TRICO BANCSHARES / 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets as of December 31, 2020 and 2019 50 Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018 51 Consolidated Statements of Comprehensive Income for the years ended December 31, 20 20, 2019 and 2018 51 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 20 20 , 201 9 , and 201 8 52 Consolidated Statements of Cash Flows for the years ended December 31, 20 20 , 201 9 , and 201 8 53 Notes to Consolidated Financial Statements 54 Management’s Report on Internal Control over Financial Reporting 100 Report of Independent Registered Public Accounting Firm – Moss Adams LLP 101 49 Table of Contents TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) At December 31, 2020 At December 31, 2019 Assets: Cash and due from banks $ 77,253 $ 92,816 Cash at Federal Reserve and other banks 592,298 183,691 Cash and cash equivalents 669,551 276,507 Investment securities: Marketable equity securities 3,025 2,960 Available for sale debt securities 1,414,264 950,138 Held to maturity debt securities 284,563 375,606 Restricted equity securities 17,250 17,250 Loans held for sale 6,268 5,265 Loans 4,763,127 4,307,366 Allowance for credit losses ( 91,847 ) ( 30,616 ) Total loans, net 4,671,280 4,276,750 Premises and equipment, net 83,731 87,086 Cash value of life insurance 118,870 117,823 Accrued interest receivable 20,004 18,897 Goodwill 220,872 220,872 Other intangible assets, net 17,833 23,557 Operating leases, right-of-use 27,846 27,879 Other assets 84,172 70,591 Total assets $ 7,639,529 $ 6,471,181 Liabilities and Shareholders’ Equity: Liabilities: Deposits: Noninterest-bearing demand $ 2,581,517 $ 1,832,665 Interest-bearing 3,924,417 3,534,329 Total deposits 6,505,934 5,366,994 Accrued interest payable 1,362 2,407 Operating lease liability 27,973 27,540 Other liabilities 94,597 91,984 Other borrowings 26,914 18,454 Junior subordinated debt 57,635 57,232 Total liabilities 6,714,415 5,564,611 Commitments and contingencies (Note 15) Shareholders’ equity: Preferred stock, no par value: 1,000,000 shares authorized; zero issued and outstanding at December 31, 2020 and 2019 — — Common stock, no par value: 50,000,000 shares authorized; issued and outstanding: 29,727,214 and 30,523,824 at December 31, 2020 and 2019, respectively 530,835 543,998 Retained earnings 381,999 367,794 Accumulated other comprehensive income (loss), net of tax 12,280 ( 5,222 ) Total shareholders’ equity 925,114 906,570 Total liabilities and shareholders’ equity $ 7,639,529 $ 6,471,181 The accompanying notes are an integral part of these consolidated financial statements. 50 Table of Contents TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year ended December 31, 2020 2019 2018 Interest and dividend income: Loans, including fees $ 233,721 $ 223,750 $ 186,117 Investments: Taxable securities 27,627 39,810 33,997 Tax exempt securities 3,566 4,002 4,345 Dividends 1,032 1,285 1,705 Interest bearing cash at Federal Reserve and other banks 1,238 3,597 2,054 Total interest and dividend income 267,184 272,444 228,218 Interest expense: Deposits 6,885 11,716 6,996 Other borrowings 17 387 2,745 Junior subordinated debt 2,555 3,272 3,131 Total interest expense 9,457 15,375 12,872 Net interest income 257,727 257,069 215,346 Provision for (benefit from) credit losses 42,813 ( 1,690 ) 2,583 Net interest income after provision for (benefit from) credit losses 214,914 258,759 212,763 Noninterest income: Service charges and fees 37,981 40,417 38,460 Commissions on sale of non-deposit investment products 2,989 2,877 3,151 Increase in cash value of life insurance 2,949 3,029 2,718 Gain on sale of loans 9,122 3,282 2,371 Gain on sale of investment securities 7 110 207 Other 2,146 3,805 2,154 Total noninterest income 55,194 53,520 49,061 Noninterest expense: Salaries and related benefits 112,121 106,065 93,942 Other 70,637 79,392 74,530 Total noninterest expense 182,758 185,457 168,472 Income before income taxes 87,350 126,822 93,352 Provision for income taxes 22,536 34,750 25,032 Net income $ 64,814 $ 92,072 $ 68,320 Earnings per share: Basic $ 2.17 $ 3.02 $ 2.57 Diluted $ 2.16 $ 3.00 $ 2.54 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year ended 2020 2019 2018 Net income $ 64,814 $ 92,072 $ 68,320 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on available for sale securities arising during the period, after reclassifications 11,126 17,159 ( 12,434 ) Change in minimum pension liability, after reclassifications 6,972 ( 4,502 ) 388 Change in joint beneficiary agreement liability ( 596 ) — 426 Other comprehensive income (loss) 17,502 12,657 ( 11,620 ) Comprehensive income $ 82,316 $ 104,729 $ 56,700 The accompanying notes are an integral part of these consolidated financial statements. 51 Table of Contents TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands, except share and per share data) Shares of Common Stock Common Stock Retained Earnings Accumulated Other Comprehensive Income (loss) Total Balance at January 1, 2018 22,955,963 $ 255,836 $ 255,200 $ ( 5,228 ) $ 505,808 Net income 68,320 68,320 Adoption ASU 2016-01 ( 62 ) 62 — Adoption ASU 2018-02 1,093 ( 1,093 ) — Other comprehensive loss ( 11,620 ) ( 11,620 ) Stock option vesting 75 75 Service condition RSU vesting 1,017 1,017 Market plus service condition RSU vesting 370 370 Stock options exercised 100,400 1,704 1,704 Service condition RSUs released 35,060 — Tax benefit from release of service condition RSUs 25,512 — Issuance of common stock 7,405,277 284,437 284,437 Repurchase of common stock ( 104,989 ) ( 1,677 ) ( 2,292 ) ( 3,969 ) Dividends paid ($ 0.70 per share) ( 18,769 ) ( 18,769 ) Balance at December 31, 2018 30,417,223 $ 541,762 $ 303,490 $ ( 17,879 ) $ 827,373 Net income 92,072 92,072 Other comprehensive income 12,657 12,657 Service condition RSU vesting 1,161 1,161 Market plus service condition RSU vesting 493 493 Stock options exercised 182,500 2,921 2,921 Service condition RSUs released 33,060 — Market plus service condition RSUs released 22,237 — Repurchase of common stock ( 131,196 ) ( 2,339 ) ( 2,769 ) ( 5,108 ) Dividends paid ($ 0.82 per share) ( 24,999 ) ( 24,999 ) Balance at December 31, 2019 30,523,824 $ 543,998 $ 367,794 $ ( 5,222 ) $ 906,570 Cumulative change from adoption of ASU 2016-13 — — ( 12,983 ) — ( 12,983 ) Balance at January 1, 2020 (as adjusted for change in accounting principle) 30,523,824 543,998 354,811 ( 5,222 ) 893,587 Net income 64,814 64,814 Other comprehensive income 17,502 17,502 Service condition RSU vesting 1,390 1,390 Market plus service condition RSU vesting 646 646 Service condition RSUs released 34,388 — Market plus service condition RSUs released 20,265 — Stock options exercised 32,000 547 547 Repurchase of common stock ( 883,263 ) ( 15,746 ) ( 11,323 ) ( 27,069 ) Dividends paid ($ 0.88 per share) ( 26,303 ) ( 26,303 ) Balance at December 31, 2020 29,727,214 $ 530,835 $ 381,999 $ 12,280 $ 925,114 The accompanying notes are an integral part of these consolidated financial statements. 52 Table of Contents TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended December 31, 2020 2019 2018 Operating activities: Net income $ 64,814 $ 92,072 $ 68,320 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment, and amortization 6,453 6,915 7,014 Amortization of intangible assets 5,724 5,723 3,499 Provision for (benefit from) credit losses 42,813 ( 1,690 ) 2,583 Amortization of investment securities premium, net 2,669 2,547 2,512 Gain on sale of investment securities ( 7 ) ( 110 ) ( 207 ) Originations of loans for resale ( 227,831 ) ( 131,074 ) ( 84,245 ) Proceeds from sale of loans originated for resale 234,424 131,689 86,988 Gain on sale of loans ( 9,122 ) ( 3,282 ) ( 2,371 ) Change in market value of mortgage servicing rights 2,634 1,811 146 Provision for (reversal of) losses on real estate owned 128 ( 102 ) 89 Deferred income tax expense ( 14,154 ) 1,692 2,600 Gain on sale or transfer of loans, to real estate owned ( 235 ) ( 608 ) ( 408 ) Operating lease payments ( 4,927 ) ( 4,931 ) — Loss on disposal of fixed assets 67 82 185 Increase in cash value of life insurance ( 2,949 ) ( 3,029 ) ( 2,718 ) Gain on life insurance death benefit ( 498 ) ( 831 ) — (Gain) loss on marketable equity securities ( 64 ) ( 86 ) 64 Equity compensation vesting expense 2,036 1,654 1,462 Change in: Interest receivable ( 1,107 ) 515 ( 5,640 ) Interest payable ( 1,045 ) 410 1,067 Amortization of operating lease right of use asset 5,393 4,592 — Other assets and liabilities, net 9,586 ( 1,153 ) 10,129 Net cash from operating activities 114,802 102,806 91,069 Investing activities: Cash acquired in acquisition; net of consideration paid — — 30,613 Proceeds from maturities of securities available for sale 167,515 97,993 73,014 Proceeds from maturities of securities held to maturity 89,858 68,346 68,937 Proceeds from sale of available for sale securities 229 127,066 293,279 Purchases of securities available for sale ( 617,552 ) ( 37,253 ) ( 436,678 ) Net redemption of restricted equity securities — — 7,429 Loan origination and principal collections, net ( 415,415 ) ( 286,339 ) ( 173,752 ) Loans purchased ( 41,126 ) — — Proceeds from sale of real estate owned 570 1,336 2,527 Purchases of premises and equipment ( 2,812 ) ( 4,293 ) ( 7,372 ) Life insurance proceeds 2,400 3,355 — Net cash from investing activities ( 816,333 ) ( 29,789 ) ( 142,003 ) Financing activities: Net change in deposits 1,138,940 528 365,400 Net change in other borrowings 8,460 2,615 ( 271,327 ) Repurchase of common stock, net ( 26,720 ) ( 2,196 ) ( 2,483 ) Dividends paid ( 26,303 ) ( 24,999 ) ( 18,769 ) Exercise of stock options, net 198 9 218 Net cash from financing activities 1,094,575 ( 24,043 ) 73,039 Net change in cash and cash equivalents 393,044 48,974 22,105 Cash and cash equivalents at beginning of year 276,507 227,533 205,428 Cash and cash equivalents at end of year $ 669,551 $ 276,507 $ 227,533 Supplemental disclosure of noncash activities: Unrealized gain (loss) on securities available for sale $ 15,796 $ 24,361 $ ( 17,627 ) Loans transferred to foreclosed assets $ 766 $ 1,249 $ 1,262 Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes $ 736 $ 5,108 $ 1,486 Obligations incurred in conjunction with leased assets $ 4,161 $ 156 $ — Supplemental disclosure of cash flow activity: Cash paid for interest expense $ 10,502 $ 14,965 $ 11,805 Cash paid for income taxes $ 29,500 $ 35,050 $ 14,525 Assets acquired in acquisition and goodwill, net $ — $ — $ 1,463,100 Liabilities assumed in acquisition $ — $ — $ 1,171,968 The accompanying notes are an integral part of these consolidated financial statements. 53 Table of Contents TRICO BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2020, 2019 and 2018 Note 1 – Summary of Significant Accounting Policies Description of Business and Basis of Presentation TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial and retail banking business in 29 California counties. The Company has five capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by the Company and three acquired with the acquisition of North Valley Bancorp. The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $ 1,731,000 are accounted for under the equity method and, accordingly, are included in other assets on the consolidated balance sheets. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheets. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Segment and Significant Group Concentration of Credit Risk The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout Northern and Central California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into one business segment that it denotes as community banking. Geographical Descriptions For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo. Business Combinations The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Net cash flows are reported for loan and deposit transactions and other borrowings. Marketable Equity Securities Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): " Recognition and Measurement of Financial Assets and Financial Liabilities ." ASU 2016-01 required equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The adoption of this guidance resulted in a $ 62,000 decrease to retaining earnings as of January 1, 2018 and a decrease to the deferred tax of $ 18,000 . During the twelve months ended December 31, 2020 and 2019, the Company recognized $ 64,000 and $ 86,000 of unrealized losses, respectively, in the consolidated statements of income related to changes in the fair value of marketable equity securities. 54 Table of Contents Debt Securities The Company classifies its debt securities into one of three categories: trading, available for sale ("AFS") or held to maturity ("HTM"). Trading securities are bought and held principally for the purpose of selling in the near term and changes in the value of these securities are recorded through earnings. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives. All other securities not included in trading or held to maturity are classified as available for sale. AFS securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale securities are reported as a separate component of other accumulated comprehensive income in shareholders’ equity until realized. Discounts are amortized or accreted over the expected life of the related investment security as an adjustment to yield using the effective interest method. Premiums on callable debt securities are generally amortized to the earliest call date of the security with the exception of mortgage backed securities, where estimated prepayments, if any, are considered. Dividend and interest income are recognized when earned. Realized gains and losses are derived from the amortized cost of the security sold. The Company did not have any debt securities classified as trading during the three year period ended December 31, 2020. The Company has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in other assets in the consolidated balance sheets. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on nonaccrual is reversed against interest income. There was no accrued interest related to debt securities reversed against interest income for the years ended December 31, 2020 and 2019. The Company evaluates available for sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the allowance for credit losses and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is recognized in earnings with a corresponding adjustment to the security's amortized cost basis. In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers' financial condition, among other factors. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. No security credit losses were recognized during the years ended December 31, 2020, 2019 or 2018. For HTM debt securities, the Company measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type, then further disaggregated by sector and bond rating. Accrued interest receivable on held-to-maturity (HTM) debt securities totaled $ 735,000 at December 31, 2020 and is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current condition and reasonable and supportable forecasts based on current and expected changes in credit ratings and default rates. Based on the implied guarantees of the U. S. Government or its agencies related to certain of these HTM investment securities, and the absence of any historical or expected losses, substantially all qualify for a zero loss assumption. Management has separately evaluated its HTM investment securities from obligations of state and political subdivisions utilizing the historical loss data represented by similar securities over a period of time spanning nearly 50 years. As a result of this evaluation, management determined that the expected credit losses associated with these securities is not significant for financial reporting purposes and therefore, no allowance for credit losses has been recognized during the years ended December 31, 2020, 2019 or 2018. Restricted Equity Securities Restricted equity securities represent the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”) and are carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB. Both cash and stock dividends are reported as income when received. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors of current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to non-interest income. 55 Table of Contents Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. Gains or losses on the sale of loans that are held for sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment to the related loan’s yield over the actual life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal, or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is considered probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loan is estimated to be fully collectible as to both principal and interest. Accrued interest receivable is not included in the calculation of the allowance for credit losses. Allowance for Credit Losses - Loans The allowance for credit losses (ACL) is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Regardless of the determination that a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in accordance with the original contract or modified terms, if appropriate. Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over the remaining life. The Company identified and accumulated loan cohort historical loss data beginning with the fourth quarter of 2008 and through the current period. In situations where the Company's actual loss history was not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than three billion and less than ten billion, were utilized to create a minimum loss rate. Adjustments to historical loss information are made for differences in relevant current loan-specific risk characteristics, such as historical timing of losses relative to the loan origination. In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios incorporate variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to changes in environmental conditions, such as California unemployment rates, household debt levels and U.S. gross domestic product. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring (TDR). The ACL on a TDR is measured using the same method as all other portfolio loans, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan. The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss: Commercial real estate : • Commercial real estate - Non-owner occupied: These commercial properties typically consist of buildings which are leased to others for their use and rely on rents as the primary source of repayment. Property types are predominantly office, retail, or light industrial but the portfolio also has some special use properties. As such, the risk of loss associated with these properties is primarily driven by general economic changes or changes in regional economies and the impact of such on a tenant’s ability to pay. Ultimately this can affect occupancy, rental rates, or both. Additional risk of loss can come from new construction resulting in oversupply, the costs to hold or operate the property, or changes in interest rates. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty years . • Commercial real estate - Owner occupied: These credits are primarily susceptible to changes in the financial condition of the business operated by the property owner. This may be driven by changes in, among other things, industry challenges, factors unique to the operating geography of the borrower, change in the individual fortunes of the business owner, general economic conditions and changes in business cycles. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven more by general economic conditions, the underlying collateral may have devalued more and thus result in larger losses in the event of default. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty years . 56 Table of Contents • Multifamily: These commercial properties are generally comprised of more than four rentable units, such as apartment buildings, with each unit intended to be occupied as the primary residence for one or more persons. Multifamily properties are also subject to changes in general or regional economic conditions, such as unemployment, ultimately resulting in increased vacancy rates or reduced rents or both. In addition, new construction can create an oversupply condition and market competition resulting in increased vacancy, reduced market rents, or both. Due to the nature of their use and the greater likelihood of tenant turnover, the management of these properties is more intensive and therefore is more critical to the preclusion of loss. • Farmland: While the Company has few loans that were originated for the purpose of the acquisition of these commercial properties, loans secured by farmland represent unique risks that are associated with the operation of an agricultural businesses. The valuation of farmland can vary greatly over time based on the property's access to resources including but not limited to water, crop prices, foreign exchange rates, government regulation or restrictions, and the nature of ongoing capital investment needed to maintain the quality of the property. Loans secured by farmland typically represent less risk to the Company than other agriculture loans as the real estate typically provides greater support in the event of default or need for longer term repayment. Consumer loans : • SFR 1-4 1st DT Liens: The most significant drivers of potential loss within the Company's residential real estate portfolio relate general, regional, or individual changes in economic conditions and their effect on employment and borrowers cash flow. Risk in this portfolio is best measured by changes in borrower credit score and loan-to-value. Loss estimates are based on the general movement in credit score, economic outlook and its effects on employment and the value of homes and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate. • SFR HELOCs and Junior Liens: Similar to residential real estate term loans, HELOCs and junior liens performance is also primarily driven by borrower cash flows based on employment status. However, HELOCs carry additional risks associated with the fact that most of these loans are secured by a deed of trust in a position that is junior to the primary lien holder. Furthermore, the risk that as the borrower's financial strength deteriorates, the outstanding balance on these credit lines may increase as they may only be canceled by the Company if certain limited criteria are met. In addition to the allowance for credit losses maintained as a percent of the outstanding loan balance, the Company maintains additional reserves for the unfunded portion of the HELOC. • Other: The majority of these consumer loans are secured by automobiles, with the remainder primarily unsecured revolving debt (credit cards). These loans are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value, if any. Typically, non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of those factors. Credit card loans are unsecured and while collection efforts are pursued in the event of default, there is typically limited opportunity for recovery. Loss estimates are based on the general movement in credit score, economic outlook and its effects on employment and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate. Commercial and industrial: • Repayment of these loans is primarily based on the cash flow of the borrower, and secondarily on the underlying collateral provided by the borrower. A borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, collateral includes accounts receivable, inventory, or equipment. Collateral securing these loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Actual and forecast changes in gross domestic product are believed to be corollary to losses associated with these credits. Construction : • While secured by real estate, construction loans represent a greater level of risk than term real estate loans due to the nature of the additional risks associated with the not only the completion of construction within an estimated time period and budget, but also the need to either sell the building or reach a level of stabilized occupancy sufficient to generate the cash flows necessary to support debt service and operating costs. The Company seeks to mitigate the additional risks associated with construction lending by requiring borrowers to comply with lower loan to value ratios and additional covenants as well as strong tertiary support of guarantors. The loss forecasting model applies the historical rate of loss for similar loans over the expected life of the asset as adjusted for macroeconomic factors. Agriculture production: • Repayment of agricultural loans is dependent upon successful operation of the agricultural business, which is greatly impacted by factors outside the control of the borrower. These factors include adverse weather conditions, including access to water, that may impact crop yields, loss of livestock due to disease or other factors, declines in market prices for agriculture products, changes in foreign exchange, and the impact of government regulations. In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the business. Consequently, agricultural production loans may involve a greater degree of risk than other types of loans. Leases: • The loss forecasting model applies the historical rate of loss for similar loans over the expected life of the asset. Leases typically represent an elevated level of credit risk as compared to loans secured by real estate as the collateral for leases is often subject to a more rapid rate of depreciation or depletion. The ultimate severity of loss is impacted by the type of collateral securing the exposure, the size of the exposure, the borrower’s industry sector, any guarantors and the geographic market. Assumptions of expected loss are conditioned to the economic outlook and the other variables discussed above. 57 Table of Contents Unfunded commitments : • The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the consolidated balance sheet in other liabilities. Real Estate Owned Real estate owned (REO) includes assets acquired through, or in lieu of, loan foreclosure. REO is held for sale and are initially recorded at fair value less estimated costs to sell at the date of acquisition, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Any write-downs based on the asset’s fair value less costs to sell at the date of acquisition are charged to the allowance for loan and lease losses. Any recoveries based on the asset’s fair value less estimated costs to sell in excess of the recorded value of the loan at the date of acquisition are recorded to the allowance for loan and lease losses. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense, along with the gain or loss on sale of REO. Premises and Equipment Land is carried at cost. Land improvements, buildings and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the shorter of the estimated useful lives of the related assets or lease terms. Asset lives range from 3 - 10 years for furniture and equipment and 15 - 40 years for land improvements and buildings. Company Owned Life Insurance The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. As a result of current tax law and the nature of these policies, the Bank records any increase in cash value of these policies as nontaxable non-interest income. If the Bank decided to surrender any of the policies prior to the death of the insured, such surrender may result in a tax expense related to the life-to-date cumulative increase in cash value of the policy. If the Bank retains such policies until the death of the insured, the Bank would receive nontaxable proceeds from the insurance company equal to the death benefit of the policies. The Bank has entered into Joint Beneficiary Agreements (JBAs) with certain of the insured that provide some level of sharing of the death benefit, less the cash surrender value, among the Bank and the beneficiaries of the insured upon the receipt of death benefits. Goodwill, Other Intangible and Long-Lived Assets Goodwill represents the excess of costs over fair value of net assets of businesses acquired from a business combination. The Company has an identifiable intangible asset consisting of core deposit intangibles (“CDI”). CDI are amortized over their respective estimated useful lives and reviewed periodically for impairment. Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Other intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed periodically for impairment. As of September 30 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. Mortgage Servicing Rights Mortgage servicing rights (“MSR”) represent the Company’s right to a future stream of cash flows based upon the contractual servicing fee associated with servicing mortgage loans. Our MSR arise from residential and commercial mortgage loans that we originate and sell, but retain the right to service the loans. The net gain from the retention of the servicing right is included in gain on sale of loans in non-interest income when the loan is sold. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing fees, when earned, and changes in fair value of the MSR, are recorded in non-interest income. 58 Table of Contents The Company accounts for MSR at fair value. The determination of fair value of our MSR requires management judgment because they are not actively traded. The determination of fair value for MSR requires valuation processes which combine the use of discounted cash flow models and extensive analysis of current market data to arrive at an estimate of fair value. The cash flow and prepayment assumptions used in our discounted cash flow model are based on empirical data drawn from the historical performance of our MSR, which we believe are consistent with assumptions used by market participants valuing similar MSR, and from data obtained on the performance of similar MSR. The key assumptions used in the valuation of MSR include mortgage prepayment speeds and the discount rate. These variables can, and generally will, change from quarter to quarter as market conditions and projected interest rates change. The key risks inherent with MSR are prepayment speed and changes in interest rates. Leases The Company records a right-of-use asset (“ROUA”) on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company is also required to record a lease liability on the consolidated balance sheets for the present value of future payment commitments. Substantially all of the Company’s leases are comprised of operating leases in which the Company is lessee of real estate property for branches, ATM locations, and general administration and operations. The Company has elected not to include short-term leases (i.e. leases with initial terms of twelve months or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments are included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance are not unknown and not determinable at lease commencement and therefore, are not included in the determination of the Company’s ROUA or lease liability. The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The Company uses the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. Off-Balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. Low Income Housing Tax Credits The Company accounts for low income housing tax credits and the related qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Upon entering into a qualified affordable housing project, the Company records, in other liabilities, the entire amount that it has agreed to invest in the project, and an equal amount, in other assets, representing its investment in the project. As the Company disburses cash to satisfy its investment obligation, other liabilities are reduced. Over time, as the tax credits and other tax benefits of the project are realized by the Company, the investment recorded in other assets is reduced using the proportional amortization method. Income Taxes The Company’s accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Interest and/or penalties related to income taxes are reported as a component of non-interest income. Share-Based Compensation Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors, based on the fair value of the awards at the date of grant. The estimate of the fair value of stock options and performance based restricted awards are based on a Black-Scholes or Monte Carlo model, respectively, while the market price of the common stock at the date of grant is used for time based restricted awards. Compensation cost is recognized over the required service period, generally defined as the vesting or measurement period. The Company’s accounting policy is to recognize forfeitures as they occur. 59 Table of Contents Earnings per Share Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. There are no unvested share-based payment awards that contain rights to nonforfeitable dividends (participating securities). Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate solely from outstanding stock options and restricted stock units, and are determined using the treasury stock method. Revenue Recognition The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Most of our revenue-generating transactions are not subject to Topic 606, including revenue generated from financial instruments, such as our loans and investment securities. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. The Company’s non-interest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2020 and December 31, 2019, the Company did not have any significant contract balances. The Company has evaluated the nature of its revenue streams and determined that further disaggregation of revenue into more granular categories beyond what is presented in Note 18 was not necessary. The following are descriptions of revenues within the scope of ASC 606. Deposit service charges The Company earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. Debit and ATM interchange fees Debit and ATM interchange income represent fees earned when a debit card issued by the Company is used. The Company earns interchange fees from debit cardholder transactions through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ debit card. Certain expenses directly associated with the credit and debit card are recorded on a net basis with the interchange income. Commission on sale of non-deposit investment products Commissions on sale of non-deposit investment products consist of fees earned from advisory asset management, trade execution and administrative fees from investments. Advisory asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and asset flows. Advisory asset management fees are recognized quarterly and are based on the portfolio values at the end of each quarter. Brokerage accounts are charged commissions at the time of a transaction and the commission schedule is based upon the type of security and quantity. In addition, revenues are earned from selling insurance and annuity policies. The amount of revenue earned is determined by the value and type of each instrument sold and is recognized at the time the policy or contract is written. Merchant fee income Merchant fee income represents fees earned by the Company for card payment services provided to its merchant customers. The Company outsources these services to a third party to provide card payment services to these merchants. The third party provider passes the payments made by the merchants through to the Company. The Company, in turn, pays the third party provider for the services it provides to the merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition, a portion of the payment received represents interchange fees which are passed through to the card issuing bank. Income is primarily earned based on the dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment is accepted by the processing network. 