Edgar Filing: TRICO BANCSHARES /

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the fiscal year ended December 31, 2015		Commission File Number 0-10661

TriCo Bancshares

(Exact name of Registrant as specified in its charter)

California

94-2792841

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


63 Constitution Drive, Chico, California		95973
(Address of principal executive offices)		(Zip Code)

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

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


Common Stock, without par value		Nasdaq Global Select Market
(Title of Class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by

reference in Part III of the Form 10-K or any amendment to this Form 10-K. YES x NO ¨

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 2015, was approximately $455,364,095 (based on the closing sales price of the Registrant’s common stock on the date). This computation excludes a total of 3,815,465 shares that are beneficially owned by the officers and directors of Registrant who may be deemed to be the affiliates of Registrant under applicable rules of the Securities and Exchange Commission.

The number of shares outstanding of Registrant’s common stock, as of February 26, 2016, was 22,785,173.

DOCUMENTS INCORPORATED BY REFERENCE

The information required to be disclosed pursuant to Part III of this report either shall be (i) deemed to be incorporated by reference from selected portions of TıriCo Bancshares’ definitive proxy statement for the 2015 annual meeting of stockholders, if such proxy statement is filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company’s most recently completed fiscal year, or (ii) included in an amendment to this report filed with the Commission on Form 10-K/A not later than the end of such 120 day period.

TABLE OF CONTENTS


		Page Number
PART I

Item 1	Business		2
Item 1A	Risk Factors		9
Item 1B	Unresolved Staff Comments		16
Item 2	Properties		16
Item 3	Legal Proceedings		16
Item 4	Mine Safety Disclosures		17

PART II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18
Item 6	Selected Financial Data		20
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		50
Item 8	Financial Statements and Supplementary Data		51
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		103
Item 9A	Controls and Procedures		103
Item 9B	Other Information		103

PART III

Item 10	Directors, Executive Officers and Corporate Governance		104
Item 11	Executive Compensation		104
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		104
Item 13	Certain Relationships and Related Transactions, and Director Independence		104
Item 14	Principal Accountant Fees and Services		104

PART IV

Item 15	Exhibits and Financial Statement Schedules		104

Signatures			105

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements about TriCo Bancshares (the “Company,” “TriCo” or “we”) and its subsidiaries for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. When you see any of the words “believes”, “expects”, “anticipates”, “estimates”, or similar expressions, these generally indicate that we are making forward-looking statements. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include those listed at Item 1A Risk Factors, in this report.

Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, whether as a result of new information, future developments or otherwise.

PART I

ITEM 1. BUSINESS

Information about TriCo Bancshares’ Business

TriCo Bancshares is a bank holding company incorporated in California in 1981 and registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company’s principal subsidiary is Tri Counties Bank, a California-chartered commercial bank (the “Bank”). The Bank offers banking services to retail customers and small to medium-sized businesses through 67 branch offices in Northern and Central California and had total assets of approximately $4.2 billion at December 31, 2015. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable limits. See “Business of Tri Counties Bank”. The Company and the Bank are headquartered in Chico, California.

As a bank holding company, TriCo is subject to the supervision of the Board of Governors of the Federal Reserve System (the “FRB”) under the BHC Act. The Bank is subject to the supervision of the California Department of Business Oversight (the “DBO”) and the FDIC. See “Regulation and Supervision.”

TriCo has five capital trusts, which are all wholly-owned trust subsidiaries formed for the purpose of issuing trust preferred securities (“Trust Preferred Securities”) and lending the proceeds to TriCo. For more information regarding the trust preferred securities please refer to Note 17, “Junior Subordinated Debt” to the financial statements at Item 8 of this report.

Additional information concerning the Company can be found on our website at www.tcbk.com. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available free of charge through the investors relations page of our website, www.tcbk.com, as soon as reasonably practicable after the Company files these reports with the U.S. Securities and Exchange Commission (“SEC”). The information on our website is not part this annual report.

Business of Tri Counties Bank

The Bank was incorporated as a California banking corporation on June 26, 1974, and received its certificate of authority to conduct banking operations on March 11, 1975. The Bank engages in the general commercial banking business in 26 counties in Northern and Central California. The Bank currently operates from 55 traditional branches and 12 in-store branches.

The Bank conducts a commercial banking business including accepting demand, savings and time deposits and making commercial, real estate, and consumer loans. It also offers installment note collection, issues cashier’s checks, sells travelers checks and provides safe deposit boxes and other customary banking services. Brokerage services are provided at the Bank’s offices by the Bank’s arrangement with Raymond James Financial Services, Inc., an independent financial services provider and broker-dealer. The Bank does not offer trust services or international banking services.

The Bank has emphasized retail banking since it opened. Most of the Bank’s customers are retail customers and small to medium-sized businesses. The Bank emphasizes serving the needs of local businesses, farmers and ranchers, retired individuals and wage earners. The majority of the Bank’s loans are direct loans made to individuals and businesses in Northern and Central California where its branches are located. At December 31, 2015, the total of the Bank’s consumer loans net of deferred fees outstanding was $395,283,000 (15.3%), the total of commercial loans outstanding was $194,913,000 (7.8%), and the total of real estate loans including construction loans of $120,909,000 was $1,932,741,000 (76.9%). The Bank takes real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery, equipment, inventory, accounts receivable and notes receivable secured by property as collateral for loans.

Most of the Bank’s deposits are attracted from individuals and business-related sources. No single person or group of persons provides a material portion of the Bank’s deposits, the loss of any one or more of which would have a materially adverse effect on the business of the Bank, nor is a material portion of the Bank’s loans concentrated within a single industry or group of related industries.

Acquisition of Three Branch Offices and Deposits from Bank of America

On October 28, 2015, the Bank agreed to purchase three branch offices in Humboldt County, California from Bank of America, N.A. The Company expects that the Bank will purchase and assume approximately $235 million in deposits in this transaction. This transaction is expected to occur in March 2016.

Acquisition of North Valley Bancorp

On October 3, 2014, TriCo completed the acquisition of North Valley Bancorp following receipt of shareholder approval for both institutions and all required regulatory approvals. As part of the acquisition, North Valley Bank, a wholly-owned subsidiary of North Valley Bancorp, merged with and into Tri Counties Bank. In the acquisition, the outstanding shares of North Valley common stock were converted into an aggregate of approximately 6.58 million shares of TriCo common stock to North Valley Bancorp shareholders, which was valued at a total of approximately $151 million based on the closing trading price of TriCo common stock on October 3, 2014 of $23.01. In addition, the outstanding options to purchase shares of North Valley Bancorp common stock were cancelled and the holders of the options received a total of $1,061,000 in cash. In connection with the merger, TriCo assumed North Valley Bancorp’s obligations with respect to its outstanding trust preferred securities.

North Valley Bank was a full-service commercial bank headquartered in Redding, California. North Valley conducted a commercial and retail banking services which included accepting demand, savings, and money market rate deposit accounts and time deposits, and making commercial, real estate and consumer loans. North Valley Bank had $935 million in assets and 22 commercial banking offices in Shasta, Humboldt, Del Norte, Mendocino, Yolo, Sonoma, Placer and Trinity Counties in Northern California at June 30, 2014.

See Note 2 in the financial statements at Item 8 of this report for a discussion about this transaction.

Other Activities

The Bank may in the future engage in other businesses either directly or indirectly through subsidiaries acquired or formed by the Bank subject to regulatory constraints. See “Regulation and Supervision.”

Employees

At December 31, 2015, the Company employed 1,011 persons, including six executive officers. Full time equivalent employees were 963. No employees of the Company are presently represented by a union or covered under a collective bargaining agreement. Management believes that its employee relations are good.

Competition

The banking business in California generally, and in the Bank’s primary service area of Northern and Central California specifically, is highly competitive with respect to both loans and deposits. It is dominated by a relatively small number of national and regional banks with many offices operating over a wide geographic area. Among the advantages such major banks have over the Bank is their ability to finance wide ranging advertising campaigns and to allocate their investment assets to regions of high yield and demand. By virtue of their greater total capitalization such institutions have substantially higher lending limits than does the Bank.

In addition to competing with other banks, the Bank competes with savings institutions, credit unions and the financial markets for funds. Yields on corporate and government debt securities and other commercial paper may be higher than on deposits, and therefore affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for available funds with money market instruments and mutual funds. During past periods of high interest rates, money market funds have provided substantial competition to banks for deposits and they may continue to do so in the future. Mutual funds are also a major source of competition for savings dollars.

The Bank relies substantially on local promotional activity, personal contacts by its officers, directors, employees and shareholders, extended hours, personalized service and its reputation in the communities it services to compete effectively.

Regulation and Supervision

General

The Company and the Bank are subject to extensive regulation under both federal and state law. This regulation is intended primarily for the protection of depositors, the FDIC deposit insurance fund and the banking system as a whole, and not for the protection of shareholders of the Company. Set forth below is a summary description of the significant laws and regulations applicable to the Company and the Bank. The description is qualified in its entirety by reference to the applicable laws and regulations.

Regulatory Agencies

The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. As a bank holding company, the Company is regulated under the BHC Act, and is subject to supervision, regulation and examination by the FRB. The Company is also under the jurisdiction of the SEC and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934, each administered by the SEC. The Company’s common stock is listed on the Nasdaq Global Select market (“Nasdaq”) under the trading symbol “TCBK” and the Company is, therefore, subject to the rules of Nasdaq for listed companies.

The Bank, as a state chartered bank, is subject to broad federal regulation and oversight extending to all its operations by the FDIC and to state regulation by the DBO.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”) as an independent entity with broad rulemaking, supervisory and enforcement authority over consumer financial products and services. The CFPB’s functions include investigating consumer complaints, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer financial products and services. CFPB regulations and guidance apply to all financial institutions, including the Bank. Banks with $10 billion or more in assets are subject to examination by the CFPB. Banks with less than $10 billion in assets, including the Bank, continue to be examined for compliance with federal consumer laws by their primary federal banking agency.

The Bank Holding Company Act

The Company is registered as a bank holding company under the BHC Act. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. As a bank holding company, TriCo is required to file reports with the FRB and the FRB periodically examines the Company. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support the subsidiary bank. Qualified bank holding companies that elect to be financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as determined solely by the FRB). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and agency, and making merchant banking investments. The Company has not elected to become a financial holding company.

The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition of more than 5 percent of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of an acquiring bank’s primary federal regulator is required before it may merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the applicant’s performance record under the Community Reinvestment Act, consumer compliance, fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.

Safety and Soundness Standards

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) implemented certain specific restrictions on transactions and required the regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, the use of brokered deposits and the aggregate extension of credit by a depository institution to an executive officer, director, principal stockholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts.

Section 39 to the Federal Deposit Insurance Act requires the agencies to establish safety and soundness standards for insured financial institutions covering:

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internal controls, information systems and internal audit systems;

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loan documentation;

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credit underwriting;

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interest rate exposure;

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asset growth;

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compensation, fees and benefits;

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asset quality, earnings and stock valuation; and

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excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss.

If an agency determines that an institution fails to meet any standard established by the guidelines, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency. An institution must file a compliance plan within 30 days of a request to do so from the institution’s primary federal regulatory agency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution.

Restrictions on Dividends and Distributions

A California corporation such as TriCo may make a distribution to its shareholders to the extent that either the corporation’s retained earnings meet or exceed the amount of the proposed distribution or the value of the corporation’s assets exceed the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met. It is the FRB’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.

The primary source of funds for payment of dividends by TriCo to its shareholders has been and will be the receipt of dividends and management fees from the Bank. TriCo’s ability to receive dividends from the Bank is limited by applicable state and federal law. Under the California Financial Code, funds available for cash dividend payments by a bank are restricted to the lesser of: (i) retained earnings or (ii) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such period). However, with the prior approval of the Commissioner of the DBO, a bank may pay cash dividends in an amount not to exceed the greatest of the: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) net income of the bank for its current fiscal year. However, if the DBO finds that the shareholders’ equity of the bank is not adequate or that the payment of a dividend would be unsafe or unsound, the Commissioner may order the bank not to pay a dividend to shareholders.

Additionally, under FDICIA, a bank may not make any capital distribution, including the payment of dividends, if after making such distribution the bank would be in any of the “undercapitalized” categories under the FDIC’s Prompt Corrective Action regulations. A bank is undercapitalized for this purpose if its leverage ratios, Tier 1 risk-based capital level and total risk-based capital ratio are not at least four percent, four percent and eight percent, respectively.

The FRB, FDIC and the DBO have authority to prohibit a bank holding company or a bank from engaging in practices which are considered to be unsafe and unsound. Depending on the financial condition of TriCo and the Bank and other factors, the FRB, FDIC or the DBO could determine that payment of dividends or other payments by TriCo or the Bank might constitute an unsafe or unsound practice.

The Community Reinvestment Act

The Community Reinvestment Act of 1977 (“CRA”) requires the federal banking regulatory agencies to periodically assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA also requires the agencies to consider a financial institution’s record of meeting its community credit when evaluating applications for, among other things, domestic branches and mergers or acquisitions. The federal banking agencies rate depository institutions’ compliance with the CRA. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” A less than “satisfactory” rating could result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of its most recent CRA examination, the Bank’s CRA rating was “Satisfactory.”

Consumer Protection Laws

The Bank is subject to many federal consumer protection statues and regulations, some of which are discussed below.

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

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

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

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

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

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

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

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The issuance of a policy report on arbitration clauses which could result in the restriction or prohibition of lenders including arbitration clauses in consumer financial services contracts.

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Actions taken to regulate and supervise credit bureaus and debt collections.

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Positions taken by CFPB on fair lending, including applying the disparate impact theory in auto financing, which could make it harder for lenders, such as the Bank, to charge different rates or apply different terms to loans to different customers.

Penalties for violations of the above laws may include fines, reimbursements, injunctive relief and other penalties.

Regulatory Capital Requirements

The Company and the Bank are subject to the minimum capital requirements of the FDIC and the FRB, respectively. Capital requirements may have an effect on the Company’s and the Bank’s profitability and ability to pay dividends. If the Company or the Bank lacks adequate capital to increase its assets without violating the minimum capital requirements or if it forced to reduce the level of its assets in order to satisfy regulatory capital requirements, its ability to generate earnings would be reduced.

The Company’s and the Bank’s primary federal regulators, the FRB and the FDIC, have adopted guidelines utilizing a risk-based capital structure. Under the risk-based capital rules applicable through December 31, 2014, banking organizations were required to maintain minimum ratios of Tier 1 capital and total capital to total risk- weighted assets (including certain off- balance sheet items, such as letters of credit). Qualifying capital is divided into two tiers. Tier 1 capital consists generally of common stockholders’ equity, retained earnings, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock (at the holding company level) and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. Tier 2 capital consists of, among other things, allowance for loan and lease losses up to 1.25% of weighted risk assets, other perpetual preferred stock, hybrid capital instruments, perpetual debt, mandatory convertible debt, subordinated debt and intermediate-term preferred stock, subject to limitations. Tier 2 capital qualifies as part of total capital up to a maximum of 100% of Tier 1 capital. Under these risk-based capital guidelines, the Company is required to maintain total capital equal to at least 8% of its assets, of which at least 4% must be in the form of Tier 1 capital. In addition, the Bank is subject to minimum capital ratios under the regulatory framework for prompt corrective action discussed below under “— Prompt Corrective Action.”

The Company and the Bank are also required to maintain a minimum leverage ratio of 4% of Tier 1 capital to total assets (the “leverage ratio”). The leverage ratio is determined by dividing an institution’s Tier 1 capital by its quarterly average total assets, less goodwill and certain other intangible assets. The minimum leverage ratio constitutes a minimum requirement for the most well-run banking organizations. See Note 29 in the financial statements at Item 8 of this report for a discussion about the Company’s risk-based capital and leverage ratios.

In July, 2013, the federal banking agencies approved new capital rules implementing the “Basel III” regulatory capital reforms and other changes required by the Dodd-Frank Act. “Basel III” refers to capital guidelines adopted by the Basel Committee on Banking Supervision, which is a committee of central banks and bank supervisors/regulators from the major industrialized countries. The new capital rules include new risk-based capital and leverage ratios, which are being phased in from 2015 to 2019, and which refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank as of January 1, 2015 under the new capital rules include: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The new capital rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: The buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the new capital rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its common equity capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The new capital rules provide regulators discretion to impose an additional capital buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the countercyclical buffer only applies to larger banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures and is not expected to have an impact on the Company or the Bank.

The new capital rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments including trust preferred securities that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the new capital rules provide that depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, such as the Company, will be able to continue to include non-qualifying instruments that were issued and included in Tier 1 capital prior to May 19, 2010, such as the Company’s Trust Preferred Securities, as Tier 1. This treatment is grandfathered and will apply even if the Company exceeds $15 billion assets due to organic growth. However, if the Company exceeds $15 billion in assets as the result of a merger or acquisition, then the Tier 1 treatment of its outstanding trust preferred securities will be phased out but may still be treated as Tier 2 capital.

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

We believe that we were in compliance with the requirements applicable to us as set forth in the new capital rules as of January 1, 2016.

Prompt Corrective Action

Prompt Corrective Action regulations of the federal bank regulatory agencies establish five capital categories in descending order (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), assignment to which depends upon the institution’s total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio. The new capital rules revised the prompt corrective action framework. Under the new prompt corrective action framework, which is designed to complement the capital conservation buffer included in the new capital rules, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%). Institutions classified in one of the three undercapitalized categories are subject to certain mandatory and discretionary supervisory actions, which include increased monitoring and review, implementation of capital restoration plans, asset growth restrictions, limitations upon expansion and new business activities, requirements to augment capital, restrictions upon deposit gathering and interest rates, replacement of senior executive officers and directors, and requiring divestiture or sale of the institution. The Bank has been classified as well-capitalized since adoption of these regulations.

