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 industry 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. 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 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 43 Table of Contents 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 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 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. Financial Highlights 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 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. 44 Table of Contents TRICO BANCSHARES Financial Summary (In thousands, except per share amounts; unaudited) Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Net interest income $ 85,046 $ 67,083 $ 152,970 $ 133,523 Reversal of (provision for) credit losses (2,100) 260 (10,430) 6,320 Non-interest income 16,430 15,957 31,526 32,067 Non-interest expense (56,264) (44,171) (102,711) (85,789) Provision for income taxes (11,748) (10,767) (19,617) (24,110) Net income $ 31,364 $ 28,362 $ 51,738 $ 62,011 Per Share Data: Basic earnings per share $ 0.93 $ 0.95 $ 1.63 $ 2.09 Diluted earnings per share $ 0.93 $ 0.95 $ 1.62 $ 2.07 Dividends paid $ 0.25 $ 0.25 $ 0.50 $ 0.50 Book value at period end $ 31.25 $ 32.53 Average common shares outstanding 33,561 29,719 31,815 29,723 Average diluted common shares outstanding 33,705 29,904 31,963 29,904 Shares outstanding at period end 33,351 29,716 At period end: Loans $ 6,113,421 $ 4,944,894 Total investment securities $ 2,802,815 $ 2,103,575 Total assets $ 10,120,611 $ 8,170,365 Total deposits $ 8,756,775 $ 6,992,053 Other borrowings $ 35,089 $ 40,559 Shareholders’ equity $ 1,042,177 $ 966,780 Financial Ratios: During the period: Return on average assets (annualized) 1.24 % 1.40 % 1.10 % 1.57 % Return on average equity (annualized) 11.53 % 11.85 % 9.93 % 13.16 % Net interest margin (1) (annualized) 3.67 % 3.58 % 3.51 % 3.66 % Efficiency ratio 55.45 % 53.19 % 55.67 % 51.81 % Average equity to average assets 10.78 % 11.81 % 11.11 % 11.93 % At end of period: Equity to assets 10.30 % 11.83 % Total capital to risk-adjusted assets 14.13 % 15.31 % (1) Fully Taxable Equivalent (FTE) 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 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. 45 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) June 30, 2022 March 31, 2022 Change % Change Interest income $ 86,955 $ 69,195 $ 17,760 25.7 % Interest expense (1,909) (1,271) (638) 50.2 % Fully tax-equivalent adjustment (FTE) (1) 397 283 114 40.3 % Net interest income (FTE) $ 85,443 $ 68,207 $ 17,236 25.3 % Net interest margin (FTE) 3.67 % 3.39 % Acquired loans discount accretion, net: Amount (included in interest income) $ 1,677 $ 1,323 $ 354 26.8 % Net interest margin less effect of acquired loan discount accretion (1) 3.60 % 3.32 % 0.28 % PPP loans yield, net: Amount (included in interest income) $ 964 $ 1,097 $ (133) (12.1) % Net interest margin less effect of PPP loan yield (1) 3.65 % 3.36 % 0.29 % Acquired loans discount accretion and PPP loan yield, net: (1) Amount (included in interest income) $ 2,641 $ 2,420 $ 221 9.1 % Net interest margin less effect of acquired loan discount accretion and PPP loan yield (1) 3.57 % 3.29 % 0.28 % Three months ended June 30, (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 % 46 Table of Contents Six months ended June 30, (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. 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 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. 