TRICO BANCSHARES / - Quarter Report: 2018 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the quarterly period ended: June 30, 2018

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

for the transition period from to .

Commission File Number: 000-10661

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 Number)

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ 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 ☐ No

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:

Common stock, no par value: 30,411,135 shares outstanding as of August 3, 2018

TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS


	Page
Forward-Looking Statements		1

PART I – FINANCIAL INFORMATION		2

Item 1 – Financial Statements (Unaudited)		2

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		52

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		74

Item 4 – Controls and Procedures		74

PART II – OTHER INFORMATION		75

Item 1 – Legal Proceedings		75

Item 1A – Risk Factors		75

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		75

Item 6 – Exhibits		76

Signatures		77

Exhibits

FORWARD-LOOKING STATEMENTS

Cautionary Statements Regarding Forward-Looking Information

This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the “Company”) that are subject to the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current knowledge and belief of the Company’s management (“Management”) 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, it may mean the Company is making forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. The Company cautions readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of changes in financial services policies, laws and regulations; technological changes; mergers and acquisitions, including costs or difficulties related to the integration of acquired companies; changes in the level of the Company’s nonperforming assets and charge-offs; any deterioration in values of California real estate, both residential and commercial; the effect of changes in accounting standards and practices; possible other-than-temporary impairment of securities held by the Company; changes in consumer spending, borrowing and savings habits; ability to attract deposits and other sources of liquidity; changes in the financial performance and/or condition of our borrowers; the impact of competition from financial and bank holding companies and other financial service providers; the possibility that any of the anticipated benefits of the Company’s recent merger with FNB Bancorp (“FNB”) will not be realized or will not be realized within the expected time period, or that integration of FNB’s operations with those of the Company will be materially delayed or will be more costly or difficult than expected; the challenges of integrating and retaining key employees; the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; unanticipated regulatory or judicial proceedings; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and the Company’s ability to manage the risks involved in the foregoing. Annualized, pro forma, projections and estimates are not forecasts and may not reflect actual results. 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. The reader is directed to the Company’s annual report on Form 10-K for the year ended December 31, 2017 and Part II, Item 1A of this report for further discussion of factors which could affect the Company’s business and cause actual results to differ materially from those suggested by any forward-looking statement made in this report. Such Form 10-K and this report should be read in their entirety to put any forward-looking statements in context and to gain a more complete understanding of the risks and uncertainties involved in the Company’s business. Any forward-looking statement may turn out to be wrong and cannot be guaranteed. The Company does not intend to update any forward-looking statement after the date of this report.

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)


	At June 30, 2018			At December 31, 2017
Assets:
Cash and due from banks	$	94,661		$	105,968
Cash at Federal Reserve and other banks		89,401			99,460

Cash and cash equivalents		184,062			205,428
Investment securities:
Marketable equity securities		2,868			2,938
Available for sale debt securities		754,207			727,945
Held to maturity debt securities		477,745			514,844
Restricted equity securities		16,956			16,956
Loans held for sale		3,601			4,616
Loans		3,146,313			3,015,165
Allowance for loan losses		(29,524	)		(30,323	)

Total loans, net		3,116,789			2,984,842
Foreclosed assets, net		1,374			3,226
Premises and equipment, net		59,014			57,742
Cash value of life insurance		99,047			97,783
Accrued interest receivable		14,253			13,772
Goodwill		64,311			64,311
Other intangible assets, net		4,496			5,174
Mortgage servicing rights		7,021			6,687
Other assets		57,409			55,051

Total assets	$	4,863,153		$	4,761,315

Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand	$	1,369,834		$	1,368,218
Interest-bearing		2,707,388			2,640,913

Total deposits		4,077,222			4,009,131
Accrued interest payable		1,175			930
Reserve for unfunded commitments		3,727			3,164
Other liabilities		58,896			63,258
Other borrowings		152,839			122,166
Junior subordinated debt		56,950			56,858

Total liabilities		4,350,809			4,255,507

Commitments and contingencies (Note 18)
Shareholders’ equity:
Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at June 30, 2018 and December 31, 2017		—			—
Common stock, no par value: 50,000,000 shares authorized; issued and outstanding:
23,004,153 at June 30, 2018		256,590
22,955,963 at December 31, 2017					255,836
Retained earnings		276,877			255,200
Accumulated other comprehensive loss, net of tax		(21,123	)		(5,228	)

Total shareholders’ equity		512,344			505,808

Total liabilities and shareholders’ equity	$	4,863,153		$	4,761,315

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Interest and dividend income:
Loans, including fees	$	39,304		$	36,418		$	77,353		$	71,332
Investments:
Taxable securities		7,438			6,903			14,760			13,606
Tax exempt securities		1,042			1,042			2,083			2,083
Dividends		298			328			634			719
Interest bearing cash at
Federal Reserve and other banks		396			353			769			788

Total interest and dividend income		48,478			45,044			95,599			88,528

Interest expense:
Deposits		1,234			974			2,330			1,868
Other borrowings		586			13			928			15
Junior subordinated debt		789			623			1,486			1,218

Total interest expense		2,609			1,610			4,744			3,101

Net interest income		45,869			43,434			90,855			85,427
Benefit from reversal of provision for loan losses		(638	)		(796	)		(874	)		(2,353	)

Net interest income after benefit from reversal of provision for loan losses		46,507			44,230			91,729			87,780

Noninterest income:
Service charges and fees		9,228			9,479			18,584			18,386
Gain on sale of loans		666			777			1,292			1,687
Commissions on sale of non-deposit investment products		810			705			1,686			1,312
Increase in cash value of life insurance		656			626			1,264			1,311
Other		814			1,323			1,638			1,917

Total noninterest income		12,174			12,910			24,464			24,613

Noninterest expense:
Salaries and related benefits		21,453			20,494			43,105			41,387
Other		16,417			15,410			32,927			30,339

Total noninterest expense		37,870			35,904			76,032			71,726

Income before income taxes		20,811			21,236			40,161			40,667
Provision for income taxes		5,782			7,647			11,222			14,999

Net income	$	15,029		$	13,589		$	28,939		$	25,668

Earnings per share:
Basic	$	0.65		$	0.59		$	1.26		$	1.12
Diluted	$	0.65		$	0.58		$	1.24		$	1.10

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)


	Three months ended June 30,					Six months ended June 30,
	2018			2017		2018			2017
Net income	$	15,029		$	13,589	$	28,939		$	25,668
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period		(3,998	)		2,846		(15,024	)		3,303
Change in minimum pension liability		80			55		160			109

Other comprehensive income (loss)		(3,918	)		2,901		(14,864	)		3,412

Comprehensive income	$	11,111		$	16,490	$	14,075		$	29,080

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data; unaudited)


	Shares of Common Stock			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balance at December 31, 2016		22,867,802		$	252,820		$	232,440		$	(7,913	)	$	477,347
Net income								25,668						25,668
Other comprehensive income											3,412			3,412
Stock option vesting					162									162
Service condition RSU vesting					419									419
Market plus service condition RSU vesting					193									193
Stock options exercised		117,850			2,163									2,163
Service condition RSUs released		25,069
Repurchase of common stock		(85,652	)		(949	)		(2,143	)					(3,092	)
Dividends paid ($0.30 per share)								(7,328	)					(7,328	)

Balance at June 30, 2017		22,925,069		$	254,808		$	248,637		$	(4,501	)	$	498,944

Balance at December 31, 2017		22,955,963		$	255,836		$	255,200		$	(5,228	)	$	505,808
Net income								28,939						28,939
Adoption ASU 2016-01								(62	)		62			—
Adoption ASU 2018-02								1,093			(1,093	)		—
Other comprehensive loss											(14,864	)		(14,864	)
Stock option vesting					54									54
Service condition RSU vesting					471									471
Market plus service condition RSU vesting					197									197
Service condition RSUs released		25,398
Market plus service condition RSUs released		25,512
Stock options exercised		14,500			223									223
Repurchase of common stock		(17,220	)		(191	)		(480	)					(671	)
Dividends paid ($0.34 per share)								(7,813	)					(7,813	)

Balance at June 30, 2018		23,004,153		$	256,590		$	276,877		$	(21,123	)	$	512,344

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)


	For the six months ended June 30,
	2018			2017
Operating activities:
Net income	$	28,939		$	25,668
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization		3,229			3,287
Amortization of intangible assets		678			711
Benefit from reversal of provision for loan losses		(874	)		(2,353	)
Amortization of investment securities premium, net		1,340			1,606
Originations of loans for resale		(43,389	)		(63,022	)
Proceeds from sale of loans originated for resale		45,437			64,699
Gain on sale of loans		(1,292	)		(1,687	)
Change in market value of mortgage servicing rights		(75	)		470
Provision for losses on foreclosed assets		90			28
Gain on sale of foreclosed assets		(388	)		(271	)
Loss on disposal of fixed assets		54			28
Gain on sale of premises held for sale		—			(3	)
Increase in cash value of life insurance		(1,264	)		(1,311	)
Life insurance proceeds in excess of cash value		—			(108	)
Loss on marketable equity securities		70			—
Equity compensation vesting expense		722			774
Change in:
Reserve for unfunded commitments		563			(120	)
Interest receivable		(481	)		422
Interest payable		245			(37	)
Other assets and liabilities, net		(660	)		(1,225	)

Net cash from operating activities		32,944			27,556

Investing activities:
Proceeds from maturities of securities available for sale		32,906			27,997
Proceeds from maturities of securities held to maturity		36,587			42,361
Purchases of securities available for sale		(81,300	)		(145,584	)
Loan origination and principal collections, net		(131,073	)		(69,491	)
Proceeds from sale of other real estate owned		2,150			1,424
Proceeds from sale of premises held for sale		36			3,338
Purchases of premises and equipment		(4,119	)		(5,885	)
Life insurance proceeds		—			649

Net cash from investing activities		(144,813	)		(145,191	)

Financing activities:
Net change in deposits		68,091			(17,138	)
Net change in other borrowings		30,673			5,067
Repurchase of common stock		(633	)		(1,122	)
Dividends paid		(7,813	)		(7,328	)
Exercise of stock options		185			193

Net cash from financing activities		90,503			(20,328	)

Net change in cash and cash equivalents		(21,366	)		(137,963	)

Cash and cash equivalents at beginning of year		205,428			305,612

Cash and cash equivalents at end of year	$	184,062		$	167,649

Supplemental disclosure of noncash activities:
Unrealized (loss) gain on securities available for sale	$	(21,304	)	$	5,698
Loans transferred to foreclosed assets	$	—		$	684
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes	$	671		$	3,092
Supplemental disclosure of cash flow activity:
Cash paid for interest expense	$	4,499		$	3,138
Cash paid for income taxes	$	8,525		$	10,650
Insurance proceeds receivable reclassified to other assets	$	—		$	921

See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 26 California counties. The Bank operates from 57 traditional branches, 9 in-store branches and 2 loan production offices. The Company has five capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by TriCo and three acquired with the acquisition of North Valley Bancorp. See Note 17 – Junior Subordinated Debt.

The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,710,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Capital Trusts are reflected as debt on the Company’s consolidated balance sheet.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Significant Group Concentration of Credit Risk

The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into one business segment that it denotes as community banking.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Net cash flows are reported for loan and deposit transactions and other borrowings.

Marketable Equity Securities

As of December 31, 2017, marketable equity securities with a fair value of $2,938,000 were recorded within investment securities available for sale on the consolidated balance sheets with changes in the fair value recorded through other comprehensive income and accumulated other comprehensive income (loss). As of January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) 2016-01 using a prospective transition approach and reclassified its marketable equity securities from investments available for sale into a separate component of investment securities. The ASU requires marketable equity securities to be reported at fair value with changes in the fair value recorded through earnings. As of January 1, 2018, unrealized losses of $62,000 were reclassified from accumulated other comprehensive loss to retained earnings and the deferred tax asset was reduced by $18,000. During the six months ended June 30, 2018, the Company recognized $70,000 of unrealized losses in the condensed consolidated statements of income related to marketable equity securities.

Debt Securities

The Company classifies its debt securities into one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives. All other securities not included in trading or held to maturity are classified as available for sale. Available for sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale securities are reported as a separate component of other accumulated comprehensive income in shareholders’ equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are derived from the amortized cost of the security sold. During the six months ended June 30, 2018 and throughout 2017, the Company did not have any debt securities classified as trading.

The Company assesses other-than-temporary impairment (“OTTI”) based on whether it intends to sell a security or if it is likely that the Company would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if we intend to sell the security or it is more likely than not that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. The accretion of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above. No OTTI losses were recognized during the six months ended June 30, 2018 or the year ended December 31, 2017.

Restricted Equity Securities

Restricted equity securities represent the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”) and are carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

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

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors of current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to noninterest income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. Gains or losses on the sale of loans that are held for sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights.

Loans and Allowance for Loan Losses

Loans originated by the Company, i.e., not purchased or acquired in a business combination, are referred to as originated loans. Originated loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment 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. The allowance is maintained at a level which, in Management’s judgment, is adequate to absorb probable incurred credit losses inherent in the loan portfolio as of the balance sheet date. 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. 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 original 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 specific reserve allocation within the allowance for loan losses.

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 probable incurred 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 probable incurred 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.

Loans purchased or acquired in a business combination are referred to as acquired loans. Acquired loans are valued as of the 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 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, thereafter, the Company determines that the estimated future cash flows of a PCI loan are expected to be less than previously estimated, 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. The Company refers to PCI loans on nonaccrual status that are accounted for using the cash basis method of income recognition as “PCI – cash basis” loans; and the Company refers to all other PCI loans as “PCI – other” loans 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 Community Bank, N.A. (“Granite”) during 2010 and Citizens Bank of Northern California (“Citizens”) during 2011.

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 acquisition. 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.

Throughout these financial statements, and in particular in Note 4 and Note 5, when we refer to “Loans” or “Allowance for loan losses” we mean all categories of loans, including Originated, PNCI, PCI – cash basis, and PCI - other. When we are not referring to all categories of loans, we will indicate which we are referring to – Originated, PNCI, PCI – cash basis, or PCI - other.

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.

Foreclosed Assets

Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Any write-downs based on the asset’s fair value less costs to sell at the date of acquisition are charged to the allowance for loan and lease losses. Any recoveries based on the asset’s fair value less estimated costs to sell in excess of the recorded value of the loan at the date of acquisition are recorded to the allowance for loan and lease losses. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Gain or loss on sale of foreclosed assets is included in noninterest income. Foreclosed assets that are not subject to a FDIC loss-share agreement are referred to as noncovered foreclosed assets.

Foreclosed assets acquired through FDIC-assisted acquisitions that are subject to a FDIC loss-share agreement, and all assets acquired via foreclosure of covered loans are referred to as covered foreclosed assets. Covered foreclosed assets are reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered foreclosed assets at the loan’s carrying value, inclusive of the acquisition date fair value discount.

Covered foreclosed assets are initially recorded at estimated fair value less estimated costs to sell on the acquisition date based on similar market comparable valuations less estimated selling costs. Any subsequent valuation adjustments due to declines in fair value will be charged to noninterest expense, and will be mostly offset by noninterest income representing the corresponding increase to the FDIC indemnification asset for the offsetting loss reimbursement amount. Any recoveries of previous valuation adjustments will be credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to the FDIC. On May 9, 2017, the Company and the FDIC terminated their loss sharing agreements.

Premises and Equipment

Land is carried at cost. Land improvements, buildings and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the shorter of the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 years for land improvements and buildings.

Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.

The Company has an identifiable intangible asset consisting of core deposit intangibles (CDI). CDI are amortized over their respective estimated useful lives, and reviewed for impairment.

Impairment of Long-Lived Assets and Goodwill

Long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.

As of December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level. The Company may choose to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then goodwill is deemed not to be impaired. However, if the Company concludes otherwise, or if the Company elected not to first assess qualitative factors, then the Company performs the first step of a two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Currently, and historically, the Company is comprised of only one reporting unit that operates within the business segment it has identified as “community banking”. Goodwill was not impaired as of December 31, 2017 because the fair value of the reporting unit exceeded its carrying value.

Mortgage Servicing Rights

Mortgage servicing rights (MSR) represent the Company’s right to a future stream of cash flows based upon the contractual servicing fee associated with servicing mortgage loans. Our MSR arise from residential and commercial mortgage loans that we originate and sell, but retain the right to service the loans. The net gain from the retention of the servicing right is included in gain on sale of loans in noninterest income when the loan is sold. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing fees are recorded in noninterest income when earned.

The Company accounts for MSR at fair value. The determination of fair value of our MSR requires management judgment because they are not actively traded. The determination of fair value for MSR requires valuation processes which combine the use of discounted cash flow models and extensive analysis of current market data to arrive at an estimate of fair value. The cash flow and prepayment assumptions used in our discounted cash flow model are based on empirical data drawn from the historical performance of our MSR, which we believe are consistent with assumptions used by market participants valuing similar MSR, and from data obtained on the performance of similar MSR. The key assumptions used in the valuation of MSR include mortgage prepayment speeds and the discount rate. These variables can, and generally will, change from quarter to quarter as market conditions and projected interest rates change. The key risks inherent with MSR are prepayment speed and changes in interest rates. The Company uses an independent third party to determine fair value of MSR.

Indemnification Asset/Liability

The Company accounts for amounts receivable or payable under its loss-share agreements entered into with the FDIC in connection with its purchase and assumption of certain assets and liabilities of Granite as indemnification assets in accordance with FASB ASC Topic 805, Business Combinations. FDIC indemnification assets are initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the fair value and the undiscounted cash flows the Company expects to collect from or pay to the FDIC will be accreted into noninterest income over the life of the FDIC indemnification asset. FDIC indemnification assets are reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolios. These adjustments are measured on the same basis as the related covered loans and covered other real estate owned. Any increases in cash flow of the covered assets over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income. On May 9, 2017, the Company and the FDIC terminated their loss sharing agreements.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is established through a provision for losses – unfunded commitments charged to noninterest expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits, and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectability, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower’s or depositor’s ability to pay.

Low Income Housing Tax Credits

The Company accounts for low income housing tax credits and the related qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Upon entering into a qualified affordable housing project, the Company records, in other liabilities, the entire amount that it has agreed to invest in the project, and an equal amount, in other assets, representing its investment in the project. As the Company disburses cash to satisfy its investment obligation, other liabilities are reduced. Over time, as the tax credits and other tax benefits of the project are realized by the Company, the investment recorded in other assets is reduced using the proportional amortization method.

Revenue Recognition

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Most of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans and investment securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2018 and December 31, 2017, the Company did not have any significant contract balances. The Company has evaluated the nature of its revenue streams and determined that further disaggregation of revenue into more granular categories beyond what is presented in the Note 21 was not necessary.

Income Taxes

The Company’s accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. Interest and/or penalties related to income taxes are reported as a component of noninterest income.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

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.

Reclassifications

During the three months ended September 30, 2017, the Company changed its classification of 1st lien and 2nd lien non-owner occupied 1-4 residential real estate mortgage loans from commercial real estate mortgage loans to residential real estate mortgage loans and consumer home equity loans, respectively. This change in loan category classification was made to better align the Company’s financial reporting classifications with regulatory reporting classifications, and to properly classify these loans for regulatory risk-based capital ratio calculations. Certain amounts reported in previous consolidated financial statements have been reclassified and recalculated to conform to the presentation in this report. These reclassifications did not affect previously reported net income, total loans or total shareholders’ equity.

Recent Accounting Pronouncements

FASB Accounting Standards Update (ASU) No.2014-09, Revenue from Contracts with Customers (Topic 606): ASU 2014-09 is intended to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15, 2016. ASU 2014-09 does not apply to revenue associated with financial instruments such as loans and investments, which are accounted for under other provisions of GAAP. The Company adopted ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (1) above, the Company recorded a reclassification of cumulative unrealized losses of its marketable equity securities from accumulated other comprehensive income (loss) to retained earnings as of January 1, 2018. Additionally, the Company recognized changes in the fair value of its marketable equity securities in the condensed consolidated statements of net income for the three and six months ended June 30, 2018. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of June 30, 2018 using an exit price notion (see Note 27 Fair Value Measurement).

FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-2, among other things, requires lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 will be effective for the Company on January 1, 2019, utilizing the modified retrospective transition approach. FASB has issued incremental guidance to the new leasing standard through ASU No. 2018-10 and 2018-11. Based on current leases, subject to change, the Company estimates that the adoption of this standard will result in an increase in assets of approximately $24 million to recognize the present value of the lease obligations with a corresponding increase in liabilities of approximately $24 million. This amount is subject to change as the Company continues to evaluate the provisions of ASU No. 2016-02, 2018-10 and 2018-11. The Company does not expect this to have a material impact on the Company’s results of operations or cash flows.

FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 is the final guidance on the new current expected credit loss (‘‘CECL’’) model. ASU 2016-13, among other things, requires the incurred loss impairment methodology in current GAAP be replaced with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (‘‘HTM’’) debt securities. ASU 2016-13 amends the accounting for credit losses on available-for-sale securities (‘‘AFS’’), whereby credit losses will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, ASU 2016-13 requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. ASU 2016-13 allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). ASU 2016-13 will be effective for the Company on January 1, 2020, and early adoption is permitted. While the Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.

FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2017-01, Business Combinations - Clarifying the Definition of a Business (Topic 805). ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 was effective for us on January 1, 2018 and did not have a significant impact on our financial statements.

FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350): ASU 2017-04 eliminates step two of the goodwill impairment test (the hypothetical purchase price allocation used to determine the implied fair value of goodwill) when step one (determining if the carrying value of a reporting unit exceeds its fair value) is failed. Instead, entities simply will compare the fair value of a reporting unit to its carrying amount and record goodwill impairment for the amount by which the reporting unit’s carrying amount exceeds its fair value. ASU 2017-04 will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. ASU 2017-07 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Topic 310). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 will be effective for the Company on January 1, 2019, and is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award’s fair value, (ii) the award’s vesting conditions and (iii) the award’s classification as an equity or liability instrument. ASU 2017-09 was effective for the Company on January 1, 2018 and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). ASU 2018-02 allows, but does not require, entities to reclassify certain income tax effects in accumulated other comprehensive income (AOCI) to retained earnings that resulted from the Tax Cuts and Jobs Act (Tax Act) that was enacted on December 22, 2017. The Tax Act included a reduction to the Federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the income tax effects in AOCI calculated using the historical Federal corporate income tax rate of 35 percent and the income tax effects in AOCI calculated using the newly enacted 21 percent Federal corporate income tax rate. The amendments in ASU 2018-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2018-02 on January 1, 2018, and elected to reclassify certain income tax effects in AOCI to retained earnings. This change in accounting principle was accounted for as a cumulative-effect adjustment to the balance sheet resulting in a $1,093,000 increase to retained earnings and a corresponding decrease to AOCI on January 1, 2018.