Deposit Insurance

Deposit accounts in the Bank are insured by the FDIC, generally up to a maximum of $250,000 per separately insured depositor. The Bank pays deposit insurance assessments based on its consolidated total assets less tangible equity capital. The assessment rate is based on the risk category of the institution. To determine the total base assessment rate, the FDIC first establishes an institution’s initial base assessment rate and then adjusts the initial base assessment based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits. The total base assessment rate ranges from 2.5 to 45 basis points of the institution’s average consolidated total assets less tangible equity capital.

The Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, the Bank may be required to pay even higher FDIC premiums than the recently increased levels. Increases in FDIC insurance premiums may have a material and adverse affect on the Company’s earnings and could have a material adverse effect on the value of, or market for, the Company’s common stock.

The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for the Bank would also result in the revocation of the Bank’s charter by the DBO.

Interstate Branching

The Dodd-Frank Act authorized national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.

Anti-Money Laundering Laws

A series of banking laws and regulations beginning with the bank Secrecy Act in 1970 requires banks to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the USA Patriot Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities.

Transactions with Affiliates

Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders (including the Company) or any related interest of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not affiliated with the bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. Regulation W requires that certain transactions between the Bank and its affiliates, including its holding company, be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies.

Impact of Monetary Policies

Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and other borrowings, and the interest rate earned by banks on loans, securities and other interest-earning assets comprises the major source of banks’ earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by its open-market dealings in United States government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements and through adjustments to the discount rate applicable to borrowings by banks which are members of the FRB. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates. The nature and timing of any future changes in such policies and their impact on the Company cannot be predicted. In addition, adverse economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan loss charge-offs, thus adversely affecting the Company’s net earnings.

ITEM 1A. RISK FACTORS

In analyzing whether to make or continue holding an investment in the Company, investors should consider, among other factors, the following:

Risks Related to the Nature and Geographic Area of Our Business

We are exposed to risks in connection with the loans we make.

A significant source of risk for us arises from the possibility that we will sustain losses because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. We have underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that we believe to be appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our respective loan portfolios. Such policies and procedures, however, may not prevent unexpected losses that could adversely affect our results of operations. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner.

Our allowance for loan losses may not be adequate to cover actual losses.

Like other financial institutions, we maintain an allowance for loan losses to provide for loan defaults and non-performance. Our allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our business, financial condition, results of operations and cash flows. The allowance for loan losses reflects our estimate of the probable losses in our loan portfolio at the relevant balance sheet date. Our allowance for loan losses is based on prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan portfolio and economic factors. The determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control and these losses may exceed current estimates. Federal and state regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. While we believe that our allowance for loan losses is adequate to cover current losses, we cannot assure you that we will not increase the allowance for loan losses further or that the allowance will be adequate to absorb loan losses we actually incur. Either of these occurrences could have a material adverse affect on our business, financial condition and results of operations.

Our business may be adversely affected by business conditions in Northern and Central California.

We conduct most of our business in Northern and Central California. As a result of this geographic concentration, our results are impacted by the difficult economic conditions in California. Deterioration in the economic conditions in California could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows:

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problem assets and foreclosures may increase,

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demand for our products and services may decline,

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low cost or non-interest bearing deposits may decrease, and

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collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans.

In view of the concentration of our operations and the collateral securing our loan portfolio in both Northern and Central California, we may be particularly susceptible to the adverse effects of any of these consequences, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

A significant majority of the loans in our portfolio are secured by real estate and a downturn in our real estate markets could hurt our business.

A downturn in our real estate markets in which we conduct our business in California could hurt our business because most of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature. As real estate prices decline, the value of real estate collateral securing our loans is reduced. As a result, our ability to recover on defaulted loans by foreclosing and selling the real estate collateral could then be diminished and we would be more likely to suffer losses on defaulted loans. As of December 31, 2015, approximately 91.0% of the book value of our loan portfolio consisted of loans collateralized by various types of real estate. Substantially all of our real estate collateral is located in California. So if there is a significant adversely decline in real estate values in California, the collateral for our loans will provide less

security. Real estate values could also be affected by, among other things, earthquakes, drought and national disasters in our markets. Any such downturn could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We depend on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of our senior management team of Messrs. Smith, O’Sullivan, Bailey, Reddish, Carney, and Ms. Ward, who have expertise in banking and experience in the California markets we serve and have targeted for future expansion. We also depend upon a number of other key executives who are California natives or are long-time residents and who are integral to implementing our business plan. The loss of the services of any one of our senior executive management team or other key executives could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are exposed to the risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Strong competition in California could hurt our profits.

Competition in the banking and financial services industry is intense. Our profitability depends upon our continued ability to successfully compete. We compete exclusively in Northern and Central California for loans, deposits and customers with commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms. In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened loan production offices or that solicit deposits in our market areas. If we are unable to attract and retain banking customers, we may be unable to continue our loan growth and level of deposits and our business, financial condition, results of operations and cash flows may be adversely affected.

Our previous results may not be indicative of our future results.

We may not be able to sustain our historical rate of growth and level of profitability or may not even be able to grow our business or continue to be profitable at all. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence and financial performance. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.

We may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral that we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse affect on our financial condition and results of operations.

Our business may be adversely affected the continuing drought in California.

California is experiencing the fourth year of a severe drought. A considerable portion of our borrowers are involved in, or are impacted to some extent by, the agricultural industry, which is dependent on water. Agriculture operating loans comprised $38.9 million and $34.8 million, or 1.5% and 1.5%, of our loan portfolio at December 31, 2015 and 2014, respectively. We also originate agriculture real estate loans, which comprised $74.5 million and $67.7 million or 3.0% and 3.0% of our loan portfolio at December 31, 2015 and 2014. As a result of the drought, there are various governmental proposals concerning the distribution or rationing of water. If the amount of water available to agriculture in our market areas becomes increasingly scarce due to drought, rationing and/or diversion, growers may not be able to continue to produce agricultural products at a reasonable profit, which has the potential to force many out of business. While many of our borrowers are not directly involved in agriculture, they could be impacted by difficulties in the agricultural industry because many jobs in our market areas are ancillary to the production, processing, marketing and sales of agricultural products. The drought has the potential to adversely affect agricultural industries as well as consumer purchasing power, and could lead to further unemployment throughout our market area. The drought therefore could have a material adverse effect on our business, financial condition, results of operations and asset quality.

Market and Interest Rate Risk

Low interest rates could hurt our profits.

Our ability to earn a profit, like that of most financial institutions, depends on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as mortgage loans and investments, and the interest expense we pay on our interest-bearing liabilities, such as deposits. Our profitability depends on our ability to manage our assets and liabilities during periods of changing market interest rates. Recently, the FRB has maintained the targeted federal funds rate at record low levels. A sustained decrease in market interest rates could adversely affect our earnings. When interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates. Under those circumstances, we would not be able to reinvest those prepayments in assets earning interest rates as high as the rates on the prepaid loans on investment securities. In addition, our commercial real estate and commercial loans, which carry interest rates that adjust in accordance with changes in the prime rate, will adjust to lower rates.

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

Because of the differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread and, in turn, our profitability. In addition, loan origination volumes are affected by market interest rates. Rising interest rates, generally, are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates may decline and in falling interest rate environments, loan repayment rates may increase. Although we have been successful in generating new loans during 2013, the continuation of historically low long-term interest rate levels may cause additional refinancing of commercial real estate and 1-4 family residence loans, which may depress our loan volumes or cause rates on loans to decline. In addition, an increase in the general level of short-term interest rates on variable rate loans may adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations or reduce the amount they wish to borrow. Additionally, if short-term market rates rise, in order to retain existing deposit customers and attract new deposit customers we may need to increase rates we pay on deposit accounts. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume, business, financial condition, results of operations and cash flows.

Regulatory Risks

Recently enacted financial reform legislation has, among other things, created a new Consumer Financial Protection Bureau, tightened capital standards and resulted in new laws and regulations that are expected to increase our costs of operations.

The Dodd-Frank Act, which was enacted in 2010, significantly changed the current bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. Among other things, the Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10

billion in assets. Banks such as the Bank with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators. In addition, the Dodd-Frank Act required the FDIC and FRB to adopt new, more stringent capital rules that apply to us. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

It is difficult to predict the continuing impact that the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

We operate in a highly regulated environment and we may be adversely affected by new laws and regulations or changes in existing laws and regulations. Regulations may prevent or impair our ability to pay dividends, engage in acquisitions or operate in other ways.

We are subject to extensive regulation, supervision and examination by the DBO, FDIC, and the FRB. See Item 1 - Regulation and Supervision of this report for information on the regulation and supervision which governs our activities. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Banking regulations, designed primarily for the protection of depositors, may limit our growth and the return to our shareholders by restricting certain of our activities, such as:

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the payment of dividends to our shareholders,

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possible mergers with or acquisitions of or by other institutions,

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desired investments,

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loans and interest rates on loans,

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interest rates paid on deposits,

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the possible expansion of branch offices, and

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the ability to provide securities or trust services.

We also are subject to regulatory capital requirements and could be subject to enforcement actions to the extent that we don’t meet these requirements. Federal and state governments and regulators could pass legislation and adopt policies responsive to current credit conditions that would have an adverse effect on the Company and its financial performance. We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material adverse impact on our operations.

Compliance with changing regulation of corporate governance and public disclosure may result in additional risks and expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Act, the Sarbanes-Oxley Act of 2002 and new SEC regulations, are creating additional expense for publicly-traded companies such as TriCo. The application of these laws, regulations and standard may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased expenses and a diversion of management time and attention. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding management’s required assessment of its internal control over financial reporting and its external auditors’ audit of that assessment requires, and will continue to require, the commitment of significant financial and managerial resources. Further, the members of our board of directors, members of our audit or compensation and management succession committees, our chief executive officer, our chief financial officer and certain other executive officers could face an increased risk of personal liability in connection with the performance of their duties. It may also become more difficult and more expensive to obtain director and officer liability insurance. As a result, our ability to attract and retain executive officers and qualified board and committee members could be more difficult.

Risks Related to Growth and Expansion

Goodwill resulting from the acquisition of North Valley Bancorp may adversely affect our results of operations.

Goodwill and other intangible assets have to increased substantially as a result of the acquisition of North Valley Bancorp. Potential impairment of goodwill and amortization of other intangible assets could adversely affect our financial condition and results of operations. We assess our goodwill and other intangible assets and long-lived assets for impairment annually and more frequently when required by U.S. GAAP. We are required to record an impairment charge if circumstances indicate that the asset carrying values exceed their fair values. Our assessment of goodwill, other intangible assets, or long-lived assets could indicate that an impairment of the carrying value of such assets may have occurred that could result in a material, non-cash write-down of such assets, which could have a material adverse effect on our results of operations and future earnings.

If we cannot attract deposits, our growth may be inhibited.

We plan to increase the level of our assets, including our loan portfolio. Our ability to increase our assets depends in large part on our ability to attract additional deposits at favorable rates. We intend to seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our customers. We cannot assure that these efforts will be successful. Our inability to attract additional deposits at competitive rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.

There are potential risks associated with future acquisitions and expansions.

We intend to continue to explore expanding our branch system through opening new bank branches and in-store branches in existing or new markets in Northern and Central California. In the ordinary course of business, we evaluate potential branch locations that would bolster our ability to cater to the small business, individual and residential lending markets in California. Any given new branch, if and when opened, will have expenses in excess of revenues for varying periods after opening that may adversely affect our results of operations or overall financial condition.

In addition, to the extent that we acquire other banks in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. These risks include:

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incurring substantial expenses in pursuing potential acquisitions without completing such acquisitions,

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losing key clients as a result of the change of ownership,

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the acquired business not performing in accordance with our expectations,

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difficulties arising in connection with the integration of the operations of the acquired business with our operations,

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needing to make significant investments and infrastructure, controls, staff, emergency backup facilities or other critical business functions that become strained by our growth,

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management needing to divert attention from other aspects of our business,

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potentially losing key employees of the acquired business,

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incurring unanticipated costs which could reduce our earnings per share,

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assuming potential liabilities of the acquired company as a result of the acquisition, and

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an acquisition may dilute our earnings per share, in both the short and long term, or it may reduce our tangible capital ratios.

As result of these risks, any given acquisition, if and when consummated, may adversely affect our results of operations or financial condition. In addition, because the consideration for an acquisition may involve cash, debt or the issuance of shares of our stock and may involve the payment of a premium over book and market values, existing shareholders may experience dilution in connection with any acquisition.

Our growth and expansion may strain our ability to manage our operations and our financial resources.

Our financial performance and profitability depend on our ability to execute our corporate growth strategy. In addition to seeking deposit and loan and lease growth in our existing markets, we may pursue expansion opportunities in new markets. Continued growth, however, may present operating and other problems that could adversely affect our business, financial condition, results of operations and cash flows. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced.

Our growth may place a strain on our administrative, operational and financial resources and increase demands on our systems and controls. This business growth may require continued enhancements to and expansion of our operating and financial systems and controls and may strain or significantly challenge them. In addition, our existing operating and

financial control systems and infrastructure may not be adequate to maintain and effectively monitor future growth. Our continued growth may also increase our need for qualified personnel. We cannot assure you that we will be successful in attracting, integrating and retaining such personnel.

Our decisions regarding the fair value of assets acquired from North Valley Bancorp, Citizens Bank of Northern California and Granite Community Bank, including the FDIC loss sharing assets or liabilities associated with Granite, could be inaccurate which could materially and adversely affect our business, financial condition, results of operations, and future prospects.

Management makes various assumptions and judgments about the collectability of acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions that include loss sharing agreements, such as our acquisition of Granite Community Bank, we may record a loss sharing asset or liability that we consider adequate to absorb future losses or recoveries which may occur in the acquired loan portfolio. In determining the size of the loss sharing asset or liability, we analyze the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and nonaccruals, local economic conditions, and other pertinent information.

If our assumptions are incorrect, the balance of the FDIC indemnification asset or liability may at any time be insufficient to cover future loan losses or recoveries, and credit loss provisions may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future loan losses could have a negative effect on our operating results.

Our ability to obtain reimbursement under the loss sharing agreement on covered assets purchased from the FDIC depends on our compliance with the terms of the loss sharing agreement.

We must certify to the FDIC on a quarterly basis our compliance with the terms of the FDIC loss sharing agreement as a prerequisite to obtaining reimbursement from the FDIC for realized losses on covered assets. The required terms of the agreements are extensive and failure to comply with any of the guidelines could result in a specific asset or group of assets permanently losing their loss sharing coverage. Additionally, Management may decide to forgo loss share coverage on certain assets to allow greater flexibility over the management of certain assets. As of December 31, 2015, $5,235,000, or 0.12%, of the Company’s assets were covered by these FDIC loss sharing agreements.

Risks Relating to Dividends and Our Common Stock

Our future ability to pay dividends is subject to restrictions.

Since we are a holding company with no significant assets other than the Bank, we currently depend upon dividends from the Bank for a substantial portion of our revenues. Our ability to continue to pay dividends in the future will continue to depend in large part upon our receipt of dividends or other capital distributions from the Bank. The ability of the Bank to pay dividends or make other capital distributions to us is subject to the restrictions in the California Financial Code and the DBO. As of December 31, 2015, the Bank could have paid $73,297,000 in dividends without the prior approval of the DBO. The amount that the Bank may pay in dividends is further restricted due to the fact that the Bank must maintain a certain minimum amount of capital to be considered a “well capitalized” institution as further described under Item 1 - Capital Requirements in this report.

From time to time, we may become a party to financing agreements or other contractual arrangements that have the effect of limiting or prohibiting us or the Bank from declaring or paying dividends. Our holding company expenses and obligations with respect to our trust preferred securities and corresponding junior subordinated deferrable interest debentures issued by us may limit or impair our ability to declare or pay dividends. Finally, our ability to pay dividends is also subject to the restrictions of the California Corporations Code. See “Regulation and Supervision – Restrictions on Dividends and Distributions.”

Anti-takeover provisions and federal law may limit the ability of another party to acquire us, which could cause our stock price to decline.

Various provisions of our articles of incorporation and bylaws could delay or prevent a third party from acquiring us, even if doing so might be beneficial to our shareholders. These provisions provide for, among other things:

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specified actions that the Board of Directors shall or may take when an offer to merge, an offer to acquire all assets or a tender offer is received,

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advance notice requirements for proposals that can be acted upon at shareholder meetings, and

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the authorization to issue preferred stock by action of the board of directors acting alone, thus without obtaining shareholder approval.

The BHC Act and the Change in Bank Control Act of 1978, as amended, together with federal regulations, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or entity acquiring “control” of a bank holding company such as TriCo. These provisions may prevent a merger or acquisition that would be attractive to shareholders and could limit the price investors would be willing to pay in the future for our common stock.

The amount of common stock owned by, and other compensation arrangements with, our officers and directors may make it more difficult to obtain shareholder approval of potential takeovers that they oppose.

As of December 31, 2015, directors and executive officers beneficially owned approximately 10.8% of our common stock and our Employee Stock Ownership Plan owned approximately 5.6%. Agreements with our senior management also provide for significant payments under certain circumstances following a change in control. These compensation arrangements, together with the common stock and option ownership of our board of directors and management, could make it difficult or expensive to obtain majority support for shareholder proposals or potential acquisition proposals of us that our directors and officers oppose.

We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.

In order to maintain our capital at desired or regulatorily-required levels, or to fund future growth, our board of directors may decide from time to time to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of our common stock. The sale of these shares may significantly dilute your ownership interest as a shareholder. New investors in the future may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders.

Holders of our junior subordinated debentures have rights that are senior to those of our common stockholders.

