TRICO BANCSHARES / 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Cautionary Statements Regarding Forward-Looking Information The statements contained herein that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There can be no assurance that future developments affecting us will be the same as those anticipated by management. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of changes in financial services policies, laws and regulations; technological changes; weather, natural disasters and other catastrophic events that may or may not be caused by climate change and their effects on economic and business environments in which the Company operates; the continuing adverse impact on the U.S. economy, including the markets in which we operate, due to the length, severity, magnitude and duration of the COVID-19 global pandemic, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products; the costs or effects of mergers, acquisitions or dispositions we may make, such as our 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); the occurrence of any event, change, or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive merger agreement between the Company and Valley; the risk that any announcements relating to the merger could have adverse effects on the market price of the common stock of either or both parties to the transaction; changes in the economy, which could materially impact credit quality trends and the ability to generate loans and gather deposits, including the pace of the recovery following the COVID-19 pandemic; the ability of us to execute our business plan in new lending markets; the future operating or financial performance of the Company, including our outlook for future growth, changes in the level of our nonperforming assets and charge-offs; the appropriateness of the allowance for credit losses including the timing and effects of the implementation of the current expected credit losses model; any deterioration in values of California real estate, both residential and commercial; the effect of changes in accounting standards and practices; possible other-than-temporary impairment of securities held by us; changes in consumer spending, borrowing and savings habits; our ability to attract deposits and other sources of liquidity; changes in the financial performance and/or condition of our borrowers; our noninterest expense and the efficiency ratio; competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies; the challenges of integrating and retaining key employees; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber-attacks and the cost to defend against such attacks; the effect of a fall in stock market prices on our brokerage and wealth management businesses; and our ability to 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. Annualized, pro forma, projections and estimates are not forecasts and may not reflect actual results. General As TriCo Bancshares (referred to in this report as “we”, “our” or the “Company”) has not commenced any business operations independent of Tri Counties Bank (the “Bank”), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income, net interest income, 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. Interest income and net interest income are shown on a non-FTE basis in the Part I - Financial Information section of this Form 10-Q, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income. Critical Accounting Policies and Estimates The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 of the consolidated financial statements 39 Table of Contents included in the Company’s annual report on Form 10-K for the year ended December 31, 2021. Geographical Descriptions For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo. Recent Developments On 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 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. 