Note 2 - Business Combinations

Merger with FNB Bancorp

On July 6, 2018, pursuant to a previously announced Agreement and Plan of Merger and Reorganization dated as of December 11, 2017 (the “Merger Agreement”) between the Company and FNB Bancorp (“FNB”), FNB merged with and into the Company with the Company continuing as the surviving corporation (the “Merger”). Immediately after the Merger, First National Bank of Northern California, the wholly owned bank subsidiary of FNB (“First National Bank”), merged with and into the Bank, with the Bank continuing as the surviving bank. The Merger and Bank Merger are collectively referred to as the “Transaction.”

As part of its business strategy, the Company evaluates opportunities to acquire bank holding companies, banks and other financial institutions, which is an important element of its strategic plan. The Transaction is consistent with the Company’s business strategy, which will (1) extend The Company’s geographic footprint into the San Francisco Peninsula, (2) create opportunities for the Company to provide additional products and services to First National Bank customers and other potential customers, and (3) strengthen the Company’s deposit base with a mature base of core deposits.

At the close of the transaction each share of FNBB common stock issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into 0.98 shares of the Company’s common stock (the “Exchange Ratio”), with cash paid in lieu of fractional shares of the Company’s common stock. In addition, on July 6, 2018, each outstanding and unexercised option to acquire shares of FNBB common stock held by FNBB’s employees and directors was canceled and, in exchange, the holder of each option received a lump sum cash payment equal to the product of (1) the number of shares of FNBB common stock remaining under the option multiplied by (2) the Exchange Ratio multiplied by (3) the amount, if any, by which the Average Closing Share Price, as defined in the Merger Agreement, exceeded the exercise price of the option.

These exchanges resulted in the Company issuing 7,405,277 shares of common stock, paying $6,000 in lieu of fractional shares, and paying $6,690,000 in exchange for the outstanding FNBB options. Based on the closing price of the Company’s common stock of $38.41 on July 6, 2018, the consideration value issued to the shareholders of FNBB was $284.4 million in aggregate. The 7,405,277 shares of the Company’s shares issued to the shareholders of FNBB on July 6, 2018 represented 24.4% of the Company’s 30,409,430 shares outstanding immediately subsequent to the Transaction.

Immediately subsequent to the Transaction, the newly combined company, operating as TriCo Bancshares with its banking subsidiary, Tri Counties Bank, had total assets of approximately $6.1 billion. Immediately prior to the merger on July 6, 2018, FNBB had investment securities of approximately $344 million, loans of approximately $868 million, deposits of approximately $995 million, borrowings from the Federal Home Loan Bank of San Francisco (FHLB) of $165 million, and total assets of approximately $1.3 billion. These amounts are subject to change as the Company is in the process of determining the fair value of FNBB assets and liabilities acquired in accordance with generally accepted accounting principles. The Company anticipates recording goodwill and core deposit intangibles with this acquisition. During July 9 and 10, 2018, the Company sold approximately $292 million of the $344 million of investment securities obtained in the Transaction at no material gain or loss from their fair value on July 6, 2018. The proceeds from these security sales were used to pay off all of the Company’s $136 million of FHLB borrowings that existed at June 30, 2018 and all of FNBB’s $165 million of FHLB borrowings that existed at July 6, 2018 and matured in steps through August 6, 2018.

The Company will file an amended Form 8-K on or before September 23, 2018 that will include financial statements for FNBB and combined pro forma financial information for the Company and FNBB as if the merger was effective on June 30, 2018 for the balance sheet and January 1, 2017 for the statements of income. The pro forma financial information will reflect various adjustments required by applicable acquisition accounting rules.

While FNBB’s banking subsidiary, First National Bank of Northern California officially became part of Tri Counties Bank on July 6, 2018, the First National Bank branches continued to operate under the name “First National Bank” until the conversion of its operating systems to the operating systems of Tri Counties Bank on July 22, 2018 at which time First National Bank banking centers along with the client relationships and all accounts converted to Tri Counties Bank.

Note 3 - Investment Securities

The amortized cost and estimated fair values of investments in debt and equity securities are summarized in the following tables:


	June 30, 2018
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government corporations and agencies	$	657,335	$	257	$	(22,164	)	$	635,428
Obligations of states and political subdivisions		121,523		359		(3,103	)		118,779

Total debt securities available for sale	$	778,858	$	616	$	(25,267	)	$	754,207

Debt Securities Held to Maturity
Obligations of U.S. government corporations and agencies	$	463,162	$	291	$	(9,211	)	$	454,242
Obligations of states and political subdivisions		14,583		77		(281	)		14,379

Total debt securities held to maturity	$	477,745	$	368	$	(9,492	)	$	468,621


	December 31, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
Debt Securities Available for Sale
Obligations of U.S. government corporations and agencies	$	609,695	$	695	$	(5,601	)	$	604,789
Obligations of states and political subdivisions		121,597		1,888		(329	)		123,156

Total debt securities available for sale	$	731,292	$	2,583	$	(5,930	)	$	727,945

Debt Securities Held to Maturity
Obligations of U.S. government corporations and agencies	$	500,271	$	5,101	$	(1,889	)	$	503,483
Obligations of states and political subdivisions		14,573		146		(37	)		14,682

Total debt securities held to maturity	$	514,844	$	5,247	$	(1,926	)	$	518,165

No investment securities were sold during the six months ended June 30, 2018 or the six months ended June 30, 2017. Investment securities with an aggregate carrying value of $410,073,000 and $285,596,000 at June 30, 2018 and December 31, 2017, respectively, were pledged as collateral for specific borrowings, lines of credit and local agency deposits.

The amortized cost and estimated fair value of debt securities at June 30, 2018 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2018, obligations of U.S. government corporations and agencies with a cost basis totaling $1,120,497,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At June 30, 2018, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 6.1 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.


Debt Securities	Available for Sale				Held to Maturity
(In thousands)	Amortized		Estimated		Amortized		Estimated
(In thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year	$	1	$	1	$	—	$	—
Due after one year through five years		233		234		1,223		1,239
Due after five years through ten years		3,229		3,331		27,400		26,800
Due after ten years		775,395		750,641		449,122		440,582

Totals	$	778,858	$	754,207	$	477,745	$	468,621

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:


	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
						(in thousands)
June 30, 2018
Debt Securities Available for Sale
Obligations of U.S. government corporations and agencies	$	437,859	$	(14,490	)	$	152,004	$	(7,674	)	$	589,863	$	(22,164	)
Obligations of states and political subdivisions		66,052		(1,785	)		16,556		(1,318	)		82,608		(3,103	)

Total debt securities available for sale	$	503,911	$	(16,275	)	$	168,560	$	(8,992	)	$	672,471	$	(25,267	)

Debt Securities Held to Maturity
Obligations of U.S. government corporations and agencies	$	326,966	$	(5,578	)	$	91,801	$	(3,633	)	$	418,767	$	(9,211	)
Obligations of states and political subdivisions		8,884		(152	)		2,536		(129	)		11,420		(281	)

Total debt securities held to maturity	$	335,850	$	(5,730	)	$	94,337	$	(3,762	)	$	430,187	$	(9,492	)


	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
						(in thousands)
December 31, 2017
Debt Securities Available for Sale
Obligations of U.S. government corporations and agencies	$	284,367	$	(2,176	)	$	166,338	$	(3,425	)	$	450,705	$	(5,601	)
Obligations of states and political subdivisions		4,904		(35	)		17,085		(294	)		21,989		(329	)

Total securities available for sale	$	289,271	$	(2,211	)	$	183,423	$	(3,719	)	$	472,694	$	(5,930	)

Debt Securities Held to Maturity
Obligations of U.S. government corporations and agencies	$	93,017	$	(567	)	$	95,367	$	(1,322	)	$	188,384	$	(1,889	)
Obligations of states and political subdivisions		1,488		(7	)		2,637		(30	)		4,125		(37	)

Total debt securities held to maturity	$	94,505	$	(574	)	$	98,004	$	(1,352	)	$	192,509	$	(1,926	)

Obligations of U.S. government corporations and agencies: Unrealized losses on investments in obligations of U.S. government corporations and agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2018, 143 debt securities representing obligations of U.S. government corporations and agencies had unrealized losses with aggregate depreciation of (3.02%) from the Company’s amortized cost basis.

Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2018, 98 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of (3.47%) from the Company’s amortized cost basis.

Marketable equity securities: All unrealized losses recognized during the reporting period were for equity securities still held at June 30, 2018.

Note 4 – Loans

A summary of loan balances follows (in thousands):


	June 30, 2018
	Originated			PNCI			PCI -			PCI -			Total
	Originated			PNCI			Cash basis			Other			Total
Mortgage loans on real estate:
Residential 1-4 family	$	326,149		$	56,823		$	—		$	1,720		$	384,692
Commercial		1,805,830			202,923			—			7,595			2,016,348

Total mortgage loans on real estate		2,131,979			259,746			—			9,315			2,401,040
Consumer:
Home equity lines of credit		270,283			14,578			1,530			45			286,436
Home equity loans		38,082			2,449			—			455			40,986
Other		21,421			2,039			—			43			23,503

Total consumer loans		329,786			19,066			1,530			543			350,925
Commercial		227,591			7,555			—			2,473			237,619
Construction:
Residential		73,570			8			—			—			73,578
Commercial		82,912			239			—			—			83,151

Total construction		156,482			247			—			—			156,729

Total loans, net of deferred loan fees and discounts	$	2,845,838		$	286,614		$	1,530		$	12,331		$	3,146,313

Total principal balance of loans owed, net of charge-offs	$	2,855,594		$	293,151		$	4,898		$	16,032		$	3,169,675
Unamortized net deferred loan fees		(9,756	)		—			—			—			(9,756	)
Discounts to principal balance of loans owed, net of charge-offs		—			(6,537	)		(3,368	)		(3,701	)		(13,606	)

Total loans, net of unamortized deferred loan fees and discounts	$	2,845,838		$	286,614		$	1,530		$	12,331		$	3,146,313

Allowance for loan losses	$	(28,761	)	$	(624	)	$	(7	)	$	(132	)	$	(29,524	)


	December 31, 2017
	Originated			PNCI			PCI - Cash basis			PCI - Other			Total
Mortgage loans on real estate:
Residential 1-4 family	$	320,522		$	63,519		$	—		$	1,385		$	385,426
Commercial		1,690,510			215,823			—			8,563			1,914,896

Total mortgage loan on real estate		2,011,032			279,342			—			9,948			2,300,322
Consumer:
Home equity lines of credit		269,942			16,248			2,069			429			288,688
Home equity loans		39,848			2,698			—			485			43,031
Other		22,859			2,251			—			45			25,155

Total consumer loans		332,649			21,197			2,069			959			356,874
Commercial		209,437			8,391			—			2,584			220,412
Construction:
Residential		67,920			10			—			—			67,930
Commercial		69,364			263			—			—			69,627

Total construction		137,284			273			—			—			137,557

Total loans, net of deferred loan fees and discounts	$	2,690,402		$	309,203		$	2,069		$	13,491		$	3,015,165

Total principal balance of loans owed, net of charge-offs	$	2,699,053		$	316,238		$	5,863		$	17,318		$	3,038,472
Unamortized net deferred loan fees		(8,651	)		—			—			—			(8,651	)
Discounts to principal balance of loans owed, net of charge-offs		—			(7,035	)		(3,794	)		(3,827	)		(14,656	)

Total loans, net of unamortized deferred loan fees and discounts	$	2,690,402		$	309,203		$	2,069		$	13,491		$	3,015,165

Allowance for loan losses	$	(29,122	)	$	(929	)	$	(17	)	$	(255	)	$	(30,323	)

The following is a summary of the change in accretable yield for PCI – other loans during the periods indicated (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Change in accretable yield:
Balance at beginning of period	$	4,147		$	9,560		$	4,262		$	10,348
Accretion to interest income		(261	)		(1,058	)		(516	)		(1,960	)
Reclassification (to) from nonaccretable difference		110			(546	)		250			(432	)

Balance at end of period	$	3,996		$	7,956		$	3,996		$	7,956

Note 5 – Allowance for Loan Losses

The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the periods indicated.


	Allowance for Loan Losses – Three Months Ended June 30, 2018
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,170	$	(51	)	$	—	$	(128	)	$	1,991
Commercial		11,495		(15	)		21		106			11,607

Total mortgage loans on real estate		13,665		(66	)		21		(22	)		13,598
Consumer:
Home equity lines of credit		5,412		(24	)		317		(657	)		5,048
Home equity loans		1,736		—			23		(227	)		1,532
Other		570		(174	)		66		95			557

Total consumer loans		7,718		(198	)		406		(789	)		7,137
Commercial		6,392		(54	)		80		(40	)		6,378
Construction:
Residential		1,351		—			—		83			1,434
Commercial		847		—			—		130			977

Total construction		2,198		—			—		213			2,411

Total	$	29,973	$	(318	)	$	507	$	(638	)	$	29,524


	Allowance for Loan Losses – Six Months Ended June 30, 2018
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,317	$	(52	)	$	—	$	(274	)	$	1,991
Commercial		11,441		(15	)		36		145			11,607

Total mortgage loans on real estate		13,758		(67	)		36		(129	)		13,598
Consumer:
Home equity lines of credit		5,800		(104	)		526		(1,174	)		5,048
Home equity loans		1,841		—			37		(346	)		1,532
Other		586		(368	)		144		195			557

Total consumer loans		8,227		(472	)		707		(1,325	)		7,137
Commercial		6,512		(259	)		130		(5	)		6,378
Construction:
Residential		1,184		—			—		250			1,434
Commercial		642		—			—		335			977

Total construction		1,826		—			—		585			2,411

Total	$	30,323	$	(798	)	$	873	$	(874	)	$	29,524


	Allowance for Loan Losses – As of June 30, 2018
(in thousands)	Individually evaluated for impairment		Loans pooled for evaluation		Loans acquired with deteriorated credit quality		Total allowance for loan losses
Mortgage loans on real estate:
Residential 1-4 family	$	147	$	1,794	$	50	$	1,991
Commercial		82		11,466		59		11,607

Total mortgage loans on real estate		229		13,260		109		13,598
Consumer:
Home equity lines of credit		287		4,754		7		5,048
Home equity loans		192		1,340		—		1,532
Other		54		503		—		557

Total consumer loans		533		6,597		7		7,137
Commercial		2,127		4,228		23		6,378
Construction:
Residential		—		1,434		—		1,434
Commercial		—		977		—		977

Total construction		—		2,411		—		2,411

Total	$	2,889	$	26,496	$	139	$	29,524


	Loans, Net of Unearned fees – As of June 30, 2018
(in thousands)	Individually evaluated for impairment		Loans pooled for evaluation		Loans acquired with deteriorated credit quality		Total loans, net of unearned fees
Mortgage loans on real estate:
Residential 1-4 family	$	6,344	$	376,628	$	1,720	$	384,692
Commercial		11,162		1,997,591		7,595		2,016,348

Total mortgage loans on real estate		17,506		2,374,219		9,315		2,401,040
Consumer:
Home equity lines of credit		2,250		282,611		1,575		286,436
Home equity loans		2,457		38,074		455		40,986
Other		247		23,213		43		23,503

Total consumer loans		4,954		343,898		2,073		350,925
Commercial		4,751		230,395		2,473		237,619
Construction:
Residential		—		73,578		—		73,578
Commercial		—		83,151		—		83,151

Total construction		—		156,729		—		156,729

Total	$	27,211	$	3,105,241	$	13,861	$	3,146,313


	Allowance for Loan Losses – Year Ended December 31, 2017
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,748	$	(60	)	$	—	$	(371	)	$	2,317
Commercial		11,517		(186	)		397		(287	)		11,441

Total mortgage loans on real estate		14,265		(246	)		397		(658	)		13,758
Consumer:
Home equity lines of credit		7,044		(98	)		698		(1,844	)		5,800
Home equity loans		2,644		(332	)		242		(713	)		1,841
Other		622		(1,186	)		375		775			586

Total consumer loans		10,310		(1,616	)		1,315		(1,782	)		8,227
Commercial		5,831		(1,444	)		428		1,697			6,512
Construction:
Residential		1,417		(1,104	)		—		871			1,184
Commercial		680		—			1		(39	)		642

Total construction		2,097		(1,104	)		1		832			1,826

Total	$	32,503	$	(4,410	)	$	2,141	$	89		$	30,323


	Allowance for Loan Losses – As of December 31, 2017
(in thousands)	Individually evaluated for impairment		Loans pooled for evaluation		Loans acquired with deteriorated credit quality		Total allowance for loan losses
Mortgage loans on real estate:
Residential 1-4 family	$	230	$	1,932	$	155	$	2,317
Commercial		30		11,351		60		11,441

Total mortgage loans on real estate		260		13,283		215		13,758
Consumer:
Home equity lines of credit		427		5,356		17		5,800
Home equity loans		107		1,734		—		1,841
Other		57		529		—		586

Total consumer loans		591		7,619		17		8,227
Commercial		1,848		4,624		40		6,512
Construction:
Residential		—		1,184		—		1,184
Commercial		—		642		—		642

Total construction		—		1,826		—		1,826

Total	$	2,699	$	27,352	$	272	$	30,323


	Loans, Net of Unearned fees – As of December 31, 2017
(in thousands)	Individually evaluated for impairment		Loans pooled for evaluation		Loans acquired with deteriorated credit quality		Total loans, net of unearned fees
Mortgage loans on real estate:
Residential 1-4 family	$	5,298	$	378,743	$	1,385	$	385,426
Commercial		13,911		1,892,422		8,563		1,914,896

Total mortgage loans on real estate		19,209		2,271,165		9,948		2,300,322
Consumer:
Home equity lines of credit		2,688		283,502		2,498		288,688
Home equity loans		1,470		41,076		485		43,031
Other		257		24,853		45		25,155

Total consumer loans		4,415		349,431		3,028		356,874
Commercial		4,470		213,358		2,584		220,412
Construction:
Residential		140		67,790		—		67,930
Commercial		—		69,627		—		69,627

Total construction		140		137,417		—		137,557

Total	$	28,234	$	2,971,371	$	15,560	$	3,015,165


	Allowance for Loan Losses – Three Months Ended June 30, 2017
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,662	$	—		$	—	$	(151	)	$	2,511
Commercial		11,542		(150	)		17		(1,307	)		10,102

Total mortgage loans on real estate		14,204		(150	)		17		(1,458	)		12,613
Consumer:
Home equity lines of credit		6,530		(13	)		252		(613	)		6,156
Home equity loans		2,451		(206	)		13		98			2,356
Other		595		(308	)		68		290			645

Total consumer loans		9,576		(527	)		333		(225	)		9,157
Commercial		5,326		(764	)		84		83			4,729
Construction:
Residential		1,339		(1,071	)		—		910			1,178
Commercial		572		—			—		(106	)		466

Total construction		1,911		(1,071	)		—		804			1,644

Total	$	31,017	$	(2,512	)	$	434	$	(796	)	$	28,143


	Allowance for Loan Losses – Six Months Ended June 30, 2017
(in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (benefit)			Ending Balance
Mortgage loans on real estate:
Residential 1-4 family	$	2,748	$	—		$		$	(237	)	$	2,511
Commercial		11,517		(150	)		127		(1,392	)		10,102

Total mortgage loans on real estate		14,265		(150	)		127		(1,629	)		12,613
Consumer:
Home equity lines of credit		7,044		(84	)		298		(1,102	)		6,156
Home equity loans		2,644		(237	)		25		(76	)		2,356
Other		622		(482	)		209		296			645

Total consumer loans		10,310		(803	)		532		(882	)		9,157
Commercial		5,831		(897	)		254		(459	)		4,729
Construction:
Residential		1,417		(1,071	)		—		832			1,178
Commercial		680		—			1		(215	)		466

Total construction		2,097		(1,071	)		1		617			1,644

Total	$	32,503	$	(2,921	)	$	914	$	(2,353	)	$	28,143


	Allowance for Loan Losses – As of June 30, 2017
(in thousands)	Individually evaluated for impairment		Loans pooled for evaluation		Loans acquired with deteriorated credit quality		Total allowance for loan losses
Mortgage loans on real estate:
Residential 1-4 family	$	249	$	2,037	$	225	$	2,511
Commercial		124		8,531		1,447		10,102

Total mortgage loans on real estate		373		10,568		1,672		12,613
Consumer:
Home equity lines of credit		400		5,748		8		6,156
Home equity loans		57		2,233		66		2,356
Other		31		614		—		645

Total consumer loans		488		8,595		74		9,157
Commercial		811		3,276		642		4,729
Construction:
Residential		14		1,121		43		1,178
Commercial		—		466		—		466

Total construction		14		1,587		43		1,644

Total	$	1,686	$	24,026	$	2,431	$	28,143


	Loans, Net of Unearned fees – As of June 30, 2017
(in thousands)	Individually evaluated for impairment		Loans pooled for evaluation		Loans acquired with deteriorated credit quality		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	4,726	$	375,217	$	1,362	$	381,305
Commercial		14,524		1,700,046		10,692		1,725,262

Total mortgage loans on real estate		19,250		2,075,263		12,054		2,106,567
Consumer:
Home equity lines of credit		2,633		280,672		3,171		286,476
Home equity loans		1,285		43,515		1,136		45,936
Other		323		27,981		66		28,370

Total consumer loans		4,241		352,168		4,373		360,782
Commercial		2,744		219,658		3,341		225,743
Construction:
Residential		—		62,626		524		63,150
Commercial		—		70,151		—		70,151

Total construction		—		132,777		524		133,301

Total	$	26,235	$	2,779,866	$	20,292	$	2,826,393

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans, and (iv) delinquency within the portfolio.

The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows:

•

Pass – This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital.

•

Special Mention – This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention.

•

Substandard – This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well-defined workout/rehabilitation program.

•

Doubtful – This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans.

•

Loss – This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the quarter in which the loss is identified.

