value of assets used to fund acquired deferred compensation plans totaling $514,000, as compared to 2019, as well as
from a $333,000 reduction in one-time death benefits realized during the years ended 2020 and 2019 of $498,000 and $831,000, respectively.
Non-interest income increased $4,459,000 or 9.1% to $53,520,000 during the year ended December 31, 2019 compared to $49,061,000 during the
comparable twelve month period in 2018. Increases in non-interest income for the year ended 2019 as compared to the same period in 2018 were largely
driven by increases in fees charged for various services and increases in usage associated with both services and interchange transactions. More
specifically, the increase in income charged for interchange fees and service charges increased by $2,390,000 or 13.1% and $1,190,000 or 7.7%,
respectively. Gains from the sale of mortgage loans, which resulted from increased volume, contributed $911,000 to the overall increase in non-interest
income during the 2019 year. Other non-interest income was positively impacted by the recognition of $831,000 in life insurance death benefits during
the year ended December 31, 2019, compared to none in the equivalent period in 2018. These positive changes were partially offset by $1,655,000 greater
decline in the value of the Company's mortgage loan servicing rights due to increases in prepayment speeds and the overall decreases in interest rates on
home loans as compared to those in the prior year.
Non-interest Expense
The following table summarizes the Company’s other non-interest expense for the periods indicated (dollars in thousands):
2020
Year Ended December 31,
2019
2018
Base salaries, net of deferred loan origination costs
Incentive compensation
Benefits and other compensation costs
Total salaries and benefits expense
Occupancy
Data processing and software
Equipment
ATM and POS network charges
Merger and acquisition expense
Advertising
Professional fees
Intangible amortization
Telecommunications
Regulatory assessments and insurance
Courier service
Operational losses
Postage
Gain on sale of foreclosed assets
Loss on disposal of fixed assets
Other miscellaneous expense
Total other non-interest expense
Total non-interest expense
Average full-time equivalent staff
$
70,164 $
70,218 $
10,022
31,935
112,121
14,528
13,504
5,704
5,433
—
2,827
3,222
5,724
2,601
1,594
1,414
1,168
1,068
(234)
67
12,018
70,638
13,106
22,741
106,065
14,893
13,517
7,022
5,447
—
5,633
3,754
5,723
3,190
1,188
1,308
986
1,258
(246)
82
15,637
79,392
$
182,759 $
185,457 $
1,093
1,150
62,422
11,147
20,373
93,942
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
(408)
185
14,191
74,530
168,472
1,071
Salaries and benefit expense increased $6,056,000 (5.7%) to $112,121,000 during the year ended December 31, 2020 as compared to $106,065,000 for the
trailing twelve month period. Base salaries, net of deferred loan origination costs remained nearly flat, decreasing by $54,000 (0.1%) to $70,164,000 due
to a decrease in average full time equivalent employees to 1,093 from 1,150 in the prior year-to-date period, offset by a higher average wage per employee
from annual merit increases. Commissions and incentive compensation decreased $3,084,000 (23.5%) to $10,022,000 during 2020 compared to 2019
primarily due to lesser quantities and volumes of non-PPP loan originations as borrower interaction and business demands for loans experienced
29
Table of Contents
disruption from COVID-19 related mandates. Benefits and other compensation costs increased by $9,194,000 (40.4%) to $31,935,000 during the year
ended December 31, 2020 as compared to $22,741,000 for the trailing twelve month period, caused by increases in expenses associated with retirement
obligations and insurance costs.
During 2018, the FDIC's Deposit Insurance Fund's (DIF) reserves exceeded the minimum set by the Dodd-Frank Act and the Bank with total assets less
than $10 billion, was entitled to receive credits to offset a portion of its assessments. As a result, during the years ended December 31, 2020 and 2019, the
Bank received credits of $610,000 and $862,000, respectively, which contributed to the fluctuation in regulatory assessments and insurance during those
periods. Total other non-interest expense decreased by $8,755,000 or 11.0% to $70,637,000 during the year ended December 31, 2020 as compared to the
$79,392,000 for the year ended December 31, 2019. Reductions in advertising expenses totaling $2,806,000 or 49.8% to $2,827,000 contributed to this
beneficial change, as did declines in miscellaneous expenses totaling $3,619,000 or 23.1% attributed primarily to a $1,681,000 reduction in travel and
training expenses as a result of state-wide shelter-in-place restrictions and a reduction of $418,000 in third party services, which were partially offset by
the indirect loan documentation and administrative costs associated with PPP lending activity.
Salary and benefit expenses increased $12,123,000 (12.9%) to $106,065,000 during the year ended December 31, 2019 compared to $93,942,000 during
the prior year month ended December 31, 2018. Base salaries, net of deferred loan origination costs increased $7,796,000 (12.5%) to $70,218,000. The
increase in base salaries was due primarily to a 7.4% increase in average full time equivalent employees to 1,150 from 1,071 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. During the year ended December 31, 2019 and 2018 there
were $3,133,000 and $2,721,000, respectively, in salaries expense that were capitalized in association with loan origination activities and the increase was
due solely to increases in the number of loans originated. Commissions and incentive compensation increased $1,959,000 (17.6%) to $13,106,000 during
2019 compared to 2018 primarily due to organic growth of loans and non-interest bearing deposits. Benefits & other compensation expense increased
$2,368,000 (11.6%) to $22,741,000 during the year ended December 31, 2019 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.
Total other non-interest expense increased by $4,862,000 or 6.50% to $79,392,000 during the year ended December 31, 2019 as compared to the
$74,530,000 for the year ended December 31, 2018. Virtually all significant increases in non-interest expense can be attributed to the acquisition of FNB
Bancorp that took place in July 2018, which is reflected in all periods during the twelve months ended December 31, 2019, as compared to only six
months in the prior year. Highlighting some of those increases were increases in occupancy, data processing, intangible amortization, which increased by
$2,754,000, $2,496,000 and 2,224,000, respectively, as compared to the prior year. The increases in non-interest expenses were partially offset by an
elimination of merger related expenses, totaling $5,227,000 in 2018 and a reduction in regulatory assessment costs resulting from credits issued by the
FDIC totaling $862,000 for the year ended 2019.
The provisions for income taxes applicable to income before taxes for the years ended December 31, 2020, 2019 and 2018 differ from amounts computed
by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory federal income tax rate are reconciled as
follows:
Federal statutory income tax rate
State income taxes, net of federal tax benefit
Tax-exempt interest on municipal obligations
Tax-exempt life insurance related income
Low income housing and other tax credits
Low income housing tax credit amortization
Compensation and benefits
Non-deductible merger expenses
Other
Effective Tax Rate
2020
Year Ended December 31,
2019
2018
21.0 %
21.0 %
21.0 %
7.7
(0.9)
(0.8)
(4.8)
4.1
0.4
—
(0.9)
25.8 %
7.9
(0.7)
(0.6)
(2.3)
2.1
(0.4)
—
0.4
8.6
(1.0)
(0.6)
(2.2)
2.0
(0.4)
0.2
(0.8)
27.4 %
26.8 %
The effective tax rate on income was 25.8%, 27.4%, and 26.8% in 2020, 2019, and 2018, respectively. The effective tax rate was greater than the Federal
statutory rates of 21% due to the combination of state tax expenses of 7.7% in 2020, 7.9% in 2019 and 8.6% in 2018. These increases in tax expense were
partially offset by Federal tax-exempt investment income of $3,566,000, $4,002,000 and $4,345,000, respectively, Federal and State tax-exempt income of
$3,447,000, $3,860,000 and $2,718,000, 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 $619,000, $230,000 and $179,000 respectively, and equity compensation excess tax benefits, net of non-
deductible compensation of $403,000, $2,537,000, and $499,000, respectively. The low-income housing tax credits and the equity compensation excess
tax benefits represent direct reductions in tax expense. In addition, the 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
provided the Company with an opportunity to file amended federal tax returns and generate proposed refunds of approximately $805,000. 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 the three years ended 2020, 2019 and 2018.
30
Table of Contents
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)
Marketable equity securities
Debt securities available for sale:
Obligations of U.S. government and agencies
Obligations of states and political subdivisions
Corporate bonds
Asset backed securities
Total debt securities available for sale
Debt securities held to maturity:
Obligations of U.S. government agencies
Obligations of states and political subdivisions
Total debt securities held to maturity
$
$
$
$
$
Year ended December 31,
2020
2019
2018
2017
2016
3,025 $
2,960 $
2,874 $
2,938 $
2,938
812,374 $
472,980 $
629,981 $
604,789 $
129,095
2,544
470,251
109,601
2,532
365,025
126,072
4,478
354,505
123,156
—
—
429,678
117,617
—
—
1,414,264 $
950,138 $
1,115,036 $
727,945 $
547,295
273,667 $
361,785 $
430,343 $
500,271 $
597,982
10,896
13,821
14,593
14,573
14,554
284,563 $
375,606 $
444,936 $
514,844 $
612,536
Debt securities available for sale increased $464,126,000 to $1,414,264 as of December 31, 2020, compared to December 31, 2019. This increase is
attributable to purchases of $617,552,000 and an increase in net unrealized gains on securities available for sale of $15,796,000, offset partially by
maturities and principal repayments of $167,515,000 and sales proceeds of $229,000. Debt securities available for sale decreased $164,898,000 to
$950,138,000 as of December 31, 2019, compared to December 31, 2018. This decrease is attributable to maturities and principal repayments of
$97,993,000, sales of $127,066,000, an increase in fair value of investments securities available for sale of $24,361,000 and amortization of net purchase
price premiums of $1,567,000.
Debt securities held to maturity decreased $91,043,000 to $284,563,000 as of December 31, 2020, compared to December 31, 2019. This decrease is
attributable to principal repayments of $89,858,000 and amortization of net purchase price premiums of $1,185,000. Debt securities held to maturity
decreased $69,330,000 to $375,606,000 as of December 31, 2019, compared to December 31, 2018. This decrease is attributable to principal repayments
of $68,346,000 and amortization of net purchase price premiums of $985,000.
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 at December 31, 2020 and December 31, 2019. The entire balance of restricted equity securities at
December 31, 2020 and 2019 represents the Bank’s investment in the Federal Home Loan Bank of San Francisco (“FHLB”).
FHLB stock is carried at par and does not have a readily determinable fair value. While technically these are considered equity securities, there is no
market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for
other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate
recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of
cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB
and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the
customer base of the FHLB, and (4) the liquidity position of the FHLB.
As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its
outstanding mortgages, total assets, or FHLB advances. The Bank may request redemption at par value of any stock in excess of the minimum required
investment. Stock redemptions are at the discretion of the FHLB.
Loans
The Bank concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial loans), consumer loans,
commercial loans (including agricultural loans), and real estate construction loans. The interest rates charged for the loans made by the Bank vary with
the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Bank and prevailing money market rates indicative of the Bank’s
cost of funds.
The majority of the Bank’s loans are direct loans made to individuals, farmers and local businesses. The Bank relies substantially on local promotional
activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Bank makes loans to borrowers
31
Table of Contents
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)
Commercial real estate
Consumer
Commercial and industrial
Construction
Agriculture production
Leases
Total loans
2020
Year ended December 31,
2018
2017
2019
2016
$
2,951,902 $
2,818,782 $
2,627,837 $
1,914,896 $
1,747,918
952,108
526,327
284,842
44,164
3,784
955,050
249,791
249,827
32,633
1,283
934,244
250,661
183,384
25,888
—
742,300
194,790
137,557
25,622
—
672,209
177,204
122,419
39,843
—
$
4,763,127 $
4,307,366 $
4,022,014 $
3,015,165 $
2,759,593
During 2020, the Company purchased a pool of SFR 1-4 1st DT loans with an ending balance of approximately $39,977,000, excluding loan premiums of
approximately $1,149,000, which also approximates the outstanding balance and unamortized premium as of December 31, 2020. There was no credit
deterioration identified at acquisition for the purchased loans. There were no loan purchases made during the year ended December 31, 2019.
In December 2020, the SBA announced plans for a second round of PPP lending with streamlined requirements for both borrowers and lenders. Effective
Friday, January 15, 2021, the Company had launched and was accepting applications via an improved online portal which allows borrowers to open a new
account and submit PPP applications under the new PPP guidance.
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)
Commercial real estate
Consumer
Commercial and industrial
Construction
Agriculture production
Leases
Total loans
2020
Year ended December 31,
2018
2017
2019
2016
62.0 %
20.0 %
11.1 %
6.0 %
0.9 %
0.1 %
100 %
65.4 %
22.2 %
5.8 %
5.8 %
0.8 %
— %
100 %
65.3 %
23.2 %
6.2 %
4.6 %
0.6 %
— %
100 %
63.5 %
24.6 %
6.5 %
4.6 %
0.8 %
— %
100 %
63.3 %
24.4 %
6.4 %
4.4 %
1.4 %
— %
100 %
At December 31, 2020 loans, including net deferred loan costs, totaled $4,763,127,000 which was a 10.58% ($455,761,000) increase over the balances at
the end of 2019. Total loans, excluding PPP, increased by $128,991,000 during the same period. At December 31, 2019 loans, including net deferred
loan costs, totaled $4,307,366,000 which was a 7.10% ($285,352,000) increase over the balances at the end of 2018.
In March 2020, the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was created to help small businesses keep workers
employed during the COVID-19 crisis. As a SBA Preferred Lender, the Company was able to provide PPP loans to small business customers. As of
December 31, 2020, the total gross balance outstanding of PPP loans was $333,982,000 (approximately 2,300 loans) as compared to total PPP originations
of $438,510,000 (approximately 2,900 loans). Included in the balance of outstanding PPP loans as of December 31, 2020 are approximately 630 loans
totaling $88,623,000 that have been submitted to and are pending forgiveness by the SBA. In the tables above, PPP loans are included in the
"Commercial and Industrial" loan category. In connection with the origination of these loans, the Company earned approximately $15,735,000 in loan
fees, offset by deferred loan costs of approximately $763,000, the net of which will be recognized over the earlier of loan maturity, repayment or receipt of
forgiveness confirmation. As of December 31, 2020 there was approximately $7,212,000 in net deferred fee income remaining to be recognized. During
the three and twelve months ended December 31, 2020, the Company recognized $4,634,000 and $7,760,000, respectively, in fees on PPP loans.
In December 2020, the SBA announced plans for a second round of PPP lending with revised requirements for both borrowers and lenders. Effective
Friday, January 15, 2021, Tri Counties Bank had launched and was accepting applications via an improved on-line portal which allows applicants to both
open a new account, if necessary, and submit a PPP application. Preliminary results of the program indicate that total originations under this second
round of PPP are expected to be thirty to fifty percent of the total round one originations.
32
Table of Contents
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 non-accrual loans” are loans that may
be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not
expected, and are not well secured and in the process of collection:
(dollars in thousands)
Performing nonaccrual loans
Nonperforming nonaccrual loans
Total nonaccrual loans
Loans 90 days past due and still accruing
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
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 credit losses to nonperforming loans
2020
2019
December 31,
2018
2017
2016
$
22,896
$
11,266
$
22,689
$
20,937
$
17,677
3,968
26,864
—
26,864
2,844
5,579
16,845
19
16,864
2,541
4,805
27,494
—
27,494
2,280
3,176
24,113
281
24,394
3,226
2,451
20,128
—
20,128
3,986
$
29,708
$
19,405
$
29,774
$
27,620
$
24,114
$
811
$
992
$
1,173
$
358
$
0.39 %
0.56 %
342 %
0.30 %
0.39 %
182 %
0.47 %
0.68 %
119 %
0.58 %
0.81 %
124 %
911
0.53 %
0.73 %
161 %
Changes in nonperforming assets during the year ended December 31, 2020
The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2020:
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Balance at
December 31,
2019
Additions
Advances/
Paydowns,
net
Charge-offs/
Write-downs
Transfers to
Foreclosed
Assets
Balance at
December 31,
2020
$
642 $
2,654 $
(186) $
— $
— $
1,408
2,024
1,242
5,316
5,191
4,217
51
9,459
2,050
—
39
—
3,298
—
1,073
7,025
3,273
3,854
789
7,916
2,201
4,546
426
—
16,864
2,541
22,114
50
(645)
(2,024)
(595)
(3,450)
(2,591)
(1,807)
(318)
(4,716)
(1,295)
—
(447)
—
(9,908)
(513)
—
—
(182)
(182)
(13)
(116)
(355)
(484)
(774)
—
—
—
(1,440)
—
—
—
—
—
(766)
—
—
(766)
—
—
—
—
(766)
766
3,110
4,061
—
1,538
8,709
5,094
6,148
167
11,409
2,182
4,546
18
—
26,864
2,844
$
19,405 $
22,164 $
(10,421) $
(1,440) $
— $
29,708
The table above does not include deposit overdraft charge-offs.
Nonperforming assets increased by $10,303,000 (53.1%) to $29,708,000 at December 31, 2020 from $19,405,000 at December 31, 2019. The increase in
nonperforming assets during 2020 was the result of new nonperforming loans of $22,114,000, which was partially offset by net paydowns, sales or
upgrades of nonperforming loans to performing status totaling $9,908,000, dispositions of foreclosed assets totaling $513,000, and net charge-offs of
$1,440,000.
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Table of Contents
Changes in nonperforming assets during the year ended December 31, 2019
The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2019:
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Balance at
December 31,
2018
Additions
Advances/
Paydowns,
net
Charge-offs/
Write-downs
(1)
Transfers to
Foreclosed
Assets
Balance at
December 31,
2019
$
8,079 $
300 $
(6,766) $
— $
(971) $
3,322
—
2,155
13,556
4,419
5,636
7
10,062
3,830
—
46
—
27,494
2,280
300
2,284
307
3,191
1,562
1,836
887
4,285
2,327
—
15
9,818
49
(1,468)
(260)
(1,220)
(9,714)
(672)
(3,037)
(678)
(4,387)
(2,034)
—
(3)
—
(16,138)
(1,090)
(746)
—
—
—
—
—
(746)
(971)
(116)
(215)
—
(331)
—
—
—
—
(2)
(3)
(165)
(170)
(2,073)
—
(19)
—
(3,008)
—
$
29,774 $
9,867 $
(17,228) $
(3,008) $
— $
19,405
(1,302)
1,302
16,864
2,541
642
1,408
2,024
1,242
5,316
5,191
4,217
51
9,459
2,050
—
39
—
(1) Charge-offs and write-downs exclude deposit overdraft charge-offs.
Nonperforming assets decreased by $10,369,000 (34.8%) to $19,405,000 at December 31, 2019 from $29,774,000 at December 31, 2018. The decrease in
nonperforming assets during 2019 was the result of new nonperforming loans of $9,818,000, which was more than offset by net paydowns, sales or
upgrades of nonperforming loans to performing status totaling $16,138,000, dispositions of foreclosed assets totaling $1,090,000, and net charge-offs of
$3,008,000.
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Changes in nonperforming assets during the three months ended December 31, 2020
The following table shows the activity in the balance of nonperforming assets for the quarter ended December 31, 2020:
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Balance at
September 30,
2020
Additions
Advances/
Paydowns,
net
Charge-offs/
Write-downs
(1)
Transfers to
Foreclosed
Assets
Balance at
December 31,
2020
$
3,010 $
127 $
(27) $
— $
— $
3,778
—
2,056
8,844
6,373
5,185
279
11,837
1,978
18
286
—
22,963
2,057
647
—
70
844
92
1,337
87
1,516
475
4,528
—
—
7,363
178
(364)
—
(406)
(797)
(763)
(281)
(72)
(1,116)
(183)
—
(268)
—
(2,364)
—
—
—
(182)
(182)
—
(93)
(127)
(220)
(87)
—
(489)
—
—
—
—
(609)
—
—
(609)
—
—
—
—
(609)
609
3,110
4,061
—
1,538
8,709
5,093
6,148
167
11,408
2,183
4,546
18
—
26,864
2,844
$
25,020 $
7,541 $
(2,364) $
(489) $
— $
29,708
(1) Charge-offs and write-downs exclude deposit overdraft charge-offs.
