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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			94-2792841
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
63 Constitution Drive, Chico, California			95973
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (530) 898-0300

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common Stock

TCBK

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.

x  Yes            o  No

Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

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

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).

x  Yes            o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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.

☒  Yes            ☐  No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐  Yes           ☒  No

The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 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.

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Table of Contents

TABLE OF CONTENTS

						Page Number
PART I
Item 1			Business			2
Item 1A			Risk Factors			8
Item 1B			Unresolved Staff Comments			19
Item 2			Properties			20
Item 3			Legal Proceedings			20
Item 4			Mine Safety Disclosures			20
PART II
Item 5			Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			21
Item 6			Selected Financial Data			23
Item 7			Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 7A			Quantitative and Qualitative Disclosures About Market Risk			48
Item 8			Financial Statements and Supplementary Data			49
Item 9			Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			103
Item 9A			Controls and Procedures			103
Item 9B			Other Information			103
PART III
Item 10			Directors, Executive Officers and Corporate Governance			104
Item 11			Executive Compensation			104
Item 12			Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			104
Item 13			Certain Relationships and Related Transactions, and Director Independence			104
Item 14			Principal Accountant Fees and Services			104
PART IV
Item 15			Exhibits and Financial Statement Schedules			105
Signatures						106

FORWARD-LOOKING STATEMENTS

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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PART I

ITEM 1.    BUSINESS

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:

•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.

•The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.

•The Truth-in-Lending Act is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably.

•The Fair Housing Act regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status.

•The Home Mortgage Disclosure Act, which includes a “fair lending” aspect, requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.

•The Real Estate Settlement Procedures Act requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.

In addition, the CFPB has taken a number of actions that may affect the Bank’s operations and compliance costs, including the following:

•The issuance of final rules for residential mortgage lending, which became effective January 10, 2013, including definitions for “qualified mortgages” and detailed standards by which lenders must satisfy themselves of the borrower’s ability to repay the loan and revised forms of disclosure under the Truth in Lending Act and the Real Estate Settlement Procedures Act.

•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:

•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:

•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:

•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.

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:

•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			High						Low
Fourth quarter			$	35.70					$	24.58
Third quarter			$	30.88					$	23.43
Second quarter			$	32.80					$	24.40
First quarter			$	40.81					$	24.49
2019
Fourth quarter			$	41.25					$	35.05
Third quarter			$	39.06					$	34.81
Second quarter			$	41.23					$	37.30
First quarter			$	40.36					$	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

Total shares approved for purchase

Total shares repurchased under the plan

Expiration date

11/12/2019

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						(a) Total number of shares purchased						(b) Average price paid per share						(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)
October 1-31, 2020						—						$	—					—						711,138
November 1-30, 2020						17,714						$	33.58					17,714						693,424
December 1-31, 2020						27,141						$	34.15					27,141						666,283
Total						44,855						$	33.92					44,855						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.

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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.

						Period Ending
Index						12/31/2015						12/31/2016						12/31/2017						12/31/2018						12/31/2019						12/31/2020
TriCo Bancshares						100.00						127.23						143.48						130.42						160.92						143.26
Russell 3000 Index						100.00						112.74						136.56						129.40						169.54						204.95
SNL Western Bank Index						100.00						110.86						123.61						97.86						119.35						88.08

Equity Compensation Plans

The following table shows shares reserved for issuance for outstanding options, stock appreciation rights and warrants granted under our equity compensation plans as of December 31, 2020. All of our equity compensation plans have been approved by shareholders.

Plan category						(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))
Equity compensation plans not approved by shareholders						—						$	—					—
Equity compensation plans approved by shareholders						128,500						$	17.72					1,222,011
Total						128,500						$	17.72					1,222,011

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected consolidated financial data are derived from our consolidated financial statements. This data should be read in connection with our consolidated financial statements and the related notes located at Item 8 of this report.

TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)

Year ended December 31,			2020						2019						2018						2017						2016
Interest income			$	267,184					$	272,444					$	228,218					$	181,402					$	173,708
Interest expense			(9,457)						(15,375)						(12,872)						(6,798)						(5,721)
Net interest income			257,727						257,069						215,346						174,604						167,987
(Provision for) benefit from loan losses			(42,813)						1,690						(2,583)						(89)						5,970
Noninterest income			55,194						53,520						49,061						49,452						44,678
Noninterest expense			(182,758)						(185,457)						(168,472)						(146,455)						(146,112)
Income before income taxes			87,350						126,822						93,352						77,512						72,523
Provision for income taxes			(22,536)						(34,750)						(25,032)						(36,958)						(27,712)
Net income			$	64,814					$	92,072					$	68,320					$	40,554					$	44,811
Share Data
Earnings per share:
Basic			$	2.17					$	3.02					$	2.57					$	1.77					$	1.96
Diluted			$	2.16					$	3.00					$	2.54					$	1.74					$	1.94
Per share:
Dividends paid			$	0.88					$	0.82					$	0.70					$	0.66					$	0.60
Book value at period end			$	31.12					$	29.70					$	27.20					$	22.03					$	20.87
Tangible book value at period end			$	23.09					$	21.69					$	18.97					$	19.01					$	17.77
Average common shares outstanding			29,917						30,478						26,593						22,912						22,814
Average diluted common shares outstanding			30,028						30,645						26,880						23,250						23,087
Shares outstanding at period end			29,727						30,524						30,417						22,956						22,868
Financial Ratios
During the period:
Return on average assets			0.91		%				1.43		%				1.24		%				0.89		%				1.02		%
Return on average equity			7.18		%				10.49		%				10.75		%				8.10		%				9.46		%
Net interest margin(1)			3.96		%				4.47		%				4.30		%				4.22		%				4.23		%
Efficiency ratio			58.40		%				59.71		%				63.72		%				65.37		%				68.71		%
Average equity to average assets			12.66		%				13.97		%				11.52		%				10.99		%				10.84		%
Dividend payout ratio			40.58		%				27.15		%				27.24		%				37.30		%				30.60		%
At period end:
Equity to assets			12.11		%				14.01		%				13.02		%				10.62		%				10.57		%
Total capital to risk-adjusted assets			15.20		%				15.10		%				14.40		%				14.07		%				14.65		%
Balance Sheet Data
Total investments			$	1,719,102					$	1,345,954					$	1,580,096					$	1,262,683					$	1,162,769
Total loans			4,763,127						4,307,366						4,022,014						3,015,165						2,759,593
Total assets			7,639,529						6,471,181						6,352,441						4,761,315						4,517,968
Total non-interest bearing deposits			2,581,517						1,832,665						1,760,580						1,368,218						1,275,745
Total deposits			6,505,934						5,366,994						5,366,466						4,009,131						3,895,560
Total other borrowings			26,914						18,484						15,839						122,166						17,493
Total junior subordinated debt			57,635						57,232						57,042						56,858						56,667
Total shareholders’ equity			925,114						906,570						827,373						505,808						477,347
Total tangible equity (2)			$	686,409					$	662,141					$	577,121					$	436,323					$	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.

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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):

			Year ended December 31,
			2020						2019						2018
Net interest income			$	257,727					$	257,069					$	215,346
Reversal of (provision for) loan losses			(42,813)						1,690						(2,583)
Noninterest income			55,194						53,520						49,061
Noninterest expense			(182,758)						(185,457)						(168,472)
Provision for income taxes			(22,536)						(34,750)						(25,032)
Net income			$	64,814					$	92,072					$	68,320
Net income per average fully-diluted share			$	2.16					$	3.00					$	2.54
Net income as a percentage of average shareholders’ equity (ROAE)			7.18		%				10.49		%				10.75		%
Net income as a percentage of average total assets (ROAA)			0.91		%				1.43		%				1.24		%

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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):

			Year ended December 31,
			2020						2019						2018
Interest income			$	267,184					$	272,444					$	228,218
Interest expense			(9,457)						(15,375)						(12,872)
Net interest income (not FTE)			257,727						257,069						215,346
FTE adjustment			1,069						1,201						1,304
Net interest income (FTE)			$	258,796					$	258,270					$	216,650
Net interest margin (FTE)			3.96		%				4.47		%				4.30		%
Acquired loans discount accretion:
Purchased loan discount accretion			$	8,171					$	8,137					$	5,271
Effect on average loan yield			0.19		%				0.20		%				0.15		%
Effect of purchased loan discount accretion on net interest margin (FTE)			0.13		%				0.11		%				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.

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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																		2019																		2018
			Average Balance						Interest Income/ Expense						Rates Earned /Paid						Average Balance						Interest Income/ Expense						Rates Earned /Paid						Average Balance						Interest Income/ Expense						Rates Earned /Paid
Assets:
Loans			$	4,361,679					$	223,086					5.11		%				$	4,111,093					$	223,750					5.44		%				$	3,548,498					$	186,117					5.24		%
PPP Loans			284,326						10,635						3.74		%				—						—						—		%				—						—						—		%
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			590,966																		660,455																		496,323
Total assets			$	7,123,431																	$	6,437,095																	$	5,538,148
Liabilities and shareholders’ equity:
Interest-bearing demand deposits			$	1,313,804					332						0.03		%				$	1,254,375					1,089						0.09		%				$	1,075,331					945						0.09		%
Savings deposits			2,015,134						2,595						0.13		%				1,883,964						4,892						0.26		%				1,610,202						2,803						0.17		%
Time deposits			397,216						3,958						1.00		%				446,142						5,735						1.29		%				378,058						3,248						0.86		%
Total interest-bearing deposits			3,726,154						6,885						0.18		%				3,584,481						11,716						0.33		%				3,063,591						6,996						0.23		%
Other borrowings			28,863						17						0.06		%				15,484						387						2.50		%				154,372						2,745						1.78		%
Junior subordinated debt			57,426						2,555						4.45		%				57,133						3,272						5.73		%				56,950						3,131						5.50		%
Total interest-bearing liabilities			3,812,443						9,457						0.25		%				3,657,098						15,375						0.42		%				3,274,913						12,872						0.39		%
Noninterest-bearing deposits			2,289,168																		1,780,746																		1,531,383
Other liabilities			119,710																		121,933																		74,113
Shareholders’ equity			902,110																		877,318																		657,739
Total liabilities and shareholders’ equity			$	7,123,431																	$	6,437,095																	$	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.

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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:

			2020 over 2019																		2019 over 2018
			Volume						Rate						Total						Volume						Rate						Total
Increase in interest income:
Loans			$	29,099					(19,128)						$	9,971					$	29,480					$	8,153					$	37,633
Investment securities—taxable			(1,764)						(10,672)						(12,436)						3,414						1,979						5,393
Investment securities—nontaxable			(662)						95						(567)						(334)						(112)						(446)
Cash at Federal Reserve and other banks			6,223						(8,583)						(2,360)						1,159						384						1,543
Total interest-earning assets			32,896						(38,288)						(5,392)						33,719						10,404						44,123
Increase in interest expense:
Interest-bearing demand deposits			53						(810)						(757)						161						(17)						144
Savings deposits			341						(2,638)						(2,297)						465						1,624						2,089
Time deposits			(631)						(1,146)						(1,777)						586						1,901						2,487
Other borrowings			(37)						(333)						(370)						(2,472)						114						(2,358)
Junior subordinated debt			17						(734)						(717)						10						131						141
Total interest-bearing liabilities			(257)						(5,661)						(5,918)						(1,250)						3,753						2,503
Increase in net interest income			$	33,153					$	(32,627)					$	526					$	34,969					$	6,651					$	41,620

Ending balances			As of December 31,												$ Change						% Change
($’s in thousands)			2020						2019
Total assets			$	7,639,529					$	6,471,181					$	1,168,348					18.1		%
Total loans			4,763,127						4,307,366						455,761						10.6		%
Total loans, excluding PPP			4,436,357						4,307,366						128,991						3.0		%
Total investments			1,719,102						1,345,954						373,148						27.7		%
Total deposits			$	6,505,934					$	5,366,994					$	1,138,940					21.2		%

Provision for Credit Losses

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.

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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.

			Year ended December 31,
(dollars in thousands)			2020						2019						2018
Provision (benefit) to allowance for credit losses			$	42,188					$	(1,690)					$	2,583
Change in reserve for unfunded loan commitments			$	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):

			Year Ended December 31,
			2020						2019						2018
ATM and interchange fees			$	21,660					$	20,639					$	18,249
Service charges on deposit accounts			13,944						16,657						15,467
Other service fees			3,156						3,015						2,852
Mortgage banking service fees			1,855						1,917						2,038
Change in value of mortgage loan servicing rights			(2,634)						(1,811)						(146)
Total service charges and fees			37,981						40,417						38,460
Commissions on sale of non-deposit investment products			2,989						2,877						3,151
Increase in cash value of life insurance			2,949						3,029						2,718
Gain on sale of loans			9,122						3,282						2,371
Lease brokerage income			668						878						678
Sale of customer checks			414						529						449
Gain on sale of investment securities			7						110						207
Gain (loss) on marketable equity securities			64						86						(64)
Other			1,000						2,312						1,091
Total other non-interest income			17,213						13,103						10,601
Total non-interest income			$	55,194					$	53,520					$	49,061

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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):

			Year Ended December 31,
			2020						2019						2018
Base salaries, net of deferred loan origination costs			$	70,164					$	70,218					$	62,422
Incentive compensation			10,022						13,106						11,147
Benefits and other compensation costs			31,935						22,741						20,373
Total salaries and benefits expense			112,121						106,065						93,942
Occupancy			14,528						14,893						12,139
Data processing and software			13,504						13,517						11,021
Equipment			5,704						7,022						6,651
ATM and POS network charges			5,433						5,447						5,271
Merger and acquisition expense			—						—						5,227
Advertising			2,827						5,633						4,578
Professional fees			3,222						3,754						3,546
Intangible amortization			5,724						5,723						3,499
Telecommunications			2,601						3,190						3,023
Regulatory assessments and insurance			1,594						1,188						1,906
Courier service			1,414						1,308						1,287
Operational losses			1,168						986						1,260
Postage			1,068						1,258						1,154
Gain on sale of foreclosed assets			(234)						(246)						(408)
Loss on disposal of fixed assets			67						82						185
Other miscellaneous expense			12,018						15,637						14,191
Total other non-interest expense			70,638						79,392						74,530
Total non-interest expense			$	182,759					$	185,457					$	168,472
Average full-time equivalent staff			1,093						1,150						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

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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:

			Year Ended December 31,
			2020						2019						2018
Federal statutory income tax rate			21.0		%				21.0		%				21.0		%
State income taxes, net of federal tax benefit			7.7						7.9						8.6
Tax-exempt interest on municipal obligations			(0.9)						(0.7)						(1.0)
Tax-exempt life insurance related income			(0.8)						(0.6)						(0.6)
Low income housing and other tax credits			(4.8)						(2.3)						(2.2)
Low income housing tax credit amortization			4.1						2.1						2.0
Compensation and benefits			0.4						(0.4)						(0.4)
Non-deductible merger expenses			—						—						0.2
Other			(0.9)						0.4						(0.8)
Effective Tax Rate			25.8		%				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.