The following tables present ending loan balances by loan category and risk grade for the periods indicated:


	Credit Quality Indicators Originated Loans– As of June 30, 2018
(in thousands)	Pass		Special Mention		Substandard		Loss		Total Originated Loans
Mortgage loans on real estate:
Residential 1-4 family	$	323,576	$	292	$	2,281	$	—	$	326,149
Commercial		1,760,898		27,717		17,215		—		1,805,830

Total mortgage loans on real estate		2,084,474		28,009		19,496		—		2,131,979
Consumer:
Home equity lines of credit		265,724		1,828		2,731		—		270,283
Home equity loans		37,441		163		478		—		38,082
Other		21,083		158		180		—		21,421

Total consumer loans		324,248		2,149		3,389		—		329,786
Commercial		221,108		3,568		2,915		—		227,591
Construction:
Residential		70,471		2,953		146		—		73,570
Commercial		82,912		—		—		—		82,912

Total construction		153,383		2,953		146		—		156,482

Total loans	$	2,783,213	$	36,679	$	25,946	$	—	$	2,845,838


	Credit Quality Indicators PNCI Loans – As of June 30, 2018
(in thousands)	Pass		Special Mention		Substandard		Loss		Total PNCI Loans
Mortgage loans on real estate:
Residential 1-4 family	$	55,039	$	—	$	1,784	$	—	$	56,823
Commercial		198,353		2,935		1,635		—		202,923

Total mortgage loans on real estate		253,392		2,935		3,419		—		259,746
Consumer:
Home equity lines of credit		13,675				903		—		14,578
Home equity loans		2,220		161		68		—		2,449
Other		2,030		4		5		—		2,039

Total consumer loans		17,925		165		976		—		19,066
Commercial		7,555				—		—		7,555
Construction:
Residential		8		—		—		—		8
Commercial		239		—		—		—		239

Total construction		247		—		—		—		247

Total loans	$	279,119	$	3,100	$	4,395	$	—	$	286,614


	Credit Quality Indicators Originated Loans – As of December 31, 2017
(in thousands)	Pass		Special Mention		Substandard		Loss		Total Originated Loans
Mortgage loans on real estate:
Residential 1-4 family	$	315,120	$	2,234	$	3,168	$	—	$	320,522
Commercial		1,649,333		18,434		22,743		—		1,690,510

Total mortgage loans on real estate		1,964,453		20,668		25,911		—		2,011,032
Consumer:
Home equity lines of credit		265,345		2,558		2,039		—		269,942
Home equity loans		37,428		800		1,620		—		39,848
Other		22,432		272		155		—		22,859

Total consumer loans		325,205		3,630		3,814		—		332,649
Commercial		195,208		9,492		4,737		—		209,437
Construction:
Residential		67,813		—		107		—		67,920
Commercial		64,492		4,872		—		—		69,364

Total construction		132,305		4,872		107		—		137,284

Total loans	$	2,617,171	$	38,662	$	34,569	$	—	$	2,690,402


	Credit Quality Indicators PNCI Loans – As of December 31, 2017
(in thousands)	Pass		Special Mention		Substandard		Loss		Total PNCI Loans
Mortgage loans on real estate:
Residential 1-4 family	$	61,411	$	218	$	1,890	$	—	$	63,519
Commercial		203,751		11,513		559		—		215,823

Total mortgage loans on real estate		265,162		11,731		2,449		—		279,342
Consumer:
Home equity lines of credit		14,866		450		932		—		16,248
Home equity loans		2,433		188		77		—		2,698
Other		2,207		38		6		—		2,251

Total consumer loans		19,506		676		1,015		—		21,197
Commercial		8,390		1		—		—		8,391
Construction:
Residential		10		—		—		—		10
Commercial		263		—		—		—		263

Total construction		273		—		—		—		273

Total	$	293,331	$	12,408	$	3,464	$	—	$	309,203

Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value. Typically non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of the two.

Problem consumer loans are generally identified by payment history of the borrower (delinquency). The Bank manages its consumer loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggest modifications if appropriate, and, when continued scheduled payments become unrealistic, initiate repossession or foreclosure through appropriate channels. Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable and the loan has been classified.

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner occupied real estate are primarily susceptible to changes in the business conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual fortunes of the business owner, and general economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by equipment or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often these shifts are a result of changes in general economic or market conditions or overbuilding and resultant over-supply. Losses are dependent on value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.

Construction loans, whether owner occupied or non-owner occupied commercial real estate loans or residential development loans, are not only susceptible to the related risks described above but the added risks of construction itself including cost over-runs, mismanagement of the project, or lack of demand or market changes experienced at time of completion. Again, losses are primarily related to underlying collateral value and changes therein as described above.

Problem C&I loans are generally identified by periodic review of financial information which may include financial statements, tax returns, rent rolls and payment history of the borrower (delinquency). Based on this information the Bank may decide to take any of several courses of action including demand for repayment, additional collateral or guarantors, and, when repayment becomes unlikely through borrower’s income and cash flow, repossession or foreclosure of the underlying collateral.

Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable and the loan has been classified.

Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to the estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue the underlying collateral and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued through lawsuit and attachment of wages or judgment liens on borrower’s other assets.

The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:


	Analysis of Originated Past Due Loans - As of June 30, 2018
(in thousands)	30-59 days		60-89 days		> 90 days		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	271	$	64	$	1,219	$	324,595	$	326,149	$	—
Commercial		1,281		577		792		1,803,180		1,805,830		—

Total mortgage loans on real estate		1,552		641		2,011		2,127,775		2,131,979		—
Consumer:
Home equity lines of credit		158		37		47		270,041		270,283		—
Home equity loans		358		150		486		37,088		38,082		—
Other		33		26		—		21,362		21,421		—

Total consumer loans		549		213		533		328,491		329,786		—
Commercial		506		766		1,778		224,541		227,591		—
Construction:
Residential		—		—		—		73,570		73,570		—
Commercial		1,249		831		—		80,832		82,912		—

Total construction		1,249		831		—		154,402		156,482		—

Total originated loans	$	3,856	$	2,451	$	4,322	$	2,835,209	$	2,845,838	$	—

The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated:


	Analysis of PNCI Past Due Loans - As of June 30, 2018
(in thousands)	30-59 days		60-89 days		> 90 days		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	59	$	78	$	36	$	56,650	$	56,823	$	—
Commercial		356		164		—		202,403		202,923		—

Total mortgage loans on real estate		415		242		36		259,053		259,746		—
Consumer:
Home equity lines of credit		182		—		77		14,319		14,578		—
Home equity loans		—		43		—		2,406		2,449		—
Other		2		—		—		2,037		2,039		—

Total consumer loans		184		43		77		18,762		19,066		—
Commercial		—		—		—		7,555		7,555		—
Construction:
Residential		—		—		—		8		8		—
Commercial		—		—		—		239		239		—

Total construction		—		—		—		247		247		—

Total PNCI loans	$	599	$	285	$	113	$	285,617	$	286,614	$	—

The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:


	Analysis of Originated Past Due Loans - As of December 31, 2017
(in thousands)	30-59 days		60-89 days		> 90 days		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	1,740	$	510	$	243	$	318,029	$	320,522	$	—
Commercial		158		987		—		1,689,365		1,690,510		—

Total mortgage loans on real estate		1,898		1,497		243		2,007,394		2,011,032		—
Consumer:
Home equity lines of credit		528		48		372		268,994		269,942		—
Home equity loans		511		107		373		38,857		39,848		—
Other		56		36		3		22,764		22,859		—

Total consumer loans		1,095		191		748		330,615		332,649		—
Commercial		956		738		1,527		206,216		209,437		—
Construction:
Residential		34		—		—		67,886		67,920		—
Commercial		—		—		—		69,364		69,364		—

Total construction		34		—		—		137,250		137,284		—

Total loans	$	3,983	$	2,426	$	2,518	$	2,681,475	$	2,690,402	$	—

The following table shows the ending balance of current and past due PNCI loans by loan category as of the date indicated:


	Analysis of PNCI Past Due Loans - As of December 31, 2017
(in thousands)	30-59 days		60-89 days		> 90 days		Current		Total		> 90 Days and Still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	1,495	$	90	$	109	$	61,825	$	63,519	$	81
Commercial		70		—		—		215,753		215,823		—

Total mortgage loans on real estate		1,565		90		109		277,578		279,342		81
Consumer:
Home equity lines of credit		298		228		330		15,392		16,248		200
Home equity loans		30		—		—		2,668		2,698		—
Other		6		26		—		2,219		2,251		—

Total consumer loans		334		254		330		20,279		21,197		200
Commercial		—		—		—		8,391		8,391		—
Construction:
Residential		—		—		—		10		10		—
Commercial		—		—		—		263		263		—

Total construction		—		—		—		273		273		—

Total loans	$	1,899	$	344	$	439	$	306,521	$	309,203	$	281

The following table shows the ending balance of nonaccrual originated and PNCI loans by loan category as of the date indicated:


	Non Accrual Loans
	As of June 30, 2018						As of December 31, 2017
(in thousands)	Originated		PNCI		Total		Originated		PNCI		Total
Mortgage loans on real estate:
Residential 1-4 family	$	3,027	$	1,082	$	4,109	$	1,725	$	1,012	$	2,737
Commercial		5,494		323		5,817		8,144		—		8,144

Total mortgage loans on real estate		8,521		1,405		9,926		9,869		1,012		10,881
Consumer:
Home equity lines of credit		1,457		574		2,031		811		402		1,213
Home equity loans		4,419		36		4,455		1,106		44		1,150
Other		341		5		346		7		5		12

Total consumer loans		6,217		615		6,832		1,924		451		2,375
Commercial		2,339		—		2,339		3,669		—		3,669
Construction:
Residential		—		—		—		—		—		—
Commercial		—		—		—		—		—		—

Total construction		—		—				—		—

Total non accrual loans	$	17,077	$	2,020	$	19,097	$	15,462	$	1,463	$	16,925

Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due under the original contractual terms. The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated.


	Impaired Originated Loans – As of, or for the Six Months Ended, June 30, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	5,656	$	3,947	$	1,050	$	4,997	$	147	$	4,600	$	76
Commercial		11,280		9,763		1,076		10,839		82		10,975		107

Total mortgage loans on real estate		16,936		13,710		2,126		15,836		229		15,575		183
Consumer:
Home equity lines of credit		1,244		1,108		106		1,214		29		1,315		19
Home equity loans		2,558		1,828		351		2,179		38		1,784		20
Other		3		—		3		3		3		3		—

Total consumer loans		3,805		2,936		460		3,396		70		3,102		39
Commercial		4,952		809		3,942		4,751		2,127		4,686		48
Construction:
Residential		—		—		—		—		—		68		—
Commercial		—		—		—		—		—		—		—

Total construction		—		—		—		—		—		68		—

Total	$	25,693	$	17,455	$	6,528	$	23,983	$	2,426	$	23,431	$	270


	Impaired PNCI Loans – As of, or for the Six Months Ended, June 30, 2018
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	1,417	$	1,348	$	—	$	1,348	$	—	$	1,339	$	10
Commercial		323		323		—		323		—		161		14

Total mortgage loans on real estate		1,740		1,671		—		1,671		—		1,500		24
Consumer:
Home equity lines of credit		1,098		529		506		1,035		258		1,035		13
Home equity loans		293		36		242		278		154		281		6
Other		244		—		244		244		51		259		5

Total consumer loans		1,635		565		992		1,557		463		1,575		24
Commercial		—		—				—		—		—		—
Construction:
Residential		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—

Total construction		—		—				—		—		—		—

Total	$	3,375	$	2,236	$	992	$	3,228	$	463	$	3,075	$	48


	Impaired Originated Loans – As of, or for the Twelve Months Ended, December 31, 2017
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	4,023	$	2,058	$	1,881	$	3,939	$	230	$	3,501	$	143
Commercial		14,186		13,101		810		13,911		30		13,851		645

Total mortgage loans on real estate		18,209		15,159		2,691		17,850		260		17,352		788
Consumer:
Home equity lines of credit		1,581		1,093		401		1,494		111		1,702		47
Home equity loans		1,627		1,107		198		1,305		10		1,193		24
Other		52		4		3		7		3		20		—

Total consumer loans		3,260		2,204		602		2,806		124		2,915		71
Commercial		4,566		575		3,895		4,470		1,848		4,283		184
Construction:
Residential		140		140		—		140		—		76		9
Commercial		—		—		—		—		—		—		—

Total construction		140		140		—		140		—		76		9

Total	$	26,175	$	18,078	$	7,188	$	25,266	$	2,232	$	24,626	$	1,052


	Impaired PNCI Loans – As of, or for the Twelve Months Ended, December 31, 2017
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	1,404	$	1,359	$	—	$	1,359	$		$	1,041	$	24
Commercial		—		—		—		—				979		—

Total mortgage loans on real estate		1,404		1,359		—		1,359		—		2,020		24
Consumer:
Home equity lines of credit		1,216		591		603		1,194		316		1,240		48
Home equity loans		178		44		121		165		97		117		6
Other		250		—		250		250		54		186		11

Total consumer loans		1,644		635		974		1,609		467		1,543		65
Commercial		—		—		—		—				—
Construction:
Residential		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—

Total construction		—		—				—		—		—		—

Total	$	3,048	$	1,994	$	974	$	2,968	$	467	$	3,563	$	89


	Impaired Originated Loans – As of, or for the Six Months Ended, June 30, 2017
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	3,108	$	1,623	$	1,463	$	3,086	$	179	$	1,417	$	23
Commercial		13,203		11,864		803		12,667		45		724		18

Total mortgage loans on real estate		16,311		13,487		2,266		15,753		224		2,141		41
Consumer:
Home equity lines of credit		1,746		1,305		331		1,636		66		380		—
Home equity loans		1,633		836		395		1,231		68		440		10
Other		73		22		50		72		23		34		1

Total consumer loans		3,452		2,163		776		2,939		157		854		11
Commercial		3,053		1,007		1,737		2,744		863		2,536		27
Construction:
Residential		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—

Total construction		—		—				—		—		—		—

Total	$	22,816	$	16,657	$	4,779	$	21,436	$	1,244	$	5,531	$	79


	Impaired PNCI Loans – As of, or for the Six Months Ended, June 30, 2017
(in thousands)	Unpaid principal balance		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Related Allowance		Average recorded investment		Interest income recognized
Mortgage loans on real estate:
Residential 1-4 family	$	1,665	$	1,387	$	253	$	1,640	$	75	$	256	$	5
Commercial		2,121		1,728		129		1,857		104		131		3

Total mortgage loans on real estate		3,786		3,115		382		3,497		179		387		8
Consumer:
Home equity lines of credit		1,012		387		610		997		332		580		13
Home equity loans		64		54		—		54		—		—		—
Other		251		—		251		251		68		185		5

Total consumer loans		1,327		441		861		1,302		400		765		18
Commercial		—		—		—		—		—		—		—
Construction:
Residential		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—

Total construction		—		—				—		—		—		—

Total	$	5,113	$	3,556	$	1,243	$	4,799	$	579	$	1,152	$	26

At June 30, 2018, $9,450,000 of originated loans were TDR and classified as impaired. The Company had no obligations to lend additional funds on these TDR as of June 30, 2018. At June 30, 2018, $1,459,000 of PNCI loans were TDR and classified as impaired. The Company had no obligations to lend additional funds on these TDR as of June 30, 2018.

At December 31, 2017, $12,517,000 of Originated loans were TDRs and classified as impaired. The Company had obligations to lend $1,000 of additional funds on these TDRs as of December 31, 2017. At December 31, 2017, $1,352,000 of PNCI loans were TDRs and classified as impaired. The Company had no obligations to lend additional funds on these TDRs as of December 31, 2017.

At June 30, 2017, $12,802,000 of originated loans were TDR and classified as impaired. The Company had no obligations to lend additional funds on these TDR as of June 30, 2017. At June 30, 2017, $1,627,000 of PNCI loans were TDR and classified as impaired. The Company had obligations to lend $2,000 of additional funds on these TDR as of June 30, 2017.

The following tables show certain information regarding Troubled Debt Restructurings (TDRs) that occurred during the periods indicated:


	TDR Information for the Three Months Ended June 30, 2018
(dollars in thousands)	Number		Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision			Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family		—	$	—	$	—	$	—			—	$	—	$	—
Commercial		1		34		34		34							—

Total mortgage loans on real estate		1		34		34		34			—		—		—
Consumer:
Home equity lines of credit		—		—		—		—			—		—		—
Home equity loans		—		—		—		—			—		—		—
Other		—		—		—		—			—		—		—

Total consumer loans		—		—		—		—			—		—		—
Commercial		2		416		422		(2	)		4		340		(2	)
Construction:
Residential		—		—		—		—			—		—		—
Commercial		—		—		—		—			—		—		—

Total construction		—		—				—			—		—		—

Total		3	$	450	$	456	$	32			4	$	340	$	(2	)


	TDR Information for the Six Months Ended June 30, 2018
(dollars in thousands)	Number		Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision			Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family		—	$		$	—	$	—				$		$
Commercial		2		417		418		46			1		169		—

Total mortgage loans on real estate		2		417		418		46			1		169		—
Consumer:
Home equity lines of credit		1		133		138		—			—		—		—
Home equity loans		1		121		121		—			—		—		—
Other		—		—		—		—			—		—		—

Total consumer loans		2		254		259		—			—		—		—
Commercial		2		416		422		(2	)		4		340		(2	)
Construction:
Residential		—		—		—		—			—		—		—
Commercial		—		—		—		—			—		—		—

Total construction		—		—				—			—		—		—

Total		6	$	1,087	$	1,099	$	44			5	$	509	$	(2	)

The following tables show certain information regarding TDRs that occurred during the periods indicated:


	TDR Information for the Three Months Ended June 30, 2017
(dollars in thousands)	Number		Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision			Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family		—	$		$	—	$	—			—	$	—	$	—
Commercial		3		623		596		(125	)		—		—		—

Total mortgage loans on real estate		3		623		596		(125	)		—		—		—
Consumer:
Home equity lines of credit		2		167		167		27			—		—		—
Home equity loans		—		—		—		—			—		—		—
Other		—		—		—		—			—		—		—

Total consumer loans		2		167		167		27			—		—		—
Commercial		2		645		539		(84	)		—		—
Construction:
Residential		—		—		—		—			—		—		—
Commercial		—		—		—		—			—		—		—

Total construction		—		—				—			—		—		—

Total		7	$	1,435	$	1,302	$	(182	)		—	$	—	$	—


	TDR Information for the Six Months Ended June 30, 2017
(dollars in thousands)	Number		Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision			Number that defaulted during the period		Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Mortgage loans on real estate:
Residential 1-4 family		—	$	—	$	—	$	—			—	$	—	$	—
Commercial		3		623		596		(125	)		1		124		—

Total mortgage loans on real estate		3		623		596		(125	)		1		124		—
Consumer:
Home equity lines of credit		3		187		187		27			—		—		—
Home equity loans		—		—		—		—			—		—		—
Other		1		14		14		11			—		—		—

Total consumer loans		4		201		201		38			—		—		—
Commercial		3		745		639		10					—
Construction:
Residential		—		—		—		—			—		—		—
Commercial		—		—		—					—		—		—

Total construction		—		—				—			—		—		—

Total		10	$	1,569	$	1,436	$	(77	)		1	$	124	$	—

Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions.

For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above.

Typically if a TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting from default of previously modified TDR’s are noted above.

Note 6 – Foreclosed Assets

A summary of the activity in the balance of foreclosed assets follows (in thousands):


	Six months ended June 30, 2018			Six months ended June 30, 2017
	Total			Noncovered			Covered			Total
Beginning balance, net	$	3,226		$	3,763		$	223		$	3,986
Additions/transfers from loans		—			684			—			684
Dispositions/sales		(1,762	)		(930	)		(223	)		(1,153	)
Valuation adjustments		(90	)		(28	)		—			(28	)

Ending balance, net	$	1,374		$	3,489			—		$	3,489

Ending valuation allowance	$	(152	)	$	(179	)		—		$	(179	)
Ending number of foreclosed assets		8			12			—			12
Proceeds from sale of foreclosed assets	$	2,150		$	1,424		$	—		$	1,424
Gain on sale of foreclosed assets	$	388		$	271		$	—		$	271

As of June 30, 2018, $837,000 of foreclosed residential real estate properties, all of which the Company has obtained physical possession of, are included in foreclosed assets. At June 30, 2018, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are underway is $743,000.

Note 7 – Premises and Equipment

Premises and equipment were comprised of:


	June 30,			December 31,
	2018			2017
	(In thousands)
Land & land improvements	$	9,973		$	9,959
Buildings		51,065			50,340
Furniture and equipment		38,172			35,939

		99,210			96,238
Less: Accumulated depreciation		(42,066	)		(40,644	)

		57,144			55,594
Construction in progress		1,870			2,148

Total premises and equipment	$	59,014		$	57,742

Depreciation expense for premises and equipment amounted to $1,386,000 and $1,394,000 for the three months ended June 30, 2018 and 2017, respectively, and $2,757,000 and $2,705,000 for the six months ended June 30, 2018 and 2017, respectively.

Note 8 – Cash Value of Life Insurance

A summary of the activity in the balance of cash value of life insurance follows (in thousands):


	Six months ended June 30,
	2018		2017
Beginning balance	$	97,783	$	95,912
Increase in cash value of life insurance		1,264		1,311
Gain on death benefit		—		108
Insurance proceeds receivable reclassified to other assets		—		(921	)

Ending balance	$	99,047	$	96,410

End of period death benefit	$	164,649	$	166,318
Number of policies owned		182		183
Insurance companies used		13		14
Current and former employees and directors covered		57		57

Note 8 – Cash Value of Life Insurance (continued)

As of June 30, 2018, the Bank was the owner and beneficiary of 182 life insurance policies, issued by 13 life insurance companies, covering 57 current and former employees and directors. These life insurance policies are recorded on the Company’s financial statements at their reported cash (surrender) values. As a result of current tax law and the nature of these policies, the Bank records any increase in cash value of these policies as nontaxable noninterest income. If the Bank decided to surrender any of the policies prior to the death of the insured, such surrender may result in a tax expense related to the life-to-date cumulative increase in cash value of the policy. If the Bank retains such policies until the death of the insured, the Bank would receive nontaxable proceeds from the insurance company equal to the death benefit of the policies. The Bank has entered into Joint Beneficiary Agreements (JBAs) with certain of the insured that for certain of the policies provide some level of sharing of the death benefit, less the cash surrender value, among the Bank and the beneficiaries of the insured upon the receipt of death benefits. See Note 15 of these condensed consolidated financial statements for additional information on JBAs.

