What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 352 added, 170 removed, 433 unchanged (55% of the section changed)

14 unchanged sentences

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, including the markets in which we operate, due to the length, severity, magnitude and duration of 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 costs or effects of mergers, acquisitions or dispositions we may make, such as our pending acquisition of Valley Republic Bancorp, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations;

the possibility that the merger between us and Valley will not close when expected or at all because required regulatory, shareholder, or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated (and the risk that required regulatory approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed transaction);

the occurrence of any event, change, or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive merger agreement between the Company and Valley;

the risk that any announcements relating to the merger could have adverse effects on the market price of the common stock of either or both parties to the transaction;

changes in the economy, which could materially impact credit quality trends and the ability to generate loans and gather deposits, including the pace of the recovery following the COVID-19 pandemic;

the ability of us to execute our business plan in new lending markets;

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;

12 unchanged sentences

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.

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 under "Risk Factors" 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.

15 unchanged sentences

and southern California as that area of the state south of Bakersfield and San Luis Obispo.

Recent Developments

On July 22, 2021, the Company entered into a definitive agreement with Valley Republic Bancorp (“Valley”) to acquire Valley and its wholly-owned subsidiary, Valley Republic Bank.

Under the terms of the agreement, Valley shareholders will receive 0.95 of a share of TriCo’s common stock in exchange for each share of Valley’s common stock, subject to certain potential adjustments.

The aggregate merger consideration of $165.6 million includes $164.7 million in TriCo stock to be issued to Valley shareholders and $0.9 million to be paid in cash to Valley option holders.

The value of the merger consideration will fluctuate until closing based on the value of TriCo’s stock.

The merger is expected to qualify as a tax-free reorganization.

The proposed transaction is expected to close in the fourth quarter of 2021, subject to satisfaction of customary closing conditions, including regulatory approvals and shareholder approval from Valley’s shareholders.

The transaction is expected to be 5.5% accretive to TriCo’s earnings per share in 2022, with 1.6% dilution to tangible book value per share, and a tangible book value earnback of 2.0 years.

The earnings per share accretion estimates are based on anticipated cost savings of approximately 17% of Valley’s non-interest expense and does not include any benefits from potential revenue synergies which may result, although opportunities have been identified.

For additional information about the proposed acquisition of Valley, see the Company’s Current Report on Form 8-K filed with the SEC on July 27, 2021 and the definitive agreement filed therewith.

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.

Performance highlights and other developments for the Company as of or for the three and six months ended June 30, 2021 included the following:

• For the three and six months ended June 30, 2021, the Company’s return on average assets was 1.40% and 1.57%, respectively, and the return on average equity was 11.85% and 13.16%, respectively.

• Organic loan growth, excluding PPP, totaled $99.2 million (8.6% annualized) for the current quarter and $327.3.million (7.5%) for the trailing twelve month period.

• For the current quarter, net interest margin was 3.58% on a tax equivalent basis as compared to 4.10% in the quarter ended June 30, 2020, and a decrease of 16 basis points from 3.74% in the trailing quarter.

• The efficiency ratio was 53.19% as of June 30, 2021, as compared to 50.42% in the trailing quarter and 59.69% in the same quarter of the prior year.

• As of June 30, 2021, the Company reported total loans, total assets and total deposits of $4.94 billion, $8.17 billion and $6.99 billion, respectively.

As a direct result of the considerable deposit growth experienced over the last 6 quarters, the loan to deposit ratio was 70.72% as of June 30, 2021, as compared to 73.21% at December 31, 2020 and 76.84% at June 30, 2020.

• Non-interest bearing deposits as a percentage of total deposits were 40.67% at June 30, 2021, as compared to 39.68% at December 31, 2020 and 39.81% at June 30, 2020.

• The average rate of interest paid on deposits, including non-interest-bearing deposits, decreased to 0.05% for the second quarter of 2021 as compared with 0.06% for the trailing quarter, and decreased by 7 basis points from the average rate paid of 0.12% during the same quarter of the prior year.

• The balance of PPP loans outstanding at June 30, 2020 totaled $248.6 million and the balance of SBA fees remaining to be accreted totaled $9.0 million.

In addition, nearly 90% of all round one PPP loans have been forgiven and repaid.