Nonperforming assets increased during the fourth quarter of 2020 by $4,688,000 (18.7%) to $29,708,000 at December 31, 2020 compared to $25,020,000
at September 30, 2020. The increase in nonperforming assets during the fourth quarter of 2020 was the result of new nonperforming loans of $7,363,000,
that were partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $2,364,000, dispositions of foreclosed
assets totaling $609,000, and net charge-offs of $489,000 in non-performing assets.
The $7,363,000 in new nonperforming loans during the fourth quarter of 2020 was comprised of, most notably, an increase of $4,648,000 on one
residential construction loan which is considered well secured, $1,337,000 on thirteen home equity lines or loans, $647,000 on five commercial and
industrial loans, and finally, $475,000 on two commercial and industrial loans.
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Table of Contents
Changes in nonperforming assets during the three months ended December 31, 2019
The following table shows the activity in the balance of nonperforming assets for the quarter ended December 31, 2019:
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Balance at
September 30,
2019
Additions
Advances/
Paydowns,
net
Charge-offs/
Write-downs
(1)
Transfers to
Foreclosed
Assets
Balance at
December 31,
2019
$
1,502 $
111 $
— $
— $
(971) $
1,184
2,024
1,331
6,041
4,502
4,531
63
9,096
3,388
—
40
—
18,565
1,546
293
—
—
404
773
494
299
1,566
615
—
—
—
2,585
105
(69)
—
(89)
(158)
(84)
(808)
(242)
(1,134)
(1,072)
—
(1)
—
(2,365)
(81)
—
—
—
—
—
—
(69)
(69)
(881)
—
—
—
(950)
—
—
—
(971)
—
—
—
—
—
—
—
—
642
1,408
2,024
1,242
5,316
5,191
4,217
51
9,459
2,050
—
39
—
(971)
971
16,864
2,541
$
20,111 $
2,690 $
(2,446) $
(950) $
— $
19,405
(1) Charge-offs and write-downs exclude deposit overdraft charge-offs.
Nonperforming assets decreased during the fourth quarter of 2019 by $706,000 (3.5%) to $19,405,000 at December 31, 2019 compared to $20,111,000 at
September 30, 2019. The decrease in nonperforming assets during the fourth quarter of 2019 was the result of new nonperforming loans of $2,585,000,
that were fully offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $2,365,000, dispositions of foreclosed
assets totaling $81,000, and net charge-offs of $950,000 in non-performing assets.
The $2,585,000 in new nonperforming loans during the fourth quarter of 2019 was comprised of increases of $773,000 on four residential real estate
loans, $404,000 on two commercial real estate loans, $494,000 on seven home equity lines and loans, and $615,000 on nine commercial and industrial
loans.
COVID Deferrals
Following the passage of the CARES Act legislation, the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working
with Customers Affected by the Coronavirus" was issued by federal bank regulators, which offers temporary relief from troubled debt restructuring
accounting for loan payment deferrals for certain customers whose businesses are experiencing economic hardship due to Coronavirus. The Company
continues to closely monitor the effects of the pandemic on our loan and deposit customers. Our management team continues to be focused on assessing
the risks in our loan portfolio and working with our customers to mitigate where possible, the risk of potential losses. Beginning in April 2020, the
Company implemented loan programs to allow certain consumers and businesses impacted by the pandemic to defer loan principal and interest payments.
36
Table of Contents
The following is a summary of COVID related loan customer modifications with outstanding balances as of December 31, 2020:
$
(dollars in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st lien
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total modifications
$
Modified Loan
Balances
Outstanding
% of Total
Category of
Loans
Interest Only
Deferral
Principal and
Interest
Deferral
90 Days
180 Days
Modification Type
Deferral Term
19,643
2,488
—
—
22,131
457
—
—
457
772
24,998
—
—
48,358
1.28 %
0.40
—
—
0.8
0.1
—
—
0.1
0.2
8.8
—
—
1.0 %
87.1 %
71.0
—
—
85.3
100.0
—
—
100.0
86.1
100.0
—
—
93.0 %
12.9 %
29.0
—
—
14.7
—
—
—
—
13.9
—
—
—
7.0 %
— %
71.0
—
—
8.0
—
—
—
—
9.0
—
—
—
3.7 %
100.0 %
29.0
—
—
92.0
100.0
—
—
100.0
91.0
100.0
—
—
96.3 %
Total loan modifications associated with CARES Act legislation made during the twelve months ended December 31, 2020 totaled approximately
$427,290,000 of which $48,358,000 remained outstanding under their modified terms as of December 31, 2020. The remaining balance of loans with
modified terms are expected to conclude their modification period during the first half of fiscal 2021, however, as long as the current pandemic and
recessionary economic conditions continue, it is anticipated that additional borrowers may request an initial or subsequent modification to their loan terms.
The total loan modifications made under the CARES Act during 2020 are inclusive of 13 loans (10 borrowers) with loan balances totaling $31,660,000
who requested and were granted a second modification and deferral. Eight of these second modifications and deferrals were for a period of three
additional months, and five of the 13 loans had concluded their second deferral period and returned to their regular payment terms and are therefore not
included in the table above. The remaining borrowers who received a second loan modification have outstanding loan balances totaling $5,840,000
million as of December 31, 2020, of which $2,000,000 has been classified as troubled debt restructurings by Management due to the likelihood of further
changes to the contractual loan terms being necessary.
Management believes that its analysis of each borrower receiving a loan modification supports the ability of that borrower to return to their normal
payment terms at the conclusion of the modification period. However, management determined that a risk rating downgrade to each credit receiving a
deferral modification was prudent until such time that the borrower's actual payment performance supported an upgrade to the pre-modification risk grade.
Allowance for Credit Losses and CECL Adoption
On January 1, 2020, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which replaces the incurred loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement
of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-
to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of
credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for
available for sale debt securities. One such change is to require increases or decreases in credit losses be presented as an allowance rather than as a write-
down on available for sale debt securities, based on management's intent to sell the security or likelihood the Company will be required to sell the security,
before recovery of the amortized cost basis.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit
exposures. Results for the reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be
reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets
purchased with credit deterioration (PCD) that were previously classified as purchase credit impaired (PCI) and accounted for under ASC 310-30. In
accordance with the Standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining
noncredit discount (based on the adjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption. The
Company recognized an increase in the ACL for loans totaling $18,913,000, including a reclassification of $481,000 from discounts on acquired loans to
the allowance for credit losses, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings,
net of $5,449,000 in taxes of $12,983,000. Management has separately evaluated its held-to-maturity investment securities from obligations of state and
political subdivisions and determined that no loss reserves were required.
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Table of Contents
Allowance for Credit Losses - Available for Sale Investment Securities
The Company evaluates available for sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the
amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in
other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the balance sheet,
limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the allowance for credit
losses and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale
debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is
recognized in earnings with a corresponding adjustment to the security's amortized cost basis. During the year ended December 31, 2020 no allowance for
credit losses nor impairment recognized in earnings related to available for sale investment securities was recorded.
Allowance for Credit Losses - Held to Maturity Investment Securities
In addition to credit losses associated with the Company's loan portfolio, the CECL standard requires that loss estimates be developed for securities
classified as held-to-maturity (HTM). As of January 1, 2020, the date of adoption for ASC 326, the Company's HTM investment portfolio had a carrying
value of approximately $375,606,000 and was comprised of $361,785,000 in obligations backed by U.S. government agencies and $13,821,000 in
obligations of states and political subdivisions. As the 96.3% of the HTM portfolio consisted of investment securities where payment performance has an
implicit or explicit guarantee from the U.S. government and where no history of credit losses exist, management believes that indicators for zero loss are
present and therefore, no loss reserves were recognized in conjunction with the adoption of the CECL standard. Management separately evaluated its
HTM investment securities from obligations of state and political subdivisions utilizing the historical loss data represented by similar securities over a
period of time spanning nearly 50 years. Based on this evaluation, management determined that the expected credit losses associated with these securities
is less than significant for financial reporting purposes and therefore, no loss reserves resulted from the adoption and implementation of the CECL
standard. Consistent with the portfolio composition at the date of adoption, as of December 31, 2020, 96.2% of the HTM portfolio consisted of
investment securities where payment performance has an implicit or explicit guarantee from the U.S. government with the remaining balance of the HTM
portfolio consisting of obligations of states and political subdivisions. In addition, the balance of investment securities maintained in the HTM portfolio
decreased by $91,043,000 or 24.2% during the year ended December 31, 2020 and management is not aware of any significant changes in credit ratings
for the securities held. Therefore, during the year ended December 31, 2020 no allowance for credit losses related to HTM securities was recorded.
Allowance for Credit Losses - Loans
The allowance for credit losses (ACL) is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be
collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible.
Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Regardless of the determination that
a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a
borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in
accordance with the original contract or modified terms, if appropriate.
The Company’s method for assessing the appropriateness of the allowance for credit losses includes specific allowances for impaired loans, formula
allowance factors for pools of credits, and qualitative considerations which include, among other things, current and forecast economic and 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.
Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.
Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a
cohort, then tracks the respective losses generated by that cohort of loans over the remaining life. The Company identified and accumulated loan cohort
historical loss data beginning with the fourth quarter of 2008 and through the current period. In situations where the Company's actual loss history was
not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than three billion and less than ten billion, were
utilized to create a minimum loss rate. Adjustments to historical loss information are made for differences in relevant current loan-specific risk
characteristics, such as historical timing of losses relative to the loan origination.
In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the
forecasted life of the assets. These macroeconomic scenarios incorporate variables that have historically been key drivers of increases and decreases in
credit losses. These variables include, but are not limited to, changes in environmental conditions, such as California unemployment rates, household debt
levels and U.S. gross domestic product.
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. As such, the proper risk grading of loans in the portfolio is important to the determination of the calculation of and determination of
adequacy of the allowance for credit losses. Utilizing the historical loss data described above, the Company applies reserve rates within any unique pool
based on its loss and risk grade migration. Therefore, within any given pool, a larger loss estimation factor is applied to less than satisfactory loans as
compared to those that the Company last graded as satisfactory. The resulting allowance for any pool is the sum of the calculated reserves determined in
this manner.
Certain loans are not included in pools of loans that are collectively evaluated. The segregation of these loans is based on the results from analysis of
identified credits that meet management’s criteria for specific evaluation. These loans are first 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 and are removed from the pools of loans collectively evaluated. When, as a result of this evaluation, a loan is
38
Table of Contents
identified as impaired they are then 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. By definition, any loan that
management has placed on non-accrual is considered impaired, however, not all impaired loans need be placed on non-accrual.
Allowance for Credit Losses - Unfunded Commitments
The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and
incorporate utilization assumptions at the estimated time of default. While the provision for credit losses associated with unfunded commitments is
included in "provision for (benefit from) credit losses" on the consolidated statement of income, the reserve for unfunded commitments is maintained on
the consolidated balance sheet in other liabilities.
The Components of the Allowance for Credit Losses
The following table sets forth the Bank’s allowance for credit losses related to loans as of the dates indicated (dollars in thousands):
(dollars in thousands)
Allowance for credit losses:
2020
2019
December 31,
2018
2017
2016
Qualitative and forecast factor allowance
$
61,935
$
12,146
$
11,577
$
10,252
$
10,275
Quantitative (Cohort) model allowance reserves
Total allowance for credit losses
Allowance for individually evaluated loans
Allowance for PCD loan losses
Allowance for PCI loan losses
Total allowance for credit losses
28,462
90,397
1,450
—
n/a
17,529
29,675
935
n/a
6
18,689
30,266
2,194
n/a
122
17,100
27,352
2,699
n/a
272
17,485
27,760
2,046
n/a
2,697
$
91,847
$
30,616
$
32,582
$
30,323
$
32,503
Ratio of allowance for credit losses to gross loans
1.93 %
0.71 %
0.81 %
1.01 %
1.18 %
The allowance for credit losses increased by $49,529,000 from the January 1, 2020 adoption date to $91,847,000 at December 31, 2020, primarily
reflecting the economic impacts of the COVID-19 pandemic and the response by domestic and global governmental authorities, including quarantines and
other social distancing policies aimed at fighting the spread of the virus.
The U.S. economy contracted into a recession with unusual speed and force in the first half of 2020, ending the longest expansionary period in
U.S. history. The U.S. government and the Federal Reserve responded to the pandemic with unprecedented measures. The Federal Reserve reduced the
target federal funds rate to zero to 0.25 percent and Congress passed the CARES Act that included an estimated $2 trillion stimulus package. Although the
U.S. economy began to recover in third quarter 2020 as social distancing policies loosened, economic metrics in fourth quarter 2020 indicate an uneven
path to recovery. In December 2020, Congress amended the CARES Act through the Consolidated Appropriations Act of 2021 to add an additional $900
billion of stimulus relief to mitigate the continued impacts of the pandemic. While certain factors point to improving economic conditions, uncertainty
remains regarding the path of the economic recovery, the mitigating impacts of government interventions, the success of vaccine distribution and the
efficacy of administered vaccines, as well as the effects of the change in leadership resulting from the recent elections.
These factors shaped the supportable forecast used by the Company in its allowance for credit loss modeled estimate at December 31, 2020.
After partial improvements in California unemployment and gross domestic product (GDP) growth in the third and early fourth quarters of 2020,
significant increases in COVID-19 infection rates in the latter half of the fourth quarter of 2020 caused both the forecasted levels of unemployment and
GDP to deteriorate through the forecast period and thus further extended the expected duration of the current recessionary period.
While the credit quality of the Company’s loan portfolio, as measured by trends in the volume of past due loans, non-accrual loans, net loan charge-offs
(recoveries) and risk grades, generally remained stable throughout the year, the changes in the actual and forecasted levels of unemployment and GDP
deteriorated significantly as compared to the adoption date of the current expected credit loss standard. As a result, the growth in the allowance for credit
losses is primarily attributable to changes in the qualitative components of the model calculation as described above.
Based on the current conditions of the loan portfolio, management believes that the $91,847,000 allowance for credit losses at December 31, 2020 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.
39
Table of Contents
The following table summarizes the allocation of the allowance for credit losses between loan types:
(in thousands)
Commercial real estate
Consumer
Commercial and industrial
Construction
Agriculture production
Leases
2020
2019
December 31,
2018
2017
2016
$
53,693 $
11,995 $
12,944 $
11,441 $
25,148
4,252
7,540
1,209
5
10,084
4,867
3,388
261
21
11,051
5,610
2,497
480
—
10,543
5,757
1,827
755
—
11,905
12,670
4,763
2,097
1,068
—
Total allowance for loan losses
$
91,847 $
30,616 $
32,582 $
30,323 $
32,503
The following table summarizes the allocation of the allowance for credit losses between loan types as a percentage of the total allowance for credit losses:
Commercial real estate
Consumer
Commercial and industrial
Construction
Agriculture production
Leases
2020
2019
December 31,
2018
2017
2016
58.5 %
27.4 %
4.6 %
8.2 %
1.3 %
— %
39.2 %
32.9 %
15.9 %
11.0 %
0.9 %
0.1 %
39.7 %
33.9 %
16.9 %
7.7 %
1.8 %
— %
37.7 %
34.8 %
19.0 %
6.0 %
2.5 %
— %
36.6 %
39.0 %
14.7 %
6.5 %
3.2 %
— %
Total allowance for loan losses
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
The following table summarizes the allocation of the allowance for credit losses between loan types as a percentage of total loans and as a percentage of
total loans in each of the loan categories listed:
Commercial real estate
Consumer
Commercial and industrial
Construction
Agriculture production
Leases
Total allowance for loan losses
2020
2019
December 31,
2018
2017
2016
1.82 %
2.62 %
0.81 %
2.65 %
2.74 %
0.13 %
1.93 %
0.42 %
1.05 %
1.81 %
1.36 %
1.82 %
1.63 %
0.71 %
0.49 %
1.18 %
2.24 %
1.36 %
1.85 %
— %
1.01 %
0.60 %
1.42 %
2.96 %
1.33 %
2.95 %
— %
1.18 %
0.68 %
1.88 %
2.69 %
1.71 %
2.68 %
— %
1.43 %
40
Table of Contents
The following tables summarize the activity in the allowance for loan losses for the years indicated (dollars in thousands):
Allowance for credit losses:
Balance at beginning of period
Adoption of ASU 2016-13 (CECL)
Provision for (reversal of) loan losses
Loans charged-off:
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Commercial and industrial
Construction
Agriculture production
Leases
Total loans charged off
Recoveries of previously charged-off loans:
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Consumer:
Home equity lines
Home equity loans
Other consumer
Commercial and industrial
Construction
Agriculture production
Leases
2020
Year ended December 31,
2018
2017
2019
2016
$
30,616
$
32,582
$
30,323
$
32,503
$
36,011
18,913
42,188
—
(1,690)
—
2,583
—
89
—
(5,970)
—
—
—
(182)
(13)
(116)
(670)
(774)
—
—
—
—
(746)
—
—
(2)
(3)
(765)
(2,104)
—
(19)
(15)
—
—
—
(77)
(301)
(783)
(1,103)
—
(85)
—
(166)
(20)
—
—
(60)
(429)
(1,186)
(1,384)
(1,104)
(60)
—
(827)
—
—
—
(321)
(804)
(822)
(456)
—
—
—
(1,755)
(3,639)
(2,364)
(4,409)
(3,230)
198
28
—
—
416
304
347
568
—
24
—
1,486
42
—
—
54
935
321
513
—
12
—
47
20
—
—
—
1,143
288
445
—
97
—
2,040
(324)
388
9
—
—
—
940
375
354
1
73
—
2,140
(2,269)
875
11
35
—
880
2,907
448
404
132
—
—
5,692
2,462
Total recoveries of previously charged off loans
Net (charge-offs) recoveries
1,885
130
3,363
(276)
Balance at end of period
Average total loans
Ratios:
$
91,847
$
30,616
$
32,582
$
30,323
$
32,503
$ 4,646,005
$ 4,111,093
$ 3,548,489
$ 2,842,659
$ 2,629,729
Net charge-offs (recoveries) during period to average loans
outstanding during period
Provision for (benefit from) credit losses to average loans
outstanding during period
Allowance for credit losses to loans at year-end
(0.01) %
0.01 %
0.01 %
0.08 %
(0.09) %
0.92 %
1.93 %
(0.04) %
0.71 %
0.07 %
0.81 %
— %
1.01 %
(0.23) %
1.18 %
Generally, losses are triggered by non-performance by the borrower and calculated based on any difference between the current loan amount and the
current value of the underlying collateral less any estimated costs associated with the disposition of the collateral.