Note 9 - Goodwill and Other Intangible Assets

The following table summarizes the Company’s goodwill intangible as of the dates indicated:


(in thousands)	June 30, 2018		Additions		Reductions		December 31, 2017
Goodwill	$	64,311		—		—	$	64,311

The following table summarizes the Company’s core deposit intangibles as of the dates indicated:


(in thousands)	June 30, 2018			Additions		Reductions/ Amortization			December 31, 2017
Core deposit intangibles	$	9,558			—		—		$	9,558
Accumulated amortization		(5,062	)		—	$	(678	)		(4,384	)

Core deposit intangibles, net	$	4,496			—	$	(678	)	$	5,174

The Company recorded additions to its CDI of $2,046,000 in conjunction with the acquisition of three branch offices from Bank of America on March 18, 2016, $6,614,000 in conjunction with the North Valley Bancorp acquisition on October 3, 2014, $898,000 in conjunction with the Citizens acquisition on September 23, 2011, and $562,000 in conjunction with the Granite acquisition on May 28, 2010. The following table summarizes the Company’s remaining estimated core deposit intangible amortization at December 31, 2017 (dollars in thousands):


Years Ended	Estimated Core Deposit Intangible Amortization
2018	$	1,324
2019		1,228
2020		1,228
2021		969
2022		280
Thereafter		145

Note 10 - Mortgage Servicing Rights

The following tables summarize the activity in, and the main assumptions used to determine the fair value of mortgage servicing rights (“MSRs”) for the periods indicated (dollars in thousands):


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Balance at beginning of period	$	6,953		$	6,860		$	6,687		$	6,595
Additions		104			193			259			471
Change in fair value		(36	)		(457	)		75			(470	)

Balance at end of period	$	7,021		$	6,596		$	7,021		$	6,596

Contractually specified servicing fees, late fees and ancillary fees earned	$	511		$	526		$	1,028		$	1,047
Balance of loans serviced at:
Beginning of period	$	806,178		$	822,506		$	811,065		$	816,623
End of period	$	801,817		$	822,549		$	801,817		$	822,549
Period end:
Weighted-average prepayment speed (CPR)								7.4	%		8.7	%
Weighted-average discount rate								12.5	%		14	%

The changes in fair value of MSRs that occurred during the three and six months ended June 30, 2018 and 2017 were mainly due to changes in principal balances, changes in mortgage prepayment speeds, and changes in investor required rate of return, or discount rate, of the MSRs.

Note 11 - Indemnification Asset

A summary of the activity in the balance of indemnification asset (liability) follows (in thousands):


	Three months ended June 30,					Six months ended June 30,
	2018		2017			2018		2017
Beginning balance		—	$	(895	)		—	$	(744	)
Effect of actual and estimated future covered losses and recoveries		—		(1	)		—		(224	)
Payments made to (received from) FDIC		—		184			—		256
Gain on termination of loss share agreement		—		712			—		712

Ending balance		—	$	—			—	$	—

During May 2015, the indemnification portion of the Company’s agreement with the FDIC related to the Company’s acquisition of certain nonresidential real estate loans of Granite in May 2010 expired. The indemnification portion of the Company’s agreement with the FDIC related to the Company’s acquisition of certain residential real estate loans of Granite in May 2010 was set to expire in May 2018. The agreement specified that recoveries of losses that are claimed by the Company and indemnified by the FDIC under the agreement that are recovered by the Company through May 2020 are to be shared with the FDIC in the same proportion as they were indemnified by the FDIC. In addition, the agreement specified that at the end of the agreement in May 2020, to the extent that total claimed losses plus servicing expenses, net of recoveries, claimed under the agreement over the entire ten year period of the agreement did not meet a certain threshold, the Company would have been required to pay to the FDIC a “true up” amount equal to fifty percent of the difference of the threshold and actual claimed losses plus servicing expenses, net of recoveries. The Company continually estimated, updated and recorded this “true up” amount, at its estimated present value, since the inception of the agreement in May 2010. On May 9, 2017, the Company and the FDIC terminated their loss sharing agreements. As part of the termination agreement, the Company paid the FDIC $184,000, and recorded a $712,000 gain representing the difference between the Company’s payment to the FDIC and the recorded payable balance on May 9, 2017.

Note 12 – Other Assets

Other assets were comprised of (in thousands):


	June 30, 2018		December 31, 2017
Deferred tax asset, net	$	27,665	$	21,697
Investment in low income housing tax credit funds		16,672		16,854
Prepaid expense		4,097		4,111
Tax refund receivable		4,754		4,754
Capital trusts		1,710		1,706
Software		793		1,126
Life insurance proceeds receivable		—		2,242
Miscellaneous other assets		1,718		2,561

Total other assets	$	57,409	$	55,051

Note 13 - Deposits

A summary of the balances of deposits follows (in thousands):


	June 30, 2018		December 31, 2017
Noninterest-bearing demand	$	1,369,834	$	1,368,218
Interest-bearing demand		1,006,331		971,459
Savings		1,385,268		1,364,518
Time certificates, over $250,000		84,015		73,596
Other time certificates		231,774		231,340

Total deposits	$	4,077,222	$	4,009,131

Certificate of deposit balances of $50,000,000 from the State of California were included in time certificates, $250,000 and over, at each of June 30, 2018 and December 31, 2017. The Bank participates in a deposit program offered by the State of California whereby the State may make deposits at the Bank’s request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Bank. Overdrawn deposit balances of $1,533,000 and $1,366,000 were classified as consumer loans at June 30, 2018 and December 31, 2017, respectively.

Note 14 – Reserve for Unfunded Commitments

The following tables summarize the activity in reserve for unfunded commitments for the periods indicated (dollars in thousands):


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018		2017
Balance at beginning of period	$	3,864		$	2,734		$	3,164	$	2,719
Provision (reversal of provision) for losses – unfunded commitments		(137	)		(135	)		563		(120	)

Balance at end of period	$	3,727		$	2,599		$	3,727	$	2,599

Note 15 – Other Liabilities

Other liabilities were comprised of (in thousands):


	June 30, 2018		December 31, 2017
Pension liability	$	28,880	$	28,472
Low income housing tax credit fund commitments		5,969		8,554
Deferred compensation		6,932		6,605
Taxes payable		1,267		—
Accrued salaries and benefits expense		5,014		6,619
Joint beneficiary agreements		3,494		3,365
Loan escrow and servicing payable		2,295		1,958
Deferred revenue		1,449		1,228
Litigation contingency		—		1,450
Miscellaneous other liabilities		3,596		5,007

Total other liabilities	$	58,896	$	63,258

Note 16 - Other Borrowings

A summary of the balances of other borrowings follows:


	June 30, 2018		December 31, 2017
	(in thousands)
FHLB collateralized borrowing, fixed rate, as of June 30, 2018 of 2.05%, payable on July 2, 2018	$	136,020	$	—
FHLB collateralized borrowing, fixed rate, as of December 31, 2017 of 1.38%, payable on January 2, 2018		—		104,729
Other collateralized borrowings, fixed rate, as of June 30, 2018 and December 31, 2017 of 0.05%, payable on July 2, 2018 and January 2, 2018, respectively		16,819		17,437

Total other borrowings	$	152,839	$	122,166

The Company did not enter into any repurchase agreements during the six months ended June 30, 2018 or the year ended December 31, 2017.

The Company maintains a collateralized line of credit with the Federal Home Loan Bank of San Francisco. Based on the FHLB stock requirements at June 30, 2018, this line provided for maximum borrowings of $1,622,655,000 of which $136,020,000 was outstanding as of June 30, 2018, leaving $1,486,635,000 available. As of June 30, 2018, the Company has designated investment securities with fair value of $198,309,000 and loans totaling $2,183,416,000 as potential collateral under this collateralized line of credit with the FHLB.

The Company had $16,819,000 and $17,437,000 of other collateralized borrowings at June 30, 2018 and December 31, 2017, respectively. Other collateralized borrowings are generally overnight maturity borrowings from non-financial institutions that are collateralized by securities owned by the Company. As of June 30, 2018, the Company has pledged as collateral and sold under agreements to repurchase investment securities with fair value of $39,957,000 under these other collateralized borrowings.

The Company maintains a collateralized line of credit with the San Francisco Federal Reserve Bank. As of June 30, 2018, this line provided for maximum borrowings of $141,993,000 of which none was outstanding, leaving $141,993,000 available. As of June 30, 2018, the Company has designated investment securities with fair value of $14,000 and loans totaling $267,570,000 as potential collateral under this collateralized line of credit with the San Francisco Federal Reserve Bank.

The Company had available unused correspondent banking lines of credit from commercial banks totaling $20,000,000 for federal funds transactions at June 30, 2018.

Note 17 – Junior Subordinated Debt

At June 30, 2018, the Company had five wholly-owned subsidiary business trusts that had issued $62.9 million of trust preferred securities (the “Capital Trusts”). Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The trusts used the net proceeds from the offering to purchase a like amount of subordinated debentures (the “Debentures”) of the Company. The Debentures are the sole assets of the trusts. The Company’s obligations under the subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. The Company also has a right to defer consecutive payments of interest on the debentures for up to five years.

The Company organized two of the Capital Trusts. The Company acquired its three other Capital Trusts and assumed their related Debentures as a result of its acquisition of North Valley Bancorp. At the acquisition date of October 3, 2014, the Debentures associated with North Valley Bancorp’s three Capital Trusts were recorded on the Company’s books at their fair values of $5,006,000, $3,918,000, and $6,063,000, respectively. The related fair value discounts to face value of these Debentures will be amortized over the remaining time to maturity for each of these Debentures using the effective interest method. Similar, and proportional, discounts were applied to the acquired common stock interests in each of the acquired Capital Trusts and these discounts will be proportionally amortized over the remaining time to maturity for each related debenture.

The recorded book values of the Debentures issued by the Capital Trusts are reflected as junior subordinated debt in the Company’s consolidated balance sheets. The common stock issued by the Capital Trusts and owned by the Company is recorded in other assets in the Company’s consolidated balance sheets. The recorded book value of the debentures issued by the Capital Trusts, less the recorded book value of the common stock of the Capital Trusts owned by the Company, continues to qualify as Tier 1 or Tier 2 capital under interim guidance issued by the Board of Governors of the Federal Reserve System.

The following table summarizes the terms and recorded balance of each subordinated debenture as of the date indicated (dollars in thousands):


					Coupon Rate			As of June 30, 2018					December 31, 2017
	Maturity		Face		(Variable)			Current			Recorded		Recorded
Subordinated Debt Series	Date		Value		3 mo. LIBOR +			Coupon Rate			Book Value		Book Value
TriCo Cap Trust I		10/7/2033	$	20,619		3.05	%		5.40	%	$	20,619	$	20,619
TriCo Cap Trust II		7/23/2034		20,619		2.55	%		4.91	%		20,619		20,619
North Valley Trust II		4/24/2033		6,186		3.25	%		5.61	%		5,154		5,135
North Valley Trust III		4/24/2034		5,155		2.80	%		5.16	%		4,060		4,041
North Valley Trust IV		3/15/2036		10,310		1.33	%		3.67	%		6,498		6,444

			$	62,889							$	56,950	$	56,858

During the six months ended June 30, 2018, the balance of Junior Subordinated Debt increased $92,000 to $56,950,000 due to purchase fair value discount amortization.

Note 18 - Commitments and Contingencies

Restricted Cash Balances— Reserves (in the form of deposits with the San Francisco Federal Reserve Bank) of $85,078,000 and $82,068,000 were maintained to satisfy Federal regulatory requirements at June 30, 2018 and December 31, 2017. These reserves are included in cash and due from banks in the accompanying consolidated balance sheets.

Lease Commitments— The Company leases 44 sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The Company currently does not have any capital leases.

At December 31, 2017, future minimum commitments under non-cancelable operating leases with initial or remaining terms of one year or more are as follows:


	Operating Leases
	(in thousands)
2018	$	3,278
2019		2,499
2020		1,847
2021		1,488
2022		757
Thereafter		798

Future minimum lease payments	$	10,667

Note 18 - Commitments and Contingencies (continued)

Rent expense under operating leases was $949,000 and $1,048,000 during the three months ended June 30, 2018 and 2017, respectively. Rent expense was offset by rent income of $10,000 and $10,000 during the three months ended June 30, 2018 and 2017, respectively. Rent expense under operating leases was $1,869,000 and $2,095,000 during the six months ended June 30, 2018 and 2017, respectively. Rent expense was offset by rent income of $21,000 and $23,000 during the six months ended June 30, 2018 and 2017, respectively.

Financial Instruments with Off-Balance-Sheet Risk— The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and deposit account overdraft privilege. Those instruments involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for deposit account overdraft privilege is represented by the overdraft privilege amount disclosed to the deposit account holder.

The following table presents a summary of the Bank’s commitments and contingent liabilities:


(in thousands)	June 30, 2018		December 31, 2017
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans	$	266,538	$	257,220
Consumer loans		443,265		422,958
Real estate mortgage loans		61,185		66,267
Real estate construction loans		223,956		187,097
Standby letters of credit		11,535		13,075
Deposit account overdraft privilege		97,670		98,260

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of one year or less or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on Management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential properties, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most standby letters of credit are issued for one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral requirements vary, but in general follow the requirements for other loan facilities.

Deposit account overdraft privilege amount represents the unused overdraft privilege balance available to the Company’s deposit account holders who have deposit accounts covered by an overdraft privilege. The Company has established an overdraft privilege for certain of its deposit account products whereby all holders of such accounts who bring their accounts to a positive balance at least once every thirty days receive the overdraft privilege. The overdraft privilege allows depositors to overdraft their deposit account up to a predetermined level. The predetermined overdraft limit is set by the Company based on account type.

Legal Proceedings — Neither the Company nor its subsidiaries are a party to any pending legal proceedings that are material, nor is their property the subject of any other material pending legal proceeding at this time. All other legal proceedings are routine and arise out of the ordinary course of the Bank’s business. None of those proceedings are currently expected to have a material adverse impact upon the Company’s and the Bank’s business, their consolidated financial position nor their operations in any material amount not already accrued, after taking into consideration any applicable insurance.

Other Commitments and Contingencies—The Company has entered into employment agreements or change of control agreements with certain officers of the Company providing severance payments and accelerated vesting of benefits under supplemental retirement agreements to the officers in the event of a change in control of the Company and termination for other than cause or after a substantial and material change in the officer’s title, compensation or responsibilities.

Mortgage loans sold to investors may be sold with servicing rights retained, with only the standard legal representations and warranties regarding recourse to the Bank. Management believes that any liabilities that may result from such recourse provisions are not significant.

Note 18 - Commitments and Contingencies (continued)

Other Commitments and Contingencies (continued)—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 June 30, 2018, the value of the Class A shares was $132.45 per share. Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was $2,925,000 as of June 30, 2018, 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.

Note 19 – Shareholders’ Equity

Dividends Paid

The Bank paid to the Company cash dividends in the aggregate amounts of $4,770,000 and $5,167,000 during the three months ended June 30, 2018 and 2017, respectively, and $9,142,000 and $9,209,000 during the six months ended June 30, 2018 and 2017, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California Department of Business Oversight. Absent approval from the Commissioner of the Department of Business Oversight, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period. Under this law, at December 31, 2017, the Bank could have paid dividends of $85,254,000 to the Company without the approval of the Commissioner of the Department of Business Oversight.

Stock Repurchase Plan

On August 21, 2007, the Board of Directors adopted a plan to repurchase, as conditions warrant, up to 500,000 shares of the Company’s common stock on the open market. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. The 500,000 shares authorized for repurchase under this stock repurchase plan represented approximately 3.2% of the Company’s 15,814,662 outstanding common shares as of August 21, 2007. This stock repurchase plan has no expiration date. As of June 30, 2018, the Company had repurchased 166,600 shares under this plan.

Stock Repurchased Under Equity Compensation Plans

During the three months ended June 30, 2018 and 2017, employees tendered 17,086 and 69,401 shares, respectively, of the Company’s common stock with market value of $667,000, and $2,488,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to pay income taxes related to equity compensation plan instruments as permitted by the Company’s shareholder-approved equity compensation plans. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is exercised. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.

During the six months ended June 30, 2018 and 2017 employees tendered 17,220 and 85,652 shares, respectively, of the Company’s common stock with market value of $671,000 and $3,092,000, respectively, in lieu of cash to exercise options to purchase shares of the Company’s stock and to satisfy tax withholding requirements related to such exercises and the release of RSUs as permitted by the Company’s shareholder-approved equity compensation plans. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is exercised. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the stock repurchase plan announced on August 21, 2007.

Note 20 - Stock Options and Other Equity-Based Incentive Instruments

In March 2009, the Company’s Board of Directors adopted the TriCo Bancshares 2009 Equity Incentive Plan (2009 Plan) covering officers, employees, directors of, and consultants to, the Company. The 2009 Plan was approved by the Company’s shareholders in May 2009. The 2009 Plan allows for the granting of the following types of “stock awards” (Awards): incentive stock options, nonstatutory stock options, performance awards, restricted stock, restricted stock unit (RSU) awards and stock appreciation rights. RSUs that vest based solely on the grantee remaining in the service of the Company for a certain amount of time, are referred to as “service condition vesting RSUs”. RSUs that vest based on the grantee remaining in the service of the Company for a certain amount of time and a market condition such as the total return of the Company’s common stock versus the total return of an index of bank stocks, are referred to as “market plus service condition vesting RSUs”. In May 2013, the Company’s shareholders approved an amendment to the 2009 Plan increasing the maximum aggregate number of shares of TriCo’s common stock which may be issued pursuant to or subject to Awards from 650,000 to 1,650,000. The number of shares available for issuance under the 2009 Plan is reduced by: (i) one share for each share of common stock issued pursuant to a stock option or a Stock Appreciation Right and (ii) two shares for each share of common stock issued pursuant to a Performance Award, a Restricted Stock Award or a Restricted Stock Unit Award. When Awards made under the 2009 Plan expire or are forfeited or cancelled, the underlying shares will become available for future Awards under the 2009 Plan. To the extent that a share of common stock pursuant to an Award that counted as two shares against the number of shares again becomes available for issuance under the 2009 Plan, the number of shares of common stock available for issuance under the 2009 Plan shall increase by two shares. Shares awarded and delivered under the 2009 Plan may be authorized but unissued, or reacquired shares. As of June 30, 2018, 408,900 options for the purchase of common shares, and 121,428 restricted stock units were outstanding, and 376,144 shares remain available for issuance, under the 2009 Plan.

In May 2001, the Company adopted the TriCo Bancshares 2001 Stock Option Plan (2001 Plan) covering officers, employees, directors of, and consultants to, the Company. Under the 2001 Plan, the option exercise price cannot be less than the fair market value of the Common Stock at the date of grant except in the case of substitute options. Options for the 2001 Plan expire on the tenth anniversary of the grant date. Vesting schedules under the 2001 Plan are determined individually for each grant. As of June 30, 2018, 20,000 options for the purchase of common shares were outstanding under the 2001 Plan. As of May 2009, as a result of the shareholder approval of the 2009 Plan, no new options may be granted under the 2001 Plan.

Note 20 - Stock Options and Other Equity-Based Incentive Instruments (continued)

Stock option activity during the six months ended June 30, 2018 is summarized in the following table:


	Number of Shares			Option Price per Share	Weighted Average Exercise Price		Value on Date of Grant	Weighted Average Fair Value
Outstanding at December 31, 2017		446,400		$12.63 to $23.21	$	16.84
Options granted		—		— to —		—
Options exercised		(14,500	)	$15.40 to $15.40	$	15.40
Options forfeited		(3,000	)	$23.21 to $23.21	$	23.21
Outstanding at June 30, 2018		428,900		$12.63 to $23.21	$	16.85

The following table shows the number, weighted-average exercise price, intrinsic value, and weighted average remaining contractual life of options exercisable, options not yet exercisable and total options outstanding as of June 30, 2018:


	Currently Exercisable		Currently Not Exercisable		Total Outstanding
Number of options		425,900		3,000		428,900
Weighted average exercise price	$	16.80	$	23.21	$	16.85
Intrinsic value (in thousands)	$	8,794	$	43	$	8,837
Weighted average remaining contractual term (yrs.)		3.5		6.3		3.5

The 3,000 options that are currently not exercisable as of June 30, 2018 are expected to vest, on a weighted-average basis, over the next 1.3 years, and the Company is expected to recognize $20,000 of pre-tax compensation costs related to these options as they vest. The Company did not modify any option grants during 2017 or the six months ended June 30, 2018.

Restricted stock unit (RSU) activity is summarized in the following table for the dates indicated:


	Service Condition Vesting RSUs					Market Plus Service Condition Vesting RSUs
	Number of RSUs			Weighted Average Fair Value on Date of Grant		Number of RSUs			Weighted Average Fair Value on Date of Grant
Outstanding at December 31, 2017		68,457					52,829
RSUs granted		26,939		$	39.31		16,939		$	36.40
Additional market plus service condition RSUs vested		—					8,506
RSUs added through dividend credits		545					—
RSUs released through vesting		(25,398	)				(25,512	)
RSUs forfeited/expired		(907	)				(970	)

Outstanding at June 30, 2018		69,636					51,792

The 69,636 of service condition vesting RSUs outstanding as of June 30, 2018 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of RSUs outstanding under the original grant. The 69,636 of service condition vesting RSUs outstanding as of June 30, 2018 are expected to vest, and be released, on a weighted-average basis, over the next 1.5 years. The Company expects to recognize $2,018,000 of pre-tax compensation costs related to these service condition vesting RSUs between June 30, 2018 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2017 or the six months ended June 30, 2018.

The 51,792 of market plus service condition vesting RSUs outstanding as of June 30, 2018 are expected to vest, and be released, on a weighted-average basis, over the next 1.9 years. The Company expects to recognize $1,116,000 of pre-tax compensation costs related to these RSUs between June 30, 2018 and their vesting dates. As of June 30, 2018, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 77,689 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 2017 or the six months ended June 30, 2018.

