TRICO BANCSHARES / 10-K

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 % 24 Table of Contents Net Interest Income The Company’s primary source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Following is a summary of the Company’s net interest income for the periods indicated (dollars in thousands): 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. 25 Table of Contents Summary of Average Balances, Yields/Rates and Interest Differential – Yield Tables The following tables present, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the statutory tax rate applicable during the period presented (dollars in thousands): Year ended December 31, 2020 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. 26 Table of Contents Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid – Volume/Rate Tables The following table sets forth a summary of the changes in the Company’s interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes applicable to both rate and volume have been included in the rate variance. Amounts are calculated on a fully taxable equivalent basis: 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. 27 Table of Contents The Company recorded a benefit of $1,690,000 from loan losses during the year ended December 31, 2019, versus a $2,583,000 provision for loan losses during the year ended December 31, 2018. The reduced provision for loan losses for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily attributable to a $1,375,000 decrease in the amount of specific reserves required on impaired loans subsequent to the sale or repayment of the outstanding balances owed. In addition, while the Company remains cautious about the risks associated with trends in California real estate prices and the affordability of housing in the markets served by the Company, changes in home affordability and energy related index rates improved during the year ended December 31, 2019. The qualitative factors associated with these two measures reduced the level of calculated required reserves by approximately $1,059,000. These decreases were partially offset by the provisions to the allowance for loan losses necessitated by net loan growth during the year. As of December 31, 2019, the Company had established reserves totaling $2,500,000 related to the Camp Fire, compared to $3,250,000 as of December 31, 2018. As shown in the Table labeled “Allowance for Loan Losses - December 31, 2019” at Note 5 in Item 8 of Part II of this report residential and commercial real estate loans, home equity lines, home equity loans, and commercial construction loans all experienced a benefit from reversal of provision for losses during the year ended December 31, 2019. The benefit from reversal of provision for loan losses of each loan category during the year ended December 31, 2019 was due primarily to improvements in historical loss factors and decreases in nonperforming loans as a total percentage of loans. The remaining other consumer, commercial and residential construction loans experienced a provision for losses during the year ended December 31, 2019 due primarily to loan growth. Net charge-offs for the year ended December 31, 2019 were $276,000 as compared to $324,000 net charge offs for the year ended December 31, 2018. Total nonperforming loans decreased from 0.68% of total loans at December 31, 2018 to 0.39% of total loans at December 31, 2019. For details of the change in nonperforming loans during the year ended December 31, 2018 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2019” and “Changes in nonperforming assets during the three months ended December 31, 2019” under the heading “Asset Quality and Non-Performing Assets ” below. 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 28 Table of Contents Non-interest income increased $1,674,000 or 3.1% to $55,194,000 during the twelve months ended December 31, 2020, compared to $53,520,000 during the equivalent period in 2019. This increase was primarily attributed to an increase in gains from the sale of mortgage loans, which resulted from increased volume, and contributed $5,840,000 to the overall increase in non-interest income during the year ended December 31, 2020 as compared to December 31, 2019. Non-interest income was negatively impacted by changes in the fair value of the Company’s mortgage servicing assets, as noted above, which contributed to a $823,000 decline for the year. Both the increased gains from the sale of mortgage loans and the decline in fair value of mortgage servicing assets are directly correlated with the elevated levels of mortgage origination volume, which was motivated by the historically low interest rate environment. Further, fee generative deposit account activity was impacted by reductions in the volume of returned check fees, declining by $2,713,000 to $13,944,000 for the twelve months ended December 31, 2020. Other non-interest income also declined by $1,312,000 during 2020, partially from decreases in the fair value of assets used to fund acquired deferred compensation plans totaling $514,000, as compared to 2019, as well as from a $333,000 reduction in one-time death benefits realized during the years ended 2020 and 2019 of $498,000 and $831,000, respectively. Non-interest income increased $4,459,000 or 9.1% to $53,520,000 during the year ended December 31, 2019 compared to $49,061,000 during the comparable twelve month period in 2018. Increases in non-interest income for the year ended 2019 as compared to the same period in 2018 were largely driven