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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-01 · 216 added, 278 removed, 684 unchanged (42% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Overview

The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the consolidated financial statements of the Company and the related notes at Item 8 of this report.

TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts;

Year ended December 31, 2021 2020 2019

Interest income $ 277,047 $ 267,184 $ 272,444

Interest expense (5,508) (9,457) (15,375)

Net interest income 271,539 257,727 257,069

(Provision for) benefit from loan losses 6,775 (42,813) 1,690

Noninterest income 63,664 55,194 53,520

Noninterest expense (178,275) (182,758) (185,457)

Income before income taxes 163,703 87,350 126,822

Provision for income taxes (46,048) (22,536) (34,750)

Net income $ 117,655 $ 64,814 $ 92,072

Earnings per share:

Basic $ 3.96 $ 2.17 $ 3.02

Diluted $ 3.94 $ 2.16 $ 3.00

Dividends paid $ 1.00 $ 0.88 $ 0.82

Book value at period end $ 33.64 $ 31.12 $ 29.70

Tangible book value at period end (2) $ 25.80 $ 23.09 $ 21.69

Average common shares outstanding 29,721 29,917 30,478

Average diluted common shares outstanding 29,882 30,028 30,645

Shares outstanding at period end 29,730 29,727 30,524

Financial Ratios

During the period:

Return on average assets 1.43 % 0.91 % 1.43 %

Return on average equity 12.10 % 7.18 % 10.49 %

Net interest margin(1)

3.58 % 3.96 % 4.47 %

Efficiency ratio 53.18 % 58.40 % 59.71 %

Average equity to average assets 11.84 % 12.66 % 13.97 %

Dividend payout ratio 25.26 % 40.58 % 27.15 %

At period end:

Equity to assets 11.61 % 12.11 % 14.01 %

Total capital to risk-weighted assets 15.42 % 15.22 % 15.07 %

Balance Sheet Data

Total investments $ 2,427,885 $ 1,719,102 $ 1,345,954

Total loans 4,916,624 4,763,127 4,307,366

Total assets 8,614,787 7,639,529 6,471,181

Total non-interest bearing deposits 2,979,882 2,581,517 1,832,665

Total deposits 7,367,159 6,505,934 5,366,994

Total other borrowings 50,087 26,914 18,484

Total junior subordinated debt 58,079 57,635 57,232

Total shareholders’ equity 1,000,184 925,114 906,570

Total tangible equity (2)

$ 766,943 $ 686,409 $ 662,141

(1) Fully taxable equivalent (FTE)

(2) Tangible equity is calculated by subtracting Goodwill and Other intangible assets from total shareholders’ equity.

Management believes that tangible equity is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.

Tangible book value is calculated by dividing tangible equity by shares outstanding at period end.

As TriCo Bancshares has not commenced any business operations independent of the Bank, the following discussion pertains primarily to the Bank.

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Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP).

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to the adequacy of the allowance for credit losses, investments, mortgage servicing rights, fair value measurements, retirement plans, intangible assets and the fair value of acquired assets and liabilities.

In preparing the consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.

Actual results could differ significantly from those estimates.

The estimate that is particularly susceptible to significant change is the determination of the provision and allowance for credit losses (ACL).

Allowance for Credit Losses

The Company’s method for assessing the appropriateness of the allowance for credit losses includes specific allowances for individually analyzed loans, formula allowance factors for pools of credits, and qualitative considerations which include, among other things, current and forecast economic and environmental factors (e.g., interest rates, growth, economic conditions, etc.).

Allowance factors for loan pools were based on historical loss experience by product type and prior risk rating.

Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.

Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over the remaining life.

The Company identified and accumulated loan cohort historical loss data beginning with the fourth quarter of 2008 and through the current period.

In situations where the Company's actual loss history was not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than three billion and less than ten billion, were utilized to create a minimum loss rate.

Adjustments to historical loss information are made for differences in relevant current loan-specific risk characteristics, such as historical timing of losses relative to the loan origination.

In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets.

These macroeconomic scenarios incorporate variables that have historically been key drivers of increases and decreases in credit losses.

These variables include, but are not limited to, changes in environmental conditions, such as California unemployment rates, household debt levels and U.S.

gross domestic product.

There is a greater chance that the Company would suffer a loss from a loan that was risk rated less than satisfactory than if the loan was last graded satisfactory.

As such, the proper risk grading of loans in the portfolio is important to the determination of the calculation of and determination of adequacy of the allowance for credit losses.

Utilizing the historical loss data described above, the Company applies reserve rates within any unique pool based on its loss and risk grade migration.

Therefore, within any given pool, a larger loss estimation factor is applied to less than satisfactory loans as compared to those that the Company last graded as satisfactory.

The resulting allowance for any pool is the sum of the calculated reserves determined in this manner.

Certain loans are not included in pools of loans that are collectively evaluated.

The segregation of these loans is based on the results from analysis of identified credits that meet management’s criteria for specific evaluation.

These loans are first reviewed individually to determine if such loans are considered impaired.

Impaired loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due under the original contractual terms and are removed from the pools of loans collectively evaluated.

When, as a result of this evaluation, a loan is identified as impaired they are then specifically reviewed and evaluated individually by management for loss potential by evaluating sources of repayment, including collateral as applicable, and a specified allowance for loan losses is established where necessary.

By definition, any loan that management has placed on non-accrual is considered impaired, however, not all impaired loans need be placed on non-accrual.

Because current economic conditions and forecasts can change and future events make it inherently difficult to predict the anticipated amount of estimated credit losses on loans, management's determination of the appropriateness of the ACL, could change significantly.

It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types.