We have supported our continued growth through the issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. At December 31, 2015, we had outstanding trust preferred securities and accompanying junior subordinated debentures with face value of $62,889,000. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures we issued to the trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock.

Risks Relating to Systems, Accounting and Internal Controls

If we fail to maintain an effective system of internal and disclosure controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our securities.

Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We continually review and analyze our internal control over financial reporting for Sarbanes-Oxley Section 404 compliance. As part of that process we may discover material weaknesses or significant deficiencies in our internal control as defined under standards adopted by the Public Company Accounting Oversight Board that require remediation. Material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected in a timely basis. Significant deficiency is a deficiency or combination of deficiencies, in internal control over financial reporting that is less severe than material weakness, yet important enough to merit attention by those responsible for the oversight of the Company’s financial reporting.

As a result of weaknesses that may be identified in our internal control, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses, we will make efforts to improve our internal and disclosure control. However, there is no assurance that we will be successful. Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect our ability to remain listed with Nasdaq. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our securities.

We rely on communications, information, operating and financial control systems technology and we may suffer an interruption in or breach of the security of those systems.

We rely heavily on our communications, information, operating and financial control systems technology to conduct our business. We rely on third party services providers to provide many of these systems. Any failure, interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and loan origination systems. We cannot assure you that such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed by us or the third parties service providers on which we rely. The occurrence of any failures, interruptions or security breaches could damage our reputation, result in a loss of customers, expose us to possible financial liability, lead to additional regulatory scrutiny or require that we make expenditures for remediation or prevention. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows.

A failure to implement technological advances could negatively impact our business.

The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources than we do to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or successfully market such products and services to our customers.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company is engaged in the banking business through 67 offices in 26 counties in Northern and Central California including thirteen offices in Shasta County, nine in Butte County, six in Sacramento and Nevada Counties, five in Placer and Humboldt Counties, three each in Stanislaus, Siskiyou, and Sutter Counties, two each in Glenn, Mendocino and Trinity Counties, and one each in Colusa, Contra Costa, Del Norte, Fresno, Kern, Lake, Lassen, Madera, Merced, Sonoma, Tehama, Tulare, Yolo and Yuba Counties. All offices are constructed and equipped to meet prescribed security requirements.

The Company owns twenty-nine branch office locations, five administrative buildings, two other buildings that it leases out and two that are for sale. The Company leases thirty-eight branch office locations, two loan production offices, and one administrative location. Most of the leases contain multiple renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance.

ITEM 3. LEGAL PROCEEDINGS

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 1.648265 per Class B share. As of December 31, 2015, the value of the Class A shares was $77.55 per share. Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was $1,712,000 as of December 31, 2015, and has not been reflected in the accompanying 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 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.

On January 24, 2014, a putative shareholder class action lawsuit was filed against TriCo, North Valley Bancorp and certain other defendants in connection with TriCo entering into the merger agreement with North Valley Bancorp. The lawsuit, which was filed in the Shasta County, California Superior Court, alleges that the members of the North Valley Bancorp board of directors breached their fiduciary duties to North Valley Bancorp shareholders by approving the proposed merger for inadequate consideration; approving the transaction in order receive benefits not equally shared by other North Valley Bancorp shareholders; entering into the merger agreement containing preclusive deal protection devices; and failing to take steps to maximize the value to be paid to the North Valley Bancorp shareholders. The lawsuit alleges claims against TriCo for aiding and abetting these alleged breaches of fiduciary duties. The plaintiff seeks, among other things, declaratory and injunctive relief concerning the alleged breaches of fiduciary duties injunctive relief prohibiting consummation of the merger, rescission, attorneys’ of the merger agreement, fees and costs, and other and further relief. On July 31, 2014 the defendants

entered into a memorandum of understanding with the plaintiffs regarding the settlement of this lawsuit. In connection with the settlement contemplated by the memorandum of understanding and in consideration for the full settlement and release of all claims, TriCo and North Valley Bancorp agreed to make certain additional disclosures related to the proposed merger, which are contained in a Current Report on Form 8-K filed by each of the companies. The memorandum of understanding contemplated that the parties would negotiate in good faith and use their reasonable best efforts to enter into a stipulation of settlement. The parties entered into a stipulation of settlement dated May 18, 2015 that was subject to customary conditions, including final court approval following notice to North Valley Bancorp’s shareholders. The parties amended the stipulation on October 19, 2015. Following a hearing in Shasta County Superior Court on October 26, 2015, the Court approved and entered a final Stipulated Judgement concluding the case and dismissing all the named individual director defendants. The Court awarded the plaintiff $250,000 in fees. A liability related to this potential settlement was established by North Valley Bancorp prior to its acquisition by TriCo on October 3, 2015, and that liability was recorded by TriCo as part of its purchase accounting of North Valley Bancorp on October 3, 2015.

On September 15, 2014, a former Personal Banker at one of the Bank’s in-store branches filed a Class Action Complaint against the Bank in Butte County Superior Court, alleging causes of action related to the observance of meal and rest periods and seeking to represent a class of current and former hourly-paid or non-exempt personal bankers, or employees with the same or similar job duties, employed by Defendants within the State of California during the preceding four years. On or about June 25, 2015, Plaintiff filed an Amended Complaint expanding the class definition to all current and formerly hourly-paid or non-exempt branch employees employed by Defendant’s within the State of California at any time during the period from September 15, 2010 to final judgment. The Bank has responded to the First Amended Complaint, denying the charges, and the parties have engaged in written discovery. The parties are in the process of scheduling the matter for mediation in the June – July, 2016 time period.

On January 20, 2015, a current Personal Banker at one of the Bank’s in-store branches filed a First Amended Complaint against Tri Counties Bank and TriCo Bancshares, dba Tri Counties Bank, in Sacramento County Superior Court, alleging causes of action related to wage statement violations. Plaintiff seeks to represent a class of current and former exempt and non-exempt employees who worked for the Bank during the time period beginning October 18, 2013 through the date of the filing of this action. The Company and the Bank have responded to the First Amended Complaint, deny the charges, and has engaged in written discovery with Plaintiff. The parties intend to mediate this matter in a joint mediation with the above matter this summer.

Neither the Company nor its subsidiaries, are party to any other material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, except routine legal proceedings arising in the ordinary course of their business. None of these proceedings is expected to have a material adverse impact upon the Company’s business, consolidated financial position or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Inapplicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Market Prices and Dividends

The Company’s common stock is traded on the Nasdaq under the symbol “TCBK.” The following table shows the high and the low closing sale prices for the common stock for each quarter in the past two years, as reported by Nasdaq:


	High		Low
2015:
Fourth quarter	$	29.39	$	24.25
Third quarter	$	25.55	$	23.08
Second quarter	$	24.75	$	23.18
First quarter	$	24.77	$	22.82
2014:
Fourth quarter	$	26.37	$	22.43
Third quarter	$	24.19	$	21.70
Second quarter	$	26.12	$	22.44
First quarter	$	28.37	$	23.85

As of February 26, 2016 there were approximately 1,636 shareholders of record of the Company’s common stock. On February 26, 2016, the closing sales price was $25.18.

The Company has paid cash dividends on its common stock in every quarter since March 1990, and it is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, financial condition and capital requirements of the Company and the Bank. As of December 31, 2015 $73,297,000 was available for payment of dividends by the Bank to the Company, under applicable laws and regulations. The Company paid cash dividends of $0.15 per common share in the quarter ended December 31, 2015, and $0.13 per common share in each of the quarters ended September 30, 2015, June 30, 2015, and $0.11 per common share in each of the quarters ended March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014, and March 31, 2014.

Issuer Repurchases of Common Stock

The Company adopted a stock repurchase plan on August 21, 2007 for the repurchase of up to 500,000 shares of the Company’s common stock from time to time as market conditions allow. The 500,000 shares authorized for repurchase under this plan represented approximately 3.2% of the Company’s approximately 15,815,000 common shares outstanding as of August 21, 2007. This plan has no stated expiration date for the repurchases. As of December 31, 2015, the Company had purchased 166,600 shares under this plan.

The following table shows the repurchases made by the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the fourth quarter of 2015:


Period	(a) Total number of shares purchased⁽¹⁾		(b) Average price paid per share		(c) Total number of shares purchased as of part of publicly announced plans or programs		(d) Maximum number shares that may yet be purchased under the plans or programs⁽²⁾
Oct. 1-31, 2015		—		—		—		333,400
Nov. 1-30, 2015		76,034	$	28.77		—		333,400
Dec. 1-31, 2015		—		—		—		333,400

Total		76,034	$	28.77		—		333,400

(1)

Includes shares purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans. See Note 19 to the consolidated financial statements at Item 8 of Part II of this report, for a discussion of the Company’s stock repurchased under equity compensation plans.

(2)	Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans.

The following graph presents the cumulative total yearly shareholder return from investing $100 on December 31, 2010, in each of TriCo common stock, the Russell 3000 Index, and the SNL Western Bank Index. The SNL Western Bank Index compiled by SNL Financial includes banks located in California, Oregon, Washington, Montana, Hawaii and Alaska with market capitalization similar to that of TriCo’s. The amounts shown assume that any dividends were reinvested.

LOGO


	*Period Ending*
*Index*	12/31/10		12/31/11		12/31/12		12/31/13		12/31/14		12/31/15
TriCo Bancshares		100.00		90.34		108.80		187.85		166.59		188.88
Russell 3000		100.00		101.03		117.61		157.07		176.79		177.64
SNL Western Bank		100.00		90.34		114.01		160.41		192.51		199.46

Equity Compensation Plans

The following table shows shares reserved for issuance for outstanding options, stock appreciation rights and warrants granted under our equity compensation plans as of December 31, 2015. All of our equity compensation plans have been approved by shareholders.


Plan category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans not approved by shareholders		—		—		—
Equity compensation plans approved by shareholders		948,350	$	17.94		734,107

Total		948,350	$	17.94		734,107

ITEM 6. SELECTED FINANCIAL DATA

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

TRICO BANCSHARES

Financial Summary

(in thousands, except per share amounts)


Year ended December 31,	2015			2014			2013			2012			2011

Interest income	$	161,414		$	121,115		$	106,560		$	108,716		$	102,982
Interest expense		5,416			4,681			4,696			7,344			10,238


Net interest income		155,998			116,434			101,864			101,372			92,744
(Benefit from) provision for loan losses		(2,210	)		(4,045	)		(715	)		9,423			23,060
Noninterest income		45,347			34,516			36,829			37,980			42,813
Noninterest expense		130,841			110,379			93,604			97,998			82,715


Income before income taxes		72,714			44,616			45,804			31,931			29,782
Provision for income taxes		28,896			18,508			18,405			12,937			11,192


Net income	$	43,818		$	26,108		$	27,399		$	18,994		$	18,590


Earnings per share:
Basic	$	1.93		$	1.47		$	1.71		$	1.19		$	1.17
Diluted	$	1.91		$	1.46		$	1.69		$	1.18		$	1.16
Per share:
Dividends paid	$	0.52		$	0.44		$	0.42		$	0.36		$	0.36
Book value at December 31	$	19.85		$	18.41		$	15.61		$	14.33		$	13.55
Tangible book value at December 31	$	16.81		$	15.31		$	14.59		$	13.30		$	12.49

Average common shares outstanding		22,750			17,716			16,045			15,988			15,935
Average diluted common shares outstanding		22,998			17,923			16,197			16,052			16,000
Shares outstanding at December 31		22,775			22,715			16,077			16,001			15,979

At December 31:
Loans, net of allowance	$	2,486,926		$	2,245,939		$	1,633,762		$	1,522,175		$	1,505,118
Total assets		4,220,722			3,916,458			2,744,066			2,609,269			2,555,597
Total deposits		3,631,266			3,380,423			2,410,483			2,289,702			2,190,536
Other borrowings		12,328			9,276			6,335			9,197			72,541
Junior subordinated debt		56,470			56,272			41,238			41,238			41,238
Shareholders’ equity		452,116			418,172			250,946			229,359			216,441

Financial Ratios:

For the year:
Return on average assets		1.11	%		0.87	%		1.04	%		0.75	%		0.82	%
Return on average equity		10.04	%		8.67	%		11.34	%		8.44	%		8.93	%
Net interest margin¹		4.32	%		4.17	%		4.18	%		4.32	%		4.43	%
Net loan (recoveries) losses to average loans		(0.07	)%		(0.13	)%		0.23	%		0.82	%		1.37	%
Efficiency ratio²		64.7	%		72.9	%		67.32	%		70.19	%		60.88	%
Average equity to average assets		11.01	%		10.00	%		9.21	%		8.91	%		9.15	%
Dividend payout ratio		27.2	%		30.1	%		24.9	%		30.5	%		31.0	%
At December 31:
Equity to assets		10.71	%		10.68	%		9.15	%		8.79	%		8.47	%
Total capital to risk-adjusted assets		15.09	%		15.63	%		14.77	%		14.53	%		13.94	%

¹	Fully taxable equivalent.

²	The sum of fully taxable equivalent net interest income and noninterest income divided by noninterest expense.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

As TriCo Bancshares has not commenced any business operations independent of the Bank, the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. The presentation of interest income and net interest income on a FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a non-FTE basis in this Item 7 this report, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. 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 loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans, intangible assets and the fair value of acquired assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company’s policies related to estimates on the allowance for loan 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.

On October 3, 2014, TriCo completed the acquisition of North Valley Bancorp. As part of the acquisition, North Valley Bank, a wholly-owned subsidiary of North Valley Bancorp, merged with and into Tri Counties Bank. In the acquisition, each share of North Valley common stock was converted into the right to receive 0.9433 shares of TriCo common stock. TriCo issued an aggregate of approximately 6.58 million shares of TriCo common stock to North Valley Bancorp shareholders, which was valued at a total of approximately $151 million based on the closing trading price of TriCo common stock on October 3, 2014 of $21.73. TriCo also assumed North Valley Bancorp’s obligations with respect to its outstanding trust preferred securities. Beginning on October 4, 2014, the effect of revenue and expenses from the operations of North Valley Bancorp, and the TriCo Bancshares common shares issued in consideration of the merger are included in the results of the Company.

North Valley Bank was a full-service commercial bank headquartered in Redding, California. North Valley conducted a commercial and retail banking services which included accepting demand, savings, and money market rate deposit accounts and time deposits, and making commercial, real estate and consumer loans. North Valley Bank had approximately $935 million in assets and 22 commercial banking offices in Shasta, Humboldt, Del Norte, Mendocino, Yolo, Sonoma, Placer and Trinity Counties in Northern California at June 30, 2014. See Note 2 in the financial statements at Item 8 of Part II of this report for a discussion about this transaction.

On September 23, 2011, the California DBO closed Citizens Bank of Northern California (“Citizens”), Nevada City, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Citizens from the FDIC under a whole bank purchase and assumption agreement without loss sharing. With this agreement, the Bank added seven traditional bank branches including two in Grass Valley, and one in each of Nevada City, Penn Valley, Lake of the Pines, Truckee, and Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and provides further opportunity to fill in the Bank’s market presence in the Northern California market.

On May 28, 2010, the Office of the Comptroller of the Currency closed Granite Community Bank (“Granite”), Granite Bay, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Granite from the FDIC under a whole bank purchase and assumption agreement with loss sharing. Under the terms of the loss sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, other real estate owned (OREO)/foreclosed assets and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the covered assets acquired from Granite. The loss sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the

loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. With this agreement, the Bank added one traditional bank branch in each of Granite Bay and Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and provides further opportunity to fill in the Bank’s market presence in the greater Sacramento, California market.

The Company refers to loans and foreclosed assets that are covered by loss sharing agreements as “covered loans” and “covered foreclosed assets”, respectively. In addition, the Company refers to loans purchased or obtained in a business combination as “purchased credit impaired” (PCI) loans, or “purchased not credit impaired” (PNCI) loans. The Company refers to loans that it originates as “originated” loans. Additional information regarding the North Valley Bancorp acquisition can be found in Note 2 in the financial statements at Item 8 of this report. Additional information regarding the definitions and accounting for originated, PNCI and PCI loans can be found in Notes 1, 2, 4 and 5 in the financial statements at Item 8 of this report, and under the heading Asset Quality and Non-Performing Assets below.

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that area of California north of, and including, Stockton; central California as that area of the State south of Stockton, to and including, Bakersfield; and southern California as that area of the State south of Bakersfield.

Results of Operations

Overview

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

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


	Year ended December 31,
	2015			2014			2013
Components of Net Income
Net interest income	$	155,998		$	116,434		$	101,864
Benefit from (provision for) loan losses		2,210			4,045			715
Noninterest income		45,347			34,516			36,829
Noninterest expense		(130,841	)		(110,379	)		(93,604	)
Taxes		(28,896	)		(18,508	)		(18,405	)

Net income	$	43,818		$	26,108		$	27,399

Net income per average fully-diluted share	$	1.91		$	1.46		$	1.69
Net income as a percentage of average shareholders’ equity		10.04	%		8.67	%		11.34	%
Net income as a percentage of average total assets		1.11	%		0.87	%		1.04	%

Net Interest Income

The Company’s primary source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on interest-bearing liabilities.

