What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-06 · 184 added, 151 removed, 634 unchanged (35% of the section changed)

59 unchanged sentences

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 aggregate merger consideration of $184.8 million includes $180.6 million in TriCo stock to be issued to Valley common shareholders and $4.2 million to be paid in cash to Valley restricted stock and option holders.

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 proposed transaction is expected to close in the coming months, 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.

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,the definitive agreement filed therewith, and the Form S-4 and subsequent Form S-4/A filed with the SEC on October 20, 2021 and October 27, 2021, respectively.

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.

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

• For the three and nine months ended September 30, 2021, the Company’s return on average assets was 1.30% and 1.48%, respectively, and the return on average equity was 11.02% and 12.42%, respectively.

• Organic loan growth, excluding PPP, totaled $30.7 million (2.6% annualized) for the current quarter and $335.7 million (7.6%) 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.

• For the current quarter, net interest margin was 3.50% on a tax equivalent basis as compared to 3.72% in the quarter ended September 30, 2020, and a decrease of 8 basis points from 3.58% in the trailing quarter.

• The efficiency ratio was 52.87% for the nine months ended September 30, 2021, as compared to 59.59% for the same period of the prior year.

• As of September 30, 2021, the Company reported total loans, total assets and total deposits of $4.89 billion, $8.46 billion and $7.24 billion, respectively.

As a direct result of the considerable deposit growth in the last 6 quarters, the loan to deposit ratio was 67.54% as of September 30, 2021, as compared to 73.21% at December 31, 2020 and 76.12% at September 30, 2020.

• The average rate of interest paid on deposits, including non-interest-bearing deposits, remained at 0.05% for the third quarter of 2021 as compared with 0.05% for the trailing quarter, and decreased by 4 basis points from the average rate paid of 0.09% during the same quarter of the prior year.

• The balance of PPP loans outstanding at September 30, 2021 totaled $157.5 million and the balance of SBA fees remaining to be accreted totaled $6.0 million.

Approximately 98% of all round one and 25% of all round two PPP loans have been forgiven and repaid by the SBA.

• Noninterest income related to service charges and fees was $11.3 million and $32.7 million for the three and nine month periods ended September 30, 2021, an increase of 7.6% and 17.7% when compared to the same periods in 2020.

• Gains generated from the origination and sale of mortgage loans were $1,814,000 in the third quarter of 2021 as compared with $2,847,000 and $3,035,000 during the trailing quarter and same quarter of the prior year.

• The reversal of provision for credit losses for loans and debt securities was $1.4 million during the quarter ended September 30, 2021, as compared to a reversal of provision expense of $0.3 million during the trailing quarter ended June 30, 2021, and a provision expense totaling $7.6 million for the three month period ended September 30, 2020.

• The allowance for credit losses to total loans was 1.72% as of September 30, 2021, compared to 1.93% as of December 31, 2020, and 1.81% as of September 30, 2020.

Non-performing assets to total assets were 0.37% at September 30, 2021, as compared to 0.43% as of June 30, 2021, and 0.34% at September 30, 2020.

SBA Paycheck Protection Program and COVID Deferrals

3 unchanged sentences

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.

As of September 30, 2021, the total gross balance outstanding of PPP loans was $157,461,000 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.

As of September 30, 2021, there was approximately $6,013,000 in net deferred fee income remaining to be recognized.

During the three and nine months ended September 30, 2021, the Company recognized $2,984,000 and $10,306,000, respectively in fees on PPP loans as compared with $2,603,000 and $4,959,000 for the three and nine months ended September 30, 2020, respectively.

The following is a summary of PPP loan related information as of the periods indicated:

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

Total number of PPP loans outstanding 1,449 2,209 2,484 2,310 2,924

PPP loan balance (Round 1 origination), gross $ 9,302 $ 51,547 $ 193,958 $ 333,982 $ 437,793

PPP loan balance (Round 2 origination), gross 148,159 197,035 176,316 n/a n/a

Total PPP loans, gross outstanding $ 157,461 $ 248,582 $ 370,274 $ 333,982 $ 437,793

PPP deferred loan fees (Round 1 origination) $ 40 $ 477 $ 2,358 $ 7,212 $ 11,846

PPP deferred loan fees (Round 2 origination) 5,973 8,513 7,072 n/a n/a

Total PPP deferred loan fees outstanding $ 6,013 $ 8,990 $ 9,430 $ 7,212 $ 11,846

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.

