TRICO BANCSHARES / 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Cautionary Statements Regarding Forward-Looking Information The statements contained herein that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There can be no assurance that future developments affecting us will be the same as those anticipated by management. We caution 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 we conduct 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; weather, natural disasters and other catastrophic events that may or may not be caused by climate change and their effects on economic and business environments in which the Company operates; the continuing adverse impact on the U.S. economy, including the markets in which we operate, due to the COVID-19 global pandemic, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products; the costs or effects of mergers, acquisitions or dispositions we may make; the future operating or financial performance of the Company, including our outlook for future growth, changes in the level of our nonperforming assets and charge-offs; the appropriateness of the allowance for credit losses including the timing and effects of the implementation of the current expected credit losses model; 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 us; changes in consumer spending, borrowing and savings habits; our ability to attract deposits and other sources of liquidity; changes in the financial performance and/or condition of our borrowers; our noninterest expense and the efficiency ratio; competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies; the challenges of integrating and retaining key employees; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber-attacks and the cost to defend against such attacks; the effect of a fall in stock market prices on our brokerage and wealth management businesses; and our ability to manage the risks involved in the foregoing. Additional factors that could cause results to differ materially from those described above can be found in our Annual Report on Form 10-K for the year ended December 31, 2020, which is on file with the Securities and Exchange Commission (the “SEC”) and available in the “Investor Relations” section of our website, https://www.tcbk.com/investor-relations and in other documents we file with the SEC. Annualized, pro forma, projections and estimates are not forecasts and may not reflect actual results. 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 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. A detailed discussion related to the Company’s accounting policies including those 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 of the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2020. 37 Table of Contents Geographical Descriptions For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo. Financial Highlights 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 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. 38 Table of Contents 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 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. 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) Modified Loan Balances Outstanding % of Total Category of Loans Interest Only Deferral Principal and Interest Deferral 90 Days 180 Days Other Commercial real estate: CRE non-owner occupied $ 41,848 2.69 % 95.6 % 4.4 % 26.6 % 57.9 % 15.6 % CRE owner occupied 5,148 0.80 100.0 — — 75.1 24.9 Multifamily — — — — — — — Farmland — — — — — — — Total commercial real estate loans 46,996 1.5 96.1 3.9 23.7 59.7 16.6 Consumer: SFR 1-4 1st lien 457 0.1 100.0 — — 100.0 — SFR HELOCs and junior liens 97 — — 100.0 100.0 — — Other — — — — — — — Total consumer loans 554 0.1 82.6 17.4 17.4 82.6 — Commercial and industrial 716 0.1 78.8 21.2 — 21.2 — Construction — — — — — — — Agriculture production — — — — — — — Leases — — — — — — — Total modifications $ 48,266 1.0 % 95.7 % 4.3 % 23.3 % 59.4 % 17.3 % 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. 