41
Table of Contents
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):
Land & Construction
Residential real estate
Commercial real estate
Total foreclosed assets
Land & Construction
Residential real estate
Commercial real estate
Total foreclosed assets
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
Balance at
December 31,
2019
Additions
Advances/
Capitalized
Costs/Other
Sales
Valuation
Adjustments
Balance at
December 31,
2020
$
313 $
119 $
— $
(313) $
35 $
1,045
1,183
647
—
—
—
(200)
—
15
—
$
2,541 $
766 $
— $
(513) $
50 $
154
1,507
1,183
2,844
Balance at
December 31,
2018
Additions
Advances/
Capitalized
Costs/Other
Sales
Valuation
Adjustments
Balance at
December 31,
2019
$
445 $
— $
— $
— $
(132) $
1,742
93
278
971
—
—
(1,064)
(26)
89
145
$
2,280 $
1,249 $
— $
(1,090) $
102 $
313
1,045
1,183
2,541
As of December 31,
2020
2019
(In thousands)
$
29,505 $
65,334
45,994
140,833
(57,462)
83,371
360
29,453
65,241
45,723
140,417
(53,704)
86,713
373
$
83,731 $
87,086
During the year ended December 31, 2020, premises and equipment, net of depreciation, decreased by $3,355,000. The Company had purchases of
$2,812,000 that were offset by depreciation of $6,100,000 and disposals of premises and equipment with net book value of $67,000. Depreciation expense
for the years ended December 31, 2019 and 2018 was $6,472,000 and $6,104,000, respectively. Purchases of fixed assets during the years ended
December 31, 2019 and 2018 totaled $4,293,000 and $7,372,000, respectively.
Intangible Assets
Intangible assets were comprised of the following:
(In thousands)
Core-deposit intangible
Goodwill
Total intangible assets
December 31,
2020
December 31,
2019
$
$
17,833 $
23,557
220,872
220,872
238,705 $
244,429
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 $156,561,000 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 $5,724,000, $5,723,000, and $3,499,000 was recorded in 2020, 2019, and 2018, respectively.
42
Table of Contents
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
Total deposits
Long-Term Debt
2020
Year ended December 31,
2018
2017
2019
2016
$
2,581,517 $
1,832,665 $
1,760,580 $
1,368,218 $
1,275,745
1,414,908
1,242,274
1,252,366
971,459
887,625
2,164,942
1,851,549
1,921,324
1,364,518
1,397,036
73,147
271,420
129,061
311,445
132,429
299,767
73,596
231,340
75,184
259,970
$
6,505,934 $
5,366,994 $
5,366,466 $
4,009,131 $
3,895,560
See Note 13 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 14 to the consolidated financial statements at Item 8 of this report for information about the Company’s junior subordinated debt.
Equity
See Note 16 and Note 26 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.
On November 12, 2019 the Board of Directors approved the authorization to repurchase up to 1,525,000 shares of the Company's common stock (the 2019
Repurchase Plan), which approximated 5.0% of the shares outstanding as of the approval date. The following table shows the repurchases made by the
Company during the periods presented:
Period
November 12, 2019 - December 31, 2019
January 1, 2020 - December 31, 2020
Market Risk Management
Total number
of
shares
purchased
—
858,717
Average price
paid per share
n/a
$30.66
Maximum number
of shares remaining that may
yet be purchased under
the 2019 Plan
1,525,000
666,283
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.
43
Table of Contents
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. As of December 31, 2019, the overnight Federal funds rate, the rate primarily
used in these interest rate shock scenarios, was less than 2.00%. Based on the historical nature of these rates in the United States not falling below zero,
management believes that a shock scenario that reduces interest rates below zero would not provide meaningful results and therefor, have not been
modeled. 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 market value of equity to changing interest rates as measured against a flat
rate (no interest rate change) instantaneous shock scenario over a twelve month period utilizing the Company's specific mix of interest earning assets and
interest bearing liabilities as of December 31, 2020.
Interest Rate Risk Simulations:
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 NII)
Estimated
Change in
Market Value of
Equity (MVE)
(as % of MVE)
6.8 %
3.5 %
—
(2.0) %
nm
36.2 %
21.6 %
—
(43.0) %
nm
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 asset sensitive over a twelve month
time horizon for rates up, and slightly sensitive over a twelve month time horizon for rates down. “Asset sensitive” implies that net interest income
increases when interest rates rise and decrease when interest rates decrease. “Liability sensitive” implies that net interest income decreases when interest
rates rise and increase 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, 2020. 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.
44
Table of Contents
As of December 31, 2020
(dollars in thousands)
Interest-earning assets:
Less than 3
months
3 - 6 months
6 - 12 months
1 - 5 years
Over 5 years
Repricing within:
Cash at Federal Reserve and other banks
$
592,298
$
—
$
—
$
—
$
—
Securities
Loans
Total interest-earning assets
Interest-bearing liabilities
Transaction deposits
Time
Other borrowings
Junior subordinated debt
Total interest-bearing liabilities
Interest sensitivity gap
Cumulative sensitivity gap
As a percentage of earning assets:
Interest sensitivity gap
Cumulative sensitivity gap
Liquidity
553,740
1,039,448
2,185,486
3,996,425
96,284
26,914
57,635
80,684
359,287
439,971
—
67,047
—
—
$ 4,177,258
$ (1,991,772)
$
$
67,047
372,924
$ (1,991,772)
$ (1,618,848)
$
$
$
229,044
519,034
748,078
—
102,261
—
—
589,120
2,376,209
2,965,329
—
78,401
—
—
102,261
$
78,401
246,242
401,995
648,237
—
611
—
—
611
645,817
$ 2,886,928
$
647,626
(973,031)
$ 1,913,897
$ 2,561,523
(30.5) %
(30.5) %
5.7 %
(24.8) %
9.9 %
(14.9) %
44.2 %
29.3 %
9.9 %
39.2 %
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 $816,333,000 in 2020. Net increases in loan balances used approximately
$456,541,000 of cash, while purchases of investment securities, net of calls and maturities, used approximately $360,179,000 of cash.
Liquidity may also be generated from liabilities through deposit growth and borrowings. These activities are included under financing activities in the
Consolidated Statement of Cash Flows. In 2020, financing activities provided funds totaling $1,094,575,000, resulting from $1,138,940,000 in deposits
and offset by $26,303,000 in dividend payments and an additional $26,720,000 used to repurchase shares of common stock. In addition, at December 31,
2020, the Company had loans and securities available to pledge towards future borrowings from the Federal Home Loan Bank and the Federal Reserve
Bank of up to $1,932,399,000 and $157,884,000, respectively. As of December 31, 2020, the Company had $26,914,000 of other borrowings as described
in Note 13 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 2020, operating activities provided cash of
$114,802,000 and primarily included net income of $64,814,000.
The Company’s investment securities, excluding held-to-maturity securities, plus cash and cash equivalents in excess of reserve requirements totaled
$2,009,089,000 at December 31, 2020, which was 26.3% of total assets at that time. This was an increase of $915,854,000 from $1,093,235,000 and
16.9% of total assets as of December 31, 2019.
Loan demand during 2021 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. In addition to Federal
economic stimulus actions, inclusive of loan programs and direct payments to taxpayers, which contributed to the growth in deposit balances, the Federal
Reserve interest rate manipulation efforts have resulted in historic low short-term and long-term interest rates, which could further 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 and forecasted changes in those balances are subject to
significant volatility and uncertainty.
The principal cash requirements of the Company are dividends on common stock when declared. The Company is dependent upon the payment of cash
dividends by the Bank to service its commitments. Shareholder dividends are expected to continue subject to the Board’s discretion and continuing
evaluation of capital levels, earnings, asset quality and other factors. The Company expects that the cash dividends paid by the Bank to the Company will
be sufficient to meet this payment schedule. Dividends from the Bank are subject to certain regulatory restrictions.
45
Table of Contents
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, 2020, 2019 and 2018, the Bank had
$10,000,000, $30,000,000, and $65,000,000, respectively, of these State deposits.
Certificates of Deposit in Denominations of $100,000 or More
(dollars in thousands)
Time remaining until maturity:
Less than 3 months
3 months to 6 months
6 months to 12 months
More than 12 months
Total
Loan maturities
Amounts as of December 31,
2019
2018
2020
$
96,546 $
90,252 $
67,108
102,252
78,661
64,161
74,682
57,244
70,473
85,781
47,254
77,912
$
344,567 $
286,339 $
281,420
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, 2020:
Loans with predetermined interest rates:
Commercial Real Estate
Consumer
Commercial & Industrial
Construction
Agricultural Production
Leases
Within
One Year
After One
But Within
5 Years
After 5
Years
(dollars in thousands)
Total
$
29,140 $
271,789 $
536,665 $
837,594
5,069
4,607
7,346
776
—
38,809
415,820
1,892
6,003
3,784
381,646
21,581
35,916
2,094
—
425,524
442,008
45,154
8,873
3,784
Total loans with predetermined interest rates
46,938
738,097
977,902
1,762,937
Loans with floating interest rates:
Commercial Real Estate
Consumer
Commercial & Industrial
Construction
Agricultural Production
Leases
Total loans with floating interest rates
Total loans
Investment maturities
62,294
11,068
46,688
29,754
29,523
—
290,084
1,761,930
2,114,308
24,760
5,180
13,217
5,482
—
490,756
32,451
196,717
286
—
526,584
84,319
239,688
35,291
—
179,327
338,723
2,482,140
3,000,190
$
226,265 $
1,076,820 $
3,460,042 $
4,763,127
The maturity distribution and yields of the investment portfolio at December 31, 2020 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.
46
Table of Contents
Debt Securities Available for Sale
Obligations of US government agencies
Obligations of states and political
subdivisions
Corporate bonds
Asset backed securities
Within
One Year
After One Year
but Through
Five Years
After Five Years
but Through Ten
Years
After Ten
Years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
(dollars in thousands)
$ 19,994
0.14 % $ 189,897
0.51 % $ 28,353
2.95 % $ 574,130
1.57 % $ 812,374
1.33 %
—
—
—
—
—
—
1,896
2,544
4.27 % 15,882
2.29 % 111,317
3.88 % 129,095
6.20 %
—
—
—
—
2,544
— % 115,435
—
354,816
1.30 % 470,251
3.69 %
6.20 %
1.36 %
1.56 %
Total debt securities available for sale
$ 19,994
0.14 % $ 194,337
0.62 % $ 159,670
1.84 % $ 1,040,263
1.72 % $ 1,414,264
Debt Securities Held to Maturity
Obligations of US government agencies
$
Obligations of states and political
subdivisions
Total debt securities held to maturity
$
—
—
—
—
$ —
— % $ 13,636
2.34 % $ 260,031
2.51 % $ 273,667
2.50 %
—
— % $
993
993
4.82 %
5,119
3.33 %
4,784
3.17 %
10,896
4.82 % $ 18,755
2.61 % $ 264,815
2.52 % $ 284,563
3.39 %
2.53 %
Off-Balance Sheet Items
The Bank has certain ongoing commitments under leases. See Note 11 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, 2020, 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 $1,441,883,000 and
$1,321,340,000 at December 31, 2020 and 2019, respectively, and represent 30.3% of the total loans outstanding at year-end 2020 versus 30.7% at
December 31, 2019. Commitments related to the Bank’s deposit overdraft privilege product totaled $110,813,000 and $110,402,000 at December 31, 2020
and 2019, respectively.
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of December 31, 2020:
Total
Less than
one year
1-3
years
3-5
years
More than
5 years
$
344,567 $
265,906 $
74,377 $
4,284 $
Other collateralized borrowings, fixed rate, as of December 31,
2020 of 0.05%, payable on January 4, 2021
26,914
26,914
—
—
—
—
—
—
2,119
390
3,064
—
—
—
—
—
—
2,784
348
2,628
—
—
20,619
20,619
5,303
4,199
6,894
22,986
172
6,516
20,619
20,619
5,215
4,118
6,661
27,973
1,546
13,791
—
—
—
—
—
84
636
1,583
(dollars in thousands)
Time deposits
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 contractual obligations
$
472,425 $
295,123 $
79,950 $
10,044 $
87,308
(1)
(2)
(3)
(4)
(5)
Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a quarterly basis
beginning October 7, 2008, matures October 7, 2033.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.55%, callable in whole or in part by the Company on a quarterly basis
beginning July 23, 2009, matures July 23, 2034.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.25%, callable in whole or in part by the Company on a quarterly basis
beginning April 24, 2008, matures April 24, 2033.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.80%, callable in whole or in part by the Company on a quarterly basis
beginning July 23, 2009, matures July 23, 2034.
Junior subordinated debt, adjustable rate of three-month LIBOR plus 1.33%, callable in whole or in part by the Company on a quarterly basis
beginning March 15, 2011, matures March 15, 2036.
47
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(6) These amounts represent known certain payments to participants under the Company’s deferred compensation and supplemental retirement plans.
See Note 22 in the financial statements at Item 8 of this report for additional information related to the Company’s deferred compensation and
supplemental retirement plan liabilities.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Market Risk Management” under Item 7 of this report which is incorporated herein.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm – Moss Adams LLP
Page
50
51
51
52
53
55
101
102
49
Table of Contents
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 credit losses
Total loans, net
Premises and equipment, net
Cash value of life insurance
Accrued interest receivable
Goodwill
Other intangible assets, net
Operating leases, right-of-use
Other assets
Total assets
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand
Interest-bearing
Total deposits
Accrued interest payable
Operating lease liability
Other liabilities
Other borrowings
Junior subordinated debt
Total liabilities
Commitments and contingencies (Note 15)
Shareholders’ equity:
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
At December 31,
2020
At December 31,
2019
$
77,253 $
592,298
669,551
3,025
1,414,264
284,563
17,250
6,268
4,763,127
(91,847)
4,671,280
83,731
118,870
20,004
220,872
17,833
27,846
84,172
92,816
183,691
276,507
2,960
950,138
375,606
17,250
5,265
4,307,366
(30,616)
4,276,750
87,086
117,823
18,897
220,872
23,557
27,879
70,591
$
7,639,529 $
6,471,181
$
2,581,517 $
3,924,417
6,505,934
1,362
27,973
94,597
26,914
57,635
1,832,665
3,534,329
5,366,994
2,407
27,540
91,984
18,454
57,232
6,714,415
5,564,611
Preferred stock, no par value: 1,000,000 shares authorized; zero issued and outstanding at December 31, 2020 and 2019
—
—
Common stock, no par value: 50,000,000 shares authorized; issued and outstanding: 29,727,214 and 30,523,824 at
December 31, 2020 and 2019, respectively
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
530,835
381,999
12,280
925,114
$
7,639,529 $
543,998
367,794
(5,222)
906,570
6,471,181
50
Table of Contents
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
Provision for (benefit from) credit losses
Net interest income after provision for (benefit from) credit 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
Year ended December 31,
2020
2019
2018
$
233,721 $
223,750 $
186,117
27,627
3,566
1,032
1,238
39,810
4,002
1,285
3,597
33,997
4,345
1,705
2,054
267,184
272,444
228,218
6,885
17
2,555
9,457
257,727
42,813
214,914
37,981
2,989
2,949
9,122
7
2,146
55,194
112,121
70,637
182,758
87,350
22,536
11,716
387
3,272
15,375
257,069
(1,690)
258,759
6,996
2,745
3,131
12,872
215,346
2,583
212,763
40,417
38,460
2,877
3,029
3,282
110
3,805
3,151
2,718
2,371
207
2,154
53,520
49,061
106,065
79,392
185,457
126,822
34,750
93,942
74,530
168,472
93,352
25,032
68,320
$
$
$
64,814 $
92,072 $
2.17 $
2.16 $
3.02 $
3.00 $
2.57
2.54
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) 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 income (loss)
Comprehensive income
2020
Year ended
2019
2018
$
64,814 $
92,072 $
68,320
11,126
6,972
(596)
17,502
17,159
(4,502)
—
12,657
$
82,316 $
104,729 $
(12,434)
388
426
(11,620)
56,700
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data)
Balance at January 1, 2018
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
Stock options exercised
Service condition RSUs released
Tax benefit from release of service condition RSUs
Issuance of common stock
Repurchase of common stock
Dividends paid ($0.70 per share)
Balance at December 31, 2018
Net income
Other comprehensive income
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 ($0.82 per share)
Balance at December 31, 2019
Shares of
Common
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (loss)
22,955,963 $
255,836 $
255,200 $
(5,228) $
68,320
(62)
1,093
62
(1,093)
(11,620)
75
1,017
370
1,704
284,437
(1,677)
100,400
35,060
25,512
7,405,277
(104,989)
(2,292)
(18,769)
Total
505,808
68,320
—
—
(11,620)
75
1,017
370
1,704
—
—
284,437
(3,969)
(18,769)
30,417,223 $
541,762 $
303,490 $
(17,879) $
827,373
92,072
12,657
1,161
493
2,921
182,500
33,060
22,237
(131,196)
(2,339)
(2,769)
(24,999)
92,072
12,657
1,161
493
2,921
—
—
(5,108)
(24,999)
30,523,824 $
543,998 $
367,794 $
(5,222) $
906,570
Cumulative change from adoption of ASU 2016-13
—
—
(12,983)
—
(12,983)
Balance at January 1, 2020 (as adjusted for change in accounting
principle)
30,523,824
543,998
Net income
Other comprehensive income
Service condition RSU vesting
Market plus service condition RSU vesting
Service condition RSUs released
Market plus service condition RSUs released
Stock options exercised
Repurchase of common stock
Dividends paid ($0.88 per share)
Balance at December 31, 2020
1,390
646
547
(15,746)
34,388
20,265
32,000
(883,263)
354,811
64,814
(11,323)
(26,303)
(5,222)
893,587
17,502
64,814
17,502
1,390
646
—
—
547
(27,069)
(26,303)
29,727,214 $
530,835 $
381,999 $
12,280 $
925,114
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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) credit 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 (reversal of) losses on real estate owned
Deferred income tax expense
Gain on sale or transfer of loans, to real estate owned
Operating lease payments
Loss on disposal of fixed assets
Increase in cash value of life insurance
Gain on life insurance death benefit
(Gain) loss on marketable equity securities
Equity compensation vesting expense
Change in:
Interest receivable
Interest payable
Amortization of operating lease right of use asset
Other assets and liabilities, net
Net cash from operating activities
Investing activities:
Cash acquired 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 real estate owned
Purchases of premises and equipment
Life insurance proceeds
Net cash from investing activities
Financing activities:
Net change in deposits
Net change in other borrowings
Repurchase of common stock, net
Dividends paid
Exercise of stock options, net
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
53
Year ended December 31,
2020
2019
2018
$
64,814 $
92,072 $
68,320
6,453
5,724
42,813
2,669
(7)
(227,831)
234,424
(9,122)
2,634
128
(14,154)
(235)
(4,927)
67
(2,949)
(498)
(64)
2,036
(1,107)
(1,045)
5,393
9,586
114,802
—
167,515
89,858
229
(617,552)
—
(415,415)
(41,126)
570
(2,812)
2,400
6,915
5,723
(1,690)
2,547
(110)
(131,074)
131,689
(3,282)
1,811
(102)
1,692
(608)
(4,931)
82
(3,029)
(831)
(86)
1,654
515
410
4,592
(1,153)
102,806
—
97,993
68,346
127,066
(37,253)
—
7,014
3,499
2,583
2,512
(207)
(84,245)
86,988
(2,371)
146
89
2,600
(408)
—
185
(2,718)
—
64
1,462
(5,640)
1,067
—
10,129
91,069
30,613
73,014
68,937
293,279
(436,678)
7,429
(286,339)
(173,752)
—
1,336
(4,293)
3,355
—
2,527
(7,372)
—
(816,333)
(29,789)
(142,003)
1,138,940
8,460
(26,720)
(26,303)
198
1,094,575
393,044
276,507
528
2,615
(2,196)
(24,999)
9
(24,043)
48,974
227,533
$
669,551 $
276,507 $
365,400
(271,327)
(2,483)
(18,769)
218
73,039
22,105
205,428
227,533
Table of Contents
Supplemental disclosure of noncash activities:
Unrealized gain (loss) 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
Obligations incurred in conjunction with leased assets
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
The accompanying notes are an integral part of these consolidated financial statements.