60 Table of Contents Gain/loss on other real estate owned, net The Company records a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed of trust. When the Company finances the sale of other real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the other real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present. Gains or losses from transactions associated with other real estate owned are recorded as a component of non-interest expense. Reclassifications Certain amounts reported in previous consolidated financial statements have been reclassified and recalculated to conform to the presentation in this report. These reclassifications did not affect previously reported amounts of net income, total assets or total shareholders’ equity. Note 2 - New Accounting Pronouncements Accounting Standards Adopted in 2020 On January 1, 2020, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which replaces the incurred loss methodology and is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require increases or decreases in credit losses be presented as an allowance rather than as a write-down on available for sale debt securities, based on management's intent to sell the security or likelihood the Company will be required to sell the security, before recovery of the amortized cost basis. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchase credit impaired (PCI) and accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining noncredit discount (based on the adjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption. The Company recognized an increase in the ACL for loans totaling $ 18,913,000 , including a reclassification of $ 481,000 from discounts on acquired loans to the allowance for credit losses, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $ 5,449,000 in taxes of $ 12,983,000 . Management has separately evaluated its held-to-maturity investment securities from obligations of state and political subdivisions and determined that no loss reserves were required. On January 1, 2020 the Company adopted ASU 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates step two of the goodwill impairment test (the hypothetical purchase price allocation used to determine the implied fair value of goodwill) when step one (determining if the carrying value of a reporting unit exceeds its fair value) is failed. Instead, entities simply will compare the fair value of a reporting unit to its carrying amount and record goodwill impairment for the amount by which the reporting unit’s carrying amount exceeds its fair value. There was no goodwill impairment recorded during the year ended December 31, 2020. On January 1, 2020 the Company adopted ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities are no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the Coronavirus Disease 2019 (COVID-19) pandemic. The CARES Act provides optional temporary relief from troubled debt restructuring and impairment accounting requirements for loan modifications related to the COVID-19 pandemic made during the period from March 1, 2020 to the earlier of December 31, 2020 or 60 days after the national emergency concerning COVID-19 declared by the President terminates. The termination of these provisions was extended, to the earlier of 60 days after the COVID-19 national emergency date or January 1, 2022, with the Consolidated Appropriations Act of 2021. Banking regulators issued similar guidance, which also clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification was considered to be short-term. Following the passage of the CARES Act legislation, the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" was issued by Federal bank regulators, which similarly offers temporary relief from troubled debt restructuring accounting for loan payment deferrals for certain customers whose businesses are experiencing economic hardship due to Coronavirus. The Interagency Statement requires the modification event to be short-term and COVID-19 related, requiring the borrower be not more than 30 days past due as of the date the modification program was implemented, and allowing Management to apply judgement as to when the modification program terminates. The ability to suspend TDR accounting under either program does not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic. 61 Table of Contents Accounting Standards Pending Adoption In October 2020, the FASB issued ASU No. 2020-10, "Codification Improvements" to address suggestions received from stakeholders on the Accounting Standards Codification and to make other incremental improvements to GAAP. ASU 2020-10 is effective for annual periods beginning after December 15, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements. Note 3 – Investment Securities The amortized cost and estimated fair values of investment securities classified as available for sale and held to maturity are summarized in the following tables: December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Debt Securities Available for Sale Obligations of U.S. government agencies $ 795,555 $ 17,710 $ ( 891 ) $ 812,374 Obligations of states and political subdivisions 123,347 5,748 — 129,095 Corporate bonds 2,459 85 — 2,544 Asset backed securities 473,720 1,682 ( 5,151 ) 470,251 Total debt securities available for sale $ 1,395,081 $ 25,225 $ ( 6,042 ) $ 1,414,264 Debt Securities Held to Maturity Obligations of U.S. government agencies 273,667 13,774 — 287,441 Obligations of states and political subdivisions 10,896 389 — 11,285 Total debt securities held to maturity $ 284,563 $ 14,163 $ — $ 298,726 There was no allowance for credit losses recorded for the held to maturity debt portfolio as of or for the year ended December 31, 2020. December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Debt Securities Available for Sale Obligations of U.S. government agencies $ 466,139 $ 7,261 $ ( 420 ) $ 472,980 Obligations of states and political subdivisions 106,373 3,229 ( 1 ) 109,601 Corporate bonds 2,430 102 — 2,532 Asset backed securities 371,809 129 ( 6,913 ) 365,025 Total debt securities available for sale $ 946,751 $ 10,721 $ ( 7,334 ) $ 950,138 Debt Securities Held to Maturity Obligations of U.S. government agencies $ 361,785 $ 6,072 $ ( 480 ) $ 367,377 Obligations of states and political subdivisions 13,821 327 — 14,148 Total debt securities held to maturity $ 375,606 $ 6,399 $ ( 480 ) $ 381,525 During 2020, proceeds from sales of debt securities were $ 229,000 , resulting in gross gains of $ 7,000 . During 2019, proceeds from sales of debt securities were $ 127,066,000 , resulting in a gross gains of $ 338,000 and gross losses of $ 228,000 . During 2018, proceeds from sales of debt securities totaled $ 293,279,000 , resulting in gross gains of $ 207,000 . Investment securities with an aggregate carrying value of $ 429,049,000 and $ 466,321,000 at December 31, 2020 and 2019, respectively, were pledged as collateral for specific borrowings, lines of credit and local agency deposits. The amortized cost and estimated fair value of debt securities at December 31, 2020 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2020, obligations of U.S. government and agencies with an amortized cost basis totaling $ 828,047,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At December 31, 2020, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 3.06 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half. 62 Table of Contents Debt Securities Available for Sale Held to Maturity (In thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due in one year $ 20,000 $ 19,994 $ — $ — Due after one year through five years 193,791 194,337 993 1,135 Due after five years through ten years 157,945 159,670 18,755 19,640 Due after ten years 1,023,345 1,040,263 264,815 277,951 Totals $ 1,395,081 $ 1,414,264 $ 284,563 $ 298,726 Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows: Less than 12 months 12 months or more Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2020 (in thousands) Debt Securities Available for Sale Obligations of U.S. government agencies $ 160,543 $ ( 891 ) $ — $ — $ 160,543 $ ( 891 ) Asset backed securities 51,544 ( 441 ) 297,020 ( 4,710 ) 348,564 ( 5,151 ) Total debt securities available for sale $ 212,087 $ ( 1,332 ) $ 297,020 $ ( 4,710 ) $ 509,107 $ ( 6,042 ) Less than 12 months 12 months or more Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2019 (in thousands) Debt Securities Available for Sale Obligations of U.S. government agencies $ 36,709 $ ( 309 ) $ 23,852 $ ( 111 ) $ 60,561 $ ( 420 ) Obligations of states and political subdivisions 778 ( 1 ) — — 778 ( 1 ) Asset backed securities 237,463 ( 4,535 ) 99,981 ( 2,378 ) 337,444 ( 6,913 ) Total securities available for sale $ 274,950 $ ( 4,845 ) $ 123,833 $ ( 2,489 ) $ 398,783 $ ( 7,334 ) Debt Securities Held to Maturity Obligations of U.S. government agencies $ 18,813 $ ( 142 ) $ 62,952 $ ( 338 ) $ 81,765 $ ( 480 ) Obligations of U.S. government corporations and agencies: Unrealized losses on investments in obligations of U.S. government corporations and agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At December 31, 2020, 10 debt securities representing obligations of U.S. government corporations and agencies had unrealized losses with aggregate depreciation of 0.55 % from the Company’s amortized cost basis. Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors in these types of securities. At the time of purchase, each of these securities were rated AA or AAA and through December 31, 2020 have not experienced any deterioration in credit rating. The Company continues to monitor these securities for changes in credit rating or other indications of credit deterioration. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At December 31, 2020, 30 asset backed securities had unrealized losses with aggregate depreciation of 1.46 % from the Company’s amortized cost basis. Marketable equity securities: All unrealized gains recognized during the reporting period were for equity securities still held at December 31, 2020. 63 Table of Contents Note 4 – Loans A summary of loan balances follows: (in thousands) December 31, 2020 December 31, 2019 Commercial real estate: CRE non-owner occupied $ 1,535,555 $ 1,609,556 CRE owner occupied 624,375 546,434 Multifamily 639,480 517,725 Farmland 152,492 145,067 Total commercial real estate loans 2,951,902 2,818,782 Consumer: SFR 1-4 1st DT liens 546,592 509,508 SFR HELOCs and junior liens 327,484 362,886 Other 78,032 82,656 Total consumer loans 952,108 955,050 Commercial and industrial 526,327 249,791 Construction 284,842 249,827 Agriculture production 44,164 32,633 Leases 3,784 1,283 Total loans, net of deferred loan fees and discounts $ 4,763,127 $ 4,307,366 Total principal balance of loans owed, net of charge-offs $ 4,805,596 $ 4,351,725 Unamortized net deferred loan fees ( 16,984 ) ( 8,927 ) Discounts to principal balance of loans owed, net of charge-offs ( 25,485 ) ( 35,432 ) Total loans, net of unamortized deferred loan fees and discounts $ 4,763,127 $ 4,307,366 Allowance for credit losses $ ( 91,847 ) $ ( 30,616 ) In March 2020, the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was created to help small businesses keep workers employed during the COVID-19 crisis. As of December 31, 2020, the total gross outstanding balance of Paycheck Protection Program (PPP) loans was $ 333,982,000 , which net of approximately $ 7,212,000 in net deferred fee income, were included in the commercial and industrial loan category, as compared to total PPP originations of $ 438,510,000 . During the twelve months ended December 31, 2020, the Company recognized $ 7,760,000 in fees on PPP loans. 64 Table of Contents Note 5 – Allowance for Credit Losses The allowance for credit losses (ACL) was $ 91,847,000 as of December 31, 2020 as compared to $ 49,529,000 as of the adoption date of the current expected credit loss accounting standard and related methodology on January 1, 2020. Changes in loan volume and changes in credit quality associated with levels of classified, past due and non-performing loans in addition to changes in qualitative factors, result in the need for changes in the balance of the allowance for credit losses. In addition to the quantitative loan portfolio credit quality characteristics which are illustrated in the following tabular disclosures, the Company’s expected credit loss methodology incorporates the use of qualitative factors. The two most critical qualitative factors utilized by the Company include the actual and forecasted changes in both California unemployment and U.S. gross domestic product. During the year ended December 31, 2020, these qualitative factors experienced significant volatility and deterioration which resulted in a significant increase in the related component of the allowance for credit losses. The table below sets forth the components of the Company’s allowance for credit losses as of the dates indicated. (dollars in thousands) December 31, 2020 January 1, 2020 December 31, 2019 Allowance for credit losses: Qualitative and forecast factor allowance $ 61,935 $ 21,830 $ 12,146 Quantitative (Cohort) model allowance reserves 28,462 26,900 17,529 Total allowance for credit losses 90,397 48,730 29,675 Allowance for individually evaluated loans 1,450 799 935 Allowance for PCD loan losses — — n/a Allowance for PCI loan losses n/a n/a 6 Total allowance for credit losses $ 91,847 $ 49,529 $ 30,616 The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the periods indicated. Allowance for Credit Losses – December 31, 2020 (in thousands) Beginning Balance Impact of CECL Adoption Charge-offs Recoveries Provision Ending Balance Commercial real estate: CRE non-owner occupied $ 5,948 $ 6,701 $ — $ 198 $ 16,533 $ 29,380 CRE owner occupied 2,027 2,281 — 28 6,525 10,861 Multifamily 3,352 2,281 — — 5,839 11,472 Farmland 668 585 ( 182 ) — 909 1,980 Total commercial real estate loans 11,995 11,848 ( 182 ) 226 29,806 53,693 Consumer: SFR 1-4 1st DT liens 2,306 2,675 ( 13 ) 416 4,733 10,117 SFR HELOCs and junior liens 6,183 4,638 ( 116 ) 304 762 11,771 Other 1,595 971 ( 670 ) 347 1,017 3,260 Total consumer loans 10,084 8,284 ( 799 ) 1,067 6,512 25,148 Commercial and industrial 4,867 ( 1,961 ) ( 774 ) 568 1,552 4,252 Construction 3,388 933 — — 3,219 7,540 Agriculture production 261 ( 179 ) — 24 1,103 1,209 Leases 21 ( 12 ) — — ( 4 ) 5 Allowance for credit losses on loans 30,616 18,913 ( 1,755 ) 1,885 42,188 91,847 Reserve for unfunded commitments 2,775 — — — 625 3,400 Total $ 33,391 $ 18,913 $ ( 1,755 ) $ 1,885 $ 42,813 $ 95,247 65 Table of Contents Allowance for Loan Losses – December 31, 2019 (in thousands) Beginning Balance Charge-offs Recoveries Provision Ending Balance Commercial real estate: CRE non-owner occupied $ 7,401 $ — $ 1,486 $ ( 2,939 ) $ 5,948 CRE owner occupied 2,711 ( 746 ) 42 20 2,027 Multifamily 2,429 — — 923 3,352 Farmland 403 — — 265 668 Total commercial real estate loans 12,944 ( 746 ) 1,528 ( 1,731 ) 11,995 Consumer: SFR 1-4 1st DT liens 2,676 ( 2 ) 54 ( 422 ) 2,306 SFR HELOCs and junior liens 7,582 ( 3 ) 935 ( 2,331 ) 6,183 Other 793 ( 765 ) 321 1,246 1,595 Total consumer loans 11,051 ( 770 ) 1,310 ( 1,507 ) 10,084 Commercial and industrial 5,610 ( 2,104 ) 513 848 4,867 Construction 2,497 — — 891 3,388 Agriculture production 480 ( 19 ) 12 ( 212 ) 261 Leases — — — 21 21 Allowance for loan losses $ 32,582 $ ( 3,639 ) $ 3,363 $ ( 1,690 ) $ 30,616 Reserve for Unfunded Commitments - December 31, 2019 Reserve for unfunded commitments $ 2,575 $ — $ — $ 200 $ 2,775 Allowance for Loan Losses – December 31, 2018 (in thousands) Beginning Balance Charge-offs Recoveries Provision Ending Balance Commercial real estate: CRE non-owner occupied $ 6,693 $ ( 15 ) $ 47 $ 676 $ 7,401 CRE owner occupied 2,686 — 20 5 2,711 Multifamily 1,491 — — 938 2,429 Farmland 571 — — ( 168 ) 403 Total commercial real estate loans 11,441 ( 15 ) 67 1,451 12,944 Consumer: SFR 1-4 1st DT liens 2,317 ( 77 ) — 436 2,676 SFR HELOCs and junior liens 7,641 ( 301 ) 1,143 ( 901 ) 7,582 Other 586 ( 783 ) 288 702 793 Total consumer loans 10,544 ( 1,161 ) 1,431 237 11,051 Commercial and industrial 5,757 ( 1,103 ) 445 511 5,610 Construction 1,826 — — 671 2,497 Agriculture production 755 ( 85 ) 97 ( 287 ) 480 Leases — — — — — Allowance for loan losses $ 30,323 $ ( 2,364 ) $ 2,040 $ 2,583 $ 32,582 Reserve for Unfunded Commitments - December 31, 2018 Reserve for unfunded commitments $ 3,164 $ — $ — $ ( 589 ) $ 2,575 As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans, and (iv) delinquency within the portfolio. The Company analyzes loans individually to classify the loans as to credit risk and grading. This analysis is performed annually for all outstanding balances greater than $ 1,000,000 and non-homogeneous loans, such as commercial real estate loans, unless other indicators, such as delinquency, trigger more frequent evaluation. Loans below the $ 1,000,000 threshold and homogenous in nature are evaluated as needed for proper grading based on delinquency and borrower credit scores. 