What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 181 added, 323 removed, 422 unchanged (54% of the section changed)

51 unchanged sentences

Financial Highlights

Performance highlights and other developments for the Company as of or for the three and nine months ended September 30, 2020 included the following:

• For the three and nine months ended September 30, 2020, the Company’s return on average assets was 0.95% and 0.79%, respectively, and the return on average equity was 7.79% and 6.13%, respectively.

• As of September 30, 2020, the Company reported total loans, total assets and total deposits of $4.83 billion, $7.45 billion and $6.34 billion, respectively.

• The loan to deposit ratio was 76.12% as of September 30, 2020, as compared to 76.84% at June 30, 2020 and 78.98% at September 30, 2019.

• For the current quarter, net interest margin was 3.72% on a tax equivalent basis as compared to 4.44% in the quarter ended September 30, 2019, and a decrease of 38 basis points from the 4.10% in the trailing quarter.

• Non-interest bearing deposits as a percentage of total deposits were 39.71% at September 30, 2020, as compared to 39.81% at June 30, 2020 and 33.56% at September 30, 2019.

• The average rate of interest paid on deposits, including non-interest-bearing deposits, decreased to 0.09% for the third quarter of 2020 as compared with 0.12% for the trailing quarter, and also decreased by 14 basis points from the average rate paid of 0.23% during the same quarter of the prior year.

• Non-performing assets to total assets were 0.34% at September 30, 2020, as compared to 0.31% as of June 30, 2020, and 0.31% at September 30, 2019.

• Credit provision expense for loans and debt securities was $7.6 million during the quarter ended September 30, 2020, as compared to provision expense of $22.2 million during the trailing quarter ended June 30, 2020, and a reversal of provision totaling ($0.3) million for the three month period ended September 30, 2019.

• Gain on sale of loans for the three and nine months ended September 30, 2020 totaled $3.0 million and $5.7 million, as compared to $1.2 million and $2.2 million for the equivalent periods ended September 30, 2019, respectively.

• The efficiency ratio was 59.44% for the third quarter of 2020, as compared to 59.69% in the trailing quarter and 58.82% in the same quarter of the 2019 year.

Performance highlights and other developments for the Company as of or for the three months ended March 31, 2021 included the following:

• For the three months ended March 31, 2021, the Company’s return on average assets was 1.75% and the return on average equity was 14.51%.

• Organic loan growth, excluding PPP was $68.19 million (6.16% annualized) for the quarter while total loan growth, excluding PPP was $169.78 million (15.3% annualized) for the quarter.

• For the current quarter, net interest margin was 3.74% on a tax equivalent basis as compared to 4.34% in the quarter ended March 31, 2020, and a decrease of 5 basis points from the 3.79% in the trailing quarter.

• The efficiency ratio was 50.42% for the first quarter of 2021, as compared to 55.11% in the trailing quarter and 59.66% in the same quarter of the prior year.

• As of March 31, 2021, the Company reported total loans, total assets and total deposits of $4.97 billion, $8.03 billion and $6.86 billion, respectively.

As a direct result of the considerable deposit growth experienced over the last twelve months, the loan to deposit ratio was 72.37% as of March 31, 2021, as compared to 73.21% at December 31, 2020 and 81.05% at March 31, 2020.

• Non-interest bearing deposits as a percentage of total deposits were 40.31% at March 31, 2021, as compared to 39.68% at December 31, 2020 and 34.86% at March 31, 2020.

• The average rate of interest paid on deposits, including non-interest-bearing deposits, decreased to 0.06% for the first quarter of 2021 as compared with 0.07% for the trailing quarter, and decreased by 13 basis points from the average rate paid of 0.19% during the same quarter of the prior year.

• Total outstanding loan deferral modifications under the CARES Act legislation was $48.27 million as of March 31, 2021, of which $18.0 million related to second deferrals, and an additional $1.9 million related to third deferrals.

• The reversal of provision for credit losses for loans and debt securities was $6.1 million during the quarter ended March 31, 2021, as compared to a provision expense of $4.9 million during the trailing quarter ended December 31, 2020, and a provision expense totaling $8.1 million for the three month period ended March 31, 2020.

• The allowance for credit losses to total loans was 1.73% as of March 31, 2021, compared to 1.93% as of December 31, 2020, and 1.15% as January 1, 2020, following the Company's adoption of CECL.

Non-performing assets to total assets were 0.39% at March 31, 2021, as compared to 0.39% as of December 31, 2020, and 0.31% at March 31, 2020.

• Gain on sale of loans for the three months ended March 31, 2021 totaled $3.2 million, as compared to $3.5 million during the quarter ended December 31, 2020 and $0.9 million for the quarter ended March 31, 2020.

SBA Paycheck Protection Program and COVID Deferrals

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

As a Small Business Administration (SBA) Preferred Lender, the Company was able to provide PPP loans to small business customers.

As of the quarter ended September 30, 2020, the total balance outstanding of PPP loans totaled $437,793,000 as compared to total PPP originations of $438,510,000.

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

As of September 30, 2020 there was approximately $11,846,000 in net deferred fee income expected to be recognized.

During the three and nine months ended September 30, 2020, the Company recognized $2,603,000 and $4,959,000, respectively, in interest and fees on PPP loans.

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

The Company originated loans under this program beginning in April, 2020 through July, 2020 (Round 1).

Following the SBA's announcement of a second round of PPP lending with streamlined requirements for both borrowers and lenders in December 2020, the Company resumed accepting applications in January, 2021 (Round 2).

The SBA has announced the PPP program will end on May 31, 2021.

As of March 31, 2021, the total gross balance outstanding of PPP loans (Round 1) was $193,958,000 (948 loans) as compared to total round 1 PPP originations of $438,510,000.

Included in the balance of outstanding PPP loans as of March 31, 2021 are approximately 115 loans totaling $75,669,000 that have been submitted to and are pending forgiveness by the SBA.

In connection with the origination of the Round 1 loans, the Company earned approximately $15,735,000 in loan fees, offset by deferred loan costs of approximately $763,000, the net of which will be recognized over the earlier of loan maturity (generally 24 months), repayment or receipt of forgiveness confirmation.

As of March 31, 2021 there was approximately $2,358,000 in net deferred fee income remaining to be recognized.

During the three months ended March 31, 2021, the Company recognized $4,854,000 in fees on round 1 PPP loans.

As of March 31, 2021, the total gross balance outstanding of PPP loans (Round 2) was $176,316,000 (1,536 loans) as compared to round 2 originations of the same amount.

Through March 31, 2021 and in connection with the origination of the Round 2 loans, the Company earned approximately $7,850,000 in loan fees, offset by deferred loan costs of approximately $400,000, the net of which will be recognized over the earlier of loan maturity (generally 60 months), repayment or receipt of forgiveness confirmation.

As of March 31, 2021 there was approximately $7,072,000 in net deferred fee income remaining to be recognized.

During the three months ended March 31, 2021, the Company recognized $378,000 in fees on round 2 PPP loans.

Based on application and approval activity occurring subsequent to March 31, 2021, management anticipates that total round 2 PPP originations will approximate 1,700 loans for $190,215,000 and which are expected generate $9,055,000 in fees from the SBA.

COVID Deferrals

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

The Company is closely monitoring the effects of the pandemic on our loan and deposit customers.

The applicable period for this relief, originally expected to expire on December 31, 2020, was extended through 2021 by way of the Consolidated Appropriations Act.

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

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

The Company implemented loan programs to allow certain consumers and businesses impacted by the pandemic to defer loan principal and interest payments.