Additionally, changes in factors and inputs may move independently of one another, such that improvement in one or certain factors may offset deterioration in others.

Management believes that the ACL was adequate as of December 31, 2021.

Other Accounting Policies and Estimates

On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to investments, mortgage servicing rights, fair value measurements, retirement plans, intangible assets and the fair value of acquired assets and liabilities.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

The Company’s policies related to estimates on the allowance for credit losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 in the financial statements at Item 8 of this report.

Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company.

Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, certain performance measures including interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (FTE) basis.

The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results.

From time to time the Bank may be presented with the opportunity to purchase individual or pools of loans in whole or in part outside of a transaction that would be considered a business combination.

As of December 31, 2020 and 2019, the outstanding carrying value of purchased loans that were not acquired in a business combination totaled $96,621,000 and $52,678,000, respectively.

The Company’s policies related to these estimates can be found in Note 1 in the financial statements at Item 8 of this report.

Geographical Descriptions

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Results of Operations

Following is a summary of the components of net income for the periods indicated (dollars in thousands):

Year ended December 31,

2020 2019 2018

Net interest income $ 257,727 $ 257,069 $ 215,346

Reversal of (provision for) loan losses (42,813) 1,690 (2,583)

Noninterest income 55,194 53,520 49,061

Noninterest expense (182,758) (185,457) (168,472)

Provision for income taxes (22,536) (34,750) (25,032)

Net income $ 64,814 $ 92,072 $ 68,320

Net income per average fully-diluted share $ 2.16 $ 3.00 $ 2.54

Net income as a percentage of average shareholders’ equity (ROAE) 7.18 % 10.49 % 10.75 %

Net income as a percentage of average total assets (ROAA) 0.91 % 1.43 % 1.24 %

Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company.

Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, certain performance measures including interest

income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (FTE) basis.

The Company believes

the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results.

Net Interest Income

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Net interest income (FTE) during the year ended December 31, 2021 increased $13,814,000 or 5.3% to $272,610,000 compared against $258,796,000 during the year ended December 31, 2020.

The increase amount of net interest income is reflective of growth in total average loan balances outstanding during 2021, which increased by $229,796,000 or 4.9% from December 31, 2020.

The yield on interest earning assets was 3.65% and 4.11% for the years ended December 31, 2021 and 2020, respectively.

This 46 basis point decrease in total earning asset yield was primarily attributable to a 23 basis point decrease in non-PPP loan yields and a 66 basis point decrease in yields on total investments.

Of the 23 basis point decrease in yields on loans, a 21 basis point decline was attributable to decreases in market rates, in addition to 2 basis point from the accretion of purchased loans.

The costs of total interest bearing liabilities decreased 12 basis points to 0.13% during the year ended December 31, 2021, as compared to 0.25% for the year ended December 31, 2020.

During the same period, costs associated with interest bearing deposits decreased by 10 basis points to 0.08% as compared to 0.18% in the prior year.

The decrease in interest expense for the year ended December 31, 2021, as compared to the trailing year, was due largely to the decreased rate environment benefiting both the interest-bearing deposit expense and other borrowings interest expense.

Net interest income (FTE) during the year ended December 31, 2020 increased $526,000 or 0.2% to $258,796,000 compared against $258,270,000 during the year ended December 31, 2019.

The relatively unchanged amount of net interest income is reflective of the declining rate environment during the year ended December 31, 2020, as total average loan balances increased by approximately $534,912,000 in 2020, and excluding PPP loans, average loan balances increased by approximately $250,586,000 compared to December 31, 2019.

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The decrease in interest expense for the year ended December 31, 2020, as compared to the trailing year, was due largely to the decreased rate environment benefiting both the interest-bearing deposit expense and other borrowings interest expense.

Net interest income (FTE) during the year ended December 31, 2019 increased $41,620,000 or 19.2% to $258,270,000 compared to $216,650,000 during the year ended December 31, 2018.

The increase was substantially attributable to changes in volume of earning assets from the acquisition of FNB Bancorp in July 2018, in addition to organic loan growth experienced during 2019.

The yield on interest earning assets was 4.74% and 4.55% for the year ended December 31, 2019 and 2018, respectively.

This 19 basis point increase in total earning asset yield was primarily attributable to a 20 basis point increase in loan yields and a 11 basis point increase in yields on total investments.

Of the 20 basis point increase in yields on loans, 15 basis points was attributable to increases in market rates while 5 basis points was from accretion of purchased loans.

The increases in yields on earning assets were partially offset by increased funding expenses as the costs of total interest bearing liabilities increased 3 basis points to 0.42% during the year ended December 31, 2019, as compared to 0.39% for the year ended December 31, 2018.

During the same period, costs associated with interest bearing deposits increased by 10 basis points to 0.33% as compared to 0.23% in the prior year.

The increase in interest expense for the year ended December 31, 2019 as compared to the prior period was due largely to the increases in the average balances of interest-bearing liabilities associated with the acquisition of FNB Bancorp, offset partially by reductions in the average balance of other borrowings.

For more information related to loan interest income, including loan purchase discount accretion, see the Summary of Average Balances, Yields/Rates and Interest Differential and Note 27 to the consolidated financial statements at Part II, Item 8 of this report.

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See the Tables labeled “Allowance for Credit Losses – December 31, 2021 and 2020” at Note 5 in Item 8 of Part II of this report for the components that make up the provision for credit losses for the years ended December 31, 2021 and 2020.

The Company adopted and implemented ASU 2016-13, referred to as the Current Expected Credit Loss (CECL), on January 1, 2020 which resulted in an increase to the allowance for credit losses of approximately $18,913,000, and a decrease to retained earnings of $12,983,000, net of taxes.