66 Table of Contents Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at initiation of the credit and periodically (every 3 - 12 months depending on collateral type) once repayment is questionable and the loan has been classified. The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows: • Pass – This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital. • Special Mention – This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention. • Substandard – This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well-defined workout/rehabilitation program. • Doubtful – This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans. • Loss – This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the quarter in which the loss is identified. The following tables present ending loan balances by loan category and risk grade for the periods indicated: Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2020 (in thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Commercial real estate: CRE non-owner occupied risk ratings Pass $ 120,520 $ 207,899 $ 155,730 $ 256,677 $ 179,523 $ 460,644 $ 76,730 $ — $ 1,457,723 Special Mention — 7,455 11,692 5,407 15,773 18,832 12,205 — 71,364 Substandard — — 1,449 584 2,147 2,288 — — 6,468 Doubtful/Loss — — — — — — — — — Total CRE non-owner occupied risk ratings $ 120,520 $ 215,354 $ 168,871 $ 262,668 $ 197,443 $ 481,764 $ 88,935 $ — $ 1,535,555 Commercial real estate: CRE owner occupied risk ratings Pass $ 105,896 $ 75,144 $ 53,816 $ 58,371 $ 54,541 $ 227,828 $ 25,508 $ — $ 601,104 Special Mention — — 288 7,451 2,955 6,140 — — 16,834 Substandard — 1,533 1,301 475 1,306 1,822 — — 6,437 Doubtful/Loss — — — — — — — — — Total CRE owner occupied risk ratings $ 105,896 $ 76,677 $ 55,405 $ 66,297 $ 58,802 $ 235,790 $ 25,508 $ — $ 624,375 67 Table of Contents Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2020 (in thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Commercial real estate: Multifamily risk ratings Pass $ 77,646 $ 118,725 $ 113,882 $ 70,112 $ 67,457 $ 123,518 $ 19,007 $ — $ 590,347 Special Mention 9,441 — — — 603 24,687 772 9,259 — 44,762 Substandard — 4,371 — — — — — — — — — — — 4,371 Doubtful/Loss — — — — — — — — — Total multifamily loans $ 87,087 $ 123,096 $ 113,882 $ 70,715 $ 92,144 $ 124,290 $ 28,266 $ — $ 639,480 Commercial real estate: Farmland risk ratings Pass $ 17,640 $ 25,003 $ 19,148 $ 12,834 $ 7,377 $ 17,129 $ 39,411 $ — $ 138,542 Special Mention — 2,567 — 1,271 227 3,107 2,258 — 9,430 Substandard — 700 — 602 — 1,214 2,004 — 4,520 Doubtful/Loss — — — — — — — — — Total farmland loans $ 17,640 $ 28,270 $ 19,148 $ 14,707 $ 7,604 $ 21,450 $ 43,673 $ — $ 152,492 Consumer loans: SFR 1-4 1st DT liens risk ratings Pass $ 183,719 $ 80,717 $ 36,342 $ 53,001 $ 46,467 $ 126,465 $ 76 $ 5,507 $ 532,294 Special Mention — 290 684 110 15 2,936 — 934 4,969 Substandard — — 1,174 929 935 5,763 — 528 9,329 Doubtful/Loss — — — — — — — — — Total SFR 1st DT liens $ 183,719 $ 81,007 $ 38,200 $ 54,040 $ 47,417 $ 135,164 $ 76 $ 6,969 $ 546,592 Consumer loans: SFR HELOCs and Junior Liens risk ratings Pass $ 793 $ — $ 13 $ 360 $ 300 $ 910 $ 297,160 $ 14,051 $ 313,587 Special Mention — — 16 — — 83 4,504 789 5,392 Substandard — — — — — 39 6,698 1,768 8,505 Doubtful/Loss — — — — — — — — — Total SFR HELOCs and Junior Liens $ 793 $ — $ 29 $ 360 $ 300 $ 1,032 $ 308,362 $ 16,608 $ 327,484 Consumer loans: Other risk ratings Pass $ 25,876 $ 29,539 $ 14,170 $ 4,238 $ 1,020 $ 967 $ 986 $ — $ 76,796 Special Mention 43 208 147 74 24 65 90 — 651 Substandard 58 82 210 74 12 140 9 — 585 Doubtful/Loss — — — — — — — — — — Total other consumer loans $ 25,977 $ 29,829 $ 14,527 $ 4,386 $ 1,056 $ 1,172 $ 1,085 $ — $ 78,032 68 Table of Contents Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2020 (in thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Commercial and industrial loans: Commercial and industrial risk ratings Pass $ 356,701 $ 48,838 $ 20,463 $ 13,151 $ 5,185 $ 9,490 $ 65,938 $ 1,085 $ 520,851 Special Mention — 102 698 195 20 178 207 11 1,411 Substandard — 301 53 1,142 823 148 1,519 79 4,065 Doubtful/Loss — — — — — — — — — Total commercial and industrial loans $ 356,701 $ 49,241 $ 21,214 $ 14,488 $ 6,028 $ 9,816 $ 67,664 $ 1,175 $ 526,327 Construction loans: Construction risk ratings Pass $ 69,133 $ 41,786 $ 92,191 $ 51,082 $ 20,868 $ 2,876 $ — $ — $ 277,936 Special Mention — — — 346 — 1,780 — — 2,126 Substandard — — — — 4,529 251 — — 4,780 Doubtful/Loss — — — — — — — — — Total construction loans $ 69,133 $ 41,786 $ 92,191 $ 51,428 $ 25,397 $ 4,907 $ — $ — $ 284,842 Agriculture production loans: Agriculture production risk ratings Pass $ 977 $ 2,079 $ 1,590 $ 1,838 $ 663 $ 708 $ 36,051 $ — $ 43,906 Special Mention — — 203 — 49 — — — 252 Substandard — — — — 6 — — — 6 Doubtful/Loss — — — — — — — — — Total agriculture production loans $ 977 $ 2,079 $ 1,793 $ 1,838 $ 718 $ 708 $ 36,051 $ — $ 44,164 Leases: Lease risk ratings Pass $ 3,784 $ — $ — $ — $ — $ — $ — $ — $ 3,784 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful/Loss — — — — — — — — — Total leases $ 3,784 $ — $ — $ — $ — $ — $ — $ — $ 3,784 Total loans outstanding: Risk ratings Pass $ 962,685 $ 629,730 $ 507,345 $ 521,664 $ 383,401 $ 970,535 $ 560,867 $ 20,643 $ 4,556,870 Special Mention 9,484 10,622 13,728 15,457 43,750 33,893 28,523 1,734 157,191 Substandard 58 6,987 4,187 3,806 9,758 11,665 10,230 2,375 49,066 Doubtful/Loss — — — — — — — — — Total loans outstanding $ 972,227 $ 647,339 $ 525,260 $ 540,927 $ 436,909 $ 1,016,093 $ 599,620 $ 24,752 $ 4,763,127 69 Table of Contents The following information related to loan originations by vintage are presented for comparison purposes only. Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019 (in thousands) 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Commercial real estate: CRE non-owner occupied risk ratings Pass $ 253,321 $ 174,869 $ 287,183 $ 221,864 $ 578,255 $ 77,070 $ — $ 1,592,562 Special Mention — — 3,182 8,401 616 — — 12,199 Substandard — 1,183 474 — 3,138 — — 4,795 Doubtful/Loss — — — — — — — — Total CRE non-owner occupied risk ratings $ 253,321 $ 176,052 $ 290,839 $ 230,265 $ 582,009 $ 77,070 $ — $ 1,609,556 Commercial real estate: CRE owner occupied risk ratings Pass $ 57,376 $ 54,298 $ 73,019 $ 69,136 $ 263,750 $ 18,524 $ — $ 536,103 Special Mention — — 437 745 3,459 — — 4,641 Substandard 601 — 493 726 3,870 — — 5,690 Doubtful/Loss — — — — — — — — Total CRE owner occupied risk ratings $ 57,977 $ 54,298 $ 73,949 $ 70,607 $ 271,079 $ 18,524 $ — $ 546,434 Commercial real estate: Multifamily risk ratings Pass $ 82,435 $ 112,739 $ 41,673 $ 99,170 $ 141,040 $ 36,061 $ — $ 513,118 Special Mention — — — — 1,103 1,480 — 2,583 Substandard — — — 2,024 — — — 2,024 Doubtful/Loss — — — — — — — — Total multifamily loans $ 82,435 $ 112,739 $ 41,673 $ 101,194 $ 142,143 $ 37,541 $ — $ 517,725 Commercial real estate: Farmland risk ratings Pass $ 26,786 $ 21,212 $ 12,248 $ 9,618 $ 22,471 $ 41,783 $ — $ 134,118 Special Mention — — 1,346 226 3,289 774 — 5,635 Substandard — — 624 466 2,929 1,295 — 5,314 Doubtful/Loss — — — — — — — — Total farmland loans $ 26,786 $ 21,212 $ 14,218 $ 10,310 $ 28,689 $ 43,852 $ — $ 145,067 Consumer loans: SFR 1-4 1st DT liens risk ratings Pass $ 102,612 $ 63,542 $ 73,195 $ 65,051 $ 187,972 $ — $ 6,242 $ 498,614 Special Mention — — 1,408 19 2,564 — 723 4,714 Substandard — 813 711 52 4,050 — 554 6,180 Doubtful/Loss — — — — — — — — Total SFR 1st DT liens $ 102,612 $ 64,355 $ 75,314 $ 65,122 $ 194,586 $ — $ 7,519 $ 509,508 70 Table of Contents Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019 (in thousands) 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Consumer loans: SFR HELOCs and Junior Liens risk ratings Pass $ 1,412 $ 14 $ 382 $ 403 $ 2,077 $ 327,589 $ 19,531 $ 351,408 Special Mention — 20 — — 4 4,189 1,169 5,382 Substandard — — — 156 14 4,208 1,718 6,096 Doubtful/Loss — — — — — — — — Total SFR HELOCs and Junior Liens $ 1,412 $ 34 $ 382 $ 559 $ 2,095 $ 335,986 $ 22,418 $ 362,886 Consumer loans: Other risk ratings Pass $ 45,876 $ 23,045 $ 7,176 $ 2,245 $ 2,071 $ 1,402 $ — $ 81,815 Special Mention 56 182 176 52 161 91 — 718 Substandard 60 — 13 — 35 15 — 123 Doubtful/Loss — — — — — — — — Total other consumer loans $ 45,992 $ 23,227 $ 7,365 $ 2,297 $ 2,267 $ 1,508 $ — $ 82,656 Commercial and industrial loans: Commercial and industrial risk ratings Pass $ 61,720 $ 31,149 $ 24,176 $ 10,747 $ 16,346 $ 96,654 $ 973 $ 241,765 Special Mention — 339 1,141 151 164 1,921 110 3,826 Substandard — 47 1,281 1,571 401 814 86 4,200 Doubtful/Loss — — — — — — — — Total commercial and industrial loans $ 61,720 $ 31,535 $ 26,598 $ 12,469 $ 16,911 $ 99,389 $ 1,169 $ 249,791 Construction loans: Construction risk ratings Pass $ 50,275 $ 92,449 $ 76,042 $ 18,973 $ 7,322 $ — $ — $ 245,061 Special Mention — — — 4,202 317 — — 4,519 Substandard — — — — 247 — — 247 Doubtful/Loss — — — — — — — — Total construction loans $ 50,275 $ 92,449 $ 76,042 $ 23,175 $ 7,886 $ — $ — $ 249,827 Agriculture production loans: Agriculture production risk ratings Pass $ 1,929 $ 1,201 $ 1,324 $ 1,012 $ 834 $ 26,306 $ — $ 32,606 Special Mention — — — — — — — — Substandard — — — 27 — — — 27 Doubtful/Loss — — — — — — — — Total agriculture production loans $ 1,929 $ 1,201 $ 1,324 $ 1,039 $ 834 $ 26,306 $ — $ 32,633 71 Table of Contents Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2019 (in thousands) 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total Leases: Lease risk ratings Pass $ 1,283 $ — $ — $ — $ — $ — $ — $ 1,283 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful/Loss — — — — — — — — Total leases $ 1,283 $ — $ — $ — $ — $ — $ — $ 1,283 Total loans outstanding: Risk ratings Pass $ 685,025 $ 574,518 $ 596,418 $ 498,219 $ 1,222,138 $ 625,389 $ 26,746 $ 4,228,453 Special Mention 56 541 7,690 13,796 11,677 8,455 2,002 44,217 Substandard 661 2,043 3,596 5,022 14,684 6,332 2,358 34,696 Doubtful/Loss — — — — — — — — Total loans outstanding $ 685,742 $ 577,102 $ 607,704 $ 517,037 $ 1,248,499 $ 640,176 $ 31,106 $ 4,307,366 Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to the estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue the underlying collateral and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued through lawsuit and attachment of wages or judgment liens on borrower’s other assets. The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated: Analysis of Past Due Loans - As of December 31, 2020 (in thousands) 30-59 days 60-89 days > 90 days Total Past Due Loans Current Total Commercial real estate: CRE non-owner occupied $ 127 $ 173 $ 239 $ 539 $ 1,535,016 $ 1,535,555 CRE owner occupied 297 — 824 1,121 623,254 624,375 Multifamily — — — — 639,480 639,480 Farmland 899 — 70 969 151,523 152,492 Total commercial real estate loans 1,323 173 1,133 2,629 2,949,273 2,951,902 Consumer: SFR 1-4 1st DT liens 37 — 960 997 545,595 546,592 SFR HELOCs and junior liens 418 212 1,671 2,301 325,183 327,484 Other 41 13 100 154 77,878 78,032 Total consumer loans 496 225 2,731 3,452 948,656 952,108 Commercial and industrial 155 426 105 686 525,641 526,327 Construction — — — — 284,842 284,842 Agriculture production — — — — 44,164 44,164 Leases — — — — 3,784 3,784 Total $ 1,974 $ 824 $ 3,969 $ 6,767 $ 4,756,360 $ 4,763,127 72 Table of Contents The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated: Analysis of Past Due Loans - As of December 31, 2019 (in thousands) 30-59 days 60-89 days > 90 days Total Past Due Loans Current Total Commercial real estate: CRE non-owner occupied $ 268 $ 136 $ 114 $ 518 $ 1,609,038 $ 1,609,556 CRE owner occupied — — 293 293 546,141 546,434 Multifamily 283 — 2,024 2,307 515,418 517,725 Farmland 30 — — 30 145,037 145,067 Total commercial real estate loans 581 136 2,431 3,148 2,815,634 2,818,782 Consumer: SFR 1-4 1st DT liens 1,149 371 1,957 3,477 506,031 509,508 SFR HELOCs and junior liens 1,258 580 1,088 2,926 359,960 362,886 Other 172 1 23 196 82,460 82,656 Total consumer loans 2,579 952 3,068 6,599 948,451 955,050 Commercial and industrial 603 297 24 924 248,867 249,791 Construction — — — — 249,827 249,827 Agriculture production 49 — — 49 32,584 32,633 Leases — — — — 1,283 1,283 Total $ 3,812 $ 1,385 $ 5,523 $ 10,720 $ 4,296,646 $ 4,307,366 The following table shows the ending balance of non accrual loans by loan category as of the date indicated: Non Accrual Loans As of December 31, 2020 As of December 31, 2019 (in thousands) Non accrual with no allowance for credit losses Total non accrual Past due 90 days or more and still accruing Non accrual with no allowance for credit losses Total non accrual Past due 90 days or more and still accruing Commercial real estate: CRE non-owner occupied $ 3,110 $ 3,110 $ — $ 639 $ 642 $ — CRE owner occupied 3,111 4,061 — 1,411 1,408 — Multifamily — — — 2,024 2,024 — Farmland 1,468 1,538 — 1,242 1,242 — Total commercial real estate loans 7,689 8,709 — 5,316 5,316 — Consumer: SFR 1-4 1st DT liens 4,950 5,093 — 5,023 5,192 — SFR HELOCs and junior liens 4,480 6,148 — 3,992 4,217 — Other 68 167 — 4 32 19 Total consumer loans 9,498 11,408 — 9,019 9,441 19 Commercial and industrial 652 2,183 — 476 2,050 — Construction 4,546 4,546 — — — — Agriculture production 5 18 — 14 38 — Leases — — — Sub-total 22,390 26,864 — 14,825 16,845 19 Less: Guaranteed loans ( 687 ) ( 811 ) ( 916 ) ( 990 ) — Total, net $ 21,703 $ 26,053 $ — $ 13,909 $ 15,855 $ 19 Interest income on non accrual loans that would have been recognized during the years ended December 31, 2020, 2019, and 2018, if all such loans had been current in accordance with their original terms, totaled $ 1,804,000 , $ 1,201,000 , and $ 2,706,000 , respectively. Interest income actually recognized on these loans during the years ended December 31, 2020, 2019, and 2018 was $ 701,000 , $ 372,000 , and $ 1,475,000 , respectively. 73 Table of Contents The following tables present the amortized cost basis of collateral dependent loans by class of loans as of the following periods: As of December 31, 2020 (in thousands) Retail Office Warehouse Other Multifamily Farmland SFR -1st Deed SFR -2nd Deed Automobile/Truck A/R and Inventory Equipment Total Commercial real estate: CRE non-owner occupied $ 2,445 $ 435 $ — $ — $ — $ — $ — $ — $ — $ — $ — $ 2,880 CRE owner occupied 796 1,176 1,668 — — — — — — — — 3,640 Multifamily — — — — — — — — — — — — Farmland — — — — — 1,538 — — — — — 1,538 Total commercial real estate loans 3,241 1,611 1,668 — — 1,538 — — — — 8,058 Consumer: SFR 1-4 1st DT liens — — — — — — 5,068 — — — — 5,068 SFR HELOCs and junior liens — — — — — — 1,855 2,839 — — — 4,694 Other — — — 42 — — — — 97 — — 139 Total consumer loans — — — 42 — — 6,923 2,839 97 — — 9,901 Commercial and industrial — — — 292 — — — — — 1,173 75 1,540 Construction — — — — — — 4,547 — — — — 4,547 Agriculture production — — — — — — — — — 13 5 18 Leases — — — — — — — — — — — — Total $ 3,241 $ 1,611 $ 1,668 $ 334 $ — $ 1,538 $ 11,470 $ 2,839 $ 97 $ 1,186 $ 80 $ 24,064 As of December 31, 2019 (in thousands) Retail Office Warehouse Other Multifamily Farmland SFR -1st Deed SFR -2nd Deed Automobile/Truck A/R and Inventory Equipment Total Commercial real estate: CRE non-owner occupied $ 2,145 $ — $ 1,220 $ 497 $ — $ — $ — $ — $ — $ — $ — $ 3,862 CRE owner occupied 361 163 420 13 — — — — — — 1,000 1,957 Multifamily — — — — 2,060 — — — — — — 2,060 Farmland — — — — — — 1,242 — — — — — 1,242 Total commercial real estate loans 2,506 163 1,640 510 2,060 1,242 — — — — 1,000 9,121 Consumer: SFR 1-4 1st DT liens — — — — — — 5,341 — — — — 5,341 SFR HELOCs and junior liens — — — — — — — 3,848 — — — 3,848 Other — — — 3 — — — — 27 — — 30 Total consumer loans — — — 3 — — 5,341 3,848 27 — — 9,219 Commercial and industrial — — — 107 — — — — — 1,926 14 2,047 Construction — — — — — — — — — — — — Agriculture production — — — — — — — — — 26 12 38 Leases — — — — — — — — — — — — Total $ 2,506 $ 163 $ 1,640 $ 620 $ 2,060 $ 1,242 $ 5,341 $ 3,848 $ 27 $ 1,952 $ 1,026 $ 20,425 74 Table of Contents The following tables show certain information regarding Troubled Debt Restructurings that occurred during the periods indicated: Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions. TDR information for the year ended December 31, 2020 (dollars in thousands) Number Pre-mod outstanding principal balance Post-mod outstanding principal balance Financial impact due to TDR taken as additional provision Number that defaulted during the period Recorded investment of TDRs that defaulted during the period Financial impact due to the default of previous TDR taken as charge- offs or additional provisions Commercial real estate: CRE non-owner occupied 1 $ 319 $ 314 $ 314 1 $ 141 $ — CRE owner occupied 4 1,847 1,877 67 1 950 — Multifamily — — — — — — — Farmland 5 1,566 1,636 — 1 451 — Total commercial real estate loans 10 3,732 3,827 381 3 1,542 — Consumer: SFR 1-4 1st DT liens — — — — 3 1,180 — SFR HELOCs and junior liens 2 172 169 — 2 140 ( 90 ) Other — — — — — — — Total consumer loans 2 172 169 — 5 1,320 ( 90 ) Commercial and industrial 6 2,106 2,078 90 — — — Construction — — — — — — — Agriculture production — — — — — — — Leases — — — — — — — Total 18 $ 6,010 $ 6,074 $ 471 8 $ 2,862 $ ( 90 ) TDR information for the year ended December 31, 2019 (dollars in thousands) Number Pre-mod outstanding principal balance Post-mod outstanding principal balance Financial impact due to TDR taken as additional provision Number that defaulted during the period Recorded investment of TDRs that defaulted during the period Financial impact due to the default of previous TDR taken as charge- offs or additional provisions Commercial real estate: CRE non-owner occupied — $ — $ — $ — — $ — $ — CRE owner occupied 2 60 67 — — — — Multifamily — — — — — — — Farmland — — — — — — — Total commercial real estate loans 2 60 67 — — — — Consumer: SFR 1-4 1st DT liens 3 659 662 30 — — — SFR HELOCs and junior liens 3 214 215 29 — — — Other — — — — — — — Total consumer loans 6 873 877 59 — — — Commercial and industrial 10 1,918 1,885 — 1 7 — Construction — — — — — — — Agriculture production — — — — — — — Leases — — — — — — — Total 18 $ 2,851 $ 2,829 $ 59 1 7 $ — 75 Table of Contents TDR information for the year ended December 31, 2018 (in thousands) Number Pre-mod outstanding principal balance Post-mod outstanding principal balance Financial impact due to TDR taken as additional provision Number that defaulted during the period Recorded investment of TDRs that defaulted during the period Financial impact due to the default of previous TDR taken as charge- offs or additional provisions Commercial real estate: CRE non-owner occupied 1 $ 39 $ 38 $ 38 1 $ 169 $ — CRE owner occupied 2 555 555 11 — — — Multifamily — — — — — — — Farmland 4 1,188 1,186 442 — — — Total commercial real estate loans 7 1,782 1,779 491 1 169 — Consumer: SFR 1-4 1st DT liens 1 156 156 — — — SFR HELOCs and junior liens 3 732 737 ( 35 ) 2 248 — Other — — — — — — — Total consumer loans 4 888 893 ( 35 ) 2 248 — Commercial and industrial 6 1,098 1,083 325 3 148 — Construction — — — — — — — Agriculture production — — — — — — — Leases — — — — — — — Total 17 $ 3,768 $ 3,755 $ 781 $ 6 $ 565 $ — For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above. Typically if a TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting from default of previously modified TDR’s are noted above. Note 6 – Real Estate Owned A summary of the activity in the balance of real estate owned follows: Year ended December 31, (in thousands) 2020 2019 Beginning balance, net $ 2,541 $ 2,280 Additions/transfers from loans 766 1,249 Dispositions/sales ( 513 ) ( 1,090 ) Valuation adjustments 50 102 Ending balance, net $ 2,844 $ 2,541 Ending valuation allowance $ ( 22 ) $ ( 139 ) Ending number of foreclosed assets 7 6 Proceeds from sale of real estate owned $ 570 $ 1,336 Gain on sale of real estate owned $ 57 $ 246 At December 31, 2020, the balance of real estate owned includes 4 foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At December 31, 2020, there were no residential real estate properties with formal foreclosure proceedings underway . 