The following is a summary of COVID related loan customer modifications with outstanding balances as of September 30, 2020:

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

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

Modification Type Deferral Term

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

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

Commercial real estate:

13 unchanged sentences

Total modifications $ 48,266 1.0 % 95.7 % 4.3 % 23.3 % 59.4 % 17.3 %

Total loan modifications associated with CARES Act legislation made during the nine months ended September 30, 2020 total approximately $422.53 million of which $130.94 million remained outstanding under their modified terms as of September 30, 2020.

Approximately $95.33 million and $35.61 million of the remaining balance of loans with modified terms are expected to conclude their modification period during the quarters ended December 31, 2020 and March 31, 2021, respectively.

However, as long as the current pandemic and recessionary economic conditions continue, it is likely that additional borrowers may request an initial or subsequent modification to their loan terms.

The total loan modifications made under the CARES Act during the 2020 year are inclusive of seven borrowers with loan balances totaling approximately $26.52 million who requested and were granted a second modification and deferral.

Six of these second modification and deferrals were for a period of three additional months and as of September 30, 2020 had concluded the second deferral period and returned to their regular payment terms.

The remaining borrower whom received a second loan modification was granted a six month deferral on an outstanding loan balance of $597,000 and is scheduled to return to payment status in January 2021.

Since inception, total loan modifications associated with CARES Act legislation totaled approximately $439,346,000, of which $48,266,000 and $48,358,000 remained outstanding under their modified terms as of March 31, 2021 and December 31, 2020, respectively.

Of the remaining balance outstanding as of March 31, 2021, $18,039,000 is related to second deferrals which are expected to conclude their modification period by August, 2021 and $1,845,000 is related to third deferrals expected to conclude in October, 2021.

Typically, borrowers who requested and were granted a deferral were provided a deferral period of approximately three or six months.

Where deferral needs and the impact of the pandemic on the borrower's business were more easily defined, a more tailored deferral period was granted.

Such loans are included in the "Other" category in the table above.

The Company has elected to forgo the CARES Act Relief guidance for loans totaling $2,160,000 and including all borrowers requesting third deferrals and has deemed such loans along with a limited number of other loans to be impaired under traditional TDR guidance.

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

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

however, due to the fluidity of the current economic environment and the potential impact on borrowers no guarantees of that ability can be provided.

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

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

TRICO BANCSHARES

2 unchanged sentences

Three months ended

September 30, Nine months ended

September 30,

2020 2019 2020 2019

Net interest income $ 66,440 $ 63,192

(Provision for) reversal of credit losses (7,649) 329 (37,963) 1,392

Reversal of (provision for) credit losses 6,060 (8,070)

Non-interest income 16,110 11,820

11 unchanged sentences

At period end:

Loans, net 4,738,763 4,150,811

Loans $ 4,966,977 $ 4,379,062

Total investment securities $ 1,962,780 $ 1,382,026

15 unchanged sentences

(1) Fully taxable equivalent (FTE)

The Company reported net income of $17,606,000 for the quarter ended September 30, 2020, compared to $7,430,000 and $23,395,000 for the quarters ended June 30, 2020 and September 30, 2019, respectively.

Diluted earnings per share were $0.59, $0.25 and $0.76 for the quarters ended September 30, 2020, June 30, 2020 and September 30, 2019, respectively.

The Company announced net income of $33,649,000 for the quarter ended March 31, 2021, compared to $16,121,000 during the quarter ended March 31, 2020.

Diluted earnings per share were $1.13 for the first quarter of 2021, compared to $0.53 for the first quarter of 2020.

Results of Operations

4 unchanged sentences

Three months ended

September 30, Nine months ended

September 30,

2020 2019 2020 2019

(dollars in thousands) 2021 2020 $ Change % Change

Interest income $ 67,916 $ 66,517 $ 1,399 2.1 %

Interest expense (1,476) (3,325) 1,849 (55.6) %

FTE adjustment 254 289 811 929

Fully tax-equivalent adjustment (FTE) (1)

277 271 6 2.2 %

Net interest income (FTE) $ 66,717 $ 63,463 $ 3,254 5.1 %

3 unchanged sentences

Net interest margin less effect of acquired loan discount accretion (1)

PPP loans yield:

3.64 % 4.22 % (0.58) %

PPP loans yield, net:

Amount (included in interest income) $ 5,863 — $ 5,863

Net interest margin less effect of PPP loan yield (1)

Acquired loan discount accretion and PPP loan yield, net:

3.59 % — 3.59 %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 7,575 $ 1,748 $ 5,827

Net interest margin less effect of acquired loan discount accretion and PPP yields 3.69 % 4.28 % 3.88 % 4.40 %

Net interest margin less effect of acquired loan discount accretion and PPP loan yield (1)

3.48 % 4.22 % (0.74) %

(1) Information is presented on a fully tax-equivalent (FTE) basis.

The Company believes the use of this non-generally accepted accounting principles (non-GAAP) measure 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.

Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan.

2 unchanged sentences

and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income.

As a result of the uncertain economic environment and corresponding rate volatility, the prepayment rate of portfolio loans, inclusive of those acquired at a premium or discount, increased during the third quarter of 2020.

During the three months ended September 30, 2020, June 30, 2020, March 31, 2020, and December 31, 2019, purchased loan discount accretion was $1,876,000, $2,587,000, $1,748,000, and $2,218,000, respectively.

As a result of the uptick in interest rates, the prepayment rate of portfolio loans, inclusive of those acquired at a premium or discount, decreased during the first quarter of 2021.

During the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, purchased loan discount accretion was $1,712,000, $1,960,000, and $1,748,000, respectively.

Summary of Average Balances, Yields/Rates and Interest Differential

Net interest income (FTE) during the three months ended September 30, 2020 decreased $1,237,000 or 1.9% to $63,708,000 compared to $64,945,000 during the three months ended June 30, 2020.

Over the same period net interest margin declined 38 basis points to 3.72% as compared to 4.10% in the trailing quarter.

The decline in net interest income (FTE) was due primarily to a decline in yield on interest earning assets, which was 3.83% for the quarter ended September 30, 2020, which represents a decrease of 43 basis points over the trailing quarter and a decrease of 89 basis points over the same quarter in the prior year.

The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, remained unchanged at 3.25% during the quarter ended September 30, 2020 as it has remained at 3.25% since the quarter ended March 31, 2020, but decreased from 4.75% at December 31, 2019 and 5.00% at September 30, 2019.

Net interest income (FTE) during the three months ended March 31, 2021 increased by $3,254,000 to $66,717,000 as compared to $63,463,000 during the same quarter in the prior year.

The increase was driven nearly entirely by changes in loan volumes inclusive of PPP activity as well as continued decreases in the rates of all interest bearing liabilities.

While changes in earning asset volumes helped to increase net interest income by $14,757,000, declining rates on earning assets caused a $13,352,000 decrease in net interest income.

Average loan yields, excluding PPP, decreased 21 basis points from 5.23% during the three months ended March 31, 2020, to 5.02% during the three months ended March 31, 2021.

The 21 basis point decrease in yields on loans during the comparable three month periods ended March 31, 2021 and 2020 was entirely attributable to decreases in market rates as a result of decreases in the Wall Street Journal Prime Index as well as competitive pricing pressures.

The following table presents, for the three month 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.

3 unchanged sentences

For the three months ended

September 30, 2020 September 30, 2019

March 31, 2021 March 31, 2020

Balance Interest

32 unchanged sentences

(3) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of i nterest-earning assets, then annualized based on the number of days in the given period.

