What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-08 · 186 added, 410 removed, 408 unchanged (59% of the section changed)

16 unchanged sentences

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 costs or effects of mergers, acquisitions or dispositions we may make, such as our recently completed acquisition of Valley Republic Bancorp, including the impact of international hostilities or geopolitical events, 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);

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the effect of a fall in stock market prices on our brokerage and wealth management businesses;

and our ability to

manage the risks involved in the foregoing.

and our ability to manage the risks involved in the foregoing.

Additional factors that could cause results to differ materially from those described above can be found under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021, 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.

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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.

Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income, net interest income, and net interest yield are generally presented on a 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.

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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.

included in the Company’s annual report on Form 10-K for the year ended December 31, 2021.

Geographical Descriptions

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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 $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 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,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.

On March 25, 2022, the Company completed its acquisition of Valley Republic Bancorp, including the merger of Valley Republic Bank (collectively "VRB") into Tri Counties Bank, with Tri Counties Bank as the surviving entity, in accordance with the terms of the merger agreement dated as of July 27, 2021.

The cash and stock transaction was valued at approximately $174.0 million in aggregate, based on TriCo's closing stock price of $42.48 on March 25, 2022.

Under the terms of the merger agreement, the Company issued approximately 4.1 million shares, in addition to approximately $431,000 in cash paid for the settlement of stock option awards at VRB.

As a result of the merger with VRB, the Company acquired assets consisting primarily of cash totaling $427.3 million, investment securities of $109.7 million, loans totaling $771.4 million (inclusive of $21.4 million in PPP and fair value discounts of $20.4 million), core deposit intangibles of $10.6 million, and liabilities consisting primarily of $1.2 billion in deposits and $47.3 million in subordinated debt (of which $4.4 million was retired as TriCo Bancshares was the counter party).

VRB was headquartered in Bakersfield, California, and had four branch locations in and around Bakersfield, which all now operate as branches for Tri Counties Bank, and a loan production office in Fresno, California.

The Company anticipates that Tri Counties Bank's previously existing Bakersfield branch and the VRB loan production office in Fresno will be consolidated, subject to regulatory approval, into the overlapping locations in the near future.

Financial Highlights

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 3.50% 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

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 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 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

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 following is a summary of COVID related loan customer modifications with outstanding balances as of September 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 $ 22,264 1.5 % 100.0 % — % 17.4 % 65.6 % 17.0 %

CRE owner occupied 1,243 0.2 100.0 — — — 100.0

Multifamily — — — — — — —

Farmland — — — — — — —

Total commercial real estate loans 23,507 0.7 — — 16.5 62.2 21.4

Consumer loans — — — — — — —

Commercial and industrial 550 0.1 100.0 — — — 100.0

Construction — — — — — — —

Agriculture production — — — — — — —

Leases — — — — — — —

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

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.

Performance highlights and other developments for the Company as of or for the three months ended March 31, 2022 included the following:

• For the three months ended March 31, 2022, the Company’s return on average assets was 0.94%, and the return on average equity was 8.19%.

• Organic loan growth, excluding PPP and acquired loans, totaled $187.9 million (15.5% annualized) for the current quarter and $437.3 million (9.5% annualized) for the trailing twelve-month period.

• For the current quarter, net interest margin, less effect of acquired loan discount accretion and PPP yields ( non-GAAP ), on a tax equivalent basis was 3.29%, an increase of 4 basis points from 3.25% in the trailing quarter.

• Inclusive of merger related expenses, the efficiency ratio was 55.95% for the three months ended March 31, 2022, as compared to 54.10% for the trailing quarter and 50.42% for the quarter ended March 31, 2021.

• As of March 31, 2022, the Company reported total loans, total assets and total deposits of $5.9 billion, $10.1 billion and $8.7 billion, respectively.

As a direct result of significant deposit growth in the last year, the loan to deposit ratio has declined to 67.15% as of March 31, 2022, as compared to 72.37% at March 31, 2021.

• The average rate of interest paid on deposits, including non-interest-bearing deposits, equaled 0.04% during the first quarter of 2022, consistent with 0.04% during the trailing quarter, and representing a decrease of 2 basis points from the average rate paid of 0.06% during the same quarter of the prior year.

• Noninterest income related to service charges and fees was $11.7 million for the three month period ended March 31, 2022, an increase of 11.6% when compared to the $10.5 million in service charge fees earned during the first three months of 2021.

• The provision for credit losses for loans and debt securities was approximately $8.3 million during the quarter ended March 31, 2022, as compared to a provision expense of approximately $1.0 million during the trailing quarter ended December 31, 2021, and a reversal of provision expense totaling $6.1 million for the three month period ended March 31, 2021.

• The allowance for credit losses to total loans was 1.64% as of March 31, 2022, compared to 1.74% as of the trailing quarter end, and 1.73% as of March 31, 2021.

Non-performing assets to total assets were 0.17% at March 31, 2022, as compared to 0.38% as of December 31, 2021, and 0.39% at March 31, 2021.

