Note 29 - Regulatory Matters

The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In July, 2013, the federal banking agencies approved final rules that substantially amend the regulatory risk-based capital rules applicable to TriCo and the Bank. The final rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and will refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to TriCo and the Bank as of January 1, 2015 under the final rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final rules permit the countercyclical buffer to be applied only to “advanced approach banks” (i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes TriCo and the Bank. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (such as TriCo) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature. The final rules also allow banks other than advanced approach banks to make a one-time election to permanently exclude or include unrealized gains and losses on available for sale securities in accumulated other comprehensive income from Tier 1 capital. The Company has elected to exclude unrealized gains and losses on available for sale securities in accumulated other comprehensive income from Tier 1 capital.

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions became effective on January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The final rules also set forth certain changes for the calculation of risk-weighted assets, which will be phased in beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. We believe that we were in compliance with the requirements applicable to us as set forth in the final rules as of January 1, 2015 and June 30, 2016.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of June 30, 2016, that the Company meets all capital adequacy requirements to which it is subject.

The following tables present actual and required capital ratios as of June 30, 2016 and December 31, 2015 for the Company and the Bank under Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of June 30, 2016 and December 31, 2015 based on the phased-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.


						Minimum Capital					Minimum Capital					Required to be
						Required – Basel III					Required – Basel III					Considered Well
	Actual					Phase-in Schedule					Fully Phased In					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2016:	(dollars in thousands)
Total Capital
(to Risk Weighted Assets):
Consolidated	$	486,632		14.73	%	$	264,227		8.00	%	$	346,798		10.50	%		N/A		N/A
Tri Counties Bank	$	484,512		14.68	%	$	264,089		8.00	%	$	346,617		10.50	%	$	330,111		10.00	%
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated	$	448,240		13.57	%	$	198,170		6.00	%	$	280,741		8.50	%		N/A		N/A
Tri Counties Bank	$	446,120		13.51	%	$	198,067		6.00	%	$	280,595		8.50	%	$	264,089		8.00	%
Common equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated	$	395,669		11.98	%	$	148,628		4.50	%	$	231,199		7.00	%		N/A		N/A
Tri Counties Bank	$	446,120		13.51	%	$	148,550		4.50	%	$	231,078		7.00	%	$	214,572		6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	448,240		10.40	%	$	172,473		4.00	%	$	172,473		4.00	%		N/A		N/A
Tri Counties Bank	$	446,120		10.35	%	$	172,467		4.00	%	$	172,467		4.00	%	$	215,584		5.00	%

						Minimum Capital					Minimum Capital					Required to be
						Required – Basel III					Required – Basel III					Considered Well
	Actual					Phase-in Schedule					Fully Phased In					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2015:	(dollars in thousands)
Total Capital
(to Risk Weighted Assets):
Consolidated	$	474,436		15.09	%	$	251,555		8.00	%	$	330,165		10.50	%		N/A		N/A
Tri Counties Bank	$	473,327		15.06	%	$	251,418		8.00	%	$	329,985		10.50	%	$	314,272		10.00	%
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated	$	435,950		13.86	%	$	188,666		6.00	%	$	267,277		8.50	%		N/A		N/A
Tri Counties Bank	$	434,841		13.84	%	$	188,563		6.00	%	$	267,131		8.50	%	$	251,418		8.00	%
Common equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated	$	385,747		12.27	%	$	141,499		4.50	%	$	220,110		7.00	%		N/A		N/A
Tri Counties Bank	$	434,841		13.84	%	$	141,422		4.50	%	$	219,990		7.00	%	$	204,277		6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	435,950		10.79	%	$	161,562		4.00	%	$	161,562		4.00	%		N/A		N/A
Tri Counties Bank	$	434,841		10.76	%	$	161,601		4.00	%	$	161,601		4.00	%	$	202,002		5.00	%

As of June 30, 2016, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis. Based on the ratios presented above, capital levels as June 30, 2016 at the Company and the Bank exceed the minimum levels necessary to be considered “well capitalized”.