The Company adopted and implemented ASU 2016-13, referred to as the Current Expected Credit Loss (CECL), on January 1, 2020 which resulted in an increase 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 also separately evaluated its held-to-maturity investment securities from obligations of state and political subdivisions utilizing the historical loss data represented by similar securities over a period of time spanning nearly 50 years, and based on this evaluation, no loss reserves were recorded for these securities at the time of adoption.

The Company recorded a provision of $42,813,000 for credit losses during the year ended December 31, 2020, versus a reversal of $1,690,000 provision for credit losses during the year ended December 31, 2019.

The increased provision for credit losses for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily attributable to the portfolio-wide qualitative indicators associated with actual changes and forecast levels of California unemployment, and gross domestic product and, to a lesser extent, loan concentration risks.

The qualitative factors associated with these two measures contributed to the level of calculated required reserves by approximately $60,563,000 as of December 31, 2020.

As of December 31, 2020, the Company had established reserves totaling $1,600,000 related to the Camp Fire, compared to $2,500,000 as of December 31, 2019.

As shown in the Table labeled “Allowance for Credit Losses - December 31, 2020” at Note 5 in Item 8 of Part II of this report, for the aforementioned reasons above, both the adoption of CECL on January 1, 2020 and provisions recorded during 2020 increased ending reserve balances year over year for all loan categories, with the exception of commercial and industrial loans and leases.

The commercial and industrial loans benefited from changes to the risk pool allocation during adoption of CECL, leading to a reduction in beginning reserves that offset provisioning during 2020.

Net recoveries for the year ended December 31, 2020 totaled $130,000 as compared to $276,000 net charge offs for the year ended December 31, 2019.

Total nonperforming loans increased from 0.39% of total loans at December 31, 2019 to 0.56% of total loans at December 31, 2020.

The Company recorded a reversal of credit loses of $6,775,000 during the year ended December 31, 2021, versus a provision for credit losses totaling $42,813,000 during the trailing year end.

The decrease in required provisioning during 2021 was attributed to improvement in both external economic indicators and the Company's internal credit risk assessment under the cohort method including changes in the level of past due and nonperforming loans.

Declines in California unemployment levels, reduced concentration risks and an improved gross domestic product outlook contributed to total required qualitative reserves of $59,855,000 as of December 31, 2021, a decline of $2,080,000 or 3.4% from December 31, 2020.

Quantitative reserves calculated using the Company's cohort loss model totaled $25,521,000 at December 31, 2021, a decline of $4,391,000 or 14.7% from the trailing period December 31, 2021.

The Company adopted CECL on January 1, 2020, and recorded total credit provisions of $42,813,000 during 2020 based on the "forward-looking" nature of the accounting guidance, coupled with the severe impact on both domestic and foreign markets from the COVID-19 pandemic.

Specifically, the qualitative factors associated with forecast levels of California unemployment and declines in gross domestic product, alone contributed to a level of calculated required reserves totaling approximately $60,563,000 as of December 31, 2020.

Net recoveries for the year ended December 31, 2021 totaled $694,000 as compared to $130,000 for the year ended December 31, 2020.

Total nonperforming loans increased 5 basis points to 0.61% of total loans at December 31, 2021 from 0.56% of total loans at December 31, 2020.

For further details of the change in nonperforming loans during the year ended December 31, 2021 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2021” and “Changes in nonperforming assets during the three months ended December 31, 2021” under the heading “Asset Quality and Non-Performing Assets ” below.

The Company recorded a benefit of $1,690,000 from loan losses during the year ended December 31, 2019, versus a $2,583,000 provision for loan losses during the year ended December 31, 2018.

The reduced provision for loan losses for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily attributable to a $1,375,000 decrease in the amount of specific reserves required on impaired loans subsequent to the sale or repayment of the outstanding balances owed.

In addition, while the Company remains cautious about the risks associated with trends in California real estate prices and the affordability of housing in the markets served by the Company, changes in home affordability and energy related index rates improved during the year ended December 31, 2019.

The qualitative factors associated with these two measures reduced the level of calculated required reserves by approximately $1,059,000.

These decreases were partially offset by the provisions to the allowance for loan losses necessitated by net loan growth during the year.

As of December 31, 2019, the Company had established reserves totaling $2,500,000 related to the Camp Fire, compared to $3,250,000 as of December 31, 2018.

As shown in the Table labeled “Allowance for Loan Losses - December 31, 2019” at Note 5 in Item 8 of Part II of this report residential and commercial real estate loans, home equity lines, home equity loans, and commercial construction loans all experienced a benefit from reversal of provision for losses during the year ended December 31, 2019.

The benefit from reversal of provision for loan losses of each loan category during the year ended December 31, 2019 was due primarily to improvements in historical loss factors and decreases in nonperforming loans as a total percentage of loans.

The remaining other consumer, commercial and residential construction loans experienced a provision for losses during the year ended December 31, 2019 due primarily to loan growth.

Net charge-offs for the year ended December 31, 2019 were $276,000 as compared to $324,000 net charge offs for the year ended December 31, 2018.

Total nonperforming loans decreased from 0.68% of total loans at December 31, 2018 to 0.39% of total loans at December 31, 2019.

For details of the change in nonperforming loans during the year ended December 31, 2018 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2019” and “Changes in nonperforming assets during the three months ended December 31, 2019” under the heading “Asset Quality and Non-Performing Assets ” below.

Year ended December 31,

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Total service charges and fees 43,948 37,981 40,417

Commissions on sale of non-deposit investment products 2,989 2,877 3,151

Asset management and commission income 3,668 2,989 2,877

Increase in cash value of life insurance 2,775 2,949 3,029

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Total non-interest income $ 63,664 $ 55,194 $ 53,520

Non-interest income increased by $8,470,000 or 15.3% to $63,664,000 during the twelve months ended December 31, 2021, compared to $55,194,000 during the same period ended December 31, 2020.