The following table presents, for the nine month 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

Nine months ended

September 30, 2020 September 30, 2019

Balance Income/

Expense Yield/

Balance Income/

Expense Yield/

Loans, excluding PPP $ 4,360,942 $ 167,747 5.14 % $ 4,070,568 $ 166,888 5.48 %

PPP loans 244,196 4,959 2.71 % — — — %

Investment securities - taxable 1,249,823 22,637 2.42 % 1,420,426 31,849 3.00 %

Investment securities - nontaxable (1)

117,745 3,515 3.99 % 138,580 4,024 3.88 %

Total investments 1,367,568 26,152 2.55 % 1,559,006 35,873 3.08 %

Cash at Federal Reserve and other banks 403,252 1,056 0.35 % 148,995 2,694 2.42 %

Total interest-earning assets 6,375,958 199,914 4.19 % 5,778,569 205,455 4.75 %

Other assets 595,617 643,130

Total assets $ 6,971,575 $ 6,421,699

Liabilities and shareholders’ equity:

Interest-bearing demand deposits $ 1,293,071 289 0.03 % $ 1,263,312 860 0.09 %

Savings deposits 1,971,348 2,190 0.15 % 1,892,122 3,631 0.26 %

Time deposits 409,005 3,297 1.08 % 443,546 4,277 1.29 %

Total interest-bearing deposits 3,673,424 5,776 0.21 % 3,598,980 8,768 0.33 %

Other borrowings 26,223 13 0.07 % 35,814 384 1.43 %

Junior subordinated debt 57,374 2,009 4.68 % 57,109 2,501 5.86 %

Total interest-bearing liabilities 3,757,021 7,798 0.28 % 3,691,903 11,653 0.42 %

Noninterest-bearing deposits 2,197,315 1,761,037

Other liabilities 120,486 101,947

Shareholders’ equity 896,753 866,812

Total liabilities and shareholders’ equity $ 6,971,575 $ 6,421,699

Net interest spread (2)

3.91 % 4.33 %

Net interest income and interest margin (3)

$ 192,116 4.02 % $ 193,802 4.48 %

(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.

As compared to the trailing quarter, net interest income increased $37,000 or 0.1% to $66,717,000 compared to $66,680,000 during the three months ended December 31, 2020.

Over the same period, net interest margin decreased 5 basis points to 3.74% as compared to 3.79% in the trailing quarter.

The 5 basis point decrease is attributed to a 2 basis point decrease in non-PPP loan yields, and a 7 basis point decline in investment security yields, which were 1.74% during the three months ended March 31, 2021, as compared to 1.81% during the trailing quarter.

Conversely, those yield declines were partially offset due to a 2 basis point improvement in the rate paid on interest-bearing liabilities, and an increase in yields on the PPP loans, which earned 6.68% during the three months ended March 31, 2021, as compared to 5.59% during the trailing quarter.

Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid

1 unchanged sentence

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 September 30, 2020

compared with three months ended September 30, 2019

Volume Rate Total

Increase (decrease) in interest income:

Loans, including PPP $ 9,350 $ (8,310) $ 1,040

Investment securities (1)

(2,652) (1,292) (3,944)

Cash at Federal Reserve and other banks 2,752 (3,334) (582)

Total interest-earning assets 9,450 (12,936) (3,486)

Increase (decrease) in interest expense:

Interest-bearing demand deposits 22 (250) (228)

Savings deposits 134 (842) (708)

Time deposits (208) (494) (702)

Other borrowings (179) (151) (330)

Junior subordinated debt 5 (254) (249)

Total interest-bearing liabilities (226) (1,991) (2,217)

Increase (decrease) in net interest income $ 9,676 $ (10,945) $ (1,269)

(in thousands) Nine months ended September 30, 2020 compared with nine months ended September 30, 2019

(in thousands) Three months ended March 31, 2021

compared with three months ended March 31, 2020

Volume Rate Total

15 unchanged sentences

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.

Net interest income (FTE) during the three months ended September 30, 2020 decreased $1,269,000 or 1.95% to $63,708,000 compared to $64,977,000 during the three months ended September 30, 2019.

The overall decrease in net interest income (FTE) was due to a reduction in the average outstanding balance, and yields earned on investment securities, totaling $3,944,000 during the period.

Declining interest rates continue to escalate pre-payment speeds on existing debt securities and promote new debt issuances at historically low coupon rates.

As an offset, increases in average loan balances (including PPP) improved interest income by $9,350,000, however, loan yields were similarly hampered by low interest rates, resulting in declines in interest income of $8,310,000.

Net interest income (FTE) during the nine months ended September 30, 2020 decreased by $1,686,000 or 0.87% to $192,116,000 compared to $193,802,000 during the nine months ended September 30, 2019.

Similar to the three month period noted above, the decrease in net interest income (FTE) is attributed primarily to declines in both the average outstanding balance, and yields earned on investment securities, totaling $9,721,000 for the nine month period ended 2020.

Additionally, a reduction in loan interest rates caused a $8,829,000 decline in interest income, and declines in interest rates on cash and due from banks led to a $4,715,000 decline in interest income.

As an offset, increases in average loan volume attributed to $14,647,000 in additional interest margin.

Net interest income (FTE) during the three months ended March 31, 2021 increased $3,254,000 or 5.1% to $66,717,000 compared to $63,463,000 during the three months ended March 31, 2020.

The overall increase in net interest income (FTE) was due to an increase in average loan volume, including PPP, and related income earned on loans, totaling $4,178,000.

Declining interest rates also continue to benefit the yield expense on deposits, resulting in a decrease of $1,614,000 in related expense.

As an offset, depressed interest rates on investment securities continue to incentive pre-payment on existing debt and promote new debt issuances being purchased with lower coupon yields, resulting in a decline of $2,153,000 in yield during the period.

Asset Quality and Loan Loss Provisioning

The Company adopted CECL on January 1, 2020.

During the three months ended September 30, 2020, the Company recorded a provision for credit losses of $7,649,000, as compared to $22,244,000 for the trailing quarter, and a reversal of provision expense of ($329,000) during the third quarter of 2019.

During the three months ended March 31, 2021, the Company recorded a reversal of credit losses of $6,060,000, as compared to a provision expense of $4,850,000 for the trailing quarter, and a provision expense of $8,070,000 during the first quarter of 2020.

The following table presents details of the provision for credit losses for the periods indicated:

Three months ended Nine months ended

(dollars in thousands) September 30, 2020 June 30, 2020 March 31, 2020 September 30, 2020

Addition to allowance for credit losses $ 7,649 $ 22,089 $ 8,000 $ 37,738

Three months ended

(dollars in thousands) March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020

Addition to (reversal of) allowance for credit losses $ (6,240) $ 4,450 $ 7,649 $ 22,089 $ 8,000

Addition to reserve for unfunded loan commitments

180 400 — 155 70

Total provision for credit losses $ (6,060) $ 4,850 $ 7,649 $ 22,244 $ 8,070

Prior to January 1, 2020 the Company accounted for the allowance for credit losses (ACL), formerly known as the allowance for loan losses under the incurred loan loss methodology.

As of December 31, 2019 the allowance for loan losses was $30,616,000.

Upon adoption of CECL on January 1, 2020, the Company recognized an increase in the ACL for loans totaling $18,913,000, including a reclassification of $481,000 from discounts on acquired loans to the allowance for credit losses, as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of $5,449,000 in taxes, of $12,983,000.