39 Table of Contents Management believes that its analysis of each borrower receiving a loan modification supports the ability of that borrower to return to their normal payment terms at the conclusion of the modification period. However, management determined that 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 Financial Summary (In thousands, except per share amounts; unaudited) Three months ended March 31, 2021 2020 Net interest income $ 66,440 $ 63,192 Reversal of (provision for) credit losses 6,060 (8,070) Non-interest income 16,110 11,820 Non-interest expense (41,618) (44,749) Provision for income taxes (13,343) (6,072) Net income $ 33,649 $ 16,121 Per Share Data: Basic earnings per share $ 1.13 $ 0.53 Diluted earnings per share $ 1.13 $ 0.53 Dividends paid $ 0.25 $ 0.22 Book value at period end $ 31.71 $ 28.91 Average common shares outstanding 29,727 30,395 Average diluted common shares outstanding 29,905 30,523 Shares outstanding at period end 29,727 29,974 At period end: Loans $ 4,966,977 $ 4,379,062 Total investment securities $ 1,962,780 $ 1,382,026 Total assets $ 8,031,612 $ 6,474,309 Total deposits $ 6,863,400 $ 5,402,698 Other borrowings $ 36,226 $ 19,309 Shareholders’ equity $ 942,539 $ 866,426 Financial Ratios: During the period: Return on average assets (annualized) 1.75 % 1.00 % Return on average equity (annualized) 14.51 % 7.14 % Net interest margin (1) (annualized) 3.74 % 4.34 % Efficiency ratio 50.42 % 59.66 % Average equity to average assets 12.05 % 13.96 % At end of period: Equity to assets 11.73 % 13.38 % Total capital to risk-adjusted assets 15.10 % 15.10 % (1) Fully taxable equivalent (FTE) 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. 40 Table of Contents Results of Operations 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. 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 FTE net income for the periods indicated (dollars in thousands): Three months ended March 31, (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) % Fully tax-equivalent adjustment (FTE) (1) 277 271 6 2.2 % Net interest income (FTE) $ 66,717 $ 63,463 $ 3,254 5.1 % Net interest margin (FTE) 3.74 % 4.34 % Acquired loans discount accretion, net: Amount (included in interest income) $ 1,712 $ 1,748 $ (36) Net interest margin less effect of acquired loan discount accretion (1) 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) 3.59 % — 3.59 % Acquired loans discount accretion and PPP loan yield, net: (1) Amount (included in interest income) $ 7,575 $ 1,748 $ 5,827 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. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; 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 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. 41 Table of Contents Summary of Average Balances, Yields/Rates and Interest Differential 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. 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 March 31, 2021 March 31, 2020 Average Balance Interest Income/ Expense Rates Earned /Paid Average Balance Interest Income/ Expense Rates Earned /Paid Assets: Loans, excluding PPP $ 4,407,150 $ 54,573 5.02 % $ 4,329,357 $ 56,258 5.23 % PPP loans 355,875 5,863 6.68 % — — — % Investment securities - taxable 1,649,980 6,394 1.57 % 1,235,672 8,572 2.79 % Investment securities - nontaxable (1) 125,055 1,200 3.89 % 118,992 1,175 3.97 % Total investments 1,775,035 7,594 1.74 % 1,354,664 9,747 2.89 % Cash at Federal Reserve and other banks 701,666 163 0.09 % 199,729 783 1.58 % Total interest-earning assets 7,239,726 68,193 3.82 % 5,883,750 66,788 4.57 % Other assets 569,186 622,837 Total assets $ 7,808,912 $ 6,506,587 Liabilities and shareholders’ equity: Interest-bearing demand deposits $ 1,430,943 $ 76 0.02 % $ 1,245,896 $ 169 0.05 % Savings deposits 2,228,281 329 0.06 % 1,864,967 1,062 0.23 % Time deposits 336,605 532 0.64 % 430,064 1,320 1.23 % Total interest-bearing deposits 3,995,829 937 0.10 % 3,540,927 2,551 0.29 % Other borrowings 32,709 4 0.05 % 22,790 5 0.09 % Junior subordinated debt 57,688 535 3.76 % 57,272 769 5.40 % Total interest-bearing liabilities 4,086,226 1,476 0.15 % 3,620,989 3,325 0.37 % Noninterest-bearing deposits 2,657,925 1,855,006 Other liabilities 123,986 121,959 Shareholders’ equity 940,775 908,633 Total liabilities and shareholders’ equity $ 7,808,912 $ 6,506,587 Net interest spread (2) 3.67 % 4.20 % Net interest income and interest margin (3) $ 66,717 3.74 % $ 63,463 4.34 % (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 i nterest-earning assets, then annualized based on the number of days in the given period. 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. 