by increases in fees charged for various services and increases in usage associated with both services and interchange transactions. More specifically, the increase in income charged for interchange fees and service charges increased by $2,390,000 or 13.1% and $1,190,000 or 7.7%, respectively. Gains from the sale of mortgage loans, which resulted from increased volume, contributed $911,000 to the overall increase in non-interest income during the 2019 year. Other non-interest income was positively impacted by the recognition of $831,000 in life insurance death benefits during the year ended December 31, 2019, compared to none in the equivalent period in 2018. These positive changes were partially offset by $1,655,000 greater decline in the value of the Company's mortgage loan servicing rights due to increases in prepayment speeds and the overall decreases in interest rates on home loans as compared to those in the prior year. Non-interest Expense The following table summarizes the Company’s other non-interest expense for the periods indicated (dollars in thousands): 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 29 Table of Contents disruption from COVID-19 related mandates. Benefits and other compensation costs increased by $9,194,000 (40.4%) to $31,935,000 during the year ended December 31, 2020 as compared to $22,741,000 for the trailing twelve month period, caused by increases in expenses associated with retirement obligations and insurance costs. During 2018, the FDIC's Deposit Insurance Fund's (DIF) reserves exceeded the minimum set by the Dodd-Frank Act and the Bank with total assets less than $10 billion, was entitled to receive credits to offset a portion of its assessments. As a result, during the years ended December 31, 2020 and 2019, the Bank received credits of $610,000 and $862,000, respectively, which contributed to the fluctuation in regulatory assessments and insurance during those periods. Total other non-interest expense decreased by $8,755,000 or 11.0% to $70,637,000 during the year ended December 31, 2020 as compared to the $79,392,000 for the year ended December 31, 2019. Reductions in advertising expenses totaling $2,806,000 or 49.8% to $2,827,000 contributed to this beneficial change, as did declines in miscellaneous expenses totaling $3,619,000 or 23.1% attributed primarily to a $1,681,000 reduction in travel and training expenses as a result of state-wide shelter-in-place restrictions and a reduction of $418,000 in third party services, which were partially offset by the indirect loan documentation and administrative costs associated with PPP lending activity. Salary and benefit expenses increased $12,123,000 (12.9%) to $106,065,000 during the year ended December 31, 2019 compared to $93,942,000 during the prior year month ended December 31, 2018. Base salaries, net of deferred loan origination costs increased $7,796,000 (12.5%) to $70,218,000. The increase in base salaries was due primarily to a 7.4% increase in average full time equivalent employees to 1,150 from 1,071 in the prior year-to-date period. Also affecting the increase in base salaries were annual merit increases and a higher wage base per employee resulting from the employees associated with the FNBB merger transaction due to the Bay Area region’s higher cost of living. During the year ended December 31, 2019 and 2018 there were $3,133,000 and $2,721,000, respectively, in salaries expense that were capitalized in association with loan origination activities and the increase was due solely to increases in the number of loans originated. Commissions and incentive compensation increased $1,959,000 (17.6%) to $13,106,000 during 2019 compared to 2018 primarily due to organic growth of loans and non-interest bearing deposits. Benefits & other compensation expense increased $2,368,000 (11.6%) to $22,741,000 during the year ended December 31, 2019 due primarily to increases in the average full time equivalent employees, as mentioned above, and to a lesser extent, annual increases in healthcare and benefits costs. Total other non-interest expense increased by $4,862,000 or 6.50% to $79,392,000 during the year ended December 31, 2019 as compared to the $74,530,000 for the year ended December 31, 2018. Virtually all significant increases in non-interest expense can be attributed to the acquisition of FNB Bancorp that took place in July 2018, which is reflected in all periods during the twelve months ended December 31, 2019, as compared to only six months in the prior year. Highlighting some of those increases were increases in occupancy, data processing, intangible amortization, which increased by $2,754,000, $2,496,000 and 2,224,000, respectively, as compared to the prior year. The increases in non-interest expenses were partially offset by an elimination of merger related expenses, totaling $5,227,000 in 2018 and a reduction in regulatory assessment costs resulting from credits issued by the FDIC totaling $862,000 for the year ended 2019. The provisions for income taxes applicable to income before taxes for the years ended December 31, 2020, 2019 and 2018 differ from amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory federal income tax rate are reconciled as follows: 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. 