76 Table of Contents Note 7 – Premises and Equipment As of December 31, (in thousands) 2020 2019 Land and land improvements $ 29,505 $ 29,453 Buildings 65,334 65,241 Furniture and equipment 45,994 45,723 140,833 140,417 Less: Accumulated depreciation ( 57,462 ) ( 53,704 ) 83,371 86,713 Construction in progress 360 373 Total premises and equipment $ 83,731 $ 87,086 Depreciation expense for premises and equipment amounted to $ 6,100,000 , $ 6,472,000 , and $ 6,104,000 during the years ended 2020, 2019, and 2018, respectively. Note 8 – Cash Value of Life Insurance A summary of the activity in the balance of cash value of life insurance follows: Year ended December 31, (in thousands) 2020 2019 Beginning balance $ 117,823 $ 117,318 Acquired policies from business combination — — Increase in cash value of life insurance 2,949 3,029 Gain on death benefit 498 831 Insurance proceeds receivable reclassified to other assets ( 2,400 ) ( 3,355 ) Ending balance $ 118,870 $ 117,823 End of period death benefit $ 197,379 $ 199,084 Number of policies owned 183 189 Insurance companies used 14 14 Current and former employees and directors covered 62 63 Note 9 – Goodwill and Other Intangible Assets The following table summarizes the Company’s goodwill intangible as of the dates indicated: (in thousands) December 31, 2020 Additions Reductions December 31, 2019 Goodwill $ 220,872 $ — $ — $ 220,872 Impairment exists when a Company’s carrying value exceeds its fair value. Goodwill is evaluated for impairment annually. At September 30, 2020, the Company had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the Company exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeds its carrying value, resulting in no impairment. For each of the years in the three year period ended December 31, 2020, there were no impairment charges recognized. The following table summarizes the Company’s core deposit intangibles (“CDI”) as of the dates indicated: (in thousands) December 31, 2020 Additions Reductions/ Amortization December 31, 2019 Core deposit intangibles $ 37,163 $ — $ — $ 37,163 Accumulated amortization ( 19,330 ) — ( 5,724 ) ( 13,606 ) Core deposit intangibles, net $ 17,833 — $ ( 5,724 ) $ 23,557 The Company recorded additions to its CDI of $ 27,605,000 in conjunction with the FNBB acquisition on July 6, 2018, $ 2,046,000 in conjunction with the acquisition of three branch offices from Bank of America on March 18, 2016, $ 6,614,000 in conjunction with the North Valley Bancorp acquisition on 77 Table of Contents October 3, 2014, and $ 898,000 in conjunction with the Citizens acquisition on September 23, 2011. The following table summarizes the Company’s estimated core deposit intangible amortization (dollars in thousands): Years Ended Estimated CDI Amortization 2021 $ 5,464 2022 4,776 2023 4,269 2024 2,482 2025 533 Thereafter 309 $ 17,833 Note 10 – Mortgage Servicing Rights The following tables summarize the activity in, and the main assumptions used to determine the fair value of mortgage servicing rights for the periods indicated (dollars in thousands): (in thousands) Year ended December 31, 2020 2019 2018 Balance at beginning of period $ 6,200 $ 7,098 $ 6,687 Additions 1,526 913 557 Change in fair value ( 2,634 ) ( 1,811 ) ( 146 ) Balance at end of period $ 5,092 $ 6,200 $ 7,098 Contractually specified servicing fees, late fees and ancillary fees earned $ 1,855 $ 1,917 $ 2,038 Balance of loans serviced at: Beginning of period $ 767,662 $ 785,138 $ 811,065 End of period $ 779,530 $ 767,662 $ 785,138 Period end: Weighted-average prepayment speed (CPR) 4.5 % 6.2 % 7.6 % Weighted-average discount rate 12.0 % 12.0 % 12.0 % The changes in fair value of MSRs during 2020 were primarily due to changes in principal balances and mortgage prepayment speeds of the MSRs. The changes in fair value of MSRs during 2019 were primarily due to changes in investor required rate of return, or discount rate, of the MSRs. The changes in fair value of MSRs during 2018 were primarily due to changes in principal balances, changes in mortgage prepayment speeds, and changes in investor required rate of return, or discount rate, of the MSRs. Note 11 - Leases The following table presents the components of lease expense for the periods indicated: Year ended December 31, (in thousands) 2020 2019 Operating lease cost $ 5,125 $ 5,228 Short-term lease cost 263 262 Variable lease cost 5 ( 29 ) Sublease income ( 120 ) ( 131 ) Total lease cost $ 5,273 $ 5,330 Prior to the adoption of ASU 2016-02, rent expense under operating leases was $ 6,348,000 for year ended 2018. Rent expense was offset by rent income of $ 42,000 during the same period. The following table presents supplemental cash flow information related to leases as of the periods ended: 78 Table of Contents Year ended December 31, (in thousands) 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 4,927 $ 4,931 ROUA obtained in exchange for operating lease liabilities $ 4,161 $ 32,162 The following table presents the weighted average operating lease term and discount rate as of the periods ended: Year ended December 31, 2020 2019 Weighted-average remaining lease term 9.9 years 9.3 years Weighted-average discount rate 3.1 % 3.2 % At December 31, 2020, future expected operating lease payments are as follows (in thousands): Periods ending December 31, 2021 $ 4,565 2022 4,230 2023 3,554 2024 3,278 2025 2,911 Thereafter 14,546 33,084 Discount for present value of expected cash flows ( 5,111 ) Lease liability at December 31, 2020 $ 27,973 Note 12 – Deposits A summary of the balances of deposits follows: (in thousands) December 31, 2020 2019 Noninterest-bearing demand $ 2,581,517 $ 1,832,665 Interest-bearing demand 1,414,908 1,242,274 Savings 2,164,942 1,851,549 Time certificates, $250,000 and over 73,147 129,061 Other time certificates 271,420 311,445 Total deposits $ 6,505,934 $ 5,366,994 Certificate of deposit balances of $ 10,000,000 and $ 30,000,000 from the State of California were included in time certificates over $250,000 at December 31, 2020 and 2019, respectively. The Bank participates in a deposit program offered by the State of California whereby the State may make deposits at the Bank’s request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Bank. Overdrawn deposit balances of $ 985,000 and $ 1,550,000 were classified as consumer loans at December 31, 2020 and 2019, respectively. At December 31, 2020, the scheduled maturities of time deposits were as follows (in thousands): Scheduled Maturities 2021 $ 265,906 2022 62,081 2023 9,826 2024 2,470 2025 4,280 Thereafter 4 Total $ 344,567 79 Table of Contents Note 13 – Other Borrowings A summary of the balances of other borrowings follows: December 31, 2020 2019 (in thousands) Other collateralized borrowings, fixed rate, as of December 31, 2020 and 2019 of 0.05 %, payable on January 4, 2021 and January 2, 2020, respectively $ 26,914 $ 18,454 Total other borrowings $ 26,914 $ 18,454 Other collateralized borrowings are generally overnight maturity borrowings from non-financial institutions that are collateralized by securities owned by the Company. As of December 31, 2020, the Company has pledged as collateral and sold under agreements to repurchase investment securities with fair value of $ 49,211,000 under these other collateralized borrowings. The Company maintains a collateralized line of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2020, this line provided for maximum borrowings of $ 1,932,399,000 of which none was outstanding. As of December 31, 2020, the Company had designated investment securities with a fair value of $ 112,456,000 and loans totaling $ 3,205,959,000 as potential collateral under this collateralized line of credit with the FHLB. The Company maintains a collateralized line of credit with the Federal Reserve Bank of San Francisco (“FRB”). As of December 31, 2020, this line provided for maximum borrowings of $ 157,884,000 of which none was outstanding. As of December 31, 2020, the Company has designated investment securities with fair value of $ 8,100 and loans totaling $ 328,011,000 as potential collateral under this collateralized line of credit with the FRB. The Company has available unused correspondent banking lines of credit from commercial banks totaling $ 60,000,000 for federal funds transactions at December 31, 2020. Note 14 – Junior Subordinated Debt At December 31, 2020, the Company had five wholly-owned subsidiary business trusts that had issued $ 63.0 million of trust preferred securities (the “Capital Trusts”). Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The trusts used the net proceeds from the offering to purchase a like amount of subordinated debentures (the “Debentures”) of the Company. The Debentures are the sole assets of the trusts. The Company’s obligations under the subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. The Company also has a right to defer consecutive payments of interest on the debentures for up to five years . The Company organized two of the Capital Trusts. The Company acquired its three other Capital Trusts and assumed their related Debentures as a result of its acquisition of North Valley Bancorp in 2014. The acquired Debentures were recorded on the Company’s books at their fair values on the acquisition date. The related fair value discounts to face value of these Debentures will be amortized over the remaining period in which their values are fully allowed to be included in the Company's capital ratio calculations using the effective interest method. The recorded book values of the Debentures issued by the Capital Trusts are reflected as junior subordinated debt in the Company’s consolidated balance sheets. The common stock issued by the Capital Trusts and owned by the Company is recorded in other assets in the Company’s consolidated balance sheets. The recorded book value of the debentures issued by the Capital Trusts, less the recorded book value of the common stock of the Capital Trusts owned by the Company will continue to qualify as Tier 1 or Tier 2 capital under interim guidance issued by the Board of Governors of the Federal Reserve System until only five years remain until their scheduled maturity. The following table summarizes the terms and recorded balance of each subordinated debenture as of the date indicated (dollars in thousands): Coupon Rate (Variable) 3 mo. LIBOR + As of December 31, 2020 December 31, 2019 Subordinated Debt Series Maturity Date Face Value Current Coupon Rate Recorded Book Value Recorded Book Value TriCo Cap Trust I 10/7/2033 $ 20,619 3.05 % 3.29 % $ 20,619 $ 20,619 TriCo Cap Trust II 7/23/2034 20,619 2.55 % 2.76 % 20,619 20,619 North Valley Trust II 4/24/2033 6,186 3.25 % 3.46 % 5,303 5,215 North Valley Trust III 7/23/2034 5,155 2.80 % 3.01 % 4,199 4,118 North Valley Trust IV 3/15/2036 10,310 1.33 % 1.55 % 6,894 6,661 $ 62,889 $ 57,635 $ 57,232 80 Table of Contents Note 15 – Commitments and Contingencies Restricted Cash Balances — Reserves (in the form of deposits with the San Francisco Federal Reserve Bank) were not required to be maintained as of December 31, 2020. Reserves totaling $ 136,370,000 were maintained to satisfy Federal regulatory requirements at December 31, 2019. These reserves are included in cash and due from banks in the accompanying consolidated balance sheets. Financial Instruments with Off-Balance-Sheet Risk — The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and deposit account overdraft privilege. Those instruments involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for deposit account overdraft privilege is represented by the overdraft privilege amount disclosed to the deposit account holder. The following table presents a summary of the Bank’s commitments and contingent liabilities: December 31, (in thousands) 2020 2019 Financial instruments whose amounts represent risk: Commitments to extend credit: Commercial loans $ 462,422 $ 363,793 Consumer loans 534,223 533,576 Real estate mortgage loans 202,306 188,959 Real estate construction loans 227,876 222,998 Standby letters of credit 15,056 12,014 Deposit account overdraft privilege 110,813 110,402 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of one year or less or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on Management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential properties, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most standby letters of credit are issued for one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral requirements vary, but in general follow the requirements for other loan facilities. Deposit account overdraft privilege amount represents the unused overdraft privilege balance available to the Company’s deposit account holders who have deposit accounts covered by an overdraft privilege. The Company has established an overdraft privilege for certain of its deposit account products whereby all holders of such accounts who bring their accounts to a positive balance at least once every thirty days receive the overdraft privilege. The overdraft privilege allows depositors to overdraft their deposit account up to a predetermined level. The predetermined overdraft limit is set by the Company based on account type. Legal Proceedings — Neither the Company nor its subsidiaries are a party to any other pending legal proceedings that are material, nor is their property the subject of any other material pending legal proceeding at this time. All other legal proceedings are routine and arise out of the ordinary course of the Bank’s business. None of those proceedings are currently expected to have a material adverse impact upon the Company’s and the Bank’s business, their consolidated financial position nor their operations in any material amount not already accrued, after taking into consideration any applicable insurance. Other Commitments and Contingencies —The Company has entered into employment agreements or change of control agreements with certain officers of the Company providing severance payments and accelerated vesting of benefits under supplemental retirement agreements to the officers in the event of a change in control of the Company and termination for other than cause or after a substantial and material change in the officer’s title, compensation or responsibilities. The Bank owns 13,396 shares of Class B common stock of Visa Inc. which are convertible into Class A common stock at a conversion ratio of 1.6228 per Class B share. As of December 31, 2020, the value of the Class A shares was $ 218.73 per share. Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was $ 4,755,000 as of December 31, 2020, and has not been reflected in the accompanying consolidated financial statements. The shares of Visa Class B common stock are restricted and may not be transferred. Visa Member Banks are required to fund an escrow account to cover settlements, resolution of pending litigation and related claims. If the funds in the escrow account are insufficient to settle all the 81 Table of Contents covered litigation, Visa may sell additional Class A shares, use the proceeds to settle litigation, and further reduce the conversion ratio. If funds remain in the escrow account after all litigation is settled, the Class B conversion ratio will be increased to reflect that surplus. Mortgage loans sold to investors may be sold with servicing rights retained, with only the standard legal representations and warranties regarding recourse to the Bank. Management believes that any liabilities that may result from such recourse provisions are not significant. Note 16 – Shareholders’ Equity Dividends Paid The Bank paid to the Company cash dividends in the aggregate amounts of $ 63,419,000 , $ 32,669,000 , and $ 26,432,000 in 2020, 2019, and 2018, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the State of California Department of Financial Protection & Innovation (the “DFPI”). Absent approval from the Commissioner of the DPFI, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period. Under this law, at December 31, 2020, the Bank could have paid dividends of $ 111,492,000 to the Company without the approval of the Commissioner of the DPFI. Stock Repurchase Plan On November 12, 2019 the Board of Directors approved the authorization to repurchase up to 1,525,000 shares of the Company's common stock (the 2019 Repurchase Plan), which approximated 5.0 % of the shares outstanding as of the approval date. The actual timing of any share repurchases will be determined by the Company's management and therefore the total value of the shares to be purchased under the program is subject to change. The 2019 Repurchase Plan has no expiration date and as of and for year ended December 31, 2020, the Company repurchased 858,717 shares. There were no shares repurchased during 2019 under the 2019 Repurchase Plan. In connection with approval of the 2019 Repurchase Plan, the Company’s previous repurchase program adopted on August 21, 2007 (the 2007 Repurchase Plan) was terminated. Under the 2007 Repurchase Plan, during the year ended December 31, 2019 the Company had repurchased zero total shares. There were 26,966 shares of common stock with a fair value of $ 968,000 repurchased under the 2007 Repurchase Plan during the year ended December 31, 2018. Stock Repurchased Under Equity Compensation Plans The Company's shareholder-approved equity compensation plans permit employees to tender recently vested shares in lieu of cash for the payment of withholding taxes on such shares. During the years ended December 31, 2020, 2019, and 2018, employees tendered 12,488 , 115,954 , and 59,025 shares, respectively, of the Company's common stock in connection with option exercises. Employees also tendered 12,058 , 15,242 and 45,964 shares in connection with other share based awards during December 31, 2020, 2018 and 2017, respectively. In total, shares of the Company's common stock tendered had market values of $ 735,837 , $ 5,108,000 , and $ 3,001,000 for the years ended December 31, 2020, 2018 and 2017, respectively. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is exercised or the other share based award vests. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the 2019 or 2007 Repurchase Plans. Note 17 – Stock Options and Other Equity-Based Incentive Instruments In April 2019, the Company’s Board of Directors adopted the TriCo Bancshares 2019 Equity Incentive Plan (2019 Plan) covering officers, employees, directors of, and consultants to, the Company. The 2019 Plan was approved by the Company’s shareholders in May 2019. The 2019 Plan allows the Company to issue equity-based incentives representing up to 1,500,000 shares, such as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards (which could either be restricted stock or restricted stock units) (collectively, Awards). The 2019 Plan contains several enhanced corporate governance provisions, including: expressly providing that executives’ Awards and cash incentive compensation are subject to TriCo’s potential clawback or recoupment if the Company must restate its financial statements; generally imposing a one year minimum vesting period on Awards; generally requiring participants to hold at least 50 % of the shares acquired under an Award for at least one year; and clarifying that credit for dividends declared on shares of common stock underlying an Award is subject to the same vesting requirements as the common stock underlying the Award. The number of shares available for issuance under the 2019 Plan will be reduced by: (i) one share for each share of common stock issued pursuant to a stock option; (ii) the total number of stock appreciation rights that are exercised, including any shares of common stock underlying such Awards that are not actually issued to the participant as the result of a net settlement; (iii) two shares for each share of common stock issued pursuant to a performance award, a restricted share Award or an RSU Award and (iv) any shares of common stock used to pay any exercise price or tax withholding obligation with respect to any Award. When Awards made under the 2019 Plan expire or are forfeited or cancelled, the underlying shares will become available for future Awards under the 2019 Plan. To the extent that a share of common stock pursuant to an Award that counted as two shares again becomes available for issuance under the 2019 Plan, the number of shares of common stock available for issuance under the 2019 Plan will increase by two shares. If shares of common stock issued pursuant to the Plan are repurchased by, or are surrendered or forfeited to the Company at no more than cost, then such shares will again be available for the grant of Awards under the Plan. Any shares of common stock repurchased by the Company with cash proceeds from the exercise of options will not, however, be added back to the pool of share available for issuance under the 2019 Plan. Shares awarded and delivered under the 2019 Plan may be authorized but unissued shares or reacquired shares. Shares tendered to TriCo or withheld from delivery to a participant as payment of the exercise price or in connection with the “net exercise” of a stock option or to satisfy TriCo’s tax withholding obligations will not again become available for future Awards under the 2019 Plan. As of December 31, 2020, there were no outstanding options for the purchase of common shares and 83,545 RSUs were outstanding, and 1,222,011 shares remain available for issuance. The 2019 Plan replaced the TriCo Bancshares 2009 Equity Incentive Plan (2009 Plan), which expired on March 26, 2019. As a result of its expiration, no further awards may be issued under the 2009 Plan, though all awards under the 2009 Plan that were outstanding as of its expiration continue to be 82 Table of Contents governed by the terms, conditions and procedures set forth in the 2009 Plan and any applicable award agreement. There were no new grants issued under the 2009 Plan during 2019 prior to expiration, and as of December 31, 2020, 128,500 options for the purchase of common shares and 16,264 RSUs remain outstanding. Stock option activity is summarized in the following table for the dates indicated: Number of Shares Option Price per Share Weighted Average Exercise Price Outstanding at January 1, 2019 343,000 $ 12.63 to $ 23.21 $ 16.67 Options granted — — — Options exercised ( 182,500 ) $ 12.63 to $ 19.46 $ 16.00 Options forfeited — — — Outstanding at December 31, 2019 160,500 $ 12.63 to $ 23.21 $ 17.60 Options granted — — — Options exercised ( 32,000 ) $ 14.54 to $ 19.46 $ 17.10 Options forfeited — — $ — Outstanding at December 31, 2020 128,500 $ 14.54 to $ 23.21 $ 17.72 The following table shows the number, weighted-average exercise price, intrinsic value, and weighted average remaining contractual life of options exercisable, options not yet exercisable and total options outstanding as of December 31, 2020: Currently Exercisable Currently Not Exercisable Total Outstanding Number of options 128,500 — 128,500 Weighted average exercise price $ 17.72 $ — $ 17.72 Intrinsic value (in thousands) $ 2,277 $ — $ 2,277 Weighted average remaining contractual term (yrs.) 1.98 — 1.98 All options outstanding as of December 31, 2020 are fully vested. The Company did not modify any option grants during the three year period ended December 31, 2020. The following table shows the total intrinsic value of options exercised, the total fair value of options vested, total compensation costs for options recognized in income, total tax benefit and excess tax benefits recognized in income related to compensation costs for options during the periods indicated: Year Ended December 31, 2020 2019 2018 Intrinsic value of options exercised $ 403,000 $ 4,169,000 $ 2,109,000 Fair value of options that vested $ — $ — $ 75,000 Total compensation costs for options recognized in expense $ — $ — $ 75,000 Total tax benefit recognized in income related to compensation costs for options $ — $ — $ 22,000 Excess tax benefit recognized in income $ — $ 1,233,000 $ 623,000 There were no stock options granted during 2020, 2019 and 2018, respectively. 83 Table of Contents Restricted stock unit activity is summarized in the following table for the dates indicated: Service Condition Vesting RSUs Market Plus Service Condition Vesting RSUs Number of RSUs Weighted Average Fair Value on Date of Grant Number of RSUs Weighted Average Fair Value on Date of Grant Outstanding at January 1, 2020 68,597 51,312 RSUs granted 64,036 $ 31.26 46,416 $ 23.30 Additional market plus service condition RSUs vested — 5,847 RSUs added through dividend credits 2,937 — RSUs released through vesting ( 34,388 ) ( 20,265 ) RSUs forfeited/expired ( 1,373 ) ( 1,695 ) Outstanding at December 31, 2020 99,809 81,615 The 99,809 of service condition vesting RSUs outstanding as of December 31, 2020 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of RSUs outstanding under the original grant. Additional RSUs credited through dividends are subject to the same vesting requirements as the original grant. The 99,809 of service condition vesting RSUs outstanding as of December 31, 2020 are expected to vest, and be released, on a weighted-average basis, over the next 1.4 years. The Company expects to recognize $ 2,409,711 of pre-tax compensation costs related to these service condition vesting RSUs between December 31, 2020 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2020 or 2019. The 81,615 of market plus service condition vesting RSUs outstanding as of December 31, 2020 are expected to vest, and be released, on a weighted-average basis, over the next 1.8 years. The Company expects to recognize $ 1,281,323 of pre-tax compensation costs related to these RSUs between December 31, 2020 and their vesting dates. As of December 31, 2020, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 122,423 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 2020 or 2019. The following table shows the compensation costs and excess tax benefits for RSUs recognized in income for the periods indicated: Year Ended December 31, 2020 2019 2018 Total compensation costs recognized in income Service condition vesting RSUs $ 1,390,000 $ 1,161,237 $ 1,017,000 Market plus service condition vesting RSUs $ 646,000 $ 493,000 $ 370,000 Excess tax benefit recognized in income Service condition vesting RSUs $ 372,000 $ 141,000 $ 104,000 Market plus service condition vesting RSUs $ 194,000 $ 146,000 $ 191,000 84 Table of Contents Note 18 – Non-interest Income and Expense The components of other non-interest income were as follows: Year Ended December 31, (in thousands) 2020 2019 2018 Debit and ATM and interchange fees $ 21,660 $ 20,639 $ 18,249 Service charges on deposit accounts 13,944 16,657 15,467 Other service fees 3,156 3,015 2,852 Mortgage banking service fees 1,855 1,917 2,038 Change in value of mortgage loan servicing rights ( 2,634 ) ( 1,811 ) ( 146 ) Total service charges and fees 37,981 40,417 38,460 Commissions on sale of non-deposit investment products 2,989 2,877 3,151 Increase in cash value of life insurance 2,949 3,029 2,718 Gain on sale of loans 9,122 3,282 2,371 Lease brokerage income 668 878 678 Sale of customer checks 414 529 449 Gain on sale of investment securities 7 110 207 Gain (loss) on marketable equity securities 64 86 ( 64 ) Other 1,000 2,312 1,091 Total other noninterest income 17,213 13,103 10,601 Total noninterest income $ 55,194 $ 53,520 $ 49,061 Mortgage banking servicing fee income (expense), net of change in value of mortgage loan servicing rights, totaling $( 779,000 ), $ 106,000 , and $ 1,892,000 were recorded within service charges and fees for the years ended December 31, 2020, 2019, and 2018, respectively. The components of noninterest expense were as follows: Year Ended December 31, (in thousands) 2020 2019 2018 Base salaries, net of deferred loan origination costs $ 70,164 $ 70,218 $ 62,422 Incentive compensation 10,022 13,106 11,147 Benefits and other compensation costs 31,935 22,741 20,373 Total salaries and benefits expense 112,121 106,065 93,942 Occupancy 14,528 14,893 12,139 Data processing and software 13,504 13,517 11,021 Equipment 5,704 7,022 6,651 ATM and POS network charges 5,433 5,447 5,271 Merger and acquisition expense — — 5,227 Advertising 2,827 5,633 4,578 Professional fees 3,222 3,754 3,546 Intangible amortization 5,724 5,723 3,499 Telecommunications 2,601 3,190 3,023 Regulatory assessments and insurance 1,594 1,188 1,906 Courier service 1,414 1,308 1,287 Operational losses 1,168 986 1,260 Postage 1,068 1,258 1,154 Gain on sale or acquisition of foreclosed assets ( 235 ) ( 246 ) ( 408 ) Loss on disposal of fixed assets 67 82 185 Other miscellaneous expense 12,018 15,637 14,191 Total other noninterest expense 70,637 79,392 74,530 Total noninterest expense $ 182,758 $ 185,457 $ 168,472 85 Table of Contents Note 19 – Income Taxes The components of consolidated income tax expense are as follows (in thousands): Year Ended December 31, 2020 2019 2018 Current tax expense Federal $ 22,104 $ 20,403 $ 13,109 State 14,586 12,655 9,323 $ 36,690 33,058 22,432 Deferred tax expense Federal ( 9,500 ) 695 1,842 State ( 4,654 ) 997 758 ( 14,154 ) 1,692 2,600 Total tax expense $ 22,536 $ 34,750 $ 25,032 A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of revenue and expense for financial and tax reporting purposes. The net change during the year in the deferred tax asset or liability results in a deferred tax expense or benefit. The Company recognized, as components of tax expense, tax credits and other tax benefits, and amortization expense relating to our investments in Qualified Affordable Housing Projects as follows for the periods indicated (in thousands): Year Ended December 31, 2020 2019 2018 Tax credits and other tax benefits – decrease in tax expense $ ( 4,200 ) $ ( 2,546 ) $ ( 1,993 ) Amortization – increase in tax expense $ 3,581 $ 2,705 $ 1,814 The carrying value of Low Income Housing Tax Credit Funds was $ 26,899,000 and $ 28,480,000 as of December 31, 2020 and 2019, respectively. As of December 31, 2020, the Company has committed to make additional capital contributions to the Low Income Housing Tax Credit Funds in the amount of $ 8,417,000 , and these contributions are expected to be made over the next several years. The provisions for income taxes applicable to income before taxes for the years ended December 31, 2020, 2019 and 2018 differ from amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory federal income tax rate are reconciled as follows: Year Ended December 31, (in thousands) 2020 2019 2018 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 7.7 7.9 8.6 Tax-exempt interest on municipal obligations ( 0.9 ) ( 0.7 ) ( 1.0 ) Tax-exempt life insurance related income ( 0.8 ) ( 0.6 ) ( 0.6 ) Low income housing tax credits ( 4.8 ) ( 2.3 ) ( 2.2 ) Low income housing tax credit amortization 4.1 2.1 2.0 Equity compensation 0.4 ( 0.4 ) ( 0.4 ) Non-deductible merger expenses — — 0.2 Other ( 0.9 ) 0.4 ( 0.8 ) Effective Tax Rate 25.8 % 27.4 % 26.8 % 86 Table of Contents The temporary differences, tax effected, which give rise to the Company’s net deferred tax asset recorded in other assets are as follows as of December 31 for the years indicated (in thousands): December 31, 2020 2019 Deferred tax assets: Allowance for losses and reserve for unfunded commitments $ 28,159 $ 9,871 Deferred compensation 1,786 2,342 Accrued pension liability 383 3,309 Other accrued expenses 1,537 1,678 Additional unfunded status of the supplemental retirement plans 13,275 9,868 Operating lease liability 8,270 8,142 State taxes 2,870 2,441 Share based compensation 837 803 Nonaccrual interest 725 649 Acquisition cost basis 2,372 4,556 Unrealized loss on securities — — Tax credits 513 576 Net operating loss carryforwards 1,131 1,578 Other 327 348 Total deferred tax assets 62,185 46,161 Deferred tax liabilities: Securities income ( 762 ) ( 762 ) Depreciation ( 7,231 ) ( 6,109 ) Right of use asset ( 8,232 ) ( 8,242 ) Merger related fixed asset valuations ( 30 ) ( 30 ) Securities accretion ( 702 ) ( 560 ) Mortgage servicing rights valuation ( 1,490 ) ( 1,813 ) Unrealized gain on securities ( 5,671 ) ( 1,001 ) Core deposit intangible ( 4,812 ) ( 6,453 ) Junior subordinated debt ( 1,553 ) ( 1,672 ) Prepaid expenses and other ( 502 ) ( 469 ) Total deferred tax liability ( 30,985 ) ( 27,111 ) Net deferred tax asset $ 31,200 $ 19,050 As part of the merger with FNB Bancorp in 2018 and North Valley Bancorp in 2014, TriCo acquired federal and state net operating loss carryforwards, capital loss carryforwards, and tax credit carryforwards. In addition, the 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided the Company with an opportunity to file amended federal tax returns and generate proposed refunds of approximately $ 805,000 . These tax attribute carryforwards will be subject to provisions of the tax law that limit the use of such losses and credits generated by a company prior to the date certain ownership changes occur. The amount of the Company’s net operating loss carryforwards that would be subject to these limitations as of December 31, 2020 were none for federal and $ 13,367,000 for California. The amount of the Company’s tax credits that would be subject to these limitations as of December 31, 2020 are $ 63,000 and $ 648,000 for federal and California, respectively. Due to the limitation, a significant portion of the state tax credits will expire regardless of whether the Company generates future taxable income. As such, the Company has recorded the future benefit of these tax credits on the books at the value which is more likely than not to be realized. These tax loss and tax credit carryforwards expire at various dates beginning in 2019. The Company believes that a valuation allowance is not needed to reduce the deferred tax assets as it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, including the tax attribute carryforwards acquired as part of the FNB Bancorp and North Valley Bancorp merger. Disclosure of unrecognized tax benefits at December 31, 2020 and 2019 were not considered significant for disclosure purposes. Management does not expect the unrecognized tax benefit will materially change in the next 12 months. During the years ended December 31, 2020 and December 31, 2019 the Company did not recognize and significant amounts related to interest and penalties associated with taxes. The Company files income tax returns in the U.S. federal jurisdiction, and California. With few exceptions, the Company is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years before 2012 and 2016, respectively. 