42 Table of Contents 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, for the period identified, 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 March 31, 2021 compared with three months ended March 31, 2020 Volume Rate Total Increase (decrease) in interest income: Loans, including PPP $ 5,670 $ (1,492) $ 4,178 Investment securities (1) 7,104 (9,257) (2,153) Cash at Federal Reserve and other banks 1,983 (2,603) (620) Total interest-earning assets 14,757 (13,352) 1,405 Increase (decrease) in interest expense: Interest-bearing demand deposits 23 (116) (93) Savings deposits 209 (942) (733) Time deposits (287) (501) (788) Other borrowings 2 (3) (1) Junior subordinated debt 6 (240) (234) Total interest-bearing liabilities (47) (1,802) (1,849) Increase (decrease) in net interest income $ 14,804 $ (11,550) $ 3,254 ( (1) Fully taxable equivalent (FTE) 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 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 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 (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 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. 43 Table of Contents 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 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 Risk Rating: Pass $ 4,765,180 95.9 % $ 4,556,870 95.7 % $ 4,280,031 97.7 % Special Mention 143,677 2.9 % 157,191 3.3 % 63,169 1.4 % Substandard 58,120 1.2 % 49,066 1.0 % 35,862 0.9 % Total $ 4,966,977 $ 4,763,127 $ 4,379,062 Classified loans to total loans 1.17 % 1.03 % 0.82 % 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 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 The following table summarizes the Company’s non-interest income for the periods indicated (in thousands): Three months ended March 31, (dollars in thousands) 2021 2020 $ Change % Change ATM and interchange fees $ 5,861 $ 5,111 $ 750 14.7 % Service charges on deposit accounts 3,269 4,046 (777) (19.2) % Other service fees 871 758 113 14.9 % Mortgage banking service fees 463 469 (6) (1.3) % Change in value of mortgage servicing rights 12 (1,258) 1,270 (101.0) % Total service charges and fees 10,476 9,126 1,350 14.8 % Increase in cash value of life insurance 673 720 (47) (6.5) % Asset management and commission income 834 916 (82) (9.0) % Gain on sale of loans 3,247 891 2,356 264.4 % Lease brokerage income 110 193 (83) (43.0) % Sale of customer checks 119 124 (5) (4.0) % 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) % Total other non-interest income 5,634 2,694 2,940 109.1 % Total non-interest income $ 16,110 $ 11,820 $ 4,290 36.3 % 44 Table of Contents 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 The following table summarizes the Company’s non-interest expense for the periods indicated (dollars in thousands): Three months ended March 31, 2021 2020 $ Change % Change Base salaries, net of deferred loan origination costs $ 15,511 $ 17,623 $ (2,112) (12.0) % Incentive compensation 3,580 3,101 479 15.4 % Benefits and other compensation costs 6,239 6,548 (309) (4.7) % Total salaries and benefits expense 25,330 27,272 (1,942) (7.1) % Occupancy 3,726 3,875 (149) (3.8) % Data processing and software 3,202 3,367 (165) (4.9) % Equipment 1,517 1,512 5 0.3 % Intangible amortization 1,431 1,431 — — % Advertising 380 665 (285) (42.9) % ATM and POS network charges 1,246 1,373 (127) (9.2) % Professional fees 594 703 (109) (15.5) % Telecommunications 581 725 (144) (19.9) % Regulatory assessments and insurance 612 95 517 544.2 % Postage 198 290 (92) (31.7) % Operational losses 209 221 (12) (5.4) % Courier service 294 331 (37) (11.2) % Gain on sale of foreclosed assets (51) (41) (10) 24.4 % Other miscellaneous expense 2,349 2,930 (581) (19.8) % Total other non-interest expense 16,288 17,477 (1,189) (6.8) % Total non-interest expense $ 41,618 $ 44,749 $ (3,131) (7.0) % Average full time equivalent staff 1,024 1,165 (141) (12.1) % 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. 45 Table of Contents Income Taxes 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. Financial Condition For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. Organic growth, inclusive of seasonal fluctuation, also contributes to the year-over-year balance sheet changes. 