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:

The following is a summary of COVID related loan customer modifications with outstanding balances as of September 30, 2021:

Modification Type Deferral Term

12 unchanged sentences

Total modifications $ 24,057 0.5 % 100.0 % — % 16.1 % 60.8 % 23.1 %

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.

Of the remaining balance outstanding as of September 30, 2021, $5,665,000 is related to second deferrals which are expected to conclude their modification period during 2021, and the remainder of deferrals are expected to conclude in the first quarter of 2022.

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.

3 unchanged sentences

Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

2021 2020 2021 2020

32 unchanged sentences

(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.

The Company announced net income of $27,422,000 for the quarter ended September 30, 2021, compared to $28,362,000 and $17,606,000 during the quarters ended June 30, 2021 and September 30, 2020, respectively.

Diluted earnings per share were $0.92, $0.95 and $0.59 for the quarters ended September 30, 2021, June 30, 2021 and September 30, 2020, respectively.

Results of Operations

4 unchanged sentences

Three months ended

(in thousands) June 30,

2021 March 31,

(in thousands) September 30,

2021 June 30,

2021 $ Change % Change

18 unchanged sentences

Three months ended

September 30,

(in thousands) 2021 2020 $ Change % Change

17 unchanged sentences

3.31 % 3.70 % (0.39) %

Six months ended

Nine months ended

September 30,

(in thousands) 2021 2020 $ Change % Change

23 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 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.

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

During the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, purchased loan discount accretion was $2,034,000, $2,566,000, and $1,876,000, respectively.

Summary of Average Balances, Yields/Rates and Interest Differential

4 unchanged sentences

For the three months ended

June 30, 2021 June 30, 2020

September 30, 2021 September 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.

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.

Net interest income (FTE) during the three months ended September 30, 2021 increased $4,790,000 or 7.5% to $68,498,000 compared to $63,708,000 for the quarter ended September 30, 2020.

Over the same period, net interest margin decreased 22 basis points to 3.50% as compared to 3.72% 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.

The 22 basis point decrease is primarily attributed to a 17 basis point decrease in non-PPP loan yields, which yielded 4.85% as of September 30, 2021 as compared to 5.02% for the quarter ended September 30, 2020.

The following table presents, for the nine month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities.

Average loan balances include nonperforming loans.

3 unchanged sentences

(unaudited, dollars in thousands)

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

Nine months ended September 30, 2021 Nine months ended September 30, 2020

Balance Income/

35 unchanged sentences

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

Three months ended September 30, 2021

compared with three months ended September 30, 2020

(in thousands) Volume Rate Total

13 unchanged sentences

Increase (decrease) in net interest income $ 12,671 $ (7,881) $ 4,790

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

Nine months ended September 30, 2021 compared with nine months ended September 30, 2020

(in thousands) Volume Rate Total

15 unchanged sentences

The following commentary regarding net interest income, interest income and interest expense may be best understood while referencing the Summary of Average Balances, Yields/Rates and Interest Differential and the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid shown above.

Net interest income (FTE) during the three months ended 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.

Net interest income (FTE) during the three months ended September 30, 2021 increased $4,790,000 or 7.5% to $68,498,000 compared to $63,708,000 during the three months ended September 30, 2020.

The overall increase in net interest income (FTE) was due to largely an increase in average loan volume, including PPP, and related yield earned on loans, which combined resulted in an improvement totaling $2,686,000.

Investment securities also contributed $1,410,000 in additional yield.

Declining interest rates also continued to benefit the interest expense on deposits, resulting in a decrease of $589,000 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.

Net interest income (FTE) during the nine months ended September 30, 2021 increased $10,437,000 or 5.4% to $202,553,000 compared to $192,116,000 during the nine months ended September 30, 2020.

The overall increase in net interest income (FTE) was due to an increase in average loan volume, including PPP, which net of the impact of declining yields resulted in a change totaling $8,759,000.

Declining interest rates also continued to benefit the yield expense on deposits, resulting in a decrease of 3,531,000 in related expense.

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.

During the three months ended September 30, 2021, the Company recorded a reversal of provision for credit losses of $1,435,000, as compared to a reversal of provision for credit losses of $260,000 during the trailing quarter, and a provision expense of $7,649,000 during the third 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

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

Addition to (reversal of) allowance for credit losses $ (1,495) $ (145) $ (6,240) $ 4,450 $ 7,649

2 unchanged sentences

Total provision for credit losses $ (1,435) $ (260) $ (6,060) $ 4,850 $ 7,649

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.