$
$
$
$
$
$
$
$
15,796 $
24,361 $
(17,627)
766 $
736 $
4,161 $
10,502 $
29,500 $
— $
— $
1,249 $
5,108 $
156 $
1,262
1,486
—
14,965 $
35,050 $
11,805
14,525
— $
— $
1,463,100
1,171,968
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TRICO BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2020, 2019 and 2018
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 and
retail 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 $1,731,000 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
Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): "Recognition and Measurement of
Financial Assets and Financial Liabilities." ASU 2016-01 required 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. The adoption of this
guidance resulted in a $62,000 decrease to retaining earnings as of January 1, 2018 and a decrease to the deferred tax of $18,000. During the twelve
months ended December 31, 2020 and 2019, the Company recognized $64,000 and $86,000 of unrealized losses, respectively, in the consolidated
statements of income related to changes in the fair value of marketable equity securities.
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Debt Securities
The Company classifies its debt securities into one of three categories: trading, available for sale ("AFS") or held to maturity ("HTM"). 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. AFS 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. Discounts are amortized or accreted over the expected life of the related investment security as an adjustment to yield using the effective
interest method. Premiums on callable debt securities are generally amortized to the earliest call date of the security with the exception of mortgage
backed securities, where estimated prepayments, if any, are considered. 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 the three year
period ended December 31, 2020.
The Company has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately
in other assets in the consolidated balance sheets. A debt security is placed on nonaccrual status at the time any principal or interest payments become
more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on nonaccrual is
reversed against interest income. There was no accrued interest related to debt securities reversed against interest income for the years ended December
31, 2020 and 2019.
The Company evaluates available for sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the
amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in
other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the balance sheet,
limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the allowance for credit
losses and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale
debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is
recognized in earnings with a corresponding adjustment to the security's amortized cost basis. In evaluating available for sale debt securities in unrealized
loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair
value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuers' financial condition, among other factors. Changes in the allowance for credit losses are recorded
as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available
for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. No security credit losses were recognized
during the years ended December 31, 2020, 2019 or 2018.
For HTM debt securities, the Company measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type,
then further disaggregated by sector and bond rating. Accrued interest receivable on held-to-maturity (HTM) debt securities totaled $735,000 at
December 31, 2020 and is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information
that is adjusted for current condition and reasonable and supportable forecasts based on current and expected changes in credit ratings and default rates.
Based on the implied guarantees of the U. S. Government or its agencies related to certain of these HTM investment securities, and the absence of any
historical or expected losses, substantially all qualify for a zero loss assumption. Management has separately evaluated its HTM investment securities
from obligations of state and political subdivisions utilizing the historical loss data represented by similar securities over a period of time spanning nearly
50 years. As a result of this evaluation, management determined that the expected credit losses associated with these securities is not significant for
financial reporting purposes and therefore, no allowance for credit losses has been recognized during the years ended December 31, 2020, 2019 or 2018.
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 non-interest income.
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Table of Contents
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
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. Loans on which the accrual of interest has been
discontinued are designated as nonaccrual loans.
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 a 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. Accrued interest receivable is not included in the calculation of the allowance for credit losses.
Allowance for Credit Losses - Loans
The allowance for credit losses (ACL) is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be
collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible.
Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Regardless of the determination that
a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a
borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in
accordance with the original contract or modified terms, if appropriate.
Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.
Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a
cohort, then tracks the respective losses generated by that cohort of loans over the remaining life. The Company identified and accumulated loan cohort
historical loss data beginning with the fourth quarter of 2008 and through the current period. In situations where the Company's actual loss history was
not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than three billion and less than ten billion, were
utilized to create a minimum loss rate. Adjustments to historical loss information are made for differences in relevant current loan-specific risk
characteristics, such as historical timing of losses relative to the loan origination. In its loss forecasting framework, the Company incorporates forward-
looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios
incorporate variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to
changes in environmental conditions, such as California unemployment rates, household debt levels and U.S. gross domestic product.
A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral.
The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the
amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off
will be taken. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is
considered to be a troubled debt restructuring (TDR). The ACL on a TDR is measured using the same method as all other portfolio loans, except when the
value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using
the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan.
The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss:
Commercial real estate:
•
•
Commercial real estate - Non-owner occupied: These commercial properties typically consist of buildings which are leased to others for their
use and rely on rents as the primary source of repayment. Property types are predominantly office, retail, or light industrial but the portfolio also
has some special use properties. As such, the risk of loss associated with these properties is primarily driven by general economic changes or
changes in regional economies and the impact of such on a tenant’s ability to pay. Ultimately this can affect occupancy, rental rates, or both.
Additional risk of loss can come from new construction resulting in oversupply, the costs to hold or operate the property, or changes in interest
rates. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty
years.
Commercial real estate - Owner occupied: These credits are primarily susceptible to changes in the financial condition of the business operated
by the property owner. This may be driven by changes in, among other things, industry challenges, factors unique to the operating geography of
the borrower, change in the individual fortunes of the business owner, general economic conditions and changes in business cycles. 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 more by general economic conditions, the underlying collateral may have devalued more
and thus result in larger losses in the event of default. The terms on these loans at origination typically have maturities from five to ten years
with amortization periods from fifteen to thirty years.
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• Multifamily: These commercial properties are generally comprised of more than four rentable units, such as apartment buildings, with each unit
intended to be occupied as the primary residence for one or more persons. Multifamily properties are also subject to changes in general or
regional economic conditions, such as unemployment, ultimately resulting in increased vacancy rates or reduced rents or both. In addition, new
construction can create an oversupply condition and market competition resulting in increased vacancy, reduced market rents, or both. Due to
the nature of their use and the greater likelihood of tenant turnover, the management of these properties is more intensive and therefore is more
critical to the preclusion of loss.
•
Farmland: While the Company has few loans that were originated for the purpose of the acquisition of these commercial properties, loans
secured by farmland represent unique risks that are associated with the operation of an agricultural businesses. The valuation of farmland can
vary greatly over time based on the property's access to resources including but not limited to water, crop prices, foreign exchange rates,
government regulation or restrictions, and the nature of ongoing capital investment needed to maintain the quality of the property. Loans
secured by farmland typically represent less risk to the Company than other agriculture loans as the real estate typically provides greater support
in the event of default or need for longer term repayment.
Consumer loans:
•
•
•
SFR 1-4 1st DT Liens: The most significant drivers of potential loss within the Company's residential real estate portfolio relate general,
regional, or individual changes in economic conditions and their effect on employment and borrowers cash flow. Risk in this portfolio is best
measured by changes in borrower credit score and loan-to-value. Loss estimates are based on the general movement in credit score, economic
outlook and its effects on employment and the value of homes and the Bank’s historical loss experience adjusted to reflect the economic outlook
and the unemployment rate.
SFR HELOCs and Junior Liens: Similar to residential real estate term loans, HELOCs and junior liens performance is also primarily driven by
borrower cash flows based on employment status. However, HELOCs carry additional risks associated with the fact that most of these loans are
secured by a deed of trust in a position that is junior to the primary lien holder. Furthermore, the risk that as the borrower's financial strength
deteriorates, the outstanding balance on these credit lines may increase as they may only be canceled by the Company if certain limited criteria
are met. In addition to the allowance for credit losses maintained as a percent of the outstanding loan balance, the Company maintains
additional reserves for the unfunded portion of the HELOC.
Other: The majority of these consumer loans are secured by automobiles, with the remainder primarily unsecured revolving debt (credit cards).
These loans 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, if any. 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 those factors. Credit card loans are unsecured and while collection efforts are pursued in the event of default, there is typically
limited opportunity for recovery. Loss estimates are based on the general movement in credit score, economic outlook and its effects on
employment and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate.
Commercial and industrial:
•
Repayment of these loans is primarily based on the cash flow of the borrower, and secondarily on the underlying collateral provided by the
borrower. A borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, collateral
includes accounts receivable, inventory, or equipment. Collateral securing these loans may depreciate over time, may be difficult to appraise,
may be illiquid and may fluctuate in value based on the success of the business. Actual and forecast changes in gross domestic product are
believed to be corollary to losses associated with these credits.
Construction:
• While secured by real estate, construction loans represent a greater level of risk than term real estate loans due to the nature of the additional
risks associated with the not only the completion of construction within an estimated time period and budget, but also the need to either sell the
building or reach a level of stabilized occupancy sufficient to generate the cash flows necessary to support debt service and operating costs. The
Company seeks to mitigate the additional risks associated with construction lending by requiring borrowers to comply with lower loan to value
ratios and additional covenants as well as strong tertiary support of guarantors. The loss forecasting model applies the historical rate of loss for
similar loans over the expected life of the asset as adjusted for macroeconomic factors.
Agriculture production:
•
Repayment of agricultural loans is dependent upon successful operation of the agricultural business, which is greatly impacted by factors outside
the control of the borrower. These factors include adverse weather conditions, including access to water, that may impact crop yields, loss of
livestock due to disease or other factors, declines in market prices for agriculture products, changes in foreign exchange, and the impact of
government regulations. In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly
affect the successful operation of the business. Consequently, agricultural production loans may involve a greater degree of risk than other types
of loans.
Leases:
•
The loss forecasting model applies the historical rate of loss for similar loans over the expected life of the asset. Leases typically represent an
elevated level of credit risk as compared to loans secured by real estate as the collateral for leases is often subject to a more rapid rate of
depreciation or depletion. The ultimate severity of loss is impacted by the type of collateral securing the exposure, the size of the exposure, the
borrower’s industry sector, any guarantors and the geographic market. Assumptions of expected loss are conditioned to the economic outlook
and the other variables discussed above.
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Unfunded commitments:
•
The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted
above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the consolidated
balance sheet in other liabilities.
Real Estate Owned
Real estate owned (REO) includes assets acquired through, or in lieu of, loan foreclosure. REO is held for sale and are initially recorded at fair value less
estimated costs to sell at the date of acquisition, 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 non-interest expense, along with the gain or loss on sale of REO.
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.
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 non-interest
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.
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 non-interest 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 non-interest 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.
Leases
The Company records a right-of-use asset (“ROUA”) on the consolidated balance sheets for those leases that convey rights to control use of identified
assets for a period of time in exchange for consideration. The Company is also required to record a lease liability on the consolidated balance sheets for
the present value of future payment commitments. Substantially all of the Company’s leases are comprised of operating leases in which the Company is
lessee of real estate property for branches, ATM locations, and general administration and operations. The Company has elected not to include short-term
leases (i.e. leases with initial terms of twelve months or less) within the ROUA and lease liability. Known or determinable adjustments to the required
minimum future lease payments are included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future
lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable
lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance are not unknown and not determinable at lease
commencement and therefore, are not included in the determination of the Company’s ROUA or lease liability.
The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used
to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the
Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include
the extended term in the calculation of the ROU asset and lease liability. The Company uses the rate implicit in the lease whenever this rate is readily
determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a
similar term.
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 non-interest income.
Share-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors, based on the fair value of the awards at
the date of grant. The estimate of the fair value of stock options and performance based restricted awards are based on a Black-Scholes or Monte Carlo
model, respectively, while the market price of the common stock at the date of grant is used for time based restricted awards. Compensation cost is
recognized over the required service period, generally defined as the vesting or measurement period. The Company’s accounting policy is to recognize
forfeitures as they occur.
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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 non-interest 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 non-interest 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, 2020 and
December 31, 2019, 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 18 was not necessary. The following are
descriptions of revenues within the scope of ASC 606.
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 fees
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.
Commission 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.
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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. Gains or losses from transactions associated with other real estate owned are recorded as a component of non-interest expense.
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 amounts of net income, total assets or total shareholders’ equity.
Note 2 - New Accounting Pronouncements
Accounting Standards Adopted in 2020
On January 1, 2020, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which replaces the incurred loss methodology and is referred to as the current expected credit loss (CECL) methodology. The measurement
of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-
to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of
credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for
available for sale debt securities. One such change is to require increases or decreases in credit losses be presented as an allowance rather than as a write-
down on available for sale debt securities, based on management's intent to sell the security or likelihood the Company will be required to sell the security,
before recovery of the amortized cost basis.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit
exposures. Results for the reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be
reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets
purchased with credit deterioration (PCD) that were previously classified as purchase credit impaired (PCI) and accounted for under ASC 310-30. In
accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining
noncredit discount (based on the adjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption. The
Company recognized an increase in the ACL for loans totaling $18,913,000, including a reclassification of $481,000 from discounts on acquired loans to
the allowance for credit losses, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings,
net of $5,449,000 in taxes of $12,983,000. Management has separately evaluated its held-to-maturity investment securities from obligations of state and
political subdivisions and determined that no loss reserves were required.
On January 1, 2020 the Company adopted ASU 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350),
which 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.
There was no goodwill impairment recorded during the year ended December 31, 2020.
On January 1, 2020 the Company adopted ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value
Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities are no
longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but are required to disclose
the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the Coronavirus Disease 2019
(COVID-19) pandemic. The CARES Act provides optional temporary relief from troubled debt restructuring and impairment accounting requirements for
loan modifications related to the COVID-19 pandemic made during the period from March 1, 2020 to the earlier of December 31, 2020 or 60 days after
the national emergency concerning COVID-19 declared by the President terminates. The termination of these provisions was extended, to the earlier of 60
days after the COVID-19 national emergency date or January 1, 2022, with the Consolidated Appropriations Act of 2021. Banking regulators issued
similar guidance, which also clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at
the time the underlying loan modification program was implemented and if the modification was considered to be short-term. Following the passage of
the CARES Act legislation, the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected
by the Coronavirus" was issued by Federal bank regulators, which similarly offers temporary relief from troubled debt restructuring accounting for loan
payment deferrals for certain customers whose businesses are experiencing economic hardship due to Coronavirus. The Interagency Statement requires
the modification event to be short-term and COVID-19 related, requiring the borrower be not more than 30 days past due as of the date the modification
program was implemented, and allowing Management to apply judgement as to when the modification program terminates. The ability to suspend TDR
accounting under either program does not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic.
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Accounting Standards Pending Adoption
In October 2020, the FASB issued ASU No. 2020-10, "Codification Improvements" to address suggestions received from stakeholders on the Accounting
Standards Codification and to make other incremental improvements to GAAP. ASU 2020-10 is effective for annual periods beginning after December
15, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.
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, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
$
795,555 $
17,710 $
(891) $
812,374
123,347
2,459
473,720
5,748
85
1,682
—
—
(5,151)
129,095
2,544
470,251
Total debt securities available for sale
$
1,395,081 $
25,225 $
(6,042) $
1,414,264
Debt Securities Held to Maturity
Obligations of U.S. government agencies
Obligations of states and political subdivisions
Total debt securities held to maturity
273,667
10,896
13,774
389
—
—
287,441
11,285
$
284,563 $
14,163 $
— $
298,726
There was no allowance for credit losses recorded for the held to maturity debt portfolio as of or for the year ended December 31, 2020.
Debt Securities Available for Sale
Obligations of U.S. government agencies
Obligations of states and political subdivisions
Corporate bonds
Asset backed securities
Total debt securities available for sale
Debt Securities Held to Maturity
Obligations of U.S. government agencies
Obligations of states and political subdivisions
Total debt securities held to maturity
Amortized
Cost
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
$
466,139 $
7,261 $
(420) $
472,980
106,373
2,430
371,809
3,229
102
129
(1)
—
(6,913)
109,601
2,532
365,025
946,751 $
10,721 $
(7,334) $
950,138
361,785 $
6,072 $
(480) $
367,377
13,821
327
—
14,148
375,606 $
6,399 $
(480) $
381,525
$
$
$
During 2020, proceeds from sales of debt securities were $229,000, resulting in gross gains of $7,000. During 2019, proceeds from sales of debt securities
were $127,066,000, resulting in a gross gains of $338,000 and gross losses of $228,000. During 2018, proceeds from sales of debt securities totaled
$293,279,000, resulting in gross gains of $207,000. Investment securities with an aggregate carrying value of $429,049,000 and $466,321,000 at
December 31, 2020 and 2019, 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, 2020 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, 2020, obligations of U.S. government and agencies with an amortized cost basis totaling $828,047,000 consist almost entirely of residential
real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For
purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies
is categorized based on final maturity date. At December 31, 2020, the Company estimates the average remaining life of these mortgage-backed securities
issued by U.S. government corporations and agencies to be approximately 3.06 years. Average remaining life is defined as the time span after which the
principal balance has been reduced by half.
63
Table of Contents
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
Totals
Available for Sale
Held to Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
20,000 $
19,994 $
— $
—
193,791
157,945
194,337
159,670
1,023,345
1,040,263
993
18,755
264,815
1,135
19,640
277,951
$
1,395,081 $
1,414,264 $
284,563 $
298,726
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, were as follows:
December 31, 2020
Debt Securities Available for Sale
Less than 12 months
Fair
Value
Unrealized
Loss
12 months or more
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
(in thousands)
Obligations of U.S. government agencies
$
160,543 $
(891) $
— $
— $
160,543 $
Asset backed securities
51,544
(441)
297,020
(4,710)
348,564
Total debt securities available for sale
$
212,087 $
(1,332) $
297,020 $
(4,710) $
509,107 $
(891)
(5,151)
(6,042)
December 31, 2019
Debt Securities Available for Sale
Less than 12 months
Fair
Value
Unrealized
Loss
12 months or more
Fair
Value
Unrealized
Loss
(in thousands)
Total
Fair
Value
Unrealized
Loss
Obligations of U.S. government agencies
$
36,709 $
(309) $
23,852 $
(111) $
60,561 $
Obligations of states and political subdivisions
778
(1)
—
—
778
Asset backed securities
237,463
(4,535)
99,981
(2,378)
337,444
Total securities available for sale
$
274,950 $
(4,845) $
123,833 $
(2,489) $
398,783 $
(420)
(1)
(6,913)
(7,334)
Debt Securities Held to Maturity
Obligations of U.S. government agencies
$
18,813 $
(142) $
62,952 $
(338) $
81,765 $
(480)
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, 2020, 10 debt securities
representing obligations of U.S. government corporations and agencies had unrealized losses with aggregate depreciation of 0.55% 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, 2020 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,
2020, 30 asset backed securities had unrealized losses with aggregate depreciation of 1.46% from the Company’s amortized cost basis.
Marketable equity securities: All unrealized gains recognized during the reporting period were for equity securities still held at December 31, 2020.
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Table of Contents
Note 4 – Loans
A summary of loan balances follows:
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total loans, net of deferred loan fees and discounts
Total principal balance of loans owed, net of charge-offs
Unamortized net deferred loan fees
Discounts to principal balance of loans owed, net of charge-offs
Total loans, net of unamortized deferred loan fees and discounts
Allowance for credit losses
December 31,
2020
December 31,
2019
$
1,535,555 $
1,609,556
624,375
639,480
152,492
546,434
517,725
145,067
2,951,902
2,818,782
546,592
327,484
78,032
952,108
526,327
284,842
44,164
3,784
4,763,127 $
4,805,596 $
(16,984)
(25,485)
509,508
362,886
82,656
955,050
249,791
249,827
32,633
1,283
4,307,366
4,351,725
(8,927)
(35,432)
4,763,127 $
4,307,366
(91,847) $
(30,616)
$
$
$
$
In March 2020, the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was created to help small businesses keep workers
employed during the COVID-19 crisis. As of December 31, 2020, the total gross outstanding balance of Paycheck Protection Program (PPP) loans was
$333,982,000, which net of approximately $7,212,000 in net deferred fee income, were included in the commercial and industrial loan category, as
compared to total PPP originations of $438,510,000. During the twelve months ended December 31, 2020, the Company recognized $7,760,000 in fees
on PPP loans.