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 March 31, 2021 As of December 31, 2020 $ Change Annualized % Change Ending balances Total assets $ 8,031,612 $ 7,639,529 $ 392,083 20.5 % Total loans 4,966,977 4,763,127 203,850 17.1 % Total investments 1,962,780 1,719,102 243,678 56.7 % Total deposits 6,863,400 6,505,934 357,466 22.0 % Total noninterest-bearing deposits 2,766,510 2,581,517 184,993 28.7 % Total other borrowings 36,226 26,914 9,312 138.4 % The following is a comparison of the year over year change in certain assets and liabilities: As of March 31, $ Change % Change ($‘s in thousands) 2021 2020 Ending balances Total assets $ 8,031,612 $ 6,474,309 $ 1,557,303 24.1 % Total loans 4,966,977 4,379,062 587,915 13.4 % Total investments 1,962,780 1,382,026 580,754 42.0 % Total deposits 6,863,400 5,402,698 1,460,702 27.0 % Total noninterest-bearing deposits 2,766,510 1,883,143 883,367 46.9 % Total other borrowings 36,226 19,309 16,917 87.6 % 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 $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. 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: 46 Table of Contents March 31, 2021 December 31, 2020 (dollars in thousands) Fair Value % Fair Value % Debt securities available for sale : Obligations of U.S. government agencies $ 1,032,934 61.4 % $ 812,374 57.4 % Obligations of states and political subdivisions 140,384 8.3 % 129,095 9.1 % Corporate bonds 2,534 0.2 % 2,544 0.2 % Asset backed securities 506,253 30.1 % 470,251 33.3 % Total debt securities available for sale $ 1,682,105 100.0 % $ 1,414,264 100.0 % March 31, 2021 December 31, 2020 (dollars in thousands) Amortized Cost % Amortized Cost % Debt securities held to maturity : Obligations of U.S. government and agencies $ 250,178 96.1 % $ 273,667 96.2 % Obligations of states and political subdivisions 10,276 3.9 % 10,896 3.8 % Total debt securities held to maturity $ 260,454 100.0 % $ 284,563 100.0 % 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. Loans The Company concentrates its lending activities in six principal areas: commercial real estate loans, consumer loans, commercial and industrial loans, construction loans, agriculture production loans and leases. 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, net deferred loan costs and discounts, as of the dates indicated: (dollars in thousands) March 31, 2021 December 31, 2020 Commercial real estate $ 3,108,624 62.59 % $ 2,951,902 61.97 % Consumer 1,041,213 20.96 % 952,108 19.99 % Commercial and industrial 551,077 11.10 % 526,327 11.05 % Construction 221,613 4.46 % 284,842 5.98 % Agriculture production 39,753 0.80 % 44,164 0.93 % Leases 4,697 0.09 % 3,784 0.08 % Total loans $ 4,966,977 100.0 % $ 4,763,127 100.0 % 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 47 Table of Contents 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. 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 to generate $9,055,000 in fees from the SBA. Nonperforming Assets The following tables set forth the amount of the Company’s nonperforming assets ("NPA") as of the dates indicated. “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) March 31, 2021 December 31, 2020 Performing nonaccrual loans $ 20,185 $ 22,896 Nonperforming nonaccrual loans 8,511 3,968 Total nonaccrual loans 28,696 26,864 Loans 90 days past due and still accruing 245 — Total nonperforming loans 28,941 26,864 Foreclosed assets 2,309 2,844 Total nonperforming assets $ 31,250 $ 29,708 Nonperforming assets to total assets 0.39 % 0.39 % Nonperforming loans to total loans 0.58 % 0.56 % Allowance for credit losses to nonperforming loans 309 % 342 % Changes in nonperforming assets during the three months ended March 31, 2021 (in thousands) Balance at December 31, 2020 New NPA / Valuation Adjustments Pay-downs /Sales /Upgrades Charge-offs/ (1) Write-downs Transfers to Foreclosed Assets Balance at March 31, 2021 Commercial real estate: CRE non-owner occupied $ 3,110 3,943 (53) — — $ 7,000 CRE owner occupied 4,061 1 (300) — — 3,762 Multifamily — — — — — — Farmland 1,538 — (107) — — 1,431 Total commercial real estate loans 8,709 3,944 (460) — — 12,193 Consumer SFR 1-4 1st DT liens 5,093 21 (118) — — 4,996 SFR HELOCs and junior liens 6,148 352 (1,358) — — 5,142 Other 167 61 — (125) — 103 Total consumer loans 11,408 434 (1,476) (125) — 10,241 Commercial and industrial 2,183 463 (594) (33) — 2,019 Construction 4,546 — (63) — — 4,483 Agriculture production 18 — (13) — — 5 Leases — — — — — — Total nonperforming loans 26,864 4,841 (2,606) (158) — 28,941 Foreclosed assets 2,844 (9) (526) — — 2,309 Total nonperforming assets $ 29,708 4,832 (3,132) — (158) — $ 31,250 (1) The table above does not include deposit overdraft charge-offs. 