ATM and interchange fees improved $3,696,000 or 17.1% as a result of increased usage due to relaxed social distancing guidelines during the year ended December 31, 2021 when compared to the same period in the prior year.

Additionally, during the year ended 2020, there was substantial downward pressure on interest rates following the COVID-19 pandemic, resulting in a decline in the fair value of mortgage servicing rights totaling $2,634,000 during the period.

Other non-interest income increased $1,574,000 during the twelve months ended December 31, 2021, largely attributed to an increase of $804,000 in the change of fair value of non-readily marketable equity investments and a $204,000 increase in proceeds from life insurance, respectively, as compared to the trailing 12 months ended.

Non-interest income increased $1,674,000 or 3.1% to $55,194,000 during the twelve months ended December 31, 2020, compared to $53,520,000 during the equivalent period in 2019.

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Further, fee generative deposit account activity was impacted by reductions in the volume of returned check fees, declining by $2,713,000 to $13,944,000 for the twelve months ended December 31, 2020.

Other non-interest income also declined by $1,312,000 during 2020, partially from decreases in the fair value of assets used to fund acquired deferred compensation plans totaling $514,000, as compared to 2019, as well as from a $333,000 reduction in one-time death benefits realized during the years ended 2020 and 2019 of $498,000 and $831,000, respectively.

Non-interest income increased $4,459,000 or 9.1% to $53,520,000 during the year ended December 31, 2019 compared to $49,061,000 during the comparable twelve month period in 2018.

Increases in non-interest income for the year ended 2019 as compared to the same period in 2018 were largely driven by increases in fees charged for various services and increases in usage associated with both services and interchange transactions.

More specifically, the increase in income charged for interchange fees and service charges increased by $2,390,000 or 13.1% and $1,190,000 or 7.7%, respectively.

Gains from the sale of mortgage loans, which resulted from increased volume, contributed $911,000 to the overall increase in non-interest income during the 2019 year.

Other non-interest income was positively impacted by the recognition of $831,000 in life insurance death benefits during the year ended December 31, 2019, compared to none in the equivalent period in 2018.

These positive changes were partially offset by $1,655,000 greater decline in the value of the Company's mortgage loan servicing rights due to increases in prepayment speeds and the overall decreases in interest rates on home loans as compared to those in the prior year.

from a $333,000 reduction in one-time death benefits realized during the years ended 2020 and 2019 of $498,000 and $831,000, respectively.

Non-interest Expense

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Equipment 5,358 5,704 7,022

ATM and POS network charges 5,433 5,447 5,271

Merger and acquisition expense — — 5,227

Intangible amortization 5,464 5,723 5,723

Advertising 2,899 2,827 5,633

ATM and POS network charges 6,040 5,433 5,447

Professional fees 3,657 3,222 3,754

Intangible amortization 5,724 5,723 3,499

Telecommunications 2,253 2,601 3,190

Regulatory assessments and insurance 2,581 1,594 1,188

Courier service 1,414 1,308 1,287

Operational losses 1,168 986 1,260

Merger and acquisition expenses 1,523 — —

Postage 710 1,068 1,258

Gain on sale of foreclosed assets (234) (246) (408)

Loss on disposal of fixed assets 67 82 185

Operational losses 964 1,168 986

Courier service 1,214 1,414 1,308

Gain on sale or acquisition of foreclosed assets (233) (234) (246)

(Gain) loss on disposal of fixed assets (439) 67 82

Other miscellaneous expense 11,038 12,018 15,637

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Average full-time equivalent staff 1,039 1,093 1,150

Salaries and benefit expense increased $6,056,000 (5.7%) to $112,121,000 during the year ended December 31, 2020 as compared to $106,065,000 for the trailing twelve month period.

Base salaries, net of deferred loan origination costs remained nearly flat, decreasing by $54,000 (0.1%) to $70,164,000 due to a decrease in average full time equivalent employees to 1,093 from 1,150 in the prior year-to-date period, offset by a higher average wage per employee from annual merit increases.

Commissions and incentive compensation decreased $3,084,000 (23.5%) to $10,022,000 during 2020 compared to 2019 primarily due to lesser quantities and volumes of non-PPP loan originations as borrower interaction and business demands for loans experienced

disruption from COVID-19 related mandates.

Benefits and other compensation costs increased by $9,194,000 (40.4%) to $31,935,000 during the year ended December 31, 2020 as compared to $22,741,000 for the trailing twelve month period, caused by increases in expenses associated with retirement obligations and insurance costs.

Salaries and benefit expense decreased $5,770,000 (5.1%) to $106,351,000 during the year ended December 31, 2021 as compared to $112,121,000 for the trailing twelve month period.

Base salaries, net of deferred loan origination costs remained nearly flat, decreasing by $320,000 (0.4%) to $69,844,000 due to a decrease in average full time equivalent employees to 1,039 from 1,093 in the prior year-to-date period, offset by a higher average wage per employee due to both, the addition of personnel with elevated technical skillets to adhere to elevated regulatory expectations and annual merit increases.

Commissions and incentive compensation increased $4,935,000 (49.2%) to $14,957,000 during 2021 compared to 2020 primarily due to increased organic non-PPP loan originations as borrower interaction and business demands for loans improved following the disruption from COVID-19 and related mandates in 2020.

Benefits and other compensation costs decreased by $10,385,000 (32.5%) to $21,550,000 during the year ended December 31, 2021 as compared to $31,935,000 for the trailing twelve month period, caused by declines in expenses associated with retirement obligations and insurance costs.