Three months ended Nine months ended

(dollars in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Balance, beginning of period $ 86,062 $ 79,739 $ 91,847 $ 30,616

Impact from adoption of ASU 2016-13 — — — 18,913

Provision for (reversal of) credit losses (1,495) 7,649 (7,880) 37,738

Loans charged-off (1,582) (194) (2,195) (1,195)

Recoveries of previously charged-off loans 1,321 381 2,534 1,503

Balance, end of period $ 84,306 $ 87,575 $ 84,306 $ 87,575

The allowance for credit losses (ACL) was $84,306,000 as of September 30, 2021, a net decrease of $1,756,000 over the immediately preceding quarter.

The reversal of allowance for credit losses of $1,495,000 was necessary as net charge-offs totaling $261,000 during the quarter were less than the required changes in quantitative and qualitative reserve components.

More specifically, the quantitative reserve required under the cohort model reduced required reserves by $1,762,000, in addition to a decrease in specific reserves on impaired totals of $874,000 as of quarter end.

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.

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

However, management notes that the majority of economic forecasts utilized in the ACL calculation have remained directionally consistent with preceding quarters, as general economic conditions continue to improve, albeit at a pace slower than expected due to unforeseen disruptions in the supply chain and increasing energy prices.

In addition, management notes that the level of governmental assistance provided through PPP as well as other programs during the last several quarters has been unprecedented.

As a result, management continues to believe that certain credit weakness are likely present in the overall economy and that it is appropriate to maintain a reserve level that incorporates such risk factors.

Loans past due 30 days or more increased by $1,247,000 during the quarter ended September 30, 2021 to $10,539,000, as compared to $9,292,000 at June 30, 2021.

Non-performing loans were $28,790,000 at September 30, 2021, a decrease of $3,915,000 and $5,827,000, respectively, from $32,705,000 and $22,963,000 as of June 30, 2021, and September 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

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

(dollars in thousands) 2021 2021 2020

Pass $ 4,698,475 96.1 % $ 4,756,381 96.2 % $ 4,630,266 95.9 %

4 unchanged sentences

Loans past due 30+ days to total loans 0.22 % 0.19 % 0.22 %

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.

The Company's loan portfolio for non-classified loans (loans graded special mention or better) remains consistent for the quarter ended September 30, 2021, as compared to the trailing quarter June 30, 2021, representing 99.0% and 98.8% of total loans outstanding, respectively.

Loans risk graded special mention increased by approximately $8,466,000 during the quarter ended September 30, 2021 as compared to the trailing quarter, while loans risk graded substandard decreased by $8,047,000 over the same period.

There was one addition to other real estate owned totaling $560,000, including a $113,000 fair value benefit, during the quarter ended September 30, 2021 and there was one sale for proceeds of approximately $189,000, which generated a net gain of $31,000 for the quarter.

As of September 30, 2021, other real estate owned consisted of six properties with a carrying value of approximately $2,650,000.

Non-interest Income

1 unchanged sentence

Three months ended

September 30,

(in thousands) 2021 2020 $ Change % Change

10 unchanged sentences

Sale of customer checks 107 91 16 17.6 %

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

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

Gain on sale of investment securities — 7 (7) n/m

Gain (loss) on marketable equity securities (14) — (14) n/m

Other 139 (80) 219 (273.8) %

1 unchanged sentence

Total non-interest income $ 15,095 $ 15,137 $ (42) (0.3) %

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.

Non-interest income decreased $42,000 or 0.3% to $15,095,000 during the three months ended September 30, 2021, compared to $15,137,000 during the comparable 2020 quarter.

Following the relaxed social distancing guidelines, increased debit card usage benefited ATM and interchange fees, increasing by $879,000, 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.

Conversely, changes in the value of mortgage servicing rights and gain on sale of mortgage loans declined by $468,000 and $1,221,000, respectively, during the three months ended September 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,

Nine months ended September 30,

(in thousands) 2021 2020 $ Change % Change

15 unchanged sentences

Total non-interest income $ 47,162 $ 38,614 $ 8,548 22.1 %

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.

Total non-interest income increased by $8,548,000 or 22.1% to $47,162,000 during the nine months ended September 30, 2021, compared to $38,614,000 during the trailing quarter June 30, 2021.