47 Table of Contents Summary of Average Balances, Yields/Rates and Interest Differential The following table presents, for the three month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands). For the three months ended June 30, 2022 June 30, 2021 Average Balance Interest Income/ Expense Rates Earned /Paid Average Balance Interest Income/ Expense Rates Earned /Paid Assets: Loans, excluding PPP $ 5,890,578 $ 68,954 4.70 % $ 4,646,188 $ 57,125 4.93 % PPP loans 37,852 964 10.22 % 332,277 3,179 3.84 % Investment securities - taxable 2,536,362 14,350 2.27 % 1,875,056 7,189 1.54 % Investment securities - nontaxable (1) 196,104 1,720 3.52 % 132,034 1,106 3.36 % Total investments 2,732,466 16,070 2.36 % 2,007,090 8,295 1.66 % Cash at Federal Reserve and other banks 669,163 1,364 0.82 % 559,026 135 0.10 % Total interest-earning assets 9,330,059 87,352 3.76 % 7,544,581 68,734 3.65 % Other assets 791,655 584,093 Total assets $ 10,121,714 $ 8,128,674 Liabilities and shareholders’ equity: Interest-bearing demand deposits $ 1,799,205 $ 99 0.02 % $ 1,490,247 $ 77 0.02 % Savings deposits 3,003,337 529 0.07 % 2,316,889 308 0.05 % Time deposits 337,007 220 0.26 % 324,867 443 0.55 % Total interest-bearing deposits 5,139,549 848 0.07 % 4,132,003 828 0.08 % Other borrowings 35,253 5 0.06 % 40,986 5 0.05 % Junior subordinated debt 100,991 1,056 4.19 % 57,788 563 3.91 % Total interest-bearing liabilities 5,275,793 1,909 0.15 % 4,230,777 1,396 0.13 % Noninterest-bearing deposits 3,603,771 2,811,078 Other liabilities 150,696 126,674 Shareholders’ equity 1,091,454 960,145 Total liabilities and shareholders’ equity $ 10,121,714 $ 8,128,674 Net interest spread (2) 3.61 % 3.52 % Net interest income and interest margin (3) $ 85,443 3.67 % $ 67,338 3.58 % (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 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. 48 Table of Contents Six months ended June 30, 2022 Six months ended June 30, 2021 Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate Assets 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 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. 49 Table of Contents Three months ended June 30, 2022 compared with three months ended June 30, 2021 (in thousands) Volume Rate Total Increase (decrease) in interest income: Loans, including PPP $ 20,827 $ (11,213) $ 9,614 Investment securities (1) 8,885 (1,110) 7,775 Cash at Federal Reserve and other banks 29 1,200 1,229 Total interest-earning assets 29,741 (11,123) 18,618 Increase (decrease) in interest expense: Interest-bearing demand deposits 15 7 22 Savings deposits 86 135 221 Time deposits 16 (239) (223) Other borrowings — — — Junior subordinated debt 422 71 493 Total interest-bearing liabilities 539 (26) 513 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 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. 50 Table of Contents Asset Quality and Credit Loss Provisioning 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) 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 following table presents the activity in the allowance for credit losses on loans for the periods indicated: 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 ACL at acquisition for PCD loans — — 2,037 — Provision for (reversal of) credit losses 1,940 (145) 10,145 (6,385) Loans charged-off (401) (387) (1,144) (613) Recoveries of previously charged-off loans 356 653 1,530 1,213 Balance, end of period $ 97,944 $ 86,062 $ 97,944 $ 86,062 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. 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 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 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. 51 Table of Contents June 30, % of Total Loans March 31, % of Total Loans June 30, % of Total Loans (dollars in thousands) 2022 2022 2021 Risk Rating: Pass $ 5,960,781 97.5 % $ 5,682,026 97.1 % $ 4,756,381 96.2 % Special Mention 105,819 1.7 % 120,684 2.1 % 130,232 2.6 % Substandard 46,821 0.8 % 49,265 0.8 % 58,281 1.2 % Total $ 6,113,421 $ 5,851,975 $ 4,944,894 Classified loans to total loans 0.77 % 0.84 % 1.18 % Loans past due 30+ days to total loans 0.10 % 0.14 % 0.19 % The ratio of classified loans to total loans improved to 0.77% 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 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. 