Following is a summary of the Company’s net interest income for the periods indicated (dollars in thousands):


	Year ended December 31,
	2015			2014			2013
Components of Net Interest Income
Interest income	$	161,414		$	121,115		$	106,560
Interest expense		(5,416	)		(4,681	)		(4,696	)

Net interest income		155,998			116,434			101,864
FTE adjustment		905			303			350

Net interest income (FTE)	$	156,903		$	116,737		$	102,214

Net interest margin (FTE)		4.32	%		4.17	%		4.18	%

Net interest income (FTE) for the year ended December 31, 2015 increased $40,166,000 (34.4%) to $156,903,000 from $116,737,000 during. The increase in net interest income (FTE) was due primarily to a $541,688,000 (29.3%) increase in the average balance of loans to $2,389,437,000, and a $505,217,000 (93%) increase in the average balance of investments to $1,049,983,000 that were partially offset by a 10 basis point decrease in the average yield on loans from 5.62% during the year ended December 31, 2014 to 5.52% during the year ended December 31, 2015, and a 17 basis point decrease in the average yield on investments from 3.01% during the year ended December 31, 2014 to 2.84% during the year ended December 31, 2015. The $541,688,000 increase in average loan balances compared to the prior year was due primarily to the

addition of $499,327,000 of loans through the acquisition of North Valley Bancorp on October 4, 2014, and net loan growth of $240,414,000 (10.5%) during the year ended December 31, 2015. The $505,217,000 increase in average investment balances from the prior year was due primarily to the addition of $212,616,000 of investments through the acquisition of North Valley Bancorp on October 4, 2014, and $371,784,000 of investment purchases in excess of investment maturities and paydowns during 2015. The 10 basis point decrease in average loan yields was due primarily to declines in market yields on new and renewed loans compared to yields on repricing, maturing, and paid off loans. The decrease in average investment yields was due primarily to declines in market yields on new investments compared to yields on existing investments. The increases in average loan and investment balances added $30,443,000 and $15,493,000, respectively, to net interest income (FTE) while the decreases in average loan and investment yields reduced net interest income (FTE) during 2015 by $2,494,000 and $2,056,000, respectively, when compared to 2014. Included in investment interest income during the year ended December 31, 2015 was a special cash dividend of $626,000 from the Company’s investment in Federal Home Loan Bank of San Francisco stock. Included in loan interest income during the year ended December 31, 2015 was discount accretion from purchased loans of $10,056,000 compared to $6,437,000 of discount accretion from purchased loans during the year ended December 31, 2014. Also included in loan interest income during the year ended December 31, 2015 was the recovery of $728,000 of loan interest income from the payoff of a single originated loan that was in interest nonaccrual status; and while recoveries of loan interest income from paid off nonaccrual loans occur from time to time, a single recovery of this magnitude is unusual. 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 30 to the consolidated financial statements at Part II, Item 8 of this report. The “Yield” and “Volume/Rate” tables shown below are useful in illustrating and quantifying the developments that affected net interest income during 2015 and 2014.

Net interest income (FTE) for the year ended December 31, 2014 was $116,737,000, an increase of $14,523,000 or 14.2% compared to the year ended December 31, 2013. The increase in net interest income (FTE) was due primarily to a $353,071,000 (14.4%) increase in the average balance of interest earning assets to $2,796,571,000, and the use of fed funds sold to purchase higher yielding investments throughout 2014 that were partially offset by a 44 basis point decrease in the average yield on loans to 5.62% and a 17 basis point decrease in the average yield on investments to 3.01% during the year ended December 31, 2014 when compared to the year ended December 31, 2013. The acquisition of North Valley Bancorp on October 3, 2014 contributed approximately $6,730,000, to interest income from loans, including approximately $480,000 of loan purchase discount accretion, and $1,310,000 to interest income from investments from October 4, 2014 to December 31, 2014. For the quarter ended December 31, 2014, the average yields on the acquired North Valley Bancorp loans, including the effect of loan purchase discount accretion, and investments were approximately 5.68% and 2.72% (FTE), respectively.

Summary of Average Balances, Yields/Rates and Interest Differential – Yield Tables

The following tables present, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands):


	Year ended December 31, 2015
	Average balance		Interest income/expense		Rates earned/paid
Assets
Loans	$	2,389,437	$	131,836		5.52	%
Investment securities - taxable		1,000,221		27,421		2.74	%
Investment securities - nontaxable		49,762		2,414		4.85	%
Cash at Federal Reserve and other banks		189,506		648		0.34	%

Total earning assets		3,628,926		162,319		4.47	%

Other assets		335,072

Total assets	$	3,963,998

Liabilities and shareholders’ equity
Interest-bearing demand deposits	$	808,281		476		0.06	%
Savings deposits		1,183,201		1,475		0.12	%
Time deposits		340,443		1,482		0.44	%
Other borrowings		8,668		4		0.05	%
Junior subordinated debt		56,345		1,979		3.51	%

Total interest-bearing liabilities		2,396,938		5,416		0.23	%

Noninterest-bearing demand		1,076,162
Other liabilities		54,597
Shareholders’ equity		436,301

Total liabilities and shareholders’ equity	$	3,963,998

Net interest spread ⁽¹⁾						4.24	%
Net interest income and interest margin ⁽²⁾			$	156,903		4.32	%


	Year ended December 31, 2014
	Average balance		Interest income/expense		Rates earned/paid
Assets
Loans	$	1,847,749	$	103,887		5.62	%
Investment securities - taxable		527,742		15,590		2.95	%
Investment securities - nontaxable		17,024		808		4.75	%
Cash at Federal Reserve and other banks		404,056		1,133		0.28	%

Total earning assets		2,796,571		121,418		4.34	%

Other assets		216,878

Total assets	$	3,013,449

Liabilities and shareholders’ equity
Interest-bearing demand deposits	$	605,241		484		0.08	%
Savings deposits		926,389		1,153		0.12	%
Time deposits		291,515		1,637		0.56	%
Other borrowings		7,512		4		0.05	%
Junior subordinated debt		44,366		1,403		3.16	%

Total interest-bearing liabilities		1,875,023		4,681		0.25	%

Noninterest-bearing demand		801,056
Other liabilities		36,085
Shareholders’ equity		301,285

Total liabilities and shareholders’ equity	$	3,013,449

Net interest spread ⁽¹⁾						4.09	%
Net interest income and interest margin ⁽²⁾			$	116,737		4.17	%

(1)	Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(2)	Net interest margin is computed by dividing net interest income by total average earning assets.

Summary of Average Balances, Yields/Rates and Interest Differential – Yield Tables (continued)


	Year ended December 31, 2013
	Average balance		Interest income/expense		Rates earned/paid
Assets
Loans	$	1,610,725	$	97,548		6.06	%
Investment securities - taxable		224,636		6,736		3.00	%
Investment securities - nontaxable		16,632		933		5.61	%
Cash at Federal Reserve and other banks		591,507		1,693		0.29	%

Total earning assets		2,443,500		106,910		4.38	%

Other assets		179,267

Total assets	$	2,622,767

Liabilities and shareholders’ equity
Interest-bearing demand deposits	$	524,139		528		0.10	%
Savings deposits		797,803		1,026		0.13	%
Time deposits		315,253		1,891		0.60	%
Other borrowings		8,026		4		0.05	%
Junior subordinated debt		41,238		1,247		3.02	%

Total interest-bearing liabilities		1,686,459		4,696		0.28	%

Noninterest-bearing demand		657,377
Other liabilities		37,297
Shareholders’ equity		241,634

Total liabilities and shareholders’ equity	$	2,622,767

Net interest spread ⁽¹⁾						4.10	%
Net interest income and interest margin ⁽²⁾			$	102,214		4.18	%

(1)	Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(2)	Net interest margin is computed by dividing net interest income by total average earning assets.

Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid – Volume/Rate Tables

The following table sets forth a summary of the changes in the Company’s interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The rate/volume variance has been included in the rate variance. Amounts are calculated on a fully taxable equivalent basis:


	2015 over 2014									2014 over 2013
	Volume			Yield/ Rate			Total			Volume			Yield/ Rate			Total
	(dollars in thousands)
Increase (decrease) in interest income:
Loans	$	30,443		$	(2,494	)	$	27,949		$	14,364		$	(8,025	)	$	6,339
Investments - taxable		13,938			(2,107	)		11,831			9,093			(239	)		8,854
Investments - nontaxable		1,555			51			1,606			22			(147	)		(125	)
Cash at Federal Reserve and other banks		(601	)		116			(485	)		(544	)		(16	)		(560	)


Total		45,335			(4,434	)		40,901			22,935			(8,427	)		14,508

Increase (decrease) in interest expense:
Demand deposits (interest-bearing)		162			(170	)		(8	)		81			(125	)		(44	)
Savings deposits		308			14			322			167			(40	)		127
Time deposits		274			(428	)		(154	)		(142	)		(112	)		(254	)
Other borrowings		1			(1	)		—			—			—			—
Junior subordinated debt		379			196			575			94			62			156


Total		1,124			(389	)		735			200			(215	)		(15	)

Increase (decrease) in net interest income	$	44,211		$	(4,045	)	$	40,166		$	22,735		$	(8,212	)	$	14,523

Provision for Loan Losses

The provision for loan losses during any period is the sum of the allowance for loan losses required at the end of the period and any loan charge offs during the period, less the allowance for loan losses required at the beginning of the period, and less any loan recoveries during the period. See the Tables labeled “Allowance for loan losses – year ended December 31, 2015 and 2014” at Note 5 in Item 8 of Part II of this report for the components that make up the provision for loan losses for the years ended December 31, 2015 and 2014.

The Company benefited from a $2,210,000 reversal of provision for loan losses during the year ended December 31, 2015 versus a $4,045,000 reversal of provision for loan losses during the year ended December 31, 2014. The decrease in the reversal of provision for loan losses for the year ended December 31, 2015 as compared to the year ended December 31, 2014 was primarily the result of increased loan originations during 2015 compared to 2014, and a decrease in net loan recoveries from 0.13% of average loans during 2014 to 0.07% of average loans during 2015. During 2015, improvements in collateral values and estimated cash flows related to nonperforming loans and purchased credit impaired loans, and reductions in nonperforming loans contributed to the reversal of provision for loan losses. As shown in the Table labeled “Allowance for Loan Losses - year ended December 31, 2015” at Note 5 in Item 8 of Part II of this report, residential real estate loans, home equity lines of credit, auto indirect loans, and residential construction loans experienced a reversal of provision for loan losses during the year ended December 31, 2015. The level of provision, or reversal of provision, for loan losses of each loan category during the year ended December 31, 2015 was due primarily to a decrease in the required allowance for loan losses as of December 31, 2015 when compared to the required allowance for loan losses as of December 31, 2014 less net charge-offs during the year ended December 31, 2015, and the effect of the changes in the allowance methodology during the year ended December 31, 2015 as described under the heading “Loans and Allowance for Loan Losses” at Note 1 in Item 8 of Part II of this report. All categories of loans except commercial real estate mortgage loans, C & I loans, and commercial construction loans experienced a decrease in the required allowance for loan losses during the year ended December 31, 2015. These decreases in required allowance for loan losses were due primarily to reduced impaired loans, improvements in estimated cash flows and collateral values for the remaining and newly impaired loans, and reductions in historical loss factors that, in part, determine the required loan loss allowance for performing loans in accordance with the Company’s allowance for loan losses methodology as described under the heading “Loans and Allowance for Loan Losses” at Note 1 in Item 8 of Part II of this report. These same factors were also present, to some extent, for commercial real estate mortgage loans, C & I loans, and commercial construction loans, but were more than offset by the effect of increased loan balances in these loan categories resulting in net provisions for loan losses in these categories during the year ended December 31, 2015. For details of the change in nonperforming loans during the year ended December 31, 2015 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2015” and “Changes in nonperforming assets during the three months ended December 31, September 30, June 30, and March 31, 2015” under the heading “Asset Quality and Non-Performing Assets” below. During the year ended December 31, 2015, the Company made one change to its allowance for loan loss methodology. The change in methodology is described under the heading “Allowance for loan losses” in the section below labeled “Financial Condition”. Excluding the effect of the change in allowance methodology during the year ended December 31, 2015, the reversal of provision for loan losses during the year ended December 31, 2015 would have been approximately $3,528,000, or $1,318,000 more than the $2,210,000 that was actually recorded, and the allowance for loan losses at December 31, 2015 would have been approximately $34,693,000, or $1,318,000 less than the $36,011,000 that was actually recorded.

The Company benefited from a $4,045,000 reversal of provision for loan losses during the year ended December 31, 2014 versus a benefit from reversal of provision for loan losses of $715,000 during the year ended December 31, 2013. As shown in the Table labeled “Allowance for Loan Losses - year ended December 31, 2014” at Note 5 in Item 8 of Part II of this report, all categories of loans except residential real estate mortgage loans, home equity loans and other consumer loans experienced a reversal of provision for loan losses during the year ended December 31, 2014. The level of provision, or reversal of provision, for loan losses of each loan category during the year ended December 31, 2014 was due primarily to a decrease in the required allowance for loan losses as of December 31, 2014 when compared to the required allowance for loan losses as of December 31, 2013 less net charge-offs during the year ended December 31, 2014, and the effect of the changes in the allowance methodology during the year ended December 31, 2014 as described under the heading “Loans and Allowance for Loan Losses” at Note 1 in Item 8 of Part II of this report. All categories of loans except home equity loans and other consumer loans experienced a decrease in the required allowance for loan losses during the year ended December 31, 2014. These decreases in required allowance for loan losses were due primarily to reduced impaired loans, improvements in estimated cash flows and collateral values for the remaining and newly impaired loans, and reductions in historical loss factors that, in part, determine the required loan loss allowance for performing loans in accordance with the Company’s allowance for loan losses methodology as described under the heading “Loans and Allowance for Loan Losses” at Note 1 in Item 8 of Part II of this report. These same factors were also present, to some extent, for home equity loans and other consumer loans, but were more than offset by the effect of increased loan balances or changes in credit quality within the “pass” category of these loan categories resulting in net provisions for loan losses in these categories during the year ended December 31, 2014. For details of the change in nonperforming loans during the year ended December 31, 2013 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2014” and “Changes in nonperforming assets during the three months ended December 31, September 30, June 30, and March 31, 2014” under the heading “Asset Quality and Non-Performing Assets” below. During the year ended December 31, 2014, the

Company made two changes to its allowance for loan loss methodology. The changes in methodology are described under the heading “Allowance for loan losses” in the section below labeled “Financial Condition”. Excluding the effect of the changes in allowance methodology during the year ended December 31, 2014, the reversal of provision for loan losses during the year ended December 31, 2014 would have been approximately $5,484,000, or $1,438,000 more than the $4,046,000 that was actually recorded, and the allowance for loan losses at December 31, 2014 would have been approximately $35,177,000, or $1,438,000 less than the $36,585,000 that was actually recorded.

The provision for loan losses related to Originated and PNCI loans is based on management’s evaluation of inherent risks in these loan portfolios and a corresponding analysis of the allowance for loan losses. The provision for loan losses related to PCI loan portfolio is based on changes in estimated cash flows expected to be collected on PCI loans. Additional discussion on loan quality, our procedures to measure loan impairment, and the allowance for loan losses is provided under the heading “Asset Quality and Non-Performing Assets” below.

Management re-evaluates the loss ratios and other assumptions used in its calculation of the allowance for loan losses for its Originated and PNCI loan portfolios on a quarterly basis and makes changes as appropriate based upon, among other things, changes in loss rates experienced, collateral support for underlying loans, changes and trends in the economy, and changes in the loan mix. Management also re-evaluates expected cash flows used in its accounting for its PCI loan portfolio, including any required allowance for loan losses, on a quarterly basis and makes changes as appropriate based upon, among other things, changes in loan repayment experience, changes in loss rates experienced, and collateral support for underlying loans.

Noninterest Income

The following table summarizes the Company’s noninterest income for the periods indicated (dollars in thousands):


	Year ended December 31,
	2015			2014			2013
Components of Noninterest Income
Service charges on deposit accounts	$	14,276		$	11,811		$	12,716
ATM fees and interchange		13,105			9,651			8,370
Other service fees		2,977			2,206			2,144
Mortgage banking service fees		2,164			1,869			1,774
Change in value of mortgage servicing rights		(701	)		(1,301	)		253

Total service charges and fees		31,821			24,236			25,257
Gain on sale of loans		3,064			2,032			5,602
Commissions on sale of nondeposit investment products		3,349			2,995			2,983
Increase in cash value of life insurance		2,786			1,953			1,727
Change in indemnification asset		(207	)		(856	)		(1,649	)
Gain on disposition of foreclosed assets		991			2,153			1,640
Gain on life insurance death benefit		155			—			—
Other noninterest income		3,388			2,003			1,269

Total noninterest income	$	45,347		$	34,516		$	36,829

Noninterest income increased $10,831,000 (31.4%) to $45,347,000 in 2015. The increase in noninterest income was due primarily to an increase in service charges on deposit accounts of $2,465,000 (20.9%) to $14,276,000, an increase in ATM fees and interchange revenue of $3,454,000 (35.8%) to $13,105,000, and an increase of $1,032,000 (50.8%) in gain on sale of loans to $3,064,000, compared to the year-ago period. These increases and the increases in other categories of noninterest income noted in the table above are primarily the result of the acquisition of North Valley Bancorp on October 4, 2014, and $870,000 of recoveries of loans from acquired institutions that were charged off prior to acquisition of those institutions by the Company that were recorded in other noninterest income during the year ended December 31, 2015. Partially offsetting these increases was a decrease of $1,162,000 in gain on sale of foreclosed assets to $991,000 during the year ended December 31, 2015. The decrease in gain on sale of foreclosed assets is due to decreased foreclosed asset sales during the year ended December 31, 2015, and the uniqueness of individual foreclosed asset sales when compared to the year-ago period.