Note 21 - Noninterest Income and Expense

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


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Service charges on deposit accounts	$	3,613		$	4,323		$	7,392		$	7,942
ATM and interchange fees		4,510			4,248			8,745			8,263
Other service fees		630			839			1,344			1,604
Mortgage banking service fees		511			526			1,028			1,047
Change in value of mortgage servicing rights		(36	)		(457	)		75			(470	)

Total service charges and fees		9,228			9,479			18,584			18,386

Commissions on sale of non-deposit investment products		810			705			1,686			1,312
Gain on sale of loans		666			777			1,292			1,687
Increase in cash value of life insurance		656			626			1,264			1,311
Gain on sale of foreclosed assets		17			153			388			271
Lease brokerage income		200			161			328			367
Sale of customer checks		138			94			239			198
Change in indemnification asset		—			711			—			490
Life insurance proceeds in excess of cash value		—			—			—			108
Loss on disposal of fixed assets		(41	)		(28	)		(54	)		(28	)
Loss on marketable equity securities		(23	)		—			(70	)		—
Other		523			232			807			511

Total other noninterest income		2,946			3,431			5,880			6,227

Total noninterest income	$	12,174		$	12,910		$	24,464		$	24,613

Note 21 - Noninterest Income and Expense (continued)

The components of noninterest expense were as follows (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018		2017
Base salaries, net of deferred loan origination costs	$	14,429		$	13,657		$	28,391	$	27,047
Incentive compensation		2,159			2,173			4,611		4,371
Benefits and other compensation costs		4,865			4,664			10,103		9,969

Total salaries and benefits expense		21,453			20,494			43,105		41,387

Occupancy		2,720			2,705			5,401		5,397
Data processing and software		2,679			2,441			5,193		4,837
Equipment		1,637			1,805			3,188		3,528
ATM and POS network charges		1,437			1,075			2,663		1,928
Advertising		1,035			1,167			1,873		2,134
Professional fees		774			690			1,546		1,456
Telecommunications		681			668			1,382		1,311
Change in reserve for unfunded commitments		(137	)		(135	)		563		(120	)
Merger and acquisition expense		601			—			1,077		—
Assessments		417			420			847		825
Postage		301			329			659		733
Intangible amortization		339			352			678		711
Operational losses		252			430			546		865
Courier service		224			263			491		517
Provision for foreclosed asset losses		—			94			90		28
Foreclosed assets expense		180			38			204		76
Other miscellaneous expense		3,277			3,068			6,526		6,113

Total other noninterest expense		16,417			15,410			32,927		30,339

Total noninterest expense	$	37,870		$	35,904		$	76,032	$	71,726

Merger and acquisition expense:
Occupancy	$	49		$	—		$	49	$	—
Equipment		11			—			11		—
Professional fees		196			—			552		—
Advertising and marketing		164			—			172		—
Postage		7			—			7		—
Other miscellaneous expense		174			—			286		—

Total merger and acquisition expense	$	601		$	—		$	1,077	$	—

Note 22 - Income Taxes

The provisions for income taxes applicable to income before taxes differ from amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory federal income tax rate are reconciled for the periods indicated as follows:


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Federal statutory income tax rate		21.0	%		35.0	%		21.0	%		35.0	%
State income taxes, net of federal tax benefit		8.8			6.6			8.9			6.7
Tax-exempt interest on municipal obligations		(1.0	)		(1.7	)		(1.1	)		(1.8	)
Increase in cash value of insurance policies		(0.7	)		(1.0	)		(0.7	)		(1.2	)
Low income housing tax credits		(0.6	)		(0.7	)		(0.8	)		(0.7	)
Equity compensation		(0.4	)		(2.1	)		(0.2	)		(1.3	)
Nondeductible merger expenses		0.3			—			0.3			—
Other		0.4			(0.1	)		0.5			0.2

Effective Tax Rate		27.8	%		36.0	%		27.9	%		36.9	%

Note 23 – Earnings Per Share

Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate solely from outstanding stock options, and are determined using the treasury stock method. Earnings per share have been computed based on the following:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2018		2017		2018		2017
Net income	$	15,029	$	13,589	$	28,939	$	25,668
Average number of common shares outstanding		22,983		22,900		22,970		22,885
Effect of dilutive stock options and restricted stock		293		340		310		351

Average number of common shares outstanding used to calculate diluted earnings per share		23,276		23,240		23,280		23,236

Options excluded from diluted earnings per share because the effect of these options was antidilutive		—		—		—		—

Note 24 – Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The components of accumulated other comprehensive loss, included in shareholders’ equity, are as follows:


(in thousands)	June 30, 2018			December 31, 2017
Net unrealized loss on available for sale securities	$	(24,651	)		(3,409	)
Tax effect		7,288			1,433

Unrealized holding loss on available for sale securities, net of tax		(17,363	)		(1,976	)

Unfunded status of the supplemental retirement plans		(5,124	)		(5,352	)
Tax effect		1,514			2,250

Unfunded status of the supplemental retirement plans, net of tax		(3,610	)		(3,102	)

Joint beneficiary agreement liability		(150	)		(150	)
Tax effect		—

Joint beneficiary agreement liability, net of tax		(150	)		(150	)

Accumulated other comprehensive loss	$	(21,123	)	$	(5,228	)

Note 24 – Comprehensive Income (continued)

The components of other comprehensive income (loss) and related tax effects are as follows:


	Three months ended June 30,						Six months ended June 30,
(in thousands)	2018			2017			2018			2017
Unrealized holding gains (losses) on available for sale securities before reclassifications	$	(5,676	)	$	4,911		$	(20,941	)	$	5,698
Amounts reclassified out of accumulated other comprehensive income:
Adoption ASU 2016-01		—			—			62			—
Adoption ASU 2018-02		—			—			(425	)		—

Total amounts reclassified out of accumulated other comprehensive income		—			—			(363	)		—

Unrealized holding gains (losses) on available for sale securities after reclassifications		(5,676	)		4,911			(21,304	)		5,698
Tax effect		1,678			(2,065	)		6,280			(2,395	)

Unrealized holding gains (losses) on available for sale securities, net of tax		(3,998	)		2,846			(15,024	)		3,303

Change in unfunded status of the supplemental retirement plans before reclassifications		—			—			668			—
Amounts reclassified out of accumulated other comprehensive income:
Amortization of prior service cost		(13	)		(1	)		(27	)		(4	)
Amortization of actuarial losses		127			96			254			192
Adoption ASU 2018-02		—			—			(668	)		—

Total amounts reclassified out of accumulated other comprehensive income		114			95			(441	)		188

Change in unfunded status of the supplemental retirement plans after reclassifications		114			95			227			188
Tax effect		(34	)		(40	)		(67	)		(79	)

Change in unfunded status of the supplemental retirement plans, net of tax		80			55			160			109

Change in joint beneficiary agreement liability before reclassifications		—			—			—			—
Amounts reclassified out of accumulated other comprehensive income		—			—			—			—

Change in joint beneficiary agreement liability after reclassifications		—						—			—
Tax effect		—			—			—			—

Change in joint beneficiary agreement liability, net of tax		—			—			—			—

Total other comprehensive income (loss)	$	(3,918	)	$	2,901		$	(14,864	)	$	3,412

Note 25 - Retirement Plans

401(k) Plan

The Company sponsors a 401(k) Plan whereby substantially all employees age 21 and over with 90 days of service may participate. Participants may contribute a portion of their compensation subject to certain limits based on federal tax laws. Prior to July 1, 2015, the Company did not contribute to the 401(k) Plan. Effective July 1, 2015, the Company initiated a discretionary matching contribution equal to 50% of participant’s elective deferrals each quarter, up to 4% of eligible compensation. The following table sets forth the benefit expense attributable to the 401(k) Plan matching contributions, and the contributions made by the Company to the 401(k) Plan during the periods indicated:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2018		2017		2018		2017
401(k) Plan benefits expense	$	251	$	194	$	454	$	380
401(k) Plan contributions made by the Company	$	247	$	192	$	446	$	371

Employee Stock Ownership Plan

Substantially all employees with at least one year of service are covered by a discretionary employee stock ownership plan (ESOP). Contributions are made to the plan at the discretion of the Board of Directors. Company shares owned by the ESOP are paid dividends and included in the calculation of earnings per share exactly as other common shares outstanding. The following table sets forth the benefit expense attributable to the ESOP, and the contributions made by the Company to the ESOP during the periods indicated:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2018		2017		2018		2017
ESOP benefits expense	$	475	$	540	$	940	$	1,065
ESOP contributions made by the Company	$	940	$	1,073	$	1,479	$	1,536

Note 25 - Retirement Plans (continued)

Deferred Compensation Plans

The Company has deferred compensation plans for certain directors and key executives, which allow certain directors and key executives designated by the Board of Directors of the Company to defer a portion of their compensation. The Company has purchased insurance on the lives of the participants and intends to hold these policies until death as a cost recovery of the Company’s deferred compensation obligations of $6,932,000 and $6,605,000 at June 30, 2018 and December 31, 2017, respectively. The following table sets forth the earnings credits on deferred balances included in noninterest expense during the periods indicated:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2018		2017		2018		2017
Deferred compensation earnings credits included in noninterest expense	$	121	$	109	$	245	$	254

Supplemental Retirement Plans

The Company has supplemental retirement plans for current and former directors and key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends (but is not required) to use the cash values of these policies to pay the retirement obligations. The following table sets forth the net periodic benefit cost recognized for the plans:


	Three months ended June 30,						Six months ended June 30,
(in thousands)	2018			2017			2018			2017
Net pension cost included the following components:
Service cost-benefits earned during the period	$	243		$	235		$	486		$	470
Interest cost on projected benefit obligation		237			248			475			496
Amortization of net obligation at transition		—			1			1			1
Amortization of prior service cost		(13	)		(3	)		(27	)		(6	)
Recognized net actuarial loss		127			97			254			195

Net periodic pension cost	$	594		$	578		$	1,189		$	1,156

Company contributions to pension plans	$	287		$	329		$	554		$	588
Pension plan payouts to participants	$	287		$	329		$	554		$	588

For the year ending December 31, 2018, the Company expects to contribute and pay out as benefits $1,106,000 to participants under the plans.

Note 26 - Related Party Transactions

Certain directors, officers, and companies with which they are associated were customers of, and had banking transactions with, the Company or the Bank in the ordinary course of business.

The following table summarizes the activity in these loans for periods indicated (in thousands):


Balance December 31, 2016	$	2,432
Advances/new loans		437
Removed/payments		(721	)

Balance December 31, 2017		2,148
Advances/new loans		145
Removed/payments		(480	)

Balance June 30, 2018	$	1,813

Deposits of directors, officers and other related parties to the Bank totaled $28,910,000 and $46,025,000 at June 30, 2018 and December 31, 2017, respectively.

Note 27 - Fair Value Measurement

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Securities available-for-sale and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or impairment write-downs of individual assets.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observable nature of the assumptions used to determine fair value. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Securities available for sale - Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities classified as Level 3 during any of the periods covered in these financial statements.

Loans held for sale – Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to nonrecurring fair value adjustments as Level 2.

Impaired originated and PNCI loans – Originated and PNCI loans are not recorded at fair value on a recurring basis. However, from time to time, an originated or PNCI loan is considered impaired and an allowance for loan losses is established. Originated and PNCI loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are considered impaired. The fair value of an impaired originated or PNCI loan is estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired originated and PNCI loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired originated and PNCI loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated or PNCI loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the impaired originated or PNCI loan as nonrecurring Level 3.

Foreclosed assets - Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense.

Mortgage servicing rights - Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3. Additional information regarding mortgage servicing rights can be found in Note 10 in the consolidated financial statements at Item 1 of this report.

Note 27 - Fair Value Measurement (continued)

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):


Fair value at June 30, 2018	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,868	$	2,868	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government corporations and agencies		635,428		—		635,428		—
Obligations of states and political subdivisions		118,779		—		118,779		—
Mortgage servicing rights		7,021		—		—		7,021

Total assets measured at fair value	$	764,096	$	2,868	$	754,207	$	7,021


Fair value at December 31, 2017	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,938	$	2,938	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government corporations and agencies		604,789		—		604,789		—
Obligations of states and political subdivisions		123,156		—		123,156		—
Mortgage servicing rights		6,687		—		—		6,687

Total assets measured at fair value	$	737,570	$	2,938	$	727,945	$	6,687

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between any levels during the six months ended June 30, 2018 or the year ended December 31, 2017.

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the time periods indicated. Had there been any transfer into or out of Level 3 during the time periods indicated, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands):


Three months ended June 30,	Beginning Balance		Transfers into (out of) Level 3		Change Included in Earnings			Issuances		Ending Balance
2018: Mortgage servicing rights	$	6,953		—	$	(36	)	$	104	$	7,021
2017: Mortgage servicing rights	$	6,860		—	$	(457	)	$	193	$	6,596

Six months ended June 30,	Beginning Balance		Transfers into (out of) Level 3		Change Included in Earnings			Issuances		Ending Balance
2018: Mortgage servicing rights	$	6,687		—	$	75		$	259	$	7,021
2017: Mortgage servicing rights	$	6,595		—	$	(470	)	$	471	$	6,596

The Company’s method for determining the fair value of mortgage servicing rights is described in Note 1. The key unobservable inputs used in determining the fair value of mortgage servicing rights are mortgage prepayment speeds and the discount rate used to discount cash projected cash flows. Generally, any significant increases in the mortgage prepayment speed and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the mortgage prepayment speed and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). Note 10 contains additional information regarding mortgage servicing rights.

The following table presents quantitative information about recurring Level 3 fair value measurements at June 30, 2018:


	Fair Value (in thousands)		Valuation Technique	Unobservable Inputs	Range, Weighted Average
Mortgage Servicing Rights	$	7,021	Discounted cash flow	Constant prepayment rate	4.9%-27.7%, 7.4%
				Discount rate	12.5%-13.5%, 12.5%

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2017:


	Fair Value (in thousands)		Valuation Technique	Unobservable Inputs	Range, Weighted Average
Mortgage Servicing Rights	$	6,687	Discounted cash flow	Constant prepayment rate	6.2%-22.0%, 8.9%
				Discount rate	13.0%-15.0%, 13.0%

Note 27 - Fair Value Measurement (continued)

The tables below present the recorded investment in assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated (in thousands):


Six months ended June 30, 2018	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
Fair value:
Impaired Originated & PNCI loans	$	1,647		—		—	$	1,647	$	(505	)
Foreclosed assets		584		—		—		584		(90	)

Total assets measured at fair value	$	2,231		—		—	$	2,231	$	(595	)


Year ended December 31, 2017	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
Fair value:
Impaired Originated & PNCI loans	$	2,767		—		—	$	2,767	$	(1,452	)
Foreclosed assets		2,217		—		—		2,217		(135	)

Total assets measured at fair value	$	4,984		—		—	$	4,984	$	(1,587	)


Six months ended June 30, 2017	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
Fair value:
Impaired Originated & PNCI loans	$	686		—		—	$	686	$	(456	)
Foreclosed assets		1,103		—		—		1,103		(28	)

Total assets measured at fair value	$	1,789		—		—	$	1,789	$	(484	)

The impaired Originated and PNCI loan amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.

The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on non-covered other real estate owned for fair value adjustments based on the fair value of the real estate.

The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2018:


June 30, 2018	Fair Value (in thousands)		Valuation Technique	Unobservable Inputs	Range, Weighted Average
Impaired Originated & PNCI loans	$	1,647	Sales comparison approach Income approach	Adjustment for differences between comparable sales; Capitalization rate	(70%) - 60%; (7.41%) N/A
Foreclosed assets (Land & construction)	$	492	Sales comparison approach	Adjustment for differences between comparable sales	(47%) - 39%; 3.64%
Foreclosed assets (Residential real estate)	$	92	Sales comparison approach	Adjustment for differences between comparable sales	(65%) - 20%; (45%)

Note 27 - Fair Value Measurement (continued)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2017:


December 31, 2017	Fair Value (in thousands)		Valuation Technique	Unobservable Inputs	Range, Weighted Average
Impaired Originated & PNCI loans	$	2,767	Sales comparison approach Income approach	Adjustment for differences between comparable sales Capitalization rate	(74%) - 23%; (19.76%) N/A
Foreclosed assets (Land & construction)	$	1,341	Sales comparison approach	Adjustment for differences between comparable sales	(53%) - 283%; 167%
Foreclosed assets (Residential real estate)	$	622	Sales comparison approach	Adjustment for differences between comparable sales	(47%) - 39%; (3.13%)
Foreclosed assets (Commercial real estate)	$	254	Sales comparison approach	Adjustment for differences between comparable sales	(84%) - 19%; (84%)

In addition to the methods and assumptions used to estimate the fair value of each class of financial instrument noted above, the following methods and assumptions were used to estimate the fair value of other classes of financial instruments for which it is practical to estimate the fair value.

Short-term Instruments - Cash and due from banks, fed funds purchased and sold, interest receivable and payable, and short-term borrowings are considered short-term instruments. For these short-term instruments their carrying amount approximates their fair value.

Securities held to maturity – The fair value of securities held to maturity is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities held to maturity classified as Level 3 during any of the periods covered in these financial statements.

Restricted Equity Securities - It is not practical to determine the fair value of restricted equity securities due to restrictions placed on their transferability.

Originated and PNCI loans - The fair value of variable rate originated and PNCI loans is the current carrying value. The interest rates on these originated and PNCI loans are regularly adjusted to market rates. The fair value of other types of fixed rate originated and PNCI loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The allowance for loan losses is a reasonable estimate of the valuation allowance needed to adjust computed fair values for credit quality of certain originated and PNCI loans in the portfolio.

PCI Loans – PCI loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value.

FDIC Indemnification Asset - The fair value of the FDIC indemnification asset is based on the discounted value of expected future cash flows under the loss-share agreement.

Deposit Liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. These values do not consider the estimated fair value of the Company’s core deposit intangible, which is a significant unrecognized asset of the Company. The fair value of time deposits and other borrowings is based on the discounted value of contractual cash flows.

Other Borrowings - The fair value of other borrowings is calculated based on the discounted value of the contractual cash flows using current rates at which such borrowings can currently be obtained.

Junior Subordinated Debentures - The fair value of junior subordinated debentures is estimated using a discounted cash flow model. The future cash flows of these instruments are extended to the next available redemption date or maturity date as appropriate based upon the spreads of recent issuances or quotes from brokers for comparable bank holding companies compared to the contractual spread of each junior subordinated debenture measured at fair value.

Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counter parties at the reporting date.

Fair values for financial instruments are management’s estimates of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates.

Note 27 - Fair Value Measurement (continued)

In January 2018, the Company adopted the provisions of Accounting Standard Update 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities”, which requires the Company to use the exit price notion when measuring the fair value of financial instruments. The Company used the exit price notion for valuing financial instruments in 2018 and the entry price notion for valuing financial instruments in 2017. The estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in thousands):


	June 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Level 1 inputs:
Cash and due from banks	$	94,661	$	94,661	$	105,968	$	105,968
Cash at Federal Reserve and other banks		89,401		89,401		99,460		99,460
Level 2 inputs:
Securities held to maturity		477,745		468,621		514,844		518,165
Restricted equity securities		16,956		N/A		16,956		N/A
Loans held for sale		3,601		3,601		4,616		4,616
Level 3 inputs:
Loans, net		3,116,789		3,091,134		2,984,842		2,992,225
Financial liabilities:
Level 2 inputs:
Deposits		4,077,222		4,073,628		4,009,131		4,006,620
Other borrowings		152,839		152,839		122,166		122,166
Level 3 inputs:
Junior subordinated debt		56,950		58,930		56,858		58,466

	Contract Amount		Fair Value		Contract Amount		Fair Value
Off-balance sheet:
Level 3 inputs:
Commitments	$	994,944	$	9,949	$	933,542	$	9,335
Standby letters of credit		11,535		115		13,075		131
Overdraft privilege commitments		97,670		977		98,260		983

Note 28 - TriCo Bancshares Condensed Financial Statements (Parent Only)


Condensed Balance Sheets	June 30,			December 31,
	2018			2017
	(In thousands)
Assets
Cash and cash equivalents	$	3,069		$	3,924
Investment in Tri Counties Bank		565,047			557,538
Other assets		1,742			1,721

Total assets	$	569,858		$	563,183

Liabilities and shareholders’ equity
Other liabilities	$	564		$	517
Junior subordinated debt		56,950			56,858

Total liabilities		57,514			57,375

Shareholders’ equity:
Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at June 30, 2018 and December 31, 2017		—			—
Common stock, no par value: authorized 50,000,000 shares; issued and outstanding 23,004,153 and 22,955,963 shares, respectively		256,590			255,836
Retained earnings		276,877			255,200
Accumulated other comprehensive loss, net		(21,123	)		(5,228	)

Total shareholders’ equity		512,344			505,808

Total liabilities and shareholders’ equity	$	569,858		$	563,183

Note 28 - TriCo Bancshares Condensed Financial Statements (Parent Only) (continued)


Condensed Statements of Income	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
	(In thousands)						(In thousands)
Interest expense	$	(789	)	$	(623	)	$	(1,486	)	$	(1,218	)
Administration expense		(511	)		(218	)		(937	)		(377	)

Loss before equity in net income of Tri Counties Bank		(1,300	)		(841	)		(2,423	)		(1,595	)
Equity in net income of Tri Counties Bank:
Distributed		4,770			5,167			9,142			9,209
Undistributed		11,253			8,909			21,650			17,383
Income tax benefit		306			354			570			671

Net income	$	15,029		$	13,589		$	28,939		$	25,668


Condensed Statements of Comprehensive Income	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
	(In thousands)						(In thousands)
Net income	$	15,029		$	13,589		$	28,939		$	25,668
Other comprehensive income (loss), net of tax:
Increase (decrease) in unrealized gains on available for sale securities arising during the period		(3,998	)		2,846			(15,024	)		3,303
Change in minimum pension liability		80			55			160			109

Other comprehensive income (loss)		(3,918	)		2,901			(14,864	)		3,412

Comprehensive income	$	11,111		$	16,490		$	14,075		$	29,080


Condensed Statements of Cash Flows	Six months ended June 30,
	2018			2017
	(In thousands)
Operating activities:
Net income	$	28,939		$	25,668
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed equity in earnings of Tri Counties Bank		(21,650	)		(17,383	)
Equity compensation vesting expense		722			774
Net change in other assets and liabilities		(605	)		(672	)

Net cash provided by operating activities		7,406			8,387
Investing activities: None
Financing activities:
Issuance of common stock through option exercise		185			192
Repurchase of common stock		(633	)		(1,121	)
Cash dividends paid — common		(7,813	)		(7,328	)

Net cash used for financing activities		(8,261	)		(8,257	)

Net change in cash and cash equivalents		(855	)		130

Cash and cash equivalents at beginning of year		3,924			2,802

Cash and cash equivalents at end of year	$	3,069		$	2,932

Note 29 - Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1, and common equity Tier 1capital to risk-weighted assets, and of Tier 1 capital to average assets.