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Table of Contents
Note 5 – Allowance for Credit Losses
The allowance for credit losses (ACL) was $91,847,000 as of December 31, 2020 as compared to $49,529,000 as of the adoption date of the current
expected credit loss accounting standard and related methodology on January 1, 2020. Changes in loan volume and changes in credit quality associated
with levels of classified, past due and non-performing loans in addition to changes in qualitative factors, result in the need for changes in the balance of
the allowance for credit losses. In addition to the quantitative loan portfolio credit quality characteristics which are illustrated in the following tabular
disclosures, the Company’s expected credit loss methodology incorporates the use of qualitative factors. The two most critical qualitative factors utilized
by the Company include the actual and forecasted changes in both California unemployment and U.S. gross domestic product. During the year ended
December 31, 2020, these qualitative factors experienced significant volatility and deterioration which resulted in a significant increase in the related
component of the allowance for credit losses. The table below sets forth the components of the Company’s allowance for credit losses as of the dates
indicated.
(dollars in thousands)
Allowance for credit losses:
December 31, 2020
January 1, 2020
December 31, 2019
Qualitative and forecast factor allowance
$
61,935 $
21,830 $
Quantitative (Cohort) model allowance reserves
Total allowance for credit losses
Allowance for individually evaluated loans
Allowance for PCD loan losses
Allowance for PCI loan losses
Total allowance for credit losses
28,462
90,397
1,450
—
n/a
26,900
48,730
799
—
n/a
12,146
17,529
29,675
935
n/a
6
$
91,847 $
49,529 $
30,616
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)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Allowance for credit losses on loans
Reserve for unfunded commitments
Total
Allowance for Credit Losses – December 31, 2020
Beginning
Balance
Impact of
CECL
Adoption
Charge-offs
Recoveries
Provision
Ending
Balance
$
— $
—
—
(182)
(182)
198 $
28
—
—
226
16,533 $
6,525
5,839
909
29,806
(13)
(116)
(670)
(799)
(774)
—
—
—
(1,755)
416
304
347
1,067
568
—
24
—
1,885
4,733
762
1,017
6,512
1,552
3,219
1,103
(4)
42,188
—
(1,755) $
—
1,885 $
625
42,813 $
$
29,380
10,861
11,472
1,980
53,693
10,117
11,771
3,260
25,148
4,252
7,540
1,209
5
91,847
3,400
95,247
$
5,948 $
2,027
3,352
668
11,995
2,306
6,183
1,595
10,084
4,867
3,388
261
21
30,616
2,775
33,391 $
$
6,701
2,281
2,281
585
11,848
2,675
4,638
971
8,284
(1,961)
933
(179)
(12)
18,913
—
18,913
66
Table of Contents
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Allowance for loan losses
Reserve for unfunded commitments
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Allowance for loan losses
Reserve for unfunded commitments
Allowance for Loan Losses – December 31, 2019
Beginning
Balance
Charge-offs
Recoveries
Provision
Ending
Balance
7,401 $
2,711
2,429
403
12,944
2,676
7,582
793
11,051
5,610
2,497
480
—
32,582 $
— $
(746)
—
—
(746)
(2)
(3)
(765)
(770)
(2,104)
—
(19)
—
(3,639) $
1,486 $
42
—
—
1,528
54
935
321
1,310
513
—
12
—
3,363 $
(2,939) $
20
923
265
(1,731)
(422)
(2,331)
1,246
(1,507)
848
891
(212)
21
(1,690) $
5,948
2,027
3,352
668
11,995
2,306
6,183
1,595
10,084
4,867
3,388
261
21
30,616
Reserve for Unfunded Commitments - December 31, 2019
2,575 $
— $
— $
200 $
2,775
Allowance for Loan Losses – December 31, 2018
Beginning
Balance
Charge-offs
Recoveries
Provision
Ending
Balance
6,693 $
2,686
1,491
571
11,441
2,317
7,641
586
10,544
5,757
1,826
755
—
30,323 $
(15) $
—
—
—
(15)
(77)
(301)
(783)
(1,161)
(1,103)
—
(85)
—
(2,364) $
47 $
20
—
—
67
—
1,143
288
1,431
445
—
97
—
2,040 $
676 $
5
938
(168)
1,451
436
(901)
702
237
511
671
(287)
—
2,583 $
7,401
2,711
2,429
403
12,944
2,676
7,582
793
11,051
5,610
2,497
480
—
32,582
Reserve for Unfunded Commitments - December 31, 2018
3,164 $
— $
— $
(589) $
2,575
$
$
$
$
$
$
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 analyzes loans individually to classify the loans as to credit risk and grading. This analysis is performed annually for
all outstanding balances greater than $1,000,000 and non-homogeneous loans, such as commercial real estate loans, unless other indicators, such as
delinquency, trigger more frequent evaluation. Loans below the $1,000,000 threshold and homogenous in nature are evaluated as needed for proper
grading based on delinquency and borrower credit scores.
67
Table of Contents
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.
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:
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2020
(in thousands)
Commercial real estate:
2020
2019
2018
2017
2016
Prior
CRE non-owner occupied risk ratings
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
Total
Pass
Special Mention
Substandard
Doubtful/Loss
Total CRE non-owner
occupied risk ratings
$ 120,520 $ 207,899 $ 155,730 $ 256,677 $ 179,523 $ 460,644 $
76,730 $
—
—
—
7,455
—
—
11,692
1,449
—
5,407
584
—
15,773
2,147
—
18,832
2,288
—
12,205
—
—
— $ 1,457,723
71,364
—
—
6,468
—
—
$ 120,520 $ 215,354 $ 168,871 $ 262,668 $ 197,443 $ 481,764 $
88,935 $
— $ 1,535,555
Commercial real estate:
CRE owner occupied risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
Total CRE owner occupied
risk ratings
$ 105,896 $
75,144 $
53,816 $
58,371 $
54,541 $ 227,828 $
25,508 $
—
—
—
—
1,533
—
288
1,301
—
7,451
475
—
2,955
1,306
—
6,140
1,822
—
—
—
—
— $ 601,104
16,834
—
—
—
6,437
—
$ 105,896 $
76,677 $
55,405 $
66,297 $
58,802 $ 235,790 $
25,508 $
— $ 624,375
68
Table of Contents
(in thousands)
Commercial real estate:
Multifamily risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2020
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
Total
$
77,646 $ 118,725 $ 113,882 $
70,112 $
67,457 $ 123,518 $
19,007 $
9,441
— —
—
603
24,687
772
9,259
—
—
4,371
—
— —
— —
— —
— —
— —
—
—
—
—
—
— $ 590,347
44,762
—
—
—
4,371
—
Total multifamily loans
$
87,087 $ 123,096 $ 113,882 $
70,715 $
92,144 $ 124,290 $
28,266 $
— $ 639,480
Commercial real estate:
Farmland risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$
17,640 $
25,003 $
19,148 $
12,834 $
7,377 $
17,129 $
39,411 $
— $ 138,542
—
—
—
2,567
700
—
—
—
—
1,271
602
—
227
—
—
3,107
1,214
—
2,258
2,004
—
—
—
—
9,430
4,520
—
Total farmland loans
$
17,640 $
28,270 $
19,148 $
14,707 $
7,604 $
21,450 $
43,673 $
— $ 152,492
Consumer loans:
SFR 1-4 1st DT liens risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$ 183,719 $
80,717 $
36,342 $
53,001 $
46,467 $ 126,465 $
76 $
—
—
—
290
—
684
1,174
110
929
—
81,007 $
—
38,200 $
—
54,040 $
15
935
—
2,936
5,763
—
47,417 $ 135,164 $
—
—
—
76 $
5,507 $ 532,294
4,969
934
528
—
9,329
—
6,969 $ 546,592
Total SFR 1st DT liens
$ 183,719 $
Consumer loans:
SFR HELOCs and Junior Liens risk ratings
$
793 $
— $
13 $
360 $
300 $
910 $ 297,160 $
—
—
—
—
—
—
16
—
—
—
—
—
—
—
—
83
39
—
4,504
6,698
—
14,051 $ 313,587
5,392
789
1,768
—
8,505
—
$
793 $
— $
29 $
360 $
300 $
1,032 $ 308,362 $
16,608 $ 327,484
Pass
Special Mention
Substandard
Doubtful/Loss
Total SFR HELOCs and
Junior Liens
Consumer loans:
Other risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
Total other consumer loans
$
$
25,876 $
29,539 $
14,170 $
4,238 $
1,020 $
967 $
986 $
43
58
208
82
147
210
74
74
24
12
65
140
90
9
—
25,977 $
—
29,829 $
—
14,527 $
— —
4,386 $
—
1,056 $
—
1,172 $
—
1,085 $
69
— $
76,796
—
—
—
— $
651
585
—
78,032
Table of Contents
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2020
(in thousands)
Commercial and industrial loans:
2020
Commercial and industrial risk ratings
2019
2018
2017
2016
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
Total
Pass
Special Mention
Substandard
Doubtful/Loss
Total commercial and
industrial loans
Construction loans:
Construction risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$ 356,701 $
48,838 $
20,463 $
13,151 $
5,185 $
9,490 $
65,938 $
—
—
—
102
301
—
698
53
—
195
1,142
—
20
823
—
178
148
—
207
1,519
—
1,085 $ 520,851
1,411
11
79
—
4,065
—
$ 356,701 $
49,241 $
21,214 $
14,488 $
6,028 $
9,816 $
67,664 $
1,175 $ 526,327
$
69,133 $
41,786 $
92,191 $
51,082 $
20,868 $
2,876 $
— $
—
—
—
—
—
—
—
—
—
346
—
—
—
1,780
4,529
—
251
—
—
—
—
— $ 277,936
2,126
—
—
—
4,780
—
Total construction loans
$
69,133 $
41,786 $
92,191 $
51,428 $
25,397 $
4,907 $
— $
— $ 284,842
Agriculture production loans:
Agriculture production risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$
977 $
2,079 $
1,590 $
1,838 $
663 $
708 $
36,051 $
— $
43,906
—
—
—
—
—
—
203
—
—
—
—
—
49
6
—
—
—
—
—
—
—
—
—
—
252
6
—
Total agriculture production
loans
$
977 $
2,079 $
1,793 $
1,838 $
718 $
708 $
36,051 $
— $
44,164
Leases:
Lease risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
Total leases
Total loans outstanding:
Risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$
3,784 $
— $
— $
— $
— $
— $
— $
— $
3,784
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
3,784 $
— $
— $
— $
— $
— $
— $
— $
3,784
$ 962,685 $ 629,730 $ 507,345 $ 521,664 $ 383,401 $ 970,535 $ 560,867 $
9,484
10,622
13,728
15,457
43,750
58
—
6,987
4,187
3,806
9,758
—
—
—
—
33,893
11,665
—
28,523
10,230
—
20,643 $ 4,556,870
157,191
1,734
2,375
—
49,066
—
Total loans outstanding
$ 972,227 $ 647,339 $ 525,260 $ 540,927 $ 436,909 $ 1,016,093 $ 599,620 $
24,752 $ 4,763,127
70
Table of Contents
The following information related to loan originations by vintage are presented for comparison purposes only.
Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019
(in thousands)
Commercial real estate:
2019
2018
2017
2016
Prior
CRE non-owner occupied risk ratings
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term
Total
Pass
Special Mention
Substandard
Doubtful/Loss
Total CRE non-owner
occupied risk ratings
$
253,321 $
174,869 $
287,183 $
221,864 $
578,255 $
77,070 $
—
—
—
—
1,183
—
3,182
474
—
8,401
—
—
616
3,138
—
—
—
—
— $ 1,592,562
12,199
—
—
—
4,795
—
$
253,321 $
176,052 $
290,839 $
230,265 $
582,009 $
77,070 $
— $ 1,609,556
Commercial real estate:
CRE owner occupied risk ratings
$
57,376 $
54,298 $
73,019 $
69,136 $
263,750 $
18,524 $
— $
—
601
—
—
—
—
437
493
—
745
726
—
3,459
3,870
—
—
—
—
—
—
—
536,103
4,641
5,690
—
$
57,977 $
54,298 $
73,949 $
70,607 $
271,079 $
18,524 $
— $
546,434
Pass
Special Mention
Substandard
Doubtful/Loss
Total CRE owner occupied
risk ratings
Commercial real estate:
Multifamily risk ratings
Pass
$
82,435 $
112,739 $
41,673 $
99,170 $
141,040 $
36,061 $
— $
Special Mention
Substandard
Doubtful/Loss
—
—
—
—
—
—
—
—
—
—
2,024
—
1,103
1,480
—
—
—
—
—
—
—
513,118
2,583
2,024
—
Total multifamily loans
$
82,435 $
112,739 $
41,673 $
101,194 $
142,143 $
37,541 $
— $
517,725
Commercial real estate:
Farmland risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$
26,786 $
21,212 $
12,248 $
9,618 $
22,471 $
41,783 $
— $
—
—
—
—
—
—
1,346
624
—
226
466
—
3,289
2,929
—
774
1,295
—
—
—
—
134,118
5,635
5,314
—
Total farmland loans
$
26,786 $
21,212 $
14,218 $
10,310 $
28,689 $
43,852 $
— $
145,067
Consumer loans:
SFR 1-4 1st DT liens risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$
102,612 $
63,542 $
73,195 $
65,051 $
187,972 $
— $
6,242 $
—
—
—
—
813
—
1,408
711
—
19
52
—
2,564
4,050
—
—
—
—
723
554
—
498,614
4,714
6,180
—
Total SFR 1st DT liens
$
102,612 $
64,355 $
75,314 $
65,122 $
194,586 $
— $
7,519 $
509,508
71
Table of Contents
Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019
(in thousands)
Consumer loans:
2019
2018
2017
2016
Prior
SFR HELOCs and Junior Liens risk ratings
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term
Total
Pass
Special Mention
Substandard
Doubtful/Loss
Total SFR HELOCs and
Junior Liens
Consumer loans:
Other risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$
1,412 $
14 $
382 $
403 $
2,077 $
327,589 $
19,531 $
—
—
—
20
—
—
—
—
—
—
156
—
4
14
—
4,189
4,208
—
1,169
1,718
—
351,408
5,382
6,096
—
$
1,412 $
34 $
382 $
559 $
2,095 $
335,986 $
22,418 $
362,886
$
45,876 $
23,045 $
7,176 $
2,245 $
2,071 $
1,402 $
— $
56
60
—
182
—
—
176
13
—
52
—
—
161
35
—
91
15
—
—
—
—
81,815
718
123
—
Total other consumer loans
$
45,992 $
23,227 $
7,365 $
2,297 $
2,267 $
1,508 $
— $
82,656
Commercial and industrial loans:
Commercial and industrial risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
Total commercial and
industrial loans
Construction loans:
Construction risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$
61,720 $
31,149 $
24,176 $
10,747 $
16,346 $
96,654 $
973 $
—
—
—
339
47
—
1,141
1,281
—
151
1,571
—
164
401
—
1,921
814
—
110
86
—
241,765
3,826
4,200
—
$
61,720 $
31,535 $
26,598 $
12,469 $
16,911 $
99,389 $
1,169 $
249,791
$
50,275 $
92,449 $
76,042 $
18,973 $
7,322 $
— $
— $
—
—
—
—
—
—
—
—
—
4,202
—
—
317
247
—
—
—
—
—
—
—
245,061
4,519
247
—
Total construction loans
$
50,275 $
92,449 $
76,042 $
23,175 $
7,886 $
— $
— $
249,827
Agriculture production loans:
Agriculture production risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
$
1,929 $
1,201 $
1,324 $
1,012 $
834 $
26,306 $
— $
—
—
—
—
—
—
—
—
—
—
27
—
—
—
—
—
—
—
—
—
—
32,606
—
27
—
Total agriculture production
loans
$
1,929 $
1,201 $
1,324 $
1,039 $
834 $
26,306 $
— $
32,633
72
Table of Contents
(in thousands)
Leases:
Lease risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
Total leases
Total loans outstanding:
Risk ratings
Pass
Special Mention
Substandard
Doubtful/Loss
Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019
2019
2018
2017
2016
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term
Total
$
1,283 $
— $
— $
— $
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,283
—
—
—
$
1,283 $
— $
— $
— $
— $
— $
— $
1,283
$
685,025 $
574,518 $
596,418 $
498,219 $ 1,222,138 $
625,389 $
26,746 $ 4,228,453
56
661
—
541
2,043
—
7,690
3,596
—
13,796
5,022
—
11,677
14,684
—
8,455
6,332
—
2,002
2,358
—
44,217
34,696
—
Total loans outstanding
$
685,742 $
577,102 $
607,704 $
517,037 $ 1,248,499 $
640,176 $
31,106 $ 4,307,366
Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with the borrower and
attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss, using a recent
valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to the estimated net realizable amount.
Depending on the length of time until ultimate collection, the Bank may revalue the underlying collateral and take additional charge-offs as warranted.
Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are
taken when collateral is liquidated and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued
through lawsuit and attachment of wages or judgment liens on borrower’s other assets.
The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total
Analysis of Past Due Loans - As of December 31, 2020
30-59 days
60-89 days
> 90 days
Total Past
Due Loans
Current
Total
$
127 $
173 $
239 $
539 $
1,535,016 $
1,535,555
297
—
899
1,323
37
418
41
496
155
—
—
—
—
—
—
173
—
212
13
225
426
—
—
—
824
—
70
1,133
960
1,671
100
2,731
105
—
—
—
1,121
—
969
623,254
639,480
151,523
624,375
639,480
152,492
2,629
2,949,273
2,951,902
997
2,301
154
3,452
686
—
—
—
545,595
325,183
77,878
948,656
525,641
284,842
44,164
3,784
546,592
327,484
78,032
952,108
526,327
284,842
44,164
3,784
$
1,974 $
824 $
3,969 $
6,767 $
4,756,360 $
4,763,127
73
Table of Contents
The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total
Analysis of Past Due Loans - As of December 31, 2019
30-59 days
60-89 days
> 90 days
Total Past
Due Loans
Current
Total
$
268 $
136 $
114 $
518 $
1,609,038 $
1,609,556
—
283
30
581
1,149
1,258
172
2,579
603
—
49
—
—
—
—
136
371
580
1
952
297
—
—
—
293
2,024
—
2,431
1,957
1,088
23
3,068
24
—
—
—
293
2,307
30
3,148
3,477
2,926
196
6,599
924
—
49
—
546,141
515,418
145,037
546,434
517,725
145,067
2,815,634
2,818,782
506,031
359,960
82,460
948,451
248,867
249,827
32,584
1,283
509,508
362,886
82,656
955,050
249,791
249,827
32,633
1,283
$
3,812 $
1,385 $
5,523 $
10,720 $
4,296,646 $
4,307,366
The following table shows the ending balance of non accrual loans by loan category as of the date indicated:
Non Accrual Loans
As of December 31, 2020
As of December 31, 2019
Non accrual
with no
allowance for
credit losses
Total non
accrual
Past due 90
days or more
and still
accruing
Non accrual
with no
allowance for
credit losses
Total non
accrual
Past due 90
days or more
and still
accruing
$
3,110 $
3,110 $
— $
639 $
642 $
3,111
—
1,468
7,689
4,950
4,480
68
9,498
652
4,546
5
22,390
(687)
4,061
—
1,538
8,709
5,093
6,148
167
11,408
2,183
4,546
18
—
26,864
(811)
—
—
—
—
—
—
—
—
—
—
—
—
—
1,411
2,024
1,242
5,316
5,023
3,992
4
9,019
476
—
14
1,408
2,024
1,242
5,316
5,192
4,217
32
9,441
2,050
—
38
14,825
(916)
16,845
(990)
$
21,703 $
26,053 $
— $
13,909 $
15,855 $
—
—
—
—
—
—
—
19
19
—
—
—
—
19
—
19
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Sub-total
Less: Guaranteed loans
Total, net
Interest income on non accrual loans that would have been recognized during the years ended December 31, 2020, 2019, and 2018, if all such loans had
been current in accordance with their original terms, totaled $1,804,000, $1,201,000, and $2,706,000, respectively. Interest income actually recognized on
these loans during the years ended December 31, 2020, 2019, and 2018 was $701,000, $372,000, and $1,475,000, respectively.