Merger and acquisition expenses associated with the proposed merger with Valley Republic Bancorp, which is pending regulatory approval from the FRB, totaled $1,523,000 during the year ended December 31, 2021.

Further, during the year ended December 31, 2021, expenses totaling approximately $1,745,000 are attributable to the Company's recently opened loan production offices, of which approximately $1,430,000 relates to salaries and benefits.

During 2018, the FDIC's Deposit Insurance Fund's (DIF) reserves exceeded the minimum set by the Dodd-Frank Act and the Bank with total assets less than $10 billion, was entitled to receive credits to offset a portion of its assessments.

As a result, during the years ended December 31, 2020 and 2019, the Bank received credits of $610,000 and $862,000, respectively, which contributed to the fluctuation in regulatory assessments and insurance during those periods.

There were no credits provided to the Bank during 2021.

Salaries and benefit expense increased $6,056,000 (5.7%) to $112,121,000 during the year ended December 31, 2020 as compared to $106,065,000 for the trailing twelve month period.

Benefits and other compensation costs increased by $9,194,000 (40.4%) to $31,935,000 during the year

ended December 31, 2020 as compared to $22,741,000 for the trailing twelve month period, caused by increases in expenses associated with retirement obligations and insurance costs.

Total other non-interest expense decreased by $8,755,000 or 11.0% to $70,637,000 during the year ended December 31, 2020 as compared to the $79,392,000 for the year ended December 31, 2019.

Reductions in advertising expenses totaling $2,806,000 or 49.8% to $2,827,000 contributed to this beneficial change, as did declines in miscellaneous expenses totaling $3,619,000 or 23.1% attributed primarily to a $1,681,000 reduction in travel and training expenses as a result of state-wide shelter-in-place restrictions and a reduction of $418,000 in third party services, which were partially offset by the indirect loan documentation and administrative costs associated with PPP lending activity.

Salary and benefit expenses increased $12,123,000 (12.9%) to $106,065,000 during the year ended December 31, 2019 compared to $93,942,000 during the prior year month ended December 31, 2018.

Base salaries, net of deferred loan origination costs increased $7,796,000 (12.5%) to $70,218,000.

The increase in base salaries was due primarily to a 7.4% increase in average full time equivalent employees to 1,150 from 1,071 in the prior year-to-date period.

Also affecting the increase in base salaries were annual merit increases and a higher wage base per employee resulting from the employees associated with the FNBB merger transaction due to the Bay Area region’s higher cost of living.

During the year ended December 31, 2019 and 2018 there were $3,133,000 and $2,721,000, respectively, in salaries expense that were capitalized in association with loan origination activities and the increase was due solely to increases in the number of loans originated.

Commissions and incentive compensation increased $1,959,000 (17.6%) to $13,106,000 during 2019 compared to 2018 primarily due to organic growth of loans and non-interest bearing deposits.

Benefits & other compensation expense increased $2,368,000 (11.6%) to $22,741,000 during the year ended December 31, 2019 due primarily to increases in the average full time equivalent employees, as mentioned above, and to a lesser extent, annual increases in healthcare and benefits costs.

Total other non-interest expense increased by $4,862,000 or 6.50% to $79,392,000 during the year ended December 31, 2019 as compared to the $74,530,000 for the year ended December 31, 2018.

Virtually all significant increases in non-interest expense can be attributed to the acquisition of FNB Bancorp that took place in July 2018, which is reflected in all periods during the twelve months ended December 31, 2019, as compared to only six months in the prior year.

Highlighting some of those increases were increases in occupancy, data processing, intangible amortization, which increased by $2,754,000, $2,496,000 and 2,224,000, respectively, as compared to the prior year.

The increases in non-interest expenses were partially offset by an elimination of merger related expenses, totaling $5,227,000 in 2018 and a reduction in regulatory assessment costs resulting from credits issued by the FDIC totaling $862,000 for the year ended 2019.

The provisions for income taxes applicable to income before taxes for the years ended December 31, 2021, 2020 and 2019 differ from amounts computed by applying the statutory Federal income tax rates to income before taxes.

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The effective tax rate was greater than the Federal statutory rates of 21% due to the combination of state tax expenses of 7.9% in 2021, 7.7% in 2020, and 7.9% in 2019.

These increases in tax expense were partially offset by Federal tax-exempt investment income of $3,566,000, $4,002,000 and $4,345,000, respectively, Federal and State tax-exempt income of $3,447,000, $3,860,000 and $2,718,000, respectively, from increase in cash value and gain on death benefit of life insurance, low income housing tax credits and losses, net of amortization of $619,000, $230,000 and $179,000 respectively, and equity compensation excess tax benefits, net of non-deductible compensation of $403,000, $2,537,000, and $499,000, respectively.

These increases in tax expense were partially offset by Federal tax-exempt interest income of $3,069,000, $3,566,000, and $4,002,000, respectively, Federal and State tax-exempt income of $3,478,000, $3,447,000, and $3,860,000, respectively, from increase in cash value and gain on death benefit of life insurance, low income housing tax credits and losses, net of amortization of $620,000, $619,000, and $230,000, respectively, and equity compensation excess tax benefits, net of non-deductible compensation of $1,495,000, $403,000, and $2,537,000, respectively.

The low-income housing tax credits and the equity compensation excess tax benefits represent direct reductions in tax expense.

In addition, the 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided the Company with an opportunity to file amended federal tax returns and generate proposed refunds of approximately $805,000.

The items noted above resulted in an effective combined Federal and State income tax rate that differed from the combined Federal and State statutory income tax rate of approximately 29.6% during the three years ended 2021, 2020 and 2019.