The allowance for credit losses (ACL) was $87,575,000 as of quarter ended September 30, 2020, a net increase of $7,836,000 over the immediately preceding quarter.

The allowance for credit losses (ACL) was $85,941,000 as of quarter ended March 31, 2021, a net decrease of $5,906,000 over the immediately preceding quarter.

More specifically, the reversal of allowance for credit losses of $6,240,000 consisted of $5,906,000 in changes relating to qualitative factors, loan volume and changes in credit quality associated with levels of classified, past due and non-performing loans, plus net recoveries totaling $334,000 during the quarter.

The portfolio-wide qualitative indicator associated with the forecast levels of US unemployment and the qualitative factors associated with portfolio concentration risks contributed approximately $3,540,000 and $2,954,000, respectively, to the reversal in credit reserves on loans during the three months ended March 31, 2021.

Reductions in the quantitative aspects of the allowance for credit losses contributed approximately $471,000 and were more specifically associated with the Company's historical loss rates which have continued to remain low despite the recent economic uncertainty.

The Company utilizes a forecast period of approximately eight quarters and obtains the forecast data from publicly available sources as of the balance sheet date.

This forecast data continues to evolve and included significant shifts in the magnitude of changes for both the unemployment and GDP factors leading up to the balance sheet date.

Management noted that the majority of economic forecasts utilized in the ACL calculation have continued to identify an expanded duration of the current recessionary period as caused by the global pandemic and partially offset by the governmental stimulus that has been provided to date.

The changes in loan volume and changes in credit quality associated with levels of classified, past due and non-performing loans, in addition to changes in qualitative factors, resulted in the need for a provision for credit losses of $7,649,000 and net recoveries totaled $187,000 during the current quarter.

The portfolio-wide qualitative indicators for changes in California Unemployment and US Policy uncertainty contributed to the majority of the increase in credit reserves on loans as of September 30, 2020 as compared to the trailing quarter, adding approximately $9,556,000 to the required reserves.

These increases were partially offset with a reduced need for reserves for concentration risks totaling $1,472,000 and reductions in specific reserves on individually evaluated loans of $321,000.

During the nine months ended September 30, 2020 the ACL has increased by $38,046,000 or 76.8% to $87,575,000.

Of that year-to-date increase, $308,000 is attributable to net recoveries;

$3,175,000 is attributable to the net change in loan portfolio composition, risk grade migration and growth;

while $34,563,000 is attributable to the net change in qualitative factors.

Loans past due 30 days or more decreased by $6,100,000 during the quarter ended September 30, 2020 to $10,522,000, as compared to $16,622,000 at June 30, 2020.

Non-performing loans were $22,963,000 at September 30, 2020 and $20,730,000 at June 30, 2020, a slight increase compared to the $16,864,000 and $18,565,000 as of December 31, 2019 and September 30, 2019, respectively.

September 30, % of Total Loans June 30, % of Total Loans December 31, % of Total Loans

(in thousands) 2020 2020 2019

Management noted that the majority of economic forecasts utilized in the ACL calculation seem to have rebounded in the current quarter, coinciding with the widespread availability of vaccines, continued easing of occupancy and social distancing restrictions, and continued government stimulus efforts.

Loans past due 30 days or more increased by $3,783,000 during the quarter ended March 31, 2021 to $10,550,000, as compared to $6,767,000 at December 31, 2020.

Non-performing loans were $28,941,000 at March 31, 2021, an increase of $2,077,000 and $10,986,000, respectively, from $26,864,000 and $17,955,000 as of December 31, 2020, and March 31, 2020, respectively.

The following table illustrates the total loans by risk rating and their respective percentage of total loans for the periods presented.

March 31, % of Total Loans December 31, % of Total Loans March 31, % of Total Loans

(dollars in thousands) 2021 2020 2020

Pass $ 4,765,180 95.9 % $ 4,556,870 95.7 % $ 4,280,031 97.7 %

4 unchanged sentences

Loans past due 30+ days to total loans 0.21 % 0.14 % 0.67 %

The Company's loan portfolio for non-classified loans (loans graded special mention or better) remains generally consistent for the quarter ended September 30, 2020, as compared to the trailing quarter June 30, 2020, representing 99.0% and 99.1% of total loans outstanding, respectively.

Loans risk graded special mention increased by approximately $89,918,000 during the quarter ended September 30, 2020 as compared to the trailing quarter.

These downgrades to special mention were largely focused in one relationship of eight loans totaling approximately $56,600,000, secured by several commercial real estate properties which remain current as to payment status and are believed to have more than sufficient collateral support.

The downgrade is related to recent management and oversight changes within the borrowing entity.

Other components of the loan population downgraded to special mention during the quarter includes approximately $7,900,000 in COVID-19 related restructured loans, shared between two relationships.

Total loans greater than 30 days past due downgraded to special mention during the quarter equaled approximately $501,000.

There was one insignificant addition and no sales of other real estate owned during the three month period ended September 30, 2020.

As of September 30, 2020, other real estate owned, which is included in other assets on the consolidated balance sheet, consisted of four properties with a carrying value of $2,057,000.

The Company's loan portfolio for non-classified loans (loans graded special mention or better) remains generally consistent for the quarter ended March 31, 2021, as compared to the trailing quarter December 31, 2020, representing 98.8% and 99.0% of total loans outstanding, respectively.

Loans risk graded special mention decreased by approximately $14,564,000 during the quarter ended March 31, 2021 as compared to the trailing quarter, while loans risk graded substandard increased by approximately $8,388,000 during the same periods.

The change in both loan risk rating categories is largely due to the migration from special mention to substandard of three loans to separate borrowers, which totaled approximately $10,380,000.

Only one of these loans is considered by management to be impaired as of March 31, 2021 and management believes that there is no ultimate risk of loss and therefore, no specific reserves have been recorded on this loan.

There were no additions to other real estate owned during the quarter ended March 31, 2021 and there was one sale for proceeds of approximately $577,000, which generated a gain of $51,000.

As of March 31, 2021, other real estate owned consisted of six properties with a carrying value of $2,309,000.

Non-interest Income

1 unchanged sentence

Three months ended

September 30,

(dollars in thousands) 2021 2020 $ Change % Change

10 unchanged sentences

Sale of customer checks 119 124 (5) (4.0) %

Gain on sale of investment securities 7 107 (100) (93.5) %

Gain on marketable equity securities — 22 (22) (100.0) %

Other (80) 361 (441) (122.2) %

Total other non-interest income 4,668 3,518 1,150 32.7 %

Total non-interest income $ 15,137 $ 14,108 $ 1,029 7.3 %

Non-interest income increased $1,029,000 or 7.3% to $15,137,000 during the three months ended September 30, 2020 compared to $14,108,000 during the comparable 2019 quarter.

Mortgage loan origination volume demand increased during the period ended September 30, 2020 as a result of the continued favorable interest rate environment, leading to an increase in mortgage loan originations sold into the secondary market which generated an additional $1,799,000 gain on sale of loans, as compared to the same quarter of 2019.

As a partial offset, fee generating deposit account activity remains depressed as a result of the COVID-19 pandemic, declining $993,000 during the three months ended September 30, 2020 compared to the same period in 2019.