40 Table of Contents TRICO BANCSHARES Financial Summary (In thousands, except per share amounts; unaudited) Three months ended March 31, 2022 2021 Net interest income $ 67,924 $ 66,440 Reversal of (provision for) credit losses (8,330) 6,060 Non-interest income 15,096 16,110 Non-interest expense (46,447) (41,618) Provision for income taxes (7,869) (13,343) Net income $ 20,374 $ 33,649 Per Share Data: Basic earnings per share $ 0.68 $ 1.13 Diluted earnings per share $ 0.67 $ 1.13 Dividends paid $ 0.25 $ 0.25 Book value at period end $ 32.78 $ 31.71 Average common shares outstanding 30,050 29,727 Average diluted common shares outstanding 30,202 29,905 Shares outstanding at period end 33,838 29,727 At period end: Loans $ 5,851,975 $ 4,966,977 Total investment securities $ 2,569,706 $ 1,962,780 Total assets $ 10,118,328 $ 8,031,612 Total deposits $ 8,714,477 $ 6,863,400 Other borrowings $ 36,184 $ 36,226 Shareholders’ equity $ 1,109,182 $ 942,539 Financial Ratios: During the period: Return on average assets (annualized) 0.94 % 1.75 % Return on average equity (annualized) 8.19 % 14.51 % Net interest margin (1) (annualized) 3.39 % 3.74 % Efficiency ratio 55.95 % 50.42 % Average equity to average assets 11.50 % 12.05 % At end of period: Equity to assets 10.96 % 11.73 % Total capital to risk-adjusted assets 14.96 % 15.13 % (1) Fully Taxable Equivalent (FTE) 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 The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report. 41 Table of Contents Net Interest Income The Company’s primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Following is a summary of the components of FTE net income for the periods indicated Three months ended (in thousands) March 31, 2022 March 31, 2021 Change % Change Interest income $ 69,195 $ 67,916 $ 1,279 1.9 % Interest expense (1,271) (1,476) 205 (13.9) % Fully tax-equivalent adjustment (FTE) (1) 283 277 6 2.2 % Net interest income (FTE) $ 68,207 $ 66,717 $ 1,490 2.2 % Net interest margin (FTE) 3.39 % 3.74 % Acquired loans discount accretion, net: Amount (included in interest income) $ 1,323 $ 1,712 $ (389) (22.7) % Net interest margin less effect of acquired loan discount accretion (1) 3.32 % 3.64 % (0.32) % PPP loans yield, net: Amount (included in interest income) $ 1,097 $ 5,863 $ (4,766) (81.3) % Net interest margin less effect of PPP loan yield (1) 3.36 % 3.59 % (0.23) % Acquired loans discount accretion and PPP loan yield, net: (1) Amount (included in interest income) $ 2,420 $ 7,575 $ (5,155) (68.1) % Net interest margin less effect of acquired loan discount accretion and PPP loan yield (1) 3.29 % 3.48 % (0.19) % (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 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 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. 42 Table of Contents Summary of Average Balances, Yields/Rates and Interest Differential The following table presents, for the three month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands). For the three months ended March 31, 2022 March 31, 2021 Average Balance Interest Income/ Expense Rates Earned /Paid Average Balance Interest Income/ Expense Rates Earned /Paid Assets: Loans, excluding PPP $ 4,937,865 $ 56,648 4.65 % $ 4,407,150 $ 54,573 5.02 % PPP loans 50,695 1,097 8.78 % 355,875 5,863 6.68 % Investment securities - taxable 2,313,204 10,223 1.79 % 1,649,980 6,394 1.57 % Investment securities - nontaxable (1) 143,873 1,225 3.45 % 125,055 1,200 3.89 % Total investments 2,457,077 11,448 1.89 % 1,775,035 7,594 1.74 % Cash at Federal Reserve and other banks 707,563 285 0.16 % 701,666 163 0.09 % Total interest-earning assets 8,153,200 69,478 3.46 % 7,239,726 68,193 3.82 % Other assets 625,056 569,186 Total assets $ 8,778,256 $ 7,808,912 Liabilities and shareholders’ equity: Interest-bearing demand deposits $ 1,597,309 $ 84 0.02 % $ 1,430,943 $ 76 0.02 % Savings deposits 2,571,023 327 0.05 % 2,228,281 329 0.06 % Time deposits 301,499 268 0.36 % 336,605 532 0.64 % Total interest-bearing deposits 4,469,831 679 0.06 % 3,995,829 937 0.10 % Other borrowings 44,731 5 0.05 % 32,709 4 0.05 % Junior subordinated debt 60,971 587 3.90 % 57,688 535 3.76 % Total interest-bearing liabilities 4,575,533 1,271 0.11 % 4,086,226 1,476 0.15 % Noninterest-bearing deposits 3,052,099 2,657,925 Other liabilities 141,400 123,986 Shareholders’ equity 1,009,224 940,775 Total liabilities and shareholders’ equity $ 8,778,256 $ 7,808,912 Net interest spread (2) 3.35 % 3.67 % Net interest income and interest margin (3) $ 68,207 3.39 % $ 66,717 3.74 % (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 . 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. 