Noninterest income decreased $2,313,000 (6.3%) to $34,516,000 in 2014. Service charges on deposit accounts were down $905,000 (7.1%) due to reduced customer overdrafts and a resulting decrease in non-sufficient funds fees. ATM fees and interchange revenue increased $1,281,000 (15.3%) due to increased interchange revenue from the negotiation of a more favorable agreement with the Company’s interchange service provider, increased sales efforts in this area, and the acquisition of North Valley Bancorp and its customer base. Overall, mortgage banking activities, which includes mortgage banking servicing fees, change in value of mortgage servicing rights, and gain on sale of loans, accounted for $2,600,000 of noninterest income in the 2014 compared to $7,629,000 in 2013. This $5,029,000 (65.9%) decrease in mortgage banking related revenue wass mainly due to an increase in mortgage rates that occurred in May 2013 that resulted in reduced mortgage refinance activity and reduced gain on sale of loans in the second half of 2013 and throughout 2014, and a decrease in change in value of mortgage servicing rights as projected servicing fees were reduced due to reduced mortgage rates at the end of 2014 that are expected to result in increased refinance activity and shorter lives of existing servicing assets. Increase

in cash value of life insurance improved $226,000 (13.1%) during 2014 due to the addition of life insurance in the North Valley Bancorp acquisition. Change in indemnification asset improved $793,000 to a negative contribution to revenue of $856,000 in 2014 is due primarily to a decrease in estimated loan losses from the loan portfolio and foreclosed assets acquired in the Granite acquisition on May 28, 2010, and the fact that such losses are generally “covered” at the rate of 80% by the FDIC. The actual decrease in estimated losses is reflected in increased interest income, decreased provision for loan losses and/or decreased provision for foreclosed asset losses. Gain on sale of foreclosed assets increased $513,000 (31.3%) to $2,153,000 during 2014 due primarily to improved property values.

Noninterest Expense

The following table summarizes the Company’s other noninterest expense for the periods indicated (dollars in thousands):


	Year ended December 31,
	2015			2014			2013
Components of Noninterest Expense
Salaries and related benefits:
Base salaries, net of deferred loan origination costs	$	46,822		$	39,342		$	34,404
Incentive compensation		6,964			5,068			4,694
Benefits and other compensation costs		17,619			13,134			12,838

Total salaries and related benefits		71,405			57,544			51,936

Other noninterest expense:
Occupancy		10,126			8,203			7,405
Equipment		5,997			4,514			4,162
Data processing and software		7,670			6,512			4,844
Assessments		2,572			2,107			2,248
ATM network charges		3,371			2,996			2,480
Advertising & marketing		3,992			2,413			1,981
Professional fees		4,545			3,888			2,707
Telecommunications		3,007			2,870			2,449
Postage		1,296			949			786
Courier service		1,154			1,055			988
Foreclosed asset expense		490			528			514
Intangible amortization		1,157			446			209
Operational losses		737			764			618
Provision for foreclosed asset losses		502			208			682
Change in reserve for unfunded commitments		330			(395	)		(1,200	)
Legal settlement		—			—			339
Merger expense		586			4,858			312
Other		11,904			10,919			10,144

Total other noninterest expenses		59,436			52,835			41,668

Total noninterest expense	$	130,841		$	110,379		$	93,604


Merger expense:
Incentive compensation		—		$	1,174			—
Benefits and other compensation costs		—			94			—
Data processing and software	$	108			475			—
Professional fees		120			2,390		$	312
Other		358			725			—

Total merger expense	$	586		$	4,858		$	312


Average full time equivalent staff		949			783			733
Noninterest expense to revenue (FTE)		64.7	%		72.9	%		67.3	%

Salary and benefit expenses increased $13,861,000 (24.1%) to $71,405,000 during the year ended December 31, 2015 compared to the year ended December 31, 2014. Base salaries, incentive compensation and benefits & other compensation expense increased $7,480,000 (19.0%), 1,896,000 (37.4%), and 4,485,000 (34.1%), respectively, to $46,822,000, $6,964,000 and $17,619,000, respectively, during the year ended December 31, 2015. The increases in these categories of salary and benefits expense are primarily due to the Company’s acquisition of North Valley Bancorp on October 4, 2014. The average number of full-time equivalent staff increased 166 (21.2%) from 783 during the year ended December 31, 2014 to 949 for the year ended December 31, 2015.

Salary and benefit expenses increased $5,608,000 (10.8%) to $57,544,000 in 2014 compared to 2013. Base salaries increased $4,938,000 (14.4%) to $39,342,000 in 2014 due primarily to the North Valley Bancorp acquisition. The average number of full time equivalent employees increased 50 (6.8%) to 783 during 2014. The increase in full time equivalent employees is due to the addition of employees from the North Valley Bancorp acquisition and the addition of operations, compliance, marketing, and administrative employees, that were partially offset by reductions of employees from the consolidation of

three, two, one and one Tri Counties Bank branches during the three months ended December 31, 2013, and March 31, June 30, and September 30, 2014, respectively. Annual salary merit increases of approximately 3.0% also contributed to the increase in base salary expense. Incentive and commission related salary expenses increased $374,000 (14.4%) to $5,068,000 during 2014 due to increases in all types of incentive compensation. Benefits expense, including retirement, medical and workers’ compensation insurance, and taxes, increased $296,000 (2.3%) to $13,134,000 during 2014 due to small to no increases in most benefit types.

Other noninterest expense increased $6,601,000 (12.5%) to $59,436,000 during the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in other noninterest expense was primarily due to the Company’s acquisition of North Valley Bancorp on October 4, 2014. Nonrecurring merger expenses related to the North Valley Bancorp acquisition totaling $586,000 and $4,858,000 are included in other noninterest expense for the years ended December 31, 2015 and 2014, respectively, of which $0 and $1,269,000 were not deductible for income tax purposes, respectively.

Other noninterest expense increased $11,167,000 (26.8%) to $52,835,000 during 2014 compared 2013 December 31, 2013. The increase in other noninterest expense was due primarily to a $4,546,000 increase in merger related expenses to $4,858,000, of which $1,269,000 are not deductible for tax purposes, a $1,668,000 (34.4%) increase in data processing and software expenses to $6,512,000, and a $1,181,000 (43.6%) increase in professional fees to $3,888,000. The increase in merger expenses was due to the North Valley Bancorp acquisition and included stay bonuses, severance pay, and other retention incentives, system conversion and other data processing expenses, professional fees including financial advisor and other consultant fees. The increase in data processing and software expenses was due primarily to increases in ongoing data processing and software expenses some of which are due to increased ongoing processing volume as a result of the North Valley Bancorp acquisition. The increase in professional fees was due primarily to increases in ongoing or non-merger related consulting fees related to compliance, control systems, and operational improvements. Increases in other areas of noninterest expense are due primarily to the North Valley Bancorp acquisition.

Income Taxes

The effective tax rate on income was 39.7%, 41.5%, and 40.2%, in 2015, 2014, and 2013, respectively. The effective tax rate was greater than the federal statutory tax rate due to state tax expense of $7,412,000, $4,817,000, and $4,811,000, respectively, in these years, and $1,310,000 of nondeductible merger expenses in 2014. Tax-exempt income of $1,509,000, $505,000, and $583,000, respectively, from investment securities, and $2,786,000, $1,953,000, and $1,727,000, respectively, from increase in cash value and gain on death benefit of life insurance in these years helped to reduce the effective tax rate.

Financial Condition

Investment Securities

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


	Year ended December 31,
(In thousands)	2015		2014		2013		2012		2011
Investment securities available for sale (at fair value):
Obligations of US government corporations and agencies	$	313,682	$	75,120	$	97,143	$	151,701	$	217,384
Obligations of states and political subdivisions		88,218		3,175		5,589		9,421		10,028
Corporate bonds		—		1,908		1,915		1,905		1,811
Marketable equity securities		2,985		3,002		—		—		—

Total investment securities available for sale	$	404,885	$	83,205	$	104,647	$	163,027	$	229,223

Investment securities available for sale increased $321,680,000 to $404,885,000 as of December 31, 2015, as compared to December 31, 2014. This increase is attributable to purchases of $358,375,000, maturities and principal repayments of $33,552,000, a decrease in fair value of investments securities available for sale of $1,895,000, proceeds from the sale of available for sale securities of $2,000 and amortization of net purchase price premiums of $1,246,000.

The following table presents the held to maturity investment securities portfolio by major type as of the dates indicated:


	Year ended December 31,
(In thousands)	2015		2014		2013		2012		2011
Investment securities held to maturity (at cost):
Obligations of US government corporations and agencies	$	711,994	$	660,836	$	227,864		—		—
Obligations of states and political subdivisions		14,536		15,590		12,640		—		—

Total investment securities held to maturity	$	726,530	$	676,426	$	240,504		—		—

Investment securities held to maturity increased $50,104,000 to $726,530,000 as of December 31, 2015, as compared to December 31, 2014. This increase is attributable to purchases of $146,100,000, less principal repayments of $93,784,000 and amortization of net purchase price discounts/premiums of $2,212,000.

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

Restricted Equity Securities

Restricted equity securities were $16,956,000 at December 31, 2015 and December 31, 2014. The entire balance of restricted equity securities at December 31, 2015 and December 31, 2014 represents the Bank’s investment in the Federal Home Loan Bank of San Francisco (“FHLB”).

FHLB stock is carried at par and does not have a readily determinable fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.

Loans

The Bank concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial loans), consumer loans, commercial loans (including agricultural loans), and real estate construction loans. The interest rates charged for the loans made by the Bank vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Bank and prevailing money market rates indicative of the Bank’s cost of funds.

The majority of the Bank’s loans are direct loans made to individuals, farmers and local businesses. The Bank relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Bank makes loans to borrowers 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 Composite

The following table shows the Company’s loan balances, including net deferred loan costs, at the dates indicated:


	Year ended December 31,
(dollars in thousands)	2015		2014		2013		2012		2011
Real estate mortgage	$	1,811,832	$	1,615,359	$	1,107,863	$	1,010,130	$	965,922
Consumer		395,283		417,084		383,163		386,111		406,330
Commercial		194,913		174,945		131,878		135,528		139,131
Real estate construction		120,909		75,136		49,103		33,054		39,649


Total loans	$	2,522,937	$	2,282,524	$	1,672,007	$	1,564,823	$	1,551,032

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


	Year ended December 31,
	2015			2014			2013			2012			2011
Real estate mortgage		71.8	%		70.7	%		66.3	%		64.5	%		62.2	%
Consumer		15.7	%		18.3	%		22.9	%		24.7	%		26.2	%
Commercial		7.7	%		7.7	%		7.9	%		8.7	%		9.0	%
Real estate construction		4.8	%		3.3	%		2.9	%		2.1	%		2.6	%


Total loans		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

At December 31, 2015 loans, including net deferred loan costs, totaled $2,522,937,000 which was a 10.5% ($240,413,000) increase over the balances at the end of 2014. Demand for commercial real estate (real estate mortgage) loans was strong during 2015. Demand for home equity loans and lines of credit was weak during 2015.

At December 31, 2014 loans, including net deferred loan costs, totaled $2,282,524,000 which was a 36.5% ($610,517,000) increase over the balances at the end of 2013. This increase in loans during 2014 included $499,327,000 of loans acquired in the North Valley Bancorp acquisition on October 3, 2014, and $32,017,000 of purchased single family residential real estate loans. Demand for commercial real estate (real estate mortgage) loans was moderate during 2014. Demand for home equity loans and lines of credit was weak during 2014.

At December 31, 2013 loans, including net deferred loan costs, totaled $1,672,007,000 which was a 6.8% ($107,184,000) increase over the balances at the end of 2012. Demand for commercial real estate (real estate mortgage) loans was weak to modest during 2013. During 2013, the Company purchased $62,698,000 of residential (real estate mortgage) loans. Demand for home equity loans and lines of credit were moderate during 2013. Real estate construction loans increased during 2013 due primarily to one large loan that was originated during 2013

Asset Quality and Nonperforming Assets

Nonperforming Assets

Loans originated by the Company, i.e., not purchased or acquired in a business combination, are referred to as originated loans. Originated loans 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 of the related loan’s yield over the actual life of the loan. Originated loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.

Originated 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 an originated 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 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.

An allowance for loan losses for originated loans is established through a provision for loan losses charged to expense. Originated loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectability of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable incurred losses inherent in existing loans, based on evaluations of the collectability, impairment and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. The Company defines an originated loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired originated loans are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

In situations related to originated loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that result in the loan being classified as a TDR, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with respect to their restructured principal balance.

Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses inherent in the Company’s originated loan portfolio. This is maintained through periodic charges to earnings. These charges are included in the Consolidated Statements of Income as provision for loan losses. All specifically identifiable and

quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company’s allowance for originated loan losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio.

The Company formally assesses the adequacy of the allowance for originated loan losses on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding originated loan portfolio, and to a lesser extent the Company’s originated loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.

The Company’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for impaired originated loans, formula allowance factors for pools of credits, and allowances for changing 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.

During the three months ended March 31, 2014, the Company modified its methodology used to determine the allowance for changing environmental factors by adding a new environmental factor based on the California Home Affordability Index (“CHAI”). The CHAI measures the percentage of households in California that can afford to purchase the median priced home in California based on current home prices and mortgage interest rates. The use of the CHAI environmental factor consists of comparing the current CHAI to its historical baseline, and allows management to consider the adverse impact that a lower than historical CHAI may have on general economic activity and the performance of our borrowers. Based on an analysis of historical data, management believes this environmental factor gives a better estimate of current economic activity compared to other environmental factors that may lag current economic activity to some extent. This change in methodology resulted in no change to the allowance for loan losses as of March 31, 2014 compared to what it would have been without this change in methodology.

During the three months ended June 30, 2014, the Company refined the method it uses to evaluate historical losses for the purpose of estimating the pool allowance for unimpaired loans. In the third quarter of 2010, the Company moved from a six point grading system (Grades A-F) to a nine point risk rating system (Risk Ratings 1-9), primarily to allow for more distinction within the “Pass” risk rating. Initially, there was not sufficient loss experience within the nine point scale to complete a migration analysis for all nine risk ratings, all loans risk rated Pass or 2-5 were grouped together, a loss rate was calculated for that group, and that loss rate was established as the loss rate for risk rating 4. The reserve ratios for risk ratings 2, 3 and 5 were then interpolated from that figure. As of June 30, 2014, the Company was able to compile twelve quarters of historical loss information for all risk ratings and use that information to calculate the loss rates for each of the nine risk ratings without interpolation. This refinement led to an increase of $1,438,000 in the reserve requirement for unimpaired loans, driven primarily by home equity lines of credit with a risk rating of 5 or “Pass-Watch.”

During the three months ended September 30, 2015, the Company modified its methodology used to determine the allowance for home equity lines of credit that are about to exit their revolving period, or have recently entered into their amortization period and are now classified as home equity loans. This change in methodology increased the required allowance for such lines and loans by $859,000, and $459,000, respectively, and represents the increase in estimated incurred losses in these lines and loans as of September 30, 2015 due to higher required contractual principal and interest payments of such lines and loans.

Loans purchased or acquired in a business combination are referred to as acquired loans. Acquired loans are valued as of acquisition date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805, Business Combinations. Loans acquired with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI) loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. Default rates, loss severity, and prepayment speed assumptions are periodically reassessed and our estimate of future payments is adjusted accordingly. The difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The difference between estimated future payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable yield

represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be more than the originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining estimated life of the loan. If, after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be less than the previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous present value however, the discount rate may not be lowered below its original level at acquisition. If the discount rate has been lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans on nonaccrual status are accounted for using the cost recovery method or cash basis method of income recognition. PCI loans are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan. The Company elected to use the “pooled” method of ASC 310-30 for PCI – other loans in the acquisition of certain assets and liabilities of Granite and Citizens.

Acquired loans that are not PCI loans are referred to as purchased not credit impaired (PNCI) loans. PNCI loans are accounted for under FASB ASC Topic 310-20, Receivables – Nonrefundable Fees and Other Costs, in which interest income is accrued on a level-yield basis for performing loans. For income recognition purposes, this method assumes that all contractual cash flows will be collected, and no allowance for loan losses is established at the time of acquistion. Post-acquisition date, an allowance for loan losses may need to be established for acquired loans through a provision charged to earnings for credit losses incurred subsequent to acquisition. Under ASC 310-20, the loss would be measured based on the probable shortfall in relation to the contractual note requirements, consistent with our allowance for loan loss policy for similar loans.

When referring to PNCI and PCI loans we use the terms “nonaccretable difference”, “accretable yield”, or “purchase discount”. Nonaccretable difference is the difference between undiscounted contractual cash flows due and undiscounted cash flows we expect to collect, or put another way, it is the undiscounted contractual cash flows we do not expect to collect. Accretable yield is the difference between undiscounted cash flows we expect to collect and the value at which we have recorded the loan on our financial statements. On the date of acquisition, all purchased loans are recorded on our consolidated financial statements at estimated fair value. Purchase discount is the difference between the estimated fair value of loans on the date of acquisition and the principal amount owed by the borrower, net of charge offs, on the date of acquisition. We may also refer to “discounts to principal balance of loans owed, net of charge-offs”. Discounts to principal balance of loans owed, net of charge-offs is the difference between principal balance of loans owed, net of charge-offs, and loans as recorded on our financial statements. Discounts to principal balance of loans owed, net of charge-offs arise from purchase discounts, and equal the purchase discount on the acquisition date.

Loans are also categorized as “covered” or “noncovered”. Covered loans refer to loans covered by a FDIC loss sharing agreement. Noncovered loans refer to loans not covered by a FDIC loss sharing agreement.

Originated loans and PNCI loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the following occurs: the loan becomes 90 days past due as to interest or principal, the full and timely collection of additional interest or principal becomes uncertain, the loan is classified as doubtful by internal credit review or bank regulatory agencies, a portion of the principal balance has been charged off, or the Company takes possession of the collateral. Loans that are placed on nonaccrual even though the borrowers continue to repay the loans as scheduled are classified as “performing nonaccrual” and are included in total nonperforming loans. The reclassification of loans as nonaccrual does not necessarily reflect Management’s judgment as to whether they are collectible.