The following tables present actual and required capital ratios as of June 30, 2018 and December 31, 2017 for the Company and the Bank under Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of June 30, 2018 and December 31, 2017 based on the then phased-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.


	Actual					Minimum Capital Required – Basel III Phase-in Schedule					Minimum Capital Required – Basel III Fully Phased In					Required to be Considered Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
As of June 30, 2018:
Total Capital
(to Risk Weighted Assets):
Consolidated	$	550,769		13.91	%	$	390,991		9.875	%	$	415,737		10.50	%		N/A		N/A
Tri Counties Bank	$	548,232		13.85	%	$	390,819		9.875	%	$	415,554		10.50	%	$	395,766		10.00	%
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated	$	517,518		13.07	%	$	311,803		7.875	%	$	336,549		8.50	%		N/A		N/A
Tri Counties Bank	$	514,981		13.01	%	$	311,666		7.875	%	$	336,401		8.50	%	$	316,613		8.00	%
Common equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated	$	462,278		11.68	%	$	252,412		6.375	%	$	277,158		7.00	%		N/A		N/A
Tri Counties Bank	$	514,981		13.01	%	$	252,301		6.375	%	$	277,036		7.00	%	$	257,248		6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	517,518		10.92	%	$	189,647		4.000	%	$	189,647		4.00	%		N/A		N/A
Tri Counties Bank	$	514,981		10.86	%	$	189,643		4.000	%	$	189,643		4.00	%	$	237,054		5.00	%

	Actual					Minimum Capital Required – Basel III Phase-in Schedule					Minimum Capital Required – Basel III Fully Phased In					Required to be Considered Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
As of December 31, 2017:
Total Capital
(to Risk Weighted Assets):
Consolidated	$	528,805		14.07	%	$	347,694		9.25	%	$	394,679		10.50	%		N/A		N/A
Tri Counties Bank	$	525,384		13.98	%	$	347,535		9.25	%	$	394,499		10.50	%	$	375,713		10.00	%
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated	$	495,318		13.18	%	$	272,517		7.25	%	$	319,502		8.50	%		N/A		N/A
Tri Counties Bank	$	491,897		13.09	%	$	272,392		7.25	%	$	319,356		8.50	%	$	300,570		8.00	%
Common equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated	$	440,643		11.72	%	$	216,134		5.75	%	$	263,120		7.00	%		N/A		N/A
Tri Counties Bank	$	491,897		13.09	%	$	216,035		5.75	%	$	262,999		7.00	%	$	244,214		6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	495,318		10.80	%	$	183,400		4.00	%	$	183,400		4.00	%		N/A		N/A
Tri Counties Bank	$	491,897		10.73	%	$	183,394		4.00	%	$	183,394		4.00	%	$	229,243		5.00	%

As of June 30, 2018, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis. Also, at June 30, 2018 and December 31, 2017, the Bank’s capital levels exceeded the minimum amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action.

Beginning January 1, 2016, the Basel III Capital Rules implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the risk-based capital ratios but not the leverage ratio. At June 30, 2018, the Company and the Bank are in compliance with the capital conservation buffer requirement. The three risk-based capital ratios will increase by 0.625% each year through 2019, at which point, the common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratio minimums will be 7.0%, 8.5% and 10.5%, respectively.

Note 30 - Summary of Quarterly Results of Operations (unaudited)

The following table sets forth the results of operations for the periods indicated, and is unaudited; however, in the opinion of Management, it reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the summarized results for such periods.


	2018 Quarters Ended
	December 31,	September 30,	June 30,			March 31,
	(dollars in thousands, except per share data)
Interest and dividend income:
Loans:
Discount accretion PCI – cash basis			$	180		$	246
Discount accretion PCI – other				95			60
Discount accretion PNCI				284			326
All other loan interest income				38,745			37,417

Total loan interest income				39,304			38,049
Debt securities, dividends and interest bearing cash at banks (not FTE)				9,174			9,072

Total interest income				48,478			47,121
Interest expense				2,609			2,135

Net interest income				45,869			44,986
(Benefit from reversal of) provision for loan losses				(638	)		(236	)

Net interest income after provision for loan losses				46,507			45,222
Noninterest income				12,174			12,290
Noninterest expense				37,870			38,162

Income before income taxes				20,811			19,350
Income tax expense				5,782			5,440

Net income			$	15,029		$	13,910

Per common share:
Net income (diluted)			$	0.65		$	0.60

Dividends			$	0.17		$	0.17

Note 30 - Summary of Quarterly Results of Operations (unaudited) (continued)


	2017 Quarters Ended
	December 31,		September 30,		June 30,			March 31,
	(dollars in thousands, except per share data)
Interest and dividend income:
Loans:
Discount accretion PCI – cash basis	$	516	$	398	$	386		$	112
Discount accretion PCI – other		445		407		797			631
Discount accretion PNCI		528		559		987			798
All other loan interest income		36,705		35,904		34,248			33,373

Total loan interest income		38,194		37,268		36,418			34,914
Debt securities, dividends and interest bearing cash at banks (not FTE)		8,767		8,645		8,626			8,570

Total interest income		46,961		45,913		45,044			43,484
Interest expense		1,868		1,829		1,610			1,491

Net interest income		45,093		44,084		43,434			41,993
Provision for (benefit from reversal of provision for) loan losses		1,677		765		(796	)		(1,557	)

Net interest income after provision for loan losses		43,416		43,319		44,230			43,550
Noninterest income		12,478		12,930		12,910			11,703
Noninterest expense		38,076		37,222		35,904			35,822

Income before income taxes		17,818		19,027		21,236			19,431
Income tax expense		14,829		7,130		7,647			7,352

Net income	$	2,989	$	11,897	$	13,589		$	12,079

Per common share:
Net income (diluted)	$	0.13	$	0.51	$	0.58		$	0.52

Dividends	$	0.17	$	0.17	$	0.17		$	0.15

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

As TriCo Bancshares (referred to in this report as “we”, “our” or the “Company”) has not commenced any business operations independent of Tri Counties Bank (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, 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, and the presentation of these measures 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 the Part I – Financial Information section of this Form 10-Q, 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

There have been no changes to the Company’s critical accounting policies during the six months ended June 30, 2018.

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted 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 and intangible assets. 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 Item 1 of Part I of this report.

On March 18, 2016, Tri Counties Bank acquired three branches from Bank of America. The branches are located in the cities of Arcata, Eureka, and Fortuna in Humboldt County, California. The Bank paid $3,204,000 for deposit relationships with balances totaling $161,231,000 and loans with balances totaling $289,000. See “Results of Operations” and “Financial Condition” below and Note 2 in Item 1 of Part I of this report, for additional discussion about this transaction.

On October 3, 2014, TriCo acquired 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. 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 per share. TriCo also 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 Bank 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. Between January 7, 2015 and January 21, 2015, four Tri Counties Bank branches and four former North Valley Bank branches were consolidated into other Tri Counties Bank or other former North Valley Bank branches.

On September 23, 2011, the California Department of Financial Institutions 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.

On May 28, 2010, the Office of the Comptroller of the Currency closed Granite Community Bank, N.A. (“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 covered 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 absorbed 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 had original terms of 5 years and 10 years, respectively, and the loss recovery provisions had original terms of 8 years and 10 years, respectively, from the acquisition date. On May 9, 2017, the Company and the FDIC agreed to terminate the whole bank purchase and assumption agreement with loss sharing. For further information regarding the whole bank purchase and assumption agreement with loss sharing, and its termination, see Note 11 in Item 1 of Part I of this report.

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 non-credit impaired” (PNCI) loans. The Company refers to loans that it originates as “originated” loans. Additional information regarding the Citizens and Granite Bank acquisitions can be found in Note 2 in Item 1 of Part I 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 Item 1 of Part I 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.

TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Net interest income (FTE)	$	46,182		$	44,059		$	91,480		$	86,677
Benefit from reversal of provision for loan losses		638			796			874			2,353
Noninterest income		12,174			12,910			24,464			24,613
Noninterest expense		(37,870	)		(35,904	)		(76,032	)		(71,726	)
Provision for income taxes (FTE)		(6,095	)		(8,272	)		(11,847	)		(16,249	)

Net income	$	15,029		$	13,589		$	28,939		$	25,668

Earnings per share:
Basic	$	0.65		$	0.59		$	1.26		$	1.12
Diluted	$	0.65		$	0.58		$	1.24		$	1.1
Per share:
Dividends paid	$	0.17		$	0.17		$	0.34		$	0.32
Book value at period end	$	22.27		$	21.76

Average common shares outstanding		22,983			22,900			22,970			22,885
Average diluted common shares outstanding		23,276			23,240			23,280			23,236
Shares outstanding at period end		23,004			22,925

At period end:
Loans, net	$	3,116,789		$	2,798,250
Total assets		4,863,153			4,519,935
Total deposits		4,077,222			3,878,422
Other borrowings		152,839			22,560
Junior subordinated debt		56,950			56,761
Shareholders’ equity		512,344			498,944

Financial Ratios:
During the period (annualized):
Return on assets		1.25	%		1.21	%		1.21	%		1.14	%
Return on equity		11.78	%		10.93	%		11.39	%		10.46	%
Net interest margin¹		4.14	%		4.26	%		4.14	%		4.19	%
Efficiency ratio¹		64.89	%		63.02	%		65.58	%		64.45	%
Average equity to average assets		10.60	%		11.07	%		10.64	%		10.93	%
At period end:
Equity to assets		10.54	%		11.04	%
Total capital to risk-adjusted assets		13.91	%		14.63	%

¹	Fully taxable equivalent (FTE)

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 Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report.

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


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Net interest income (FTE)	$	46,182		$	44,059		$	91,480		$	86,677
Benefit from reversal of provision for loan losses		638			796			874			2,353
Noninterest income		12,174			12,910			24,464			24,613
Noninterest expense		(37,870	)		(35,904	)		(76,032	)		(71,726	)
Provision for income taxes (FTE)		(6,095	)		(8,272	)		(11,847	)		(16,249	)

Net income	$	15,029		$	13,589		$	28,939		$	25,668

Net Interest Income

The Company’s primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Interest income	$	48,478		$	45,044		$	95,599		$	88,528
Interest expense		(2,609	)		(1,610	)		(4,744	)		(3,101	)

Net interest income (not FTE)		45,869			43,434			90,855			85,427
FTE adjustment		313			625			625			1,250

Net interest income (FTE)	$	46,182		$	44,059		$	91,480		$	86,677

Net interest margin (FTE)		4.14	%		4.26	%		4.14	%		4.19	%

Purchased loan discount accretion	$	559		$	2,170		$	1,191		$	3,711

Effect of purchased loan discount accretion on net interest margin (FTE)		0.05	%		0.21	%		0.05	%		0.18	%

Summary of Average Balances, Yields/Rates and Interest Differential

The following table presents, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-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).


	For the three months ended
	June 30, 2018							June 30, 2017
	Average Balance		Interest Income/ Expense		Rates Earned /Paid			Average Balance		Interest Income/ Expense		Rates Earned /Paid
Assets:
Loans	$	3,104,126	$	39,304		5.06	%	$	2,783,686	$	36,418		5.23	%
Investment securities - taxable		1,122,534		7,736		2.76	%		1,077,703		7,231		2.68	%
Investment securities - nontaxable⁽¹⁾		136,126		1,355		3.98	%		136,256		1,667		4.89	%
Cash at Federal Reserve and other banks		94,874		396		1.67	%		137,376		353		1.03	%

Total interest-earning assets		4,457,660		48,791		4.38	%		4,135,021		45,669		4.42	%
Other assets		356,863							357,368

Total assets	$	4,814,523						$	4,492,389

Liabilities and shareholders’ equity:
Interest-bearing demand deposits	$	995,528		214		0.09	%	$	936,482		201		0.09	%
Savings deposits		1,393,121		427		0.12	%		1,353,132		410		0.12	%
Time deposits		313,556		593		0.78	%		321,515		363		0.45	%
Other borrowings		139,307		586		1.68	%		20,011		13		0.26	%
Junior subordinated debt		56,928		789		5.54	%		56,736		623		4.39	%

Total interest-bearing liabilities		2,898,440		2,609		0.36	%		2,687,876		1,610		0.24	%
Noninterest-bearing deposits		1,339,905							1,240,390
Other liabilities		65,745							66,898
Shareholders’ equity		510,433							497,225

Total liabilities and shareholders’ equity	$	4,814,523						$	4,492,389

Net interest spread⁽²⁾						4.02	%						4.18	%
Net interest income and interest margin⁽³⁾			$	46,182		4.14	%			$	44,059		4.26	%


	For the six months ended
	June 30, 2018							June 30, 2017
	Average Balance		Interest Income/ Expense		Rates Earned /Paid			Average Balance		Interest Income/ Expense		Rates Earned /Paid
Assets:
Loans	$	3,066,152	$	77,353		5.05	%	$	2,771,115	$	71,332		5.15	%
Investment securities - taxable		1,123,964		15,394		2.74	%		1,057,966		14,325		2.71	%
Investment securities - nontaxable⁽¹⁾		136,143		2,708		3.98	%		136,273		3,333		4.89	%
Cash at Federal Reserve and other banks		92,869		769		1.66	%		167,391		788		0.94	%

Total interest-earning assets		4,419,128		96,224		4.35	%		4,132,745		89,778		4.34	%
Other assets		358,747							360,278

Total assets	$	4,777,875						$	4,493,023

Liabilities and shareholders’ equity:
Interest-bearing demand deposits	$	994,867		425		0.09	%	$	921,793		328		0.07	%
Savings deposits		1,382,249		838		0.12	%		1,364,590		834		0.12	%
Time deposits		310,035		1,067		0.69	%		326,652		706		0.43	%
Other borrowings		123,544		928		1.50	%		18,747		15		0.16	%
Junior subordinated debt		56,905		1,486		5.22	%		56,713		1,218		4.30	%

Total interest-bearing liabilities		2,867,600		4,744		0.33	%		2,688,495		3,101		0.23	%
Noninterest-bearing deposits		1,336,070							1,244,121
Other liabilities		65,982							69,389
Shareholders’ equity		508,223							491,018

Total liabilities and shareholders’ equity	$	4,777,875						$	4,493,023

Net interest spread⁽²⁾						4.02	%						4.11	%
Net interest income and interest margin⁽³⁾			$	91,480		4.14	%			$	86,677		4.19	%

⁽¹⁾	Fully taxable equivalent (FTE)

⁽²⁾	Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

⁽³⁾	Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-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

The following table sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (in thousands).


	Three months ended June 30, 2018 compared with three months ended June 30, 2017
	Volume			Rate			Total
Increase (decrease) in interest income:
Loans	$	4,190		$	(1,304	)	$	2,886
Investment securities		298			(105	)		193
Cash at Federal Reserve and other banks		(109	)		152			43

Total interest-earning assets		4,379			(1,257	)		3,122

Increase (decrease) in interest expense:
Interest-bearing demand deposits		13			—			13
Savings deposits		12			5			17
Time deposits		(9	)		239			230
Other borrowings		78			495			573
Junior subordinated debt		2			164			166

Total interest-bearing liabilities		96			903			999

Increase (decrease) in net interest income	$	4,283		$	(2,160	)	$	2,123


	Six months ended June 30, 2018 compared with six months ended June 30, 2017
	Volume			Rate			Total
Increase (decrease) in interest income:
Loans	$	7,597		$	(1,576	)	$	6,021
Investment securities		891			(447	)		444
Cash at Federal Reserve and other banks		(350	)		331			(19	)

Total interest-earning assets		8,138			(1,692	)		6,446

Increase (decrease) in interest expense:
Interest-bearing demand deposits		26			71			97
Savings deposits		11			(7	)		4
Time deposits		(36	)		397			361
Other borrowings		84			829			913
Junior subordinated debt		4			264			268

Total interest-bearing liabilities		89			1,554			1,643

Increase (decrease) in net interest income	$	8,049		$	(3,246	)	$	4,803

The following commentary regarding net interest income, interest income and interest expense may be best understood while referencing the Summary of Average Balances, Yields/Rates and Interest Differential and the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid shown above, and Note 30 to the Consolidated Financial Statements at Part I, Item 1 of this report.

Net interest income (FTE) during the three months ended June 30, 2018 increased $2,123,000 (4.8%) to $46,182,000 compared to $44,059,000 during the three months ended June 30, 2017. The increase in net interest income (FTE) was due primarily to an increase in the average balance of loans that was partially offset by a 17 basis point decrease in yield on loans, and a 12 basis point increase in the average rate paid on interest-bearing liabilities. The 17 basis point decrease in loan yields from 5.23% during the three months ended June 30, 2017 to 5.06% during the three months ended June 30, 2018 was due to a decrease in purchased loan discount accretion from $2,170,000 during the three months ended June 30, 2017 to $559,000 during the three months ended June 30, 2018. This decrease in purchased loan discount accretion reduced loan yields by 24 basis points, and net interest margin by 16 basis points, but was substantially offset by increases in new and renewed loan yields due to increases in market yields. The 12 basis point increase in the average rate paid on interest-bearing liabilities was primarily due to increases in market rates that increased the rates the Company pays on its time deposits, overnight borrowings, and junior subordinated debt. Also affecting net interest margin during the three months ended June 30, 2018, was the decrease in the Federal tax rate from 35% to 21%. This decrease in the Federal tax rate caused the fully tax-equivalent (FTE) yield on the Company’s nontaxable investments to decrease from 4.89% during the three months ended June 30, 2017 to 3.98% during the three months ended March 31, 2018, and resulted in net interest income (FTE) being $312,000, or 3 basis points, less than it otherwise would have been. The negative impact on net interest margin from the decreases in average loan yields was offset by the positive impact of an increase in average loan balances and a decrease in the average balance of lower yielding interest earning cash compared to the year-ago quarter.

Net interest income (FTE) during the six months ended June 30, 2018 increased $4,803,000 (5.5%) from the same period in 2017 to $91,480,000. The increase in net interest income (FTE) was due primarily to volume increases in average balances of loans and average balance of investments that were partially offset by decreases in the average yield on loans and investments – nontaxable, and increases in rates paid on time deposits, other borrowings, and junior subordinated debt compared to the six months ended June 30, 2017. The reduction in loan yields was primarily due to reduced discount accretion on purchased loans as the remaining discount on those purchased loans is becoming smaller with the passage of time. The reduction in investment – nontaxable yields compared to the year-ago six month period is due to the change in the Federal tax rate on January 1, 2018. The increase in rates paid on time deposits, other borrowings, and junior subordinated is due to increases to the indexes that these borrowings are tied to. In the case of time deposits, the increase in rate is due primarily to the rate paid on the Bank’s $50 million time deposit from the State of California that is generally tied to the three month Treasury bill rate. Other borrowings, that are primarily overnight FHLB borrowings, are generally tied to the Federal Funds Rate. The Company’s junior subordinated debt is indexed to 3-month LIBOR.

The Federal Reserve has increased the Federal Funds target rate 25 basis points in each of December 2015, December 2016, March 2017, June 2017, December 2017, March 2018, and June 2018; and the widely used prime rate of lending index has mirrored these increases in the Federal Funds rate, increasing from 3.25% in December 2015 to 5.00% in June 2018. While a significant portion of the Bank’s loans are indexed to the prime lending rate, and have rates that reset on or near the date of any prime lending rate change, the positive effect of such prime lending rate changes were substantially offset, during most of this time, by loan renewals and originations at market rates that were lower than the average rate of the Bank’s loan portfolio. During the first six months of 2018, rates on loan renewals and originations have generally been at or above the average rate of the Bank’s loan portfolio.

As of June 30, 2018, the Bank’s $3,169,675,000 principal balance of loans, net of charge-offs, and not including deferred loan fees and purchase discounts, was made up of loans with principal balances totaling $1,099,885,000 that have fixed interest rates, and $2,069,790,000 of loans with interest rates that are variable. Included in the balance of variable rate loans as of June 30, 2018 were loans with principal balances of approximately $551,216,000 that had adjustable interest rates tied to the prime lending rate that adjust on or near the date of any prime rate change, and of which approximately $23,182,000 had minimum contractual interest rates that are higher than their prime-indexed rate and will not experience an interest rate increase until their prime-indexed rate exceeds their minimum contractual interest rate. Also included in the balance of variable rate loans as of June 30, 2018 were loans with principal balances of approximately $1,072,482,000 that had adjustable interest rates tied to the 5-year U.S. Treasury Bond Rate index (5-year CMT index), and of which approximately $51,135,000 had minimum contractual interest rates that are higher than their 5-year CMT-indexed rate and will not experience an interest rate increase until their 5-year CMT-indexed rate exceeds their minimum contractual interest rate on their reset date. These 5-year CMT indexed loans have interest rates that adjust once every five years. Of course, any of these prime-indexed, 5-year CMT-indexed, or any other variable rate loan, may payoff, or may be refinanced, at any time.

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 – three and six months ended June 30, 2018 and 2017” at Note 5 in Item 1 of Part I of this report for the components that make up the provision for loan losses for the three and six months ended June 30, 2018 and 2017.

The Company recorded a reversal of provision for loan losses of $638,000 during the three months ended June 30, 2018 compared to a reversal of provision for loan losses of $796,000 during the three months ended June 30, 2017. The $638,000 reversal of provision for loan losses during the three months ended June 30, 2018 was due primarily to continued low loan losses, improvement in collateral values of impaired loans, and net upgrades in the credit quality of performing loans during the three months ended June 30, 2018. Nonperforming loans were $25,420,000, or 0.81% of loans outstanding as of June 30, 2018, compared to $24,394,000, or 0.81% of loans outstanding as of December 31, 2017, and $17,429,000, or 0.62% of loans outstanding as of June 30, 2017. During the three months ended June 30, 2018 the Company recorded net loan recoveries of $189,000.