74
Table of Contents
The following tables present the amortized cost basis of collateral dependent loans by class of loans as of the following periods:
Total commercial real estate loans
3,241
1,611
1,668
—
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total
Retail
Office
Warehouse
Other Multifamily
Farmland
SFR -1st Deed
SFR -2nd Deed Automobile/Truck A/R and Inventory Equipment
Total
As of December 31, 2020
$
2,445 $
435 $
— $ — $
— $
— $
— $
— $
— $
— $
— $
796
—
—
1,176
1,668
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
42
42
292
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,538
1,538
—
—
—
—
—
—
—
—
—
—
—
—
5,068
1,855
—
6,923
—
4,547
—
—
—
—
—
—
—
2,839
—
2,839
—
—
—
—
—
—
—
—
—
—
97
97
—
—
—
—
—
—
—
—
—
—
—
—
1,173
—
13
—
—
—
—
—
—
—
—
75
—
5
—
$
3,241 $
1,611 $
1,668 $ 334 $
— $
1,538 $
11,470 $
2,839 $
97 $
1,186 $
80 $
24,064
Retail
Office Warehouse
Other Multifamily
Farmland
SFR -1st Deed
SFR -2nd Deed Automobile/Truck A/R and Inventory Equipment
Total
As of December 31, 2019
$
2,145 $ —
$
1,220 $ 497 $
— $
— $
— $
— $
— $
— $
— $
361
—
—
—
—
—
—
—
—
—
—
163
—
—
163
—
—
—
—
—
—
—
—
420
—
—
13
—
—
—
2,060
— —
1,640
510
2,060
—
—
1,242
1,242
—
—
—
—
—
—
—
—
—
—
3
3
107
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,341
—
—
5,341
—
—
—
—
—
—
—
—
—
3,848
—
3,848
—
—
—
—
—
—
—
—
—
—
27
27
—
—
—
—
—
—
—
—
—
—
—
—
1,926
—
26
—
1,000
—
—
1,000
—
—
—
—
14
—
12
—
$
2,506 $
163
$
1,640 $ 620 $
2,060 $
1,242 $
5,341 $
3,848 $
27 $
1,952 $
1,026 $
20,425
75
2,880
3,640
—
1,538
8,058
5,068
4,694
139
9,901
1,540
4,547
18
—
3,862
1,957
2,060
1,242
9,121
5,341
3,848
30
9,219
2,047
—
38
—
Total commercial real estate loans
2,506
Table of Contents
The following tables show certain information regarding Troubled Debt Restructurings that occurred during the periods indicated: 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.
TDR information for the year ended December 31, 2020
Pre-mod
outstanding
principal
balance
Post-mod
outstanding
principal
balance
Financial
impact due to
TDR taken as
additional
provision
Number that
defaulted during
the period
Recorded
investment of
TDRs that
defaulted during
the period
Number
Financial impact
due to the
default of
previous TDR
taken as charge-
offs or additional
provisions
1 $
4
—
5
10
—
2
—
2
6
—
—
—
319 $
314 $
1,847
—
1,566
3,732
—
172
—
172
1,877
—
1,636
3,827
—
169
—
169
2,106
2,078
—
—
—
—
—
—
314
67
—
—
381
—
—
—
—
90
—
—
—
1 $
1
—
1
3
3
2
—
5
—
—
—
—
141 $
950
—
451
1,542
1,180
140
—
1,320
—
—
—
—
18 $
6,010 $
6,074 $
471
8 $
2,862 $
—
—
—
—
—
—
(90)
—
(90)
—
—
—
—
(90)
TDR information for the year ended December 31, 2019
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
— $
2
— $
60
— $
67
—
—
2
3
3
—
6
10
—
—
—
—
—
60
659
214
—
873
—
—
67
662
215
—
877
1,918
1,885
—
—
—
—
—
—
18 $
2,851 $
2,829 $
—
—
—
—
—
30
29
—
59
—
—
—
—
59
— $
— $
—
—
—
—
—
—
—
—
1
—
—
—
1
—
—
—
—
—
—
—
—
7
—
—
—
7 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(dollars in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total
(dollars in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total
76
Table of Contents
(in thousands)
Commercial real estate:
CRE non-owner occupied
CRE owner occupied
Multifamily
Farmland
Total commercial real estate loans
Consumer:
SFR 1-4 1st DT liens
SFR HELOCs and junior liens
Other
Total consumer loans
Commercial and industrial
Construction
Agriculture production
Leases
Total
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 $
2
39 $
555
38 $
555
—
4
7
1
3
—
4
6
—
—
—
—
1,188
1,782
156
732
—
888
—
1,186
1,779
156
737
—
893
1,098
1,083
—
—
—
—
—
—
38
11
—
442
491
(35)
—
(35)
325
—
—
—
1 $
169 $
—
—
—
1
—
2
—
2
3
—
—
—
—
—
—
169
—
248
—
248
148
—
—
—
17 $
3,768 $
3,755 $
781 $
6 $
565 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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.
Note 6 – Real Estate Owned
A summary of the activity in the balance of real estate owned follows:
(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 real estate owned
Gain on sale of real estate owned
Year ended December 31,
2020
2019
$
2,541 $
766
(513)
50
2,844 $
(22) $
7
570 $
57 $
$
$
$
$
2,280
1,249
(1,090)
102
2,541
(139)
6
1,336
246
At December 31, 2020, the balance of real estate owned includes 4 foreclosed residential real estate properties recorded as a result of obtaining physical
possession of the property. At December 31, 2020, there were no residential real estate properties with formal foreclosure proceedings underway.
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Note 7 – Premises and Equipment
(in thousands)
Land and land improvements
Buildings
Furniture and equipment
Less: Accumulated depreciation
Construction in progress
Total premises and equipment
As of December 31,
2020
2019
$
29,505 $
65,334
45,994
140,833
(57,462)
83,371
360
$
83,731 $
29,453
65,241
45,723
140,417
(53,704)
86,713
373
87,086
Depreciation expense for premises and equipment amounted to $6,100,000, $6,472,000, and $6,104,000 during the years ended 2020, 2019, and 2018,
respectively.
Note 8 – Cash Value of Life Insurance
A summary of the activity in the balance of cash value of life insurance follows:
(in thousands)
Beginning balance
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,
2020
2019
$
117,823 $
117,318
—
2,949
498
(2,400)
$
$
118,870 $
197,379 $
183
14
62
—
3,029
831
(3,355)
117,823
199,084
189
14
63
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,
2020
Additions
Reductions
December 31,
2019
$
220,872
$
— $
— $
220,872
Impairment exists when a Company’s carrying value exceeds its fair value. Goodwill is evaluated for impairment annually. At September 30, 2020, 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, 2020, 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
Core deposit intangibles, net
December 31,
2020
Additions
Reductions/
Amortization
December 31,
2019
$
$
37,163 $
(19,330)
17,833
— $
—
— $
37,163
(5,724)
(13,606)
— $
(5,724) $
23,557
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
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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
2021
2022
2023
2024
2025
Thereafter
$
Estimated CDI
Amortization
5,464
4,776
4,269
2,482
533
309
$
17,833
Note 10 – Mortgage Servicing Rights
The following tables summarize the activity in, and the main assumptions used to determine the fair value of mortgage servicing rights for the periods
indicated (dollars in thousands):
(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
Year ended December 31,
2019
2018
2020
$
$
$
$
$
6,200
1,526
(2,634)
5,092
1,855
767,662
779,530
$
7,098
$
6,687
913
(1,811)
6,200
1,917
785,138
767,662
$
$
$
$
557
(146)
7,098
2,038
811,065
785,138
$
$
$
$
4.5 %
12.0 %
6.2 %
12.0 %
7.6 %
12.0 %
The changes in fair value of MSRs during 2020 were primarily due to changes in principal balances and mortgage prepayment speeds of the MSRs. The
changes in fair value of MSRs during 2019 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 2018 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.
Note 11 - Leases
The following table presents the components of lease expense for the periods indicated:
(in thousands)
Operating lease cost
Short-term lease cost
Variable lease cost
Sublease income
Total lease cost
Year ended December 31,
2020
2019
$
$
5,125 $
263
5
(120)
5,273 $
5,228
262
(29)
(131)
5,330
Prior to the adoption of ASU 2016-02, rent expense under operating leases was $6,348,000 for year ended 2018. Rent expense was offset by rent income
of $42,000 during the same period.
The following table presents supplemental cash flow information related to leases as of the periods ended:
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Table of Contents
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
ROUA obtained in exchange for operating lease liabilities
The following table presents the weighted average operating lease term and discount rate as of the periods ended:
Weighted-average remaining lease term
Weighted-average discount rate
At December 31, 2020, future expected operating lease payments are as follows (in thousands):
Periods ending December 31,
2021
2022
2023
2024
2025
Thereafter
Discount for present value of expected cash flows
Lease liability at December 31, 2020
Note 12 – Deposits
A summary of the balances of deposits follows:
(in thousands)
Noninterest-bearing demand
Interest-bearing demand
Savings
Time certificates, $250,000 and over
Other time certificates
Total deposits
Year ended December 31,
2020
2019
$
$
4,927 $
4,161 $
4,931
32,162
Year ended December 31,
2020
2019
9.9 years
3.1 %
9.3 years
3.2 %
$
$
4,565
4,230
3,554
3,278
2,911
14,546
33,084
(5,111)
27,973
December 31,
2020
2019
$
2,581,517 $
1,832,665
1,414,908
2,164,942
73,147
271,420
1,242,274
1,851,549
129,061
311,445
$
6,505,934 $
5,366,994
Certificate of deposit balances of $10,000,000 and $30,000,000 from the State of California were included in time certificates over $250,000 at
December 31, 2020 and 2019, respectively. The Bank participates in a deposit program offered by the State of California whereby the State may make
deposits at the Bank’s request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally more
favorable than other wholesale funding sources available to the Bank. Overdrawn deposit balances of $985,000 and $1,550,000 were classified as
consumer loans at December 31, 2020 and 2019, respectively.
At December 31, 2020, the scheduled maturities of time deposits were as follows (in thousands):
2021
2022
2023
2024
2025
Thereafter
Total
80
$
Scheduled
Maturities
265,906
62,081
9,826
2,470
4,280
4
$
344,567
Table of Contents
Note 13 – Other Borrowings
A summary of the balances of other borrowings follows:
(in thousands)
Other collateralized borrowings, fixed rate, as of December 31, 2020 and 2019 of 0.05%, payable on January 4, 2021
and January 2, 2020, respectively
Total other borrowings
December 31,
2020
2019
$
$
26,914 $
26,914 $
18,454
18,454
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, 2020, the Company has pledged as collateral and sold under agreements to repurchase investment securities with fair
value of $49,211,000 under these other collateralized borrowings.
The Company maintains a collateralized line of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2020, this line provided
for maximum borrowings of $1,932,399,000 of which none was outstanding. As of December 31, 2020, the Company had designated investment
securities with a fair value of $112,456,000 and loans totaling $3,205,959,000 as potential collateral under this collateralized line of credit with the FHLB.
The Company maintains a collateralized line of credit with the Federal Reserve Bank of San Francisco (“FRB”). As of December 31, 2020, this line
provided for maximum borrowings of $157,884,000 of which none was outstanding. As of December 31, 2020, the Company has designated investment
securities with fair value of $8,100 and loans totaling $328,011,000 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 $60,000,000 for federal funds transactions at
December 31, 2020.
Note 14 – Junior Subordinated Debt
At December 31, 2020, the Company had five wholly-owned subsidiary business trusts that had issued $63.0 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 period in which their values are fully allowed
to be included in the Company's capital ratio calculations 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 will continue to qualify as Tier 1 or Tier 2 capital under interim guidance issued by the Board of Governors of the Federal
Reserve System until only five years remain until their scheduled maturity.
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
7/23/2034
3/15/2036
$
20,619
20,619
6,186
5,155
10,310
62,889
Coupon Rate
(Variable)
3 mo. LIBOR +
As of December 31, 2020
Current
Coupon Rate
Recorded
Book Value
December 31,
2019
Recorded
Book Value
3.05 %
2.55 %
3.25 %
2.80 %
1.33 %
3.29 % $
20,619 $
2.76 %
3.46 %
3.01 %
1.55 %
20,619
5,303
4,199
6,894
20,619
20,619
5,215
4,118
6,661
$
57,635 $
57,232
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Note 15 – Commitments and Contingencies
Restricted Cash Balances — Reserves (in the form of deposits with the San Francisco Federal Reserve Bank) were not required to be maintained as of
December 31, 2020. Reserves totaling $136,370,000 were maintained to satisfy Federal regulatory requirements at December 31, 2019. These reserves
are included in cash and due from banks in the accompanying consolidated balance sheets.
Financial Instruments with Off-Balance-Sheet Risk — The Company is a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and
deposit account overdraft privilege. Those instruments involve, to varying degrees, elements of risk in excess of the amount recognized in the balance
sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet instruments. The Company’s exposure to loss in the event of nonperformance by
the other party to the financial instrument for deposit account overdraft privilege is represented by the overdraft privilege amount disclosed to the deposit
account holder.
The following table presents a summary of the Bank’s commitments and contingent liabilities:
(in thousands)
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans
Consumer loans
Real estate mortgage loans
Real estate construction loans
Standby letters of credit
Deposit account overdraft privilege
December 31,
2020
2019
$
462,422 $
534,223
202,306
227,876
15,056
110,813
363,793
533,576
188,959
222,998
12,014
110,402
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 1.6228 per
Class B share. As of December 31, 2020, the value of the Class A shares was $218.73 per share. Utilizing the conversion ratio, the value of unredeemed
Class A equivalent shares owned by the Bank was $4,755,000 as of December 31, 2020, 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
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Table of Contents
covered litigation, Visa may sell additional Class A shares, use the proceeds to settle litigation, and further reduce the conversion ratio. If funds remain in
the escrow account after all litigation is settled, the Class B conversion ratio will be increased to reflect that surplus.
Mortgage loans sold to investors may be sold with servicing rights retained, with only the standard legal representations and warranties regarding recourse
to the Bank. Management believes that any liabilities that may result from such recourse provisions are not significant.
Note 16 – Shareholders’ Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of $63,419,000, $32,669,000, and $26,432,000 in 2020, 2019, and 2018,
respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the State of California Department of Financial Protection
& Innovation (the “DFPI”). Absent approval from the Commissioner of the DPFI, 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, 2020, the Bank could have paid dividends of $111,492,000 to the Company without the approval of the Commissioner of the DPFI.
Stock Repurchase Plan
On November 12, 2019 the Board of Directors approved the authorization to repurchase up to 1,525,000 shares of the Company's common stock (the 2019
Repurchase Plan), which approximated 5.0% of the shares outstanding as of the approval date. The actual timing of any share repurchases will be
determined by the Company's management and therefore the total value of the shares to be purchased under the program is subject to change. The 2019
Repurchase Plan has no expiration date and as of and for year ended December 31, 2020, the Company repurchased 858,717 shares. There were no shares
repurchased during 2019 under the 2019 Repurchase Plan.
In connection with approval of the 2019 Repurchase Plan, the Company’s previous repurchase program adopted on August 21, 2007 (the 2007 Repurchase
Plan) was terminated. Under the 2007 Repurchase Plan, during the year ended December 31, 2019 the Company had repurchased zero total shares. There
were 26,966 shares of common stock with a fair value of $968,000 repurchased under the 2007 Repurchase Plan during the year ended December 31,
2018.
Stock Repurchased Under Equity Compensation Plans
The Company's shareholder-approved equity compensation plans permit employees to tender recently vested shares in lieu of cash for the payment of
withholding taxes on such shares. During the years ended December 31, 2020, 2019, and 2018, employees tendered 12,488, 115,954, and 59,025 shares,
respectively, of the Company's common stock in connection with option exercises. Employees also tendered 12,058, 15,242 and 45,964 shares in
connection with other share based awards during December 31, 2020, 2018 and 2017, respectively. In total, shares of the Company's common stock
tendered had market values of $735,837, $5,108,000, and $3,001,000 for the years ended December 31, 2020, 2018 and 2017, respectively. 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 or the other share based
award vests. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the 2019 or 2007 Repurchase Plans.
Note 17 – Stock Options and Other Equity-Based Incentive Instruments
In April 2019, the Company’s Board of Directors adopted the TriCo Bancshares 2019 Equity Incentive Plan (2019 Plan) covering officers, employees,
directors of, and consultants to, the Company. The 2019 Plan was approved by the Company’s shareholders in May 2019. The 2019 Plan allows the
Company to issue equity-based incentives representing up to 1,500,000 shares, such as incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units and performance awards (which could either be restricted stock or restricted stock units)
(collectively, Awards). The 2019 Plan contains several enhanced corporate governance provisions, including: expressly providing that executives’
Awards and cash incentive compensation are subject to TriCo’s potential clawback or recoupment if the Company must restate its financial statements;
generally imposing a one year minimum vesting period on Awards; generally requiring participants to hold at least 50% of the shares acquired under an
Award for at least one year; and clarifying that credit for dividends declared on shares of common stock underlying an Award is subject to the same
vesting requirements as the common stock underlying the Award.
The number of shares available for issuance under the 2019 Plan will be reduced by: (i) one share for each share of common stock issued pursuant to a
stock option; (ii) the total number of stock appreciation rights that are exercised, including any shares of common stock underlying such Awards that are
not actually issued to the participant as the result of a net settlement; (iii) two shares for each share of common stock issued pursuant to a performance
award, a restricted share Award or an RSU Award and (iv) any shares of common stock used to pay any exercise price or tax withholding obligation with
respect to any Award. When Awards made under the 2019 Plan expire or are forfeited or cancelled, the underlying shares will become available for future
Awards under the 2019 Plan. To the extent that a share of common stock pursuant to an Award that counted as two shares again becomes available for
issuance under the 2019 Plan, the number of shares of common stock available for issuance under the 2019 Plan will increase by two shares. If shares of
common stock issued pursuant to the Plan are repurchased by, or are surrendered or forfeited to the Company at no more than cost, then such shares will
again be available for the grant of Awards under the Plan. Any shares of common stock repurchased by the Company with cash proceeds from the exercise
of options will not, however, be added back to the pool of share available for issuance under the 2019 Plan. Shares awarded and delivered under the 2019
Plan may be authorized but unissued shares or reacquired shares. Shares tendered to TriCo or withheld from delivery to a participant as payment of the
exercise price or in connection with the “net exercise” of a stock option or to satisfy TriCo’s tax withholding obligations will not again become available
for future Awards under the 2019 Plan. As of December 31, 2020, there were no outstanding options for the purchase of common shares and 83,545 RSUs
were outstanding, and 1,222,011 shares remain available for issuance.