Interest income on originated nonaccrual loans that would have been recognized during the years ended December 31, 2015, 2014 and 2013, if all such loans had been current in accordance with their original terms, totaled $1,840,000, $2,734,000, and $1,524,000, respectively. Interest income actually recognized on these originated loans during the years ended December 31, 2015, 2014 and 2013 was $170,000, $81,000, and $273,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the years ended December 31, 2015, 2014 and 2013, if all such loans had been current in accordance with their original terms, totaled $386,000, $254,000, and $295,000. Interest income actually recognized on these PNCI loans during the years ended December 31, 2015, 2014 and 2013 was $205,000, $4,000, and $38,000.

The Company’s policy is to place originated loans and PNCI loans 90 days or more past due on nonaccrual status. In some instances when an originated loan is 90 days past due Management does not place it on nonaccrual status because the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not

exceed 30 days. Loans where the collateral has been repossessed are classified as foreclosed assets. Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits.

The following table sets forth the amount of the Bank’s nonperforming assets as of the dates indicated. For purposes of the following table, “PCI – other” loans that are 90 days past due and still accruing are not considered nonperforming loans. “Performing nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:


	December 31,
(dollars in thousands)	2015			2014			2013			2012			2011
Performing nonaccrual loans	$	31,033		$	45,072		$	48,112		$	49,045		$	61,164
Nonperforming nonaccrual loans		6,086			2,517			5,104			23,471			23,647

Total nonaccrual loans		37,119			47,589			53,216			72,516			84,811

Originated and PNCI loans 90 days past due and still accruing		—			—			—			—			920

Total nonperforming loans		37,119			47,589			53,216			72,516			85,731
Noncovered foreclosed assets		5,369			4,449			5,588			5,957			13,268
Covered foreclosed assets		—			445			674			1,541			3,064

Total nonperforming assets	$	42,488		$	52,483		$	59,478		$	80,014		$	102,063


U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans	$	28		$	123		$	101		$	131		$	3,061
Indemnified portion of covered foreclosed assets		—		$	356		$	539		$	1,233		$	2,451

Nonperforming assets to total assets		1.01	%		1.88	%		2.30	%		3.07	%		3.99	%
Nonperforming loans to total loans		1.47	%		2.08	%		3.18	%		4.63	%		5.53	%
Allowance for loan losses to nonperforming loans		97	%		77	%		72	%		59	%		54	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		2.69	%		3.31	%		4.09	%		5.30	%		6.34	%

The following tables set forth the amount of the Bank’s nonperforming assets as of the dates indicated. For purposes of the following tables, “PCI – other” loans that are 90 days past due and still accruing are not considered nonperforming loans. “Performing nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:


	December 31, 2015
(dollars in thousands)	Originated			PNCI			PCI – cash basis			PCI - other			Total
Performing nonaccrual loans	$	18,483		$	3,747		$	5,055		$	3,748		$	31,033
Nonperforming nonaccrual loans		4,341			1,651			24			70			6,086

Total nonaccrual loans		22,824			5,398			5,079			3,818			37,119
Originated loans 90 days past due and still accruing		—			—			—			—			—

Total nonperforming loans		22,824			5,398			5,079			3,818			37,119
Noncovered foreclosed assets		4,195			—			—			1,174			5,369
Covered foreclosed assets		—			—			—			—			—

Total nonperforming assets	$	27,019		$	5,398		$	5,079		$	4,992		$	42,488


U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans	$	28			—			—			—		$	28
Indemnified portion of covered foreclosed assets		—			—			—			—			—

Nonperforming assets to total assets		0.64	%		0.13	%		0.12	%		0.12	%		1.01	%
Nonperforming loans to total loans		1.15	%		1.09	%		100.00	%		10.87	%		1.47	%
Allowance for loan losses to nonperforming loans		137	%		34	%		2	%		73	%		97	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		1.90	%		3.11	%		60.92	%		18.49	%		2.69	%


	December 31, 2014
(dollars in thousands)	Originated			PNCI			PCI – cash basis			PCI - other			Total
Performing nonaccrual loans	$	30,449		$	1,233		$	5,587		$	7,803		$	45,072
Nonperforming nonaccrual loans		2,080			413			24			—			2,517

Total nonaccrual loans		32,529			1,646			5,611			7,803			47,589
Originated loans 90 days past due and still accruing		—			—			—			—			—

Total nonperforming loans		32,529			1,646			5,611			7,803			47,589
Noncovered foreclosed assets		3,316			—			—			1,133			4,449
Covered foreclosed assets		—			—			—			445			445

Total nonperforming assets	$	35,845		$	1,646		$	5,611		$	9,381		$	52,483


U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans	$	123			—			—			—		$	123
Indemnified portion of covered foreclosed assets		—			—			—		$	356		$	356

Nonperforming assets to total assets		1.28	%		0.06	%		0.20	%		0.34	%		1.88	%
Nonperforming loans to total loans		2.02	%		0.27	%		99.98	%		16.50	%		2.08	%
Allowance for loan losses to nonperforming loans		92	%		200	%		6	%		39	%		77	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		2.14	%		3.30	%		64.45	%		21.09	%		3.31	%

The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2015:


(dollars in thousands):	Balance at December 31, 2015		New NPA		Advances/ Capitalized Costs		Pay-downs /Sales /Upgrades			Charge-offs/ Write-downs			Transfers to Foreclosed Assets			Category Changes			Balance at December 31, 2014
Real estate mortgage:
Residential	$	3,702	$	932		—	$	(1,159	)	$	(224	)	$	(843	)	$	383		$	4,613
Commercial		21,251		9,784		63		(13,471	)		—			(1,468	)		—			26,343
Consumer
Home equity lines		9,216		2,293		132		(1,592	)		(694	)		(877	)		(422	)		10,376
Home equity loans		1,414		645		72		(196	)		(243	)		(270	)		39			1,367
Auto indirect		—		1		—		(15	)		(4	)		—			—			18
Other consumer		55		293		6		(43	)		(387	)		—			—			186
Commercial		979		1,519		—		(2,046	)		(680	)		—			—			2,186
Construction:
Residential		12		1,715		—		(2,322	)		—			(1,782	)		—			2,401
Commercial		490		490		—		(99	)		—			—			—			99

Total nonperforming loans		37,119		17,672		273		(20,943	)		(2,232	)		(5,240	)		—			47,589
Noncovered foreclosed assets		5,369		—		195		(4,458	)		(502	)		5,240			445			4,449
Covered foreclosed assets		—		—		—		—			—			—			(445	)		445

Total nonperforming assets	$	42,488	$	17,672	$	468	$	(25,401	)	$	(2,734	)		—			—		$	52,483

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

The following tables and narratives describe the activity in the balance of nonperforming assets during each of the three-month periods ending March 31, June 30, September 30, and December 31, 2015. These tables and narratives are presented in chronological order:

Changes in nonperforming assets during the three months ended December 31, 2015


(In thousands):	Balance at December 31, 2015		New NPA		Advances/ Capitalized Costs		Pay-downs /Sales /Upgrades			Charge-offs/ Write-downs			Transfers to Foreclosed Assets			Category Changes		Balance at September 30, 2015
Real estate mortgage:
Residential	$	3,702	$	77		—	$	(710	)		—		$	(599	)		—	$	4,934
Commercial		21,251		470		—		(2,007	)		—			—			—		22,788
Consumer
Home equity lines		9,216		313	$	62		(471	)	$	(70	)		—			—		9,382
Home equity loans		1,414		233		—		(59	)		(42	)		(127	)		—		1,409
Auto indirect		—		—		—		—			—			—			—		—
Other consumer		55		44		—		(17	)		(46	)		—			—		74
Commercial (C&I)		979		906		—		(25	)		(89	)		—			—		187
Construction:
Residential		12		—		—		(32	)		—			—			—		44
Commercial		490		490		—		(80	)		—			—			—		80

Total nonperforming loans		37,119		2,533		62		(3,401	)		(247	)		(726	)		—		38,898
Foreclosed assets		5,369		—		—		(487	)		(155	)		726					5,285

Total nonperforming assets	$	42,488	$	2,533	$	62	$	(3,888	)	$	(402	)		—			—	$	44,183

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

Nonperforming assets decreased during the fourth quarter of 2015 by $1,695,000 (3.84%) to $42,488,000 at December 31, 2015 compared to $44,183,000 at September 30, 2015. The decrease in nonperforming assets during the fourth quarter of 2015 was primarily the result of new nonperforming loans of $2,533,000, advances on existing nonperforming loans of $62,000, less pay-downs, sales or upgrades of nonperforming loans to performing status totaling $3,401,000, less dispositions of foreclosed assets totaling $487,000, less loan charge-offs of $247,000, and less write-downs of foreclosed assets of $155,000.

The $2,533,000 in new nonperforming loans during the fourth quarter of 2015 was comprised of $77,000 on two residential real estate loans, $470,000 on two commercial real estate loans, $546,000 on seven home equity lines and loans, $44,000 on 12 consumer loans, $906,000 on six C&I loans, and $490,000 on a single commercial construction loan.

The $470,000 in new nonperforming commercial real estate loans was primarily comprised of one loan in the amount of $391,000 secured by a commercial retail building in northern California.

The $490,000 in new nonperforming commercial construction loans was entirely comprised of one loan secured by an agricultural processing facility in northern California. Related charge-offs are discussed below.

Loan charge-offs during the three months ended December 31, 2015

In the fourth quarter of 2015, the Company recorded $248,000 in loan charge-offs and $133,000 in deposit overdraft charge-offs less $692,000 in loan recoveries and $90,000 in deposit overdraft recoveries resulting in $401,000 of net loan recoveries. Primary causes of the loan charges taken in the fourth quarter of 2015 were gross charge-offs of $112,000 on four home equity lines and loans, $46,000 on 13 other consumer loans, and $89,000 on five C&I loans. During the fourth quarter of 2015, there were no individual charges greater than $250,000.

Changes in nonperforming assets during the three months ended September 30, 2015


(In thousands):	Balance at September 30, 2015		New NPA		Advances/ Capitalized Costs		Pay-downs /Sales /Upgrades			Charge-offs/ Write-downs			Transfers to Foreclosed Assets			Category Changes			Balance at June 30, 2015
Real estate mortgage:
Residential	$	4,934	$	160		—	$	(129	)	$	(15	)	$	(107	)	$	103		$	4,922
Commercial		22,788		1,281		—		(1,478	)		—			(497	)		—			23,482
Consumer
Home equity lines		9,382		729	$	7		(264	)		(199	)		(117	)		(235	)		9,461
Home equity loans		1,409		—		60		(41	)		(73	)		(110	)		132			1,441
Auto indirect		—		—		—		—			—			—			—			—
Other consumer		74		85		—		(14	)		(194	)		—			—			197
Commercial (C&I)		187		15		—		(18	)		(52	)		—			—			242
Construction:
Residential		44		1,707		—		(3	)		—			(1,707	)		—			47
Commercial		80		—		—		(8	)		—			—			—			88

Total nonperforming loans		38,898		3,977		67		(1,955	)		(533	)		(2,538	)		—			39,880
Foreclosed assets		5,285		—		11		(2,551	)		(106	)		2,538			—			5,393

Total nonperforming assets	$	44,183	$	3,977	$	78	$	(4,506	)	$	(639	)		—			—		$	45,273

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

Nonperforming assets decreased during the third quarter of 2015 by $1,090,000 (2.41%) to $44,183,000 at September 30, 2015 compared to 45,273,000 at June 30, 2015. The decrease in nonperforming assets during the third quarter of 2015 was primarily the result of new nonperforming loans of $3,977,000, advances on existing nonperforming loans of $78,000, less pay-downs, sales or upgrades of nonperforming loans to performing status totaling $1,955,000, less dispositions of foreclosed assets totaling $2,551,000, less loan charge-offs of $533,000, and less write-downs of foreclosed assets of $106,000.

The $3,977,000 in new nonperforming loans during the third quarter of 2015 was comprised of increases of $160,000 on six residential real estate loans, $1,281,000 on nine commercial real estate loans, $729,000 on 18 home equity lines and loans, $85,000 on 17 consumer loans, $15,000 on two C&I loans, and $1,707,000 on two residential construction loans.

The $1,281,000 in new nonperforming commercial real estate loans was primarily comprised of one loan in the amount of $253,000 secured by a commercial warehouse in northern California, and one loan in the amount of $485,000 secured by an event facility in central California. Related charge-offs are discussed below.

The $1,707,000 in new residential construction loans was primarily comprised of one loan in the amount of $1,561,000 secured by development land in central California.

The $1,955,000 in pay-downs, sales or upgrades of loans in the third quarter of 2015 was comprised of decreases of $129,000 on 39 residential real estate loans, $1,478,000 on 46 commercial real estate loans, $305,000 on 121 home equity lines and loans, $14,000 on 18 consumer loans, $18,000 on 10 C&I loans, $3,000 on two residential construction loans and $8,000 on two commercial construction loans.

Loan charge-offs during the three months ended September 30, 2015

In the third quarter of 2015, the Company recorded $533,000 in loan charge-offs and $154,000 in deposit overdraft charge-offs less $2,252,000 in loan recoveries and $94,000 in deposit overdraft recoveries resulting in $1,659,000 of net recoveries. Primary causes of the loan charges taken in the third quarter of 2015 were gross charge-offs of $15,000 on two residential real estate loans, $272,000 on nine home equity lines and loans, $194,000 on 19 other consumer loans, and $52,000 on a single C&I loan. During the third quarter of 2015, there were no individual charges greater than $250,000.

Changes in nonperforming assets during the three months ended June 30, 2015


(In thousands):	Balance at June 30, 2015		New NPA		Advances/ Capitalized Costs		Pay-downs /Sales /Upgrades			Charge-offs/ Write-downs			Transfers to Foreclosed Assets			Category Changes			Balance at March 31, 2015
Real estate mortgage:
Residential	$	4,922	$	78		—	$	(179	)	$	(128	)	$	(82	)		—		$	5,233
Commercial		23,482		3,991		—		(8,686	)		—			—			—			28,177
Consumer
Home equity lines		9,461		465		11		(490	)		(84	)		(227	)		—			9,786
Home equity loans		1,441		275		1		(59	)		(117	)		(22	)		—			1,363
Auto indirect		—		1		—		(11	)		(4	)		—			—			14
Other consumer		197		96		—		—			(34	)		—			—			135
Commercial (C&I)		242		64		—		(1,859	)		(5	)		—			—			2,042
Construction:
Residential		47		8		—		(2,259	)		—			(75	)		—			2,373
Commercial		88		—		—		(6	)		—			—			—			94

Total nonperforming loans		39,880		4,978		12		(13,549	)		(372	)		(406	)		—			49,217
Noncovered foreclosed assets		5,393		—		195		(925	)		(175	)		406			445			5,447
Covered foreclosed assets		—		—		—		—			—			—			(445	)		445

Total nonperforming assets	$	45,273	$	4,978	$	207	$	(14,474	)	$	(547	)		—			—		$	55,109

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

Nonperforming assets decreased during the second quarter of 2015 by $9,836,000 (17.9%) to $45,273,000 at June 30, 2015 compared to $55,109,000 at March 31, 2015. The decrease in nonperforming assets during the second quarter of 2015 was primarily the result of new nonperforming loans of $4,978,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of $207,000, less pay-downs, sales or upgrades of nonperforming loans to performing status totaling $13,549,000, less dispositions of foreclosed assets totaling $925,000, less loan charge-offs of $372,000, and less write-downs of foreclosed assets of $175,000.

The $4,978,000 in new nonperforming loans during the second quarter of 2015 was comprised of increases of $78,000 on three residential real estate loans, $3,991,000 on eight commercial real estate loans, $740,000 on 12 home equity lines and loans, $1,000 on two indirect auto loans, $96,000 on 15 consumer loans, $64,000 on three C&I loans, and $8,000 on a single residential real estate loan.

The $3,991,000 in new nonperforming commercial real estate loans was primarily made up of one loan in the amount of $2,038,000 secured by a commercial retail property in central California, one loan in the amount of $836,000 secured by a multi-family property in northern California, three loans totaling $588,000 secured by a commercial warehouse in central California, and one loan in the amount of $466,000 secured by a single family residence in central California. Related charge-offs are discussed below.

The $13,549,000 in pay-downs, sales or upgrades of loans in the second quarter of 2015 was comprised of decreases of $179,000 on 37 residential real estate loans, $8,686,000 on 44 commercial real estate loans, $549,000 on 135 home equity lines and loans, $11,000 on eight auto indirect loans, $1,859,000 on 11 C&I loans, $2,259,000 on three residential construction loans and $6,000 on two commercial construction loans.

The $8,686,000 reduction in nonperforming commercial real estate loans was primarily made up of one upgrade in the amount of $328,000 on a loan secured by commercial office property in northern California, and upgrades on four loans secured by commercial office and warehouse properties in central California in the amount of $7,375,000.

The $1,859,000 in reduction in nonperforming C&I loans was primarily made up of pay-downs in the amount of $1,844,000 on three loans in northern California secured by general business assets.

The $2,259,000 in reduction in nonperforming residential construction loans was primarily made up of a pay-down in the amount of $2,250,000 on a loan secured by residential development land in central California.

Loan charge-offs during the three months ended June 30, 2015

In the second quarter of 2015, the Company recorded $372,000 in loan charge-offs and $142,000 in deposit overdraft charge-offs less $448,000 in loan recoveries and $99,000 in deposit overdraft recoveries resulting in $32,000 of net recoveries. Primary causes of the loan charges taken in the second quarter of 2015 were gross charge-offs of $128,000 on three residential real estate loans, $201,000 on nine home equity lines and loans, $4,000 on two indirect auto loans, $34,000 on 13 other consumer loans, and $5,000 on three C&I loans. During the second quarter of 2015, there were no individual charges greater than $250,000.