Financial Condition

Investment Securities

The following table presents the available for sale debt securities and marketable equity investment securities portfolio by major type as of the dates indicated:

Year ended December 31,

(dollars in thousands) 2020 2019 2018 2017 2016

Marketable equity securities $ 3,025 $ 2,960 $ 2,874 $ 2,938 $ 2,938

Debt securities available for sale:

Obligations of U.S.

government and agencies $ 812,374 $ 472,980 $ 629,981 $ 604,789 $ 429,678

Obligations of states and political subdivisions 129,095 109,601 126,072 123,156 117,617

Corporate bonds 2,544 2,532 4,478 — —

Asset backed securities 470,251 365,025 354,505 — —

Total debt securities available for sale $ 1,414,264 $ 950,138 $ 1,115,036 $ 727,945 $ 547,295

Debt securities held to maturity:

Obligations of U.S.

government agencies $ 273,667 $ 361,785 $ 430,343 $ 500,271 $ 597,982

Obligations of states and political subdivisions 10,896 13,821 14,593 14,573 14,554

Total debt securities held to maturity $ 284,563 $ 375,606 $ 444,936 $ 514,844 $ 612,536

Debt securities available for sale increased $464,126,000 to $1,414,264 as of December 31, 2020, compared to December 31, 2019.

This increase is attributable to purchases of $617,552,000 and an increase in net unrealized gains on securities available for sale of $15,796,000, offset partially by maturities and principal repayments of $167,515,000 and sales proceeds of $229,000.

Debt securities available for sale decreased $164,898,000 to $950,138,000 as of December 31, 2019, compared to December 31, 2018.

This decrease is attributable to maturities and principal repayments of $97,993,000, sales of $127,066,000, an increase in fair value of investments securities available for sale of $24,361,000 and amortization of net purchase price premiums of $1,567,000.

Debt securities held to maturity decreased $91,043,000 to $284,563,000 as of December 31, 2020, compared to December 31, 2019.

This decrease is attributable to principal repayments of $89,858,000 and amortization of net purchase price premiums of $1,185,000.

Debt securities held to maturity decreased $69,330,000 to $375,606,000 as of December 31, 2019, compared to December 31, 2018.

This decrease is attributable to principal repayments of $68,346,000 and amortization of net purchase price premiums of $985,000.

Additional information about the investment portfolio is provided in Note 3 in the financial statements at Item 8 of Part II of this report.

Restricted Equity Securities

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real estate mortgage loans (residential and commercial loans), consumer loans, commercial loans (including agricultural loans), and real estate construction loans.

The interest rates charged for the loans made by the Bank vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Bank and prevailing money market rates indicative of the Bank’s cost of funds.

The interest rates charged for the loans made by the Bank vary with

the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Bank and prevailing money market rates indicative of the Bank’s cost of funds.

The majority of the Bank’s loans are direct loans made to individuals, farmers and local businesses.

The Bank relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions.

The Bank makes loans to borrowers

whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.

The Bank makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.

Loan Portfolio Composition

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Consumer 1,071,551 952,108 955,050

Commercial and industrial 526,327 249,791 250,661 194,790 177,204

Commercial and industrial, excluding PPP 198,208 199,557 249,791

SBA PPP loans 61,147 326,770 —

Construction 222,281 284,842 249,827

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Total loans $ 4,916,624 $ 4,763,127 $ 4,307,366

During 2020, the Company purchased a pool of SFR 1-4 1st DT loans with an ending balance of approximately $39,977,000, excluding loan premiums of approximately $1,149,000, which also approximates the outstanding balance and unamortized premium as of December 31, 2020.

Allowance for credit losses $ (85,376) $ (91,847) $ (30,616)

During the years ended 2021 and 2020, the Company purchased pools of SFR 1-4 1st DT (consumer) loans totaling approximately $101,466,000 and $41,126,000, respectively, inclusive of loan premiums.

As of December 31, 2021 and 2020, the total remaining balances outstanding from these purchases equaled approximately $125,053,000 and $41,126,000, respectively.

There was no credit deterioration identified at acquisition for the purchased loans.

There were no loan purchases made during the year ended December 31, 2019.

In December 2020, the SBA announced plans for a second round of PPP lending with streamlined requirements for both borrowers and lenders.

Effective Friday, January 15, 2021, the Company had launched and was accepting applications via an improved online portal which allows borrowers to open a new account and submit PPP applications under the new PPP guidance.

The following table shows the Company’s loan balances, including net deferred loan fees, as a percentage of total loans at the dates indicated:

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Consumer 21.8 % 20.0 % 22.2 %

Commercial and industrial 11.1 % 5.8 % 6.2 % 6.5 % 6.4 %

Commercial and industrial, excluding PPP 4.1 % 4.2 % 5.8 %

SBA PPP loans 1.2 % 6.9 % — %

Construction 4.5 % 6.0 % 5.8 %

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Total loans 100 % 100 % 100 %

Allowance for credit losses 1.74 % 1.93 % 0.71 %

At December 31, 2021 loans, including net deferred loan costs, totaled $4,916,624,000 which was a 3.2% ($153,497,000) increase over the balances at the end of 2020.

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At December 31, 2020 loans, including net deferred loan costs, totaled $4,763,127,000 which was a 10.6% ($455,761,000) increase over the balances at the end of 2019.

Total loans, excluding PPP, increased by 3.0% ($128,991,000) during the same period.

At December 31, 2019 loans, including net deferred loan costs, totaled $4,307,366,000 which was a 7.1% ($285,352,000) increase over the balances at the end of 2018.

In March 2020, the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was created to help small businesses keep workers employed during the COVID-19 crisis.