The 2019 Plan replaced the TriCo Bancshares 2009 Equity Incentive Plan (2009 Plan), which expired on March 26, 2019. As a result of its expiration, no
further awards may be issued under the 2009 Plan, though all awards under the 2009 Plan that were outstanding as of its expiration continue to be
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governed by the terms, conditions and procedures set forth in the 2009 Plan and any applicable award agreement. There were no new grants issued under
the 2009 Plan during 2019 prior to expiration, and as of December 31, 2020, 128,500 options for the purchase of common shares and 16,264 RSUs remain
outstanding.
Stock option activity is summarized in the following table for the dates indicated:
Outstanding at January 1, 2019
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2019
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2020
Number of
Shares
Option Price
per Share
343,000
—
(182,500)
—
$12.63 to $23.21
$
—
$12.63 to $19.46
$
—
160,500
$12.63 to $23.21
$
—
—
(32,000)
$14.54 to $19.46
$
—
— $
128,500
$14.54 to $23.21
$
Weighted
Average
Exercise
Price
16.67
—
16.00
—
17.60
—
17.10
—
17.72
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, 2020:
Number of options
Weighted average exercise price
Intrinsic value (in thousands)
Weighted average remaining contractual term (yrs.)
Currently
Exercisable
Currently Not
Exercisable
Total
Outstanding
$
$
128,500
17.72 $
2,277 $
1.98
—
— $
— $
—
128,500
17.72
2,277
1.98
All options outstanding as of December 31, 2020 are fully vested. The Company did not modify any option grants during the three year period ended
December 31, 2020.
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 expense
Total tax benefit recognized in income related to compensation costs for options
Excess tax benefit recognized in income
There were no stock options granted during 2020, 2019 and 2018, respectively.
Year Ended December 31,
2019
2018
2020
403,000 $
4,169,000 $
2,109,000
— $
— $
— $
— $
— $
— $
— $
75,000
75,000
22,000
1,233,000 $
623,000
$
$
$
$
$
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Restricted stock unit activity is summarized in the following table for the dates indicated:
Outstanding at January 1, 2020
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, 2020
Service Condition Vesting RSUs
Market Plus Service Condition
Vesting RSUs
Number
of RSUs
68,597
Weighted Average
Fair Value on
Date of Grant
Number of
RSUs
Weighted Average
Fair Value on
Date of Grant
51,312
64,036 $
31.26
46,416 $
23.30
—
2,937
(34,388)
(1,373)
99,809
5,847
—
(20,265)
(1,695)
81,615
The 99,809 of service condition vesting RSUs outstanding as of December 31, 2020 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 99,809 of service condition vesting RSUs outstanding as of December 31,
2020 are expected to vest, and be released, on a weighted-average basis, over the next 1.4 years. The Company expects to recognize $2,409,711 of pre-tax
compensation costs related to these service condition vesting RSUs between December 31, 2020 and their vesting dates. The Company did not modify any
service condition vesting RSUs during 2020 or 2019.
The 81,615 of market plus service condition vesting RSUs outstanding as of December 31, 2020 are expected to vest, and be released, on a weighted-
average basis, over the next 1.8 years. The Company expects to recognize $1,281,323 of pre-tax compensation costs related to these RSUs between
December 31, 2020 and their vesting dates. As of December 31, 2020, 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 122,423 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 2020 or 2019.
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
Year Ended December 31,
2019
2018
2020
$
$
$
$
1,390,000 $
1,161,237 $
1,017,000
646,000 $
493,000 $
370,000
372,000 $
141,000 $
104,000
194,000 $
146,000 $
191,000
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Note 18 – Non-interest Income and Expense
The components of other non-interest income were as follows:
(in thousands)
Debit and ATM and interchange fees
Service charges on deposit accounts
Other service fees
Mortgage banking service fees
Change in value of mortgage loan servicing rights
Total service charges and fees
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 investment securities
Gain (loss) on marketable equity securities
Other
Total other noninterest income
Total noninterest income
Year Ended December 31,
2019
2018
2020
$
21,660 $
20,639 $
13,944
3,156
1,855
(2,634)
37,981
2,989
2,949
9,122
668
414
7
64
1,000
17,213
16,657
3,015
1,917
(1,811)
40,417
2,877
3,029
3,282
878
529
110
86
2,312
13,103
$
55,194 $
53,520 $
18,249
15,467
2,852
2,038
(146)
38,460
3,151
2,718
2,371
678
449
207
(64)
1,091
10,601
49,061
Mortgage banking servicing fee income (expense), net of change in value of mortgage loan servicing rights, totaling $(779,000), $106,000, and
$1,892,000 were recorded within service charges and fees for the years ended December 31, 2020, 2019, and 2018, respectively.
The components of noninterest expense were as follows:
(in thousands)
Base salaries, net of deferred loan origination costs
Incentive compensation
Benefits and other compensation costs
Total salaries and benefits expense
Occupancy
Data processing and software
Equipment
ATM and POS network charges
Merger and acquisition expense
Advertising
Professional fees
Intangible amortization
Telecommunications
Regulatory assessments and insurance
Courier service
Operational losses
Postage
Gain on sale or acquisition of foreclosed assets
Loss on disposal of fixed assets
Other miscellaneous expense
Total other noninterest expense
Total noninterest expense
86
Year Ended December 31,
2019
2018
2020
70,164 $
10,022
31,935
112,121
14,528
13,504
5,704
5,433
—
2,827
3,222
5,724
2,601
1,594
1,414
1,168
1,068
(235)
67
12,018
70,637
182,758 $
70,218 $
13,106
22,741
106,065
14,893
13,517
7,022
5,447
—
5,633
3,754
5,723
3,190
1,188
1,308
986
1,258
(246)
82
15,637
79,392
185,457 $
62,422
11,147
20,373
93,942
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
(408)
185
14,191
74,530
168,472
$
$
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Note 19 – Income Taxes
The components of consolidated income tax expense are as follows (in thousands):
Current tax expense
Federal
State
Deferred tax expense
Federal
State
Total tax expense
Year Ended December 31,
2019
2018
2020
$
$
22,104 $
20,403 $
14,586
36,690
(9,500)
(4,654)
(14,154)
12,655
33,058
695
997
1,692
13,109
9,323
22,432
1,842
758
2,600
$
22,536 $
34,750 $
25,032
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.
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):
Tax credits and other tax benefits – decrease in tax expense
Amortization – increase in tax expense
Year Ended December 31,
2019
2018
2020
$
$
(4,200) $
(2,546) $
3,581 $
2,705 $
(1,993)
1,814
The carrying value of Low Income Housing Tax Credit Funds was $26,899,000 and $28,480,000 as of December 31, 2020 and 2019, respectively. As of
December 31, 2020, the Company has committed to make additional capital contributions to the Low Income Housing Tax Credit Funds in the amount of
$8,417,000, 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, 2020, 2019 and 2018 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:
(in thousands)
Federal statutory income tax rate
State income taxes, net of federal tax benefit
Tax-exempt interest on municipal obligations
Tax-exempt life insurance related income
Low income housing tax credits
Low income housing tax credit amortization
Equity compensation
Non-deductible merger expenses
Other
Effective Tax Rate
Year Ended December 31,
2019
2018
2020
21.0 %
21.0 %
21.0 %
7.7
(0.9)
(0.8)
(4.8)
4.1
0.4
—
(0.9)
25.8 %
7.9
(0.7)
(0.6)
(2.3)
2.1
(0.4)
—
0.4
8.6
(1.0)
(0.6)
(2.2)
2.0
(0.4)
0.2
(0.8)
27.4 %
26.8 %
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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):
December 31,
2020
2019
Deferred tax assets:
Allowance for losses and reserve for unfunded commitments
$
28,159 $
Deferred compensation
Accrued pension liability
Other accrued expenses
Additional unfunded status of the supplemental retirement plans
Operating lease liability
State taxes
Share based compensation
Nonaccrual interest
Acquisition cost basis
Unrealized loss on securities
Tax credits
Net operating loss carryforwards
Other
Total deferred tax assets
Deferred tax liabilities:
Securities income
Depreciation
Right of use asset
Merger related fixed asset valuations
Securities accretion
Mortgage servicing rights valuation
Unrealized gain on securities
Core deposit intangible
Junior subordinated debt
Prepaid expenses and other
Total deferred tax liability
Net deferred tax asset
1,786
383
1,537
13,275
8,270
2,870
837
725
2,372
—
513
1,131
327
62,185
(762)
(7,231)
(8,232)
(30)
(702)
(1,490)
(5,671)
(4,812)
(1,553)
(502)
9,871
2,342
3,309
1,678
9,868
8,142
2,441
803
649
4,556
—
576
1,578
348
46,161
(762)
(6,109)
(8,242)
(30)
(560)
(1,813)
(1,001)
(6,453)
(1,672)
(469)
(30,985)
(27,111)
$
31,200 $
19,050
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. In addition, the 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
provided the Company with an opportunity to file amended federal tax returns and generate proposed refunds of approximately $805,000. 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, 2020 were none for federal and $13,367,000 for California. The amount of the Company’s tax credits that would be subject to these
limitations as of December 31, 2020 are $63,000 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, 2020 and 2019 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, 2020 and December 31, 2019 the
Company did not recognize and significant amounts related to interest and penalties associated with 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 2012 and 2016, respectively.
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Note 20 – 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
Average number of common shares outstanding used to calculate diluted earnings per share
Options excluded from diluted earnings per share because the effect of these options was
antidilutive
Year Ended December 31,
2020
2019
2018
$
64,814 $
92,072 $
29,917
111
30,028
30,478
167
30,645
68,320
26,593
287
26,880
—
—
10,056
Note 21 – 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 gains (losses) 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 gains (losses) on available for sale securities after reclassifications
Tax effect
Unrealized holding gains (losses) on available for sale securities, net of tax
Change in unfunded status of the supplemental retirement plans before reclassifications
Amounts reclassified out of accumulated other comprehensive income:
Amortization of prior service cost
Amortization of actuarial losses
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
Change in joint beneficiary agreement liability before reclassifications
Tax effect
Change in unfunded status of the supplemental retirement plans, net of tax
Year Ended December 31,
2020
2019
2018
$
15,803 $
24,471 $
(17,057)
(7)
—
—
(7)
15,796
(4,670)
11,126
645
(55)
9,309
—
9,254
9,899
(2,927)
6,972
(596)
—
(596)
(110)
—
—
(110)
24,361
(7,202)
17,159
(6,745)
(54)
408
—
354
(6,391)
1,889
(4,502)
—
—
—
(207)
62
(425)
(570)
(17,627)
5,193
(12,434)
762
(54)
510
(668)
(212)
550
(162)
388
426
—
426
Total other comprehensive income (loss)
$
17,502 $
12,657 $
(11,620)
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The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:
(in thousands)
Net unrealized gain (loss) on available for sale securities
Tax effect
Unrealized holding loss on available for sale securities, net of tax
Unfunded status of the supplemental retirement plans
Tax effect
Unfunded status of the supplemental retirement plans, net of tax
Joint beneficiary agreement liability, net of tax
Accumulated other comprehensive loss
Note 22 – Retirement Plans
401(k) Plan
Year Ended December 31,
2020
2019
$
19,183
(5,671)
13,512
(1,294)
382
(912)
(320)
3,387
(1,001)
2,386
(11,193)
3,309
(7,884)
276
$
12,280 $
(5,222)
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
Employee Stock Ownership Plan
Year Ended December 31,
2019
2018
2020
$
$
1,139 $
202 $
1,119 $
1,003 $
879
872
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
Deferred Compensation Plans
Year Ended December 31,
2019
2018
2020
$
$
2,400 $
1,951 $
2,500 $
1,875 $
1,887
1,952
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 certain of the
participants and intends to hold these policies until death as a cost recovery of the Company’s deferred compensation obligations of $6,043,000 and
$7,923,000 at December 31, 2020 and 2019, respectively. Earnings credits on deferred balances included in non-interest expense are included in the
following table:
(in thousands)
Deferred compensation earnings credits included in non-interest expense
Supplemental Retirement Plans
Year Ended December 31,
2019
2018
2020
$
212 $
363 $
462
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 $118,870,000 and $117,823,000 at December 31, 2020 and 2019, respectively.
The Company recorded in other liabilities the additional unfunded status of the supplemental retirement plans of $1,294,000 and $11,193,000 related to
the supplemental retirement plans as of December 31, 2020 and 2019, 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.
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At December 31, 2020 and 2019, the additional unfunded status of the supplemental retirement plans of $1,294,000 and $11,193,000 were offset by a
reduction of shareholders’ equity accumulated other comprehensive loss of $912,000 and $7,884,000, respectively, representing the after-tax impact of the
additional unfunded status of the supplemental retirement plans, and the related deferred tax asset of $382,000 and $3,309,000, respectively. Amounts
recognized as a component of accumulated other comprehensive income (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 $254,000 of the net actuarial loss reported in the following table as of December 31, 2020 as a component of net periodic benefit cost
during 2021.
(in thousands)
Transition obligation
Prior service cost
Net actuarial loss
Amount included in accumulated other comprehensive income (loss)
Deferred tax benefit
December 31,
2020
2019
$
— $
(86)
1,380
1,294
(382)
1
(141)
11,333
11,193
(3,309)
7,884
Amount included in accumulated other comprehensive income (loss), net of tax
$
912 $
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
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Fair value of plan assets at end of year
Funded status
Unrecognized net obligation existing at January 1, 1986
Unrecognized net actuarial loss
Unrecognized prior service cost
Accumulated other comprehensive income
Accrued benefit cost
Accumulated benefit obligation
December 31,
2020
2019
$
(36,737) $
(29,196)
(2,225)
(1,014)
640
—
1,336
(879)
(1,131)
(6,747)
—
1,216
(38,000) $
(36,737)
— $
— $
—
—
(38,000) $
(36,737)
—
1,380
(86)
(1,294)
1
11,333
(141)
(11,193)
(38,000) $
(36,737)
(36,298) $
(35,981)
$
$
$
$
$
$
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
Net periodic pension cost
The following table sets forth assumptions used in accounting for the plans:
91
Year Ended December 31,
2019
2018
2020
$
2,225 $
879 $
1,014
1
(55)
9,309
1,131
2
(54)
408
973
949
2
(54)
510
$
12,494 $
2,366 $
2,380
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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
Year Ended December 31,
2019
2018
2020
2.40 %
2.82 %
3.25 %
— %
2.82 %
3.96 %
3.25 %
— %
3.96 %
3.40 %
3.25 %
— %
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:
(in thousands)
2021
2022
2023
2024
2025
2026-2030
Expected Benefit
Payments to
Participants
Estimated
Company
Contributions
$
1,119 $
2,203
2,176
2,183
2,172
10,131
1,119
2,203
2,176
2,183
2,172
10,131
Note 23 – 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, 2019
Advances/new loans
Removed/payments
Balance December 31, 2019
Advances/new loans
Removed/payments
Balance December 31, 2020
$
$
9,203
9,032
(8,114)
10,121
665
(3,953)
6,833
Deposits of directors, officers and other related parties to the Bank totaled $40,843,000 and $41,647,000 at December 31, 2020 and 2019, respectively.
Note 24 – Fair Value Measurement
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In
estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach.
Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the
risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Securities
available-for-sale and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be
required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These
nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or impairment write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the
observable nature of the assumptions used to determine fair value. These levels are:
Level 1 —
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 —
Level 3 —
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These
unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
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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 loans—Loans are not recorded at fair value on a recurring basis. However, from time to time, loans maybe considered impaired and an
allowance for credit losses is established. 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 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 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 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 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 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 non-interest expense.
Mortgage servicing rights—Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a
discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is
currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is
therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as
Level 3. Additional information regarding mortgage servicing rights can be found in Note 10 in the consolidated financial statements at Item 1 of this
report.
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):
Fair value at December 31, 2020
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
Total
Level 1
Level 2
Level 3
$
3,025 $
3,025 $
— $
812,374
129,095
2,544
470,251
6,268
5,092
—
—
—
—
—
—
812,374
129,095
2,544
470,251
6,268
—
$
1,428,649 $
3,025 $
1,420,532 $
—
—
—
—
—
—
5,092
5,092
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Fair value at December 31, 2019
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
Level 1
Level 2
Level 3
$
2,960 $
2,960 $
— $
472,980
109,601
2,532
365,025
5,265
6,200
—
—
—
—
—
—
472,980
109,601
2,532
365,025
5,265
—
—
—
—
—
—
—
6,200
6,200
Total assets measured at fair value
$
964,563 $
2,960 $
955,403 $
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 2020 or 2019.
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, 2020, 2019, and 2018. Had there been any transfer into or out of Level 3 during 2020, 2019, or 2018, 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,
2020: Mortgage servicing rights
2019: Mortgage servicing rights
2018: Mortgage servicing rights
Beginning
Balance
Transfers
into (out of)
Level 3
Change
Included
in Earnings
Issuances
Ending
Balance
$
$
$
6,200
7,098
6,687
— $
— $
— $
(2,634) $
(1,811) $
(146) $
1,526 $
913 $
557 $
5,092
6,200
7,098
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, 2020 and 2019:
December 31, 2020
Mortgage Servicing Rights
December 31, 2019
Mortgage Servicing Rights
Fair Value
(in thousands)
$5,092
Valuation
Technique
Discounted
cash flow
Unobservable
Inputs
Constant
prepayment rate
Range,
Weighted
Average
14.4%-20.0%, 17.6%
Discount rate
10.0%-14.0%, 12.0%
$6,200
Discounted
cash flow
Constant
prepayment rate
5.0%-27.3%, 7.6%
Discount rate
12.0%-13.0%, 12.0%
The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated, that had a
write-down or an additional allowance provided during the periods indicated (in thousands):
Year ended December 31, 2020
Fair value:
Impaired loans
Real estate owned
Total assets measured at fair value
Total
Level 1
Level 2
Level 3
Total Gains
(Losses)
$
$
1,424
979
2,403
—
—
—
— $
—
— $
1,424 $
(1,489)
979
155
2,403 $
(1,334)
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Table of Contents
Year ended December 31, 2019
Fair value:
Impaired loans
Real estate owned
Total assets measured at fair value
Total
Level 1
Level 2
Level 3
Total Gains
(Losses)
$
$
1,055
417
1,472
—
—
—
— $
—
— $
1,055 $
417
1,472 $
(652)
(27)
(679)
The impaired 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, 2020 and 2019:
December 31, 2020
Impaired loans
Real estate owned (Land)
Real estate owned (Residential)
December 31, 2019
Impaired loans
Real estate owned (Residential)
Fair Value
(in thousands)
1,424
$
$
$
155
824
Valuation Technique
Sales comparison
approach
Income approach
Sales comparison
approach
Sales comparison
approach
Unobservable Inputs
Adjustment for differences
between
comparable sales;
Capitalization rate
Adjustment for differences
between
comparable sales
Adjustment for differences
between
comparable sales
Fair Value
(in thousands)
1,055
$
Valuation
Technique
Sales comparison
approach Income
approach
$
417
Sales comparison
approach
Unobservable Inputs
Adjustment for differences
between
comparable sales Capitalization
rate
Adjustment for differences
between
comparable sales
Range,
Weighted Average
Not meaningful;
N/A
Not meaningful;
N/A
Not meaningful;
N/A
Range,
Weighted Average
Not meaningful;
N/A
Not meaningful;
N/A
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Table of Contents
The estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in thousands):
Financial assets:
Level 1 inputs:
Cash and due from banks
Cash at Federal Reserve and other banks
Level 2 inputs:
Securities held to maturity
Restricted equity securities
Level 3 inputs:
Loans, net
Financial liabilities:
Level 2 inputs:
Deposits
Other borrowings
Level 3 inputs:
December 31, 2020
December 31, 2019
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
77,253 $
77,253 $
92,816 $
592,298
592,298
183,691
284,563
17,250
298,726
N/A
375,606
17,250
92,816
183,691
381,525
N/A
4,671,280
4,753,027
4,276,750
4,263,064
6,505,934
6,507,235
5,366,994
5,365,921
26,914
26,914
18,454
18,454
Junior subordinated debt
57,635
56,632
57,232
56,297
Off-balance sheet:
Level 3 inputs:
Commitments (1)
Standby letters of credit (1)
Overdraft privilege commitments (1)
Contract
Amount
Fair
Value
Contract
Amount
Fair
Value
$
1,426,827 $
14,268 $
1,309,326 $
13,093
15,056
110,813
151
1,108
12,014
110,402
120
1,104
The methods and assumptions used to estimate the fair value of each class of financial instruments not measured at fair value are as follows:
Securities held to maturity - This includes mortgage-backed securities issued by government sponsored entities and municipal bonds. 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.