TRICO BANCSHARES

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Three months ended

September 30, Nine months ended

September 30,

2021 2020 2021 2020

Net interest income $ 67,924 $ 66,440

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(1) Fully Taxable Equivalent (FTE)

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.

The Company announced net income of $20,374,000 for the quarter ended March 31, 2022, compared to $28,222,000 during the trailing quarter ended December 31, 2021 and $33,649,000 during the quarter ended March 31, 2021.

Diluted earnings per share were $0.67 for the first quarter of 2022, compared to $0.94 for the fourth quarter of 2021 and $1.13 for the first quarter of 2021.

Results of Operations

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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):

Following is a summary of the components of FTE net income for the periods indicated

Three months ended

(in thousands) September 30,

2021 June 30,

(in thousands) March 31,

2022 March 31,

2021 Change % Change

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3.29 % 3.48 % (0.19) %

Three months ended

September 30,

(in thousands) 2021 2020 $ Change % Change

Interest income $ 69,628 $ 65,438 $ 4,190 6.4 %

Interest expense (1,395) (1,984) 589 (29.7) %

Fully tax-equivalent adjustment (FTE) (1)

265 254 11 4.3 %

Net interest income (FTE) $ 68,498 $ 63,708 $ 4,790 7.5 %

Net interest margin (FTE) 3.50 % 3.72 %

Acquired loans discount accretion, net:

Amount (included in interest income) $ 2,034 $ 1,876 $ 158

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

3.40 % 3.61 % (0.21) %

PPP loans yield, net:

Amount (included in interest income) $ 3,507 $ 2,603 $ 904

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

3.42 % 3.81 % (0.39) %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 5,541 $ 4,479 $ 1,062

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

3.31 % 3.70 % (0.39) %

Nine months ended

September 30,

(in thousands) 2021 2020 $ Change % Change

Interest income $ 206,023 $ 199,103 $ 6,920 3.5 %

Interest expense (4,267) (7,798) 3,531 (45.3) %

Fully tax-equivalent adjustment (FTE) (1)

797 811 (14) (1.7) %

Net interest income (FTE) $ 202,553 $ 192,116 $ 10,437 5.4 %

Net interest margin (FTE) 3.61 % 4.02 %

Acquired loans discount accretion, net:

Amount (included in interest income) $ 6,311 $ 6,211 $ 100

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

3.50 % 3.91 % (0.41) %

PPP loans yield, net:

Amount (included in interest income) $ 12,549 $ 4,959 $ 7,590

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

3.53 % 4.07 % (0.54) %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 18,860 $ 11,170 $ 7,690

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

3.41 % 3.91 % (0.50) %

(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.

(1) Certain information included herein is presented on a 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.

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

Generally, as time goes on, the dollar impact 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 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.

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 first quarter of 2022.

During the three months ended March 31, 2022, December 31, 2021, and March 31, 2021, purchased loan discount accretion was $1,323,000, $1,780,000, and $1,712,000, respectively.

Summary of Average Balances, Yields/Rates and Interest Differential

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For the three months ended

September 30, 2021 September 30, 2020

March 31, 2022 March 31, 2021

Balance Interest

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(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 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 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 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.

Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income.

Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).

ANALYSIS OF CHANGE IN NET INTEREST MARGIN ON EARNING ASSETS

(unaudited, dollars in thousands)

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

Balance Income/

Expense Yield/

Balance Income/

Expense Yield/

Loans, excluding PPP $ 4,580,292 $ 168,916 4.93 % $ 4,360,942 $ 167,747 5.14 %

PPP loans 300,006 12,549 5.59 % 244,196 4,959 2.71 %

Investments-taxable 1,838,023 21,324 1.55 % 1,249,823 22,637 2.42 %

Investments-nontaxable (1)

129,057 3,453 3.58 % 117,745 3,515 3.99 %

Total investments 1,967,080 24,777 1.68 % 1,367,568 26,152 2.55 %

Cash at Federal Reserve and other banks 656,912 578 0.12 % 403,252 1,056 0.35 %

Total earning assets 7,504,290 206,820 3.68 % 6,375,958 199,914 4.19 %

Other assets, net 591,983 595,617

Total assets $ 8,096,273 $ 6,971,575

Liabilities and shareholders’ equity

Interest-bearing demand deposits $ 1,476,987 $ 269 0.02 % $ 1,293,071 $ 289 0.03 %

Savings deposits 2,318,169 965 0.06 % 1,971,348 2,190 0.15 %

Time deposits 327,562 1,386 0.57 % 409,005 3,297 1.08 %

Total interest-bearing deposits 4,122,718 2,620 0.08 % 3,673,424 5,776 0.21 %

Other borrowings 40,732 15 0.05 % 26,223 13 0.07 %

Junior subordinated debt 57,790 1,632 3.78 % 57,374 2,009 4.68 %

Total interest-bearing liabilities 4,221,240 4,267 0.14 % 3,757,021 7,798 0.28 %

Noninterest-bearing deposits 2,790,828 2,197,315

Other liabilities 121,334 120,486

Shareholders’ equity 962,871 896,753

Total liabilities and shareholders’ equity $ 8,096,273 $ 6,971,575

Net interest rate spread (1) (2)

3.54 % 3.91 %

Net interest income and margin (1) (3)

$ 202,553 3.61 % $ 192,116 4.02 %

(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.