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: 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 PPP loan balance (TCBK round 1 origination), gross $ 1,183 $ 2,544 $ 51,547 PPP loan balance (TCBK round 2 origination), gross 9,442 60,767 197,035 Acquired PPP loan balance (VRB origination), gross 7,447 — — Total PPP loans, gross outstanding $ 18,072 $ 63,311 $ 248,582 PPP deferred loan fees (Round 1 origination) — 1 477 PPP deferred loan fees (Round 2 origination) 318 2,163 8,513 Total PPP deferred loan fees (costs) outstanding $ 318 $ 2,164 $ 8,990 Non-interest Income 52 Table of Contents The following table summarizes the Company’s non-interest income for the periods indicated (in thousands): Three months ended June 30, (in thousands) 2022 2021 $ Change % Change ATM and interchange fees $ 6,984 $ 6,558 $ 426 6.5 % Service charges on deposit accounts 4,163 3,462 701 20.2 % Other service fees 1,279 914 365 39.9 % Mortgage banking service fees 482 467 15 3.2 % Change in value of mortgage servicing rights 136 (471) 607 (128.9) % Total service charges and fees 13,044 10,930 2,114 19.3 % Increase in cash value of life insurance 752 745 7 0.9 % Asset management and commission income 1,039 947 92 9.7 % Gain on sale of loans 542 2,847 (2,305) (81.0) % Lease brokerage income 238 249 (11) (4.4) % Sale of customer checks 441 116 325 280.2 % Gain on sale of investment securities — — — n/m (Loss) gain on marketable equity securities (94) 8 (102) (1,275.0) % Other 468 115 353 307.0 % Total other non-interest income 3,386 5,027 (1,641) (32.6) % Total non-interest income $ 16,430 $ 15,957 $ 473 3.0 % 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. 53 Table of Contents Non-interest Expense The following table summarizes the Company’s non-interest expense for the periods indicated: Three months ended June 30, (in thousands) 2022 2021 $ Change % Change Base salaries, net of deferred loan origination costs $ 22,169 $ 17,537 $ 4,632 26.4 % Incentive compensation 4,282 4,322 (40) (0.9) % Benefits and other compensation costs 6,491 5,222 1,269 24.3 % Total salaries and benefits expense 32,942 27,081 5,861 21.6 % Occupancy 3,996 3,700 296 8.0 % Data processing and software 3,596 3,201 395 12.3 % Equipment 1,453 1,207 246 20.4 % Intangible amortization 1,702 1,431 271 18.9 % Advertising 818 734 84 11.4 % ATM and POS network charges 1,781 1,551 230 14.8 % Professional fees 1,233 1,046 187 17.9 % Telecommunications 564 564 — — % Regulatory assessments and insurance 779 618 161 26.1 % Merger and acquisition expense 2,221 — 2,221 n/m Postage 313 124 189 152.4 % Operational losses 456 212 244 115.1 % Courier service 486 288 198 68.8 % 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 % Total other non-interest expense 23,322 17,090 6,232 36.5 % Total non-interest expense $ 56,264 $ 44,171 $ 12,093 27.4 % Average full time equivalent staff 1,183 1,020 163 16.0 % 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. 54 Table of Contents 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. Income Taxes 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. 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 June 30, March 31, Annualized % Change (dollars in thousands) 2022 2022 $ Change Total assets $ 10,120,611 $ 10,118,328 $ 2,283 0.1 % Total loans 6,113,421 5,851,975 261,446 17.9 Total loans, excluding PPP 6,095,667 5,795,370 300,297 20.7 Total investments 2,802,815 2,569,706 233,109 36.3 Total deposits $ 8,756,775 $ 8,714,477 $ 42,298 1.9 % 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, 55 Table of Contents 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 June 30, Acquired Balances Organic $ Change Organic % Change (dollars in thousands) 2022 2021 $ Change Total assets $ 10,120,611 $ 8,170,365 $ 1,950,246 $ 1,363,529 $ 586,717 7.2 % Total loans 6,113,421 4,944,894 1,168,527 773,390 395,137 8.0 Total loans, excluding PPP 6,095,667 4,705,302 1,390,365 751,978 638,387 13.6 Total investments 2,802,815 2,103,575 699,240 109,716 589,524 28.0 Total deposits $ 8,756,775 $ 6,992,053 $ 1,764,722 $ 1,215,479 $ 549,243 7.9 % 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 $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 