Most notably, the historically low rate environment has benefited the production volumes of mortgage loans that are originated and sold for a gain which contributed $2,246,000 to the overall increase in non-interest income.

Other non-interest income increased by $1,093,000 or 809.6% for the nine months ended September 30, 2021.

The nine months ended 2020 period included a reduction of income totaling $577,000 attributed to decreases in the fair value of assets used to fund acquired deferred compensation plans, as compared to an increase in income totaling $370,000 during the same period in 2021.

The remaining changes in non-interest income for the nine months ended September 30, 2021 and 2020 are generally consistent with the changes in the

comparable three month periods discussed above.

Non-interest Expense

1 unchanged sentence

Three months ended

September 30,

(in thousands) 2021 2020 $ Change % Change

12 unchanged sentences

Regulatory assessments and insurance 673 538 135 25.1 %

Merger and acquisition expense 651 — 651 n/m

Postage 156 118 38 32.2 %

1 unchanged sentence

Courier service 286 345 (59) (17.1) %

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

Gain on sale or acquisition of foreclosed assets (144) — (144) n/m

(Gain) loss on disposal of fixed assets (19) 22 (41) (186.4) %

3 unchanged sentences

Average full time equivalent staff 1,049 1,105 (56) (5.1) %

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.

Non-interest expense decreased by $907,000 or 1.9% to $45,807,000 during the three months ended September 30, 2021 as compared to $46,714,000 for the three months ended September 30, 2020.

Salaries, net of deferred loan origination costs, decreased by $1,081,000 to $17,673,000 for the three months ended September 30, 2021.

The comparative period in 2020 included approximately $400,000 in non-recurring severance costs from reductions in personnel and a reduction of nearly $745,000 in deferred loan origination costs following a taper of the first round of PPP loan origination volume.

Benefits and other compensation expense decreased by $2,905,000 during the three months ended September 30, 2021, primarily the result of decreases in expenses associated with retirement obligations and group insurance costs.

Approximately $95,000 of the increase in occupancy expense is attributable to the Company's recently opened loan production offices.

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

Six months ended June 30,

Nine months ended September 30,

(in thousands) 2021 2020 $ Change % Change

12 unchanged sentences

Regulatory assessments and insurance 1,903 993 910 91.6 %

Merger and acquisition expense 651 — 651 n/m

Postage 478 691 (213) (30.8) %

7 unchanged sentences

Average full-time equivalent staff 1,031 1,129 (98) (8.7) %

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 changes in non-interest expense for the nine months ended September 30, 2021 and 2020 are generally consistent with the changes in the comparable three month periods discussed above.

Changes in incentive compensation expense were impacted primarily by increases in net loan growth which, excluding PPP, totaled approximately $335,658,000 for the nine months ended September 30, 2021 as compared to $218,042,000 during the similar nine month period in the prior year.

For the nine months ended September 30, 2021, approximately $944,000 of total expenses are attributable to the Company's recently opened loan production offices, of which approximately $824,000 relates to salaries and benefits.

Regulatory assessment and insurance expense increased in the current year to date period primarily due to the expiration of credits during the 2020 year and to a lesser extent, the overall balance sheet growth of the Bank.

The Company’s effective tax rate was 28.5% for the nine months ended September 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.

While the Company has initiated several tax strategies in anticipation of future tax rate increases, it is not anticipated that any will directly impact the Company's effective tax rate until such rate changes have been legislatively approved.

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

2 unchanged sentences

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

(in thousands) As of September 30, 2021 As of June 30, 2021 $ Change Annualized

Ending balances

6 unchanged sentences

Total other borrowings 45,601 40,559 5,042 49.7 %

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.

Organic loan growth, excluding PPP, of $30,746,000 or 2.6% on an annualized basis was realized during the quarter ended September 30, 2021, primarily within commercial real estate.

In addition, investment security growth was $229,440,000 or 43.6% 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.

Earning asset growth was funded by the continued growth of deposit balances which increased during the third quarter of 2021 by $244,769,000 or 14.0% annualized.

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

As of June 30, $ Change % Change

As of September 30, $ Change % Change

(in thousands) 2021 2020

7 unchanged sentences

Total other borrowings 45,601 27,055 18,546 68.5 %

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.

The PPP program and other forms of stimulus payments have increased deposit levels significantly during the 12 months ended September 30, 2021.

While excess deposit proceeds are ratably being allocated to the purchase of investment securities with short and medium term durations to improve overall margin, we expect to maintain above average levels of liquidity into 2022, as the economic impacts of COVID-19, Federal economic policy changes, and the extent of future Federal and state stimulus remains uncertain.

Investment securities increased to $2,333,015,000 at September 30, 2021, a change of $859,080,000 or 58.3% from $1,473,935,000 at September 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.

Investment securities available for sale increased $681,557,000 to $2,095,821,000 as of September 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

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

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

September 30, 2021 December 31, 2020

(in thousands) Fair Value % Fair Value %

6 unchanged sentences

Total debt securities available for sale $ 2,095,821 100.0 % $ 1,414,264 100.0 %

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

(in thousands) Amortized

5 unchanged sentences

Total debt securities held to maturity $ 216,979 100.0 % $ 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.

Investment securities held to maturity decreased $67,584,000 to $216,979,000 as of September 30, 2021, as compared to December 31, 2020.

This decrease is attributable to calls and principal repayments of $66,880,000, and amortization of net purchase premiums of $704,000.

6 unchanged sentences

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

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

Commercial real estate $ 3,222,737 65.94 % $ 2,951,902 61.97 %

5 unchanged sentences

Total loans $ 4,887,496 100.0 % $ 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.

As of September 30, 2021 and December 31, 2020, the total gross balance outstanding of PPP loans was $157,461,000 and $333,982,000 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.

As of September 30, 2021 and December 31, 2020, there was approximately $6,013,000 and $7,212,000 in net deferred fee income remaining to be recognized.

During the three and nine months ended September 30, 2021, the Company recognized $2,984,000 and $10,306,000, respectively in fees on PPP loans.

During the three and nine months ended September 30, 2020, the Company recognized $2,603,000 and $4,959,000 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:

(in thousands) June 30,

(in thousands) September 30,

2021 December 31,

9 unchanged sentences

Allowance for credit losses to nonperforming loans 341 % 342 %

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

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

(in thousands) Balance at

March 31, 2021 New NPA /

June 30, 2021 New NPA /

Adjustments Pay-downs

1 unchanged sentence

Assets Balance at

June 30, 2021

September 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 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

Nonperforming assets decreased during the three months ended September 30, 2021 by $3,512,000 (10.0%) to $31,440,000 at September 30, 2021 compared to $34,952,000 at June 30, 2021.

The decrease in nonperforming assets during the third quarter of 2021 was primarily the result gross pay-downs of $7,011,000, which included $4,387,000 of construction loans transferred to multifamily, and write-downs of $1,493,000, which were partially offset by new nonperforming assets of $492,000.

During the third quarter of 2021, a credit totaling $4,387,000 was transferred from Construction to Multifamily as part of the original contractual terms of the note agreement.

Excluding this loan, new non performing loans added during the third quarter totaled just $492,000.

Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the specific loan loss reserves associated with these loans is sufficient as of September 30, 2021.

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

In the third quarter of 2021, the Company recorded $1,493,000 in loan charge-offs and $89,000 in deposit overdraft charge-offs less $1,288,000 in loan recoveries and $33,000 in deposit overdraft recoveries, which collectively resulted in $261,000 of net recoveries.

Loan charge-offs within the commercial and industrial portfolio totaled $1,112,000, with $655,000 related to a single borrower and two additional borrowers with charge-offs totaling $199,000 and $100,000, respectively.

Concentrated recovery activity included $793,000 from a single CRE owner-occupied borrower and $290,000 from a single commercial and industrial loan.

Changes in nonperforming assets during the nine months ended September 30, 2021

(in thousands) Balance at

3 unchanged sentences

Assets Balance at

June 30, 2021

September 30, 2021

Commercial real estate:

16 unchanged sentences

(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.

Nonperforming assets increased during the nine months ended September 30, 2021 by $1,732,000 (5.8%) to $31,440,000 at September 30, 2021 compared to $29,708,000 at December 31, 2020.

Excluding the loan totaling $4,387,000 transferred from Construction to Multifamily, the increase in nonperforming assets during the first nine months of 2021 was primarily the result of new nonperforming loans of $11,801,000, which were partially offset by pay-downs of $8,217,000 and write-downs of $1,965,000.

Loan charge-offs during the nine months ended September 30, 2021

During the nine months ended September 30, 2021, the Company recorded $1,965,000 in loan charge-offs and $230,000 in deposit overdraft charge-offs less $2,437,000 in loan recoveries and $97,000 in deposit overdraft recoveries, which collectively resulted in $339,000 of net recoveries.

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,

(in thousands) September 30,

2021 June 30,

2021 March 31,

2021 December 31,

2020 September 30, 2020 June 30, 2020

2020 September 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 $86,062,000 allowance for loan losses at June 30, 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 $84,306,000 allowance for loan losses at September 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:

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

September 30, 2021 December 31, 2020 September 30, 2020

Commercial real estate $ 50,729 60.2 % 53,693 58.5 % $ 50,294 57.4 %

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:

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

September 30, 2021 December 31, 2020 September 30, 2020

Commercial real estate $ 3,222,737 1.57 % $ 2,951,902 1.82 % $ 2,936,422 1.71 %

7 unchanged sentences

Three months ended

June 30, Six months ended

September 30, Nine months ended

September 30,

(in thousands) 2021 2020 2021 2020

38 unchanged sentences

Foreclosed Assets, Net of Allowance for Losses

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

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

(in thousands) Balance at

1 unchanged sentence

Adjustments Transfers

from Loans Balance at June 30, 2021

from Loans Balance at September 30, 2021

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

2 unchanged sentences

Total foreclosed assets $ 2,844 $ (868) $ 125 $ 549 $ 2,650

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.

During the three and nine months ended September 30, 2021, the Company’s deposits increased by $244,769,000 and $730,888,000, respectively, to $7,236,822,000 at quarter ended.

Included in the September 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 (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.

The 2021 Repurchase Plan has no expiration date (in accordance with applicable laws and regulations) and during the three and nine month periods September 30, 2021, the Company repurchased zero and 63,317 shares with a market value of $2,831,000, 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.

Under the 2019 Repurchase Plan, during the nine months ended September 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.

The Company’s primary capital resource is shareholders’ equity, which totaled $982,014,000 at September 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 Company’s ratio of equity to total assets was 11.8% and 12.1% as of September 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 September 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

September 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 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.

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

As of September 30, 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 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.

As of September 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 nine months of 2021 generated cash flows from operations of $99,919,000 compared to $78,584,000 during the first nine months of 2020.

Net cash used by investing activities was $752,929,000 for the nine months ended September 30, 2021, compared to net cash from investing activities of $639,947,000 during the nine months ending 2020.

Financing activities provided $723,695,000 during the nine months ended September 30, 2021, compared to $937,438,000 used during the nine months ended June 30, 2020.

During the nine months ended September 30, 2021 deposit balance increases of $730,888,000 were the largest contributor to the source of funding that facilitated net loan growth of $124,369,000 and net investment security growth of $613,913,000, compared to a decrease of $973,594,000 for financing activity during the same period in 2020.

The changes in contractual obligations of the Company and Bank, to include but not limited to term subordinated debt, operating leases, deferred compensation and supplemental retirement plans as well as off-balance sheet commitments such as unfunded loans and letters of credit have remained relatively unchanged when compared to the similar balances or totals as of December 31, 2020.

The Company maintains a collateralized line of credit with the FHLB.

Based on the FHLB stock requirements at September 30, 2021, this line provided for maximum borrowings of $2.22 billion of which none was outstanding.

As of September 30, 2021, the Company had designated investment securities with a fair value of $75,998,000 and loans totaling $3.46 billion as potential collateral under this collateralized line of credit with the FHLB.

The Company maintains a collateralized line of credit with the Federal Reserve Bank of San Francisco (“FRB”).

As of December 31, 2020, this line provided for maximum borrowings of $157,884,000 of which none was outstanding.

As of December 31, 2020, the Company has designated investment securities with fair value of $8,100 and loans totaling $328,011,000 as potential collateral under this collateralized line of credit with the FRB.

The principal cash requirements of the Company are dividends on common stock when declared.

The Company is dependent upon the payment of cash dividends by the Bank to service its commitments.

Shareholder dividends are expected to continue subject to the Board’s discretion and continuing evaluation of capital levels, earnings, asset quality and other factors.

The Company expects that the cash dividends paid by the Bank to the Company will be sufficient to meet this payment schedule.

Dividends from the Bank are subject to certain regulatory restrictions.

Dividends paid used $22,291,000 and $19,758,000 of cash during the nine months ended September 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