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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:

			Year ended December 31,
(dollars in thousands)			2020						2019						2018						2017						2016
Marketable equity securities			$	3,025					$	2,960					$	2,874					$	2,938					$	2,938
Debt securities available for sale:
Obligations of U.S. government and agencies			$	812,374					$	472,980					$	629,981					$	604,789					$	429,678
Obligations of states and political subdivisions			129,095						109,601						126,072						123,156						117,617
Corporate bonds			2,544						2,532						4,478						—						—
Asset backed securities			470,251						365,025						354,505						—						—
Total debt securities available for sale			$	1,414,264					$	950,138					$	1,115,036					$	727,945					$	547,295
Debt securities held to maturity:
Obligations of U.S. government agencies			$	273,667					$	361,785					$	430,343					$	500,271					$	597,982
Obligations of states and political subdivisions			10,896						13,821						14,593						14,573						14,554
Total debt securities held to maturity			$	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

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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:

			Year ended December 31,
(dollars in thousands)			2020						2019						2018						2017						2016
Commercial real estate			$	2,951,902					$	2,818,782					$	2,627,837					$	1,914,896					$	1,747,918
Consumer			952,108						955,050						934,244						742,300						672,209
Commercial and industrial			526,327						249,791						250,661						194,790						177,204
Construction			284,842						249,827						183,384						137,557						122,419
Agriculture production			44,164						32,633						25,888						25,622						39,843
Leases			3,784						1,283						—						—						—
Total loans			$	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:

			Year ended December 31,
(dollars in thousands)			2020						2019						2018						2017						2016
Commercial real estate			62.0		%				65.4		%				65.3		%				63.5		%				63.3		%
Consumer			20.0		%				22.2		%				23.2		%				24.6		%				24.4		%
Commercial and industrial			11.1		%				5.8		%				6.2		%				6.5		%				6.4		%
Construction			6.0		%				5.8		%				4.6		%				4.6		%				4.4		%
Agriculture production			0.9		%				0.8		%				0.6		%				0.8		%				1.4		%
Leases			0.1		%				—		%				—		%				—		%				—		%
Total loans			100		%				100		%				100		%				100		%				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.

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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:

			December 31,
(dollars in thousands)			2020						2019						2018						2017						2016
Performing nonaccrual loans			$	22,896					$	11,266					$	22,689					$	20,937					$	17,677
Nonperforming nonaccrual loans			3,968						5,579						4,805						3,176						2,451
Total nonaccrual loans			26,864						16,845						27,494						24,113						20,128
Loans 90 days past due and still accruing			—						19						—						281						—
Total nonperforming loans			26,864						16,864						27,494						24,394						20,128
Foreclosed assets			2,844						2,541						2,280						3,226						3,986
Total nonperforming assets			$	29,708					$	19,405					$	29,774					$	27,620					$	24,114
U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans			$	811					$	992					$	1,173					$	358					$	911
Nonperforming assets to total assets			0.39		%				0.30		%				0.47		%				0.58		%				0.53		%
Nonperforming loans to total loans			0.56		%				0.39		%				0.68		%				0.81		%				0.73		%
Allowance for credit losses to nonperforming loans			342		%				182		%				119		%				124		%				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)			Balance at December 31, 2019						Additions						Advances/ Paydowns, net						Charge-offs/ Write-downs						Transfers to Foreclosed Assets						Balance at December 31, 2020
Commercial real estate:
CRE non-owner occupied			$	642					$	2,654					$	(186)					$	—					$	—					$	3,110
CRE owner occupied			1,408						3,298						(645)						—						—						4,061
Multifamily			2,024						—						(2,024)						—						—						—
Farmland			1,242						1,073						(595)						(182)						—						1,538
Total commercial real estate loans			5,316						7,025						(3,450)						(182)						—						8,709
Consumer:
SFR 1-4 1st DT			5,191						3,273						(2,591)						(13)						(766)						5,094
SFR HELOCs and junior liens			4,217						3,854						(1,807)						(116)						—						6,148
Other			51						789						(318)						(355)						—						167
Total consumer loans			9,459						7,916						(4,716)						(484)						(766)						11,409
Commercial and industrial			2,050						2,201						(1,295)						(774)						—						2,182
Construction			—						4,546						—						—						—						4,546
Agriculture production			39						426						(447)						—						—						18
Leases			—						—						—						—						—						—
Total nonperforming loans			16,864						22,114						(9,908)						(1,440)						(766)						26,864
Foreclosed assets			2,541						50						(513)						—						766						2,844
Total nonperforming assets			$	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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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)			Balance at December 31, 2018						Additions						Advances/ Paydowns, net						Charge-offs/ Write-downs (1)						Transfers to Foreclosed Assets						Balance at December 31, 2019
Commercial real estate:
CRE non-owner occupied			$	8,079					$	300					$	(6,766)					$	—					$	(971)					$	642
CRE owner occupied			3,322						300						(1,468)						(746)						—						1,408
Multifamily			—						2,284						(260)						—						—						2,024
Farmland			2,155						307						(1,220)						—						—						1,242
Total commercial real estate loans			13,556						3,191						(9,714)						(746)						(971)						5,316
Consumer:
SFR 1-4 1st DT			4,419						1,562						(672)						(2)						(116)						5,191
SFR HELOCs and junior liens			5,636						1,836						(3,037)						(3)						(215)						4,217
Other			7						887						(678)						(165)						—						51
Total consumer loans			10,062						4,285						(4,387)						(170)						(331)						9,459
Commercial and industrial			3,830						2,327						(2,034)						(2,073)						—						2,050
Construction			—						—						—						—						—						—
Agriculture production			46						15						(3)						(19)						—						39
Leases			—												—						—						—						—
Total nonperforming loans			27,494						9,818						(16,138)						(3,008)						(1,302)						16,864
Foreclosed assets			2,280						49						(1,090)						—						1,302						2,541
Total nonperforming assets			$	29,774					$	9,867					$	(17,228)					$	(3,008)					$	—					$	19,405

(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)			Balance at September 30, 2020						Additions						Advances/ Paydowns, net						Charge-offs/ Write-downs (1)						Transfers to Foreclosed Assets						Balance at December 31, 2020
Commercial real estate:
CRE non-owner occupied			$	3,010					$	127					$	(27)					$	—					$	—					$	3,110
CRE owner occupied			3,778						647						(364)						—						—						4,061
Multifamily			—						—						—						—						—						—
Farmland			2,056						70						(406)						(182)						—						1,538
Total commercial real estate loans			8,844						844						(797)						(182)						—						8,709
Consumer:
SFR 1-4 1st DT			6,373						92						(763)						—						(609)						5,093
SFR HELOCs and junior liens			5,185						1,337						(281)						(93)						—						6,148
Other			279						87						(72)						(127)						—						167
Total consumer loans			11,837						1,516						(1,116)						(220)						(609)						11,408
Commercial and industrial			1,978						475						(183)						(87)						—						2,183
Construction			18						4,528						—												—						4,546
Agriculture production			286						—						(268)						—						—						18
Leases			—						—						—												—						—
Total nonperforming loans			22,963						7,363						(2,364)						(489)						(609)						26,864
Foreclosed assets			2,057						178						—												609						2,844
Total nonperforming assets			$	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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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)			Balance at September 30, 2019						Additions						Advances/ Paydowns, net						Charge-offs/ Write-downs (1)						Transfers to Foreclosed Assets						Balance at December 31, 2019
Commercial real estate:
CRE non-owner occupied			$	1,502					$	111					$	—					$	—					$	(971)					$	642
CRE owner occupied			1,184						293						(69)						—						—						1,408
Multifamily			2,024						—						—						—						—						2,024
Farmland			1,331						—						(89)						—						—						1,242
Total commercial real estate loans			6,041						404						(158)						—						(971)						5,316
Consumer:
SFR 1-4 1st DT			4,502						773						(84)						—						—						5,191
SFR HELOCs and junior liens			4,531						494						(808)						—						—						4,217
Other			63						299						(242)						(69)						—						51
Total consumer loans			9,096						1,566						(1,134)						(69)						—						9,459
Commercial and industrial			3,388						615						(1,072)						(881)						—						2,050
Construction			—						—						—						—						—						—
Agriculture production			40						—						(1)						—						—						39
Leases			—						—						—						—						—						—
Total nonperforming loans			18,565						2,585						(2,365)						(950)						(971)						16,864
Foreclosed assets			1,546						105						(81)												971						2,541
Total nonperforming assets			$	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.

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The following is a summary of COVID related loan customer modifications with outstanding balances as of December 31, 2020:

															Modification Type												Deferral Term
(dollars in thousands)			Modified Loan Balances Outstanding						% of Total Category of Loans						Interest Only Deferral						Principal and Interest Deferral						90 Days						180 Days
Commercial real estate:
CRE non-owner occupied			$	19,643					1.28		%				87.1		%				12.9		%				—		%				100.0		%
CRE owner occupied			2,488						0.40						71.0						29.0						71.0						29.0
Multifamily			—						—						—						—						—						—
Farmland			—						—						—						—						—						—
Total commercial real estate loans			22,131						0.8						85.3						14.7						8.0						92.0
Consumer:
SFR 1-4 1st lien			457						0.1						100.0						—						—						100.0
SFR HELOCs and junior liens			—						—						—						—						—						—
Other			—						—						—						—						—						—
Total consumer loans			457						0.1						100.0						—						—						100.0
Commercial and industrial			772						0.2						86.1						13.9						9.0						91.0
Construction			24,998						8.8						100.0						—						—						100.0
Agriculture production			—						—						—						—						—						—
Leases			—						—						—						—						—						—
Total modifications			$	48,358					1.0		%				93.0		%				7.0		%				3.7		%				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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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

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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):

			December 31,
(dollars in thousands)			2020						2019						2018						2017						2016
Allowance for credit losses:
Qualitative and forecast factor allowance			$	61,935					$	12,146					$	11,577					$	10,252					$	10,275
Quantitative (Cohort) model allowance reserves			28,462						17,529						18,689						17,100						17,485
Total allowance for credit losses			90,397						29,675						30,266						27,352						27,760
Allowance for individually evaluated loans			1,450						935						2,194						2,699						2,046
Allowance for PCD loan losses			—						n/a						n/a						n/a						n/a
Allowance for PCI loan losses			n/a						6						122						272						2,697
Total allowance for credit losses			$	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.

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The following table summarizes the allocation of the allowance for credit losses between loan types:

			December 31,
(in thousands)			2020						2019						2018						2017						2016
Commercial real estate			$	53,693					$	11,995					$	12,944					$	11,441					$	11,905
Consumer			25,148						10,084						11,051						10,543						12,670
Commercial and industrial			4,252						4,867						5,610						5,757						4,763
Construction			7,540						3,388						2,497						1,827						2,097
Agriculture production			1,209						261						480						755						1,068
Leases			5						21						—						—						—
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:

			December 31,
			2020						2019						2018						2017						2016
Commercial real estate			58.5		%				39.2		%				39.7		%				37.7		%				36.6		%
Consumer			27.4		%				32.9		%				33.9		%				34.8		%				39.0		%
Commercial and industrial			4.6		%				15.9		%				16.9		%				19.0		%				14.7		%
Construction			8.2		%				11.0		%				7.7		%				6.0		%				6.5		%
Agriculture production			1.3		%				0.9		%				1.8		%				2.5		%				3.2		%
Leases			—		%				0.1		%				—		%				—		%				—		%
Total allowance for loan losses			100.0		%				100.0		%				100.0		%				100.0		%				100.0		%

The following table summarizes the allocation of the allowance for 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:

			December 31,
			2020						2019						2018						2017						2016
Commercial real estate			1.82		%				0.42		%				0.49		%				0.60		%				0.68		%
Consumer			2.62		%				1.05		%				1.18		%				1.42		%				1.88		%
Commercial and industrial			0.81		%				1.81		%				2.24		%				2.96		%				2.69		%
Construction			2.65		%				1.36		%				1.36		%				1.33		%				1.71		%
Agriculture production			2.74		%				1.82		%				1.85		%				2.95		%				2.68		%
Leases			0.13		%				1.63		%				—		%				—		%				—		%
Total allowance for loan losses			1.93		%				0.71		%				1.01		%				1.18		%				1.43		%

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The following tables summarize the activity in the allowance for loan losses for the years indicated (dollars in thousands):

			Year ended December 31,
			2020						2019						2018						2017						2016
Allowance for credit losses:
Balance at beginning of period			$	30,616					$	32,582					$	30,323					$	32,503					$	36,011
Adoption of ASU 2016-13 (CECL)			18,913						—						—						—						—
Provision for (reversal of) loan losses			42,188						(1,690)						2,583						89						(5,970)
Loans charged-off:
Commercial real estate:
CRE non-owner occupied			—						—						(15)						(166)						(827)
CRE owner occupied			—						(746)						—						(20)						—
Multifamily			—						—						—						—						—
Farmland			(182)						—						—						—						—
Consumer:
SFR 1-4 1st DT liens			(13)						(2)						(77)						(60)						(321)
SFR HELOCs and junior liens			(116)						(3)						(301)						(429)						(804)
Other			(670)						(765)						(783)						(1,186)						(822)
Commercial and industrial			(774)						(2,104)						(1,103)						(1,384)						(456)
Construction			—						—						—						(1,104)						—
Agriculture production			—						(19)						(85)						(60)						—
Leases			—												—						—						—
Total loans charged off			(1,755)						(3,639)						(2,364)						(4,409)						(3,230)
Recoveries of previously charged-off loans:
Commercial real estate:
CRE non-owner occupied			198						1,486						47						388						875
CRE owner occupied			28						42						20						9						11
Multifamily			—						—						—						—						35
Farmland			—						—						—						—						—
Consumer:
Home equity lines			416						54						—						—						880
Home equity loans			304						935						1,143						940						2,907
Other consumer			347						321						288						375						448
Commercial and industrial			568						513						445						354						404
Construction			—						—						—						1						132
Agriculture production			24						12						97						73						—
Leases			—						—						—						—						—
Total recoveries of previously charged off loans			1,885						3,363						2,040						2,140						5,692
Net (charge-offs) recoveries			130						(276)						(324)						(2,269)						2,462
Balance at end of period			$	91,847					$	30,616					$	32,582					$	30,323					$	32,503
Average total loans			$	4,646,005					$	4,111,093					$	3,548,489					$	2,842,659					$	2,629,729
Ratios:
Net charge-offs (recoveries) during period to average loans outstanding during period			(0.01)		%				0.01		%				0.01		%				0.08		%				(0.09)		%
Provision for (benefit from) credit losses to average loans outstanding during period			0.92		%				(0.04)		%				0.07		%				—		%				(0.23)		%
Allowance for credit losses to loans at year-end			1.93		%				0.71		%				0.81		%				1.01		%				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.