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 % Debt securities available for sale : Obligations of U.S. government agencies $ 1,536,831 59.0 % $ 1,257,389 57.0 % Obligations of states and political subdivisions 303,694 11.6 % 192,244 8.7 % Corporate bonds 7,544 0.3 % 6,756 0.3 % 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 % June 30, 2022 December 31, 2021 (in thousands) Amortized Cost % Amortized Cost % Debt securities held to maturity : Obligations of U.S. government and agencies $ 170,337 96.3 % $ 192,068 96.1 % Obligations of states and political subdivisions 6,457 3.7 % 7,691 3.9 % Total debt securities held to maturity $ 176,794 100.0 % $ 199,759 100.0 % 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. 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. 56 Table of Contents The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment. The following table shows the Company’s loan balances, net deferred loan costs and discounts, as of the dates indicated: (in thousands) June 30, 2022 December 31, 2021 Commercial real estate $ 4,049,893 66.2 % $ 3,306,054 67.2 % Consumer 1,162,989 19.0 % 1,071,551 21.8 % Commercial and industrial 507,685 8.3 % 259,355 5.3 % Construction 313,646 5.2 % 222,281 4.5 % Agriculture production 71,373 1.2 % 50,811 1.1 % Leases 7,835 0.1 % 6,572 0.1 % Total loans $ 6,113,421 100.0 % $ 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) June 30, 2022 December 31, 2021 Performing nonaccrual loans $ 8,967 $ 27,713 Nonperforming nonaccrual loans 2,958 2,637 Total nonaccrual loans 11,925 30,350 Loans 90 days past due and still accruing — — Total nonperforming loans 11,925 30,350 Foreclosed assets 3,379 2,594 Total nonperforming assets $ 15,304 $ 32,944 Nonperforming assets to total assets 0.15 % 0.38 % Nonperforming loans to total loans 0.20 % 0.62 % Allowance for credit losses to nonperforming loans 821 % 294 % 57 Table of Contents Changes in nonperforming assets during the three months ended June 30, 2022 (in thousands) Balance at March 31, 2022 New NPA / Valuation Adjustments Pay-downs /Sales /Upgrades Charge-offs/ (1) Write-downs Transfers to Foreclosed Assets Balance at June 30, 2022 Commercial real estate: CRE non-owner occupied $ 2,383 $ — $ (222) $ — $ — $ 2,161 CRE owner occupied 1,468 — (27) — — 1,441 Multifamily 148 — (8) — — 140 Farmland 2,012 — (1,649) — — 363 Total commercial real estate loans 6,011 — (1,906) — — 4,105 Consumer SFR 1-4 1st DT liens 3,496 33 (206) — — 3,323 SFR HELOCs and junior liens 3,170 682 (162) — (375) 3,315 Other 78 112 (20) (62) — 108 Total consumer loans 6,744 827 (388) (62) (375) 6,746 Commercial and industrial 1,194 248 (253) (235) — 954 Construction 139 — (19) — — 120 Agriculture production — — — — — — Leases — — — — — — Total nonperforming loans 14,088 1,075 (2,566) (297) (375) 11,925 Foreclosed assets 2,907 98 (1) — 375 3,379 Total nonperforming assets $ 16,995 $ 1,173 $ (2,567) $ (297) $ — $ 15,304 (1) The table above does not include deposit overdraft charge-offs. 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. 58 Table of Contents Changes in nonperforming assets during the six months ended June 30, 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 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 Consumer 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) June 30, 2022 December 31, 2021 June 30, 2021 Allowance for credit losses: Qualitative and forecast factor allowance $ 65,516 $ 59,855 $ 58,118 Cohort model allowance reserves 31,965 24,539 26,237 Allowance for individually evaluated loans 463 982 1,707 Total allowance for credit losses $ 97,944 $ 85,376 $ 86,062 Allowance for credit losses for loans / total loans 1.60 % 1.74 % 1.74 % 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 $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) June 30, 2022 December 31, 2021 June 30, 2021 Commercial real estate $ 55,450 56.6 % 51,140 59.9 % $ 51,637 60.0 % Consumer 23,931 24.4 % 23,474 27.5 % 23,950 27.8 % Commercial and industrial 9,979 10.2 % 3,862 4.5 % 4,511 5.2 % Construction 7,522 7.7 % 5,667 6.7 % 4,951 5.8 % Agriculture production 1,046 1.1 % 1,215 1.4 % 1,007 1.2 % Leases 16 0.02 % 18 — % 6 — % Total allowance for credit losses $ 97,944 100.0 % 85,376 100.0 % $ 86,062 100.0 % 59 Table of Contents 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) June 30, 2022 December 31, 2021 June 30, 2021 Commercial real estate 1.37 % 1.55 % 1.62 % Consumer 2.06 % 2.19 % 2.27 % Commercial and industrial 1.97 % 1.49 % 1.00 % Construction 2.40 % 2.55 % 2.47 % Agriculture production 1.47 % 2.39 % 2.40 % Leases 0.20 % 0.27 % 0.12 % Total loans 1.60 % 1.74 % 1.74 % 60 Table of Contents The following table summarizes the activity in the allowance for credit losses for the periods indicated: Three months ended June 30, Six months ended June 30, (in thousands) 2022 2021 2022 2021 Allowance for credit losses: Balance at beginning of period $ 96,049 $ 85,941 $ 85,376 $ 91,847 ACL on PCD loans — — 2,037 — Provision for (reversal of) loan losses 1,940 (145) 10,145 (6,385) 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 (166) (86) (285) (279) Commercial and industrial (235) (301) (565) (334) Construction — — — — Agriculture production — — — — Leases — — — — Total loans charged-off (401) (387) (1,144) (613) Recoveries of previously charged-off loans: Commercial real estate: CRE non-owner occupied — — — 2 CRE owner occupied 1 — 1 1 Multifamily — — — — Farmland — — — — Consumer: 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 Construction — — — — Agriculture production 1 2 2 22 Leases — — — — Total recoveries of previously charged-off loans 356 653 1,530 1,213 Net recoveries (45) 266 386 600 Balance at end of period $ 97,944 $ 86,062 $ 97,944 $ 86,062 Average total loans $ 5,928,430 $ 4,646,188 $ 5,461,092 $ 4,527,329 Ratios (annualized): Net recoveries during period to average loans outstanding during period — % 0.02 % 0.01 % 0.03 % Provision for credit losses (benefit from reversal of) to average loans outstanding during period 0.03 % (0.01) % 0.37 % (0.28) % 61 Table of Contents Foreclosed Assets, Net of Allowance for Losses The following table details the components and summarize the activity in foreclosed assets, net of allowances for losses, for the six months ended June 30, 2022: (in thousands) Balance at December 31, 2021 Sales Valuation Adjustments Transfers from Loans Balance at June 30, 2022 Land & construction $ 155 $ — $ — $ — $ 155 Residential real estate 1,258 — 97 688 2,043 Commercial real estate 1,181 — — — 1,181 Total foreclosed assets $ 2,594 $ — $ 97 $ 688 $ 3,379 Deposits 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 See Note 9 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 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 June 30, 2022 December 31, 2021 Ratio Minimum Regulatory Requirement Ratio Minimum Regulatory Requirement Total risk based capital 14.1 % 10.5 % 15.4 % 10.5 % Tier I capital 12.3 % 8.5 % 14.2 % 8.5 % Common equity Tier 1 capital 11.5 % 7.0 % 13.2 % 7.0 % Leverage 9.4 % 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. 62 Table of Contents 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. The registration statement does not limit the amount of securities that may be issued thereunder. Our ability to issue securities is subject to market conditions and other factors including, in the case of our debt securities, our credit ratings and compliance with current and prospective covenants in credit agreements. Liquidity The Company’s principal source of asset liquidity is cash at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities available for sale. As of June 30, 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. 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 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 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. 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 $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. Dividends from the Bank are subject to certain regulatory restrictions.