• The reversal of provision for credit losses for loans and debt securities was $0.3 million during the quarter ended June 30, 2021, as compared to a reversal of provision expense of $6.1 million during the trailing quarter ended March 31, 2021, and a provision expense totaling $22.2 million for the three month period ended June 30, 2020.

• The allowance for credit losses to total loans was 1.74% as of June 30, 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 0.43% at June 30, 2021, as compared to 0.39% as of March 31, 2021, and 0.31% at June 30, 2020.

• Gain on sale of loans for the three and six months ended June 30, 2021 totaled $2.8 million and $6.1 million, respectively, as compared to $3.2 million during the quarter ended March 31, 2021 and $1.7 million for the quarter ended June 30, 2020.

SBA Paycheck Protection Program and COVID Deferrals

2 unchanged sentences

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.

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

As of June 30, 2021, the total gross balance outstanding of PPP loans was $248,582,000 as compared to total PPP originations of $640,410,000.

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

As of June 30, 2021 there was approximately $8,990,000 in net deferred fee income remaining to be recognized.

During the three and six months ended June 30, 2021, the Company recognized $2,344,000 and $7,304,000, respectively in fees on PPP loans.

COVID Deferrals

1 unchanged sentence

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.

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:

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

(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:

4 unchanged sentences

Total commercial real estate loans 53,065 1.7 97.5 2.5 23.7 89.3 16.6

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 —

Consumer loans — — — — — — —

Commercial and industrial 557 0.1 100.0 — — — 100.0

3 unchanged sentences

Total modifications $ 53,622 1.1 % 95.7 % 2.5 % — % 88.4 % 11.6 %

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, 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.

Of the remaining balance outstanding as of June 30, 2021, $33,350,000 is related to second deferrals which are expected to conclude their modification period by November, 2021 and $2,525,595 is related to third deferrals expected to conclude in October, 2021.

The remaining balance of loans with modified terms are scheduled to conclude their modification period during fiscal 2021.

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

TRICO BANCSHARES

2 unchanged sentences

Three months ended

June 30, Six months ended

2021 2020 2021 2020

Net interest income $ 67,083 $ 64,659 $ 133,523 $ 127,851

31 unchanged sentences

(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.

The Company announced net income of $28,362,000 for the quarter ended June 30, 2021, compared to $33,649,000 and $7,430,000 during the quarters ended March 31, 2021 and June 30, 2020, respectively.

Diluted earnings per share were $0.95, $1.13 and $0.25 for the quarters ended June 30, 2021, March 31, 2021 and June 30, 2020, respectively.

Results of Operations

4 unchanged sentences

Three months ended

(dollars in thousands) 2021 2020 $ Change % Change

(in thousands) June 30,

2021 March 31,

2021 $ Change % Change

Interest income $ 68,479 $ 67,916 $ 563 0.8 %

16 unchanged sentences

3.47 % 3.49 % (0.02) %

(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.

Three months ended

(in thousands) 2021 2020 $ Change % Change

Interest income $ 68,479 $ 67,148 $ 1,331 2.0 %

Interest expense (1,396) (2,489) 1,093 (43.9) %

Fully tax-equivalent adjustment (FTE) (1)

255 286 (31) (10.8) %

Net interest income (FTE) $ 67,338 $ 64,945 $ 2,393 3.7 %

Net interest margin (FTE) 3.58 % 4.10 %

Acquired loans discount accretion, net:

Amount (included in interest income) $ 2,566 $ 2,587 $ (21)

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

3.44 % 3.94 % (0.50) %

PPP loans yield, net:

Amount (included in interest income) $ 3,179 $ 2,356 $ 823

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

3.61 % 4.14 % (0.53) %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 5,745 $ 4,943 $ 802

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

3.47 % 3.98 % (0.51) %

Six months ended

(in thousands) 2021 2020 $ Change % Change

Interest income $ 136,395 $ 133,665 $ 2,730 2.0 %

Interest expense (2,872) (5,814) 2,942 (50.6) %

Fully tax-equivalent adjustment (FTE) (1)

532 557 (25) (4.5) %

Net interest income (FTE) $ 134,055 $ 128,408 $ 5,647 4.4 %

Net interest margin (FTE) 3.66 % 4.22 %

Acquired loans discount accretion, net:

Amount (included in interest income) $ 4,278 $ 4,335 $ (57)

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

3.54 % 4.08 % (0.54) %

PPP loans yield, net:

Amount (included in interest income) $ 9,042 $ 2,356 $ 6,686

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

3.59 % 4.25 % (0.66) %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 13,320 $ 6,691 $ 6,629

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

3.46 % 4.11 % (0.65) %

(1) Certain information included herein is presented on a fully tax-equivalent (FTE) basis and/or to present additional financial details which may be desired by users of this financial information.