As shown in the Table labeled “Allowance for Loan Losses – Three Months Ended June 30, 2018” at Note 5 in Item 1 of Part I of this report, residential real estate mortgage loans, home equity lines of credit, home equity loans, and commercial loans experienced a benefit from reversal of provision for loan losses while commercial real estate mortgage loans, other consumer loans, and residential and commercial construction loans experienced a provision for loan losses during the three months ended June 30, 2018. The level of provision, or reversal of provision, for loan losses of each loan category during the three months ended June 30, 2018 was due primarily to the increase or decrease in the required allowance for loan losses as of June 30, 2018 when compared to the required allowance for loan losses as of March 31, 2018 plus or minus net charge-offs or net recoveries during the three months ended June 30, 2018. All categories of loans except commercial real estate mortgage loans, and residential and commercial construction loans experienced a decrease in the required allowance for loan losses during the three months ended June 30, 2018. The decrease in the required allowance for loan losses for all loan categories except commercial real estate mortgage loans, and residential and commercial construction loans was due primarily to stable or improving estimated cash flows and collateral values for certain impaired originated and purchased loans, continued low net charge off rates in many loan categories, and stable to improving economic environmental factors. The increase in the required allowance for loan losses for commercial real estate mortgage loans, and residential and commercial construction loans was due primarily to increases in loan balances in those categories that was partially offset by stable or improving estimated cash flows and collateral values for certain impaired originated and purchased loans, continued low net charge off rates in many loan categories, and stable to improving economic environmental factors. The increases and decreases in estimated cash flows and collateral values, changes in historical loss factors, and stable to improving economic environmental factors, in part, determine the required loan loss allowance for nonperforming and 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 1 of Part I of this report. For details of the change in nonperforming loans during the three months ended June 30, 2018 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the three months ended June 30, 2018” under the heading “Asset Quality and Non-Performing Assets” below.

The Company recorded a reversal of provision for loan losses of $874,000 during the six months ended June 30, 2018 compared to a reversal of provision for loan losses of $2,353,000 during the six months ended June 30, 2017. The $874,000 reversal of provision for loan losses during the six months ended June 30, 2018 was primarily due to continued low loan losses, improvement in collateral values of impaired loans, and net upgrades in the credit quality of performing loans during the three months ended June 30, 2018. During the six months ended June 30, 2018 the Company recorded $75,000 of net loan recoveries.

As shown in the Table labeled “Allowance for Loan Losses – Six Months Ended June 30, 2018” at Note 5 in Item 1 of Part I of this report, residential real estate mortgage loans, home equity lines of credit, home equity loans, and commercial loans experienced a benefit from reversal of provision for loan losses while commercial real estate mortgage loans, other consumer loans, and residential and commercial construction loans experienced a provision for loan losses during the six months ended June 30, 2018. The level of provision, or reversal of provision, for loan losses of each loan category during the six months ended June 30, 2018 was due primarily to the increase or decrease in the required allowance for loan losses as of June 30, 2018 when compared to the required allowance for loan losses as of December 31, 2017 plus or minus net charge-offs or net recoveries during the six months ended June 30, 2018. All categories of loans except commercial real estate mortgage loans, and residential and commercial construction loans experienced a decrease in the required allowance for loan losses during the six months ended June 30, 2018. The decrease in the required allowance for loan losses for all loan categories except commercial real estate mortgage loans, and residential and commercial construction loans was due primarily to stable or improving estimated cash flows and collateral values for certain impaired originated and purchased loans, continued low net charge off rates in many loan categories, and stable to improving economic environmental factors. The increase in the required allowance for loan losses for commercial real estate mortgage loans, and residential and commercial construction loans was due primarily to increases in loan balances in those categories that was partially offset by stable or improving estimated cash flows and collateral values for certain impaired originated and purchased loans, continued low net charge off rates in many loan categories, and stable to improving economic environmental factors. The increases and decreases in estimated cash flows and collateral values, changes in historical loss factors, and stable to improving economic environmental factors, in part, determine the required loan loss allowance for nonperforming and 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 1 of Part I of this report. For details of the change in nonperforming loans during the six months ended June 30, 2018 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the six months ended June 30, 2018” under the heading “Asset Quality and Non-Performing Assets” below.

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 (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Service charges on deposit accounts	$	3,613		$	4,323		$	7,392		$	7,942
ATM and interchange fees		4,510			4,248			8,745			8,263
Other service fees		630			839			1,344			1,604
Mortgage banking service fees		511			526			1,028			1,047
Change in value of mortgage servicing rights		(36	)		(457	)		75			(470	)

Total service charges and fees		9,228			9,479			18,584			18,386

Commissions on sale of non-deposit investment products		810			705			1,686			1,312
Gain on sale of loans		666			777			1,292			1,687
Increase in cash value of life insurance		656			626			1,264			1,311
Gain on sale of foreclosed assets		17			153			388			271
Lease brokerage income		200			161			328			367
Sale of customer checks		138			94			239			198
Change in indemnification asset		—			711			—			490
Life insurance proceeds in excess of cash value		—			—			—			108
Loss on disposal of fixed assets		(41	)		(28	)		(54	)		(28	)
Loss on marketable equity securities		(23	)		—			(70	)		—
Other		523			232			807			511

Total other noninterest income		2,946			3,431			5,880			6,227

Total noninterest income	$	12,174		$	12,910		$	24,464		$	24,613

Mortgage loan servicing fees, net of change in fair value of mortgage loan servicing rights	$	475		$	69		$	1,103		$	577

Noninterest income decreased $736,000 (5.7%) to $12,174,000 during the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The decrease in noninterest income was due to the changes noted in the table above. The $710,000 (16.4%) decrease in service charges on deposit accounts was made up of a $329,000 (14.1%) decrease in nonsufficient fund (NSF) fees to $2,010,000, and a $381,000 (19.2%) decrease in other deposit account service charges to $1,603,000. The decrease in NSF fees was due primarily to continued growth in customer adoption of the bank’s digital services that improves the ability of customers to manage funds and avoid overdrafts. The decrease in other deposit service charges was due primarily to the rapid growth of customer adoption of e-Statements that reduces statement fees. Both NSF fees and service charges are also reduced by higher average deposit account balances: the average Consumer DDA account balance was 7.1% higher at the end of the second quarter of 2018 compared to the same period a year earlier, while the average Business DDA account was 7.6% higher. Higher account balances mean that fewer customers have balances small enough to require payment of a monthly maintenance fee on their accounts and fewer customers are in danger of overdrawing their accounts. The $421,000 (92.1%) increase in change in value of mortgage servicing rights (MSRs) was due to relatively steady estimated prepayment speeds and a declining market discount rate to value MSR cash flow during the three months ended June 30, 2018 compared to increasing estimated prepaid speeds and a steady discount rate during the three months ended June 30, 2017. These factors caused the value of MSR to decrease only $36,000 during the three months ended June 30, 2018 compared to a decrease of $457,000 during the three months ended June 30, 2017. During the three months ended June 30, 2017, the Company recorded a $711,000 gain upon the early termination of its loss sharing agreement with the FDIC. The $291,000 increase in other noninterest income to $523,000 was due primarily to a $372,000 recovery on a purchased loan for which the initial charge off was recorded prior to acquisition. Such pre-acquisition loan recoveries are recorded in miscellaneous other noninterest income.

Noninterest income decreased $149,000 (0.6%) to $24,464,000 during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decrease in noninterest income was due to the changes noted in the table above. The $550,000 (6.9%) decrease in service charges on deposit accounts was made up of a $600,000 (13.0%) decrease in nonsufficient fund (NSF) fees to $4,007,000, and a $50,000 (1.5%) increase in other deposit account service charges to $3,385,000. The decrease in NSF fees was due primarily to continued growth in customer adoption of the Company’s digital services that improves the ability of customers to manage funds and avoid overdrafts. Higher account balances mean that fewer customers have balances small enough to require payment of a monthly maintenance fee on their accounts and fewer customers are in danger of overdrawing their accounts. The $545,000 increase in change in value of mortgage servicing rights (MSRs) was due to slightly decreasing prepayment speeds and a declining market discount rate to value MSR cash flow during the six months ended June 30, 2018 compared to increasing estimated prepaid speeds and a steady discount rate during the six months ended June 30, 2017. These factors caused the value of MSR to increase $75,000 during the six months ended June 30, 2018 compared to a decrease of $470,000 during the six months ended June 30, 2017. The Company recorded a $711,000 gain upon the early termination of its loss sharing agreement with the FDIC resulting in net increase of $490,000 in the indemnification asset value during the six months ended June 30, 2017. The $296,000 increase in other noninterest income to $807,000 was due primarily to a $372,000 recovery on a purchased loan for which the initial charge off was recorded prior to acquisition. Such pre-acquisition loan recoveries are recorded in miscellaneous other noninterest income.

Noninterest Expense

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


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Base salaries, net of deferred loan origination costs	$	14,429		$	13,657		$	28,391		$	27,047
Incentive compensation		2,159			2,173			4,611			4,371
Benefits and other compensation costs		4,865			4,664			10,103			9,969

Total salaries and benefits expense		21,453			20,494			43,105			41,387

Occupancy		2,720			2,705			5,401			5,397
Data processing and software		2,679			2,441			5,193			4,837
Equipment		1,637			1,805			3,188			3,528
ATM and POS network charges		1,437			1,075			2,663			1,928
Advertising		1,035			1,167			1,873			2,134
Professional fees		774			690			1,546			1,456
Telecommunications		681			668			1,382			1,311
Change in reserve for unfunded commitments		(137	)		(135	)		563			(120	)
Merger and acquisition expense		601			—			1,077			—
Assessments		417			420			847			825
Postage		301			329			659			733
Intangible amortization		339			352			678			711
Operational losses		252			430			546			865
Courier service		224			263			491			517
Provision for (reversal of) foreclosed asset losses		—			94			90			28
Foreclosed assets expense		180			38			204			76
Other miscellaneous expense		3,277			3,068			6,526			6,113

Total other noninterest expense		16,417			15,410			32,927			30,339

Total noninterest expense	$	37,870		$	35,904		$	76,032		$	71,726

Merger and acquisition expense:
Occupancy	$	49		$	—		$	49		$	—
Equipment		11			—			11			—
Professional fees		196			—			552			—
Advertising and marketing		164			—			172			—
Postage		7			—			7			—
Other miscellaneous expense		174			—			286			—

Total merger and acquisition expense	$	601		$	—		$	1,077		$	—

Average full time equivalent staff		1,001			1,007			1,001			1,011
Noninterest expense to revenue (FTE)		64.9	%		63.0	%		65.6	%		64.4	%

Salary and benefit expenses increased $959,000 (4.7%) to $21,453,000 during the three months ended June 30, 2018 compared to $20,494,000 during the three months ended June 30, 2017. Base salaries, net of deferred loan origination costs increased $772,000 (5.7%) to $14,429,000. The increase in base salaries was due to annual merit increases, and the addition of employees with base salaries above the average base salary that were partially offset by a 0.6% decrease in average full time equivalent employees to 1,001 from 1,007 in the year-ago quarter. Commissions and incentive compensation decreased $14,000 (0.6%) to $2,159,000 during the three months ended June 30, 2018 compared to the year-ago quarter. Benefits & other compensation expense increased $201,000 (4.3%) to $4,865,000 during the three months ended June 30, 2018 due primarily to an increase in health insurance expense.

Salary and benefit expenses increased $1,718,000 (4.2%) to $43,105,000 during the six months ended June 30, 2018 compared to $41,387,000 during the six months ended June 30, 2017. Base salaries, net of deferred loan origination costs increased $1,344,000 (5.0%) to $28,391,000. The increase in base salaries was due to annual merit increases, and the addition of employees with base salaries above the average base salary that were partially offset by a 1.0% decrease in average full time equivalent employees to 1,001 from 1,011 in the year-ago period. Commissions and incentive compensation increased $240,000 (5.5%) to $4,611,000 during the six months ended June 30, 2018 compared to the year-ago quarter. Benefits & other compensation expense increased $134,000 (1.3%) to $10,103,000 during the six months ended June 30, 2018.

Other noninterest expense increased $1,007,000 (6.5%) to $16,417,000 during the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The increase in other noninterest expense was due to the changes noted in the table above. The $238,000 and $362,000 increases in data processing and software expense and ATM & POS network charges, respectively, were due primarily to system enhancements and capacity expansion. The $168,000 decrease in equipment expense was due to decreased equipment rental, repair and maintenance. During the three months ended June 30, 2018, the Company incurred $601,000 of merger related expense associated with the proposed merger with FNBB of which $324,000 is nondeductible for tax purposes.

Other noninterest expense increased $2,588,000 (8.5%) to $32,927,000 during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase in other noninterest expense was due to the changes noted in the table above. The $684,000 increase in change in reserve for unfunded commitments was due primarily to an increase in unfunded construction loan commitments from December 31, 2017 to June 30, 2018 compared to a reduction in such commitments during the year-ago period. The $356,000 and $735,000 increases in data processing and software expense and ATM & POS network charges, respectively, were due primarily to system enhancements and capacity expansion. The $340,000 decrease in equipment expense was due to decreased equipment rental, repair and maintenance. During the six months ended June 30, 2018, the Company incurred $1,077,000 of merger related expense associated with the proposed merger with FNBB of which $667,000 is nondeductible for tax purposes.

Income Taxes


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Federal statutory income tax rate		21.0	%		35.0	%		21.0	%		35.0	%
State income taxes, net of federal tax benefit		8.8			6.6			8.9			6.7
Tax-exempt interest on municipal obligations		(1.0	)		(1.7	)		(1.1	)		(1.8	)
Increase in cash value of insurance policies		(0.7	)		(1.0	)		(0.7	)		(1.2	)
Low income housing tax credits		(0.6	)		(0.7	)		(0.8	)		(0.7	)
Equity compensation		(0.4	)		(2.1	)		(0.2	)		(1.3	)
Nondeductible merger expenses		0.3			—			0.3			—
Other		0.4			(0.1	)		0.5			0.2

Effective Tax Rate		27.8	%		36.0	%		27.9	%		36.9	%

The effective combined Federal and State income tax rate on income was 27.8% and 36.0% for the three months ended June 30, 2018 and 2017, respectively. This decrease in effective combined Federal and State income tax rate was due primarily to a decrease in the Federal tax rate from 35% to 21% effective January 1, 2018. The effective combined Federal and State income tax rate was greater than the Federal statutory tax rate due to State income tax expense of $2,315,000 and $2,143,000, for the three months ended June 30, 2018 and 2017, respectively, that were partially offset by the effects of tax-exempt income of $1,042,000 and $1,042,000, respectively, from investment securities, $656,000 and $627,000, respectively, from increase in cash value of life insurance, low-income housing tax credits of $121,000 and $50,000, respectively, $84,000 and $607,000, respectively, of equity compensation excess tax benefits, and $324,000 of nondeductible merger expense during the three months ended June 30, 2018. The low income housing tax credits and the equity compensation excess tax benefits represent direct reductions in tax expense.

The effective combined Federal and State income tax rate on income was 27.9% and 36.9% for the six months ended June 30, 2018 and 2017, respectively. This decrease in effective combined Federal and State income tax rate was due primarily to a decrease in the Federal tax rate from 35% to 21% effective January 1, 2018. The effective combined Federal and State income tax rate was greater than the Federal statutory tax rate due to State income tax expense of $4,522,000 and $4,195,000, respectively, in these periods that were partially offset by the effects of tax-exempt income of $2,083,000 and $2,083,000, respectively, from investment securities, $1,264,000 and $1,419,000, respectively, from increase in cash value of life insurance, low-income housing tax credits of $311,000 and $171,000, respectively, $85,000 and $697,000, respectively, of equity compensation related excess tax benefits and $667,000 of nondeductible merger expense during the six months ended June 30, 2018.. The low income housing tax credits and the equity compensation excess tax benefits represent direct reductions in tax expense.

Financial Condition

Investment Securities

Investment securities available for sale increased $26,262,000 to $754,207,000 as of June 30, 2018, compared to December 31, 2017. This increase is attributable to purchases of $32,906,000, maturities and principal repayments of $81,300,000, a decrease in fair value of investments securities available for sale of $21,304,000 and amortization of net purchase price premiums of $828,000.

The following table presents the available for sale investment securities portfolio by major type as of June 30, 2018 and December 31, 2017:


(dollars in thousands)	June 30, 2018					December 31, 2017
	Fair Value		%			Fair Value		%
Debt securities available for sale:
Obligations of U.S. government corporations and agencies	$	635,428		84.3	%	$	604,789		83.1	%
Obligations of states and political subdivisions		118,779		15.7	%		123,156		16.9	%

Total debt securities available for sale	$	754,207		100.0	%	$	727,945		100.0	%

Investment securities held to maturity decreased $37,099,000 to $477,745,000 as of June 30, 2018, as compared to December 31, 2017. This decrease is attributable to principal repayments of $36,587,000, and amortization of net purchase price premiums of $512,000.

The following table presents the held to maturity investment securities portfolio by major type as of June 30, 2018 and December 31, 2017:


(dollars in thousands)	June 30, 2018					December 31, 2017
	Cost Basis		%			Cost Basis		%
Securities held to maturity:
Obligations of U.S. government corporations and agencies	$	463,162		96.9	%	$	500,271		97.2	%
Obligations of states and political subdivisions		14,583		3.10	%		14,573		2.80	%

Total securities held to maturity	$	477,745		100	%	$	514,844		100.0	%

Additional information about the investment portfolio is provided in Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements at Item 1 of Part I of this report.

Restricted Equity Securities

Restricted equity securities were $16,956,000 at June 30, 2018 and December 31, 2017. The entire balance of restricted equity securities at June 30, 2018 and December 31, 2017 represent the Company’s investment in the Federal Home Loan Bank of San Francisco (“FHLB”).

Additional information about the restricted equity securities is provided in Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements at Item 1 of Part I of this report.

Loans

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

The majority of the Company’s loans are direct loans made to individuals, farmers and local businesses. The Company relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.

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


(in thousands)	June 30,		December 31,
	2018		2017
Real estate mortgage	$	2,401,040	$	2,300,322
Consumer		350,925		356,874
Commercial		237,619		220,412
Real estate construction		156,729		137,557

Total loans	$	3,146,313	$	3,015,165

At June 30, 2018 loans, including net deferred loan costs, totaled $3,146,313,000 which was a $131,148,000 (4.4%) increase over the balances at December 31, 2017. Demand for all categories of loans was moderate to good during the six months ended June 30, 2018.

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


	June 30,			December 31,
	2018			2017
Real estate mortgage		76.3	%		76.3	%
Consumer		11.2	%		11.8	%
Commercial		7.5	%		7.3	%
Real estate construction		5.0	%		4.6	%

Total loans		100	%		100	%

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 losses inherent in existing loans and leases, 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 original 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.

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’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for impaired originated 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 were based on historical loss experience by product type and prior risk rating.

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.

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 three months ended June 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $341,000 and $185,000, respectively. Interest income actually recognized on these originated loans during the three months ended June 30, 2018 and 2017 was $53,000 and $14,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the three months ended June 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $26,000 and $62,000, respectively. Interest income actually recognized on these PNCI loans during the three months ended June 30, 2018 and 2017 was $12,000 and $12,000.

Interest income on originated nonaccrual loans that would have been recognized during the six months ended June 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $626,000 and $374,000, respectively. Interest income actually recognized on these originated loans during the six months ended June 30, 2018 and 2017 was $75,000 and $16,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the six months ended June 30, 2018 and 2017, if all such loans had been current in accordance with their original terms, totaled $54,000 and $98,000. Interest income actually recognized on these PNCI loans during the six months ended June 30, 2018 and 2017 was $11,000 and $12,000.

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 Company’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:


(dollars in thousands)	June 30,			December 31,
	2018			2017
Performing nonaccrual loans	$	20,516		$	20,937
Nonperforming nonaccrual loans		4,904			3,176

Total nonaccrual loans		25,420			24,113
Originated and PNCI loans 90 days past due and still accruing		—			281

Total nonperforming loans		25,420			24,394
Foreclosed assets		1,374			3,226

Total nonperforming assets	$	26,794		$	27,620

Nonperforming assets to total assets		0.55	%		0.58	%
Nonperforming loans to total loans		0.81	%		0.81	%
Allowance for loan losses to nonperforming loans		116	%		124	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		1.67	%		1.77	%

The following table set forth the amount of the Company’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:


	June 30, 2018
(dollars in thousands)	Originated			PNCI			PCI – cash basis			PCI - other			Total
Performing nonaccrual loans	$	12,754		$	1,907		$	1,517		$	4,338		$	20,516
Nonperforming nonaccrual loans		4,323			113			13			455			4,904

Total nonaccrual loans		17,077			2,020			1,530			4,793			25,420
Originated and PNCI loans 90 days past due and still accruing		—			—			—			—			—

Total nonperforming loans		17,077			2,020			1,530			4,793			25,420
Foreclosed assets		584			—			—			790			1,374

Total nonperforming assets	$	17,661		$	2,020		$	1,530		$	5,583		$	26,794

U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans	$	301			—			—			—		$	301
Nonperforming assets to total assets		0.36	%		0.04	%		0.03	%		0.11	%		0.54	%
Nonperforming loans to total loans		0.54	%		0.06	%		0.05	%		0.15	%		0.80	%
Allowance for loan losses to nonperforming loans		170	%		37	%		0.52	%		3.34	%		118	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		1.35	%		2.44	%		68.91	%		23.91	%		1.67	%


	December 31, 2017
(dollars in thousands)	Originated			PNCI			PCI – cash basis			PCI - other			Total
Performing nonaccrual loans	$	12,942		$	1,305		$	2,056		$	4,634		$	20,937
Nonperforming nonaccrual loans		2,520			158			13			485			3,176

Total nonaccrual loans		15,462			1,463			2,069			5,119			24,113
Originated loans 90 days past due and still accruing		—			281			—			—			281

Total nonperforming loans		15,462			1,744			2,069			5,119			24,394
Noncovered foreclosed assets		1,836			—			—			1,390			3,226
Covered foreclosed assets		—			—			—			—			—

Total nonperforming assets	$	17,298		$	1,744		$	2,069		$	6,509		$	27,620

U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans	$	358											$	358
Nonperforming assets to total assets		0.36	%		0.04	%		0.04	%		0.14	%		0.58	%
Nonperforming loans to total loans		0.57	%		0.56	%		100	%		37.94	%		0.81	%
Allowance for loan losses to nonperforming loans		188	%		53	%		1.00	%		5.00	%		124	%
Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed		1.32	%		2.22	%		64.71	%		22.1	%		1.77	%

Changes in nonperforming assets during the three months ended June 30, 2018


(in thousands):	Balance at June 30, 2018		New NPA		Advances/ Capitalized Costs		Pay-downs /Sales /Upgrades			Charge-offs/ Write-downs			Transfers to Foreclosed Assets		Category Changes			Balance at March 31, 2018
Real estate mortgage:
Residential	$	4,207	$	281	$	—	$	(226	)	$	(51	)	$	—	$	—		$	4,203
Commercial		11,885		1,184		—		(764	)		(15	)		—		—			11,480
Consumer
Home equity lines		2,637		1,042		273		(1,515	)		(24	)		—		(63	)		2,924
Home equity loans		2,725		1,068		—		(124	)		—			—		63			1,718
Other consumer		8		—		—		(25	)		(4	)							37
Commercial		3,958		217		—		(224	)		(54	)		—		—			4,019
Construction:
Residential		—		—		—		—			—			—		—			—
Commercial		—		—		—		—			—			—		—			—

Total nonperforming loans		25,420		3,792		273		(2,878	)		(148	)		—		—			24,381
Foreclosed assets		1,374		—		—		(190	)		—			—		—			1,564

Total nonperforming assets	$	26,794	$	3,792	$	273	$	(3,068	)	$	(148	)	$	—	$	—		$	25,945

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

Nonperforming assets increased during the second quarter of 2018 by $849,000 (3.3%) to $26794,000 at June 30, 2018 compared to $25,945,000 at March 31, 2018. The increase in nonperforming assets during the second quarter of 2018 was primarily the result of new nonperforming loans totaling $3,792,000 and advances on nonperforming loans of $273,000, that were partially offset by sales or upgrades of nonperforming loans of $2,373,000, dispositions of foreclosed assets totaling $190,000, and loan charge-offs of $134,000.