Changes in nonperforming assets during the three months ended March 31, 2015


(In thousands):	Balance at March 31, 2015		New NPA		Advances/ Capitalized Costs		Pay-downs /Sales /Upgrades			Charge-offs/ Write-downs			Transfers to Foreclosed Assets			Category Changes			Balance at December 31, 2014
Real estate mortgage:
Residential	$	5,233	$	617		—	$	(141	)	$	(81	)	$	(55	)	$	280		$	4,613
Commercial		28,177		4,042		63		(1,300	)		—			(971	)		—			26,343
Consumer
Home equity lines		9,786		786		52		(683	)		(341	)		(217	)		(187	)		10,376
Home equity loans		1,363		137		—		(37	)		(11	)		—			(93	)		1,367
Auto indirect		14		—		—		(4	)		—			—			—			18
Other consumer		135		68		6		(12	)		(113	)		—			—			186
Commercial (C&I)		2,042		534		—		(144	)		(534	)		—			—			2,186
Construction:
Residential		2,373		—		—		(28	)		—			—			—			2,401
Commercial		94		—		—		(5	)		—			—			—			99

Total nonperforming loans		49,217		6,184		121		(2,354	)		(1,080	)		(1,243	)		—			47,589
Noncovered foreclosed assets		5,447		—		316		(495	)		(66	)		1,243			—			4,449
Covered foreclosed assets		445		—		—		—			—			—			—			445

Total nonperforming assets	$	55,109	$	6,184	$	437	$	(2,849	)	$	(1,146	)		—			—		$	52,483

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

Nonperforming assets increased during the first quarter of 2015 by $2,626,000 (5.0%) to $55,109,000 at March 31, 2015 compared to $52,483,000 at December 31, 2014. The increase in nonperforming assets during the first quarter of 2015 was primarily the result of new nonperforming loans of $6,184,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of $121,000, less pay-downs, sales or upgrades of nonperforming loans to performing status totaling $2,038,000, less dispositions of foreclosed assets totaling $495,000, less loan charge-offs of $1,080,000, and less write-downs of foreclosed assets of $66,000.

The $6,184,000 in new nonperforming loans during the first quarter of 2015 was comprised of increases of $617,000 on two residential real estate loans, $4,042,000 on four commercial real estate loans, $923,000 on 13 home equity lines and loans, $68,000 on 26 consumer loans, and $534,000 on nine C&I loans.

The $617,000 in new nonperforming residential real estate loans was primarily comprised of a single loan in the amount of $594,000 secured by a single family residence in northern California.

The $4,042,000 in new nonperforming commercial real estate loans was primarily made up of one loan in the amount of $2,904,000 secured by a commercial retail property in northern California, one loan in the amount of $690,000 secured by hospitality real estate in northern California, and one loan in the amount of $328,000 secured by a commercial office property in northern California.

The $534,000 in new nonperforming commercial and industrial loan was primarily comprised of a single lending relationship in the amount of $479,000 secured by various non-real estate business assets in central California. Related charge-offs are discussed below.

Loan charge-offs during the three months ended March 31, 2015

In the first quarter of 2015, the Company recorded $1,080,000 in loan charge-offs and $155,000 in deposit overdraft charge-offs less $390,000 in loan recoveries and $118,000 in deposit overdraft recoveries resulting in $727,000 of net charge-offs. Primary causes of the loan charges taken in the first quarter of 2015 were gross charge-offs of $81,000 on two residential real estate loans, $352,000 on 10 home equity lines and loans, $113,000 on 29 other consumer loans, and $534,000 on eight C&I loans.

The $534,000 in charge-offs the Bank incurred in its commercial and industrial portfolio was primarily the result of $479,000 in charge-offs incurred on a single relationship secured by various non-real estate business assets in central California. The remaining $55,000 was spread over four loans spread throughout the Company’s footprint.

Differences between the amounts explained in this section and the total charge-offs listed for a particular category are generally made up of individual charges of less than $250,000 each. Generally losses are triggered by non-performance by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying collateral less any estimated costs associated with the disposition of the collateral.

Allowance for Loan Losses

The Company’s allowance for loan losses is comprised of allowances for originated, PNCI and PCI loans. All such allowances are established through a provision for loan losses charged to expense.

Originated and PNCI loans, and deposit related overdrafts are charged against the allowance for originated loan losses when Management believes that the collectability of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowances for originated and PNCI loan losses are amounts that Management believes will be adequate to absorb probable losses inherent in existing originated loans, based on evaluations of the collectability, impairment and prior loss experience of those loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem

loans, and current economic conditions that may affect the borrower’s ability to pay. The Company defines an originated or PNCI loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired originated and PNCI loans are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

In situations related to originated and PNCI loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that provide for a reduction of either interest or principal, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with respect to their restructured principal balance.

Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses inherent in the Company’s originated and PNCI loan portfolios. These are maintained through periodic charges to earnings. These charges are included in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company’s allowances for originated and PNCI loan losses are meant to be an estimate of these unknown but probable losses inherent in these portfolios.

The Company formally assesses the adequacy of the allowance for originated and PNCI loan losses on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding originated and PNCI loan portfolios, and to a lesser extent the Company’s originated and PNCI loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated or acquired. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.

The Company’s method for assessing the appropriateness of the allowance for originated and PNCI loan losses includes specific allowances for impaired loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on historical loss experience by product type and prior risk rating. Allowances for impaired loans are based on analysis of individual credits. Allowances for changing environmental factors are Management’s best estimate of the probable impact these changes have had on the originated or PNCI loan portfolio as a whole. The allowances for originated and PNCI loans are included in the allowance for loan losses.

As noted above, the allowances for originated and PNCI loan losses consists of a specific allowance, a formula allowance, and an allowance for environmental factors. The first component, the specific allowance, results from the analysis of identified credits that meet management’s criteria for specific evaluation. These loans are 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 contractual terms. Impaired loans are 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.

The second component of the allowance for originated and PNCI loan losses, the formula allowance, is an estimate of the probable losses that have occurred across the major loan categories in the Company’s originated and PNCI loan portfolios. This analysis is based on loan grades by pool and the loss history of these pools. This analysis covers the Company’s entire originated and PNCI loan portfolios including unused commitments but excludes any loans that were analyzed individually and assigned a specific allowance as discussed above. The total amount allocated for this component is determined by applying loss estimation factors to outstanding loans and loan commitments. The loss factors were previously based primarily on the Company’s historical loss experience tracked over a five-year period and adjusted as appropriate for the

input of current trends and events. Because historical loss experience varies for the different categories of originated loans, the loss factors applied to each category also differed. In addition, 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. Therefore, for any given category, a larger loss estimation factor was applied to less than satisfactory loans than to those that the Company last graded as satisfactory. The resulting formula allowance was the sum of the allocations determined in this manner.

The third component of the allowances for originated and PNCI loan losses, the environmental factor allowance, is a component that is not allocated to specific loans or groups of loans, but rather is intended to absorb losses that may not be provided for by the other components. There are several primary reasons that the other components discussed above might not be sufficient to absorb the losses present in the originated and PNCI loan portfolios, and the environmental factor allowance is used to provide for the losses that have occurred because of them.

The first reason is that there are limitations to any credit risk grading process. The volume of originated and PNCI loans makes it impractical to re-grade every loan every quarter. Therefore, it is possible that some currently performing originated or PNCI loans not recently graded will not be as strong as their last grading and an insufficient portion of the allowance will have been allocated to them. Grading and loan review often must be done without knowing whether all relevant facts are at hand. Troubled borrowers may deliberately or inadvertently omit important information from reports or conversations with lending officers regarding their financial condition and the diminished strength of repayment sources.

The second reason is that the loss estimation factors are based primarily on historical loss totals. As such, the factors may not give sufficient weight to such considerations as the current general economic and business conditions that affect the Company’s borrowers and specific industry conditions that affect borrowers in that industry. The factors might also not give sufficient weight to other environmental factors such as changing economic conditions and interest rates, portfolio growth, entrance into new markets or products, and other characteristics as may be determined by Management.

Specifically, in assessing how much environmental factor allowance needed to be provided, management considered the following:

•

with respect to the economy, management considered the effects of changes in GDP, unemployment, CPI, debt statistics, housing starts, housing sales, auto sales, agricultural prices, home affordability, and other economic factors which serve as indicators of economic health and trends and which may have an impact on the performance of our borrowers, and

•

with respect to changes in the interest rate environment, management considered the recent changes in interest rates and the resultant economic impact it may have had on borrowers with high leverage and/or low profitability; and

•

with respect to changes in energy prices, management considered the effect that increases, decreases or volatility may have on the performance of our borrowers, and

•

with respect to loans to borrowers in new markets and growth in general, management considered the relatively short seasoning of such loans and the lack of experience with such borrowers, and

•

with respect to loans that have not yet been identified as impaired, management considered the volume and severity of past due loans.

Each of these considerations was assigned a factor and applied to a portion or the entire originated and PNCI loan portfolios. Since these factors are not derived from experience and are applied to large non-homogeneous groups of loans, they are available for use across the portfolio as a whole.

historical loss information for all risk ratings and use that information to calculate the loss rates for each of the nine risk ratings without interpolation. This refinement led to an increase of $1,438,000 in the reserve requirement for unimpaired loans, driven primarily by home equity lines of credit with a risk rating of 5 or “Pass-Watch.”

Acquired loans are valued as of acquisition date in accordance with FASB ASC Topic 805, Business Combinations. Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI) loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In addition, because of the significant credit discounts associated with the loans acquired in the Granite acquisition, the Company elected to account for all loans acquired in the Granite acquisition under FASB ASC Topic 310-30, and classify them all as PCI loans. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The difference between estimated future payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable yield represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company determines that the future cash flows of a PCI loan are expected to be more than the originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining estimated life of the loan. If after acquisition, the Company determines that the future cash flows of a PCI loan are expected to be less than the previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous present value however, the discount rate may not be lowered below its original level. If the discount rate has been lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan.

The Components of the Allowance for Loan Losses

The following table sets forth the Bank’s allowance for loan losses as of the dates indicated (dollars in thousands):


	December 31,
	2015			2014			2013			2012			2011

Allowance for originated and PNCI loan losses:
Specific allowance	$	2,890		$	4,267		$	3,975		$	4,505		$	5,993
Formula allowance		20,603			22,076			24,611			29,314			32,023
Environmental factors allowance		9,625			6,815			5,619			3,919			3,687

Allowance for originated and PNCI loan losses		33,118			33,158			34,205			37,738			41,703
Allowance for PCI loan losses		2,893			3,427			4,040			4,910			4,211

Allowance for loan losses	$	36,011		$	36,585		$	38,245		$	42,648		$	45,914

Allowance for loan losses to loans		1.43	%		1.60	%		2.29	%		2.73	%		2.96	%

Based on the current conditions of the loan portfolio, management believes that the $36,011,000 allowance for loan losses at December 31, 2015 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

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


	December 31,
(dollars in thousands)	2015		2014		2013		2012		2011
Real estate mortgage	$	13,950	$	12,313	$	12,854	$	12,305	$	15,621
Consumer		15,079		18,201		18,238		23,461		20,506
Commercial		5,271		4,226		4,331		4,703		6,545
Real estate construction		1,711		1,845		2,822		2,179		3,242


Total allowance for loan losses	$	36,011	$	36,585	$	38,245	$	42,648	$	45,914

The following table summarizes the allocation of the allowance for loan losses between loan types as a percentage of the total allowance for loan losses:


	December 31,
	2015			2014			2013			2012			2011
Real estate mortgage		38.7	%		33.7	%		33.6	%		28.9	%		34.0	%
Consumer		41.9	%		49.7	%		47.7	%		55.0	%		44.7	%
Commercial		14.6	%		11.6	%		11.3	%		11.0	%		14.2	%
Real estate construction		4.8	%		5.0	%		7.4	%		5.1	%		7.1	%


Total allowance for loan losses		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

The following table summarizes the allocation of the allowance for loan losses between loan types as a percentage of the total loans:


	December 31,
	2015			2014			2013			2012			2011
Real estate mortgage		0.77	%		0.76	%		1.16	%		1.22	%		1.62	%
Consumer		3.81	%		4.36	%		4.76	%		6.08	%		5.05	%
Commercial		2.70	%		2.42	%		3.28	%		3.47	%		4.70	%
Real estate construction		1.42	%		2.46	%		5.75	%		6.59	%		8.18	%


Total allowance for loan losses		1.43	%		1.60	%		2.29	%		2.73	%		2.96	%

The following tables summarize the activity in the allowance for loan losses, reserve for unfunded commitments, and allowance for losses (which is comprised of the allowance for loan losses and the reserve for unfunded commitments) for the years indicated (dollars in thousands):


	Year ended December 31,
	2015			2014			2013			2012			2011
Allowance for loan losses:
Balance at beginning of period	$	36,585		$	38,245		$	42,648		$	45,914		$	42,571
(Benefit from) provision for loan losses		(2,210	)		(4,045	)		(715	)		9,423			23,060
Loans charged off:
Real estate mortgage:
Residential		(224	)		(171	)		(46	)		(1,558	)		(1,655	)
Commercial		—			(110	)		(2,038	)		(3,457	)		(4,451	)
Consumer:
Home equity lines		(694	)		(1,094	)		(2,651	)		(8,042	)		(9,746	)
Home equity loans		(242	)		(29	)		(94	)		(385	)		(789	)
Auto indirect		(4	)		(3	)		(68	)		(83	)		(427	)
Other consumer		(972	)		(599	)		(887	)		(1,202	)		(1,158	)
Commercial		(680	)		(479	)		(1,599	)		(1,251	)		(2,534	)
Construction:
Residential		—			(4	)		(20	)		(406	)		(634	)
Commercial		—			(69	)		(140	)		(100	)		(653	)

Total loans charged off		(2,816	)		(2,558	)		(7,543	)		(16,484	)		(22,047	)
Recoveries of previously charged-off loans:
Real estate mortgage:
Residential		204			2			345			147			126
Commercial		243			540			994			1,020			127
Consumer:
Home equity lines		666			960			1,053			398			573
Home equity loans		252			34			41			100			45
Auto indirect		42			86			195			215			379
Other consumer		500			495			759			860			839
Commercial		677			1,268			340			643			173
Construction:
Residential		1,728			1,377			63			412			28
Commercial		140			181			65			—			40

Total recoveries of previously charged off loans		4,452			4,943			3,855			3,795			2,330

Net charge-offs		1,636			2,385			(3,688	)		(12,689	)		(19,717	)

Balance at end of period	$	36,011		$	36,585		$	38,245		$	42,648		$	45,914


	Year ended December 31,
	2015			2014			2013			2012			2011
Reserve for unfunded commitments:
Balance at beginning of period	$	2,145		$	2,415		$	3,615		$	2,740		$	2,640
Provision for losses – unfunded commitments		330			(270	)		(1,200	)		875			100

Balance at end of period	$	2,475		$	2,145		$	2,415		$	3,615		$	2,740


Balance at end of period:
Allowance for loan losses	$	36,011		$	36,585		$	38,245		$	42,648		$	45,914
Reserve for unfunded commitments		2,475			2,145			2,415			3,615			2,740

Allowance for loan losses and reserve for unfunded commitments	$	38,486		$	38,730		$	40,660		$	46,263		$	48,654


As a percentage of total loans at end of period:
Allowance for loan losses		1.43	%		1.60	%		2.29	%		2.73	%		2.96	%
Reserve for unfunded commitments		0.10	%		0.10	%		0.14	%		0.23	%		0.18	%

Allowance for loan losses and reserve for unfunded commitments		1.53	%		1.70	%		2.43	%		2.96	%		3.14	%


Average total loans	$	2,389,437		$	1,847,749		$	1,610,725		$	1,552,540		$	1,442,821

Ratios:
Net charge-offs during period to average loans outstanding during period		(0.07	)%		(0.13	)%		0.23	%		0.82	%		1.37	%
Provision for loan losses to average loans outstanding		(0.09	)%		(0.22	)%		(0.04	)%		0.61	%		1.60	%
Allowance for loan losses to loans at year end		1.43	%		1.60	%		2.29	%		2.73	%		2.96	%

Foreclosed Assets, Net of Allowance for Losses

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


(dollars in thousands):	Balance at December 31, 2015		New NPA		Advances/ Capitalized Costs		Sales			Valuation Adjustments			Transfers from Loans		Category Changes			Balance at December 31, 2014
Noncovered:
Land & Construction	$	2,491		—		—	$	(61	)	$	(20	)	$	153	$	445		$	1,974
Residential real estate		1,787		—	$	195		(3,374	)		(276	)		3,620		—			1,622
Commercial real estate		1,091		—		—		(1,023	)		(206	)		1,467		—			853

Total noncovered		5,369		—		195		(4,458	)		(502	)		5,240		445			4,449

Covered:
Land & Construction		—		—		—		—			—			—		(445	)		445
Residential real estate		—		—		—		—			—			—		—			—
Commercial real estate		—		—		—		—			—			—		—			—

Total covered		—		—		—		—			—			—		(445	)		445

Total foreclosed assets	$	5,369		—	$	195	$	(4,458	)	$	(502	)	$	5,240		—		$	4,894


(dollars in thousands):	Balance at December 31, 2014		New NPA		Advances/ Capitalized Costs		Sales			Valuation Adjustments			Transfers from Loans		Category Changes			Balance at December 31, 2013
Noncovered:
Land & Construction	$	1,974	$	204		—	$	(603	)	$	(50	)	$	1,845		—		$	578
Residential real estate		1,622		244	$	462		(2,621	)		(87	)		1,680		—			1,944
Commercial real estate		853		247		—		(4,167	)		(59	)		1,766		—			3,066

Total noncovered		4,449		695		462		(7,391	)		(196	)		5,291		—			5,588

Covered:
Land & Construction		445		—		—		(217	)		(12	)		—		—			674
Residential real estate		—		—		—		—			—			—		—			—
Commercial real estate		—		—		—		—			—			—		—			—

Total covered		445		—		—		(217	)		(12	)		—		—			674

Total foreclosed assets	$	4,894	$	695	$	462	$	(7,608	)	$	(208	)	$	5,291		—		$	6,262

Premises and Equipment

Premises and equipment were comprised of:


	December 31, 2015			December 31, 2014
	(In thousands)
Land & land improvements	$	8,909		$	8,933
Buildings		38,643			39,638
Furniture and equipment		31,081			28,446

		78,633			77,017
Less: Accumulated depreciation		(35,518	)		(33,570	)

		43,115			43,447
Construction in progress		696			46

Total premises and equipment	$	43,811		$	43,493

During the year ended December 31, 2014, premises and equipment increased $318,000 due to purchases of $5,489,000, that were partially offset by depreciation of $5,034,000 and disposals of premises and equipment with net book value of $137,000.