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 48 Table of Contents 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) March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Allowance for credit losses: Qualitative and forecast factor allowance $ 56,500 $ 61,935 $ 56,393 $ 48,548 $ 29,250 Cohort model allowance reserves 27,959 28,462 30,373 30,061 27,699 Total allowance for credit losses 84,459 90,397 86,766 78,609 56,949 Allowance for individually evaluated loans 1,482 1,450 809 1,130 962 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 / 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 $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: March 31, 2021 December 31, 2020 March 31, 2020 Commercial real estate $ 50,403 58.7 % 53,693 58.5 % $ 29,250 50.5 % Consumer 24,604 28.6 % 25,148 27.4 % 19,592 33.8 % Commercial and industrial 4,464 5.2 % 4,252 4.6 % 3,868 6.7 % Construction 5,476 6.4 % 7,540 8.2 % 4,595 8.0 % Agriculture production 988 1.1 % 1,209 1.3 % 595 1.0 % Leases 6 — % 5 — % 11 — % Total allowance for credit losses $ 85,941 100.0 % 91,847 100.0 % $ 57,911 100.0 % 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: 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 % Consumer 1,041,213 2.36 % 952,108 2.62 % 957,831 2.05 % Commercial and industrial 551,077 0.81 % 526,327 0.81 % 264,986 1.46 % Construction 221,613 2.47 % 284,842 2.65 % 241,714 1.90 % Agriculture production 39,753 2.49 % 44,164 2.74 % 23,660 2.51 % Leases 4,697 0.13 % 3,784 0.13 % 1,688 0.65 % Total allowance for credit losses $ 4,966,977 1.73 % $ 4,763,127 1.93 % $ 4,379,062 1.32 % 49 Table of Contents The following table summarizes the activity in the allowance for credit losses for the periods indicated (dollars in thousands): Three months ended March 31, (in thousands) 2021 2020 Allowance for credit losses: Balance at beginning of period $ 91,847 $ 30,616 Impact of adoption from ASU 2016-13 — 18,913 Provision for (reversal of) loan losses (6,240) 8,000 Loans charged-off: Commercial real estate: CRE non-owner occupied — — CRE owner occupied — — Multifamily — — Farmland — — Consumer: SFR 1-4 1st DT liens — — SFR HELOCs and junior liens — — Other (193) (130) Commercial and industrial (33) (380) Construction — — Agriculture production — — Leases — — Total loans charged-off (226) (510) Recoveries of previously charged-off loans: Commercial real estate: CRE non-owner occupied 2 189 CRE owner occupied 1 5 Multifamily — — Farmland — — Consumer: Home equity lines 10 410 Home equity loans 285 48 Other consumer 106 94 Commercial and industrial 136 126 Construction — — Agriculture production 20 20 Leases — — Total recoveries of previously charged-off loans 560 892 Net (charge-offs) recoveries 334 382 Balance at end of period $ 85,941 $ 57,911 Average total loans $ 4,763,025 $ 4,329,357 Ratios (annualized): Net recoveries (charge-offs) during period to average loans outstanding during period 0.03 % 0.04 % Provision for loan losses (benefit from reversal of) to average loans outstanding during period (0.52) % 0.74 % 50 Table of Contents 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 thee months ended March 31, 2021: (in thousands) Balance at December 31, 2020 Sales Valuation Adjustments Transfers from Loans Balance at March 31, 2021 Land & Construction $ 154 $ — $ — $ — $ 154 Residential real estate 1,507 (526) (9) — 972 Commercial real estate 1,183 — — — 1,183 Total foreclosed assets $ 2,844 $ (526) $ (9) $ — $ 2,309 Deposits 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. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company. Off-Balance Sheet Arrangements See Note 7 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. 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 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: March 31, 2021 December 31, 2020 Ratio Minimum Regulatory Requirement Ratio Minimum Regulatory Requirement Total risk based capital 15.1 % 10.5 % 15.2 % 10.5 % Tier I capital 13.9 % 8.5 % 14.0 % 8.5 % Common equity Tier 1 capital 12.9 % 7.0 % 12.9 % 7.0 % Leverage 10.0 % 4.0 % 9.9 % 4.0 % 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. 51 Table of Contents 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 current and prospective covenants in credit agreements. Liquidity 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 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. Dividends from the Bank are subject to certain regulatory restrictions.