30 Table of Contents Financial Condition Investment Securities The following table presents the available for sale debt securities and marketable equity investment securities portfolio by major type as of the dates indicated: 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 31 Table of Contents whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment. Loan Portfolio Composition The following table shows the Company’s loan balances, including net deferred loan fees, at the dates indicated: 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. 32 Table of Contents Asset Quality and Nonperforming Assets Nonperforming Assets The following tables set forth the amount of the Bank’s nonperforming assets as of the dates indicated. “Performing non-accrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection: 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. 33 Table of Contents Changes in nonperforming assets during the year ended December 31, 2019 The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2019: (in thousands) 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. 34 Table of Contents 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. 35 Table of Contents Changes in nonperforming assets during the three months ended December 31, 2019 The following table shows the activity in the balance of nonperforming assets for the quarter ended December 31, 2019: (in thousands) 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. 36 Table of Contents 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. 37 Table of Contents Allowance for Credit Losses - Available for Sale Investment Securities The Company evaluates available for sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the allowance for credit losses and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is recognized in earnings with a corresponding adjustment to the security's amortized cost basis. During the year ended December 31, 2020 no allowance for credit losses nor impairment recognized in earnings related to available for sale investment securities was recorded. Allowance for Credit Losses - Held to Maturity Investment Securities In addition to credit losses associated with the Company's loan portfolio, the CECL standard requires that loss estimates be developed for securities classified as held-to-maturity (HTM). As of January 1, 2020, the date of adoption for ASC 326, the Company's HTM investment portfolio had a carrying value of approximately $375,606,000 and was comprised of $361,785,000 in obligations backed by U.S. government agencies and $13,821,000 in obligations of states and political subdivisions. As the 96.3% of the HTM portfolio consisted of investment securities where payment performance has an implicit or explicit guarantee from the U.S. government and where no history of credit losses exist, management believes that indicators for zero loss are present and therefore, no loss reserves were recognized in conjunction with the adoption of the CECL standard. Management separately evaluated its HTM investment securities from obligations of state and political subdivisions utilizing the historical loss data represented by similar securities over a period of time spanning nearly 50 years. Based on this evaluation, management determined that the expected credit losses associated with these securities is less than significant for financial reporting purposes and therefore, no loss reserves resulted from the adoption and implementation of the CECL standard. Consistent with the portfolio composition at the date of adoption, as of December 31, 2020, 96.2% of the HTM portfolio consisted of investment securities where payment performance has an implicit or explicit guarantee from the U.S. government with the remaining balance of the HTM portfolio consisting of obligations of states and political subdivisions. In addition, the balance of investment securities maintained in the HTM portfolio decreased by $91,043,000 or 24.2% during the year ended December 31, 2020 and management is not aware of any significant changes in credit ratings for the securities held. Therefore, during the year ended December 31, 2020 no allowance for credit losses related to HTM securities was recorded. Allowance for Credit Losses - Loans The allowance for credit losses (ACL) is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Regardless of the determination that a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in accordance with the original contract or modified terms, if appropriate. The Company’s method for assessing the appropriateness of the allowance for credit losses includes specific allowances for impaired loans, formula allowance factors for pools of credits, and qualitative considerations which include, among other things, current and forecast economic and environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools were based on historical loss experience by product type and prior risk rating. Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over the remaining life. The Company identified and accumulated loan cohort historical loss data beginning with the fourth quarter of 2008 and through the current period. In situations where the Company's actual loss history was not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than three billion and less than ten billion, were utilized to create a minimum loss rate. Adjustments to historical loss information are made for differences in relevant current loan-specific risk characteristics, such as historical timing of losses relative to the loan origination. In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios incorporate variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, changes in environmental conditions, such as California unemployment rates, household debt levels and U.S. gross domestic product. There is a greater chance that the Company would suffer a loss from a loan that was risk rated less than satisfactory than if the loan was last graded satisfactory. As such, the proper risk grading of loans in the portfolio is important to the determination of the calculation of and determination of adequacy of the allowance for credit losses. Utilizing the historical loss data described above, the Company applies reserve rates within any unique pool based on its loss and risk grade migration. Therefore, within any given pool, a larger loss estimation factor is applied to less than satisfactory loans as compared to those that the Company last graded as satisfactory. The resulting allowance for any pool is the sum of the calculated reserves determined in this manner. Certain loans are not included in pools of loans that are collectively evaluated. The segregation of these loans is based on the results from analysis of identified credits that meet management’s criteria for specific evaluation. These loans are first reviewed individually to determine if such loans are considered impaired. Impaired loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due under the original contractual terms and are removed from the pools of loans collectively evaluated. When, as a result of this evaluation, a loan is 38 Table of Contents identified as impaired they are then specifically reviewed and evaluated individually by management for loss potential by evaluating sources of repayment, including collateral as applicable, and a specified allowance for loan losses is established where necessary. By definition, any loan that management has placed on non-accrual is considered impaired, however, not all impaired loans need be placed on non-accrual. Allowance for Credit Losses - Unfunded Commitments The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and incorporate utilization assumptions at the estimated time of default. While the provision for credit losses associated with unfunded commitments is included in "provision for (benefit from) credit losses" on the consolidated statement of income, the reserve for unfunded commitments is maintained on the consolidated balance sheet in other liabilities. The Components of the Allowance for Credit Losses The following table sets forth the Bank’s allowance for credit losses related to loans as of the dates indicated (dollars in thousands): 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. 39 Table of Contents 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 % 40 Table of Contents 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. 41 Table of Contents Foreclosed Assets, Net of Allowance for Losses The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the years indicated (dollars in thousands): 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. 42 Table of Contents 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. 43 Table of Contents In the simulation of net interest income and market value of equity, the forecast balance sheet is processed against various interest rate scenarios. These various interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and rate ramp and or shock scenarios including -200, -100, +100, and +200 basis points around the flat scenario. As of December 31, 2019, the overnight Federal funds rate, the rate primarily used in these interest rate shock scenarios, was less than 2.00%. Based on the historical nature of these rates in the United States not falling below zero, management believes that a shock scenario that reduces interest rates below zero would not provide meaningful results and therefor, have not been modeled. These scenarios assume that 1) interest rates increase or decrease evenly (in a “ramp” fashion) over a twelve-month period and remain at the new levels beyond twelve months or 2) that interest rates change instantaneously (“shock”). The simulation results shown below assume no changes in the structure of the Company’s balance sheet over the twelve months being measured. The following table summarizes the estimated effect on net interest income and market value of equity to changing interest rates as measured against a flat rate (no interest rate change) instantaneous shock scenario over a twelve month period utilizing the Company's specific mix of interest earning assets and interest bearing liabilities as of December 31, 2020. Interest Rate Risk Simulations: Change in Interest Rates (Basis Points) 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. 44 Table of Contents 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. 45 Table of Contents The maturity distribution of certificates of deposit in denominations of $100,000 or more is set forth in the following table. These deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain higher yields elsewhere if available. The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. At December 31, 2020, 2019 and 2018, the Bank had $10,000,000, $30,000,000, and $65,000,000, respectively, of these State deposits. Certificates of Deposit in Denominations of $100,000 or More 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. 46 Table of Contents 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. 47 Table of Contents (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 liabilitie s. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See “Market Risk Management” under Item 7 of this report which is incorporated herein. 48 Table of Contents