87 Table of Contents Note 20 – Earnings per Share Earnings per share have been computed based on the following: Year Ended December 31, (in thousands) 2020 2019 2018 Net income $ 64,814 $ 92,072 $ 68,320 Average number of common shares outstanding 29,917 30,478 26,593 Effect of dilutive stock options and restricted stock 111 167 287 Average number of common shares outstanding used to calculate diluted earnings per share 30,028 30,645 26,880 Options excluded from diluted earnings per share because the effect of these options was antidilutive — — 10,056 Note 21 – Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are as follows: Year Ended December 31, (in thousands) 2020 2019 2018 Unrealized holding gains (losses) on available for sale securities before reclassifications $ 15,803 $ 24,471 $ ( 17,057 ) Amounts reclassified out of accumulated other comprehensive income: Realized gains on debt securities ( 7 ) ( 110 ) ( 207 ) Adoption ASU 2016-01 — — 62 Adoption ASU 2018-02 — — ( 425 ) Total amounts reclassified out of accumulated other comprehensive income ( 7 ) ( 110 ) ( 570 ) Unrealized holding gains (losses) on available for sale securities after reclassifications 15,796 24,361 ( 17,627 ) Tax effect ( 4,670 ) ( 7,202 ) 5,193 Unrealized holding gains (losses) on available for sale securities, net of tax 11,126 17,159 ( 12,434 ) Change in unfunded status of the supplemental retirement plans before reclassifications 645 ( 6,745 ) 762 Amounts reclassified out of accumulated other comprehensive income: Amortization of prior service cost ( 55 ) ( 54 ) ( 54 ) Amortization of actuarial losses 9,309 408 510 Adoption ASU 2018-02 — — ( 668 ) Total amounts reclassified out of accumulated other comprehensive income 9,254 354 ( 212 ) Change in unfunded status of the supplemental retirement plans after reclassifications 9,899 ( 6,391 ) 550 Tax effect ( 2,927 ) 1,889 ( 162 ) Change in unfunded status of the supplemental retirement plans, net of tax 6,972 ( 4,502 ) 388 Change in joint beneficiary agreement liability before reclassifications ( 596 ) — 426 Tax effect — — — Change in unfunded status of the supplemental retirement plans, net of tax ( 596 ) — 426 Total other comprehensive income (loss) $ 17,502 $ 12,657 $ ( 11,620 ) 88 Table of Contents The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows: Year Ended December 31, (in thousands) 2020 2019 Net unrealized gain (loss) on available for sale securities $ 19,183 3,387 Tax effect ( 5,671 ) ( 1,001 ) Unrealized holding loss on available for sale securities, net of tax 13,512 2,386 Unfunded status of the supplemental retirement plans ( 1,294 ) ( 11,193 ) Tax effect 382 3,309 Unfunded status of the supplemental retirement plans, net of tax ( 912 ) ( 7,884 ) Joint beneficiary agreement liability, net of tax ( 320 ) 276 Accumulated other comprehensive loss $ 12,280 $ ( 5,222 ) Note 22 – Retirement Plans 401(k) Plan The Company sponsors a 401(k) Plan whereby substantially all employees age 21 and over with 90 days of service may participate. Participants may contribute a portion of their compensation subject to certain limits based on federal tax laws. Prior to July 1, 2015, the Company did not contribute to the 401(k) Plan. Effective July 1, 2015, the Company initiated a discretionary matching contribution equal to 50 % of participant’s elective deferrals each quarter, up to 4 % of eligible compensation. The Company recorded salaries & benefits expense attributable to the 401(k) Plan matching contributions and 401(k) Plan matching contributions for the years ended: Year Ended December 31, (in thousands) 2020 2019 2018 401(k) Plan benefits expense $ 1,139 $ 1,119 $ 879 401(k) Plan contributions made by the Company $ 202 $ 1,003 $ 872 Employee Stock Ownership Plan Substantially all employees with at least one year of service are covered by a discretionary employee stock ownership plan (ESOP). Company shares owned by the ESOP are paid dividends and included in the calculation of earnings per share as common shares outstanding. Contributions are made to the plan at the discretion of the Board of Directors. Expenses related to the Company’s ESOP, included in benefits and other compensation costs under salaries and benefits expense, and contributions to the plan for the years ended were: Year Ended December 31, (in thousands) 2020 2019 2018 ESOP benefits expense $ 2,400 $ 2,500 $ 1,887 ESOP contributions made by the Company $ 1,951 $ 1,875 $ 1,952 Deferred Compensation Plans The Company has deferred compensation plans for certain directors and key executives, which allow certain directors and key executives designated by the Board of Directors of the Company to defer a portion of their compensation. The Company has purchased insurance on the lives of certain of the participants and intends to hold these policies until death as a cost recovery of the Company’s deferred compensation obligations of $ 6,043,000 and $ 7,923,000 at December 31, 2020 and 2019, respectively. Earnings credits on deferred balances included in non-interest expense are included in the following table: Year Ended December 31, (in thousands) 2020 2019 2018 Deferred compensation earnings credits included in non-interest expense $ 212 $ 363 $ 462 Supplemental Retirement Plans The Company has supplemental retirement plans for certain directors and key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to hold these policies until death as a cost recovery of the Company’s retirement obligations. The cash values of the insurance policies purchased to fund the deferred compensation obligations and the supplemental retirement obligations were $ 118,870,000 and $ 117,823,000 at December 31, 2020 and 2019, respectively. The Company recorded in other liabilities the additional unfunded status of the supplemental retirement plans of $ 1,294,000 and $ 11,193,000 related to the supplemental retirement plans as of December 31, 2020 and 2019, respectively. These amounts represent the amount by which the projected benefit obligations for these retirement plans exceeded the fair value of plan assets plus amounts previously accrued related to the plans. The projected benefit obligation is recorded in other liabilities. 89 Table of Contents At December 31, 2020 and 2019, the additional unfunded status of the supplemental retirement plans of $ 1,294,000 and $ 11,193,000 were offset by a reduction of shareholders’ equity accumulated other comprehensive loss of $ 912,000 and $ 7,884,000 , respectively, representing the after-tax impact of the additional unfunded status of the supplemental retirement plans, and the related deferred tax asset of $ 382,000 and $ 3,309,000 , respectively. Amounts recognized as a component of accumulated other comprehensive income (loss) as of year-end that have not been recognized as a component of the combined net period benefit cost of the Company’s defined benefit pension plans are presented in the following table. The Company expects to recognize approximately $ 254,000 of the net actuarial loss reported in the following table as of December 31, 2020 as a component of net periodic benefit cost during 2021. December 31, (in thousands) 2020 2019 Transition obligation $ — $ 1 Prior service cost ( 86 ) ( 141 ) Net actuarial loss 1,380 11,333 Amount included in accumulated other comprehensive income (loss) 1,294 11,193 Deferred tax benefit ( 382 ) ( 3,309 ) Amount included in accumulated other comprehensive income (loss), net of tax $ 912 $ 7,884 Information pertaining to the activity in the supplemental retirement plans, using a measurement date of December 31, is as follows: December 31, (in thousands) 2020 2019 Change in benefit obligation: Benefit obligation at beginning of year $ ( 36,737 ) $ ( 29,196 ) Service cost ( 2,225 ) ( 879 ) Interest cost ( 1,014 ) ( 1,131 ) Actuarial (loss)/gain 640 ( 6,747 ) Plan amendments — — Benefits paid 1,336 1,216 Benefit obligation at end of year $ ( 38,000 ) $ ( 36,737 ) Change in plan assets: Fair value of plan assets at beginning of year $ — $ — Fair value of plan assets at end of year $ — $ — Funded status $ ( 38,000 ) $ ( 36,737 ) Unrecognized net obligation existing at January 1, 1986 — 1 Unrecognized net actuarial loss 1,380 11,333 Unrecognized prior service cost ( 86 ) ( 141 ) Accumulated other comprehensive income ( 1,294 ) ( 11,193 ) Accrued benefit cost $ ( 38,000 ) $ ( 36,737 ) Accumulated benefit obligation $ ( 36,298 ) $ ( 35,981 ) The following table sets forth the net periodic benefit cost recognized for the supplemental retirement plans: Year Ended December 31, (in thousands) 2020 2019 2018 Net pension cost included the following components: Service cost-benefits earned during the period $ 2,225 $ 879 $ 973 Interest cost on projected benefit obligation 1,014 1,131 949 Amortization of net obligation at transition 1 2 2 Amortization of prior service cost ( 55 ) ( 54 ) ( 54 ) Recognized net actuarial loss 9,309 408 510 Net periodic pension cost $ 12,494 $ 2,366 $ 2,380 The following table sets forth assumptions used in accounting for the plans: 90 Table of Contents Year Ended December 31, 2020 2019 2018 Discount rate used to calculate benefit obligation 2.40 % 2.82 % 3.96 % Discount rate used to calculate net periodic pension cost 2.82 % 3.96 % 3.40 % Average annual increase in executive compensation 3.25 % 3.25 % 3.25 % Average annual increase in director compensation — % — % — % The following table sets forth the expected benefit payments to participants and estimated contributions to be made by the Company under the supplemental retirement plans for the years indicated: (in thousands) Expected Benefit Payments to Participants Estimated Company Contributions 2021 $ 1,119 $ 1,119 2022 2,203 2,203 2023 2,176 2,176 2024 2,183 2,183 2025 2,172 2,172 2026-2030 10,131 10,131 Note 23 – Related Party Transactions Certain directors, officers, and companies with which they are associated were customers of, and had banking transactions with, the Company or the Bank in the ordinary course of business. The following table summarizes the activity in these loans for the periods indicated: (in thousands) Balance January 1, 2019 $ 9,203 Advances/new loans 9,032 Removed/payments ( 8,114 ) Balance December 31, 2019 10,121 Advances/new loans 665 Removed/payments ( 3,953 ) Balance December 31, 2020 $ 6,833 Deposits of directors, officers and other related parties to the Bank totaled $ 40,843,000 and $ 41,647,000 at December 31, 2020 and 2019, respectively. Note 24 – Fair Value Measurement The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Securities available-for-sale and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or impairment write-downs of individual assets. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observable nature of the assumptions used to determine fair value. These levels are: Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. 91 Table of Contents Securities available for sale —Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities classified as Level 3 during any of the periods covered in these financial statements. Loans held for sale —Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to nonrecurring fair value adjustments as Level 2. Impaired loans —Loans are not recorded at fair value on a recurring basis. However, from time to time, loans maybe considered impaired and an allowance for credit losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of an impaired loan is estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Foreclosed assets —Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense. Mortgage servicing rights —Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3. Additional information regarding mortgage servicing rights can be found in Note 10 in the consolidated financial statements at Item 1 of this report. The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands): Fair value at December 31, 2020 Total Level 1 Level 2 Level 3 Marketable equity securities $ 3,025 $ 3,025 $ — $ — Debt securities available for sale: Obligations of U.S. government agencies 812,374 — 812,374 — Obligations of states and political subdivisions 129,095 — 129,095 — Corporate bonds 2,544 — 2,544 — Asset backed securities 470,251 — 470,251 — Loans held for sale 6,268 — 6,268 — Mortgage servicing rights 5,092 — — 5,092 Total assets measured at fair value $ 1,428,649 $ 3,025 $ 1,420,532 $ 5,092 92 Table of Contents Fair value at December 31, 2019 Total Level 1 Level 2 Level 3 Marketable equity securities $ 2,960 $ 2,960 $ — $ — Debt securities available for sale: Obligations of U.S. government agencies 472,980 — 472,980 — Obligations of states and political subdivisions 109,601 — 109,601 — Corporate bonds 2,532 — 2,532 — Asset backed securities 365,025 — 365,025 — Loans held for sale 5,265 — 5,265 — Mortgage servicing rights 6,200 — — 6,200 Total assets measured at fair value $ 964,563 $ 2,960 $ 955,403 $ 6,200 Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between any levels during 2020 or 2019. The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2020, 2019, and 2018. Had there been any transfer into or out of Level 3 during 2020, 2019, or 2018, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands): Year ended December 31, Beginning Balance Transfers into (out of) Level 3 Change Included in Earnings Issuances Ending Balance 2020: Mortgage servicing rights $ 6,200 — $ ( 2,634 ) $ 1,526 $ 5,092 2019: Mortgage servicing rights $ 7,098 — $ ( 1,811 ) $ 913 $ 6,200 2018: Mortgage servicing rights $ 6,687 — $ ( 146 ) $ 557 $ 7,098 The Company’s method for determining the fair value of mortgage servicing rights is described in Note 1. The key unobservable inputs used in determining the fair value of mortgage servicing rights are mortgage prepayment speeds and the discount rate used to discount cash projected cash flows. Generally, any significant increases in the mortgage prepayment speed and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the mortgage prepayment speed and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). Note 10 contains additional information regarding mortgage servicing rights. The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2020 and 2019: December 31, 2020 Fair Value (in thousands) Valuation Technique Unobservable Inputs Range, Weighted Average Mortgage Servicing Rights $ 5,092 Discounted cash flow Constant prepayment rate 14.4 %- 20.0 %, 17.6 % Discount rate 10.0 %- 14.0 %, 12.0 % December 31, 2019 Mortgage Servicing Rights $ 6,200 Discounted cash flow Constant prepayment rate 5.0 %- 27.3 %, 7.6 % Discount rate 12.0 %- 13.0 %, 12.0 % The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated, that had a write-down or an additional allowance provided during the periods indicated (in thousands): Year ended December 31, 2020 Total Level 1 Level 2 Level 3 Total Gains (Losses) Fair value: Impaired loans $ 1,424 — — $ 1,424 $ ( 1,489 ) Real estate owned 979 — — 979 155 Total assets measured at fair value $ 2,403 — — $ 2,403 $ ( 1,334 ) 93 Table of Contents Year ended December 31, 2019 Total Level 1 Level 2 Level 3 Total Gains (Losses) Fair value: Impaired loans $ 1,055 — — $ 1,055 $ ( 652 ) Real estate owned 417 — — 417 ( 27 ) Total assets measured at fair value $ 1,472 — — $ 1,472 $ ( 679 ) The impaired loan amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero . The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on non-covered other real estate owned for fair value adjustments based on the fair value of the real estate. The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property. The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2020 and 2019: December 31, 2020 Fair Value (in thousands) Valuation Technique Unobservable Inputs Range, Weighted Average Impaired loans $ 1,424 Sales comparison approach Income approach Adjustment for differences between comparable sales; Capitalization rate Not meaningful; N/A Real estate owned (Land) $ 155 Sales comparison approach Adjustment for differences between comparable sales Not meaningful; N/A Real estate owned (Residential) $ 824 Sales comparison approach Adjustment for differences between comparable sales Not meaningful; N/A December 31, 2019 Fair Value (in thousands) Valuation Technique Unobservable Inputs Range, Weighted Average Impaired loans $ 1,055 Sales comparison approach Income approach Adjustment for differences between comparable sales Capitalization rate Not meaningful; N/A Real estate owned (Residential) $ 417 Sales comparison approach Adjustment for differences between comparable sales Not meaningful; N/A 94 Table of Contents The estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in thousands): December 31, 2020 December 31, 2019 Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Level 1 inputs: Cash and due from banks $ 77,253 $ 77,253 $ 92,816 $ 92,816 Cash at Federal Reserve and other banks 592,298 592,298 183,691 183,691 Level 2 inputs: Securities held to maturity 284,563 298,726 375,606 381,525 Restricted equity securities 17,250 N/A 17,250 N/A Level 3 inputs: Loans, net 4,671,280 4,753,027 4,276,750 4,263,064 Financial liabilities: Level 2 inputs: Deposits 6,505,934 6,507,235 5,366,994 5,365,921 Other borrowings 26,914 26,914 18,454 18,454 Level 3 inputs: Junior subordinated debt 57,635 56,632 57,232 56,297 Contract Amount Fair Value Contract Amount Fair Value Off-balance sheet: Level 3 inputs: Commitments (1) $ 1,426,827 $ 14,268 $ 1,309,326 $ 13,093 Standby letters of credit (1) 15,056 151 12,014 120 Overdraft privilege commitments (1) 110,813 1,108 110,402 1,104 The methods and assumptions used to estimate the fair value of each class of financial instruments not measured at fair value are as follows: Securities held to maturity - This includes mortgage-backed securities issued by government sponsored entities and municipal bonds. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Restricted equity securities - Consists of FHLB stock whereby carrying value approximates fair value. Loans - Loans are generally valued by discounting expected cash flows using market inputs with adjustments based on cohort level assumptions for certain loan types as well as internally developed estimates at a business segment level. Due to the significance of the unobservable market inputs and assumptions, as well as the absence of a liquid secondary market for most loans, these loans are classified as Level 3. Certain loans are measured based on observable market prices sourced from external data providers and classified as Level 2. Nonaccrual loans are written down and reported at their estimated recovery value which approximates their fair value and classified as Level 3. Deposits - The estimated fair value of deposits with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts was the amount payable on demand at the reporting date. The fair value of time deposits was estimated based on a discounted cash flow technique using Level 3 inputs appropriate to the contractual maturity. Other borrowings - The cash flows were calculated using the contractual features of the advance and then discounted using observable market. These are short-term in nature. Junior subordinated debt - The fair value of structured financings was estimated based on a discounted cash flow technique using observable market interest rates adjusted for estimated spreads. (1) Lending related commitments - The fair value of these commitments, including revolving credit facilities, standby letters of credit and overdrafts are carried at contract value, which approximates fair value but are not actively traded. These instruments generate fees, which approximate those currently charged to originate similar commitments, which are recognized over the term of the commitment period. 95 Table of Contents Note 25 – TriCo Bancshares Condensed Financial Statements (Parent Only) Condensed Balance Sheets December 31, 2020 December 31, 2019 (In thousands) Assets Cash and cash equivalents $ 13,297 $ 5,008 Investment in Tri Counties Bank 967,949 957,544 Other assets 1,818 1,765 Total assets $ 983,064 $ 964,317 Liabilities and shareholders’ equity Other liabilities $ 315 $ 515 Junior subordinated debt 57,635 57,232 Total liabilities 57,950 57,747 Shareholders’ equity: Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at December 31, 2020 and 2019 — — Common stock, no par value: authorized 50,000,000 shares; issued and outstanding 29,727,214 and 30,523,824 shares at December 31, 2020 and 2019, respectively 530,835 543,998 Retained earnings 381,999 367,794 Accumulated other comprehensive income (loss), net 12,280 ( 5,222 ) Total shareholders’ equity 925,114 906,570 Total liabilities and shareholders’ equity $ 983,064 $ 964,317 Condensed Statements of Income Year Ended December 31, 2020 2019 2018 (In thousands) Interest expense $ ( 2,555 ) $ ( 3,272 ) $ ( 3,131 ) Administration expense ( 932 ) ( 877 ) ( 1,489 ) Loss before equity in net income of Tri Counties Bank ( 3,487 ) ( 4,149 ) ( 4,620 ) Equity in net income of Tri Counties Bank: Distributed 63,419 32,669 26,432 Undistributed 3,851 62,326 45,315 Income tax benefit 1,031 1,226 1,193 Net income $ 64,814 $ 92,072 $ 68,320 Condensed Statements of Comprehensive Income Year Ended December 31, 2020 2019 2018 (In thousands) Net income $ 64,814 $ 92,072 $ 68,320 Other comprehensive income (loss), net of tax: Increase (decrease) in unrealized gains on available for sale securities arising during the period 11,126 17,159 ( 12,434 ) Change in minimum pension liability 6,972 ( 4,502 ) 388 Change in joint beneficiary agreement liablity ( 596 ) — 426 Other comprehensive income (loss) 17,502 12,657 ( 11,620 ) Comprehensive income $ 82,316 $ 104,729 $ 56,700 96 Table of Contents Condensed Statements of Cash Flows Year Ended December 31, 2020 2019 2018 (In thousands) Operating activities: Net income $ 64,814 $ 92,072 $ 68,320 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed equity in earnings of Tri Counties Bank ( 3,851 ) ( 62,326 ) ( 45,315 ) Equity compensation vesting expense 2,036 1,654 1,462 Net change in other assets and liabilities ( 1,885 ) ( 1,580 ) ( 4,983 ) Net cash provided by operating activities 61,114 29,820 19,484 Investing activities: None Financing activities: Issuance of common stock through option exercise 198 9 218 Repurchase of common stock ( 26,720 ) ( 2,196 ) ( 2,483 ) Cash dividends paid — common ( 26,303 ) ( 24,999 ) ( 18,769 ) Net cash used for financing activities ( 52,825 ) ( 27,186 ) ( 21,034 ) Net change in cash and cash equivalents 8,289 2,634 ( 1,550 ) Cash and cash equivalents at beginning of year 5,008 2,374 3,924 Cash and cash equivalents at end of year $ 13,297 $ 5,008 $ 2,374 97 Table of Contents Note 26 – Regulatory Matters The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. These capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require that minimum amounts and ratios of total, Tier 1, and common equity Tier 1capital to risk-weighted assets, and of Tier 1 capital to average assets be maintained. Under applicable capital requirements both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5%, a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. In addition, the Company and the Bank are also required to maintain a capital conservation buffer consisting of common equity Tier 1 capital above 2.5% of minimum risk based capital ratios to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The additional 2.5% buffer, where applicable, is included in the minimum ratios set forth in the table below. Management believes as of December 31, 2020 and 2019, the Company and Bank meet all capital adequacy requirements to which they are subject. Actual Required for Capital Adequacy Purposes Required to be Considered Well Capitalized Under Prompt Corrective Action Regulations (in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2020: Total Capital (to Risk Weighted Assets): Consolidated $ 793,433 15.22 % $ 547,352 10.50 % N/A N/A Tri Counties Bank $ 780,320 14.97 % $ 547,156 10.50 % $ 521,101 10.00 % Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 727,879 13.96 % $ 443,094 8.50 % N/A N/A Tri Counties Bank $ 714,811 13.72 % $ 442,936 8.50 % $ 416,881 8.00 % Common equity Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 671,975 12.89 % $ 364,901 7.00 % N/A N/A Tri Counties Bank $ 714,811 13.72 % $ 364,771 7.00 % $ 338,716 6.50 % Tier 1 Capital (to Average Assets): Consolidated $ 727,879 9.93 % $ 293,138 4.00 % N/A N/A Tri Counties Bank $ 714,811 9.76 % $ 292,949 4.00 % $ 366,186 5.00 % Actual Required for Capital Adequacy Purposes Required to be Considered Well Capitalized Under Prompt Corrective Action Regulations (in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2019: Total Capital (to Risk Weighted Assets): Consolidated $ 753,200 15.07 % $ 524,944 10.50 % N/A N/A Tri Counties Bank $ 748,660 14.98 % $ 524,759 10.50 % $ 499,770 10.00 % Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 719,809 14.40 % $ 424,955 8.50 % N/A N/A Tri Counties Bank $ 715,269 14.31 % $ 424,805 8.50 % $ 399,816 8.00 % Common equity Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 664,296 13.29 % $ 349,963 7.00 % N/A N/A Tri Counties Bank $ 715,269 14.31 % $ 349,839 7.00 % $ 324,851 6.50 % Tier 1 Capital (to Average Assets): Consolidated $ 719,809 11.55 % $ 249,343 4.00 % N/A N/A Tri Counties Bank $ 715,269 11.47 % $ 249,337 4.00 % $ 311,672 5.00 % 98 Table of Contents Note 27 – Summary of Quarterly Results of Operations (unaudited) The following table sets forth the results of operations for the four quarters of 2020 and 2019, and is unaudited; however, in the opinion of Management, it reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the summarized results for such periods. 2020 Quarters Ended (dollars in thousands, except per share data) December 31, September 30, June 30, March 31, Interest and dividend income: Loans: Discount accretion $ 1,960 $ 1,876 $ 2,587 $ 1,748 All other loan interest income 59,055 56,163 55,822 54,510 Total loan interest income 61,015 58,039 58,409 56,258 Debt securities, dividends and interest bearing cash at banks 7,066 7,399 8,739 10,259 Total interest income 68,081 65,438 67,148 66,517 Interest expense 1,659 1,984 2,489 3,325 Net interest income 66,422 63,454 64,659 63,192 Provision for credit losses 4,850 7,649 22,244 8,070 Net interest income after provision for credit losses 61,572 55,805 42,415 55,122 Noninterest income 16,580 15,137 11,657 11,820 Noninterest expense 45,745 46,714 45,550 44,749 Income before income taxes 32,407 24,228 8,522 22,193 Income tax expense 8,750 6,622 1,092 6,072 Net income $ 23,657 $ 17,606 $ 7,430 $ 16,121 Per common share: Net income (diluted) $ 0.79 $ 0.59 $ 0.25 $ 0.53 Dividends $ 0.22 $ 0.22 $ 0.22 $ 0.22 2019 Quarters Ended (dollars in thousands, except per share data) December 31, September 30, June 30, March 31, Interest and dividend income: Loans: Discount accretion $ 2,218 $ 2,360 $ 1,904 $ 1,655 All other loan interest income 54,644 54,639 53,587 52,743 Total loan interest income 56,862 56,999 55,491 54,398 Debt securities, dividends and interest bearing cash at banks 11,056 11,890 12,689 13,059 Total interest income 67,918 68,889 68,180 67,457 Interest expense 3,722 4,201 3,865 3,587 Net interest income 64,196 64,688 64,315 63,870 Provision for (benefit from reversal of provision for) loan losses ( 298 ) ( 329 ) 537 ( 1,600 ) Net interest income after provision for loan losses 64,494 65,017 63,778 65,470 Noninterest income 14,186 14,108 13,423 11,803 Noninterest expense 46,964 46,344 46,697 45,452 Income before income taxes 31,716 32,781 30,504 31,821 Income tax expense 8,826 9,386 7,443 9,095 Net income $ 22,890 $ 23,395 $ 23,061 $ 22,726 Per common share: Net income (diluted) $ 0.75 $ 0.76 $ 0.75 $ 0.74 Dividends $ 0.22 $ 0.22 $ 0.19 $ 0.19 99 Table of Contents MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of TriCo Bancshares is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in the 2013 Internal Control – Integrated Framework, management of the Company has concluded the Company maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2020. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial information contained in this report. The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and judgments by management. In addition to management’s assessment, Moss Adams LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements as of and for the year ended December 31, 2020, and the Company’s effectiveness of internal control over financial reporting as of December 31, 2020, dated March 1, 2021, as stated in its report, which is included herein. /s/ Richard P. Smith Richard P. Smith President and Chief Executive Officer /s/ Peter G. Wiese Peter G. Wiese Executive Vice President and Chief Financial Officer March 1, 2021 100 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of TriCo Bancshares Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of TriCo Bancshares (and subsidiaries) (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders equity, and cash flow for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”. We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020, due to the adoption of Accounting Standards Codification Topic 326: Financial Instruments - Credit Losses (“Topic 326”). The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 101 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses - CECL Adoption, Loan Risk Ratings, Reasonable and Supportable Forecasts and Qualitative Factors As discussed in Note 1 to the consolidated financial statements, the Company adopted Accounting Standards Update No. 2016-13, Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses (Topic 326), as of January 1, 2020, using the modified retrospective method of adoption. Topic 326 requires the measurement of the current expected credit losses (“CECL”) for financial assets, including the Company’s loan portfolio, held at the reporting date. Accordingly, the Company recorded a decrease to retained earnings of $12,983,000, net of taxes of $5,449,000, as of January 1, 2020 for the cumulative effect of adopting Topic 326. As further discussed in Note 1 and Note 5, the Company’s allowance for credit losses for loans was $91,847,000 as of December 31, 2020, and consists of both historical credit loss experience and management’s estimates of current conditions and reasonable and supportable forecasts. The Company’s allowance for credit losses for loans is a valuation account that is deducted from the amortized cost basis of loans to present the net carrying value at the amount expected to be collected on such loans and is a material and complex estimate requiring significant management judgment in the estimation of expected lifetime losses within the loan portfolio at both the date of adoption and the balance sheet date. We identified management’s adoption of Topic 326, risk ratings of loans, and the reasonable and supportable forecasts, including the estimate of a qualitative and environmental factor related to California’s unemployment, and the selection of the methodology and economic variables utilized, as a critical audit matter. In estimating the allowance for credit losses on loans, the Company utilizes relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company considers relevant credit quality indicators for each loan segment, stratifies loans by risk rating, and estimates losses for each loan cohort based upon their nature, historical experience, and risk profile. This process requires significant management judgment in the review of the loan portfolio and assignment of risk ratings based upon the characteristics of loans. In addition, estimation of the lifetime expected credit losses for loans require significant management judgment, particularly as it relates to forward-looking information through the use of environment factors applied over the forecasted life of the loans. Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation and operating effectiveness of controls relating to management’s adoption of Topic 326 and the calculation of the allowance for credit losses on loans, including controls over the review of loans and assignment of risk ratings, evaluation of the environmental and forecast factors, model development and validation, selection and application of new accounting policies, and disclosures. • Evaluating the appropriateness of the Company’s assumptions and elections involved in the adoption of the CECL methodology, including the cohort methodology selected by the Company compared to other available methodologies as well as the economic variables selected based on the correlation to historical charge offs. • Evaluating the appropriateness of the Company’s loan risk rating policy and testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable. • Evaluating the reasonableness and appropriateness of the estimated California unemployment factor utilized by management in forming the forecast factors and any qualitative adjustments by comparing forecasts and any qualitative adjustments to relevant external data, including historical trends. • Testing the mathematical accuracy and computation of the allowance for credit losses for loans by re-performing or independently calculating significant elements of the allowance, including quantitative historical loss factors applied to the loan segments based on risk ratings and utilizing relevant source documents, including the completeness and accuracy of the data used in the calculation. • Evaluating the accuracy and completeness of the Company’s disclosures in accordance with Topic 326. /s/ Moss Adams LLP Sacramento, California March 1, 2021 We have served as the Company’s auditor since 2018. 102 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.