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

Nine months ended

September 30,

(dollars in thousands) 2020 2019 $ Change % Change

ATM and interchange fees $ 15,913 $ 15,412 $ 501 3.3 %

Service charges on deposit accounts 10,426 12,389 (1,963) (15.8) %

Other service fees 2,296 2,198 98 4.5 %

Mortgage banking service fees 1,386 1,441 (55) (3.8) %

Change in value of mortgage servicing rights (2,258) (1,652) (606) 36.7 %

Total service charges and fees 27,763 29,788 (2,025) (6.8) %

Increase in cash value of life insurance 2,203 2,294 (91) (4.0) %

Asset management and commission income 2,244 2,102 142 6.8 %

Gain on sale of loans 5,662 2,223 3,439 154.7 %

Lease brokerage income 495 631 (136) (21.6) %

Sale of customer checks 303 401 (98) (24.4) %

Gain on sale of investment securities 7 107 (100) (93.5) %

Gain on marketable equity securities 72 100 (28) (28.0) %

Gain on sale of investment securities — — — n/a

(Loss) gain on marketable equity securities (53) 47 (100) (212.8) %

Other 704 (197) 901 (457.4) %

1 unchanged sentence

Total non-interest income $ 16,110 $ 11,820 $ 4,290 36.3 %

Non-interest income decreased $720,000 or 1.8% to $38,614,000 during the nine months ended September 30, 2020 compared to $39,334,000 during the comparable nine month period in 2019.

Non-interest income for the nine months ended September 30, 2020 as compared to the same period in 2019 was negatively impacted by changes in deposit customer behaviors which have led to a reduction in fee generating account activity which is down $1,963,000 during the nine month period in 2020 as compared to the same period in 2019, has been partially offset by $501,000 in favorable card related activities and interchange income.

In addition, the change in the fair value of the Company’s mortgage servicing assets, contributed to a $606,000 decline.

Other non-interest income declined by $1,823,000, partially from decreases in the fair value of assets used to fund acquired deferred compensation plans totaling $718,000 for the nine months ended September 30, 2020 as compared to the same period 2019, as well as from an absence of one-time death benefits totaling $728,000 realized during the nine months ended September 30, 2019.

The declines noted above were partially offset by $3,439,000 in gains from the sale of mortgage loans, which resulted from both increased volume and profit margins during the nine months ended September 30, 2020.

Non-interest income increased $4,290,000 or 36.3% to $16,110,000 during the three months ended March 31, 2021, compared to a decrease of $470,000 or 2.8% from $16,580,000 during the trailing quarter ended December 31, 2020.

Mortgage loan origination and sale volume was the primary driver of the year over year quarterly increase.

The increased volume was a direct result of the low interest rate environment, which also contributed to limited mortgage servicing rights valuation change in the current quarter, leading to an additional $1,270,000 increase in non-interest income.

Other non-interest income contributed $704,000 during the quarter ended March 31, 2021, an increase of $901,000 due to an $817,000 change in valuation of deferred compensation account balances which, while net neutral to net income, impacted benefit costs.

As an offset to these increases in non-interest income, fee income from deposit account service charges remain depressed from pre-pandemic levels as average account balances and savings remain elevated and consumers migrate to an elevated level of card and e-banking rather than check usage.

Non-interest Expense

1 unchanged sentence

Three months ended

September 30,

2021 2020 $ Change % Change

16 unchanged sentences

Gain on sale of foreclosed assets (51) (41) (10) 24.4 %

Loss on disposal of fixed assets 22 2 20 1,000.0 %

Other miscellaneous expense 2,349 2,930 (581) (19.8) %

2 unchanged sentences

Average full time equivalent staff 1,024 1,165 (141) (12.1) %

Non-interest expense increased by $370,000 or 0.8% to $46,714,000 during the three months ended September 30, 2020 as compared to $46,344,000 for the three months ended September 30, 2019.

Total salary and benefit expense increased by $2,422,000 or 9.0% to $29,321,000 during the three months ended September 30, 2020 as compared to $26,899,000 for the same period in 2019.

Salaries, net of deferred loan origination costs increased by $1,098,000 to $18,754,000 for the three-months ended September 30, 2020 due to a decrease in loan origination activity and therefore a reduction in deferred loan origination costs of $165,000 as well as employee severance costs of $400,000 associated with reductions in personnel.

Benefits related expenses increased by $2,931,000 to $8,383,000 during the quarter primarily as a result of increases in expenses associated with retirement obligations and insurance costs.

Partially offsetting this increase were declines in miscellaneous expenses, which decreased during the period by $1,099,000 or 30.7% to $2,478,000, and were specifically attributed to a $614,000 reduction in travel and outside training expenses as associated with the precautionary and restricted travel environment associated with the pandemic.

Further, reductions in advertising expense totaled $489,000 or 36.0%, to $869,000 during the three months ended September 30, 2020 as compared to $1,358,000 for the same period in 2019.

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

Nine months ended

September 30,

2020 2019 $ Change % Change

Base salaries, net of deferred loan origination costs $ 53,654 $ 51,624 $ 2,030 3.9 %

Incentive compensation 7,680 10,064 (2,384) (23.7) %

Benefits and other compensation costs 22,314 17,058 5,256 30.8 %

Total salaries and benefits expense 83,648 78,746 4,902 6.2 %

Occupancy 10,713 11,223 (510) (4.5) %

Data processing and software 10,585 10,114 471 4.7 %

Equipment 4,411 5,298 (887) (16.7) %

Intangible amortization 4,293 4,293 — — %

Advertising 2,065 4,222 (2,157) (51.1) %

ATM and POS network charges 3,897 3,936 (39) (1.0) %

Professional fees 2,399 2,895 (496) (17.1) %

Telecommunications 1,983 2,437 (454) (18.6) %

Regulatory assessments and insurance 993 1,095 (102) (9.3) %

Postage 691 1,063 (372) (35.0) %

Operational losses 559 679 (120) (17.7) %

Courier service 1,013 1,039 (26) (2.5) %

Gain on sale of foreclosed assets (57) (246) 189 (76.8) %

Loss on disposal of fixed assets 37 82 (45) (54.9) %

Other miscellaneous expense 9,783 11,617 (1,834) (15.8) %

Total other non-interest expense 53,365 59,747 (6,382) (10.7) %

Total non-interest expense $ 137,013 $ 138,493 $ (1,480) (1.1) %

Average full time equivalent staff 1,093 1,145 (52) (4.5) %

Non-interest expense decreased by $1,480,000 or 1.1% to $137,013,000 during the nine months ended September 30, 2020 as compared to $138,493,000 for the same period in 2019.

Reductions in advertising expenses totaling $2,157,000 or 51.1% to $2,065,000 contributed to this beneficial change, as did declines in miscellaneous expenses totaling $1,834,000 or 15.8% attributed primarily to a $1,681,000 reduction in travel and training expenses as a result of state-wide shelter-in-place restrictions and a reduction of $418,000 in third party services, which were partially offset by the indirect loan documentation and administrative costs associated with PPP lending activity.

These declines were also offset by a net increase in salaries and benefits expense by $4,902,000 or 6.2% to $83,648,000 during the nine months ended September 30, 2020 as compared to $78,746,000 for the same period in 2019.

While the increase in salaries was more than offset by the reductions in incentive compensation costs, increases in benefits and other compensation costs of $5,256,000 were caused by expenses associated with retirement obligations.

The Company’s effective tax rate was 25.1% for the nine months ended September 30, 2020, as compared to 27.4% for the year ended December 31, 2019.

The reduction in effective tax rate was made possible through the provisions of the Coronavirus Aid, Relief, and

Economic Security Act (“CARES Act”) which provided the Company with an opportunity to file amended tax returns and generate proposed refunds of approximately $805,000.

Non-interest expense decreased by $3,131,000 or 7.0% to $41,618,000 during the three months ended March 31, 2021 as compared to $44,749,000 for the three months ended March 31, 2020.