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 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.

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

During the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, purchased loan discount accretion was $2,566,000, $1,712,000, and $2,587,000, respectively.

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.

3 unchanged sentences

For the three months ended

March 31, 2021 March 31, 2020

June 30, 2021 June 30, 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.

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.

Net interest income (FTE) during the three months ended June 30, 2021 increased $2,393,000 or 3.7% to $67,338,000 compared to $64,945,000 for the quarter ended June 30, 2020.

Over the same period, net interest margin decreased 52 basis points to 3.58% as compared to 4.10% in the comparative 2020 period.

The 52 basis point decrease is primarily attributed to a 30 basis point decrease in non-PPP loan yields, which yielded 4.93% as of June 30, 2021 as compared to 5.23% for the quarter ended June 30, 2020.

The following table presents, for the six 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).

ANALYSIS OF CHANGE IN NET INTEREST MARGIN ON EARNING ASSETS

(unaudited, dollars in thousands)

Six months ended June 30, 2021 Six months ended June 30, 2020

Balance Income/

Expense Yield/

Balance Income/

Expense Yield/

Loans, excluding PPP $ 4,527,329 $ 111,698 4.98 % $ 4,346,419 $ 112,311 5.20 %

PPP loans 344,011 9,042 5.30 % 146,285 2,356 3.24 %

Investments-taxable 1,763,140 13,583 1.55 % 1,235,672 16,261 2.65 %

Investments-nontaxable (1)

128,564 2,306 3.62 % 118,992 2,413 4.08 %

Total investments 1,891,704 15,889 1.69 % 1,354,664 18,674 2.77 %

Cash at Federal Reserve and other banks 629,952 298 0.10 % 266,752 881 0.66 %

Total earning assets 7,392,996 136,927 3.73 % 6,114,120 134,222 4.41 %

Other assets, net 575,138 653,006

Total assets $ 7,968,134 $ 6,767,126

Liabilities and shareholders’ equity

Interest-bearing demand deposits $ 1,461,377 $ 153 0.02 % $ 1,269,452 $ 233 0.04 %

Savings deposits 2,272,830 637 0.06 % 1,918,918 1,706 0.18 %

Time deposits 330,703 975 0.59 % 419,638 2,425 1.16 %

Total interest-bearing deposits 4,064,910 1,765 0.09 % 3,608,008 4,364 0.24 %

Other borrowings 36,870 9 0.05 % 24,552 9 0.07 %

Junior subordinated debt 57,739 1,098 3.83 % 57,324 1,441 5.06 %

Total interest-bearing liabilities 4,159,519 2,872 0.14 % 3,689,884 5,814 0.32 %

Noninterest-bearing deposits 2,734,922 2,059,242

Other liabilities 123,233 123,481

Shareholders’ equity 950,460 894,519

Total liabilities and shareholders’ equity $ 7,968,134 $ 6,767,126

Net interest rate spread (1) (2)

3.59 % 4.09 %

Net interest income and margin (1) (3)

$ 134,055 3.66 % $ 128,408 4.22 %

(1) Fully taxable equivalent (FTE).

All yields and rates are calculated using specific day counts for the period and year as applicable.

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

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

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

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 March 31, 2021

compared with three months ended March 31, 2020

Volume Rate Total

Three months ended June 30, 2021

compared with three months ended June 30, 2020

(in thousands) Volume Rate Total

Increase (decrease) in interest income:

12 unchanged sentences

Increase (decrease) in net interest income $ 17,461 $ (15,068) $ 2,393

Six months ended June 30, 2021 compared with six months ended June 30, 2020

(in thousands) Volume Rate Total

Increase (decrease) in interest income:

Loans, including PPP $ 9,845 $ (3,772) $ 6,073

Investment securities (1)

18,071 (20,856) (2,785)

Cash at Federal Reserve and other banks 1,199 (1,782) (583)

Total interest-earning assets 29,115 (26,410) 2,705

Increase (decrease) in interest expense:

Interest-bearing demand deposits 77 (157) (80)

Savings deposits 637 (1,706) (1,069)

Time deposits (1,032) (418) (1,450)

Other borrowings 9 (9) —

Junior subordinated debt 21 (364) (343)

Total interest-bearing liabilities (288) (2,654) (2,942)

Increase (decrease) in net interest income $ 29,403 $ (23,756) $ 5,647

( (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.

Net interest income (FTE) during the three months ended June 30, 2021 increased $2,393,000 or 3.7% to $67,338,000 compared to $64,945,000 during the three months ended June 30, 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, which net of the impact of declining yields resulted in a change totaling $1,895,000.

Declining interest rates also continued to benefit the interest expense on deposits, resulting in a decrease of $985,000 in related costs.

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 $632,000 in yield during the period.

Net interest income (FTE) during the six months ended June 30, 2021 increased $5,647,000 or 4.4% to $134,055,000 compared to $128,408,000 during the six months ended June 30, 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 $6,073,000.

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

Declining interest rates also continued to benefit the yield expense on deposits, resulting in a decrease of $2,559,000 in related expense.

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.

During the three months ended June 30, 2021, the Company recorded a reversal of provision for credit losses of $260,000, as compared to a reversal of provision for credit losses of $6,060,000 during the trailing quarter, and a provision expense of $22,244,000 during the second 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

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

Addition to (reversal of) allowance for credit losses $ (145) $ (6,240) $ 4,450 $ 7,649 $ 22,089

Addition to reserve for unfunded loan commitments

Addition to (reversal of) unfunded loan commitments

(115) 180 400 — 155

Total provision for credit losses $ (260) $ (6,060) $ 4,850 $ 7,649 $ 22,244

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.

Six months ended

(in thousands) June 30, 2021 June 30, 2020

Addition to (reversal of) allowance for credit losses $ (6,385) $ 30,089

Addition to (reversal of) unfunded loan commitments

Total provision for credit losses $ (6,320) $ 30,313

The allowance for credit losses (ACL) was $86,062,000 as of June 30, 2021, a net increase of $121,000 over the immediately preceding quarter.

The reversal of allowance for credit losses of $145,000 was necessary as the net recoveries totaling $266,000 during the quarter were in excess of the required changes in quantitative and qualitative reserve components.

More specifically, the portfolio-wide qualitative indicator associated with the forecast levels of US unemployment reduced the required credit reserves by $2,294,000, while the qualitative factors associated with portfolio concentration risks, stemming from second quarter loan growth, added approximately $1,708,000 to the credit expense on loans as of June 30, 2021.

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.

Management noted that the majority of economic forecasts utilized in the ACL calculation seem to have rebounded slightly 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 decreased by $1,258,000 during the quarter ended June 30, 2021 to $9,292,000, as compared to $10,550,000 at March 31, 2021.

Non-performing loans were $32,705,000 at June 30, 2021, an increase of $3,764,000 and $11,975,000, respectively, from $28,941,000 and $20,730,000 as of March 31, 2021, and June 30, 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

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

(in thousands) 2021 2021 2020

Pass $ 4,756,379 96.2 % $ 4,765,180 95.9 % $ 4,556,870 95.7 %

4 unchanged sentences

Loans past due 30+ days to total loans 0.19 % 0.19 % 0.14 %

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.

The Company's loan portfolio for non-classified loans (loans graded special mention or better) remains consistent for the quarter ended June 30, 2021, as compared to the trailing quarter March 31, 2021, representing 98.8% of total loans outstanding, respectively.

Loans risk graded special mention decreased by approximately $13,445,000 during the quarter ended June 30, 2021 as compared to the trailing quarter, while loans risk graded substandard increased modestly by $161,000 over the same period.

The reduction in special mention risk graded credits was largely the result of two relationships being upgraded, totaling $9,747,000.

The total balance of substandard risk graded credits remained consistent as of the current and trailing quarters;

although, the Company did benefit from the payoff of one credit, which was subsequently offset by a separate credit that was downgraded to substandard.

There was one addition to other real estate owned totaling approximately $101,000 during the quarter ended June 30, 2021 and there was one sale for proceeds of approximately $184,000, which generated a net gain of $15,000 for the quarter.

As of June 30, 2021, other real estate owned consisted of six properties with a carrying value of approximately $2,248,000.

Non-interest Income

1 unchanged sentence

Three months ended

(dollars in thousands) 2021 2020 $ Change % Change

(in thousands) 2021 2020 $ Change % Change

ATM and interchange fees $ 6,558 $ 5,165 $ 1,393 27.0 %

10 unchanged sentences

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

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

Gain on marketable equity securities 8 25 (17) (68.0) %

Other 115 142 (27) (19.0) %

1 unchanged sentence

Total non-interest income $ 15,957 $ 11,657 $ 4,300 36.9 %

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 income increased $4,300,000 or 36.9% to $15,957,000 during the three months ended June 30, 2021, compared to $11,657,000 during the comparable 2020 quarter.

Following the relaxed social distancing guidelines, increased debit card usage benefited ATM and interchange fees, increasing by $1,393,000, during the recent quarter ended.

Additionally, changes in the value of mortgage servicing rights and gain on sale of mortgage loans improved by $765,000 and $1,111,000, respectively, during the three months ended June 30, 2021 as compared to the equivalent period in 2020.

The following table presents the key components of non-interest income for the current and prior year periods indicated:

Six months ended June 30,

(in thousands) 2021 2020 $ Change % Change

ATM and interchange fees $ 12,419 $ 10,276 $ 2,143 20.9 %

Service charges on deposit accounts 6,731 7,092 (361) (5.1) %

Other service fees 1,785 1,492 293 19.6 %

Mortgage banking service fees 930 928 2 0.2 %

Change in value of mortgage servicing rights (459) (2,494) 2,035 (81.6) %

Total service charges and fees 21,406 17,294 4,112 23.8 %

Increase in cash value of life insurance 1,418 1,430 (12) (0.8) %

Asset management and commission income 1,781 1,577 204 12.9 %

Gain on sale of loans 6,094 2,627 3,467 132.0 %

Lease brokerage income 359 320 39 12.2 %

Sale of customer checks 235 212 23 10.8 %

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

Gain (loss) on marketable equity securities (45) 72 (117) (162.5) %

Other 819 (55) 874 (1,589.1) %

Total other non-interest income 10,661 6,183 4,478 72.4 %

Total non-interest income $ 32,067 $ 23,477 $ 8,590 36.6 %

Non-interest income increased $8,590,000 or 36.6% to $32,067,000 during the six months ended June 30, 2021, compared to $23,477,000 during the comparable period in 2020.

Following the relaxed social distancing guidelines, increased debit card usage benefited ATM and interchange fees, increasing by $2,143,000, during the most recent six months period ended.

Additionally, changes in the value of mortgage servicing rights and gain on sale of mortgage loans improved by $2,035,000 and $3,467,000, respectively, during the six months ended June 30, 2021 as compared to the equivalent period in 2020.

Non-interest Expense

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

The following table summarizes the Company’s non-interest expense for the periods indicated:

Three months ended

2021 2020 $ Change % Change

(in thousands) 2021 2020 $ Change % Change

Base salaries, net of deferred loan origination costs $ 17,537 $ 17,277 $ 260 1.5 %

14 unchanged sentences

Courier service 288 337 (49) (14.5) %

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

Gain on sale or acquisition of foreclosed assets (15) (16) 1 (6.3) %

(Gain) loss on disposal of fixed assets (426) 15 (441) (2,940.0) %

Other miscellaneous expense 2,855 4,375 (1,520) (34.7) %

2 unchanged sentences

Average full time equivalent staff 1,020 1,140 (120) (10.5) %

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.

Non-interest expense decreased by $1,379,000 or 3.0% to $44,171,000 during the three months ended June 30, 2021 as compared to $45,550,000 for the three months ended June 30, 2020.

Benefits and other compensation expense decreased by $2,161,000 during the three months ended June 30, 2021, primarily due to improved long-term benefit obligation costs.

Other miscellaneous expenses decreased by $1,520,000 during the three months ended June 30, 2021, due specifically to the absence of indirect loan documentation and administrative costs incurred in conjunction with the PPP loan program incurred during the three months ended June 30, 2020.

A gain on disposal of fixed assets was recorded during the quarter totaling $426,000 related to the sale of a former retail branch building.

Conversely, incentive compensation increased by $1,927,000 or 80.5% to $4,322,000 during the quarter ended June 30, 2021 as compared to the same period in 2020, due to the organic loan growth and strong overall Company performance during the quarter.

The following table presents the key components of non-interest income for the current and prior year periods indicated:

Six months ended June 30,

(in thousands) 2021 2020 $ Change % Change

Base salaries, net of deferred loan origination costs $ 33,048 $ 34,900 $ (1,852) (5.3) %

Incentive compensation 7,902 5,496 2,406 43.8 %

Benefits and other compensation costs 11,461 13,931 (2,470) (17.7) %

Total salaries and benefits expense 52,411 54,327 (1,916) (3.5) %

Occupancy 7,426 7,273 153 2.1 %

Data processing and software 6,403 7,024 (621) (8.8) %

Equipment 2,724 2,862 (138) (4.8) %

Intangible amortization 2,862 2,862 — — %

Advertising 1,114 1,196 (82) (6.9) %

ATM and POS network charges 2,797 2,583 214 8.3 %

Professional fees 1,640 1,444 196 13.6 %

Telecommunications 1,145 1,364 (219) (16.1) %

Regulatory assessments and insurance 1,230 455 775 170.3 %

Postage 322 573 (251) (43.8) %

Operational losses 421 405 16 4.0 %

Courier service 582 668 (86) (12.9) %

Gain on sale or acquisition of foreclosed assets (66) (57) (9) 15.8 %

(Gain) loss on disposal of fixed assets (426) 15 (441) (2940.0) %

Other miscellaneous expense 5,204 7,306 (2,102) (28.8) %

Total other non-interest expense 33,378 35,973 (2,595) (7.2) %

Total non-interest expense $ 85,789 $ 90,300 $ (4,511) (5.0) %

Average full-time equivalent staff 1,022 1,141 (119) (10.4) %

The Company’s effective tax rate was 28.0% for the six months ended June 30, 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.

2 unchanged sentences

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

(in thousands) As of June 30, 2021 As of December 31, 2020 $ Change Annualized

Ending balances

1 unchanged sentence

Total loans 4,944,894 4,763,127 181,767 7.6 %

Total PPP loans 239,592 326,770 (87,178) (53.4) %

Total investments 2,103,575 1,719,102 384,473 44.7 %

2 unchanged sentences

Total other borrowings 40,559 26,914 13,645 101.4 %

Organic loan growth, excluding PPP, of $99,169,000 or 8.6% on an annualized basis was realized during the quarter ended June 30, 2021, primarily within commercial real estate.

In addition, investment security growth was $140,795,000 or 28.7% on an annualized basis as excess liquidity continued to be put to use in higher yielding earning assets.

Earning asset growth was funded by the continued growth of deposit balances which increased during the second quarter of 2021 by $128,653,000 or 7.5% annualized.

SBA forgiveness outpaced new loan origination activity, resulting in a $22,083,000 or 1.8% annualized decrease in total loans during the second quarter as compared to the trailing quarter.

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

As of June 30, $ Change % Change

(in thousands) 2021 2020

Ending balances

1 unchanged sentence

Total loans 4,944,894 4,801,405 143,489 3.0 %

Total PPP loans 239,592 423,431 (183,839) (43.4) %

Total investments 2,103,575 1,353,728 749,847 55.4 %

2 unchanged sentences

Total other borrowings 40,559 38,544 2,015 5.2 %

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.

The PPP program generated significant increases in volume during the twelve months ended June 30, 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 increased to $2,103,575,000 at June 30, 2021, a change of $749,847,000 or 55.4% from $1,353,728,000 at June 30, 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.

Investment securities available for sale increased $433,304,000 to $1,847,568,000 as of June 30, 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:

March 31, 2021 December 31, 2020

(dollars in thousands) Fair Value % Fair Value %

There were no sales of investment securities during the three and six months ended June 30, 2021 and 2020, respectively.

The following table presents the available for sale debt securities portfolio by major type as of June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

(in thousands) Fair Value % Fair Value %

Debt securities available for sale :

5 unchanged sentences

Total debt securities available for sale $ 1,847,568 100.0 % $ 1,414,264 100.0 %

March 31, 2021 December 31, 2020

(dollars in thousands) Amortized

June 30, 2021 December 31, 2020

(in thousands) Amortized

Cost % Amortized

4 unchanged sentences

Total debt securities held to maturity $ 235,778 100.0 % $ 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.

Investment securities held to maturity decreased $48,785,000 to $235,778,000 as of June 30, 2021, as compared to December 31, 2020.

This decrease is attributable to calls and principal repayments of $48,269,000, and amortization of net purchase premiums of $2,855,000.

6 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) March 31, 2021 December 31, 2020

(in thousands) June 30, 2021 December 31, 2020

Commercial real estate $ 3,194,336 64.60 % $ 2,951,902 61.97 %

5 unchanged sentences

Total loans $ 4,944,894 100.0 % $ 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

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.

As of June 30, 2021, the total gross balance outstanding of PPP loans was $248,582,000 as compared to total PPP originations of $640,410,000.

As of June 30, 2021 there was approximately $8,990,000 in net deferred fee income remaining to be recognized.

During the three and six months ended June 30, 2021, the Company recognized $2,344,000 and $7,304,000, respectively in fees on 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) March 31,

(in thousands) June 30,

2021 December 31,

9 unchanged sentences

Allowance for credit losses to nonperforming loans 274 % 342 %

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

Changes in nonperforming assets during the three months ended June 30, 2021

(in thousands) Balance at

March 31, 2021 New NPA /

Adjustments Pay-downs

/Upgrades Charge-offs/ (1)

Assets Balance at

June 30, 2021

Commercial real estate:

CRE non-owner occupied $ 7,000 1,833 (318) — — $ 8,515

CRE owner occupied 3,762 2,134 (286) — — 5,610

Multifamily — 171 — — — 171

Farmland 1,431 — (85) — — 1,346

Total commercial real estate loans 12,193 4,138 (689) — — 15,642

SFR 1-4 1st DT liens 4,996 23 (793) — 102 4,328

SFR HELOCs and junior liens 5,142 292 (830) — — 4,604

Other 103 30 (8) (12) — 113

Total consumer loans 10,241 345 (1,631) (12) 102 9,045

Commercial and industrial 2,019 1,985 (88) (301) 3,615

Construction 4,483 — (81) — — 4,402

Agriculture production 5 — (5) — — —

Leases — — — — — —

Total nonperforming loans 28,941 6,468 (2,494) (313) 102 32,704

Foreclosed assets 2,309 — (61) — — 2,248

Total nonperforming assets $ 31,250 6,468 (2,555) — (313) 102 $ 34,952

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

Nonperforming assets increased during the three months ended June 30, 2021 by $3,702,000 (11.8%) to $34,952,000 at June 30, 2021 compared to $31,250,000 at March 31, 2021.

The increase in nonperforming assets during the second quarter of 2021 was primarily the result of new nonperforming loans of $6,468,000, which were partially offset by pay-downs of $2,555,000 and write-downs of $313,000.

Non performing loans added during the second quarter of 2021 were primarily within commercial real estate, with non-owner occupied adding $1,833,000 and owner occupied contributing $2,134,000 .

Management believes these loans are well-secured as of June 30, 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 June 30, 2021.

Loan charge-offs during the three months ended June 30, 2021

In the second quarter of 2021, the Company recorded $313,000 in loan charge-offs and $74,000 in deposit overdraft charge-offs less $623,000 in loan recoveries and $30,000 in deposit overdraft recoveries, which collectively resulted in $266,000 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 six months ended June 30, 2021

(in thousands) Balance at

December 31, 2020 New NPA /

2 unchanged sentences

Assets Balance at

March 31, 2021

June 30, 2021

Commercial real estate:

16 unchanged sentences

(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

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.

Nonperforming assets increased during the six months ended June 30, 2021 by $5,244,000 (17.7%) to $34,952,000 at June 30, 2021 compared to $29,708,000 at December 31, 2020.

The increase in nonperforming assets during the first half of 2021 was primarily the result of new nonperforming loans of $11,309,000, which were partially offset by pay-downs of $5,696,000 and write-downs of $471,000.

Loan charge-offs during the six months ended June 30, 2021

During the six months ended June 30, 2021, the Company recorded $471,000 in loan charge-offs and $142,000 in deposit overdraft charge-offs less $1,149,000 in loan recoveries and $64,000 in deposit overdraft recoveries, which collectively resulted in $600,000 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.

1 unchanged sentence

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

(dollars in thousands) March 31,

(in thousands) June 30,

2021 March 31,

2021 December 31,

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

2020 September 30, 2020 June 30, 2020

Allowance for credit losses:

7 unchanged sentences

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.

Based on the current conditions of the loan portfolio, management believes that the $86,062,000 allowance for loan losses at June 30, 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

June 30, 2021 December 31, 2020 June 30, 2020

Commercial real estate $ 51,637 60.0 % 53,693 58.5 % $ 44,850 56.2 %

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:

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

June 30, 2021 December 31, 2020 June 30, 2020

Commercial real estate $ 3,194,336 1.62 % $ 2,951,902 1.82 % $ 2,905,485 1.54 %

4 unchanged sentences

Leases 5,199 0.12 % 3,784 0.13 % 1,763 0.68 %

Total allowance for credit losses $ 4,966,977 1.73 % $ 4,763,127 1.93 % $ 4,379,062 1.32 %

The following table summarizes the activity in the allowance for credit losses for the periods indicated (dollars in thousands):

Total loans $ 4,944,894 1.74 % $ 4,763,127 1.93 % $ 4,801,405 1.66 %

The following table summarizes the activity in the allowance for credit losses for the periods indicated:

Three months ended

June 30, Six months ended

(in thousands) 2021 2020 2021 2020

8 unchanged sentences

Multifamily — — — —

Farmland — — — —

SFR 1-4 1st DT liens — (11) — (11)

4 unchanged sentences

Agriculture production — — — —

Leases — — — —

Total loans charged-off (387) (491) (613) (1,001)

4 unchanged sentences

Multifamily — — — —

Farmland — — — —

Home equity lines 1 2 11 412

4 unchanged sentences

Agriculture production 2 — 22 20

Leases — — — —

Total recoveries of previously charged-off loans 653 230 1,213 1,122

4 unchanged sentences

Net recoveries (charge-offs) during period to average loans outstanding during period 0.02 % (0.02) % 0.03 % 0.01 %

Provision for loan losses (benefit from reversal of) to average loans outstanding during period (0.52) % 0.74 %

Provision for credit losses (benefit from reversal of) to average loans outstanding during period (0.01) % 1.90 % (0.28) % 1.34 %

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:

The following table details the components and summarize the activity in foreclosed assets, net of allowances for losses, for the six months ended June 30, 2021:

(in thousands) Balance at

1 unchanged sentence

Adjustments Transfers

from Loans Balance at

March 31, 2021

from Loans Balance at June 30, 2021

Land & construction $ 154 $ — $ — $ — $ 154

2 unchanged sentences

Total foreclosed assets $ 2,844 $ (710) $ 11 $ 102 $ 2,247

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.

During the three and six months ended June 30, 2021, the Company’s deposits increased by $128,653,000 and $486,119,000, respectively, to $6,992,053,000 at quarter ended.

Included in the June 30, 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.

6 unchanged sentences

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.

The 2021 Repurchase Plan has no expiration date (in accordance with applicable laws and regulations) and during the three and six month periods June 30, 2021, the Company repurchased 45,354 shares with a market value of $2,101,000, respectively.

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.

Under the 2019 Repurchase Plan, during the six months ended June 30, 2021, the Company repurchased 223 shares with a market value of approximately $8,000.

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 Company’s primary capital resource is shareholders’ equity, which totaled $966,780,000 at June 30, 2021.

This amount represents an increase of $24,241,000 during the quarter ended June 30, 2021, primarily as a result of net income of $28,362,000, plus an increase in accumulated other comprehensive income of $5,206,000, offset by $7,430,000 in cash dividends paid on common stock.

The Company’s ratio of equity to total assets was 11.8% and 12.1% as of June 30, 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 June 30, 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

June 30, 2021 December 31, 2020

Ratio Minimum

4 unchanged sentences

Leverage 9.9 % 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.

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.

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 June 30, 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.

2 unchanged sentences

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.

As of June 30, 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 six months of 2021 generated cash flows from operations of $58,806,000 compared to $63,705,000 during the first six months of 2020.

Net cash used by investing activities was $570,986,000 for the six months ended June 30, 2021, compared to net cash from investing activities of $497,490,000 during the six months ending 2020.

Financing activities provided $482,369,000 during the six months ended June 30, 2021, compared to $863,130,000 used during the six months ended June 30, 2020.

Deposit balance changes increased available liquidity by $486,119,000 during the six months ended June 30, 2021, compared to a decrease of $881,264,000 for financing activity during the same period in 2020.

Dividends paid used $14,862,000 and $13,208,000 of cash during the six months ended June 30, 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