43 Table of Contents Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid The following table sets forth, for the period identified, a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components. Three months ended March 31, 2022 compared with three months ended March 31, 2021 (in thousands) Volume Rate Total Increase (decrease) in interest income: Loans, including PPP $ 6,597 $ (9,288) $ (2,691) Investment securities (1) 9,310 (5,456) 3,854 Cash at Federal Reserve and other banks 1 121 122 Total interest-earning assets 15,908 (14,623) 1,285 Increase (decrease) in interest expense: Interest-bearing demand deposits 8 — 8 Savings deposits 51 (53) (2) Time deposits (56) (208) (264) Other borrowings 2 (1) 1 Junior subordinated debt 31 21 52 Total interest-bearing liabilities 36 (241) (205) Increase (decrease) in net interest income $ 15,872 $ (14,382) $ 1,490 The following commentary regarding net interest income, interest income and interest expense may be best understood while referencing the Summary of Average Balances, Yields/Rates and Interest Differential and the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid shown above. Net interest income (FTE) during the three months ended March 31, 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 (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 reserve for unfunded loan commitments 125 265 180 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. 44 Table of Contents 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 ACL at acquisition for PCD loans 2,037 — Provision for (reversal of) credit losses 8,205 (6,240) Loans charged-off (743) (226) Recoveries of previously charged-off loans 1,174 560 Balance, end of period $ 96,049 $ 85,941 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, 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 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. March 31, % of Total Loans December 31, % of Total Loans March 31 % of Total Loans (dollars in thousands) 2022 2021 2021 Risk Rating: Pass $ 5,682,026 97.1 % $ 4,787,077 97.4 % $ 4,765,180 95.9 % Special Mention 120,684 2.1 % 77,461 1.5 % 143,677 2.9 % Substandard 49,265 0.8 % 52,086 1.1 % 58,120 1.2 % Total $ 5,851,975 $ 4,916,624 $ 4,966,977 Classified loans to total loans 0.84 % 1.06 % 1.17 % Loans past due 30+ days to total loans 0.14 % 0.09 % 0.21 % 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. 45 Table of Contents 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 The following table summarizes the Company’s non-interest income for the periods indicated (in thousands): Three months ended March 31, (in thousands) 2022 2021 $ Change % Change ATM and interchange fees $ 6,243 $ 5,861 $ 382 6.5 % Service charges on deposit accounts 3,834 3,269 565 17.3 % Other service fees 882 871 11 1.3 % Mortgage banking service fees 463 463 — — % Change in value of mortgage servicing rights 274 12 262 2,183.3 % Total service charges and fees 11,696 10,476 1,220 11.6 % Increase in cash value of life insurance 638 673 (35) (5.2) % Asset management and commission income 887 834 53 6.4 % Gain on sale of loans 1,246 3,247 (2,001) (61.6) % Lease brokerage income 158 110 48 43.6 % Sale of customer checks 104 119 (15) (12.6) % Gain on sale of investment securities — — — n/m Gain on marketable equity securities (137) (53) (84) 158.5 % Other 504 704 (200) (28.4) % Total other non-interest income 3,400 5,634 (2,234) (39.7) % Total non-interest income $ 15,096 $ 16,110 $ (1,014) (6.3) % 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. 46 Table of Contents Non-interest Expense The following table summarizes the Company’s non-interest expense for the periods indicated: Three months ended March 31, (in thousands) 2022 2021 $ Change % Change Base salaries, net of deferred loan origination costs $ 18,216 $ 15,511 $ 2,705 17.4 % Incentive compensation 2,583 3,580 (997) (27.8) % Benefits and other compensation costs 5,972 6,239 (267) (4.3) % Total salaries and benefits expense 26,771 25,330 1,441 5.7 % Occupancy 3,575 3,726 (151) (4.1) % Data processing and software 3,513 3,202 311 9.7 % Equipment 1,333 1,517 (184) (12.1) % Intangible amortization 1,228 1,431 (203) (14.2) % Advertising 637 380 257 67.6 % ATM and POS network charges 1,375 1,246 129 10.4 % Professional fees 876 594 282 47.5 % Telecommunications 521 581 (60) (10.3) % Regulatory assessments and insurance 720 612 108 17.6 % Merger and acquisition expense 4,032 — 4,032 n/m Postage 228 198 30 15.2 % 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 (1,078) — (1,078) n/m Other miscellaneous expense 2,485 2,349 136 5.8 % Total other non-interest expense 19,676 16,288 3,388 20.8 % Total non-interest expense $ 46,447 $ 41,618 $ 4,829 11.6 % Average full time equivalent staff 1,084 1,024 60 5.9 % 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. Income Taxes 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. 47 Table of Contents Financial Condition For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. The following is a comparison of the quarterly change in certain assets and liabilities: Ending balances March 31, December 31, Acquired Balances Organic $ Change Annualized Organic % Change (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 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 % 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: Ending balances As of March 31, Acquired Organic $ Change Organic % Change (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 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 % 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 $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 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 % Debt securities available for sale : Obligations of U.S. government agencies $ 1,690,744 71.6 % $ 1,257,389 57.0 % Obligations of states and political subdivisions 267,195 11.3 % 192,244 8.7 % Corporate bonds 7,616 0.3 % 6,756 0.3 % Asset backed securities 397,352 16.8 % 751,549 34.0 % Total debt securities available for sale $ 2,362,907 100.0 % $ 2,207,938 100.0 % 48 Table of Contents March 31, 2022 December 31, 2021 (in thousands) Amortized Cost % Amortized Cost % Debt securities held to maturity : Obligations of U.S. government and agencies $ 180,289 96.5 % $ 192,068 96.1 % Obligations of states and political subdivisions 6,459 3.5 % 7,691 3.9 % Total debt securities held to maturity $ 186,748 100.0 % $ 199,759 100.0 % 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. Loans The Company concentrates its lending activities in six principal areas: commercial real estate loans, consumer loans, commercial and industrial loans, construction loans, agriculture production loans and leases. The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Company and prevailing money market rates indicative of the Company’s cost of funds. The majority of the Company’s loans are direct loans made to individuals, farmers and local businesses. The Company relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment. The following table shows the Company’s loan balances, net deferred loan costs and discounts, as of the dates indicated: (in thousands) March 31, 2022 December 31, 2021 Commercial real estate $ 3,832,974 65.5 % $ 3,306,054 67.2 % Consumer 1,136,712 19.4 % 1,071,551 21.8 % Commercial and industrial 500,882 8.6 % 259,355 5.3 % Construction 303,960 5.2 % 222,281 4.5 % Agriculture production 69,339 1.2 % 50,811 1.1 % Leases 8,108 0.1 % 6,572 0.1 % Total loans $ 5,851,975 100.0 % $ 4,916,624 100.0 % Nonperforming Assets 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) March 31, 2022 December 31, 2021 Performing nonaccrual loans $ 11,643 $ 27,713 Nonperforming nonaccrual loans 2,293 2,637 Total nonaccrual loans 13,936 30,350 Loans 90 days past due and still accruing 152 — Total nonperforming loans 14,088 30,350 Foreclosed assets 2,907 2,594 Total nonperforming assets $ 16,995 $ 32,944 Nonperforming assets to total assets 0.17 % 0.38 % Nonperforming loans to total loans 0.24 % 0.62 % Allowance for credit losses to nonperforming loans 682 % 294 % 49 Table of Contents Changes in nonperforming assets during the three months ended March 31, 2022 (in thousands) Balance at December 31, 2021 New NPA / Valuation Adjustments Pay-downs /Sales /Upgrades Charge-offs/ (1) Write-downs Transfers to Foreclosed Assets Balance at March 31, 2022 Commercial real estate: CRE non-owner occupied $ 7,899 2,214 (7,730) — — $ 2,383 CRE owner occupied 5,036 — (3,568) — — 1,468 Multifamily 4,457 — (4,309) — — 148 Farmland 3,020 391 (792) (294) (313) 2,012 Total commercial real estate loans 20,412 2,605 (16,399) (294) (313) 6,011 Consumer SFR 1-4 1st DT liens 3,596 340 (440) — — 3,496 SFR HELOCs and junior liens 3,801 931 (1,562) — — 3,170 Other 71 14 (6) (1) — 78 Total consumer loans 7,468 1,285 (2,008) (1) — 6,744 Commercial and industrial 2,415 396 (1,287) (330) — 1,194 Construction 55 85 (1) — — 139 Agriculture production — — — — — — Leases — — — — — — Total nonperforming loans 30,350 4,371 (19,695) (625) (313) 14,088 Foreclosed assets 2,594 — — — 313 2,907 Total nonperforming assets $ 32,944 4,371 (19,695) (625) — $ 16,995 (1) The table above does not include deposit overdraft charge-offs. 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. 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. (in thousands) 50 Table of Contents 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) March 31, 2022 December 31, 2021 March 31, 2021 Allowance for credit losses: Qualitative and forecast factor allowance $ 64,334 $ 59,855 $ 56,500 Cohort model allowance reserves 30,880 24,539 27,959 Allowance for individually evaluated loans 835 982 1,482 Total allowance for credit losses $ 96,049 $ 85,376 $ 85,941 Allowance for credit losses for loans / total loans 1.64 % 1.74 % 1.73 % 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 $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: (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 % Consumer 23,852 24.8 % 23,474 27.5 % 24,604 28.6 % Commercial and industrial 8,869 9.2 % 3,862 4.5 % 4,464 5.2 % Construction 7,437 7.7 % 5,667 6.7 % 5,476 6.4 % Agriculture production 883 0.9 % 1,215 1.4 % 988 1.1 % Leases 16 0.1 % 18 — % 6 — % Total allowance for credit losses $ 96,049 100.0 % 85,376 100.0 % $ 85,941 100.0 % The following table summarizes the allocation of the allowance for credit losses as a percentage of the total loans for each loan category as of the dates indicated: (in thousands) March 31, 2022 December 31, 2021 March 31, 2021 Commercial real estate 1.43 % 1.55 % 1.62 % Consumer 2.10 % 2.19 % 2.36 % Commercial and industrial 1.77 % 1.49 % 0.81 % Construction 2.45 % 2.55 % 2.47 % Agriculture production 1.27 % 2.39 % 2.49 % Leases 0.20 % 0.27 % 0.13 % Total loans 1.64 % 1.74 % 1.73 % 51 Table of Contents The following table summarizes the activity in the allowance for credit losses for the periods indicated: Three months ended March 31, (in thousands) 2022 2021 Allowance for credit losses: Balance at beginning of period $ 85,376 $ 91,847 ACL on PCD loans 2,037 — Provision for (reversal of) loan losses 8,205 (6,240) Loans charged-off: Commercial real estate: CRE non-owner occupied — — CRE owner occupied — — Multifamily — — Farmland (294) — Consumer: SFR 1-4 1st DT liens — — SFR HELOCs and junior liens — — Other (119) (193) Commercial and industrial (330) (33) Construction — — Agriculture production — — Leases — — Total loans charged-off (743) (226) Recoveries of previously charged-off loans: Commercial real estate: CRE non-owner occupied — 2 CRE owner occupied — 1 Multifamily — — Farmland — — Consumer: SFR 1-4 1st DT liens 40 10 SFR HELOCs and junior liens 175 285 Other 71 106 Commercial and industrial 887 136 Construction — — Agriculture production 1 20 Leases — — Total recoveries of previously charged-off loans 1,174 560 Net recoveries 431 334 Balance at end of period $ 96,049 $ 85,941 Average total loans $ 4,988,560 $ 4,763,025 Ratios (annualized): 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) % 52 Table of Contents Foreclosed Assets, Net of Allowance for Losses The following table details the components and summarize the activity in foreclosed assets, net of allowances for losses, for the three months ended March 31, 2022: (in thousands) Balance at December 31, 2021 Sales Valuation Adjustments Transfers from Loans Balance at March 31, 2022 Land & construction $ 155 $ — $ — $ — $ 155 Residential real estate 1,258 — — 313 1,571 Commercial real estate 1,181 — — — 1,181 Total foreclosed assets $ 2,594 $ — $ — $ 313 $ 2,907 Deposits 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. The negotiated rates on these State deposits are generally more favorable than other wholesale funding sources available to the Company. Off-Balance Sheet Arrangements See Note 7 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s commitments and contingencies including off-balance-sheet arrangements. Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management. On February 25, 2021 the Board of Directors 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 Regulatory Requirement Ratio Minimum Regulatory Requirement Total risk based capital 15.0 % 10.5 % 15.4 % 10.5 % Tier I capital 13.1 % 8.5 % 14.2 % 8.5 % Common equity Tier 1 capital 12.3 % 7.0 % 13.2 % 7.0 % Leverage 10.8 % 4.0 % 9.9 % 4.0 % 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. 53 Table of Contents 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. The registration statement does not limit the amount of securities that may be issued thereunder. Our ability to issue securities is subject to market conditions and other factors including, in the case of our debt securities, our credit ratings and compliance with current and prospective covenants in credit agreements. Liquidity The Company’s principal source of asset liquidity is cash at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities available for sale. As of March 31, 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. 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. 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 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 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. Dividends from the Bank are subject to certain regulatory restrictions.