As compared to the same quarter in the prior year, average loan yields, excluding PPP, decreased 37 basis points from 5.02% during the three months ended March 31, 2021, to 4.65% during the three months ended March 31, 2022.

The accretion of discounts from acquired loans added 7 and 10 basis points to loan yields during the quarters ended March 31, 2022 and March 31, 2021, respectively.

Therefore, of the 37 basis point decrease in yields on loans during the comparable three month periods ended March 31, 2022 and 2021, 34 basis points was attributable to decreases in market rates, while 3 basis points resulted from less accretion of discounts.

Net interest income was also benefited by a 15 basis point increase in rates earned on investment securities which was 1.89% during the three month periods ended March 31, 2022 as compared to 1.74% during the three month period ended March 31, 2021, which combined with increases in volume of approximately $682,042,000 contributed to a $3,854,000 increase in interest income.

The decline in interest expense during March 31, 2022 when compared to the same quarter from the prior year was primarily attributed to reductions in the rates offered on deposit products.

This benefit was primarily realized as the terms on higher yielding time deposits were replace with time deposits at lower rates.

As a result, the cost of interest-bearing deposits decreased by 4 basis points during the quarter ended March 31, 2022, to 0.06% from 0.10% during the same quarter of the prior year.

In addition, the level of noninterest-bearing deposits continues to benefit the average cost of total deposits at 0.04% during the current quarter, compared to 0.6% in the first quarter of the prior year.

The ratio of average total noninterest-bearing deposits to total average deposits was 40.6% as of March 31, 2022 as compared to 39.9% for the quarter ended March 31, 2021.

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

1 unchanged sentence

Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components.

Three months ended September 30, 2021

compared with three months ended September 30, 2020

(in thousands) Volume Rate Total

Increase (decrease) in interest income:

Loans, including PPP $ 1,298 $ 1,388 $ 2,686

Investment securities (1)

11,287 (9,877) 1,410

Cash at Federal Reserve and other banks 27 78 105

Total interest-earning assets 12,612 (8,411) 4,201

Increase (decrease) in interest expense:

Interest-bearing demand deposits 8 52 60

Savings deposits 75 (231) (156)

Time deposits (148) (313) (461)

Other borrowings 2 — 2

Junior subordinated debt 4 (38) (34)

Total interest-bearing liabilities (59) (530) (589)

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

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

Three months ended March 31, 2022

compared with three months ended March 31, 2021

(in thousands) Volume Rate Total

13 unchanged sentences

Increase (decrease) in net interest income $ 15,872 $ (14,382) $ 1,490

( (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 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.

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.

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 $1,375,000 in yield during the nine month period.

Asset Quality and Loan Loss Provisioning

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.

Net interest income (FTE) during the three months ended March 31, 2022 increased $1,490,000 or 2.2% to $68,207,000 compared to $66,717,000 during the three months ended March 31, 2021.

The overall increase in net interest income (FTE) was due to largely an increase in average investment and loan balances, which resulted in improvements totaling $9,310,000 and $6,597,000, respectively, despite lower yields offsetting those earnings by $5,456,000 and $9,288,000, respectively.

In addition, net interest income on loans was impacted by a $4,766,000 decrease in PPP related income during the comparable periods.

Declining interest rates also continued to benefit interest expenses on deposits, resulting in a net decrease of $258,000 while net changes in deposit volumes resulted in an increase in interest expense of $3,000.

Asset Quality and Credit Loss Provisioning

During the three months ended March 31, 2022, the Company recorded a provision for credit losses of $8,330,000, as compared to a $980,000 provision during the trailing quarter, and a reversal of provision expense of $6,060,000 during the first quarter of 2021.

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

Three months ended

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

(dollars in thousands) March 31, 2022 December 31, 2021 March 31, 2021

Addition to (reversal of) allowance for credit losses $ 8,205 $ 715 $ (6,240)

Addition to (reversal of) unfunded loan commitments

60 (115) 180 400 —

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

Three months ended Nine months ended

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

Addition to reserve for unfunded loan commitments

Total provision for (reversal of) credit losses $ 8,330 $ 980 $ (6,060)

The allowance for credit losses (ACL) was $96,049,000 as of March 31, 2022, a net increase of $10,108,000 over the immediately preceding quarter.

The provision for credit losses of $8,205,000 during the quarter was the net effect of increases in required reserves totaling $10,820,000 related to the loan portfolio acquired from VRB totaling $703,848,000, which is net of $68,513,000 in purchase credit deteriorated loans (PCD) and $21,412,000 in PPP loans as of the merger date, partially offset by a decline in required reserves from the Company's organic loan portfolio totaling $2,615,000.