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Foreclosed Assets, Net of Allowance for Losses

The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the years indicated (dollars in thousands):

			Balance at December 31, 2019						Additions						Advances/ Capitalized Costs/Other						Sales						Valuation Adjustments						Balance at December 31, 2020
Land & Construction			$	313					$	119					$	—					$	(313)					$	35					$	154
Residential real estate			1,045						647						—						(200)						15						1,507
Commercial real estate			1,183						—						—						—						—						1,183
Total foreclosed assets			$	2,541					$	766					$	—					$	(513)					$	50					$	2,844

			Balance at December 31, 2018						Additions						Advances/ Capitalized Costs/Other						Sales						Valuation Adjustments						Balance at December 31, 2019
Land & Construction			$	445					$	—					$	—					$	—					$	(132)					$	313
Residential real estate			1,742						278						—						(1,064)						89						1,045
Commercial real estate			93						971						—						(26)						145						1,183
Total foreclosed assets			$	2,280					$	1,249					$	—					$	(1,090)					$	102					$	2,541

Premises and Equipment

Premises and equipment were comprised of:

			As of December 31,
			2020						2019
			(In thousands)
Land & land improvements			$	29,505					$	29,453
Buildings			65,334						65,241
Furniture and equipment			45,994						45,723
			140,833						140,417
Less: Accumulated depreciation			(57,462)						(53,704)
			83,371						86,713
Construction in progress			360						373
Total premises and equipment			$	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:

			December 31, 2020						December 31, 2019
(In thousands)
Core-deposit intangible			$	17,833					$	23,557
Goodwill			220,872						220,872
Total intangible assets			$	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.

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Deposit Portfolio Composition

The following table shows the Company’s deposit balances at the dates indicated:

			Year ended December 31,
(dollars in thousands)			2020						2019						2018						2017						2016
Noninterest-bearing demand			$	2,581,517					$	1,832,665					$	1,760,580					$	1,368,218					$	1,275,745
Interest-bearing demand			1,414,908						1,242,274						1,252,366						971,459						887,625
Savings			2,164,942						1,851,549						1,921,324						1,364,518						1,397,036
Time certificates, over $250,000			73,147						129,061						132,429						73,596						75,184
Other time certificates			271,420						311,445						299,767						231,340						259,970
Total deposits			$	6,505,934					$	5,366,994					$	5,366,466					$	4,009,131					$	3,895,560

Long-Term Debt

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						Total number of shares purchased						Average price paid per share						Maximum number of shares remaining that may yet be purchased under the 2019 Plan
November 12, 2019 - December 31, 2019						—						n/a						1,525,000
January 1, 2020 - December 31, 2020						858,717						$30.66						666,283

Market Risk Management

Overview. The goal for managing the assets and liabilities of the Bank is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Bank to undue interest rate risk. The Board of Directors has overall responsibility for the Company’s interest rate risk management policies. The Bank has an Asset and Liability Management Committee which establishes and monitors guidelines to control the sensitivity of earnings and the fair value of certain assets and liabilities as may be caused by changes in interest rates. The Company does not hold any financial instruments that are not maintained in US dollars and is not party to any contracts that may be settled or repaid in a denomination other than US dollars.

Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. Market value of equity is the net present value of estimated cash flows from the Bank’s assets, liabilities and off-balance sheet items. The Bank uses simulation models to forecast net interest margin and market value of equity.

Simulation of net interest margin and market value of equity under various interest rate scenarios is the primary tool used to measure interest rate risk. The Bank estimated the potential impact of changing interest rates on net interest margin and market value of equity using computer-modeling techniques. A balance sheet forecast is prepared using inputs of actual loan, securities and interest-bearing liability (i.e. deposits/borrowings) positions as the beginning base.

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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)			Estimated Change in Net Interest Income (NII) (as % of NII)						Estimated Change in Market Value of Equity (MVE) (as % of MVE)
+200 (shock)			6.8		%				36.2		%
+100 (shock)			3.5		%				21.6		%
+    0 (flat)			—						—
-100 (shock)			(2.0)		%				(43.0)		%
-200 (shock)			nm						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.

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As of December 31, 2020			Repricing within:
(dollars in thousands)			Less than 3 months						3 - 6 months						6 - 12 months						1 - 5 years						Over 5 years
Interest-earning assets:
Cash at Federal Reserve and other banks			$	592,298					$	—					$	—					$	—					$	—
Securities			553,740						80,684						229,044						589,120						246,242
Loans			1,039,448						359,287						519,034						2,376,209						401,995
Total interest-earning assets			2,185,486						439,971						748,078						2,965,329						648,237
Interest-bearing liabilities
Transaction deposits			3,996,425						—						—						—						—
Time			96,284						67,047						102,261						78,401						611
Other borrowings			26,914						—						—						—						—
Junior subordinated debt			57,635						—						—						—						—
Total interest-bearing liabilities			$	4,177,258					$	67,047					$	102,261					$	78,401					611
Interest sensitivity gap			$	(1,991,772)					$	372,924					$	645,817					$	2,886,928					$	647,626
Cumulative sensitivity gap			$	(1,991,772)					$	(1,618,848)					$	(973,031)					$	1,913,897					$	2,561,523
As a percentage of earning assets:
Interest sensitivity gap			(30.5)		%				5.7		%				9.9		%				44.2		%				9.9		%
Cumulative sensitivity gap			(30.5)		%				(24.8)		%				(14.9)		%				29.3		%				39.2		%

Liquidity

Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Consolidated Statement of Cash Flows. Net cash used by investing activities totaled $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.

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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

			Amounts as of December 31,
(dollars in thousands)			2020						2019						2018
Time remaining until maturity:
Less than 3 months			$	96,546					$	90,252					$	70,473
3 months to 6 months			67,108						64,161						85,781
6 months to 12 months			102,252						74,682						47,254
More than 12 months			78,661						57,244						77,912
Total			$	344,567					$	286,339					$	281,420

Loan maturities

Loan demand also affects the Company’s liquidity position. The following table presents the maturities of loans, net of deferred loan costs, at December 31, 2020:

			Within One Year						After One But Within 5 Years						After 5 Years						Total
			(dollars in thousands)
Loans with predetermined interest rates:
Commercial Real Estate			$	29,140					$	271,789					$	536,665					$	837,594
Consumer			5,069						38,809						381,646						425,524
Commercial & Industrial			4,607						415,820						21,581						442,008
Construction			7,346						1,892						35,916						45,154
Agricultural Production			776						6,003						2,094						8,873
Leases			—						3,784						—						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			62,294						290,084						1,761,930						2,114,308
Consumer			11,068						24,760						490,756						526,584
Commercial & Industrial			46,688						5,180						32,451						84,319
Construction			29,754						13,217						196,717						239,688
Agricultural Production			29,523						5,482						286						35,291
Leases			—						—						—						—
Total loans with floating interest rates			179,327						338,723						2,482,140						3,000,190
Total loans			$	226,265					$	1,076,820					$	3,460,042					$	4,763,127

Investment maturities

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.

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			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)
Debt Securities Available for Sale
Obligations of US government agencies			$	19,994					0.14		%				$	189,897					0.51		%				$	28,353					2.95		%				$	574,130					1.57		%				$	812,374					1.33		%
Obligations of states and political subdivisions			—						—						1,896						4.27		%				15,882						2.29		%				111,317						3.88		%				129,095						3.69		%
Corporate bonds			—						—						2,544						6.20		%				—						—						—						—						2,544						6.20		%
Asset backed securities			—						—												—		%				115,435						—						354,816						1.30		%				470,251						1.36		%
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					1.56		%
Debt Securities Held to Maturity
Obligations of US government agencies			$	—					—						$	—					—		%				$	13,636					2.34		%				$	260,031					2.51		%				$	273,667					2.50		%
Obligations of states and political subdivisions			—						—						993						4.82		%				5,119						3.33		%				4,784						3.17		%				10,896						3.39		%
Total debt securities held to maturity			$	—					—		%				$	993					4.82		%				$	18,755					2.61		%				$	264,815					2.52		%				$	284,563					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:

(dollars in thousands)			Total						Less than one year						1-3 years						3-5 years						More than 5 years
Time deposits			$	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						—						—						—
Junior subordinated debt:
TriCo Trust I(1)			20,619						—						—						—						20,619
TriCo Trust II(2)			20,619						—						—						—						20,619
North Valley Trust II(3)			5,215						—						—						—						5,303
North Valley Trust III(4)			4,118						—						—						—						4,199
North Valley Trust IV(5)			6,661						—						—						—						6,894
Operating lease obligations			27,973						84						2,119						2,784						22,986
Deferred compensation(6)			1,546						636						390						348						172
Supplemental retirement plans(6)			13,791						1,583						3,064						2,628						6,516
Total contractual obligations			$	472,425					$	295,123					$	79,950					$	10,044					$	87,308

(1)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.

(2)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.

(3)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.

(4)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.

(5)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.

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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

			Page
Consolidated Balance Sheets as of December 31, 2020 and 2019			50
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018			51
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018			51
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019, and 2018			52
Consolidated Statements of Cash Flows for the years ended December  31, 2020, 2019, and 2018			53
Notes to Consolidated Financial Statements			54
Management’s Report on Internal Control over Financial Reporting			100
Report of Independent Registered Public Accounting Firm – Moss Adams LLP			101

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TRICO BANCSHARES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

			At December 31, 2020						At December 31, 2019
Assets:
Cash and due from banks			$	77,253					$	92,816
Cash at Federal Reserve and other banks			592,298						183,691
Cash and cash equivalents			669,551						276,507
Investment securities:
Marketable equity securities			3,025						2,960
Available for sale debt securities			1,414,264						950,138
Held to maturity debt securities			284,563						375,606
Restricted equity securities			17,250						17,250
Loans held for sale			6,268						5,265
Loans			4,763,127						4,307,366
Allowance for credit losses			(91,847)						(30,616)
Total loans, net			4,671,280						4,276,750
Premises and equipment, net			83,731						87,086
Cash value of life insurance			118,870						117,823
Accrued interest receivable			20,004						18,897
Goodwill			220,872						220,872
Other intangible assets, net			17,833						23,557
Operating leases, right-of-use			27,846						27,879
Other assets			84,172						70,591
Total assets			$	7,639,529					$	6,471,181
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand			$	2,581,517					$	1,832,665
Interest-bearing			3,924,417						3,534,329
Total deposits			6,505,934						5,366,994
Accrued interest payable			1,362						2,407
Operating lease liability			27,973						27,540
Other liabilities			94,597						91,984
Other borrowings			26,914						18,454
Junior subordinated debt			57,635						57,232
Total liabilities			6,714,415						5,564,611
Commitments and contingencies (Note 15)
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: 50,000,000 shares authorized; issued and outstanding: 29,727,214 and 30,523,824 at December 31, 2020 and 2019, respectively			530,835						543,998
Retained earnings			381,999						367,794
Accumulated other comprehensive income (loss), net of tax			12,280						(5,222)
Total shareholders’ equity			925,114						906,570
Total liabilities and shareholders’ equity			$	7,639,529					$	6,471,181

The accompanying notes are an integral part of these consolidated financial statements.

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TRICO BANCSHARES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

			Year ended December 31,
			2020						2019						2018
Interest and dividend income:
Loans, including fees			$	233,721					$	223,750					$	186,117
Investments:
Taxable securities			27,627						39,810						33,997
Tax exempt securities			3,566						4,002						4,345
Dividends			1,032						1,285						1,705
Interest bearing cash at Federal Reserve and other banks			1,238						3,597						2,054
Total interest and dividend income			267,184						272,444						228,218
Interest expense:
Deposits			6,885						11,716						6,996
Other borrowings			17						387						2,745
Junior subordinated debt			2,555						3,272						3,131
Total interest expense			9,457						15,375						12,872
Net interest income			257,727						257,069						215,346
Provision for (benefit from) credit losses			42,813						(1,690)						2,583
Net interest income after provision for (benefit from) credit losses			214,914						258,759						212,763
Noninterest income:
Service charges and fees			37,981						40,417						38,460
Commissions on sale of non-deposit investment products			2,989						2,877						3,151
Increase in cash value of life insurance			2,949						3,029						2,718
Gain on sale of loans			9,122						3,282						2,371
Gain on sale of investment securities			7						110						207
Other			2,146						3,805						2,154
Total noninterest income			55,194						53,520						49,061
Noninterest expense:
Salaries and related benefits			112,121						106,065						93,942
Other			70,637						79,392						74,530
Total noninterest expense			182,758						185,457						168,472
Income before income taxes			87,350						126,822						93,352
Provision for income taxes			22,536						34,750						25,032
Net income			$	64,814					$	92,072					$	68,320
Earnings per share:
Basic			$	2.17					$	3.02					$	2.57
Diluted			$	2.16					$	3.00					$	2.54

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

			Year ended
			2020						2019						2018
Net income			$	64,814					$	92,072					$	68,320
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period, after reclassifications			11,126						17,159						(12,434)
Change in minimum pension liability, after reclassifications			6,972						(4,502)						388
Change in joint beneficiary agreement liability			(596)						—						426
Other comprehensive income (loss)			17,502						12,657						(11,620)
Comprehensive income			$	82,316					$	104,729					$	56,700

The accompanying notes are an integral part of these consolidated financial statements.