Intangible Assets

Intangible assets at December 31, 2015 and 2014 were comprised of the following:


	December 31,
	2015		2014
	(In thousands)
Core-deposit intangible	$	5,894	$	7,051
Goodwill		63,462		63,462

Total intangible assets	$	69,356	$	70,513

The core-deposit intangible asset resulted from the Company’s acquisition of North Valley Bancorp in 2014, Citizens in 2011, and Granite in 2010. The goodwill intangible asset includes $47,943,000 from the North Valley Bancorp acquisition in 2014, and $15,519,000 from the North State National Bank acquisition in 2003. Amortization of core deposit intangible assets amounting to $1,157,000, $446,000, and $209,000 was recorded in 2015, 2014, and 2013, respectively.

Deposits

See Note 13 to the consolidated financial statements at Item 8 of this report for information about the Company’s deposits.

Long-Term Debt

See Note 16 to the consolidated financial statements at Item 8 of this report for information about the Company’s other borrowings, including long-term debt.

Junior Subordinated Debt

See Note 17 to the consolidated financial statements at Item 8 of this report for information about the Company’s junior subordinated debt.

Equity

See Note 19 and Note 29 in the consolidated financial statements at Item 8 of this report for a discussion of shareholders’ equity and regulatory capital, respectively. Management believes that the Company’s capital is adequate to support anticipated growth, meet the cash dividend requirements of the Company and meet the future risk-based capital requirements of the Bank and the Company.

Market Risk Management

Overview. The goal for managing the assets and liabilities of the Bank is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Bank to undue interest rate risk. The Board of Directors has overall responsibility for the Company’s interest rate risk management policies. The Bank has an Asset and Liability Management Committee (ALCO) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates.

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

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

In the simulation of net interest income, the forecast balance sheet is processed against various interest rate scenarios. These various interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and rate ramp scenarios including -100, +100, and +200 basis points around the flat scenario. These ramp scenarios assume that interest rates increase or decrease evenly (in a “ramp” fashion) over a twelve-month period and remain at the new levels beyond twelve months.

The following table summarizes the projected effect on net interest income and net income due to changing interest rates as measured against a flat rate (no interest rate change) scenario over the succeeding twelve month period. The simulation results shown below assume no changes in the structure of the Company’s balance sheet over the twelve months being measured (a “flat” balance sheet scenario), and that deposit rates will track general interest rate changes by approximately 50%:

Interest Rate Risk Simulation of Net Interest Income and Net Income as of December 31, 2015


	Estimated Change in
Change in Interest	Net Interest Income (NII)
Rates (Basis Points)	(as % of “flat” NII)
+200 (ramp)		(1.95	%)
+100 (ramp)		(0.90	%)
+ 0 (flat)		—
-100 (ramp)		(1.32	%)

In the simulation of market value of equity, the forecast balance sheet is processed against various interest rate scenarios. These various interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and rate shock scenarios including -100, +100, and +200 basis points around the flat scenario. These rate shock scenarios assume that interest rates increase or decrease immediately (in a “shock” fashion) and remain at the new level in the future.

The following table summarizes the effect on market value of equity due to changing interest rates as measured against a flat rate (no change) scenario:

Interest Rate Risk Simulation of Market Value of Equity as of December 31, 2015


Change in Interest Rates (Basis Points)	Estimated Change in Market Value of Equity (MVE) (as % of “flat” MVE)
+200 (shock)		(10.9	%)
+100 (shock)		(4.1	%)
+ 0 (flat)		—
-100 (shock)		(6.0	%)

These results indicate that given a “flat” balance sheet scenario, and if deposit rates track general interest rate changes by approximately 50%, the Company’s balance sheet is slightly liability sensitive over a twelve month time horizon for rates up, and slightly asset sensitive over a twelve month time horizon for rates down. “Liability sensitive” implies that net interest income decreases when interest rates rise and increase when interest rates decrease. “Asset sensitive” implies that net interest income increases when interest rates rise and decrease when interest rates decrease. “Neutral sensitivity” implies that net interest income does not change when interest rates change. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs.

The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of interest rate deviations. In addition, the simulation results noted above contain various assumptions such as a flat balance sheet, and the rate that deposit interest rates change as general interest rates change. Therefore, they do not reflect likely actual results, but serve as estimates of interest rate risk.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding tables. For example, although certain of the Company’s assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain of the Company’s asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in the preceding tables. Further, a change in U.S. Treasury rates accompanied by a change in the shape of the treasury yield curve could result in different estimations from those presented herein. Accordingly, the results in the preceding tables should not be relied upon as indicative of actual results in the event of changing market interest rates. Additionally, the resulting estimates of changes in market value of equity are not intended to represent, and should not be construed to represent, estimates of changes in the underlying value of the Company.

Interest rate sensitivity is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities. One aspect of these repricing characteristics is the time frame within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. An analysis of the repricing time frames of interest-bearing assets and liabilities is sometimes called a “gap” analysis because it shows the gap between assets and liabilities repricing or maturing in each of a number of periods. Another aspect of these repricing characteristics is the relative magnitude of the repricing for each category of interest earning asset and interest-bearing liability given various changes in market interest rates. Gap analysis gives no indication of the relative magnitude of repricing given various changes in interest rates. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity gaps are measured as the difference between the volumes of assets and liabilities in the Company’s current portfolio that are subject to repricing at various time horizons.

The following interest rate sensitivity table shows the Company’s repricing gaps as of December 31, 2014. In this table transaction deposits, which may be repriced at will by the Company, have been included in the less than 3-month category. The inclusion of all of the transaction deposits in the less than 3-month repricing category causes the Company to appear liability sensitive. Because the Company may reprice its transaction deposits at will, transaction deposits may or may not reprice immediately with changes in interest rates.

Due to the limitations of gap analysis, as described above, the Company does not actively use gap analysis in managing interest rate risk. Instead, the Company relies on the more sophisticated interest rate risk simulation model described above as its primary tool in measuring and managing interest rate risk.


Interest Rate Sensitivity – December 31, 2015	Repricing within:
(dollars in thousands)	Less than 3 months			3 - 6 months			6 - 12 months			1 - 5 years			Over 5 years
Interest-earning assets:
Cash at Federal Reserve and other banks	$	209,156			—			—			—			—
Securities		32,961		$	34,514		$	76,172		$	436,098		$	551,670
Loans		579,583			130,458			226,164			1,276,356			310,376

Total interest-earning assets		821,700			164,972			302,336			1,712,454			862,046

Interest-bearing liabilities
Transaction deposits		2,135,501			—			—			—			—
Time		146,483			65,757			73,160			54,667			3
Other borrowings		12,328			—			—			—			—
Junior subordinated debt		56,470			—			—			—			—

Total interest-bearing liabilities	$	2,350,782		$	65,757		$	73,160		$	54,667			3


Interest sensitivity gap	$	(1,529,082	)	$	99,215		$	229,176		$	1,657,787		$	862,043
Cumulative sensitivity gap	$	(1,529,082	)	$	(1,429,867	)	$	(1,200,691	)	$	457,096		$	1,319,139
As a percentage of earning assets:
Interest sensitivity gap		(39.6	%)		2.6	%		5.9	%		42.9	%		22.3	%
Cumulative sensitivity gap		(39.6	%)		(37.0	%)		(31.1	%)		11.8	%		34.1	%

Liquidity

Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Consolidated Statement of Cash Flows. Net cash used by investing activities totaled $604,310,000 in 2015. Net increases in investment and loan balances used $360,065,000 and $243,691,000 of cash, respectively.

Liquidity may also be generated from liabilities through deposit growth and borrowings. These activities are included under financing activities in the Consolidated Statement of Cash Flows. In 2015, financing activities provide funds totaling $242,226,000 due to a $250,843,000 increase in deposit balances. Dividends paid used $11,849,000 of cash during 2015. The Bank also had available correspondent banking lines of credit totaling $15,000,000 at December 31, 2015. In addition, at December 31, 2015 the Company had loans and securities available to pledge towards future borrowings from the Federal Home Loan Bank and the Federal Reserve Bank of up to $1,768,140,000 and $186,405,000, respectively. As of December 31, 2015, the Company had $12,328,000 of other borrowings as described in Note 16 of the consolidated financial statements of the Company and the related notes at Item 8 of this report. While these sources are expected to continue to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions. Liquidity is also provided or used through the results of operating activities. In 2015, operating activities provided cash of $54,817,000.

The Company’s investment securities available for sale plus cash and cash equivalents in excess of reserve requirements totaled $637,686,000 at December 31, 2015, which was 15.1% of total assets at that time. This was an increase of $1,369,000 from $636,317,000 and decrease from 16.2% of total assets as of December 31, 2014.

Loan demand during 2016 will be dictated by economic and competitive conditions. The Company aggressively solicits non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to interest rates. The growth of deposit balances is subject to heightened competition, the success of the Company’s sales efforts, delivery of superior customer service and market conditions. The reduction in the federal funds rate and various Federal Reserve interest rate manipulation efforts have resulted in historic low short-term and long-term interest rates, which could impact deposit volumes in the future. Depending on economic conditions, interest rate levels, and a variety of other conditions, deposit growth may be used to fund loans, to reduce short-term borrowings or purchase investment securities. However, due to concerns such as uncertainty in the general economic environment, competition and political uncertainty, loan demand and levels of customer deposits are not certain.

The principal cash requirements of the Company are dividends on common stock when declared. The Company is dependent upon the payment of cash dividends by the Bank to service its commitments. Shareholder dividends are expected to continue subject to the Board’s discretion and continuing evaluation of capital levels, earnings, asset quality and other factors. The Company expects that the cash dividends paid by the Bank to the Company will be sufficient to meet this payment schedule. Dividends from the Bank are subject to certain regulatory restrictions.

The maturity distribution of certificates of deposit in denominations of $100,000 or more is set forth in the following table. These deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain

higher yields elsewhere if available. The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. At December 31, 2015, 2014 and 2013, the Bank had $50,000,000, $5,000,000 and $5,000,000, respectively, of these State deposits.

Certificates of Deposit in Denominations of $100,000 or More


	Amounts as of December 31,
(dollars in thousands)	2015		2014		2013
Time remaining until maturity:
Less than 3 months	$	104,368	$	66,199	$	61,205
3 months to 6 months		31,327		36,166		39,580
6 months to 12 months		34,722		41,787		16,772
More than 12 months		26,747		36,488		40,090

Total	$	197,164	$	180,640	$	157,647

Loan demand also affects the Company’s liquidity position. The following table presents the maturities of loans, net of deferred loan costs, at December 31, 2015:


	Within One Year		After One But Within 5 Years		After 5 Years		Total
	(dollars in thousands)
Loans with predetermined interest rates:
Real estate mortgage	$	35,593	$	114,884	$	547,497	$	697,974
Consumer		3,024		44,579		99,895		147,498
Commercial		5,499		67,811		15,606		88,916
Real estate construction		20,035		4,721		23,690		48,446

		64,151		231,995		686,688		982,834

Loans with floating interest rates:
Real estate mortgage		22,819		124,052		966,987		1,113,858
Consumer		4,029		6,665		237,091		247,785
Commercial		73,811		9,582		22,604		105,997
Real estate construction		30,002		5,628		36,833		72,463

		130,661		145,927		1,263,515		1,540,103

Total loans	$	194,812	$	377,922	$	1,950,203	$	2,522,937

The maturity distribution and yields of the investment portfolio at December 31, 2015 is presented in the following table. The timing of the maturities indicated in the table below is based on final contractual maturities. Most mortgage-backed securities return principal throughout their contractual lives. As such, the weighted average life of mortgage-backed securities based on outstanding principal balance is usually significantly shorter than the final contractual maturity indicated below. Yields on tax exempt securities are shown on a tax equivalent basis.


	Within One Year			After One Year but Through Five Years				After Five Years but Through Ten Years				After Ten Years				Total
	Amount Yield			Amount Yield				Amount Yield				Amount Yield				Amount Yield
	(dollars in thousands)
Securities Available for Sale
Obligations of US government corporations and agencies		—	—	$	8,792	2.59	%	$	24,086	3.42	%	$	280,804	2.57	%	$	313,682	2.63	%
Obligations of states and political subdivisions		—	—		321	6.80	%		1,118	6.61	%		86,779	5.77	%		88,218	5.78	%
Corporate bonds		—	—		—	—			—	—			—	—			—	—
Marketable equity securities		—	—		—	—			—	—			2,985	—			2,985	—

Total securities available for sale		—	—	$	9,113	2.74	%	$	25,204	3.56	%	$	370,568	3.28	%	$	404,885	3.29	%


	Within One Year			After One Year but Through Five Years				After Five Years but Through Ten Years				After Ten Years				Total
	Amount Yield			Amount Yield				Amount Yield				Amount Yield				Amount Yield
	(dollars in thousands)
Securities Held to Maturity
Obligations of US government corporations and agencies		—	—		—	—			—	—		$	711,994	2.65	%	$	711,994	2.65	%
Obligations of states and political subdivisions		—	—	$	1,147	4.13	%	$	830	5.80	%		12,559	4.14	%		14,536	4.23	%


Total securities held to maturity		—	—	$	1,147	4.13	%	$	830	5.80	%	$	724,553	2.68	%	$	726,530	2.68	%

Off-Balance Sheet Items

The Bank has certain ongoing commitments under operating and capital leases. See Note 18 of the financial statements at Item 8 of this report for the terms. These commitments do not significantly impact operating results. As of December 31, 2015 commitments to extend credit and commitments related to the Bank’s deposit overdraft privilege product were the Bank’s only financial instruments with off-balance sheet risk. The Bank has not entered into any material contracts for financial derivative instruments such as futures, swaps, options, etc. Commitments to extend credit were $713,646,000 and $673,706,000 at December 31, 2015 and 2014, respectively, and represent 28.4% of the total loans outstanding at year-end 2015 versus 29.5% at December 31, 2014. Commitments related to the Bank’s deposit overdraft privilege product totaled $94,473,000 and $101,060,000 at December 31, 2015 and 2014, respectively.

Certain Contractual Obligations

The following chart summarizes certain contractual obligations of the Company as of December 31, 2015:


(dollars in thousands)	Total		Less than one year		1-3 years		3-5 years		More than 5 years

Time deposits	$	340,070	$	285,400	$	38,085	$	16,582	$	3
Other collateralized borrowings, fixed rate of 0.05% payable on January 4, 2016		12,328		12,328		—		—		—
Junior subordinated:
TriCo Trust I⁽¹⁾		20,619		—		—		—		20,619
TriCo Trust II⁽²⁾		20,619		—		—		—		20,619
North Valley Trust II⁽³⁾		6,186		—		—		—		6,186
North Valley Trust III⁽⁴⁾		5,155		—		—		—		5,155
North Valley Trust IV⁽⁵⁾		10,310		—		—		—		10,310
Operating lease obligations		11,474		3,067		4,155		3,593		659
Deferred compensation⁽⁶⁾		8,367		1,338		2,134		1,918		2,977
Supplemental retirement plans⁽⁶⁾		8,127		1,104		1,957		1,576		3,490


Total contractual obligations	$	443,255	$	303,237	$	46,331	$	23,669	$	70,018

(1)	Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a quarterly basis beginning October 7, 2008, matures October 7, 2033.

(2)	Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.55%, callable in whole or in part by the Company on a quarterly basis beginning July 23, 2009, matures July 23, 2034.

(3)	Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.25%, callable in whole or in part by the Company on a quarterly basis beginning April 24, 2008, matures April 24, 2033.

(4)	Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.80%, callable in whole or in part by the Company on a quarterly basis beginning July 23, 2009, matures July 23, 2034.

(5)	Junior subordinated debt, adjustable rate of three-month LIBOR plus 1.33%, callable in whole or in part by the Company on a quarterly basis beginning March 15, 2011, matures March 15, 2036.

(6)

These amounts represent known certain payments to participants under the Company’s deferred compensation and supplemental retirement plans. See Note 25 in the financial statements at Item 8 of this report for additional information related to the Company’s deferred compensation and supplemental retirement plan liabilities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Market Risk Management” under Item 7 of this report which is incorporated herein.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS


	Page

Consolidated Balance Sheets as of December 31, 2015 and 2014		52
Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013		53
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014, and 2013		54
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014, and 2013		54
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013		55
Notes to Consolidated Financial Statements		56
Management’s Report on Internal Control over Financial Reporting		101
Report of Independent Registered Public Accounting Firm		102

TRICO BANCSHARES

CONSOLIDATED BALANCE SHEETS


	At December 31,
	2015		2014
	(in thousands, except share data)
Assets:
Cash and due from banks	$	94,305	$	93,150
Cash at Federal Reserve and other banks		209,156		517,578


Cash and cash equivalents		303,461		610,728
Investment securities: