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 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, 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; 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 39 Table of Contents 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. 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. 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. 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. 40 Table of Contents Financial Highlights 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 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 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. 41 Table of Contents 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. The following is a summary of COVID related loan customer modifications with outstanding balances as of June 30, 2021: Modification Type Deferral Term (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 $ 23,811 1.6 % 94.4 % 5.6 % — % 81.5 % 18.5 % CRE owner occupied 2,943 0.5 100.0 — — 57.1 42.9 Multifamily 26,311 3.2 100.0 — — 100.0 — Farmland — — — — — — — Total commercial real estate loans 53,065 1.7 97.5 2.5 23.7 89.3 16.6 Consumer loans — — — — — — — Commercial and industrial 557 0.1 100.0 — — — 100.0 Construction — — — — — — — Agriculture production — — — — — — — Leases — — — — — — — Total modifications $ 53,622 1.1 % 95.7 % 2.5 % — % 88.4 % 11.6 % 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. 42 Table of Contents TRICO BANCSHARES Financial Summary (In thousands, except per share amounts; unaudited) Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Net interest income $ 67,083 $ 64,659 $ 133,523 $ 127,851 Reversal of (provision for) credit losses 260 (22,244) 6,320 (30,313) Non-interest income 15,957 11,657 32,067 23,477 Non-interest expense (44,171) (45,550) (85,789) (90,300) Provision for income taxes (10,767) (1,092) (24,110) (7,164) Net income $ 28,362 $ 7,430 $ 62,011 $ 23,551 Per Share Data: Basic earnings per share $ 0.95 $ 0.25 $ 2.09 $ 0.78 Diluted earnings per share $ 0.95 $ 0.25 $ 2.07 $ 0.78 Dividends paid $ 0.25 $ 0.22 $ 0.50 $ 0.44 Book value at period end Average common shares outstanding 29,719 29,754 29,723 30,074 Average diluted common shares outstanding 29,904 29,883 29,904 30,203 Shares outstanding at period end 29,716 29,759 At period end: Loans 4,944,894 4,801,405 Total investment securities 2,103,575 1,353,728 Total assets 8,170,365 7,360,071 Total deposits 6,992,053 6,248,258 Other borrowings 40,559 38,544 Shareholders’ equity 966,780 885,686 Financial Ratios: During the period: Return on average assets (annualized) 1.40 % 0.43 % 1.57 % 0.70 % Return on average equity (annualized) 11.85 % 3.39 % 13.16 % 5.28 % Net interest margin (1) (annualized) 3.58 % 4.10 % 3.66 % 4.22 % Efficiency ratio 53.19 % 59.69 % 51.81 % 59.82 % Average equity to average assets 11.81 % 12.53 % 11.93 % 13.22 % At end of period: Equity to assets 11.83 % 12.03 % Total capital to risk-adjusted assets 15.31 % 15.13 % (1) Fully taxable equivalent (FTE) 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 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. 43 Table of Contents 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 (in thousands) June 30, 2021 March 31, 2021 $ Change % Change Interest income $ 68,479 $ 67,916 $ 563 0.8 % Interest expense (1,396) (1,476) 80 (5.4) % Fully tax-equivalent adjustment (FTE) (1) 255 277 (22) (7.9) % Net interest income (FTE) $ 67,338 $ 66,717 $ 621 0.9 % Net interest margin (FTE) 3.58 % 3.74 % Acquired loans discount accretion, net: Amount (included in interest income) $ 2,566 $ 1,712 $ 854 Net interest margin less effect of acquired loan discount accretion (1) 3.44 % 3.64 % (0.20) % PPP loans yield, net: Amount (included in interest income) $ 3,179 $ 5,863 $ (2,684) Net interest margin less effect of PPP loan yield (1) 3.61 % 3.59 % 0.02 % Acquired loans discount accretion and PPP loan yield, net: (1) Amount (included in interest income) $ 5,745 $ 7,575 $ (1,830) Net interest margin less effect of acquired loan discount accretion and PPP loan yield (1) 3.47 % 3.49 % (0.02) % Three months ended June 30, (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: (1) 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) % 44 Table of Contents Six months ended June 30, (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. 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 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 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. 45 Table of Contents Summary of Average Balances, Yields/Rates and Interest Differential 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 June 30, 2021 June 30, 2020 Average Balance Interest Income/ Expense Rates Earned /Paid Average Balance Interest Income/ Expense Rates Earned /Paid Assets: Loans, excluding PPP $ 4,646,188 $ 57,125 4.93 % $ 4,363,481 $ 56,053 5.23 % PPP loans 332,277 3,179 3.84 % 292,569 2,356 3.24 % Investment securities - taxable 1,875,056 7,189 1.54 % 1,251,873 7,689 2.47 % Investment securities - nontaxable (1) 132,034 1,106 3.36 % 119,860 1,238 4.15 % Total investments 2,007,090 8,295 1.66 % 1,371,733 8,927 2.62 % Cash at Federal Reserve and other banks 559,026 135 0.10 % 338,082 98 0.12 % Total interest-earning assets 7,544,581 68,734 3.65 % 6,365,865 67,434 4.26 % Other assets 584,093 661,870 Total assets $ 8,128,674 $ 7,027,735 Liabilities and shareholders’ equity: Interest-bearing demand deposits $ 1,490,247 $ 77 0.02 % $ 1,293,007 $ 64 0.02 % Savings deposits 2,316,889 308 0.05 % 1,968,374 644 0.13 % Time deposits 324,867 443 0.55 % 409,242 1,105 1.09 % Total interest-bearing deposits 4,132,003 828 0.08 % 3,670,623 1,813 0.20 % Other borrowings 40,986 5 0.05 % 26,313 4 0.06 % Junior subordinated debt 57,788 563 3.91 % 57,372 672 4.71 % Total interest-bearing liabilities 4,230,777 1,396 0.13 % 3,754,308 2,489 0.27 % Noninterest-bearing deposits 2,811,078 2,266,671 Other liabilities 126,674 126,351 Shareholders’ equity 960,145 880,405 Total liabilities and shareholders’ equity $ 8,128,674 $ 7,027,735 Net interest spread (2) 3.52 % 3.99 % Net interest income and interest margin (3) $ 67,338 3.58 % $ 64,945 4.10 % (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. 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). 46 Table of Contents 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 Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate Assets 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 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. Three months ended June 30, 2021 compared with three months ended June 30, 2020 (in thousands) Volume Rate Total Increase (decrease) in interest income: Loans, including PPP $ 6,780 $ (4,885) $ 1,895 Investment securities (1) 10,515 (11,147) (632) Cash at Federal Reserve and other banks 66 (29) 37 Total interest-earning assets 17,361 (16,061) 1,300 Increase (decrease) in interest expense: Interest-bearing demand deposits 10 3 13 Savings deposits 113 (449) (336) Time deposits (230) (432) (662) Other borrowings 2 (1) 1 Junior subordinated debt 5 (114) (109) Total interest-bearing liabilities (100) (993) (1,093) 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 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 continued to benefit the yield expense on deposits, resulting in a decrease of $2,559,000 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 $2,785,000 in yield during the period. 47 Table of Contents Asset Quality and Loan Loss Provisioning 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 (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 (reversal of) unfunded loan commitments (115) 180 400 — 155 Total provision for credit losses $ (260) $ (6,060) $ 4,850 $ 7,649 $ 22,244 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 65 224 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 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. June 30, % of Total Loans March 31, % of Total Loans December 31, % of Total Loans (in thousands) 2021 2021 2020 Risk Rating: Pass $ 4,756,379 96.2 % $ 4,765,180 95.9 % $ 4,556,870 95.7 % Special Mention 130,234 2.6 % 143,677 2.9 % 157,191 3.3 % Substandard 58,281 1.2 % 58,120 1.2 % 49,066 1.0 % Total $ 4,944,894 $ 4,966,977 $ 4,763,127 Classified loans to total loans 1.18 % 1.17 % 1.03 % 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 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. 48 Table of Contents 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 The following table summarizes the Company’s non-interest income for the periods indicated (in thousands): Three months ended June 30, (in thousands) 2021 2020 $ Change % Change ATM and interchange fees $ 6,558 $ 5,165 $ 1,393 27.0 % Service charges on deposit accounts 3,462 3,046 416 13.7 % Other service fees 914 734 180 24.5 % Mortgage banking service fees 467 459 8 1.7 % Change in value of mortgage servicing rights (471) (1,236) 765 (61.9) % Total service charges and fees 10,930 8,168 2,762 33.8 % Increase in cash value of life insurance 745 710 35 4.9 % Asset management and commission income 947 661 286 43.3 % Gain on sale of loans 2,847 1,736 1,111 64.0 % Lease brokerage income 249 127 122 96.1 % Sale of customer checks 116 88 28 31.8 % Gain on sale of investment securities — — — n/a Gain on marketable equity securities 8 25 (17) (68.0) % Other 115 142 (27) (19.0) % Total other non-interest income 5,027 3,489 1,538 44.1 % Total non-interest income $ 15,957 $ 11,657 $ 4,300 36.9 % 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. 49 Table of Contents Non-interest Expense The following table summarizes the Company’s non-interest expense for the periods indicated: Three months ended June 30, (in thousands) 2021 2020 $ Change % Change Base salaries, net of deferred loan origination costs $ 17,537 $ 17,277 $ 260 1.5 % Incentive compensation 4,322 2,395 1,927 80.5 % Benefits and other compensation costs 5,222 7,383 (2,161) (29.3) % Total salaries and benefits expense 27,081 27,055 26 0.1 % Occupancy 3,700 3,398 302 8.9 % Data processing and software 3,201 3,657 (456) (12.5) % Equipment 1,207 1,350 (143) (10.6) % Intangible amortization 1,431 1,431 — — % Advertising 734 531 203 38.2 % ATM and POS network charges 1,551 1,210 341 28.2 % Professional fees 1,046 741 305 41.2 % Telecommunications 564 639 (75) (11.7) % Regulatory assessments and insurance 618 360 258 71.7 % Postage 124 283 (159) (56.2) % Operational losses 212 184 28 15.2 % Courier service 288 337 (49) (14.5) % 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) % Total other non-interest expense 17,090 18,495 (1,405) (7.6) % Total non-interest expense $ 44,171 $ 45,550 $ (1,379) (3.0) % Average full time equivalent staff 1,020 1,140 (120) (10.5) % 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. 50 Table of Contents 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) % Income Taxes 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. 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. The following is a comparison of the quarterly change in certain assets and liabilities: (in thousands) As of June 30, 2021 As of December 31, 2020 $ Change Annualized % Change Ending balances Total assets $ 8,170,365 $ 7,639,529 $ 530,836 13.9 % 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 % Total deposits 6,992,053 6,505,934 486,119 14.9 % Total noninterest-bearing deposits 2,843,783 2,581,517 262,266 20.3 % 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. 51 Table of Contents The following is a comparison of the year over year change in certain assets and liabilities: As of June 30, $ Change % Change (in thousands) 2021 2020 Ending balances Total assets $ 8,170,365 $ 7,360,071 $ 810,294 11.0 % 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 % Total deposits 6,992,053 6,248,258 743,795 11.9 % Total noninterest-bearing deposits 2,843,783 2,487,120 356,663 14.3 % Total other borrowings 40,559 38,544 2,015 5.2 % 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 $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 $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 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 : Obligations of U.S. government agencies $ 1,133,416 61.3 % $ 812,374 57.4 % Obligations of states and political subdivisions 146,924 8.0 % 129,095 9.1 % Corporate bonds 2,556 0.1 % 2,544 0.2 % Asset backed securities 564,672 30.6 % 470,251 33.3 % Total debt securities available for sale $ 1,847,568 100.0 % $ 1,414,264 100.0 % June 30, 2021 December 31, 2020 (in thousands) Amortized Cost % Amortized Cost % Debt securities held to maturity : Obligations of U.S. government and agencies $ 226,925 96.2 % $ 273,667 96.2 % Obligations of states and political subdivisions 8,853 3.8 % 10,896 3.8 % Total debt securities held to maturity $ 235,778 100.0 % $ 284,563 100.0 % 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. 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. 52 Table of Contents 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: (in thousands) June 30, 2021 December 31, 2020 Commercial real estate $ 3,194,336 64.60 % $ 2,951,902 61.97 % Consumer 1,050,609 21.25 % 952,108 19.99 % Commercial and industrial 452,069 9.14 % 526,327 11.05 % Construction 200,714 4.06 % 284,842 5.98 % Agriculture production 41,967 0.85 % 44,164 0.93 % Leases 5,199 0.11 % 3,784 0.08 % Total loans $ 4,944,894 100.0 % $ 4,763,127 100.0 % 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. 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: (in thousands) June 30, 2021 December 31, 2020 Performing nonaccrual loans $ 25,307 $ 22,896 Nonperforming nonaccrual loans 7,398 3,968 Total nonaccrual loans 32,705 26,864 Loans 90 days past due and still accruing — — Total nonperforming loans 32,705 26,864 Foreclosed assets 2,247 2,844 Total nonperforming assets $ 34,952 $ 29,708 Nonperforming assets to total assets 0.44 % 0.39 % Nonperforming loans to total loans 0.66 % 0.56 % Allowance for credit losses to nonperforming loans 274 % 342 % 53 Table of Contents Changes in nonperforming assets during the three months ended June 30, 2021 (in thousands) Balance at March 31, 2021 New NPA / Valuation Adjustments Pay-downs /Sales /Upgrades Charge-offs/ (1) Write-downs Transfers to Foreclosed 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 Consumer 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. 54 Table of Contents Changes in nonperforming assets during the six months ended June 30, 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 June 30, 2021 Commercial real estate: CRE non-owner occupied $ 3,110 5,776 (371) — — $ 8,515 CRE owner occupied 4,061 2,135 (586) — — 5,610 Multifamily — 171 — — — 171 Farmland 1,538 — (192) — — 1,346 Total commercial real estate loans 8,709 8,082 (1,149) — — 15,642 Consumer SFR 1-4 1st DT liens 5,093 44 (911) — 102 4,328 SFR HELOCs and junior liens 6,148 644 (2,188) — — 4,604 Other 167 91 (8) (137) — 113 Total consumer loans 11,408 779 (3,107) (137) 102 9,045 Commercial and industrial 2,183 2,448 (682) (334) — 3,615 Construction 4,546 — (144) — — 4,402 Agriculture production 18 — (18) — — — Leases — — — — — — Total nonperforming loans 26,864 11,309 (5,100) (471) 102 32,704 Foreclosed assets 2,844 — (596) — — 2,248 Total nonperforming assets $ 29,708 11,309 (5,696) — (471) 102 $ 34,952 (1) The table above does not include deposit overdraft charge-offs. 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. 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: (in thousands) June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Allowance for credit losses: Qualitative and forecast factor allowance $ 58,118 $ 56,500 $ 61,935 $ 56,393 $ 48,548 Cohort model allowance reserves 26,237 27,959 28,462 30,373 30,061 Total allowance for credit losses 84,355 84,459 90,397 86,766 78,609 Allowance for individually evaluated loans 1,707 1,482 1,450 809 1,130 Allowance for PCD loan losses — — — — — Total allowance for credit losses $ 86,062 $ 85,941 $ 91,847 $ 87,575 $ 79,739 Allowance for credit losses for loans / Total loans 1.74 % 1.73 % 1.93 % 1.81 % 1.66 % 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 $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. 