The $3,792,000 in new nonperforming loans during the second quarter of 2018 was comprised of increases of $281,000 on two residential real estate loans, $1,184,000 on six commercial real estate loans, $2,111,000 on 31 home equity lines and loans, and $216,000 on 6 C&I loans. Related charge-offs are discussed below.

Loan charge-offs during the three months ended June 30, 2018

In the second quarter of 2018, the Company recorded $211,000 in loan charge-offs and $107,000 in deposit overdraft charge-offs less $448,000 in loan recoveries and $59,000 in deposit overdraft recoveries resulting in $189,000 of net recoveries. Primary causes of the loan charges taken in the second quarter of 2018 were gross charge-offs of $15,000 on 1 commercial real estate loan, $75,000 on 3 home equity lines and loans, $67,000 on 19 other consumer loans, and $54,000 on one C&I loans.

Total charge-offs were generally comprised 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.

Changes in nonperforming assets during the three months ended March 31, 2018


(in thousands):	Balance at				Advances/		Pay-downs						Transfers to					Balance at
	March 31,		New		Capitalized		/Sales			Charge-offs/			Foreclosed		Category			December 31,
	2018		NPA		Costs		/Upgrades			Write-downs			Assets		Changes			2017
Real estate mortgage:
Residential	$	4,203	$	506	$	—	$	(206	)	$	—		$	—	$	164		$	3,739
Commercial		11,480		385		—		(823	)		—			—		98			11,820
Consumer
Home equity lines		2,924		562		—		(876	)		(80	)		—		(164	)		3,482
Home equity loans		1,718		143		—		(60	)		(1	)		—		—			1,636

Other consumer		37		113		—		(4	)		(83	)		—		—			11
Commercial		4,019		1,141		—		(525	)		(205	)		—		(98	)		3,706
Construction:
Residential		—		—		—		—			—			—		—			—
Commercial		—		—		—		—			—			—		—			—

Total nonperforming loans		24,381		2,850				(2,494	)		(369	)							24,394
Foreclosed assets		1,564		—		—		(1,572	)		(90	)		—		—			3,226

Total nonperforming assets	$	25,945	$	2,850	$	—	$	(4,066	)	$	(459	)	$	—	$	—		$	27,620

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

Nonperforming assets decreased during the first quarter of 2018 by $1,676,000 (6.1%) to $25,945,000 at March 31, 2018 compared to $27,620,000 at December 31, 2017. The decrease in nonperforming assets during the first quarter of 2018 was primarily the result of sales or upgrades of nonperforming loans to performing status totaling $2,494,000, dispositions of foreclosed assets totaling $1,572,000, loan charge-offs of $369,000, and write-downs on foreclosed assets totaling $90,000, that were partially offset by new nonperforming loans of $2,850,000.

The $2,850,000 in new nonperforming loans during the first quarter of 2018 was comprised of increases of $506,000 on six residential real estate loans, $385,000 on one commercial real estate loan, $705,000 on 14 home equity lines and loans, $113,000 on 20 consumer loans, and $1,141,000 on 14 C&I loans. Related charge-offs are discussed below.

Loan charge-offs during the three months ended March 31, 2018

In the first quarter of 2018, the Company recorded $369,000 in loan charge-offs and $111,000 in deposit overdraft charge-offs less $296,000 in loan recoveries and $70,000 in deposit overdraft recoveries resulting in $114,000 of net charge-offs. Primary causes of the loan charges taken in the first quarter of 2018 were gross charge-offs of $81,000 on three home equity lines and loans, $83,000 on 19 other consumer loans, and $205,000 on seven C&I loans.

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 original 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

•

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

•

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

•

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

•

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.

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 allowance for loan losses as of the dates indicated:


(dollars in thousands)	June 30,			December 31,
(dollars in thousands)	2018			2017
Allowance for originated and PNCI loan losses:
Specific allowance	$	2,889		$	2,699
Formula allowance		14,904			17,100
Environmental factors allowance		11,592			10,252

Allowance for originated and PNCI loan losses		29,385			30,051
Allowance for PCI loan losses		139			272

Allowance for loan losses	$	29,524		$	30,323

Allowance for loan losses to loans		0.94	%		1.01	%

For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Provision for Loan Losses” at “Results of Operations” and “Allowance for Loan Losses” above. Based on the current conditions of the loan portfolio, management believes that the $29,524,000 allowance for loan losses at June 30, 2018 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 as of the dates indicated:


(in thousands)	June 30,		December 31,
(in thousands)	2018		2017
Real estate mortgage	$	13,598	$	13,758
Consumer		7,137		8,227
Commercial		6,378		6,512
Real estate construction		2,411		1,826

Total allowance for loan losses	$	29,524	$	30,323

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 as of the dates indicated:


	June 30,			December 31,
	2018			2017
Real estate mortgage		46.1	%		45.4	%
Consumer		24.2	%		27.1	%
Commercial		21.6	%		21.5	%
Real estate construction		8.2	%		6.0	%

Total allowance for loan losses		100.0	%		100.0	%

The following table summarizes the allocation of the allowance for loan losses as a percentage of the total loans for each loan category as of the dates indicated:


	June 30,			December 31,
	2018			2017
Real estate mortgage		0.57	%		0.60	%
Consumer		2.03	%		2.31	%
Commercial		2.68	%		2.95	%
Real estate construction		1.54	%		1.33	%

Total allowance for loan losses		0.94	%		1.01	%

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 periods indicated (dollars in thousands):


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Allowance for loan losses:
Balance at beginning of period	$	29,973		$	31,017		$	30,323		$	32,503
Provision for loan losses		(638	)		(796	)		(874	)		(2,353	)
Loans charged off:
Real estate mortgage:
Residential		(51	)		—			(52	)		—
Commercial		(15	)		(150	)		(15	)		(150	)
Consumer:
Home equity lines		(24	)		(13	)		(104	)		(84	)
Home equity loans		—			(206	)		—			(237	)
Other consumer		(174	)		(308	)		(368	)		(482	)
Commercial		(54	)		(764	)		(259	)		(897	)
Construction:
Residential		—			(1,071	)		—			(1,071	)
Commercial		—			—			—			—

Total loans charged off		(318	)		(2,512	)		(798	)		(2,921	)
Recoveries of previously charged-off loans:
Real estate mortgage:
Residential		—			—			—			—
Commercial		21			17			36			127
Consumer:
Home equity lines		317			252			526			298
Home equity loans		23			13			37			25
Other consumer		66			68			144			209
Commercial		80			84			130			254
Construction:
Residential		—			—			—			—
Commercial		—			—			—			1

Total recoveries of previously charged off loans		507			434			873			914

Net (charge-offs) recoveries		189			(2,078	)		75			(2,007	)

Balance at end of period	$	29,524		$	28,143		$	29,524		$	28,143


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Reserve for unfunded commitments:
Balance at beginning of period	$	3,864		$	2,734		$	3,164		$	2,719
(Reversal of) provision for losses – unfunded commitments		(137	)		(135	)		563			(120	)

Balance at end of period	$	3,727		$	2,599		$	3,727		$	2,599

Balance at end of period:
Allowance for loan losses							$	29,524		$	28,143
Reserve for unfunded commitments								3,727			2,599

Allowance for loan losses and reserve for unfunded commitments							$	33,251		$	30,742

As a percentage of total loans at end of period:
Allowance for loan losses								0.94	%		1.00	%
Reserve for unfunded commitments								0.12	%		0.09	%

Allowance for loan losses and reserve for unfunded commitments								1.06	%		1.09	%

Average total loans	$	3,104,126		$	2,783,686		$	3,066,152		$	2,771,115
Ratios (annualized):
Net charge-offs (recoveries) during period to average loans outstanding during period		(0.02	)%		0.30	%		(0.01	)%		0.14	%
Provision for (benefit from) loan losses to average loans outstanding during period		(0.08	)%		(0.11	)%		(0.11	)%		(0.17	)%

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 period indicated (dollars in thousands):


	Balance at June 30, 2018		New NPA		Advances/ Capitalized Costs/Other		Sales			Valuation Adjustments			Transfers from Loans		Balance at March 31, 2018
Land & Construction	$	445	$	—	$	—	$	(190	)	$	—		$	—	$	635
Residential real estate		836		—		—		—			—			—		836
Commercial real estate		93		—		—		—			—			—		93

Total foreclosed assets	$	1,374	$	—	$	—	$	(190	)	$	—		$	—	$	1,564


	Balance at March 31, 2018		New NPA		Advances/ Capitalized Costs/Other		Sales			Valuation Adjustments			Transfers from Loans		Balance at December 31, 2017
Land & Construction	$	635	$	—	$	—	$	(1,151	)	$	—		$	—	$	1,786
Residential real estate		836		—		—		(277	)		(73	)		—		1,186
Commercial real estate		93		—		—		(144	)		(17	)		—		254

Total foreclosed assets	$	1,564	$	—	$	—	$	(1,572	)	$	(90	)	$	—	$	3,226

Premises and Equipment

Premises and equipment were comprised of:


	June 30,			December 31,
	2018			2017
	(In thousands)
Land & land improvements	$	9,973		$	9,959
Buildings		51,065			50,340
Furniture and equipment		38,172			35,939

		99,210			96,238
Less: Accumulated depreciation		(42,066	)		(40,644	)

		57,144			55,594
Construction in progress		1,870			2,148

Total premises and equipment	$	59,014		$	57,742

During the six months ended June 30, 2018, premises and equipment increased $1,272,000 due to purchases of $4,119,000, that were partially offset by depreciation of $2,757,000 and disposals of premises and equipment with net book value of $90,000.

Intangible Assets

Intangible assets at were comprised of the following as of the dates indicated:


	June 30,		December 31,
	2018		2017
	(In thousands)
Core-deposit intangible	$	4,496	$	5,174
Goodwill		64,311		64,311

Total intangible assets	$	68,807	$	69,485

The core-deposit intangible assets resulted from the Bank’s acquisition of three bank branches from Bank of America on March 18, 2016, North Valley Bancorp in 2014, Citizens in 2011, and Granite in 2010. The goodwill intangible asset includes $849,000 from the acquisition of three bank branches from Bank of America on March 18, 2016, $47,943,000 from the North Valley Bancorp acquisition in 2014, and $15,519,000 from the North State National Bank acquisition in 2003. Amortization of core deposit intangible assets amounting to $339,000 and $352,000 was recorded during the three months ended June 30, 2018 and 2017, respectively. Amortization of core deposit intangible assets amounting to $678,000 and $711,000 was recorded during the six months ended June 30, 2018 and 2017, respectively.

Investment in Low Income Housing Tax Credit Funds

During the six months ended June 30, 2018, the Company’s investment in low income housing tax credit funds, recorded in other assets, decreased $182,000 to $16,672,000 due amortization of such investments. During the six months ended June 30, 2018, the Company made $2,585,000 of capital contributions to several of its five existing low income housing tax credit fund investments reducing its commitment for future capital contributions to $5,969,000 at June 30, 2018. This commitment for low income housing tax credit funds is recorded in other liabilities.

Deposits

During the six months ended June 30, 2018, the Company’s deposits increased $68,091,000 (1.7%) to $4,077,222,000. Included in the June 30, 2018 and December 31, 2017 certificate of deposit balances are $50,000,000 from the State of California. The Company participates in a deposit program offered by the State of California whereby the State may make deposits at the Company’s request subject to collateral and creditworthiness constraints. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company. See Note 13 to the condensed consolidated financial statements at Item 1 of Part I of this report for more information about the Company’s deposits.

Long-Term Debt

See Note 16 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s other borrowings, including long-term debt.

Junior Subordinated Debt

See Note 17 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s junior subordinated debt.

Off-Balance Sheet Arrangements

See Note 18 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s commitments and contingencies including off-balance-sheet arrangements.

Capital Resources

The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management.

The Company adopted and announced 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. During the six months ended June 30, 2018, the Company did not repurchase any shares under this plan. This plan has no stated expiration date for the repurchases. As of June 30, 2018, the Company had repurchased 166,600 shares under this plan, which left 333,400 shares available for repurchase under the plan. Shares that are repurchased in accordance with the provisions of a Company stock option plan or equity compensation plan are not counted against the number of shares repurchased under the repurchase plan adopted on August 21, 2007.

The Company’s primary capital resource is shareholders’ equity, which was $512,344,000 at June 30, 2018. This amount represents an increase of $6,536,000 (1.3%) from December 31, 2017, the net result of comprehensive income for the period of $14,075,000, the effect of equity compensation vesting of $722,000, and the exercise of stock options of $223,000, that were partially offset by dividends paid of $7,813,000, and repurchase of common stock of $671,000. The Company’s ratio of equity to total assets was 10.5% and 10.6% as of June 30, 2018 and December 31, 2017, respectively. We believe that the Company and the Bank were in compliance with applicable minimum capital requirements set forth in the final Basel III Capital rules as of June 30, 2018. The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:


	June 30, 2018						December 31, 2017
	Ratio			Minimum Regulatory Requirement			Ratio			Minimum Regulatory Requirement
Total capital		13.91	%		9.875	%		14.07	%		9.25	%
Tier I capital		13.07	%		7.875	%		13.18	%		7.25	%
Common equity Tier 1 capital		11.68	%		6.375	%		11.72	%		5.75	%
Leverage		10.92	%		4.00	%		10.80	%		4.00	%

See Note 19 and Note 29 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.

Liquidity

The Company’s principal source of asset liquidity is cash at Federal Reserve and other banks and marketable investment securities available for sale. At June 30, 2018, cash at Federal Reserve and other banks in excess of reserve requirements and investment securities available for sale totaled $853,191,000, or 17.5% of total assets, representing an increase of $1,886,000 (0.2%) from $851,305,000, or 17.3% of total assets at December 31, 2017. This decrease in cash and securities available for sale is due mainly to loan growth in excess of deposit growth that was partially offset by an increase in other borrowings and a net reduction in securities during the six months ended June 30, 2018. The Company’s profitability during the first six months of 2018 generated cash flows from operations of $32,944,000 compared to $27,566,000 during the first six months of 2017. Maturities of investment securities produced cash inflows of $69,493,000 during the six months ended June 30, 2018 compared to $70,358,000 for the six months ended June 30, 2017. During the six months ended June 30, 2018, the Company invested in securities totaling $81,300,000 and net loan principal increases of $131,073,000 compared to $145,584,000 invested in securities and $69,491,000 net loan principal increases, respectively, during the first six months of 2017. Proceeds from the sale of foreclosed assets accounted for $2,150,000 and $1,424,000 of investing sources of funds during the six months ended June 30, 2018 and 2017, respectively. The purchase of premises and equipment accounted for $4,119,000 and $5,885,000 of investing uses of funds during the six months ended June 30, 2018 and 2017, respectively. These changes in investment and loan balances, proceeds from sale of foreclosed assets and premises and equipment contributed to net cash used by investing activities of $144,813,000 during the six months ended June 30, 2018, compared to net cash used by investing activities of $145,191,000 during the six months ended June 30, 2017. Financing activities provided net cash of $90,503,000 during the six months ended June 30, 2018, compared to net cash used by financing activities of $20,328,000 during the six months ended June 30, 2017. Deposit balance increases accounted for $68,091,000 of financing sources of funds during the six months ended June 30, 2018. Deposit balance decreases accounted for $17,138,000 of financing uses of funds during the six months ended June 30, 2017. Net changes in other borrowings accounted for $30,673,000 of financing sources of funds during the six months ended June 30, 2018, compared to $5,067,000 of financing sources of funds during the six months ended June 30, 2017. Dividends paid used $7,813,000 and $7,328,000 of cash during the six months ended June 30, 2018 and 2017, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of June 30, 2018 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2017

Item 4.

Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2018. Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2018.

During the six months ended June 30, 2018, there were no changes in our internal controls or in other factors that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

See Note 18 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s involvement in litigation.

Item 1A – Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I—Item 1A—Risk Factors” in our Form 10-K for the year ended December 31, 2017 which are incorporated by reference herein. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

Information concerning additional risk factors related to the merger of the Company and FNB is available in the Company’s registration statement on Form S-4 SEC (filed on March 21, 2018 and amended on April 14, 2018).

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

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 three months ended June 30, 2018:


					(c) Total number of
					shares purchased as of		(d) Maximum number
					part of publicly		shares that may yet
	(a) Total number		(b) Average price		announced plans or		be purchased under the
Period	of shares purchased ⁽¹⁾		paid per share		programs		plans or programs ⁽²⁾
April 1-30, 2018		—	$	—		—		333,400
May 1-31, 2018		17,086	$	39.01		—		333,400
June 1-30, 2018		—	$	—		—		333,400

Total		17,086	$	39.01		—		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 condensed consolidated financial statements at Item 1 of Part I 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.

Item 6 – Exhibits

EXHIBIT INDEX


Exhibit No.		Exhibit

3.1		Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to TriCo’s Current Report on Form 8-K filed on March 17, 2009).

3.2		Bylaws of TriCo, as amended (incorporated by reference to Exhibit 3.1 to TriCo’s Current Report on Form 8-K filed February 17, 2011).

4.1		Instruments defining the rights of holders of the long-term debt securities of the TriCo and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. TriCo hereby agrees to furnish copies of these instruments to the Securities and Exchange Commission upon request.

10.1*		Form of Change of Control Agreement among TriCo, Tri Counties Bank and each of Dan Bailey, Craig Carney, John Fleshood, Richard O’Sullivan, and Thomas Reddish (incorporated by reference to Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed on July 23, 2013).

10.2*		TriCo’s 2001 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).

10.3*		TriCo’s 2009 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed April 3, 2013).

10.4*		Amended Employment Agreement between TriCo and Richard Smith dated as of March 28, 2013 (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed April 3, 2013).

10.5*		Transaction Bonus Agreement between TriCo Bancshares and Richard P. Smith dated as of August 7, 2014 (incorporated by reference to Exhibit 10.4 to TriCo’s Form 8-K filed on August 13, 2014).

10.6*		Tri Counties Bank Executive Deferred Compensation Plan restated April 1, 1992, and January 1, 2005 (incorporated by reference to Exhibit 10.9 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

10.7*		Tri Counties Bank Deferred Compensation Plan for Directors effective January 1, 2005 (incorporated by reference to Exhibit 10.10 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

10.8*		2005 Tri Counties Bank Deferred Compensation Plan for Executives and Directors effective January 1, 2005 (incorporated by reference to Exhibit 10.11 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

10.9*		Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, and amended and restated January 1, 2004 (incorporated by reference to Exhibit 10.12 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).

10.10*		2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 (incorporated by reference to Exhibit 10.13 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).

10.11*		Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January 1, 2004 (incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).

10.12*		2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January 1, 2004 (incorporated by reference to Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).

10.13*		Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Richard O’Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith (incorporated by reference to Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).

10.14*		Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Vereschagin (incorporated by reference to Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).

10.15*		Form of Tri Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Craig Carney, Richard Miller, Richard O’Sullivan, and Thomas Reddish (incorporated by reference to Exhibit 10.16 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).

10.16*		Form of Tri Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Carroll Taresh, and Alex Vereschagin (incorporated by reference to Exhibit 10.17 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).

10.17*		Form of Indemnification Agreement between TriCo and its directors and executive officers (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed September 10, 2013).

10.18*		Form of Indemnification Agreement between Tri Counties Bank its directors and executive officers (incorporated by reference to Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed September 10, 2013).

10.19*		Form of Stock Option Agreement and Grant Notice pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to TriCo’s Annual Report on Form 10-K filed March 1, 2018).

10.20*		Form of Restricted Stock Unit Agreement and Grant Notice for Non-Employee Directors pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed November 14, 2014).

Item 6 – Exhibits (continued)



10.21*		Form of Restricted Stock Unit Agreement and Grant Notice for Executives pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to TriCo’s Current Report on Form 8-K filed November 14, 2014).

10.22*		Form of Performance Award Agreement and Grant Notice pursuant to TriCo’s 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to TriCo’s Current Report on Form 8-K filed August 13, 2014).

10.23*		John Fleshood Offer Letter dated November 3, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed on November 30, 2016).

10.24*		Amendment to John Fleshood Offer Letter dated December 19, 2016 (incorporated by reference to Exhibit 10.1 to TriCo’s Current Report on Form 8-K filed on November 30, 2016).

31.1		Rule 13a-14(a)/15d-14(a) Certification of CEO

31.2		Rule 13a-14(a)/15d-14(a) Certification of CFO

32.1		Section 1350 Certification of CEO

32.2		Section 1350 Certification of CFO

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

*	Management contract or compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


						TRICO BANCSHARES
						(Registrant)

Date: August 9, 2018						/s/ Thomas J. Reddish
						Thomas J. Reddish
						Executive Vice President and Chief Financial Officer
						(Duly authorized officer and principal accounting and financial officer)