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TRICO BANCSHARES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data)

			Shares of Common Stock						Common Stock						Retained Earnings						Accumulated Other Comprehensive Income (loss)						Total
Balance at January 1, 2018			22,955,963						$	255,836					$	255,200					$	(5,228)					$	505,808
Net income															68,320												68,320
Adoption ASU 2016-01															(62)						62						—
Adoption ASU 2018-02															1,093						(1,093)						—
Other comprehensive loss																					(11,620)						(11,620)
Stock option vesting									75																		75
Service condition RSU vesting									1,017																		1,017
Market plus service condition RSU vesting									370																		370
Stock options exercised			100,400						1,704																		1,704
Service condition RSUs released			35,060																								—
Tax benefit from release of service condition RSUs			25,512																								—
Issuance of common stock			7,405,277						284,437																		284,437
Repurchase of common stock			(104,989)						(1,677)						(2,292)												(3,969)
Dividends paid ($0.70 per share)															(18,769)												(18,769)
Balance at December 31, 2018			30,417,223						$	541,762					$	303,490					$	(17,879)					$	827,373
Net income															92,072												92,072
Other comprehensive income																					12,657						12,657
Service condition RSU vesting									1,161																		1,161
Market plus service condition RSU vesting									493																		493
Stock options exercised			182,500						2,921																		2,921
Service condition RSUs released			33,060																								—
Market plus service condition RSUs released			22,237																								—
Repurchase of common stock			(131,196)						(2,339)						(2,769)												(5,108)
Dividends paid ($0.82 per share)															(24,999)												(24,999)
Balance at December 31, 2019			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						354,811						(5,222)						893,587
Net income															64,814												64,814
Other comprehensive income																					17,502						17,502
Service condition RSU vesting									1,390																		1,390
Market plus service condition RSU vesting									646																		646
Service condition RSUs released			34,388																								—
Market plus service condition RSUs released			20,265																								—
Stock options exercised			32,000						547																		547
Repurchase of common stock			(883,263)						(15,746)						(11,323)												(27,069)
Dividends paid ($0.88 per share)															(26,303)												(26,303)
Balance at December 31, 2020			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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TRICO BANCSHARES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

			Year ended December 31,
			2020						2019						2018
Operating activities:
Net income			$	64,814					$	92,072					$	68,320
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization			6,453						6,915						7,014
Amortization of intangible assets			5,724						5,723						3,499
Provision for (benefit from) credit losses			42,813						(1,690)						2,583
Amortization of investment securities premium, net			2,669						2,547						2,512
Gain on sale of investment securities			(7)						(110)						(207)
Originations of loans for resale			(227,831)						(131,074)						(84,245)
Proceeds from sale of loans originated for resale			234,424						131,689						86,988
Gain on sale of loans			(9,122)						(3,282)						(2,371)
Change in market value of mortgage servicing rights			2,634						1,811						146
Provision for (reversal of) losses on real estate owned			128						(102)						89
Deferred income tax expense			(14,154)						1,692						2,600
Gain on sale or transfer of loans, to real estate owned			(235)						(608)						(408)
Operating lease payments			(4,927)						(4,931)						—
Loss on disposal of fixed assets			67						82						185
Increase in cash value of life insurance			(2,949)						(3,029)						(2,718)
Gain on life insurance death benefit			(498)						(831)						—
(Gain) loss on marketable equity securities			(64)						(86)						64
Equity compensation vesting expense			2,036						1,654						1,462
Change in:
Interest receivable			(1,107)						515						(5,640)
Interest payable			(1,045)						410						1,067
Amortization of operating lease right of use asset			5,393						4,592						—
Other assets and liabilities, net			9,586						(1,153)						10,129
Net cash from operating activities			114,802						102,806						91,069
Investing activities:
Cash acquired in acquisition; net of consideration paid			—						—						30,613
Proceeds from maturities of securities available for sale			167,515						97,993						73,014
Proceeds from maturities of securities held to maturity			89,858						68,346						68,937
Proceeds from sale of available for sale securities			229						127,066						293,279
Purchases of securities available for sale			(617,552)						(37,253)						(436,678)
Net redemption of restricted equity securities			—						—						7,429
Loan origination and principal collections, net			(415,415)						(286,339)						(173,752)
Loans purchased			(41,126)						—						—
Proceeds from sale of real estate owned			570						1,336						2,527
Purchases of premises and equipment			(2,812)						(4,293)						(7,372)
Life insurance proceeds			2,400						3,355						—
Net cash from investing activities			(816,333)						(29,789)						(142,003)
Financing activities:
Net change in deposits			1,138,940						528						365,400
Net change in other borrowings			8,460						2,615						(271,327)
Repurchase of common stock, net			(26,720)						(2,196)						(2,483)
Dividends paid			(26,303)						(24,999)						(18,769)
Exercise of stock options, net			198						9						218
Net cash from financing activities			1,094,575						(24,043)						73,039
Net change in cash and cash equivalents			393,044						48,974						22,105
Cash and cash equivalents at beginning of year			276,507						227,533						205,428
Cash and cash equivalents at end of year			$	669,551					$	276,507					$	227,533
Supplemental disclosure of noncash activities:
Unrealized gain (loss) on securities available for sale			$	15,796					$	24,361					$	(17,627)
Loans transferred to foreclosed assets			$	766					$	1,249					$	1,262
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes			$	736					$	5,108					$	1,486
Obligations incurred in conjunction with leased assets			$	4,161					$	156					$	—
Supplemental disclosure of cash flow activity:
Cash paid for interest expense			$	10,502					$	14,965					$	11,805
Cash paid for income taxes			$	29,500					$	35,050					$	14,525
Assets acquired in acquisition and goodwill, net			$	—					$	—					$	1,463,100
Liabilities assumed in acquisition			$	—					$	—					$	1,171,968

The accompanying notes are an integral part of these consolidated financial statements.

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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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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:

			December 31, 2020
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Estimated Fair Value
									(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies			$	795,555					$	17,710					$	(891)					$	812,374
Obligations of states and political subdivisions			123,347						5,748						—						129,095
Corporate bonds			2,459						85						—						2,544
Asset backed securities			473,720						1,682						(5,151)						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			273,667						13,774						—						287,441
Obligations of states and political subdivisions			10,896						389						—						11,285
Total debt securities held to maturity			$	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.

			December 31, 2019
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Estimated Fair Value
									(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies			$	466,139					$	7,261					$	(420)					$	472,980
Obligations of states and political subdivisions			106,373						3,229						(1)						109,601
Corporate bonds			2,430						102						—						2,532
Asset backed securities			371,809						129						(6,913)						365,025
Total debt securities available for sale			$	946,751					$	10,721					$	(7,334)					$	950,138
Debt Securities Held to Maturity
Obligations of U.S. government agencies			$	361,785					$	6,072					$	(480)					$	367,377
Obligations of states and political subdivisions			13,821						327						—						14,148
Total debt securities held to maturity			$	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.

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Debt Securities			Available for Sale												Held to Maturity
(In thousands)			Amortized Cost						Estimated Fair Value						Amortized Cost						Estimated Fair Value
Due in one year			$	20,000					$	19,994					$	—					$	—
Due after one year through five years			193,791						194,337						993						1,135
Due after five years through ten years			157,945						159,670						18,755						19,640
Due after ten years			1,023,345						1,040,263						264,815						277,951
Totals			$	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:

			Less than 12 months												12 months or more												Total
			Fair Value						Unrealized Loss						Fair Value						Unrealized Loss						Fair Value						Unrealized Loss
December 31, 2020			(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies			$	160,543					$	(891)					$	—					$	—					$	160,543					$	(891)
Asset backed securities			51,544						(441)						297,020						(4,710)						348,564						(5,151)
Total debt securities available for sale			$	212,087					$	(1,332)					$	297,020					$	(4,710)					$	509,107					$	(6,042)

			Less than 12 months												12 months or more												Total
			Fair Value						Unrealized Loss						Fair Value						Unrealized Loss						Fair Value						Unrealized Loss
December 31, 2019			(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government agencies			$	36,709					$	(309)					$	23,852					$	(111)					$	60,561					$	(420)
Obligations of states and political subdivisions			778						(1)						—						—						778						(1)
Asset backed securities			237,463						(4,535)						99,981						(2,378)						337,444						(6,913)
Total securities available for sale			$	274,950					$	(4,845)					$	123,833					$	(2,489)					$	398,783					$	(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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Note 4 – Loans

A summary of loan balances follows:

(in thousands)			December 31, 2020						December 31, 2019
Commercial real estate:
CRE non-owner occupied			$	1,535,555					$	1,609,556
CRE owner occupied			624,375						546,434
Multifamily			639,480						517,725
Farmland			152,492						145,067
Total commercial real estate loans			2,951,902						2,818,782
Consumer:
SFR 1-4 1st DT liens			546,592						509,508
SFR HELOCs and junior liens			327,484						362,886
Other			78,032						82,656
Total consumer loans			952,108						955,050
Commercial and industrial			526,327						249,791
Construction			284,842						249,827
Agriculture production			44,164						32,633
Leases			3,784						1,283
Total loans, net of deferred loan fees and discounts			$	4,763,127					$	4,307,366
Total principal balance of loans owed, net of charge-offs			$	4,805,596					$	4,351,725
Unamortized net deferred loan fees			(16,984)						(8,927)
Discounts to principal balance of loans owed, net of charge-offs			(25,485)						(35,432)
Total loans, net of unamortized deferred loan fees and discounts			$	4,763,127					$	4,307,366
Allowance for credit losses			$	(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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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)			December 31, 2020						January 1, 2020						December 31, 2019
Allowance for credit losses:
Qualitative and forecast factor allowance			$	61,935					$	21,830					$	12,146
Quantitative (Cohort) model allowance reserves			28,462						26,900						17,529
Total allowance for credit losses			90,397						48,730						29,675
Allowance for individually evaluated loans			1,450						799						935
Allowance for PCD loan losses			—						—						n/a
Allowance for PCI loan losses			n/a						n/a						6
Total allowance for credit losses			$	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.

			Allowance for Credit Losses – December 31, 2020
(in thousands)			Beginning Balance						Impact of CECL Adoption						Charge-offs						Recoveries						Provision						Ending  Balance
Commercial real estate:
CRE non-owner occupied			$	5,948					$	6,701					$	—					$	198					$	16,533					$	29,380
CRE owner occupied			2,027						2,281						—						28						6,525						10,861
Multifamily			3,352						2,281						—						—						5,839						11,472
Farmland			668						585						(182)						—						909						1,980
Total commercial real estate loans			11,995						11,848						(182)						226						29,806						53,693
Consumer:
SFR 1-4 1st DT liens			2,306						2,675						(13)						416						4,733						10,117
SFR HELOCs and junior liens			6,183						4,638						(116)						304						762						11,771
Other			1,595						971						(670)						347						1,017						3,260
Total consumer loans			10,084						8,284						(799)						1,067						6,512						25,148
Commercial and industrial			4,867						(1,961)						(774)						568						1,552						4,252
Construction			3,388						933						—						—						3,219						7,540
Agriculture production			261						(179)						—						24						1,103						1,209
Leases			21						(12)						—						—						(4)						5
Allowance for credit losses on loans			30,616						18,913						(1,755)						1,885						42,188						91,847
Reserve for unfunded commitments			2,775						—						—						—						625						3,400
Total			$	33,391					$	18,913					$	(1,755)					$	1,885					$	42,813					$	95,247

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			Allowance for Loan Losses – December 31, 2019
(in thousands)			Beginning Balance												Charge-offs						Recoveries						Provision						Ending  Balance
Commercial real estate:
CRE non-owner occupied			$	7,401											$	—					$	1,486					$	(2,939)					$	5,948
CRE owner occupied			2,711												(746)						42						20						2,027
Multifamily			2,429												—						—						923						3,352
Farmland			403												—						—						265						668
Total commercial real estate loans			12,944												(746)						1,528						(1,731)						11,995
Consumer:
SFR 1-4 1st DT liens			2,676												(2)						54						(422)						2,306
SFR HELOCs and junior liens			7,582												(3)						935						(2,331)						6,183
Other			793												(765)						321						1,246						1,595
Total consumer loans			11,051												(770)						1,310						(1,507)						10,084
Commercial and industrial			5,610												(2,104)						513						848						4,867
Construction			2,497												—						—						891						3,388
Agriculture production			480												(19)						12						(212)						261
Leases			—												—						—						21						21
Allowance for loan losses			$	32,582											$	(3,639)					$	3,363					$	(1,690)					$	30,616
			Reserve for Unfunded Commitments - December 31, 2019
Reserve for unfunded commitments			$	2,575											$	—					$	—					$	200					$	2,775

			Allowance for Loan Losses – December 31, 2018
(in thousands)			Beginning Balance												Charge-offs						Recoveries						Provision						Ending  Balance
Commercial real estate:
CRE non-owner occupied			$	6,693											$	(15)					$	47					$	676					$	7,401
CRE owner occupied			2,686												—						20						5						2,711
Multifamily			1,491												—						—						938						2,429
Farmland			571												—						—						(168)						403
Total commercial real estate loans			11,441												(15)						67						1,451						12,944
Consumer:
SFR 1-4 1st DT liens			2,317												(77)						—						436						2,676
SFR HELOCs and junior liens			7,641												(301)						1,143						(901)						7,582
Other			586												(783)						288						702						793
Total consumer loans			10,544												(1,161)						1,431						237						11,051
Commercial and industrial			5,757												(1,103)						445						511						5,610
Construction			1,826												—						—						671						2,497
Agriculture production			755												(85)						97						(287)						480
Leases			—												—						—						—						—
Allowance for loan losses			$	30,323											$	(2,364)					$	2,040					$	2,583					$	32,582
			Reserve for Unfunded Commitments - December 31, 2018
Reserve for unfunded commitments			$	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.