Salary and benefit expense decreased by $1,942,000 or 7.1% to $25,330,000 during the three months ended March 31, 2021 as compared to $27,272,000 for the same period in 2020.

During the three months ended March 31, 2021, the 140 decline in average full-time equivalent employees benefited employee salary expense by $1,591,000, and increased salary deferrals from loan origination reduced the expense an additional $445,000, respectively, as compared to the quarter ended March 31, 2020.

Miscellaneous expenses also decreased during the period by $581,000 or 19.8% to $2,349,000 as compared to the same period in 2020, which is primarily attributed to precautionary reductions in travel and outside training expenses associated that began late in the first quarter of 2020.

Offsetting these decreases were larger regulatory assessment and insurance costs, which increased to a normalized quarterly rate of $612,000 during the period, an increase of $517,000 as compared to the first quarter of 2020, during which the FDIC issued a regulatory assessment credit of $437,000.

The Company’s effective tax rate was 28.4% for the year ended March 31, 2021, as compared to 25.8% for the year ended December 31, 2020.

The reduced effective tax rate in the prior year was made possible through the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which provided the Company with an opportunity to file amended tax returns and generate proposed refunds of approximately $805,000.

Other differences between the Company's effective tax rate and applicable federal and state statutory rates are due to the proportion of non-taxable revenue and low income housing tax credits as compared to the levels of pre-tax earnings.

2 unchanged sentences

Organic growth, inclusive of seasonal fluctuation, also contributes to the year-over-year balance sheet changes.

During the most recent quarter, loan growth of $24,933,000 was primarily attributed to organic non-PPP loan originations of $22,416,000 or 2.0% of loan balances, excluding PPP, during the quarter ended September 30, 2020.

Investment securities increased to $1,473,935,000, a change of $120,207,000 or 35.5% from $1,353,728,000 at June 30, 2020.

The Company purchased approximately $196,118,000 in

securities during the three months ended September 30, 2020, offset largely by an accelerated rate of prepayment or maturity of these debt instruments totaling $79,621,000 correlating with the historically low interest rate environment.

During the most recent quarter, loan growth of $169,776,000, excluding PPP, was attributed to $101,367,000 in acquired loans, with the remainder from organic loan growth from origination.

Investment securities increased to $1,962,780,000, a change of $243,678,000 or 56.7% from $1,719,102,000 at December 31, 2020.

The Company purchased approximately $372,917,000 in securities during the three months ended March 31, 2021, offset partially by an accelerated rate of prepayment or maturity of these debt instruments totaling $115,663,000 correlating with the historically low interest rate environment.

The following is a comparison of the quarterly change in certain assets and liabilities:

($‘s in thousands) As of September 30, 2020 As of June 30, 2020 $ Change Annualized

($‘s in thousands) As of March 31, 2021 As of December 31, 2020 $ Change Annualized

Ending balances

6 unchanged sentences

The following is a comparison of the year over year change in certain assets and liabilities:

As of September 30, $ Change % Change

As of March 31, $ Change % Change

($‘s in thousands) 2021 2020

6 unchanged sentences

Total other borrowings 36,226 19,309 16,917 87.6 %

Loan growth of $643,990,000 or 15.4% during the twelve month period ending September 30, 2020 consisted of approximately $425,947,000 from the PPP program, with the remainder of approximately $218,043,000 attributed to organic loan growth.

Growth of deposit balances totaled $1,045,181,000 or 19.7% during the same comparative period.

Expansion of Federal stimulus programs and the trends in consumer spending including reduced levels of business and personal travel likely attributed to the significant deposit growth during the quarter.

Excess deposit proceeds have been temporarily allocated to cash and due from banks, which increased to $652,582,000 at September 30, 2020 from $259,047,000 as of September 30, 2019.

As discussed in previous quarters, the PPP program generated significant increases in volume during the twelve months ended March 31, 2021 for both loan and deposit balances.

Other forms of stimulus payments have further elevated deposit levels during the same period.

While excess deposit proceeds are ratably being allocated to the purchase of investment securities with medium term durations to improve overall margin, we expect to maintain above average levels of liquidity through 2021, as the economic impacts of COVID-19 and amount of future stimulus both remain uncertain.

Investment securities increased to $1,962,780,000 at March 31, 2021, a change of $580,754,000 or 42.0% from $1,382,026,000 at March 31, 2020.

Investment Securities

Investment securities available for sale increased $192,819,000 to $1,142,957,000 as of September 30, 2020, compared to December 31, 2019.

Investment securities available for sale increased $267,841,000 to $1,682,105,000 as of March 31, 2021, compared to December 31, 2020.

This increase is primarily supported by deposit growth and available cash reserves.

Proceeds from the sale of investment securities totaled $229,000 and $125,247,000 during the nine month periods ended September 30, 2020 and 2019, respectively.

Gross realized gains from the sale of investment securities totaled $7,000 during the three and nine months ended September 30, 2020, respectively.

There were no gross realized losses on the sale of securities during 2020.

Gross realized gains from the sale of investment securities totaled $335,000 during the three and nine months ended September 30, 2019, respectively.

Gross realized losses from the sale of investment securities during the three and nine months ended September 30, 2019 totaled $228,000.

Sale activity in the 2020 and 2019 periods related to the repositioning of the investment securities portfolio which was necessitated by changes in the broader rate environment.

The following table presents the available for sale debt securities portfolio by major type as of September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

There were no sales of investment securities during the three months ended March 31, 2021 and 2020, respectively.

The following table presents the available for sale debt securities portfolio by major type as of March 31, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

(dollars in thousands) Fair Value % Fair Value %

6 unchanged sentences

Total debt securities available for sale $ 1,682,105 100.0 % $ 1,414,264 100.0 %

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(dollars in thousands) Amortized

5 unchanged sentences

Total debt securities held to maturity $ 260,454 100.0 % $ 284,563 100.0 %

Investment securities held to maturity decreased $64,910,000 to $310,696,000 as of September 30, 2020, as compared to December 31, 2019.

This decrease is attributable to principal repayments of $26,136,000, and amortization of net purchase premiums of $332,000.

Investment securities held to maturity decreased $24,109,000 to $260,454,000 as of March 31, 2021, as compared to December 31, 2020.

This decrease is attributable to calls and principal repayments of $23,850,000, and amortization of net purchase premiums of $259,000.

The Company concentrates its lending activities in six principal areas:

5 unchanged sentences

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

(dollars in thousands) September 30, 2020 December 31, 2019

(dollars in thousands) March 31, 2021 December 31, 2020

Commercial real estate $ 3,108,624 62.59 % $ 2,951,902 61.97 %

5 unchanged sentences

Total loans $ 4,966,977 100.0 % $ 4,763,127 100.0 %

At September 30, 2020 loans, including net deferred loan costs and discounts, totaled $4,826,338,000 which was a $422,343,000 (38.6%) annualized increase over the balances at December 31, 2019.

As a Small Business Administration (SBA) Preferred Lender, the Company was able to provide PPP loans to small business customers.

As of the quarter ended September 30, 2020, the total balance outstanding of PPP loans was $437,793,000 (approximately 2,900 loans) as compared to total PPP originations of $438,510,000.

As of September 30, 2020 there was approximately $11,846,000 in net deferred fee income expected to be recognized.

During the three and nine months ended September 30, 2020, the Company recognized $2,603,000 and $4,959,000, respectively, in interest and fees on PPP loans.

As of March 31, 2021, the total gross balance outstanding of PPP loans (Round 1) was $193,958,000 (948 loans) as compared to total round 1 PPP originations of $438,510,000.