Restricted equity securities - Consists of FHLB stock whereby carrying value approximates fair value.
Loans - Loans are generally valued by discounting expected cash flows using market inputs with adjustments based on cohort level assumptions for
certain loan types as well as internally developed estimates at a business segment level. Due to the significance of the unobservable market inputs and
assumptions, as well as the absence of a liquid secondary market for most loans, these loans are classified as Level 3. Certain loans are measured based on
observable market prices sourced from external data providers and classified as Level 2. Nonaccrual loans are written down and reported at their estimated
recovery value which approximates their fair value and classified as Level 3.
Deposits - The estimated fair value of deposits with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts
was the amount payable on demand at the reporting date. The fair value of time deposits was estimated based on a discounted cash flow technique using
Level 3 inputs appropriate to the contractual maturity.
Other borrowings - The cash flows were calculated using the contractual features of the advance and then discounted using observable market. These are
short-term in nature.
Junior subordinated debt - The fair value of structured financings was estimated based on a discounted cash flow technique using observable market
interest rates adjusted for estimated spreads.
(1) Lending related commitments - The fair value of these commitments, including revolving credit facilities, standby letters of credit and overdrafts are
carried at contract value, which approximates fair value but are not actively traded. These instruments generate fees, which approximate those currently
charged to originate similar commitments, which are recognized over the term of the commitment period.
96
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Note 25 – 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, 2020 and
2019
Common stock, no par value: authorized 50,000,000 shares; issued and outstanding 29,727,214 and 30,523,824
shares at December 31, 2020 and 2019, respectively
Retained earnings
Accumulated other comprehensive income (loss), net
Total shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Income
Interest expense
Administration expense
Loss before equity in net income of Tri Counties Bank
Equity in net income of Tri Counties Bank:
Distributed
Undistributed
Income tax benefit
Net income
Condensed Statements of Comprehensive Income
Net income
Other comprehensive 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
97
December 31,
2020
December 31,
2019
(In thousands)
$
$
$
13,297 $
967,949
1,818
5,008
957,544
1,765
983,064 $
964,317
315 $
57,635
57,950
515
57,232
57,747
—
—
530,835
381,999
12,280
925,114
$
983,064 $
543,998
367,794
(5,222)
906,570
964,317
2020
Year Ended December 31,
2019
(In thousands)
2018
$
(2,555) $
(3,272) $
(932)
(3,487)
63,419
3,851
1,031
(877)
(4,149)
32,669
62,326
1,226
$
64,814 $
92,072 $
(3,131)
(1,489)
(4,620)
26,432
45,315
1,193
68,320
2020
Year Ended December 31,
2019
(In thousands)
2018
$
64,814 $
92,072 $
68,320
11,126
6,972
(596)
17,502
17,159
(4,502)
—
12,657
(12,434)
388
426
(11,620)
$
82,316 $
104,729 $
56,700
Table of Contents
Condensed Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed equity in earnings of Tri Counties Bank
Equity compensation vesting expense
Net change in other assets and liabilities
Net cash provided by operating activities
Investing activities: None
Financing activities:
Issuance of common stock through option exercise
Repurchase of common stock
Cash dividends paid — common
Net cash used for financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2020
Year Ended December 31,
2019
(In thousands)
2018
$
64,814 $
92,072 $
68,320
(3,851)
2,036
(1,885)
61,114
198
(26,720)
(26,303)
(52,825)
8,289
5,008
(62,326)
1,654
(1,580)
29,820
9
(2,196)
(24,999)
(27,186)
2,634
2,374
$
13,297 $
5,008 $
(45,315)
1,462
(4,983)
19,484
218
(2,483)
(18,769)
(21,034)
(1,550)
3,924
2,374
98
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Note 26 – Regulatory Matters
The Company and the Bank are 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action
specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. These 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 that minimum amounts and ratios of total,
Tier 1, and common equity Tier 1capital to risk-weighted assets, and of Tier 1 capital to average assets be maintained. Under applicable capital
requirements both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5%, a Tier 1 leverage ratio of 4.0%, a Tier 1
risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. In addition, the Company and the Bank are also required to maintain a capital conservation
buffer consisting of common equity Tier 1 capital above 2.5% of minimum risk based capital ratios to avoid restrictions on certain activities including
payment of dividends, stock repurchases and discretionary bonuses to executive officers. The additional 2.5% buffer, where applicable, is included in the
minimum ratios set forth in the table below. Management believes as of December 31, 2020 and 2019, the Company and Bank meet all capital adequacy
requirements to which they are subject.
Actual
Required for Capital
Adequacy Purposes
Required to be
Considered Well
Capitalized Under Prompt
Corrective Action Regulations
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
793,433
780,320
15.22 % $
547,352
10.50 %
N/A
N/A
14.97 % $
547,156
10.50 % $
521,101
10.00 %
(in thousands)
As of December 31, 2020:
Total Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital (to Risk Weighted Assets):
Consolidated
$
727,879
13.96 % $
443,094
8.50 %
N/A
Tri Counties Bank
$
Common equity Tier 1 Capital (to Risk Weighted Assets):
714,811
13.72 % $
442,936
8.50 % $
416,881
Consolidated
Tri Counties Bank
Tier 1 Capital (to Average Assets):
Consolidated
Tri Counties Bank
$
$
$
$
671,975
714,811
727,879
714,811
12.89 % $
364,901
7.00 %
N/A
13.72 % $
364,771
7.00 % $
338,716
9.93 % $
293,138
4.00 %
N/A
9.76 % $
292,949
4.00 % $
366,186
N/A
8.00 %
N/A
6.50 %
N/A
5.00 %
(in thousands)
As of December 31, 2019:
Total Capital (to Risk Weighted Assets):
Consolidated
Tri Counties Bank
Tier 1 Capital (to Risk Weighted Assets):
Actual
Required for Capital
Adequacy Purposes
Required to be
Considered Well
Capitalized Under Prompt
Corrective Action Regulations
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
753,200
748,660
15.07 % $
524,944
10.50 %
N/A
N/A
14.98 % $
524,759
10.50 % $
499,770
10.00 %
Consolidated
$
719,809
14.40 % $
424,955
8.50 %
N/A
Tri Counties Bank
$
Common equity Tier 1 Capital (to Risk Weighted Assets):
715,269
14.31 % $
424,805
8.50 % $
399,816
Consolidated
Tri Counties Bank
Tier 1 Capital (to Average Assets):
Consolidated
Tri Counties Bank
$
$
$
$
664,296
715,269
719,809
715,269
13.29 % $
349,963
7.00 %
N/A
14.31 % $
349,839
7.00 % $
324,851
11.55 % $
249,343
4.00 %
N/A
11.47 % $
249,337
4.00 % $
311,672
N/A
8.00 %
N/A
6.50 %
N/A
5.00 %
99
Table of Contents
Note 27 – Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters of 2020 and 2019, 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.
(dollars in thousands, except per share data)
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
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per common share:
Net income (diluted)
Dividends
(dollars in thousands, except per share data)
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
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
2020 Quarters Ended
December 31,
September 30,
June 30,
March 31,
$
1,960 $
1,876 $
2,587 $
59,055
61,015
7,066
68,081
1,659
66,422
4,850
61,572
16,580
45,745
32,407
8,750
56,163
58,039
7,399
65,438
1,984
63,454
7,649
55,805
15,137
46,714
24,228
6,622
55,822
58,409
8,739
67,148
2,489
64,659
22,244
42,415
11,657
45,550
8,522
1,092
1,748
54,510
56,258
10,259
66,517
3,325
63,192
8,070
55,122
11,820
44,749
22,193
6,072
$
$
$
23,657 $
17,606 $
7,430 $
16,121
0.79 $
0.22 $
0.59 $
0.22 $
0.25 $
0.22 $
0.53
0.22
2019 Quarters Ended
December 31,
September 30,
June 30,
March 31,
$
2,218 $
2,360 $
1,904 $
54,644
56,862
11,056
67,918
3,722
64,196
54,639
56,999
11,890
68,889
4,201
64,688
64,494
14,186
46,964
31,716
8,826
65,017
14,108
46,344
32,781
9,386
53,587
55,491
12,689
68,180
3,865
64,315
537
63,778
13,423
46,697
30,504
7,443
1,655
52,743
54,398
13,059
67,457
3,587
63,870
(1,600)
65,470
11,803
45,452
31,821
9,095
22,890 $
23,395 $
23,061 $
22,726
0.75 $
0.22 $
0.76 $
0.22 $
0.75 $
0.19 $
0.74
0.19
$
$
$
100
Provision for (benefit from reversal of provision for) loan losses
(298)
(329)
Table of Contents
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, 2020.
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, 2020, and the Company’s effectiveness of internal control over financial reporting as of
December 31, 2020, dated March 1, 2021, 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, 2021
101
Table of Contents
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 sheets of TriCo Bancshares (and subsidiaries) (the “Company”) as of December 31, 2020 and
2019, the related consolidated statements of income, comprehensive income, changes in shareholders equity, and cash flow for each of the three years in
the period ended December 31, 2020, 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, 2020, 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, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period
ended December 31, 2020, 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, 2020, based on criteria established in
Internal Control - Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020, due to
the adoption of Accounting Standards Codification Topic 326: Financial Instruments - Credit Losses (“Topic 326”). The Company adopted the new credit
loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with
previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also
communicated as a critical audit matter below.
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 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
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.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - CECL Adoption, Loan Risk Ratings, Reasonable and Supportable Forecasts and Qualitative Factors
As discussed in Note 1 to the consolidated financial statements, the Company adopted Accounting Standards Update No. 2016-13, Accounting Standards
Codification Topic 326, Financial Instruments - Credit Losses (Topic 326), as of January 1, 2020, using the modified retrospective method of adoption.
Topic 326 requires the measurement of the current expected credit losses (“CECL”) for financial assets, including the Company’s loan portfolio, held at
the reporting date. Accordingly, the Company recorded a decrease to retained earnings of $12,983,000, net of taxes of $5,449,000, as of January 1, 2020
for the cumulative effect of adopting Topic 326. As further discussed in Note 1 and Note 5, the Company’s allowance for credit losses for loans was
$91,847,000 as of December 31, 2020, and consists of both historical credit loss experience and management’s estimates of current conditions and
reasonable and supportable forecasts. The Company’s allowance for credit losses for loans is a valuation account that is deducted from the amortized cost
basis of loans to present the net carrying value at the amount expected to be collected on such loans and is a material and complex estimate requiring
significant management judgment in the estimation of expected lifetime losses within the loan portfolio at both the date of adoption and the balance sheet
date.
We identified management’s adoption of Topic 326, risk ratings of loans, and the reasonable and supportable forecasts, including the estimate of a
qualitative and environmental factor related to California’s unemployment, and the selection of the methodology and economic variables utilized, as a
critical audit matter. In estimating the allowance for credit losses on loans, the Company utilizes relevant information, from internal and external sources,
relating to past events, current conditions, and reasonable and supportable forecasts. The Company considers relevant credit quality indicators for each
loan segment, stratifies loans by risk rating, and estimates losses for each loan cohort based upon their nature, historical experience, and risk profile. This
process requires significant management judgment in the review of the loan portfolio and assignment of risk ratings based upon the characteristics of
loans. In addition, estimation of the lifetime expected credit losses for loans require significant management judgment, particularly as it relates to forward-
looking information through the use of environment factors applied over the forecasted life of the loans. Auditing these complex judgments and
assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
•
•
•
•
•
•
Testing the design, implementation and operating effectiveness of controls relating to management’s adoption of Topic 326 and the calculation
of the allowance for credit losses on loans, including controls over the review of loans and assignment of risk ratings, evaluation of the
environmental and forecast factors, model development and validation, selection and application of new accounting policies, and disclosures.
Evaluating the appropriateness of the Company’s assumptions and elections involved in the adoption of the CECL methodology, including the
cohort methodology selected by the Company compared to other available methodologies as well as the economic variables selected based on
the correlation to historical charge offs.
Evaluating the appropriateness of the Company’s loan risk rating policy and testing a risk-based targeted selection of loans to gain substantive
evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are
reasonable.
Evaluating the reasonableness and appropriateness of the estimated California unemployment factor utilized by management in forming the
forecast factors and any qualitative adjustments by comparing forecasts and any qualitative adjustments to relevant external data, including
historical trends.
Testing the mathematical accuracy and computation of the allowance for credit losses for loans by re-performing or independently calculating
significant elements of the allowance, including quantitative historical loss factors applied to the loan segments based on risk ratings and
utilizing relevant source documents, including the completeness and accuracy of the data used in the calculation.
Evaluating the accuracy and completeness of the Company’s disclosures in accordance with Topic 326.
/s/ Moss Adams LLP
Sacramento, California
March 1, 2021
We have served as the Company’s auditor since 2018.
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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, 2020, 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, 2020, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the
Company in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
instructions for Form 10-K.
(b) Management’s Report on Internal Control over Financial Reporting and Attestation Report of Registered Public Accounting Firm
Management’s report on internal control over financial reporting is set forth on page 103 of this report and is incorporated herein by reference. The
effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, has been audited by Moss Adams LLP, an independent
registered public accounting firm, as stated in its report, which is set forth on pages 101 and 102 of this report and is incorporated herein by reference.
(c) Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the fourth quarter of the year ended December 31, 2020, 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 2020 was so disclosed.
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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 shall either be incorporated herein by reference from the Company’s Proxy Statement for the 2021 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 2021 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 2021 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 2021 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 2021 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.
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PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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.
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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, 2021
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, 2021
/s/ Richard P. Smith
Richard P. Smith, Chairman of the Board, President, Chief Executive
Officer and Director (Principal Executive Officer)
Date: March 1, 2021
/s/ Peter G. Wiese
Peter G. Wiese, Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 1, 2021
/s/ Donald J. Amaral
Donald J. Amaral, Director
Date: March 1, 2021
/s/ Craig S. Compton
Craig S. Compton, Director
Date: March 1, 2021
/s/ L. Gage Chrysler
L. Gage Chrysler, Director
Date: March 1, 2021
/s/ Kirsten E. Garen
Kirsten E. Garen, Director
Date: March 1, 2021
/s/ Cory W. Giese
Cory W. Giese, Independent Lead Director
Date: March 1, 2021
/s/ John S.A. Hasbrook
John S.A. Hasbrook, Director
Date: March 1, 2021
/s/ Margaret L. Kane
Margaret L. Kane, Director
Date: March 1, 2021
/s/ Michael W. Koehnen
Michael W. Koehnen, Director
Date: March 1, 2021
/s/ Martin A. Mariani
Martin A. Mariani, Director
Date: March 1, 2021
/s/ Thomas C. McGraw
Thomas C. McGraw, Director
Date: March 1, 2021
/s/ Kimberley H. Vogel
Kimberley H. Vogel, Director
107
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Exhibit No.
2.1
2.2
3.1
3.2
4.1
4.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
EXHIBIT INDEX
Exhibit
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.
TriCo Bancshares securities registered pursuant to Section 12 of the Securities Exchange Act of 1934
Form of Change of Control Agreement among TriCo, Tri Counties Bank and each of Dan Bailey, Craig Carney, John Fleshood, and
Peter Wiese (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed on July 23, 2013).
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).
Tri Counties Bank Executive Deferred Compensation Plan restated April 1, 1992, and January 1, 2005 (incorporated by reference to
Exhibit 10.9 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
Tri Counties Bank Deferred Compensation Plan for Directors effective January 1, 2005 (incorporated by reference to Exhibit 10.10 to
TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
2005 Tri Counties Bank Deferred Compensation Plan for Executives and Directors effective January 1, 2005 (incorporated by reference
to Exhibit 10.11 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, and amended and
restated January 1, 2004 (incorporated by reference to Exhibit 10.12 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 (incorporated by reference to Exhibit
10.13 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January 1, 2004
(incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January 1, 2004 (incorporated by reference to Exhibit 10.15
to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George Barstow, Dan Bay, Ron
Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Richard O’Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith
(incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey,
Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Vereschagin (incorporated by reference to
Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
Form of Tri Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and Craig
Carney (incorporated by reference to Exhibit 10.16 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2003).
Form of Tri Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don
Amaral, Craig Compton, John Hasbrook, and Michael Koehnen (incorporated by reference to Exhibit 10.17 to TriCo’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003).
Form of Indemnification Agreement between TriCo and its directors and executive officers (incorporated by reference to Exhibit 10.1 to
TriCo’s Current Report on Form 8-K filed September 10, 2013).
Form of Indemnification Agreement between Tri Counties Bank its directors and executive officers (incorporated by reference to
Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed September 10, 2013).
Form of Stock Option, Stock Appreciation Right, Restricted Stock Unit Award, and Performance Share Award Agreements, and Notice
of Grant of Stock Option pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to TriCo’s Annual
Report on Form 10-K for the year ended December 31, 2017).
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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10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
21.1
23.1
31.1
31.2
32.1
32.2
Form of Restricted Stock Unit Agreement and Grant Notice for Directors pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed November 14, 2014).
Form of Performance Award Agreement and Grant Notice pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by reference to
Exhibit 10.3 to TriCo’s Current Report on Form 8-K filed August 13, 2014).
John Fleshood Offer Letter dated November 3, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K
filed on November 30, 2016).
Amendment to John Fleshood Offer Letter dated December 19, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report
on Form 8-K filed on November 30, 2016).
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).
TriCo's 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.26 to TriCo's Annual Report on Form 10-K filed on March 2,
2019).
Form of Restricted Stock Unit Agreement and Grant Notice for Non-employee Directors pursuant to TriCo's 2019 Equity Incentive plan
(incorporated by reference to Exhibit 99.1 of TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
Form of Restricted Stock Unit Agreement and Grant Notice for Employees pursuant to TriCo's 2019 Equity Incentive plan (incorporated by
reference to Exhibit 99.2 of TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
Form of Performance Award Agreement and Grant Notice pursuant to TriCo's 2019 Equity Incentive plan (incorporated by reference to
Exhibit 99.1 of TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
List of Subsidiaries
Consent of Moss Adams 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**
101.INS
Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)
*
**
Management contract or compensatory plan or arrangement
Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise
subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
109