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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)			2020						2019						2018						2017						2016						Prior						Revolving Loans Amortized Cost Basis						Revolving Loans Converted to Term						Total
Commercial real estate:
CRE non-owner occupied risk ratings
Pass			$	120,520					$	207,899					$	155,730					$	256,677					$	179,523					$	460,644					$	76,730					$	—					$	1,457,723
Special Mention			—						7,455						11,692						5,407						15,773						18,832						12,205						—						71,364
Substandard			—						—						1,449						584						2,147						2,288						—						—						6,468
Doubtful/Loss			—						—						—						—						—						—						—						—						—
Total CRE non-owner occupied risk ratings			$	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			$	105,896					$	75,144					$	53,816					$	58,371					$	54,541					$	227,828					$	25,508					$	—					$	601,104
Special Mention			—						—						288						7,451						2,955						6,140						—						—						16,834
Substandard			—						1,533						1,301						475						1,306						1,822						—						—						6,437
Doubtful/Loss			—						—						—						—						—						—						—						—						—
Total CRE owner occupied risk ratings			$	105,896					$	76,677					$	55,405					$	66,297					$	58,802					$	235,790					$	25,508					$	—					$	624,375

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			Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2020
(in thousands)			2020						2019						2018						2017						2016						Prior						Revolving Loans Amortized Cost Basis						Revolving Loans Converted to Term						Total
Commercial real estate:
Multifamily risk ratings
Pass			$	77,646					$	118,725					$	113,882					$	70,112					$	67,457					$	123,518					$	19,007					$	—					$	590,347
Special Mention			9,441						—			—			—						603						24,687						772						9,259						—						44,762
Substandard			—						4,371						—			—			—			—			—			—			—			—			—			—			—						4,371
Doubtful/Loss			—						—						—						—						—						—						—						—						—
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			$	17,640					$	25,003					$	19,148					$	12,834					$	7,377					$	17,129					$	39,411					$	—					$	138,542
Special Mention			—						2,567						—						1,271						227						3,107						2,258						—						9,430
Substandard			—						700						—						602						—						1,214						2,004						—						4,520
Doubtful/Loss			—						—						—						—						—						—						—						—						—
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			$	183,719					$	80,717					$	36,342					$	53,001					$	46,467					$	126,465					$	76					$	5,507					$	532,294
Special Mention			—						290						684						110						15						2,936						—						934						4,969
Substandard			—						—						1,174						929						935						5,763						—						528						9,329
Doubtful/Loss			—						—						—						—						—						—						—						—						—
Total SFR 1st DT liens			$	183,719					$	81,007					$	38,200					$	54,040					$	47,417					$	135,164					$	76					$	6,969					$	546,592

Consumer loans:
SFR HELOCs and Junior Liens risk ratings
Pass			$	793					$	—					$	13					$	360					$	300					$	910					$	297,160					$	14,051					$	313,587
Special Mention			—						—						16						—						—						83						4,504						789						5,392
Substandard			—						—						—						—						—						39						6,698						1,768						8,505
Doubtful/Loss			—						—						—						—						—						—						—						—						—
Total SFR HELOCs and Junior Liens			$	793					$	—					$	29					$	360					$	300					$	1,032					$	308,362					$	16,608					$	327,484

Consumer loans:
Other risk ratings
Pass			$	25,876					$	29,539					$	14,170					$	4,238					$	1,020					$	967					$	986					$	—					$	76,796
Special Mention			43						208						147						74						24						65						90						—						651
Substandard			58						82						210						74						12						140						9						—						585
Doubtful/Loss			—						—						—						—			—			—						—						—						—						—
Total other consumer loans			$	25,977					$	29,829					$	14,527					$	4,386					$	1,056					$	1,172					$	1,085					$	—					$	78,032

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			Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2020
(in thousands)			2020						2019						2018						2017						2016						Prior						Revolving Loans Amortized Cost Basis						Revolving Loans Converted to Term						Total
Commercial and industrial loans:
Commercial and industrial risk ratings
Pass			$	356,701					$	48,838					$	20,463					$	13,151					$	5,185					$	9,490					$	65,938					$	1,085					$	520,851
Special Mention			—						102						698						195						20						178						207						11						1,411
Substandard			—						301						53						1,142						823						148						1,519						79						4,065
Doubtful/Loss			—						—						—						—						—						—						—						—						—
Total commercial and industrial loans			$	356,701					$	49,241					$	21,214					$	14,488					$	6,028					$	9,816					$	67,664					$	1,175					$	526,327

Construction loans:
Construction risk ratings
Pass			$	69,133					$	41,786					$	92,191					$	51,082					$	20,868					$	2,876					$	—					$	—					$	277,936
Special Mention			—						—						—						346						—						1,780						—						—						2,126
Substandard			—						—						—						—						4,529						251						—						—						4,780
Doubtful/Loss			—						—						—						—						—						—						—						—						—
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			$	977					$	2,079					$	1,590					$	1,838					$	663					$	708					$	36,051					$	—					$	43,906
Special Mention			—						—						203						—						49						—						—						—						252
Substandard			—						—						—						—						6						—						—						—						6
Doubtful/Loss			—						—						—						—						—						—						—						—						—
Total agriculture production loans			$	977					$	2,079					$	1,793					$	1,838					$	718					$	708					$	36,051					$	—					$	44,164

Leases:
Lease risk ratings
Pass			$	3,784					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	3,784
Special Mention			—						—						—						—						—						—						—						—						—
Substandard			—						—						—						—						—						—						—						—						—
Doubtful/Loss			—						—						—						—						—						—						—						—						—
Total leases			$	3,784					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	3,784

Total loans outstanding:
Risk ratings
Pass			$	962,685					$	629,730					$	507,345					$	521,664					$	383,401					$	970,535					$	560,867					$	20,643					$	4,556,870
Special Mention			9,484						10,622						13,728						15,457						43,750						33,893						28,523						1,734						157,191
Substandard			58						6,987						4,187						3,806						9,758						11,665						10,230						2,375						49,066
Doubtful/Loss			—						—						—						—						—						—						—						—						—
Total loans outstanding			$	972,227					$	647,339					$	525,260					$	540,927					$	436,909					$	1,016,093					$	599,620					$	24,752					$	4,763,127

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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)			2019						2018						2017						2016						Prior						Revolving Loans Amortized Cost Basis						Revolving Loans Converted to Term						Total
Commercial real estate:
CRE non-owner occupied risk ratings
Pass			$	253,321					$	174,869					$	287,183					$	221,864					$	578,255					$	77,070					$	—					$	1,592,562
Special Mention			—						—						3,182						8,401						616						—						—						12,199
Substandard			—						1,183						474						—						3,138						—						—						4,795
Doubtful/Loss			—						—						—						—						—						—						—						—
Total CRE non-owner occupied risk ratings			$	253,321					$	176,052					$	290,839					$	230,265					$	582,009					$	77,070					$	—					$	1,609,556

Commercial real estate:
CRE owner occupied risk ratings
Pass			$	57,376					$	54,298					$	73,019					$	69,136					$	263,750					$	18,524					$	—					$	536,103
Special Mention			—						—						437						745						3,459						—						—						4,641
Substandard			601						—						493						726						3,870						—						—						5,690
Doubtful/Loss			—						—						—						—						—						—						—						—
Total CRE owner occupied risk ratings			$	57,977					$	54,298					$	73,949					$	70,607					$	271,079					$	18,524					$	—					$	546,434

Commercial real estate:
Multifamily risk ratings
Pass			$	82,435					$	112,739					$	41,673					$	99,170					$	141,040					$	36,061					$	—					$	513,118
Special Mention			—						—						—						—						1,103						1,480						—						2,583
Substandard			—						—						—						2,024						—						—						—						2,024
Doubtful/Loss			—						—						—						—						—						—						—						—
Total multifamily loans			$	82,435					$	112,739					$	41,673					$	101,194					$	142,143					$	37,541					$	—					$	517,725

Commercial real estate:
Farmland risk ratings
Pass			$	26,786					$	21,212					$	12,248					$	9,618					$	22,471					$	41,783					$	—					$	134,118
Special Mention			—						—						1,346						226						3,289						774						—						5,635
Substandard			—						—						624						466						2,929						1,295						—						5,314
Doubtful/Loss			—						—						—						—						—						—						—						—
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			$	102,612					$	63,542					$	73,195					$	65,051					$	187,972					$	—					$	6,242					$	498,614
Special Mention			—						—						1,408						19						2,564						—						723						4,714
Substandard			—						813						711						52						4,050						—						554						6,180
Doubtful/Loss			—						—						—						—						—						—						—						—
Total SFR 1st DT liens			$	102,612					$	64,355					$	75,314					$	65,122					$	194,586					$	—					$	7,519					$	509,508

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			Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019
(in thousands)			2019						2018						2017						2016						Prior						Revolving Loans Amortized Cost Basis						Revolving Loans Converted to Term						Total
Consumer loans:
SFR HELOCs and Junior Liens risk ratings
Pass			$	1,412					$	14					$	382					$	403					$	2,077					$	327,589					$	19,531					$	351,408
Special Mention			—						20						—						—						4						4,189						1,169						5,382
Substandard			—						—						—						156						14						4,208						1,718						6,096
Doubtful/Loss			—						—						—						—						—						—						—						—
Total SFR HELOCs and Junior Liens			$	1,412					$	34					$	382					$	559					$	2,095					$	335,986					$	22,418					$	362,886

Consumer loans:
Other risk ratings
Pass			$	45,876					$	23,045					$	7,176					$	2,245					$	2,071					$	1,402					$	—					$	81,815
Special Mention			56						182						176						52						161						91						—						718
Substandard			60						—						13						—						35						15						—						123
Doubtful/Loss			—						—						—						—						—						—						—						—
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			$	61,720					$	31,149					$	24,176					$	10,747					$	16,346					$	96,654					$	973					$	241,765
Special Mention			—						339						1,141						151						164						1,921						110						3,826
Substandard			—						47						1,281						1,571						401						814						86						4,200
Doubtful/Loss			—						—						—						—						—						—						—						—
Total commercial and industrial loans			$	61,720					$	31,535					$	26,598					$	12,469					$	16,911					$	99,389					$	1,169					$	249,791

Construction loans:
Construction risk ratings
Pass			$	50,275					$	92,449					$	76,042					$	18,973					$	7,322					$	—					$	—					$	245,061
Special Mention			—						—						—						4,202						317						—						—						4,519
Substandard			—						—						—						—						247						—						—						247
Doubtful/Loss			—						—						—						—						—						—						—						—
Total construction loans			$	50,275					$	92,449					$	76,042					$	23,175					$	7,886					$	—					$	—					$	249,827

Agriculture production loans:
Agriculture production risk ratings
Pass			$	1,929					$	1,201					$	1,324					$	1,012					$	834					$	26,306					$	—					$	32,606
Special Mention			—						—						—						—						—						—						—						—
Substandard			—						—						—						27						—						—						—						27
Doubtful/Loss			—						—						—						—						—						—						—						—
Total agriculture production loans			$	1,929					$	1,201					$	1,324					$	1,039					$	834					$	26,306					$	—					$	32,633

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			Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019
(in thousands)			2019						2018						2017						2016						Prior						Revolving Loans Amortized Cost Basis						Revolving Loans Converted to Term						Total
Leases:
Lease risk ratings
Pass			$	1,283					$	—					$	—					$	—					$	—					$	—					$	—					$	1,283
Special Mention			—						—						—						—						—						—						—						—
Substandard			—						—						—						—						—						—						—						—
Doubtful/Loss			—						—						—						—						—						—						—						—
Total leases			$	1,283					$	—					$	—					$	—					$	—					$	—					$	—					$	1,283

Total loans outstanding:
Risk ratings
Pass			$	685,025					$	574,518					$	596,418					$	498,219					$	1,222,138					$	625,389					$	26,746					$	4,228,453
Special Mention			56						541						7,690						13,796						11,677						8,455						2,002						44,217
Substandard			661						2,043						3,596						5,022						14,684						6,332						2,358						34,696
Doubtful/Loss			—						—						—						—						—						—						—						—
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:

			Analysis of Past Due Loans - As of December 31, 2020
(in thousands)			30-59 days						60-89 days						> 90 days						Total Past Due Loans						Current						Total
Commercial real estate:
CRE non-owner occupied			$	127					$	173					$	239					$	539					$	1,535,016					$	1,535,555
CRE owner occupied			297						—						824						1,121						623,254						624,375
Multifamily			—						—						—						—						639,480						639,480
Farmland			899						—						70						969						151,523						152,492
Total commercial real estate loans			1,323						173						1,133						2,629						2,949,273						2,951,902
Consumer:
SFR 1-4 1st DT liens			37						—						960						997						545,595						546,592
SFR HELOCs and junior liens			418						212						1,671						2,301						325,183						327,484
Other			41						13						100						154						77,878						78,032
Total consumer loans			496						225						2,731						3,452						948,656						952,108
Commercial and industrial			155						426						105						686						525,641						526,327
Construction			—						—						—						—						284,842						284,842
Agriculture production			—						—						—						—						44,164						44,164
Leases			—						—						—						—						3,784						3,784
Total			$	1,974					$	824					$	3,969					$	6,767					$	4,756,360					$	4,763,127

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The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:

			Analysis of Past Due Loans - As of December 31, 2019
(in thousands)			30-59 days						60-89 days						> 90 days						Total Past Due Loans						Current						Total
Commercial real estate:
CRE non-owner occupied			$	268					$	136					$	114					$	518					$	1,609,038					$	1,609,556
CRE owner occupied			—						—						293						293						546,141						546,434
Multifamily			283						—						2,024						2,307						515,418						517,725
Farmland			30						—						—						30						145,037						145,067
Total commercial real estate loans			581						136						2,431						3,148						2,815,634						2,818,782
Consumer:
SFR 1-4 1st DT liens			1,149						371						1,957						3,477						506,031						509,508
SFR HELOCs and junior liens			1,258						580						1,088						2,926						359,960						362,886
Other			172						1						23						196						82,460						82,656
Total consumer loans			2,579						952						3,068						6,599						948,451						955,050
Commercial and industrial			603						297						24						924						248,867						249,791
Construction			—						—						—						—						249,827						249,827
Agriculture production			49						—						—						49						32,584						32,633
Leases			—						—						—						—						1,283						1,283
Total			$	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
(in thousands)			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
Commercial real estate:
CRE non-owner occupied			$	3,110					$	3,110					$	—					$	639					$	642					$	—
CRE owner occupied			3,111						4,061						—						1,411						1,408						—
Multifamily			—						—						—						2,024						2,024						—
Farmland			1,468						1,538						—						1,242						1,242						—
Total commercial real estate loans			7,689						8,709						—						5,316						5,316						—
Consumer:
SFR 1-4 1st DT liens			4,950						5,093						—						5,023						5,192						—
SFR HELOCs and junior liens			4,480						6,148						—						3,992						4,217						—
Other			68						167						—						4						32						19
Total consumer loans			9,498						11,408						—						9,019						9,441						19
Commercial and industrial			652						2,183						—						476						2,050						—
Construction			4,546						4,546						—						—						—						—
Agriculture production			5						18						—						14						38						—
Leases									—						—																		—
Sub-total			22,390						26,864						—						14,825						16,845						19
Less: Guaranteed loans			(687)						(811)												(916)						(990)						—
Total, net			$	21,703					$	26,053					$	—					$	13,909					$	15,855					$	19

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.

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The following tables present the amortized cost basis of collateral dependent loans by class of loans as of the following periods:

			As of December 31, 2020
(in thousands)			Retail						Office						Warehouse						Other						Multifamily						Farmland						SFR -1st Deed						SFR -2nd Deed						Automobile/Truck						A/R and Inventory						Equipment						Total
Commercial real estate:
CRE non-owner occupied			$	2,445					$	435					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	2,880
CRE owner occupied			796						1,176						1,668						—						—						—						—						—						—						—						—						3,640
Multifamily			—						—						—						—						—						—						—						—						—						—						—						—
Farmland			—						—						—						—						—						1,538						—						—						—						—						—						1,538
Total commercial real estate loans			3,241						1,611						1,668						—						—						1,538						—						—						—						—												8,058
Consumer:
SFR 1-4 1st DT liens			—						—						—						—						—						—						5,068						—						—						—						—						5,068
SFR HELOCs and junior liens			—						—						—						—						—						—						1,855						2,839						—						—						—						4,694
Other			—						—						—						42						—						—						—						—						97						—						—						139
Total consumer loans			—						—						—						42						—						—						6,923						2,839						97						—						—						9,901
Commercial and industrial			—						—						—						292						—						—						—						—						—						1,173						75						1,540
Construction			—						—						—						—						—						—						4,547						—						—						—						—						4,547
Agriculture production			—						—						—						—						—						—						—						—						—						13						5						18
Leases			—						—						—						—						—						—						—						—						—						—						—						—
Total			$	3,241					$	1,611					$	1,668					$	334					$	—					$	1,538					$	11,470					$	2,839					$	97					$	1,186					$	80					$	24,064

			As of December 31, 2019
(in thousands)			Retail						Office						Warehouse						Other						Multifamily						Farmland						SFR -1st Deed						SFR -2nd Deed						Automobile/Truck						A/R and Inventory						Equipment						Total
Commercial real estate:
CRE non-owner occupied			$	2,145					$	—					$	1,220					$	497					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	3,862
CRE owner occupied			361						163						420						13						—						—						—						—						—						—						1,000						1,957
Multifamily			—						—						—						—						2,060						—						—						—						—						—						—						2,060
Farmland			—						—						—						—						—			—			1,242						—						—						—						—						—						1,242
Total commercial real estate loans			2,506						163						1,640						510						2,060						1,242						—						—						—						—						1,000						9,121
Consumer:
SFR 1-4 1st DT liens			—						—						—						—						—						—						5,341						—						—						—						—						5,341
SFR HELOCs and junior liens			—						—						—						—						—						—						—						3,848						—						—						—						3,848
Other			—						—						—						3						—						—						—						—						27						—						—						30
Total consumer loans			—						—						—						3						—						—						5,341						3,848						27						—						—						9,219
Commercial and industrial			—						—						—						107						—						—						—						—						—						1,926						14						2,047
Construction			—						—						—						—						—						—						—						—						—						—						—						—
Agriculture production			—						—						—						—						—						—						—						—						—						26						12						38
Leases			—						—						—						—						—						—						—						—						—						—						—						—
Total			$	2,506					$	163					$	1,640					$	620					$	2,060					$	1,242					$	5,341					$	3,848					$	27					$	1,952					$	1,026					$	20,425

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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
(dollars in thousands)			Number						Pre-mod outstanding principal balance						Post-mod outstanding principal balance						Financial impact due to TDR taken as additional provision						Number that defaulted during the period						Recorded investment of TDRs that defaulted during the period						Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Commercial real estate:
CRE non-owner occupied			1						$	319					$	314					$	314					1						$	141					$	—
CRE owner occupied			4						1,847						1,877						67						1						950						—
Multifamily			—						—						—						—						—						—						—
Farmland			5						1,566						1,636						—						1						451						—
Total commercial real estate loans			10						3,732						3,827						381						3						1,542						—
Consumer:
SFR 1-4 1st DT liens			—						—						—						—						3						1,180						—
SFR HELOCs and junior liens			2						172						169						—						2						140						(90)
Other			—						—						—						—						—						—						—
Total consumer loans			2						172						169						—						5						1,320						(90)
Commercial and industrial			6						2,106						2,078						90						—						—						—
Construction			—						—						—						—						—						—						—
Agriculture production			—						—						—						—						—						—						—
Leases			—						—						—						—						—						—						—
Total			18						$	6,010					$	6,074					$	471					8						$	2,862					$	(90)

			TDR information for the year ended December 31, 2019
(dollars in thousands)			Number						Pre-mod outstanding principal balance						Post-mod outstanding principal balance						Financial impact due to TDR taken as additional provision						Number that defaulted during the period						Recorded investment of TDRs that defaulted during the period						Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Commercial real estate:
CRE non-owner occupied			—						$	—					$	—					$	—					—						$	—					$	—
CRE owner occupied			2						60						67						—						—						—						—
Multifamily			—						—						—						—						—						—						—
Farmland			—						—						—						—						—						—						—
Total commercial real estate loans			2						60						67						—						—						—						—
Consumer:
SFR 1-4 1st DT liens			3						659						662						30						—						—						—
SFR HELOCs and junior liens			3						214						215						29						—						—						—
Other			—						—						—						—						—						—						—
Total consumer loans			6						873						877						59						—						—						—
Commercial and industrial			10						1,918						1,885						—						1						7						—
Construction			—						—						—						—						—						—						—
Agriculture production			—						—						—						—						—						—						—
Leases			—						—						—						—						—						—						—
Total			18						$	2,851					$	2,829					$	59					1						7						$	—

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			TDR information for the year ended December 31, 2018
(in thousands)			Number						Pre-mod outstanding principal balance						Post-mod outstanding principal balance						Financial impact due to TDR taken as additional provision						Number that defaulted during the period						Recorded investment of TDRs that defaulted during the period						Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Commercial real estate:
CRE non-owner occupied			1						$	39					$	38					$	38					1						$	169					$	—
CRE owner occupied			2						555						555						11						—						—						—
Multifamily			—						—						—						—						—						—						—
Farmland			4						1,188						1,186						442						—						—						—
Total commercial real estate loans			7						1,782						1,779						491						1						169						—
Consumer:
SFR 1-4 1st DT liens			1						156						156												—						—						—
SFR HELOCs and junior liens			3						732						737						(35)						2						248						—
Other			—						—						—						—						—						—						—
Total consumer loans			4						888						893						(35)						2						248						—
Commercial and industrial			6						1,098						1,083						325						3						148						—
Construction			—						—						—						—						—						—						—
Agriculture production			—						—						—						—						—						—						—
Leases			—						—						—						—						—						—						—
Total			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:

			Year ended December 31,
(in thousands)			2020						2019
Beginning balance, net			$	2,541					$	2,280
Additions/transfers from loans			766						1,249
Dispositions/sales			(513)						(1,090)
Valuation adjustments			50						102
Ending balance, net			$	2,844					$	2,541
Ending valuation allowance			$	(22)					$	(139)
Ending number of foreclosed assets			7						6
Proceeds from sale of real estate owned			$	570					$	1,336
Gain on sale of real estate owned			$	57					$	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

			As of December 31,
(in thousands)			2020						2019
Land and land improvements			$	29,505					$	29,453
Buildings			65,334						65,241
Furniture and equipment			45,994						45,723
			140,833						140,417
Less: Accumulated depreciation			(57,462)						(53,704)
			83,371						86,713
Construction in progress			360						373
Total premises and equipment			$	83,731					$	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:

			Year ended December 31,
(in thousands)			2020						2019
Beginning balance			$	117,823					$	117,318
Acquired policies from business combination			—						—
Increase in cash value of life insurance			2,949						3,029
Gain on death benefit			498						831
Insurance proceeds receivable reclassified to other assets			(2,400)						(3,355)
Ending balance			$	118,870					$	117,823
End of period death benefit			$	197,379					$	199,084
Number of policies owned			183						189
Insurance companies used			14						14
Current and former employees and directors covered			62						63

Note 9 – Goodwill and Other Intangible Assets

The following table summarizes the Company’s goodwill intangible as of the dates indicated:

(in thousands)			December 31, 2020						Additions						Reductions						December 31, 2019
Goodwill			$	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)			December 31, 2020						Additions						Reductions/ Amortization						December 31, 2019
Core deposit intangibles			$	37,163					$	—					$	—					$	37,163
Accumulated amortization			(19,330)						—						(5,724)						(13,606)
Core deposit intangibles, net			$	17,833					—						$	(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			Estimated CDI Amortization
2021			$	5,464
2022			4,776
2023			4,269
2024			2,482
2025			533
Thereafter			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)			Year ended December 31,
			2020						2019						2018
Balance at beginning of period			$	6,200					$	7,098					$	6,687
Additions			1,526						913						557
Change in fair value			(2,634)						(1,811)						(146)
Balance at end of period			$	5,092					$	6,200					$	7,098
Contractually specified servicing fees, late fees and ancillary fees earned			$	1,855					$	1,917					$	2,038
Balance of loans serviced at:
Beginning of period			$	767,662					$	785,138					$	811,065
End of period			$	779,530					$	767,662					$	785,138
Period end:
Weighted-average prepayment speed (CPR)			4.5		%				6.2		%				7.6		%
Weighted-average discount rate			12.0		%				12.0		%				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:

			Year ended December 31,
(in thousands)			2020						2019
Operating lease cost			$	5,125					$	5,228
Short-term lease cost			263						262
Variable lease cost			5						(29)
Sublease income			(120)						(131)
Total lease cost			$	5,273					$	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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			Year ended December 31,
(in thousands)			2020						2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases			$	4,927					$	4,931
ROUA obtained in exchange for operating lease liabilities			$	4,161					$	32,162

The following table presents the weighted average operating lease term and discount rate as of the periods ended:

			Year ended December 31,
			2020						2019
Weighted-average remaining lease term			9.9 years						9.3 years
Weighted-average discount rate			3.1		%				3.2		%

At December 31, 2020, future expected operating lease payments are as follows (in thousands):

Periods ending December 31,
2021			$	4,565
2022			4,230
2023			3,554
2024			3,278
2025			2,911
Thereafter			14,546
			33,084
Discount for present value of expected cash flows			(5,111)
Lease liability at December 31, 2020			$	27,973

Note 12 – Deposits

A summary of the balances of deposits follows:

(in thousands)			December 31,
			2020						2019
Noninterest-bearing demand			$	2,581,517					$	1,832,665
Interest-bearing demand			1,414,908						1,242,274
Savings			2,164,942						1,851,549
Time certificates, $250,000 and over			73,147						129,061
Other time certificates			271,420						311,445
Total deposits			$	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):

			Scheduled Maturities
2021			$	265,906
2022			62,081
2023			9,826
2024			2,470
2025			4,280
Thereafter			4
Total			$	344,567

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Note 13 – Other Borrowings

A summary of the balances of other borrowings follows:

			December 31,
			2020						2019
(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			$	26,914					$	18,454
Total other borrowings			$	26,914					$	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):

																		Coupon Rate (Variable) 3 mo. LIBOR +						As of December 31, 2020												December 31, 2019
Subordinated Debt Series						Maturity Date						Face Value												Current Coupon Rate						Recorded Book Value						Recorded Book Value
TriCo Cap Trust I						10/7/2033						$	20,619					3.05		%				3.29		%				$	20,619					$	20,619
TriCo Cap Trust II						7/23/2034						20,619						2.55		%				2.76		%				20,619						20,619
North Valley Trust II						4/24/2033						6,186						3.25		%				3.46		%				5,303						5,215
North Valley Trust III						7/23/2034						5,155						2.80		%				3.01		%				4,199						4,118
North Valley Trust IV						3/15/2036						10,310						1.33		%				1.55		%				6,894						6,661
												$	62,889																	$	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:

			December 31,
(in thousands)			2020						2019
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans			$	462,422					$	363,793
Consumer loans			534,223						533,576
Real estate mortgage loans			202,306						188,959
Real estate construction loans			227,876						222,998
Standby letters of credit			15,056						12,014
Deposit account overdraft privilege			110,813						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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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:

			Number of Shares						Option Price per Share						Weighted Average Exercise Price
Outstanding at January 1, 2019			343,000						$12.63 to $23.21						$	16.67
Options granted			—						—						—
Options exercised			(182,500)						$12.63 to $19.46						$	16.00
Options forfeited			—						—						—
Outstanding at December 31, 2019			160,500						$12.63 to $23.21						$	17.60
Options granted			—						—						—
Options exercised			(32,000)						$14.54 to $19.46						$	17.10
Options forfeited			—						—						$	—
Outstanding at December 31, 2020			128,500						$14.54 to $23.21						$	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:

			Currently Exercisable						Currently Not Exercisable						Total Outstanding
Number of options			128,500						—						128,500
Weighted average exercise price			$	17.72					$	—					$	17.72
Intrinsic value (in thousands)			$	2,277					$	—					$	2,277
Weighted average remaining contractual term (yrs.)			1.98						—						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:

			Year Ended December 31,
			2020						2019						2018
Intrinsic value of options exercised			$	403,000					$	4,169,000					$	2,109,000
Fair value of options that vested			$	—					$	—					$	75,000
Total compensation costs for options recognized in expense			$	—					$	—					$	75,000
Total tax benefit recognized in income related to compensation costs for options			$	—					$	—					$	22,000
Excess tax benefit recognized in income			$	—					$	1,233,000					$	623,000

There were no stock options granted during 2020, 2019 and 2018, respectively.