Included in the balance of outstanding PPP loans as of March 31, 2021 are approximately 115 loans totaling $75,669,000 that have been submitted to and are pending forgiveness by the SBA.

In connection with the origination of these loans, the Company earned $15,735,000 in loan fees, offset by deferred loan costs of $763,000, the net of which will be recognized over the earlier of loan maturity (generally 24 months), repayment or receipt of forgiveness confirmation.

As of March 31, 2021 there was $2,358,000 in net deferred fee income remaining to be recognized.

During the three months ended March 31, 2021, the Company recognized $4,854,000 in fees on round 1 PPP loans.

As of March 31, 2021, the total gross balance outstanding of PPP loans (Round 2) was $176,316,000 (1,536 loans) as compared to round 2 originations of the same amount.

In connection with the origination of these loans, the Company earned $7,850,000 in loan fees, offset by

deferred loan costs of $400,000, the net of which will be recognized over the earlier of loan maturity (generally 60 months), repayment or receipt of forgiveness confirmation.

As of March 31, 2021 there was $7,072,000 in net deferred fee income remaining to be recognized.

During the three months ended March 31, 2021, the Company recognized $378,000 in fees on round 2 PPP loans.

Nonperforming Assets

1 unchanged sentence

“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) September 30,

(dollars in thousands) March 31,

2021 December 31,

9 unchanged sentences

Allowance for credit losses to nonperforming loans 309 % 342 %

Changes in nonperforming assets during the three months ended September 30, 2020

(in thousands) Balance at

June 30, 2020 New NPA /

Adjustments Pay-downs

/Upgrades Charge-offs/ (1)

Assets Balance at

September 30, 2020

Commercial real estate:

CRE non-owner occupied $ 677 2,461 (128) — — $ 3,010

CRE owner occupied 2,409 1,397 (28) — — 3,778

Multifamily 2,024 — (2,024) —

Farmland 1,819 238 (1) — — 2,056

Total commercial real estate loans 6,929 4,096 (2,181) — — 8,844

SFR 1-4 1st DT liens 6,719 1,144 (1,330) (2) (158) 6,373

SFR HELOCs and junior liens 5,665 385 (865) — — 5,185

Other 106 454 (183) (98) — 279

Total consumer loans 12,490 1,983 (2,378) (100) (158) 11,837

Commercial and industrial 1,710 851 (489) (94) — 1,978

Construction — 18 — — — 18

Agriculture production 445 — (159) — — 286

Leases — — — — — —

Total nonperforming loans 21,574 6,948 (5,207) (194) (158) 22,963

Foreclosed assets 1,922 — — (23) 158 2,057

Total nonperforming assets $ 23,496 6,948 (5,207) — (217) — $ 25,020

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

Nonperforming assets increased during the three months ended September 30, 2020 $1,524,000 (6.5%) to $25,020,000 at September 30, 2020 compared to $23,496,000 at June 30, 2020.

The increase in nonperforming assets during the third quarter of 2020 was primarily the result of new nonperforming loans of $6,948,000, which were partially offset by pay-downs of $5,207,000 and write-downs of $217,000.

Non performing loans added during the third quarter of 2020 were primarily within commercial real estate, with non-owner occupied adding $2,461,000 and owner occupied additions totaling $1,397,000.

Management believes these loans are well-secured as of September 30, 2020.

Further, management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the specific loan loss reserves associated with these loans is sufficient as of September 30, 2020.

Loan charge-offs during the three months ended September 30, 2020

In the third quarter of 2020, the Company recorded $136,000 in loan charge-offs and $58,000 in deposit overdraft charge-offs less $334,000 in loan recoveries and $47,000 in deposit overdraft recoveries resulting in $187,000 of net recoveries.

Loan charge-offs were not concentrated within any single loan or borrower relationship and were comprised entirely of individual charges of less than $100,000 each.

Changes in nonperforming assets during the nine months ended September 30, 2020

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

(in thousands) Balance at

3 unchanged sentences

Assets Balance at

September 30, 2020

March 31, 2021

Commercial real estate:

16 unchanged sentences

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

Nonperforming assets increased during the first nine months of 2020 by $5,615,000 (28.9%) to $25,020,000 at September 30, 2020 compared to $19,405,000 at December 31, 2019.

The increase in nonperforming assets during the third quarter of 2020 was primarily the result of new nonperforming loans of $14,752,000, which were partially offset by pay-downs of $7,834,000 and write-downs of $1,303,000.

Loan charge-offs during the nine months ended September 30, 2020

During the nine months ended September 30, 2020, the Company recorded $952,000 in loan charge-offs and $243,000 in deposit overdraft charge-offs less $1,344,000 in loan recoveries and $159,000 in deposit overdraft recoveries resulting in $308,000 of net recoveries for the year to date period.

Nonperforming assets increased during the three months ended March 31, 2021 $1,542,000 (5.2%) to $31,250,000 at March 31, 2021 compared to $29,708,000 at December 31, 2020.

The increase in nonperforming assets during the first quarter of 2021 was primarily the result of new nonperforming loans of $4,841,000, which were partially offset by pay-downs of $3,132,000 and write-downs of $158,000.

Non performing loans added during the first quarter of 2021 were primarily within commercial real estate, with non-owner occupied adding $3,943,000.

Management believes these loans are well-secured as of March 31, 2021.

Further, management is actively engaged in

the collection and recovery efforts for all nonperforming assets and believes that the specific loan loss reserves associated with these loans is sufficient as of March 31, 2021.

Loan charge-offs during the three months ended March 31, 2021

In the first quarter of 2021, the Company recorded $158,000 in loan charge-offs and $68,000 in deposit overdraft charge-offs less $526,000 in loan recoveries and $34,000 in deposit overdraft recoveries, which collectively resulted in $334,000 of net recoveries.

Loan charge-offs were not concentrated within any single loan or borrower relationship and were comprised entirely of individual charges of less than $100,000 each.

The Components of the Allowance for Credit Losses for Loans

The following table sets forth the allowance for credit losses as of the dates indicated:

(dollars in thousands) September 30,

2020 June 30,

2020 March 31, 2020 January 1, 2020 December 31,

(dollars in thousands) March 31,

2021 December 31,

2020 September 30, 2020 June 30, 2020 March 31,

Allowance for credit losses:

3 unchanged sentences

Allowance for individually evaluated loans 1,482 1,450 809 1,130 962

Allowance for PCD loan losses — — — — n/a

Allowance for PCI loan losses n/a n/a n/a n/a 6

Allowance for PCD loan losses — — — — —

Total allowance for credit losses $ 85,941 $ 91,847 $ 87,575 $ 79,739 $ 57,911

Allowance for credit losses for loans 1.81 % 1.66 % 1.32 % 1.16 % 0.71 %

Allowance for credit losses for loans / Total loans 1.73 % 1.93 % 1.81 % 1.66 % 1.32 %

For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Asset Quality and Loan Loss Provisioning” at “Results of Operations” , above.

Based on the current conditions of the loan portfolio, management believes that the $87,575,000 allowance for loan losses at September 30, 2020 is adequate to absorb probable losses inherent in the Bank’s loan portfolio.

No assurance can be given, however, that adverse economic conditions or other

circumstances will not result in increased losses in the portfolio.