As a SBA Preferred Lender, the Company was able to provide PPP loans to small business customers.

As of December 31, 2020, the total gross balance outstanding of PPP loans was $333,982,000 (approximately 2,300 loans) as compared to total PPP originations of $438,510,000 (approximately 2,900 loans).

Included in the balance of outstanding PPP loans as of December 31, 2020 are approximately 630 loans totaling $88,623,000 that have been submitted to and are pending forgiveness by the SBA.

In the tables above, PPP loans are included in the "Commercial and Industrial" loan category.

In connection with the origination of these loans, the Company earned approximately $15,735,000 in loan fees, offset by deferred loan costs of approximately $763,000, the net of which will be recognized over the earlier of loan maturity, repayment or receipt of forgiveness confirmation.

The SBA ended PPP and did not accept new borrowing applications, effective May 31, 2021.

As of December 31, 2021, the total gross balance outstanding of PPP loans was $63,311,000 as compared to total PPP originations of $640,410,000.

In connection with the origination of these loans, the Company earned approximately $25,299,000 in loan fees, offset by deferred loan costs of approximately $1,245,000, the net of which will be recognized over the earlier of loan maturity (between 24-60 months), repayment or receipt of forgiveness confirmation.

As of December 31, 2021, over 90% of all PPP loans originated have been forgiven and repaid by the SBA and there was approximately $2,164,000 in net deferred fee income remaining to be recognized.

During the year ended December 31, 2021, the Company recognized $14,148,000, respectively in fees on PPP loans as compared with $7,760,000 for the year ended December 31, 2020, respectively.

As of December 31, 2020, the total gross balance outstanding of PPP loans was $333,982,000 as compared to total PPP originations of $438,510,000.

In connection with the origination of these loans, the Company earned approximately $15,735,000 in loan fees, offset by deferred loan costs of approximately $763,000.

As of December 31, 2020 there was approximately $7,212,000 in net deferred fee income remaining to be recognized.

During the three and twelve months ended December 31, 2020, the Company recognized $4,634,000 and $7,760,000, respectively, in fees on PPP loans.

In December 2020, the SBA announced plans for a second round of PPP lending with revised requirements for both borrowers and lenders.

Effective Friday, January 15, 2021, Tri Counties Bank had launched and was accepting applications via an improved on-line portal which allows applicants to both open a new account, if necessary, and submit a PPP application.

Preliminary results of the program indicate that total originations under this second round of PPP are expected to be thirty to fifty percent of the total round one originations.

From time to time the Bank may be presented with the opportunity to purchase individual or pools of loans in whole or in part outside of a transaction that would be considered a business combination.

As of December 31, 2021 and 2020, the outstanding carrying value of purchased loans that were not acquired in a business combination totaled $159,373,000 and $96,621,000, respectively.

Asset Quality and Nonperforming Assets

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Total nonperforming assets $ 19,405 $ 22,164 $ (10,421) $ (1,440) $ — $ 29,708

(1) Charge-offs and write-downs exclude deposit overdraft charge-offs.

Nonperforming assets decreased by $10,369,000 (34.8%) to $19,405,000 at December 31, 2019 from $29,774,000 at December 31, 2018.

The decrease in nonperforming assets during 2019 was the result of new nonperforming loans of $9,818,000, which was more than offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $16,138,000, dispositions of foreclosed assets totaling $1,090,000, and net charge-offs of $3,008,000.

The table above does not include deposit overdraft charge-offs.

Nonperforming assets increased by $10,303,000 (53.1%) to $29,708,000 at December 31, 2020 from $19,405,000 at December 31, 2019.

The increase in nonperforming assets during 2020 was the result of new nonperforming loans of $22,114,000, which was partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $9,908,000, dispositions of foreclosed assets totaling $513,000, and net charge-offs of $1,440,000.

Changes in nonperforming assets during the three months ended December 31, 2021

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Nonperforming assets increased during the fourth quarter of 2021 by $1,504,000 (4.8%) to $32,944,000 at December 31, 2020 compared to $31,440,000 at September 30, 2021.

The increase in nonperforming assets during the fourth quarter of 2020 was the result of new nonperforming loans of $7,363,000, that were partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $2,364,000, dispositions of foreclosed assets totaling $609,000, and net charge-offs of $489,000 in non-performing assets.

The $7,363,000 in new nonperforming loans during the fourth quarter of 2020 was comprised of, most notably, an increase of $4,648,000 on one residential construction loan which is considered well secured, $1,337,000 on thirteen home equity lines or loans, $647,000 on five commercial and industrial loans, and finally, $475,000 on two commercial and industrial loans.

The increase in nonperforming assets during the fourth quarter of 2021 was the result of new nonperforming loans of $3,858,000, that were partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $1,690,000, dispositions of foreclosed assets totaling $559,000, and net charge-offs of $105,000 in non-performing loans.

The $3,858,000 in new nonperforming loans during the fourth quarter of 2021 was comprised of, most notably, an increase of $1,992,000 and $1,633,000, respectively, on separate farmland relationships, both of which have been individually evaluated for collectability under the collateral methodology.

Reserves of approximately $275,000 have been recorded in connections with these relationships has been recorded as of December 31, 2021.

Changes in nonperforming assets during the three months ended December 31, 2020

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(1) Charge-offs and write-downs exclude deposit overdraft charge-offs.

Nonperforming assets decreased during the fourth quarter of 2019 by $706,000 (3.5%) to $19,405,000 at December 31, 2019 compared to $20,111,000 at September 30, 2019.

The decrease in nonperforming assets during the fourth quarter of 2019 was the result of new nonperforming loans of $2,585,000, that were fully offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $2,365,000, dispositions of foreclosed assets totaling $81,000, and net charge-offs of $950,000 in non-performing assets.