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Restricted stock unit activity is summarized in the following table for the dates indicated:

			Service Condition Vesting RSUs												Market Plus Service Condition Vesting RSUs
			Number of RSUs						Weighted Average Fair Value on Date of Grant						Number of RSUs						Weighted Average Fair Value on Date of Grant
Outstanding at January 1, 2020			68,597												51,312
RSUs granted			64,036						$	31.26					46,416						$	23.30
Additional market plus service condition RSUs vested			—												5,847
RSUs added through dividend credits			2,937												—
RSUs released through vesting			(34,388)												(20,265)
RSUs forfeited/expired			(1,373)												(1,695)
Outstanding at December 31, 2020			99,809												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:

			Year Ended December 31,
			2020						2019						2018
Total compensation costs recognized in income
Service condition vesting RSUs			$	1,390,000					$	1,161,237					$	1,017,000
Market plus service condition vesting RSUs			$	646,000					$	493,000					$	370,000
Excess tax benefit recognized in income
Service condition vesting RSUs			$	372,000					$	141,000					$	104,000
Market plus service condition vesting RSUs			$	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:

			Year Ended December 31,
(in thousands)			2020						2019						2018
Debit and ATM and interchange fees			$	21,660					$	20,639					$	18,249
Service charges on deposit accounts			13,944						16,657						15,467
Other service fees			3,156						3,015						2,852
Mortgage banking service fees			1,855						1,917						2,038
Change in value of mortgage loan servicing rights			(2,634)						(1,811)						(146)
Total service charges and fees			37,981						40,417						38,460
Commissions on sale of non-deposit investment products			2,989						2,877						3,151
Increase in cash value of life insurance			2,949						3,029						2,718
Gain on sale of loans			9,122						3,282						2,371
Lease brokerage income			668						878						678
Sale of customer checks			414						529						449
Gain on sale of investment securities			7						110						207
Gain (loss) on marketable equity securities			64						86						(64)
Other			1,000						2,312						1,091
Total other noninterest income			17,213						13,103						10,601
Total noninterest income			$	55,194					$	53,520					$	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:

			Year Ended December 31,
(in thousands)			2020						2019						2018
Base salaries, net of deferred loan origination costs			$	70,164					$	70,218					$	62,422
Incentive compensation			10,022						13,106						11,147
Benefits and other compensation costs			31,935						22,741						20,373
Total salaries and benefits expense			112,121						106,065						93,942
Occupancy			14,528						14,893						12,139
Data processing and software			13,504						13,517						11,021
Equipment			5,704						7,022						6,651
ATM and POS network charges			5,433						5,447						5,271
Merger and acquisition expense			—						—						5,227
Advertising			2,827						5,633						4,578
Professional fees			3,222						3,754						3,546
Intangible amortization			5,724						5,723						3,499
Telecommunications			2,601						3,190						3,023
Regulatory assessments and insurance			1,594						1,188						1,906
Courier service			1,414						1,308						1,287
Operational losses			1,168						986						1,260
Postage			1,068						1,258						1,154
Gain on sale or acquisition of foreclosed assets			(235)						(246)						(408)
Loss on disposal of fixed assets			67						82						185
Other miscellaneous expense			12,018						15,637						14,191
Total other noninterest expense			70,637						79,392						74,530
Total noninterest expense			$	182,758					$	185,457					$	168,472

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Note 19 – Income Taxes

The components of consolidated income tax expense are as follows (in thousands):

			Year Ended December 31,
			2020						2019						2018
Current tax expense
Federal			$	22,104					$	20,403					$	13,109
State			14,586						12,655						9,323
			$	36,690					33,058						22,432
Deferred tax expense
Federal			(9,500)						695						1,842
State			(4,654)						997						758
			(14,154)						1,692						2,600
Total tax expense			$	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):

			Year Ended December 31,
			2020						2019						2018
Tax credits and other tax benefits – decrease in tax expense			$	(4,200)					$	(2,546)					$	(1,993)
Amortization – increase in tax expense			$	3,581					$	2,705					$	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:

			Year Ended December 31,
(in thousands)			2020						2019						2018
Federal statutory income tax rate			21.0		%				21.0		%				21.0		%
State income taxes, net of federal tax benefit			7.7						7.9						8.6
Tax-exempt interest on municipal obligations			(0.9)						(0.7)						(1.0)
Tax-exempt life insurance related income			(0.8)						(0.6)						(0.6)
Low income housing tax credits			(4.8)						(2.3)						(2.2)
Low income housing tax credit amortization			4.1						2.1						2.0
Equity compensation			0.4						(0.4)						(0.4)
Non-deductible merger expenses			—						—						0.2
Other			(0.9)						0.4						(0.8)
Effective Tax Rate			25.8		%				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					$	9,871
Deferred compensation			1,786						2,342
Accrued pension liability			383						3,309
Other accrued expenses			1,537						1,678
Additional unfunded status of the supplemental retirement plans			13,275						9,868
Operating lease liability			8,270						8,142
State taxes			2,870						2,441
Share based compensation			837						803
Nonaccrual interest			725						649
Acquisition cost basis			2,372						4,556
Unrealized loss on securities			—						—
Tax credits			513						576
Net operating loss carryforwards			1,131						1,578
Other			327						348
Total deferred tax assets			62,185						46,161
Deferred tax liabilities:
Securities income			(762)						(762)
Depreciation			(7,231)						(6,109)
Right of use asset			(8,232)						(8,242)
Merger related fixed asset valuations			(30)						(30)
Securities accretion			(702)						(560)
Mortgage servicing rights valuation			(1,490)						(1,813)
Unrealized gain on securities			(5,671)						(1,001)
Core deposit intangible			(4,812)						(6,453)
Junior subordinated debt			(1,553)						(1,672)
Prepaid expenses and other			(502)						(469)
Total deferred tax liability			(30,985)						(27,111)
Net deferred tax asset			$	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:

			Year Ended December 31,
(in thousands)			2020						2019						2018
Net income			$	64,814					$	92,072					$	68,320
Average number of common shares outstanding			29,917						30,478						26,593
Effect of dilutive stock options and restricted stock			111						167						287
Average number of common shares outstanding used to calculate diluted earnings per share			30,028						30,645						26,880
Options excluded from diluted earnings per share because the effect of these options was antidilutive			—						—						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:

			Year Ended December 31,
(in thousands)			2020						2019						2018
Unrealized holding gains (losses) on available for sale securities before reclassifications			$	15,803					$	24,471					$	(17,057)
Amounts reclassified out of accumulated other comprehensive income:
Realized gains on debt securities			(7)						(110)						(207)
Adoption ASU 2016-01			—						—						62
Adoption ASU 2018-02			—						—						(425)
Total amounts reclassified out of accumulated other comprehensive income			(7)						(110)						(570)
Unrealized holding gains (losses) on available for sale securities after reclassifications			15,796						24,361						(17,627)
Tax effect			(4,670)						(7,202)						5,193
Unrealized holding gains (losses) on available for sale securities, net of tax			11,126						17,159						(12,434)
Change in unfunded status of the supplemental retirement plans before reclassifications			645						(6,745)						762
Amounts reclassified out of accumulated other comprehensive income:
Amortization of prior service cost			(55)						(54)						(54)
Amortization of actuarial losses			9,309						408						510
Adoption ASU 2018-02			—						—						(668)
Total amounts reclassified out of accumulated other comprehensive income			9,254						354						(212)
Change in unfunded status of the supplemental retirement plans after reclassifications			9,899						(6,391)						550
Tax effect			(2,927)						1,889						(162)
Change in unfunded status of the supplemental retirement plans, net of tax			6,972						(4,502)						388
Change in joint beneficiary agreement liability before reclassifications			(596)						—						426
Tax effect			—						—						—
Change in unfunded status of the supplemental retirement plans, net of tax			(596)						—						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:

			Year Ended December 31,
(in thousands)			2020						2019
Net unrealized gain (loss) on available for sale securities			$	19,183					3,387
Tax effect			(5,671)						(1,001)
Unrealized holding loss on available for sale securities, net of tax			13,512						2,386
Unfunded status of the supplemental retirement plans			(1,294)						(11,193)
Tax effect			382						3,309
Unfunded status of the supplemental retirement plans, net of tax			(912)						(7,884)
Joint beneficiary agreement liability, net of tax			(320)						276
Accumulated other comprehensive loss			$	12,280					$	(5,222)

Note 22 – Retirement Plans

401(k) Plan

The Company sponsors a 401(k) Plan whereby substantially all employees age 21 and over with 90 days of service may participate. Participants may contribute a portion of their compensation subject to certain limits based on federal tax laws. Prior to July 1, 2015, the Company did not contribute to the 401(k) Plan. Effective July 1, 2015, the Company initiated a discretionary matching contribution equal to 50% of participant’s elective deferrals each quarter, up to 4% of eligible compensation. The Company recorded salaries & benefits expense attributable to the 401(k) Plan matching contributions and 401(k) Plan matching contributions for the years ended:

			Year Ended December 31,
(in thousands)			2020						2019						2018
401(k) Plan benefits expense			$	1,139					$	1,119					$	879
401(k) Plan contributions made by the Company			$	202					$	1,003					$	872

Employee Stock Ownership Plan

Substantially all employees with at least one year of service are covered by a discretionary employee stock ownership plan (ESOP). Company shares owned by the ESOP are paid dividends and included in the calculation of earnings per share as common shares outstanding. Contributions are made to the plan at the discretion of the Board of Directors. Expenses related to the Company’s ESOP, included in benefits and other compensation costs under salaries and benefits expense, and contributions to the plan for the years ended were:

			Year Ended December 31,
(in thousands)			2020						2019						2018
ESOP benefits expense			$	2,400					$	2,500					$	1,887
ESOP contributions made by the Company			$	1,951					$	1,875					$	1,952

Deferred Compensation Plans

The Company has deferred compensation plans for certain directors and key executives, which allow certain directors and key executives designated by the Board of Directors of the Company to defer a portion of their compensation. The Company has purchased insurance on the lives of 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:

			Year Ended December 31,
(in thousands)			2020						2019						2018
Deferred compensation earnings credits included in non-interest expense			$	212					$	363					$	462

Supplemental Retirement Plans

The Company has supplemental retirement plans for certain directors and key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to hold these policies until death as a cost recovery of the Company’s retirement obligations. The cash values of the insurance policies purchased to fund the deferred compensation obligations and the supplemental retirement obligations were $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.

			December 31,
(in thousands)			2020						2019
Transition obligation			$	—					$	1
Prior service cost			(86)						(141)
Net actuarial loss			1,380						11,333
Amount included in accumulated other comprehensive income (loss)			1,294						11,193
Deferred tax benefit			(382)						(3,309)
Amount included in accumulated other comprehensive income (loss), net of tax			$	912					$	7,884

Information pertaining to the activity in the supplemental retirement plans, using a measurement date of December 31, is as follows:

			December 31,
(in thousands)			2020						2019
Change in benefit obligation:
Benefit obligation at beginning of year			$	(36,737)					$	(29,196)
Service cost			(2,225)						(879)
Interest cost			(1,014)						(1,131)
Actuarial (loss)/gain			640						(6,747)
Plan amendments			—						—
Benefits paid			1,336						1,216
Benefit obligation at end of year			$	(38,000)					$	(36,737)
Change in plan assets:
Fair value of plan assets at beginning of year			$	—					$	—
Fair value of plan assets at end of year			$	—					$	—
Funded status			$	(38,000)					$	(36,737)
Unrecognized net obligation existing at January 1, 1986			—						1
Unrecognized net actuarial loss			1,380						11,333
Unrecognized prior service cost			(86)						(141)
Accumulated other comprehensive income			(1,294)						(11,193)
Accrued benefit cost			$	(38,000)					$	(36,737)
Accumulated benefit obligation			$	(36,298)					$	(35,981)

The following table sets forth the net periodic benefit cost recognized for the supplemental retirement plans:

			Year Ended December 31,
(in thousands)			2020						2019						2018
Net pension cost included the following components:
Service cost-benefits earned during the period			$	2,225					$	879					$	973
Interest cost on projected benefit obligation			1,014						1,131						949
Amortization of net obligation at transition			1						2						2
Amortization of prior service cost			(55)						(54)						(54)
Recognized net actuarial loss			9,309						408						510
Net periodic pension cost			$	12,494					$	2,366					$	2,380

The following table sets forth assumptions used in accounting for the plans:

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			Year Ended December 31,
			2020						2019						2018
Discount rate used to calculate benefit obligation			2.40		%				2.82		%				3.96		%
Discount rate used to calculate net periodic pension cost			2.82		%				3.96		%				3.40		%
Average annual increase in executive compensation			3.25		%				3.25		%				3.25		%
Average annual increase in director compensation			—		%				—		%				—		%