The following table presents the activity in the allowance for credit losses on loans for the periods indicated:

Three months ended

(dollars in thousands) March 31, 2022 March 31, 2021

Balance, beginning of period $ 85,376 $ 91,847

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

ACL at acquisition for PCD loans 2,037 —

Provision for (reversal of) credit losses 8,205 (6,240)

2 unchanged sentences

Balance, end of period $ 96,049 $ 85,941

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.

Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered PCD.

For PCD loans and leases, the initial estimate of expected credit losses is recognized in the ACL on the date of acquisition using both a discounted cash flow model, and the same methodology as other loans and leases held-for-investment.

The ACL recorded as of the VRB merger date for PCD loans totaled $2,037,000.

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 improving shifts in the magnitude of changes for both the unemployment and GDP factors leading up to the balance sheet date.

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, particularly CA unemployment trends.

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.

In addition, management notes that the actual and forecast increases in inflation that were previously identified by the Federal Reserve Board as "transitory", combined with overseas conflicts and leading to the likely rise in short-term interest rates and flattening or inversion of the yield curve, may be further indication of future economic contraction.

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

Loans past due 30 days or more increased by $4,070,000 during the quarter ended March 31, 2022 to $8,402,000, as compared to $4,332,000 at December 31, 2021.

Non-performing loans were $14,088,000 at March 31, 2022, a decrease of $16,262,000 and $14,853,000 from $30,350,000 and $28,941,000 as of December 31, 2021 and March 31, 2021, respectively.

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

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

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

(dollars in thousands) 2022 2021 2021

5 unchanged sentences

Loans past due 30+ days to total loans 0.14 % 0.09 % 0.21 %

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.

The ratio of classified loans to total loans improved to 0.84% as of March 31, 2022 as compared to both 1.06% and 1.17% for the trailing quarter and same quarter of the prior year, respectively.

The Company's criticized loan balances increased during the current quarter by approximately $40,402,000 to $169,949,000 as of March 31, 2022, primarily from the merger with VRB which added approximately $65,556,000 in criticized loans, net of $2,957,000 in purchase discounts.

All of the criticized loans acquired from VRB were identified by management as PCD as of the acquisition date.

The Company's organic classified loan balances outstanding improved by approximately $19,100,000 during the quarter ended March 31, 2022, the majority of which was attributed to a sale of substandard loans totaling approximately $12,043,000.

In addition, one relationship totaling $4,982,000 was upgraded during the quarter.

There was one property added to other real estate owned totaling $313,000 during the quarter ended March 31, 2022, and no disposals.

As of March 31, 2022, other real estate owned consisted of seven properties with a carrying value of approximately $2,907,000.

Non-performing assets of $16,995,000 at March 31, 2022 represented 0.17% of total assets, a substantial decrease from the $32,944,000 or 0.38% and $31,250,000 or 0.39% as of December 31, 2021 and March 31, 2021, respectively.

The improvement in non-performing assets relates to the loan sale and grading changes discussed above.

SBA Paycheck Protection Program and COVID Deferrals

In March 2020 (Round 1) and subsequently in December 2020 (Round 2), the SBA PPP was created to help small businesses keep workers employed during the COVID-19 crisis.

Tri Counties Bank, through its online portal, facilitated the ability for borrowers to open a new deposit account and submit PPP applications during the entirety of the Programs.

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

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

(dollars in thousands) March 31, 2022 December 31, 2021 March 31, 2021

Total number of PPP loans outstanding 243 450 2,484

PPP loan balance (TCBK round 1 origination), gross $ 1,323 $ 2,544 $ 193,958

PPP loan balance (TCBK round 2 origination), gross 37,305 60,767 176,316

Acquired PPP loan balance (VRB origination), gross 19,167 — —

Total PPP loans, gross outstanding $ 57,795 $ 63,311 $ 370,274

PPP deferred loan fees (Round 1 origination) — 1 2,358

PPP deferred loan fees (Round 2 origination) 1,190 2,163 7,072

Total PPP deferred loan fees (costs) outstanding $ 1,190 $ 2,164 $ 9,430

Non-interest Income

1 unchanged sentence

Three months ended

September 30,

(in thousands) 2022 2021 $ Change % Change

11 unchanged sentences

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

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

Other 139 (80) 219 (273.8) %

Total other non-interest income 3,830 4,668 (838) (18.0) %

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

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.

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:

Nine months ended September 30,

(in thousands) 2021 2020 $ Change % Change

ATM and interchange fees $ 18,935 $ 15,913 $ 3,022 19.0 %

Service charges on deposit accounts 10,339 10,426 (87) (0.8) %

Other service fees 2,682 2,296 386 16.8 %

Mortgage banking service fees 1,406 1,386 20 1.4 %

Change in value of mortgage servicing rights (691) (2,258) 1,567 (69.4) %

Total service charges and fees 32,671 27,763 4,908 17.7 %

Increase in cash value of life insurance 2,062 2,203 (141) (6.4) %

Asset management and commission income 2,738 2,244 494 22.0 %

Gain on sale of loans 7,908 5,662 2,246 39.7 %

Lease brokerage income 542 495 47 9.5 %

Sale of customer checks 342 303 39 12.9 %

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

Gain (loss) on marketable equity securities (59) 72 (131) (181.9) %

Gain on marketable equity securities (137) (53) (84) 158.5 %

Other 504 704 (200) (28.4) %

1 unchanged sentence

Total non-interest income $ 15,096 $ 16,110 $ (1,014) (6.3) %

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 income decreased $1,014,000 or 6.3% to $15,096,000 during the three months ended March 31, 2022, compared to $16,110,000 during the comparable 2020 quarter.

This was largely the result of the $2,001,000 decrease in gain on sale of loans which is a direct result of increases in mortgage rates and a corresponding decline in mortgage loan volumes.

However, this decrease was partially offset by increases in ATM and interchange fees of $382,000 or 6.5%, and service charges on deposit accounts totaling $565,000 or 17.3%, both as a result of increased usage due to relaxed social distancing guidelines during the quarter March 31, 2022 when compared to the same period in the prior year.

Other non-interest income during the quarter ended March 31, 2022 included a gain on debt extinguishment of $235,000 and an increase in the fair value of certain equity investments of $225,000.

Other non-interest income during the quarter ended March 31, 2021 included an increase in the value of funded retirement account values of $445,000 as compared to a decrease in value of $59,000 related to the same retirement accounts during the quarter ended March 31, 2022.

Non-interest Expense

1 unchanged sentence

Three months ended

September 30,

(in thousands) 2022 2021 $ Change % Change

14 unchanged sentences

Postage 228 198 30 15.2 %

Operational losses 244 154 90 58.4 %

Operational (gain) losses (183) 209 (392) (187.6) %

Courier service 414 294 120 40.8 %

Gain on sale or acquisition of foreclosed assets — (51) 51 n/m

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

Other miscellaneous expense 3,159 2,478 681 27.5 %

Total other non-interest expense 19,533 17,393 2,140 12.3 %

Total non-interest expense $ 45,807 $ 46,714 $ (907) (1.9) %

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

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:

Nine months ended September 30,

(in thousands) 2021 2020 $ Change % Change

Base salaries, net of deferred loan origination costs $ 50,721 $ 53,654 $ (2,933) (5.5) %

Incentive compensation 11,025 7,680 3,345 43.6 %

Benefits and other compensation costs 16,939 22,314 (5,375) (24.1) %

Total salaries and benefits expense 78,685 83,648 (4,963) (5.9) %

Occupancy 11,197 10,713 484 4.5 %

Data processing and software 10,092 10,585 (493) (4.7) %

Equipment 4,060 4,411 (351) (8.0) %

Intangible amortization 4,271 4,293 (22) (0.5) %

Advertising 2,080 2,065 15 0.7 %

ATM and POS network charges 4,489 3,897 592 15.2 %

Professional fees 2,730 2,399 331 13.8 %

Telecommunications 1,719 1,983 (264) (13.3) %

Regulatory assessments and insurance 1,903 993 910 91.6 %

Merger and acquisition expense 651 — 651 n/m

Postage 478 691 (213) (30.8) %

Operational losses 665 559 106 19.0 %

Courier service 868 1,013 (145) (14.3) %

Gain on sale or acquisition of foreclosed assets (210) (57) (153) 268.4 %

(Gain) loss on disposal of fixed assets (445) 37 (482) (1302.7) %

(Gain) loss on disposal of fixed assets (1,078) — (1,078) n/m

Other miscellaneous expense 2,485 2,349 136 5.8 %

2 unchanged sentences

Average full time equivalent staff 1,084 1,024 60 5.9 %

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.

Non-interest expense increased by $4,829,000 or 11.6% to $46,447,000 during the three months ended March 31, 2022 as compared to $41,618,000 for the three months ended March 31, 2021.

Total salaries and benefits expense increased by $1,441,000 or 5.7% to $26,771,000 for the three months ended March 31, 2022 as compared to $25,330,000 for the quarterly period ended March 31, 2021 as a direct result of increases in full-time equivalent staffing similarly increasing by 5.9% or 60 FTE.

Merger and acquisition expenses associated with the merger with Valley Republic Bancorp totaled $4,032,000 during the current quarter.

The Company sold a former administrative building and relocated a branch during the quarter resulting in a net gain on disposal of approximately $1,078,000 as noted above.

The Company’s effective tax rate was 27.9% for the three months ended March 31, 2022, as compared to 28.1% for the year ended December 31, 2021.

Differences between the Company's effective tax rate and applicable federal and state blended statutory rate of approximately 29.6% are due to the proportion of non-taxable revenues, non-deductible expenses, and benefits from tax credits as compared to the levels of pre-tax earnings.

Financial Condition

1 unchanged sentence

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

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

Ending balances

Ending balances March 31, December 31, Acquired Balances Organic

$ Change Annualized Organic

(dollars in thousands) 2022 2021 $ Change

Total assets $ 10,118,328 $ 8,614,787 $ 1,503,541 $ 1,363,529 $ 140,012 6.5 %

Total loans 5,851,975 4,916,624 935,351 773,390 161,961 13.2

Total PPP loans 151,448 239,592 (88,144) (147.2) %

Total loans, excluding PPP 5,795,370 4,855,477 939,893 751,978 187,915 15.5

Total investments 2,569,706 2,427,885 141,821 109,716 32,105 5.3

Total deposits $ 8,714,477 $ 7,367,159 $ 1,347,318 $ 1,215,479 $ 131,839 7.2 %

Total noninterest-bearing deposits 2,943,016 2,843,783 99,233 14.0 %

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

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 third quarter of 2021 by $244,769,000 or 14.0% annualized.

Organic loan growth, excluding PPP, of $187,915,000 or 15.5% on an annualized basis was realized during the quarter ended March 31, 2022, primarily within commercial real estate and commercial and industrial.

In addition, investment security organic growth was $32,105,000 or 5.3% on an annualized basis as excess liquidity, driven by continued strong deposit growth, was put to use in higher yielding earning assets.

Deposit balances continue to increase, with an organic change of $131,839,000 or 7.2% annualized during the period, which provides management with opportunities to deploy excess cash within the investment portfolio or other interest earnings assets.

During the three months ended March 31, 2022 and excluding PPP balance changes, loan originations totaled approximately $396 million while payoffs of loans totaled $225 million which compares to origination and payoff activity during the three months ended December 31, 2021 of $412 million and $297 million, respectively.

Investment securities increased to $2,569,706,000 at March 31, 2022, an organic change of $497,210,000 or 25.3% from the prior year.

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

As of September 30, $ Change % Change

(in thousands) 2021 2020

Ending balances

Ending balances As of March 31, Acquired Organic

$ Change Organic

(dollars in thousands) 2022 2021 $ Change Balances

Total assets $ 10,118,328 $ 8,031,612 $ 2,086,716 $ 1,363,529 $ 723,187 9.0 %

Total loans 5,851,975 4,966,977 884,998 773,390 111,608 2.2

Total PPP loans 151,448 425,947 (274,499) (64.4) %

Total loans, excluding PPP 5,795,370 4,606,133 1,189,237 751,978 437,259 9.5

Total investments 2,569,706 1,962,780 606,926 109,716 497,210 25.3

Total deposits $ 8,714,477 $ 6,863,400 $ 1,851,077 $ 1,215,479 $ 635,598 9.3 %

Total noninterest-bearing deposits 2,943,016 2,517,819 425,197 16.9 %

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

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.

PPP loan balances outstanding, net of related deferred fees, have declined by $304,239,000 during the twelve months ended March 31, 2022, meanwhile, non-PPP loan balances have increased as a result of organic activities by approximately $437,259,000 during the same period.

This has led to a long-term beneficial and meaningful shift in the makeup of the loan portfolio, despite total loan balances increasing modestly during the 12 month period ended March 31, 2022, by $111,608,000 or 2.2%.

The Company's non-PPP loan originations have increased significantly over the past year but have also been challenged by an acceleration in payoffs.

Specifically, during the twelve months ended March 31, 2022 and excluding PPP balance changes, loan originations totaled approximately $1.40 billion while payoffs of loans totaled $0.91 billion.

Investment securities increased to $2,569,706,000 at March 31, 2022, an organic change of $497,210,000 or 25.3% from the prior year.

Investment Securities

Investment securities available for sale increased $681,557,000 to $2,095,821,000 as of September 30, 2021, compared to December 31, 2020.

Investment securities available for sale increased $154,969,000 to $2,362,907,000 as of March 31, 2022, compared to December 31, 2021.

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

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

There were no sales of investment securities during the three months ended March 31, 2022 and 2021, respectively.

The following table presents the available for sale debt securities portfolio by major type as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

(in thousands) Fair Value % Fair Value %

6 unchanged sentences

Total debt securities available for sale $ 2,362,907 100.0 % $ 2,207,938 100.0 %

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(in thousands) Amortized

5 unchanged sentences

Total debt securities held to maturity $ 186,748 100.0 % $ 199,759 100.0 %

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

Investment securities held to maturity decreased $13,011,000 to $186,748,000 as of March 31, 2022, as compared to December 31, 2021.

This decrease is attributable to calls and principal repayments of $12,894,000, and amortization of net purchase premiums of $117,000.

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) September 30, 2021 December 31, 2020

(in thousands) March 31, 2022 December 31, 2021

Commercial real estate $ 3,832,974 65.5 % $ 3,306,054 67.2 %

5 unchanged sentences

Total loans $ 5,851,975 100.0 % $ 4,916,624 100.0 %

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 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

The following tables set forth the amount of the Company’s nonperforming assets ("NPA") as of the dates indicated.

The following tables set forth the amount of the Company’s NPAs 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) September 30,

(in thousands) March 31,

2022 December 31,

9 unchanged sentences

Allowance for credit losses to nonperforming loans 682 % 294 %

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

Changes in nonperforming assets during the three months ended March 31, 2022

(in thousands) Balance at

June 30, 2021 New NPA /

December 31, 2021 New NPA /

Adjustments Pay-downs

/Upgrades Charge-offs/ (1)

Assets Balance at

September 30, 2021

Assets Balance at March 31, 2022

Commercial real estate:

16 unchanged sentences

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

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

Nonperforming assets decreased during the three months ended March 31, 2022 by $14,255,000 or 45.62% to $16,995,000 at March 31, 2022 compared to $32,944,000 at December 31, 2021.

The decrease in nonperforming assets during the first quarter of 2022 was primarily the result of nonperforming loan sales, which totaled approximately $12,043,000 during the quarter.

The nonperforming loans added during the period totaling $4,371,000 were acquired from VRB and identified as PCD.

Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the loan loss reserves associated with these loans is sufficient as of March 31, 2022.

Loan charge-offs during the three months ended March 31, 2022

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.

1 unchanged sentence

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

December 31, 2020 New NPA /

Adjustments Pay-downs

/Upgrades Charge-offs/ (1)

Assets Balance at

September 30, 2021

Commercial real estate:

CRE non-owner occupied $ 3,110 5,776 (1,155) (18) — $ 7,713

CRE owner occupied 4,061 2,135 (1,319) — — 4,877

Multifamily — 4,568 (8) — — 4,560

Farmland 1,538 37 (302) (126) — 1,147

Total commercial real estate loans 8,709 12,516 (2,784) (144) — 18,297

SFR 1-4 1st DT liens 5,093 44 (610) (145) (549) 3,833

SFR HELOCs and junior liens 6,148 861 (2,975) — — 4,034

Other 167 166 (20) (229) — 84

Total consumer loans 11,408 1,071 (3,605) (374) (549) 7,951

Commercial and industrial 2,183 2,481 (810) (1,447) — 2,407

Construction 4,546 — (4,531) — — 15

Agriculture production 18 120 (18) — — 120

Leases — — — — — —

Total nonperforming loans 26,864 16,188 (11,748) (1,965) (549) 28,790

Foreclosed assets 2,844 113 (856) — 549 2,650

Total nonperforming assets $ 29,708 16,301 (12,604) (1,965) — $ 31,440

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

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.

(in thousands)

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) September 30,

2021 June 30,

2021 March 31,

(in thousands) March 31,

2022 December 31,

2020 September 30, 2020

2021 March 31,

Allowance for credit losses:

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Cohort model allowance reserves 30,880 24,539 27,959

Total allowance for credit losses 83,473 84,355 84,459 90,397 86,766

Allowance for individually evaluated loans 835 982 1,482

Allowance for PCD loan losses — — — — —

Total allowance for credit losses $ 96,049 $ 85,376 $ 85,941

1 unchanged sentence

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 $84,306,000 allowance for loan losses at September 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 $96,049,000 allowance for loan losses at March 31, 2022 is adequate to absorb probable losses inherent in the Bank’s loan portfolio.

No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

The following table summarizes the allocation of the allowance for credit losses between loan types and by percentage of the total allowance for loan losses as of the dates indicated:

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

(in thousands) March 31, 2022 December 31, 2021 March 31, 2021

Commercial real estate $ 54,992 57.3 % 51,140 59.9 % $ 50,403 58.7 %

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

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

(in thousands) March 31, 2022 December 31, 2021 March 31, 2021

Commercial real estate 1.43 % 1.55 % 1.62 %

7 unchanged sentences

Three months ended

September 30, Nine months ended

September 30,

(in thousands) 2022 2021

1 unchanged sentence

Balance at beginning of period $ 85,376 $ 91,847

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

ACL on PCD loans 2,037 —

Provision for (reversal of) loan losses 8,205 (6,240)

11 unchanged sentences

Agriculture production — —

Leases — — — —

Total loans charged-off (743) (226)

4 unchanged sentences

Multifamily — —

Farmland — — — —

Home equity lines 1 2 12 414

Home equity loans 63 126 860 265

Other consumer 97 85 262 253

SFR 1-4 1st DT liens 40 10

SFR HELOCs and junior liens 175 285

Commercial and industrial 887 136

1 unchanged sentence

Agriculture production 1 20

Leases — — — —

Total recoveries of previously charged-off loans 1,174 560

Net (charge-offs) recoveries (261) 187 339 308

Net recoveries 431 334

Balance at end of period $ 96,049 $ 85,941

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Ratios (annualized):

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

Net recoveries during period to average loans outstanding during period 0.03 % 0.03 %

Provision for credit losses (benefit from reversal of) to average loans outstanding during period 0.66 % (0.52) %

Foreclosed Assets, Net of Allowance for Losses

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

The following table details the components and summarize the activity in foreclosed assets, net of allowances for losses, for the three months ended March 31, 2022:

(in thousands) Balance at

1 unchanged sentence

Adjustments Transfers

from Loans Balance at September 30, 2021

from Loans Balance at March 31, 2022

Land & construction $ 155 $ — $ — $ — $ 155

2 unchanged sentences

Total foreclosed assets $ 2,594 $ — $ — $ 313 $ 2,907

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.

During the three months ended March 31, 2022, the Company’s deposits increased by $1,347,318,000 to $8,714,477,000 at quarter end, of which $131,839,000 was organic growth, and the remainder is attributed to the acquisition of VRB.

Included in the March 31, 2022 and December 31, 2021 certificate of deposit balances is $1,000,000, 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.

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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 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 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 $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 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:

September 30, 2021 December 31, 2020

On February 25, 2021 the Board of Directors authorized the repurchase of 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 2021 Repurchase Plan is subject to change.

The Company may repurchase its outstanding shares of common stock from time to time in open market or privately-negotiated transactions, including block trades, or pursuant to 10b5-1 trading plans.

The 2021 Repurchase Plan has no expiration date (in accordance with applicable laws and regulations).

Concurrently with the announcement of the completion of the VRB merger, the Company announced the resumption of its 2021 Repurchase Plan planned activities.

During the three month period ended March 31, 2022 the Company no shares were repurchased under this Plan, respectively.

As of March 31, 2022 a total of 1,936,683 shares remained authorized for repurchase under the 2021 Repurchase Plan.

Total shareholders' equity increased by $108,998,000 during the quarter ended March 31, 2022, as a result of issuing $173,585,000 in common stock associated with the VRB merger and net income of $20,374,000, which was partially offset by a decrease in accumulated other comprehensive income of $78,339,000 and $7,433,000 in cash dividends paid on common stock.

As a result, the Company’s book value was $32.78 per share at March 31, 2022 as compared to $33.64 and $31.71 at December 31, 2021, and March 31, 2021, respectively.

The Company’s tangible book value per share, a non-GAAP measure, calculated by subtracting goodwill and other intangible assets from total shareholders’ equity and dividing that sum by total shares outstanding, was $23.04 per share at March 31, 2022, as compared to $25.80 and $23.72 at December 31, 2021, and March 31, 2021, respectively.

Trailing Quarter Balance Sheet Change

March 31, 2022 December 31, 2021

Ratio Minimum

5 unchanged sentences

See Note 10 and Note 16 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.

As of March 31, 2022, 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 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.

As of March 31, 2022, Federal Reserve cash reserve ratios continue to be temporarily reduced to zero as a response to the worldwide COVID-19 pandemic and on-going impact on supply chains and the energy markets.

The Company’s profitability during the first three months of 2022 generated cash flows from operations of $34,845,000 compared to $41,196,000 during the first three months of 2021.

Net cash from investing activities was $121,914,000 for the three months ended March 31, 2022, compared to net cash used by investing activities of $460,561,000 during the three months ending 2021.

Financing activities provided $110,503,000 during the three months ended March 31, 2022, compared to $359,336,000 used during the three months ended March 31, 2021.

During the three months ended March 31, 2022 cash acquired in connection with the VRB merger of $426,883,000 and deposit balance increases of $131,839,000 were the largest contributor to the source of funding that facilitated net organic loan growth of $161,961,000 and net organic investment security growth of $32,105,000, inclusive of changes in the fair value of available for sale investment securities, compared to an increase of deposit balances of $357,466,000 during the same period in 2021.

These contractual obligations increased as a result of the merger with VRB during the quarter ended March 31, 2022, but organically, remained otherwise consistent with similar balances or totals as of December 31, 2021.

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.

Based on the FHLB stock requirements at March 31, 2022, this line provided for maximum borrowings of $2.22 billion of which none was outstanding.

As of March 31, 2022, the Company had designated investment securities with a fair value of $67,027,000 and loans totaling $3.53 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.

As of March 31, 2021, this line provided for maximum borrowings of $182,331,000 of which none was outstanding.

As of March 31, 2021, the Company has designated investment securities with fair value of $5,800 and loans totaling $307,596,000 as potential collateral under this collateralized line of credit with the FRB.

The Company is dependent upon the payment of cash dividends by the Bank to service its commitments, which have historically included dividends to shareholders, scheduled debt service payments, and general operations.

Shareholder dividends are expected to continue subject to the Board’s discretion and management's 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 cover the Company's cash flow needs.

However, the Company and its ability to generate liquidity through either the issuance of stock or debt, also serves as a potential source of strength for the Bank.

Dividends paid by the Company to holders of its common stock used $7,433,000 and $7,432,000 of cash during the three months ended March 31, 2022 and 2021, 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