55 Table of Contents 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: June 30, 2021 December 31, 2020 June 30, 2020 Commercial real estate $ 51,637 60.0 % 53,693 58.5 % $ 44,850 56.2 % Consumer 23,950 27.8 % 25,148 27.4 % 23,165 29.1 % Commercial and industrial 4,511 5.2 % 4,252 4.6 % 4,018 5.0 % Construction 4,951 5.8 % 7,540 8.2 % 6,775 8.5 % Agriculture production 1,007 1.2 % 1,209 1.3 % 919 1.2 % Leases 6 — % 5 — % 12 0.02 % Total allowance for credit losses $ 86,062 100.0 % 91,847 100.0 % $ 79,739 100.0 % 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: 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 % Consumer 1,050,609 2.27 % 952,108 2.62 % 945,669 2.45 % Commercial and industrial 452,069 1.00 % 526,327 0.81 % 634,481 0.63 % Construction 200,714 2.47 % 284,842 2.65 % 278,566 2.43 % Agriculture production 41,967 2.40 % 44,164 2.74 % 35,441 0.26 % Leases 5,199 0.12 % 3,784 0.13 % 1,763 0.68 % Total loans $ 4,944,894 1.74 % $ 4,763,127 1.93 % $ 4,801,405 1.66 % 56 Table of Contents The following table summarizes the activity in the allowance for credit losses for the periods indicated: Three months ended June 30, Six months ended June 30, (in thousands) 2021 2020 2021 2020 Allowance for credit losses: Balance at beginning of period $ 85,941 $ 57,911 $ 91,847 $ 30,616 Impact of adoption from ASU 2016-13 — — — 18,913 Provision for (reversal of) loan losses (145) 22,089 (6,385) 30,089 Loans charged-off: Commercial real estate: CRE non-owner occupied — — — — CRE owner occupied — — — — Multifamily — — — — Farmland — — — — Consumer: SFR 1-4 1st DT liens — (11) — (11) SFR HELOCs and junior liens — (23) — (23) Other (86) (243) (279) (373) Commercial and industrial (301) (214) (334) (594) Construction — — — — Agriculture production — — — — Leases — — — — Total loans charged-off (387) (491) (613) (1,001) Recoveries of previously charged-off loans: Commercial real estate: CRE non-owner occupied — 5 2 193 CRE owner occupied — 4 1 9 Multifamily — — — — Farmland — — — — Consumer: Home equity lines 1 2 11 412 Home equity loans 512 92 797 140 Other consumer 59 72 165 167 Commercial and industrial 79 55 215 181 Construction — — — — Agriculture production 2 — 22 20 Leases — — — — Total recoveries of previously charged-off loans 653 230 1,213 1,122 Net (charge-offs) recoveries 266 (261) 600 121 Balance at end of period $ 86,062 $ 79,739 $ 86,062 $ 79,739 Average total loans $ 4,646,188 $ 4,656,050 $ 4,527,329 $ 4,492,704 Ratios (annualized): Net recoveries (charge-offs) during period to average loans outstanding during period 0.02 % (0.02) % 0.03 % 0.01 % Provision for credit losses (benefit from reversal of) to average loans outstanding during period (0.01) % 1.90 % (0.28) % 1.34 % 57 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 six months ended June 30, 2021: (in thousands) Balance at December 31, 2020 Sales Valuation Adjustments Transfers from Loans Balance at June 30, 2021 Land & construction $ 154 $ — $ — $ — $ 154 Residential real estate 1,507 (710) 11 102 910 Commercial real estate 1,183 — — — 1,183 Total foreclosed assets $ 2,844 $ (710) $ 11 $ 102 $ 2,247 Deposits 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. 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 (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 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 $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: June 30, 2021 December 31, 2020 Ratio Minimum Regulatory Requirement Ratio Minimum Regulatory Requirement Total risk based capital 15.3 % 10.5 % 15.2 % 10.5 % Tier I capital 14.1 % 8.5 % 14.0 % 8.5 % Common equity Tier 1 capital 13.0 % 7.0 % 12.9 % 7.0 % 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 58 Table of Contents 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. 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 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. Dividends from the Bank are subject to certain regulatory restrictions.