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)			Expected Benefit Payments to Participants						Estimated Company Contributions
2021			$	1,119					$	1,119
2022			2,203						2,203
2023			2,176						2,176
2024			2,183						2,183
2025			2,172						2,172
2026-2030			10,131						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			$	9,203
Advances/new loans			9,032
Removed/payments			(8,114)
Balance December 31, 2019			10,121
Advances/new loans			665
Removed/payments			(3,953)
Balance December 31, 2020			$	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 —    Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 —    Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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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			Total						Level 1						Level 2						Level 3
Marketable equity securities			$	3,025					$	3,025					$	—					$	—
Debt securities available for sale:
Obligations of U.S. government agencies			812,374						—						812,374						—
Obligations of states and political subdivisions			129,095						—						129,095						—
Corporate bonds			2,544						—						2,544						—
Asset backed securities			470,251						—						470,251						—
Loans held for sale			6,268						—						6,268						—
Mortgage servicing rights			5,092						—						—						5,092
Total assets measured at fair value			$	1,428,649					$	3,025					$	1,420,532					$	5,092

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Fair value at December 31, 2019			Total						Level 1						Level 2						Level 3
Marketable equity securities			$	2,960					$	2,960					$	—					$	—
Debt securities available for sale:
Obligations of U.S. government agencies			472,980						—						472,980						—
Obligations of states and political subdivisions			109,601						—						109,601						—
Corporate bonds			2,532						—						2,532						—
Asset backed securities			365,025						—						365,025						—
Loans held for sale			5,265						—						5,265						—
Mortgage servicing rights			6,200						—						—						6,200
Total assets measured at fair value			$	964,563					$	2,960					$	955,403					$	6,200

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,						Beginning Balance						Transfers into (out of) Level 3						Change Included in Earnings						Issuances						Ending Balance
2020: Mortgage servicing rights						$	6,200					—						$	(2,634)					$	1,526					$	5,092
2019: Mortgage servicing rights						$	7,098					—						$	(1,811)					$	913					$	6,200
2018: Mortgage servicing rights						$	6,687					—						$	(146)					$	557					$	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

Fair Value (in thousands)

Valuation Technique

Unobservable Inputs

Range, Weighted Average

Mortgage Servicing Rights

$5,092

Discounted cash flow

Constant prepayment rate

14.4%-20.0%, 17.6%

Discount rate

10.0%-14.0%, 12.0%

December 31, 2019

Mortgage Servicing Rights

$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						Total						Level 1						Level 2						Level 3						Total Gains (Losses)
Fair value:
Impaired loans						$	1,424					—						—						$	1,424					$	(1,489)
Real estate owned						979						—						—						979						155
Total assets measured at fair value						$	2,403					—						—						$	2,403					$	(1,334)

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Year ended December 31, 2019						Total						Level 1						Level 2						Level 3						Total Gains (Losses)
Fair value:
Impaired loans						$	1,055					—						—						$	1,055					$	(652)
Real estate owned						417						—						—						417						(27)
Total assets measured at fair value						$	1,472					—						—						$	1,472					$	(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

Fair Value (in thousands)

Valuation Technique

Unobservable Inputs

Range, Weighted Average

Impaired loans

$

1,424

Sales comparison approach Income approach

Adjustment for differences between comparable sales; Capitalization rate

Not meaningful; N/A

Real estate owned (Land)

$

155

Sales comparison approach

Adjustment for differences between comparable sales

Not meaningful; N/A

Real estate owned (Residential)

$

824

Sales comparison approach

Adjustment for differences between comparable sales

Not meaningful; N/A

December 31, 2019

Fair Value (in thousands)

Valuation Technique

Unobservable Inputs

Range, Weighted Average

Impaired loans

$

1,055

Sales comparison approach Income approach

Adjustment for differences between comparable sales Capitalization rate

Not meaningful; N/A

Real estate owned (Residential)

$

417

Sales comparison approach

Adjustment for differences between comparable sales

Not meaningful; N/A

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The estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in thousands):

			December 31, 2020												December 31, 2019
			Carrying Amount						Fair Value						Carrying Amount						Fair Value
Financial assets:
Level 1 inputs:
Cash and due from banks			$	77,253					$	77,253					$	92,816					$	92,816
Cash at Federal Reserve and other banks			592,298						592,298						183,691						183,691
Level 2 inputs:
Securities held to maturity			284,563						298,726						375,606						381,525
Restricted equity securities			17,250						N/A						17,250						N/A
Level 3 inputs:
Loans, net			4,671,280						4,753,027						4,276,750						4,263,064
Financial liabilities:
Level 2 inputs:
Deposits			6,505,934						6,507,235						5,366,994						5,365,921
Other borrowings			26,914						26,914						18,454						18,454
Level 3 inputs:
Junior subordinated debt			57,635						56,632						57,232						56,297

			Contract Amount						Fair Value						Contract Amount						Fair Value
Off-balance sheet:
Level 3 inputs:
Commitments (1)			$	1,426,827					$	14,268					$	1,309,326					$	13,093
Standby letters of credit (1)			15,056						151						12,014						120
Overdraft privilege commitments (1)			110,813						1,108						110,402						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.

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Note 25 – TriCo Bancshares Condensed Financial Statements (Parent Only)

Condensed Balance Sheets

			December 31, 2020						December 31, 2019
			(In thousands)
Assets
Cash and cash equivalents			$	13,297					$	5,008
Investment in Tri Counties Bank			967,949						957,544
Other assets			1,818						1,765
Total assets			$	983,064					$	964,317
Liabilities and shareholders’ equity
Other liabilities			$	315					$	515
Junior subordinated debt			57,635						57,232
Total liabilities			57,950						57,747
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			530,835						543,998
Retained earnings			381,999						367,794
Accumulated other comprehensive income (loss), net			12,280						(5,222)
Total shareholders’ equity			925,114						906,570
Total liabilities and shareholders’ equity			$	983,064					$	964,317

Condensed Statements of Income

			Year Ended December 31,
			2020						2019						2018
									(In thousands)
Interest expense			$	(2,555)					$	(3,272)					$	(3,131)
Administration expense			(932)						(877)						(1,489)
Loss before equity in net income of Tri Counties Bank			(3,487)						(4,149)						(4,620)
Equity in net income of Tri Counties Bank:
Distributed			63,419						32,669						26,432
Undistributed			3,851						62,326						45,315
Income tax benefit			1,031						1,226						1,193
Net income			$	64,814					$	92,072					$	68,320

Condensed Statements of Comprehensive Income

			Year Ended December 31,
			2020						2019						2018
									(In thousands)
Net income			$	64,814					$	92,072					$	68,320
Other comprehensive income (loss), net of tax:
Increase (decrease) in unrealized gains on available for sale securities arising during the period			11,126						17,159						(12,434)
Change in minimum pension liability			6,972						(4,502)						388
Change in joint beneficiary agreement liablity			(596)						—						426
Other comprehensive income (loss)			17,502						12,657						(11,620)
Comprehensive income			$	82,316					$	104,729					$	56,700

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Condensed Statements of Cash Flows

			Year Ended December 31,
			2020						2019						2018
									(In thousands)
Operating activities:
Net income			$	64,814					$	92,072					$	68,320
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed equity in earnings of Tri Counties Bank			(3,851)						(62,326)						(45,315)
Equity compensation vesting expense			2,036						1,654						1,462
Net change in other assets and liabilities			(1,885)						(1,580)						(4,983)
Net cash provided by operating activities			61,114						29,820						19,484
Investing activities: None
Financing activities:
Issuance of common stock through option exercise			198						9						218
Repurchase of common stock			(26,720)						(2,196)						(2,483)
Cash dividends paid — common			(26,303)						(24,999)						(18,769)
Net cash used for financing activities			(52,825)						(27,186)						(21,034)
Net change in cash and cash equivalents			8,289						2,634						(1,550)
Cash and cash equivalents at beginning of year			5,008						2,374						3,924
Cash and cash equivalents at end of year			$	13,297					$	5,008					$	2,374

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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
(in thousands)			Amount						Ratio						Amount						Ratio						Amount						Ratio
As of December 31, 2020:
Total Capital (to Risk Weighted Assets):
Consolidated			$	793,433					15.22		%				$	547,352					10.50		%				N/A						N/A
Tri Counties Bank			$	780,320					14.97		%				$	547,156					10.50		%				$	521,101					10.00		%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated			$	727,879					13.96		%				$	443,094					8.50		%				N/A						N/A
Tri Counties Bank			$	714,811					13.72		%				$	442,936					8.50		%				$	416,881					8.00		%
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated			$	671,975					12.89		%				$	364,901					7.00		%				N/A						N/A
Tri Counties Bank			$	714,811					13.72		%				$	364,771					7.00		%				$	338,716					6.50		%
Tier 1 Capital (to Average Assets):
Consolidated			$	727,879					9.93		%				$	293,138					4.00		%				N/A						N/A
Tri Counties Bank			$	714,811					9.76		%				$	292,949					4.00		%				$	366,186					5.00		%

			Actual																		Required for Capital Adequacy Purposes												Required to be Considered Well Capitalized Under Prompt Corrective Action Regulations
(in thousands)			Amount						Ratio																		Amount						Ratio						Amount						Ratio
As of December 31, 2019:
Total Capital (to Risk Weighted Assets):
Consolidated			$	753,200					15.07		%																$	524,944					10.50		%				N/A						N/A
Tri Counties Bank			$	748,660					14.98		%																$	524,759					10.50		%				$	499,770					10.00		%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated			$	719,809					14.40		%																$	424,955					8.50		%				N/A						N/A
Tri Counties Bank			$	715,269					14.31		%																$	424,805					8.50		%				$	399,816					8.00		%
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated			$	664,296					13.29		%																$	349,963					7.00		%				N/A						N/A
Tri Counties Bank			$	715,269					14.31		%																$	349,839					7.00		%				$	324,851					6.50		%
Tier 1 Capital (to Average Assets):
Consolidated			$	719,809					11.55		%																$	249,343					4.00		%				N/A						N/A
Tri Counties Bank			$	715,269					11.47		%																$	249,337					4.00		%				$	311,672					5.00		%

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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.

			2020 Quarters Ended
(dollars in thousands, except per share data)			December 31,						September 30,						June 30,						March 31,
Interest and dividend income:
Loans:
Discount accretion			$	1,960					$	1,876					$	2,587					$	1,748
All other loan interest income			59,055						56,163						55,822						54,510
Total loan interest income			61,015						58,039						58,409						56,258
Debt securities, dividends and interest bearing cash at banks			7,066						7,399						8,739						10,259
Total interest income			68,081						65,438						67,148						66,517
Interest expense			1,659						1,984						2,489						3,325
Net interest income			66,422						63,454						64,659						63,192
Provision for credit losses			4,850						7,649						22,244						8,070
Net interest income after provision for credit losses			61,572						55,805						42,415						55,122
Noninterest income			16,580						15,137						11,657						11,820
Noninterest expense			45,745						46,714						45,550						44,749
Income before income taxes			32,407						24,228						8,522						22,193
Income tax expense			8,750						6,622						1,092						6,072
Net income			$	23,657					$	17,606					$	7,430					$	16,121
Per common share:
Net income (diluted)			$	0.79					$	0.59					$	0.25					$	0.53
Dividends			$	0.22					$	0.22					$	0.22					$	0.22

			2019 Quarters Ended
(dollars in thousands, except per share data)			December 31,						September 30,						June 30,						March 31,
Interest and dividend income:
Loans:
Discount accretion			$	2,218					$	2,360					$	1,904					$	1,655
All other loan interest income			54,644						54,639						53,587						52,743
Total loan interest income			56,862						56,999						55,491						54,398
Debt securities, dividends and interest bearing cash at banks			11,056						11,890						12,689						13,059
Total interest income			67,918						68,889						68,180						67,457
Interest expense			3,722						4,201						3,865						3,587
Net interest income			64,196						64,688						64,315						63,870
Provision for (benefit from reversal of provision for) loan losses			(298)						(329)						537						(1,600)
Net interest income after provision for loan losses			64,494						65,017						63,778						65,470
Noninterest income			14,186						14,108						13,423						11,803
Noninterest expense			46,964						46,344						46,697						45,452
Income before income taxes			31,716						32,781						30,504						31,821
Income tax expense			8,826						9,386						7,443						9,095
Net income			$	22,890					$	23,395					$	23,061					$	22,726
Per common share:
Net income (diluted)			$	0.75					$	0.76					$	0.75					$	0.74
Dividends			$	0.22					$	0.22					$	0.19					$	0.19

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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

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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

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EXHIBIT INDEX

Exhibit No.						Exhibit
2.1						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).
2.2						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).
3.1						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).
3.2						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).
4.1						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.
4.2						TriCo Bancshares securities registered pursuant to Section 12 of the Securities Exchange Act of 1934

10.1*						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).
10.2*						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).
10.3*						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).
10.4*						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).
10.5*						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).
10.6*						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).
10.7*						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).
10.8*						2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 (incorporated by reference to Exhibit 10.13 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.9*						Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January  1, 2004 (incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.10*						2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January  1, 2004 (incorporated by reference to Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.11*						Form of Joint Beneficiary Agreement effective March  31, 2003 between Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Richard O’Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith (incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
10.12*						Form of Joint Beneficiary Agreement effective March  31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Vereschagin (incorporated by reference to Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
10.13*						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).
10.14*						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).
10.15*						Form of Indemnification Agreement between TriCo and its directors and executive officers (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed September 10, 2013).
10.16*						Form of Indemnification Agreement between Tri Counties Bank its directors and executive officers (incorporated by reference to Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed September 10, 2013).
10.17*						Form of Stock Option, Stock Appreciation Right, Restricted Stock Unit Award, and Performance Share Award Agreements, and Notice of Grant of Stock Option pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to TriCo’s Annual Report on Form 10-K for the year ended December 31, 2017).
10.18*						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*						Form of Restricted Stock Unit Agreement and Grant Notice for Directors pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed November 14, 2014).
10.20*						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).
10.21*						John Fleshood Offer Letter dated November 3, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed on November 30, 2016).
10.22*						Amendment to John Fleshood Offer Letter dated December  19, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed on November 30, 2016).
10.23*						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).
10.24*						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).
10.25*						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).
10.26*						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).
10.27*						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).
21.1						List of Subsidiaries
23.1						Consent of Moss Adams LLP, Independent Registered Public Accounting Firm
31.1						Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2						Rule 13a-14(a)/15d-14(a) Certification of CFO
32.1						Section 1350 Certification of CEO**
32.2						Section 1350 Certification of CFO**
101.INS						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.

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