Based on the current conditions of the loan portfolio, management believes that the $85,941,000 allowance for loan losses at March 31, 2021 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 credit losses between loan types and by percentage of the total allowance for loan losses as of the dates indicated:

September 30, 2020 January 1, 2020 December 31, 2019

March 31, 2021 December 31, 2020 March 31, 2020

Commercial real estate $ 50,403 58.7 % 53,693 58.5 % $ 29,250 50.5 %

6 unchanged sentences

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

September 30, 2020 January 1, 2020 December 31, 2019

March 31, 2021 December 31, 2020 March 31, 2020

Commercial real estate $ 3,108,624 1.62 % $ 2,951,902 1.82 % $ 2,889,183 1.01 %

7 unchanged sentences

Three months ended

September 30, Nine months ended

September 30,

(in thousands) 2021 2020

8 unchanged sentences

Multifamily — —

Farmland — — — —

SFR 1-4 1st DT liens — —

4 unchanged sentences

Agriculture production — —

Leases — — — —

Total loans charged-off (226) (510)

4 unchanged sentences

Multifamily — —

Farmland — — — —

Home equity lines 10 410

4 unchanged sentences

Agriculture production 20 20

Leases — — — —

Total recoveries of previously charged-off loans 560 892

6 unchanged sentences

Foreclosed Assets, Net of Allowance for Losses

The following table details the components and summarize the activity in foreclosed assets, net of allowances for losses for the nine months ended September 30, 2020:

The following table details the components and summarize the activity in foreclosed assets, net of allowances for losses for the thee months ended March 31, 2021:

(in thousands) Balance at

2 unchanged sentences

from Loans Balance at

September 30,

March 31, 2021

Land & Construction $ 154 $ — $ — $ — $ 154

2 unchanged sentences

Total foreclosed assets $ 2,844 $ (526) $ (9) $ — $ 2,309

During the three and nine months ended September 30, 2020, the Company’s deposits increased $92,330,000 and $973,594,000, respectively, to $6,340,588,000.

Included in the September 30, 2020 and December 31, 2019 certificate of deposit balances are $30,000,000, respectively, from the State of California.

During the three months ended March 31, 2021, the Company’s deposits increased $357,466,000 to $6,863,400,000.

Included in the March 31, 2021 and December 31, 2020 certificate of deposit balances are $10,000,000, respectively, 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.

4 unchanged sentences

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

On November 12, 2019 the Board of Directors approved the authorization to repurchase up to 1,525,000 shares of the Company's common stock (the 2019 Repurchase Plan), which approximates 5.0% of the shares outstanding as of the approval date.

On February 25, 2021 the Board of Directors approved the authorization to repurchase up to 2,000,000 shares of the Company's common stock (the 2021 Repurchase Plan), which approximated 6.7% of the shares outstanding as of the approval date.

The actual timing of any share repurchases will be determined by the Company's management and therefore the total value of the shares to be purchased under the program is subject to change.

The 2019 Repurchase Plan has no expiration date.

During the three and nine months ended September 30, 2020, the Company repurchased zero and 813,862 shares with a market value of $0 and $7,669,000, respectively, under the 2019 Repurchase Plan.

The Company’s primary capital resource is shareholders’ equity, which was $902,262,000 at September 30, 2020.

This amount represents an increase of $16,576,000 during the quarter ended September 30, 2020 primarily as a result of an increase in accumulated other comprehensive income of $4,957,000, partially offset by $6,549,000 in cash dividends paid on common stock.

The Company’s ratio of equity to total assets was 12.1% and 14.0% as of September 30, 2020 and December 31, 2019, 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 September 30, 2020.

The 2021 Repurchase Plan has no expiration date and the Company has had no share repurchases during the quarter ended March 31, 2021.

In connection with approval of the 2021 Repurchase Plan, the Company’s previous repurchase program adopted on November 12, 2019 (the 2019 Repurchase Plan) was terminated.

Under the 2019 Repurchase Plan, during the three months ended March 31, 2021, the Company repurchased 223 shares with a market value of approximately $8,260.

The Company repurchased 858,717 shares during 2020.

The Company’s primary capital resource is shareholders’ equity, which totaled $942,539,000 at March 31, 2021.

This amount represents an increase of $17,425,000 during the quarter ended March 31, 2021 primarily as a result of net income for the quarter of $33,649,000 and partially offset by a decrease in accumulated other comprehensive income of $9,319,000 and the payment of $7,432,000 in cash dividends on common stock .

The Company’s ratio of equity to total assets was 11.7% and 12.1% as of March 31, 2021 and December 31, 2020, 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 March 31, 2021.

The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Ratio Minimum

Requirement Ratio Minimum

Total capital 15.2 % 10.5 % 15.1 % 9.3 %

Total risk based capital 15.1 % 10.5 % 15.2 % 10.5 %

Tier I capital 13.9 % 8.5 % 14.0 % 8.5 %

2 unchanged sentences

See Note 8 and Note 14 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.

As of September 30, 2020, we had an effective shelf registration statement on file with the Securities and Exchange Commission that allows us to issue various types of debt securities, as well as common stock, preferred stock, warrants, depositary shares representing fractional interest in shares of preferred stock, purchase contracts and units from time to time in one or more offerings.

As of March 31, 2021, we had an effective shelf registration statement on file with the Securities and Exchange Commission that allows us to issue various types of debt securities, as well as common stock, preferred stock, warrants, depositary shares representing fractional interest in shares of preferred stock, purchase contracts and units from time to time in one or more offerings.

Each issuance under the shelf registration statement will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued.

The registration statement does not limit the amount of securities that may be issued thereunder.

Our ability to issue securities is subject to market conditions and other factors including, in the case of our debt securities, our credit ratings and compliance with the covenants in our credit agreement.

Our ability to issue securities is subject to market conditions and other factors including, in the case of our debt securities, our credit ratings and compliance with current and prospective covenants in credit agreements.

The Company’s principal source of asset liquidity is cash at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities available for sale.

As of September 30, 2020, Federal Reserve cash reserve ratios have been temporarily reduced to zero as a response to the COVID-19 pandemic.

The Company’s profitability during the first nine months of 2020 generated cash flows from operations of $78,584,000 compared to $76,266,000 during the first nine months of 2019.

Net cash used by investing activities was $639,947,000 for the nine months ended September 30, 2020, compared to net cash from investing activities of $46,204,000 during the nine months ending 2019.

Financing activities provided $937,438,000 during the nine months ended September 30, 2020, compared to $90,956,000 used during the nine months ended September 30, 2019.

Deposit balance changes increased available liquidity by $973,594,000 during the nine months ended September 30, 2020, compared to a decrease of $71,059,000 for financing activity during the same period in 2019.

Dividends paid used $19,758,000 and $18,285,000 of cash during the nine months ended September 30, 2020 and 2019, respectively.

As of March 31, 2021, Federal Reserve cash reserve ratios continue to be temporarily reduced to zero as a response to the COVID-19 pandemic.

The Company’s profitability during the first three months of 2021 generated cash flows from operations of $41,196,000 compared to $33,617,000 during the first three months of 2020.

Net cash used by investing activities was $460,561,000 for the three months ended March 31, 2021, compared to net cash from investing activities of $137,406,000 during the three months ending 2020.

Financing activities provided $359,336,000 during the three months ended March 31, 2021, compared to $12,748,000 used during the three months ended March 31, 2020.

Deposit balance changes increased available liquidity by $357,466,000 during the three months ended March 31, 2021, compared to a decrease of $35,704,000 for financing activity during the same period in 2020.

Dividends paid used $7,432,000 and $6,664,000 of cash during the three months ended March 31, 2021 and 2020, respectively.

The Company’s liquidity is dependent on dividends received from the Bank.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis