What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-10 · 301 added, 145 removed, 449 unchanged (50% of the section changed)

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inflation, interest rate, market and monetary fluctuations;

the impact of changes in financial services policies, laws and regulations;

the impact of changes in financial services industry policies, laws and regulations;

technological changes;

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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.

The Company's results for the quarter ended June 30, 2022 reflect the full operational impact of the March 25, 2022 merger with Valley Republic Bancorp.

Critical Accounting Policies and Estimates

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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.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the

circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 of the consolidated financial statements

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

A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for credit 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, 2021.

Geographical Descriptions

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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%.

Performance highlights and other developments for the Company as of or for the three and six months ended June 30, 2022, included the following:

• For the three and six months ended June 30, 2022, the Company’s return on average assets was 1.24% and 1.10%, while the return on average equity was 11.53% and 9.93%, respectively.

These ratios were impacted by merger related expenses of $2,221,000 and $6,253,000 for the respective periods in 2022.

• Organic loan growth, excluding PPP and acquired loans, totaled $300.3 million (20.7% annualized) for the current quarter and $638.4 million (13.6% 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.

• For the current quarter, net interest margin, less the effect of acquired loan discount accretion and PPP yields ( non-GAAP ), on a tax equivalent basis was 3.57%, an increase of 28 basis points from 3.29% in the trailing quarter.

• The efficiency ratio was 55.45% for the three months ended June 30, 2022, as compared to 55.95% for the trailing quarter.

• As of June 30, 2022, the Company reported total loans, total assets and total deposits of $6.1 billion, $10.1 billion and $8.8 billion, respectively.

As a direct result of organic loan growth during the quarter, the loan to deposit ratio has increased to 69.8% as of June 30, 2022, as compared to 67.2% as of the trailing quarter.

• The average rate of interest paid on deposits, including non-interest-bearing deposits, equaled 0.04% during the second quarter of 2022, consistent with 0.04% during the trailing quarter, and representing a decrease of one basis point from the average rate paid of 0.05% during the same quarter of the prior year.

• Noninterest income related to service charges and fees was $13.0 million for the three month period ended June 30, 2022, an increase of 19.3% when compared to the same period in 2021.

• The provision for credit losses for loans and debt securities was approximately $2.1 million during the quarter ended June 30, 2022, as compared to a provision expense of $8.3 million during the trailing quarter ended March 31, 2022, and a reversal of provision expense totaling $0.3 million for the three month period ended June 30, 2021.

• The allowance for credit losses to total loans was 1.60% as of June 30, 2022, compared to 1.64% as of the trailing quarter end, and 1.74% as of June 30, 2021.

Non-performing assets to total assets were 0.15% at June 30, 2022, as compared to 0.17% as of March 31, 2022, and 0.43% at June 30, 2021.

TRICO BANCSHARES

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Three months ended

June 30, Six months ended

2022 2021 2022 2021

Net interest income $ 85,046 $ 67,083 $ 152,970 $ 133,523

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(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.

The Company announced net income of $31,364,000 for the quarter ended June 30, 2022, compared to $20,374,000 during the trailing quarter ended March 31, 2022, and $28,362,000 during the quarter ended June 30, 2021.

Diluted earnings per share were $0.93 for the second quarter of 2022, compared to $0.67 for the first quarter of 2022 and $0.95 for the second quarter of 2021.

Results of Operations

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Three months ended

(in thousands) March 31,

(in thousands) June 30,

2022 March 31,

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3.57 % 3.29 % 0.28 %

(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.

Three months ended

(dollars in thousands) 2022 2021 Change % Change

Interest income $ 86,955 $ 68,479 $ 18,476 27.0 %

Interest expense (1,909) (1,396) (513) 36.7 %

Fully tax-equivalent adjustment (FTE) (1)

397 255 142 55.7 %

Net interest income (FTE) $ 85,443 $ 67,338 $ 18,105 26.9 %

Net interest margin (FTE) 3.67 % 3.58 %

Acquired loans discount accretion, net:

Amount (included in interest income) $ 1,677 $ 2,566 $ (889) (34.6) %

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

3.60 % 3.44 % 0.16 %

PPP loans yield, net:

Amount (included in interest income) $ 964 $ 3,179 $ (2,215) (69.7) %

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

3.65 % 3.57 % 0.08 %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 2,641 $ 5,745 $ (3,104) (54.0) %

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

3.57 % 3.43 % 0.14 %

Six months ended

(dollars in thousands) 2022 2021 Change % Change

Interest income $ 156,150 $ 136,395 $ 19,755 14.5 %

Interest expense (3,180) (2,872) (308) 10.7 %

Fully tax-equivalent adjustment (FTE) (1)

680 532 148 27.8 %

Net interest income (FTE) $ 153,650 $ 134,055 $ 19,595 14.6 %

Net interest margin (FTE) 3.54 % 3.66 %

Acquired loans discount accretion, net:

Amount (included in interest income) $ 3,000 $ 4,278 $ (1,278) (29.9) %

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

3.51 % 3.54 % (0.03) %

PPP loans yield, net:

Amount (included in interest income) $ 2,061 $ 9,042 $ (6,981) (77.2) %

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

3.51 % 3.59 % (0.08) %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 5,061 $ 13,320 $ (8,259) (62.0) %

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

3.44 % 3.46 % (0.02) %

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

The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provide additional clarity in assessing its results, and the presentation of these measures are common practice within the banking industry.

See additional information related to non-GAAP measures at the back of this document.

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.

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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.

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 two quarters of 2022.

During the three months ended June 30, 2022, March 31, 2022, and June 30, 2021, purchased loan discount accretion was $1,677,000, $1,323,000, and $2,566,000, respectively.

Summary of Average Balances, Yields/Rates and Interest Differential

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For the three months ended

March 31, 2022 March 31, 2021

June 30, 2022 June 30, 2021

Balance Interest

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(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.

As compared to the same quarter in the prior year, average loan yields, excluding PPP, decreased 23 basis points from 4.93% during the three months ended June 30, 2021, to 4.70% during the three months ended June 30, 2022.

The accretion of discounts from acquired loans added 11 and 22 basis points to loan yields during the quarters ended June 30, 2022 and June 30, 2021, respectively.

Therefore, of the 23 basis point decrease in yields on loans during the comparable three month periods ended June 30, 2022 and 2021, 12 basis points was attributable to changes in competitive market rates, while 11 basis points resulted from less accretion of discounts.

The rates paid on interest bearing deposits generally remained flat during the quarter ended June 30, 2022 as compared to the trailing quarter.

The cost of interest-bearing deposits decreased by 1 basis point during the quarter ended June 30, 2022, to 0.07% from 0.08% 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 which decreased to at 0.04% in current quarter, as compared to 0.05% in the second quarter of the prior year.

Six months ended June 30, 2022 Six months ended June 30, 2021

Balance Income/

Expense Yield/

Balance Income/

Expense Yield/

Loans, excluding PPP $ 5,416,854 $ 125,602 4.68 % $ 4,527,329 $ 111,698 4.98 %

PPP loans 44,238 2,061 9.40 % 344,011 9,042 5.30 %

Investments-taxable 2,434,045 24,573 2.04 % 1,763,140 13,583 1.55 %

Investments-nontaxable (1)

170,132 2,945 3.49 % 128,564 2,306 3.62 %

Total investments 2,604,177 27,518 2.13 % 1,891,704 15,889 1.69 %

Cash at Federal Reserve and other banks 688,257 1,649 0.48 % 629,952 298 0.10 %

Total earning assets 8,753,526 156,830 3.61 % 7,392,996 136,927 3.73 %

Other assets, net 700,170 575,138

Total assets $ 9,453,696 $ 7,968,134

Liabilities and shareholders’ equity

Interest-bearing demand deposits $ 1,698,815 $ 183 0.02 % $ 1,461,377 $ 153 0.02 %

Savings deposits 2,788,374 856 0.06 % 2,272,830 637 0.06 %

Time deposits 319,351 488 0.31 % 330,703 975 0.59 %

Total interest-bearing deposits 4,806,540 1,527 0.06 % 4,064,910 1,765 0.09 %

Other borrowings 39,966 10 0.05 % 36,870 9 0.05 %

Junior subordinated debt 81,092 1,643 4.09 % 57,739 1,098 3.83 %

Total interest-bearing liabilities 4,927,598 3,180 0.13 % 4,159,519 2,872 0.14 %

Noninterest-bearing deposits 3,329,459 2,734,922

Other liabilities 146,073 123,233

Shareholders’ equity 1,050,566 950,460

Total liabilities and shareholders’ equity $ 9,453,696 $ 7,968,134

Net interest rate spread (1) (2)

3.48 % 3.59 %

Net interest income and margin (1) (3)

$ 153,650 3.54 % $ 134,055 3.66 %

(1) Fully taxable equivalent (FTE).

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

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

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

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

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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

Three months ended June 30, 2022

compared with three months ended June 30, 2021

(in thousands) Volume Rate Total

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Increase (decrease) in net interest income $ 29,202 $ (11,097) $ 18,105

Six months ended June 30, 2022 compared with six months ended June 30, 2021

(in thousands) Volume Rate Total

Increase (decrease) in interest income:

Loans, including PPP $ 60,627 $ (53,704) $ 6,923

Investment securities (1)

11,904 (275) 11,629

Cash at Federal Reserve and other banks 58 1,293 1,351

Total interest-earning assets 72,589 (52,686) 19,903

Increase (decrease) in interest expense:

Interest-bearing demand deposits 47 (17) 30

Savings deposits 309 (90) 219

Time deposits (67) (420) (487)

Other borrowings 1 — 1

Junior subordinated debt 894 (349) 545

Total interest-bearing liabilities 1,184 (876) 308

Increase (decrease) in net interest income $ 71,405 $ (51,810) $ 19,595

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.

Net interest income (FTE) during the three months ended June 30, 2022 increased $18,105,000 or 26.9% to $85,443,000 compared to $67,338,000 during the three months ended June 30, 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 in net interest income totaling $8,885,000 and $20,827,000, respectively, despite lower yields offsetting those earnings by $1,110,000 and $11,213,000, respectively.

In addition, interest income on loans was impacted by a $2,215,000 decrease in PPP related income during the comparable periods.

Following the VRB merger during the first quarter of 2022, larger average balances of subordinated debt has resulted in $422,000 of additional interest expense.

Net interest income (FTE) during the six months ended June 30, 2022 increased $19,595,000 or 14.6% to $153,650,000 compared to $134,055,000 during the six months ended June 30, 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 in net interest income totaling $11,904,000 and $60,627,000, respectively, despite lower yields offsetting those earnings by $275,000 and $53,704,000, respectively.

In addition, interest income on loans was impacted by a $6,981,000 decrease in PPP related income during the comparable periods.

Following the VRB merger during the first quarter of 2022, larger average balances of subordinated debt has resulted in $545,000 of additional net interest expense.

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:

During the three months ended June 30, 2022, the Company recorded a provision for credit losses of $2,100,000, as compared to a $8,330,000 provision during the trailing quarter, and a reversal of provision expense of $260,000 during the second quarter of 2021.

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

Three months ended

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

(dollars in thousands) June 30, 2022 March 31, 2022 December 31, 2021 June 30, 2021

Addition to (reversal of) allowance for credit losses $ 1,940 $ 8,205 $ 715 $ (145)

Addition to reserve for unfunded loan commitments

160 125 265 (115)

Total provision for (reversal of) credit losses $ 2,100 $ 8,330 $ 980 $ (260)

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

Three months ended Six months ended

(dollars in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Balance, beginning of period $ 96,049 $ 85,941 $ 85,376 $ 91,847

4 unchanged sentences

Balance, end of period $ 97,944 $ 86,062 $ 97,944 $ 86,062

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 allowance for credit losses (ACL) was $97,944,000 as of June 30, 2022, a net increase of $1,895,000 over the immediately preceding quarter.

The provision for credit losses of $1,940,000 during the quarter was the net effect of increases in required reserves due to loan growth and net charge-offs totaling $45,000.

By comparison, the provision for credit losses of $10,145,000 during the six-months ended June 30, 2022 was generally comprised of $10,820,000 in association with the loans acquired from Valley Republic Bank and a net reversal of credit losses of $675,000.

The qualitative components of the ACL resulted in a net decline in required reserves due to continued improvement in US employment rates and tempered by a weaker outlook of US GDP.

Meanwhile, the quantitative component of the ACL increased reserve requirements over the trailing quarter due to loan volume growth partially offset by decreases in reserves associated with specifically evaluated loans.

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.

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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.

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 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.

Loans past due 30 days or more decreased by $2,482,000 during the quarter ended June 30, 2022 to $5,920,000, as compared to $8,402,000 at March 31, 2022.

Non-performing loans were $11,925,000 at June 30, 2022, a decrease of $2,163,000 and $20,780,000 from $14,088,000 and $32,705,000 as of March 31, 2022 and June 30, 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

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

(dollars in thousands) 2022 2022 2021

5 unchanged sentences

Loans past due 30+ days to total loans 0.10 % 0.14 % 0.19 %

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.

The ratio of classified loans to total loans improved to 0.77% as of June 30, 2022 as compared to both 0.84% and 1.18% for the trailing quarter and same quarter of the prior year, respectively.

The Company's criticized loan balances decreased during the current quarter by approximately $17,309,000 to $152,640,000 as of June 30, 2022.

The improvement in criticized loans was the result of active management by the credit department, as there were no loan sales during the period.

The five largest criticized credits upgraded or paid off totaled approximately $8,800,000, and there were no charge-offs incurred in connection with the successful management of these credits.

There was one property added to other real estate owned totaling $375,000 during the quarter ended June 30, 2022, and no disposals.

As of June 30, 2022, other real estate owned consisted of nine properties with a carrying value of approximately $3,379,000.

Non-performing assets of $15,304,000 at June 30, 2022 represented 0.15% of total assets, a decrease from the $16,995,000 or 0.17% and $34,952,000 or 0.43% as of March 31, 2022 and June 30, 2021, respectively.

The improvement in non-performing assets during the current quarter was spread amongst several lending relationships.

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.

In March 2020 (Round 1) and subsequently in December 2020 (Round 2), the Small Business Administration ("SBA") Paycheck Protection Program ("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.

1 unchanged sentence

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

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

(dollars in thousands) June 30, 2022 December 31, 2021 June 30, 2021

Total number of PPP loans outstanding 90 450 2,209

22 unchanged sentences

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

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

(Loss) gain on marketable equity securities (94) 8 (102) (1,275.0) %

Other 468 115 353 307.0 %

1 unchanged sentence

Total non-interest income $ 16,430 $ 15,957 $ 473 3.0 %

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 income increased $473,000 or 3.0% to $16,430,000 during the three months ended June 30, 2022, compared to $15,957,000 during the quarter ended June 30, 2021.

Generally, the quarter over quarter changes are reflective of increases following the VRB merger on March 25, 2022.

As an outlier, the gain on sale of mortgage loans declined by $2,305,000 or 81.0% during the quarter ended June 30, 2022, attributed to the rapidly rising rate environment and resulting decline in mortgage application and origination volumes as compared to the equivalent period in 2021.

Six months ended June 30,

(in thousands) 2022 2021 $ Change % Change

ATM and interchange fees $ 13,227 $ 12,419 $ 808 6.5 %

Service charges on deposit accounts 7,997 6,731 1,266 18.8 %

Other service fees 2,161 1,785 376 21.1 %

Mortgage banking service fees 945 930 15 1.6 %

Change in value of mortgage servicing rights 410 (459) 869 (189.3) %

Total service charges and fees 24,740 21,406 3,334 15.6 %

Increase in cash value of life insurance 1,390 1,418 (28) (2.0) %

Asset management and commission income 1,926 1,781 145 8.1 %

Gain on sale of loans 1,788 6,094 (4,306) (70.7) %

Lease brokerage income 396 359 37 10.3 %

Sale of customer checks 545 235 310 131.9 %

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

Loss on marketable equity securities (231) (45) (186) 413.3 %

Other 972 819 153 18.7 %

Total other non-interest income 6,786 10,661 (3,875) (36.3) %

Total non-interest income $ 31,526 $ 32,067 $ (541) (1.7) %

The changes in non-interest income for the six months ended June 30, 2022 and 2021 are generally consistent with changes in the three months periods discussed above.

Non-interest Expense

17 unchanged sentences

Postage 313 124 189 152.4 %

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

Operational losses 456 212 244 115.1 %

Courier service 486 288 198 68.8 %

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

Gain on sale or acquisition of foreclosed assets (98) (15) (83) 553.3 %

Loss (gain) on disposal of fixed assets 5 (426) 431 (101.2) %

Other miscellaneous expense 4,017 2,855 1,162 40.7 %

2 unchanged sentences

Average full time equivalent staff 1,183 1,020 163 16.0 %

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.

Non-interest expense increased by $12,093,000 or 27.4% to $56,264,000 during the three months ended June 30, 2022 as compared to $44,171,000 for the three months ended June 30, 2021.

Total salaries and benefits expense increased by $5,861,000 or 21.6% to $32,942,000 for the three months ended June 30, 2022 as compared to $27,081,000 for the quarterly period ended June 30, 2021 as a direct result of increases in full-time equivalent staffing similarly increasing by 16.0%, or 163 FTE, following the acquisition with VRB (representing 99 FTE) during the first quarter of 2021, new loan production offices in Southern California opened during the third quarter of 2021, and other staffing increases resulting from organic growth.

Merger and acquisition expenses associated with the merger with VRB totaled $2,221,000 during the current quarter.

Six months ended June 30,

(in thousands) 2022 2021 $ Change % Change

Base salaries, net of deferred loan origination costs $ 40,385 $ 33,048 $ 7,337 22.2 %

Incentive compensation 6,865 7,902 (1,037) (13.1) %

Benefits and other compensation costs 12,463 11,461 1,002 8.7 %

Total salaries and benefits expense 59,713 52,411 7,302 13.9 %

Occupancy 7,571 7,426 145 2.0 %

Data processing and software 7,109 6,403 706 11.0 %

Equipment 2,786 2,724 62 2.3 %

Intangible amortization 2,930 2,862 68 2.4 %

Advertising 1,455 1,114 341 30.6 %

ATM and POS network charges 3,156 2,797 359 12.8 %

Professional fees 2,109 1,640 469 28.6 %

Telecommunications 1,085 1,145 (60) (5.2) %

Regulatory assessments and insurance 1,499 1,230 269 21.9 %

Merger and acquisition expense 6,253 — 6,253 n/m

Postage 541 322 219 68.0 %

Operational losses 273 421 (148) (35.2) %

Courier service 900 582 318 54.6 %

Gain on sale or acquisition of foreclosed assets (98) (66) (32) 48.5 %

Gain on disposal of fixed assets (1,073) (426) (647) 151.9 %

Other miscellaneous expense 6,502 5,204 1,298 24.9 %

Total other non-interest expense 42,998 33,378 9,620 28.8 %

Total non-interest expense $ 102,711 $ 85,789 $ 16,922 19.7 %

Average full-time equivalent staff 1,133 1,022 111 10.9 %

The changes in non-interest expense for the six months ended June 30, 2022 and 2021 are generally consistent with changes in the comparable three months periods discussed above.

The Company’s effective tax rate was 27.5% for the six months ended June 30, 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.

2 unchanged sentences

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

Ending balances June 30, March 31, Annualized

(dollars in thousands) 2022 2022 $ Change

4 unchanged sentences

Total deposits $ 8,756,775 $ 8,714,477 $ 42,298 1.9 %

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.

Organic loan growth, excluding PPP, of $300,297,000 or 20.7% on an annualized basis was realized during the quarter ended June 30, 2022, primarily within commercial real estate.

During the quarter, and exclusive of PPP balance changes, loan originations totaled approximately $697 million while payoffs of loans totaled $397 million, which compares to origination and payoff activity during the three months ended March 31, 2022 of $396 million and $225 million, respectively.

While management believes that loan pipelines are robust,

loan activity during the quarter is reflective of increased customer awareness of the rising interest rate environment.

Investment security growth was $233,109,000 or 36.3% on an annualized basis as excess liquidity from strong deposit growth during the trailing 12 month period was put to use in higher yielding earning assets.

Deposit balances increased, with an organic change of $42,298,000 or 1.9% annualized during the period.

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

Ending balances As of March 31, Acquired Organic

Ending balances As of June 30, Acquired Balances Organic

$ Change Organic

(dollars in thousands) 2022 2021 $ Change Balances

(dollars in thousands) 2022 2021 $ Change

Total assets $ 10,120,611 $ 8,170,365 $ 1,950,246 $ 1,363,529 $ 586,717 7.2 %

3 unchanged sentences

Total deposits $ 8,756,775 $ 6,992,053 $ 1,764,722 $ 1,215,479 $ 549,243 7.9 %

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.

Non-PPP loan balances have increased as a result of organic activities by approximately $638,387,000 during the twelve month period ending June 30, 2022.

This, combined with earning assets acquired in the merger with Valley Republic Bank, has led to a long-term beneficial and meaningful shift in the makeup of the loan portfolio.

Specifically, during the twelve months ended June 30, 2022 and excluding PPP balance changes, loan originations totaled approximately $2.2 billion while payoffs of loans totaled $1.6 billion.

Investment securities increased to $2,802,815,000 at June 30, 2022, an organic change of $589,524,000 or 28.0% 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.

Investment securities available for sale increased $398,127,000 to $2,606,065,000 as of June 30, 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

There were no sales of investment securities during the three and six months ended June 30, 2022 and 2021, respectively.

The following table presents the available for sale debt securities portfolio by major type as of June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021

(in thousands) Fair Value % Fair Value %

5 unchanged sentences

Asset backed securities 434,192 16.7 % 409,552 18.5 %

Non-agency collateralized mortgage obligations 323,804 12.4 % 341,997 15.5 %

Total debt securities available for sale $ 2,606,065 100.0 % $ 2,207,938 100.0 %

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(in thousands) Amortized

5 unchanged sentences

Total debt securities held to maturity $ 176,794 100.0 % $ 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.

Investment securities held to maturity decreased $22,965,000 to $176,794,000 as of June 30, 2022, as compared to December 31, 2021.

This decrease is attributable to calls and principal repayments of $22,752,000, and amortization of net purchase premiums of $213,000.

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) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Commercial real estate $ 4,049,893 66.2 % $ 3,306,054 67.2 %

8 unchanged sentences

“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,

(in thousands) June 30,

2022 December 31,

9 unchanged sentences

Allowance for credit losses to nonperforming loans 821 % 294 %

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

Changes in nonperforming assets during the three months ended June 30, 2022

(in thousands) Balance at

December 31, 2021 New NPA /

March 31, 2022 New NPA /

Adjustments Pay-downs

/Upgrades Charge-offs/ (1)

Assets Balance at March 31, 2022

Assets Balance at June 30, 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 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)

Nonperforming assets decreased during the three months ended June 30, 2022 by $1,689,000 or 9.9% to $15,304,000 at June 30, 2022 compared to $16,995,000 at March 31, 2022.

The decrease in nonperforming assets during the second quarter of 2022 was primarily the result of pay-downs on non-performing loans, which totaled $2,566,000 during the quarter.

The nonperforming loans added during the period totaled just $1,075,000.

Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the credit loss reserves associated with these loans is sufficient as of June 30, 2022.

Loan charge-offs during the three months ended June 30, 2022

In the second quarter of 2022, the Company recorded $298,000 in loan charge-offs and $103,000 in deposit overdraft charge-offs less $319,000 in loan recoveries and $37,000 in deposit overdraft recoveries, which collectively resulted in $45,000 of net charge-offs.

Changes in nonperforming assets during the six months ended June 30, 2022

(in thousands) Balance at

December 31, 2021 New NPA /

Adjustments Pay-downs

/Upgrades Charge-offs/ (1)

Assets Balance at

June 30, 2022

Commercial real estate:

CRE non-owner occupied $ 7,899 $ 2,214 $ (7,952) $ — $ — $ 2,161

CRE owner occupied 5,036 — (3,595) — — 1,441

Multifamily 4,457 — (4,317) — — 140

Farmland 3,020 391 (2,441) (294) (313) 363

Total commercial real estate loans 20,412 2,605 (18,305) (294) (313) 4,105

SFR 1-4 1st DT liens 3,596 373 (646) — — 3,323

SFR HELOCs and junior liens 3,801 1,613 (1,724) — (375) 3,315

Other 71 126 (26) (63) — 108

Total consumer loans 7,468 2,112 (2,396) (63) (375) 6,746

Commercial and industrial 2,415 644 (1,540) (565) — 954

Construction 55 85 (20) — — 120

Agriculture production — — — — — —

Leases — — — — — —

Total nonperforming loans 30,350 5,446 (22,261) (922) (688) 11,925

Foreclosed assets 2,594 97 — — 688 3,379

Total nonperforming assets $ 32,944 $ 5,543 $ (22,261) $ (922) $ — $ 15,304

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,

(in thousands) June 30,

2022 December 31,

2021 March 31,

2021 June 30,

Allowance for credit losses:

5 unchanged sentences

For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Asset Quality and Loan Loss Provisioning” at “Results of Operations” , above.

Based on the current conditions of the loan portfolio, management believes that the $96,049,000 allowance for loan losses at March 31, 2022 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 $97,944,000 allowance for loan losses at June 30, 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

(in thousands) June 30, 2022 December 31, 2021 June 30, 2021

Commercial real estate $ 55,450 56.6 % 51,140 59.9 % $ 51,637 60.0 %

6 unchanged sentences

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

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

(in thousands) June 30, 2022 December 31, 2021 June 30, 2021

Commercial real estate 1.37 % 1.55 % 1.62 %

7 unchanged sentences

Three months ended

June 30, Six months ended

(in thousands) 2022 2021 2022 2021

15 unchanged sentences

Agriculture production — — — —

Leases — — — —

Total loans charged-off (401) (387) (1,144) (613)

4 unchanged sentences

Multifamily — — — —

Farmland — — — —

SFR 1-4 1st DT liens 1 1 41 11

SFR HELOCs and junior liens 153 512 328 797

Other 76 59 147 165

Commercial and industrial 124 79 1,011 215

1 unchanged sentence

Agriculture production 1 2 2 22

Leases — — — —

Total recoveries of previously charged-off loans 356 653 1,530 1,213

6 unchanged sentences

Foreclosed Assets, Net of Allowance for Losses

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

The following table details the components and summarize the activity in foreclosed assets, net of allowances for losses, for the six months ended June 30, 2022:

(in thousands) Balance at

1 unchanged sentence

Adjustments Transfers

from Loans Balance at March 31, 2022

from Loans Balance at June 30, 2022

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

2 unchanged sentences

Total foreclosed assets $ 2,594 $ — $ 97 $ 688 $ 3,379

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.

During the three and six months ended June 30, 2022, the Company’s deposits increased by $42,298,000 and $1,389,616,000 to $8,756,775,000 at quarter end.

Included in the June 30, 2022 and December 31, 2021 certificate of deposit balances is zero and $1,000,000, respectively, from the State of California.

Off-Balance Sheet Arrangements

7 unchanged sentences

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.

During the three and six month period ended June 30, 2022, the Company repurchased 526,749 shares with a market value of $21,750,000, respectively.

Total shareholders' equity decreased by $67,005,000 during the quarter ended June 30, 2022, as a result of an increase in accumulated other comprehensive losses of $68,611,000, share repurchases totaling approximately $21,750,000, and cash dividend payments on common stock of $8,360,000, partially offset by net income of $31,364,000.

As a result, the Company’s book value was $31.25 per share at June 30, 2022 as compared to $32.78 and $32.53 at March 31, 2022, and June 30, 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 $21.41 per share at June 30, 2022, as compared to $23.04 and $24.60 at March 31, 2022, and June 30, 2021, respectively.

Trailing Quarter Balance Sheet Change

March 31, 2022 December 31, 2021

June 30, 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 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.

As of June 30, 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 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.

As of June 30, 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 six months of 2022 generated cash flows from operations of $72,140,000 compared to $58,806,000 during the first six months of 2021.

Net cash used by investing activities was $472,710,000 for the six months ended June 30, 2022, compared to net cash used by investing activities of $570,986,000 during the six months ending 2021.

Financing activities provided $121,017,000 during the six months ended June 30, 2022, compared to $482,369,000 used during the six months ended June 30, 2021.

During the six months ended June 30, 2022 cash acquired in connection with the VRB merger of $426,883,000 and deposit balance increases of $174,137,000 were the largest contributor to the source of funding that facilitated net organic loan growth of $423,407,000 and net organic investment security growth of $282,464,000, inclusive of changes in the fair value of available for sale investment securities, compared to an increase of deposit balances of $486,119,000 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.

1 unchanged sentence

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.

Based on the FHLB stock requirements at June 30, 2022, this line provided for maximum borrowings of $2.42 billion of which none was outstanding.

As of June 30, 2022, the Company had designated investment securities with a fair value of $58,638,000 and loans totaling $3.97 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 June 30, 2022, this line provided for maximum borrowings of $243,529,000 of which none was outstanding.

As of March 31, 2021, the Company has designated investment securities with fair value of $5,300 and loans totaling $347,786,000 as potential collateral under this collateralized line of credit with the FRB.

3 unchanged sentences

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.

Dividends paid by the Company to holders of its common stock used $15,792,000 and $14,862,000 of cash during the six months ended June 30, 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