The $2,585,000 in new nonperforming loans during the fourth quarter of 2019 was comprised of increases of $773,000 on four residential real estate loans, $404,000 on two commercial real estate loans, $494,000 on seven home equity lines and loans, and $615,000 on nine commercial and industrial loans.

Nonperforming assets increased during the fourth quarter of 2020 by $4,688,000 (18.7%) to $29,708,000 at December 31, 2020 compared to $25,020,000 at September 30, 2020.

COVID Deferrals

Following the passage of the CARES Act legislation, the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" was issued by federal bank regulators, which offers temporary relief from troubled debt restructuring accounting for loan payment deferrals for certain customers whose businesses are experiencing economic hardship due to Coronavirus.

The Company continues to closely monitor the effects of the pandemic on our loan and deposit customers.

Our management team continues to be focused on assessing the risks in our loan portfolio and working with our customers to mitigate where possible, the risk of potential losses.

Beginning in April 2020, the Company implemented loan programs to allow certain consumers and businesses impacted by the pandemic to defer loan principal and interest payments.

The COVID deferral relief period under the CARES act legislation ended effective January 1, 2022, as such, any further requests for modification from borrowers will be evaluated in accordance with loan modification accounting guidance.

The following is a summary of COVID related loan customer modifications with outstanding balances as of December 31, 2021:

Modification Type Deferral Term

(dollars in thousands) Modified Loan Balances Outstanding % of Total Category of Loans Interest Only Deferral Principal and Interest Deferral 90 Days 180 Days

(dollars in thousands) Modified Loan Balances Outstanding % of Total Category of Loans Interest Only Deferral Principal and Interest Deferral 90 Days 180 Days Other

Commercial real estate:

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Total commercial real estate loans 18,437 0.6 — — — 79.5 20.5

SFR 1-4 1st lien 457 0.1 100.0 — — 100.0

SFR HELOCs and junior liens — — — — — —

Other — — — — — —

Total consumer loans 457 0.1 100.0 — — 100.0

— — — — — — —

Commercial and industrial — — — — — — —

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Total modifications $ 18,437 0.4 % 100.0 % — % — % 79.5 % 20.5 %

Total loan modifications associated with CARES Act legislation made during the twelve months ended December 31, 2020 totaled approximately $427,290,000 of which $48,358,000 remained outstanding under their modified terms as of December 31, 2020.

The remaining balance of loans with modified terms are expected to conclude their modification period during the first half of fiscal 2021, however, as long as the current pandemic and recessionary economic conditions continue, it is anticipated that additional borrowers may request an initial or subsequent modification to their loan terms.

The total loan modifications made under the CARES Act during 2020 are inclusive of 13 loans (10 borrowers) with loan balances totaling $31,660,000 who requested and were granted a second modification and deferral.

Eight of these second modifications and deferrals were for a period of three additional months, and five of the 13 loans had concluded their second deferral period and returned to their regular payment terms and are therefore not included in the table above.

The remaining borrowers who received a second loan modification have outstanding loan balances totaling $5,840,000 million as of December 31, 2020, of which $2,000,000 has been classified as troubled debt restructurings by Management due to the likelihood of further changes to the contractual loan terms being necessary.

The remaining balance outstanding as of December 31, 2021 are expected to conclude their modification period during the first half of 2022.

Management believes that its analysis of each borrower receiving a loan modification supports the ability of that borrower to return to their normal payment terms at the conclusion of the modification period.

However, management determined that a risk rating downgrade to each credit receiving a deferral modification was prudent until such time that the borrower's actual payment performance supported an upgrade to the pre-modification risk grade.

Allowance for Credit Losses and CECL Adoption

On January 1, 2020, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology that is referred to as the current expected credit loss (CECL) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases.

In addition, ASC 326 made changes to the accounting for available for sale debt securities.

One such change is to require increases or decreases in credit losses be presented as an allowance rather than as a write-down on available for sale debt securities, based on management's intent to sell the security or likelihood the Company will be required to sell the security, before recovery of the amortized cost basis.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Results for the reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchase credit impaired (PCI) and accounted for under ASC 310-30.

In accordance with the Standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption.

The remaining noncredit discount (based on the adjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption.

The Company recognized an increase in the ACL for loans totaling $18,913,000, including a reclassification of $481,000 from discounts on acquired loans to the allowance for credit losses, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $5,449,000 in taxes of $12,983,000.

Management has separately evaluated its held-to-maturity investment securities from obligations of state and political subdivisions and determined that no loss reserves were required.

Allowance for Credit Losses - Available for Sale Investment Securities

Allowance for Credit Losses - Investment Securities

The Company evaluates available for sale debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.

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However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is recognized in earnings with a corresponding adjustment to the security's amortized cost basis.

During the year ended December 31, 2020 no allowance for credit losses nor impairment recognized in earnings related to available for sale investment securities was recorded.

During the years ended December 31, 2021 and 2020, no allowance for credit losses nor impairment recognized in earnings related to available for sale investment securities was recorded.

Allowance for Credit Losses - Held to Maturity Investment Securities

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Therefore, during the year ended December 31, 2020 no allowance for credit losses related to HTM securities was recorded.

Allowance for Credit Losses - Loans

The allowance for credit losses (ACL) is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Regardless of the determination that a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in accordance with the original contract or modified terms, if appropriate.

The Company’s method for assessing the appropriateness of the allowance for credit losses includes specific allowances for impaired loans, formula allowance factors for pools of credits, and qualitative considerations which include, among other things, current and forecast economic and environmental factors (e.g., interest rates, growth, economic conditions, etc.).