What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-09 · 194 added, 383 removed, 475 unchanged (55% of the section changed)

9 unchanged sentences

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 on the Company's business condition and financial operating results;

inflation, interest rate, market and monetary fluctuations impacts on the Company's business condition and financial operating results;

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

regulatory restrictions on our ability to successfully market and price our products to consumers;

technological changes;

1 unchanged sentence

the continuing adverse impact on the U.S.

economy, including the markets in which we operate due to the COVID-19 global pandemic;

economy, including the markets in which we operate due to the lingering effects of the COVID-19 global pandemic;

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;

economy and potentially increased unemployment on the performance of our loan portfolio, the market value of our investment securities, the availability of, and cost of, sources of funding and the demand for our products;

adverse developments with respect to U.S.

or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures and labor shortages on the economic recovery and our business;

the impacts of international hostilities or geopolitical events;

the costs or effects of mergers, acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial business benefits associated with any such activities;

or global economic conditions and other uncertainties, including the impact of supply chain disruptions, commodities prices, inflationary pressures and labor shortages on the economic recovery and our business;

the impacts of international hostilities, terrorism or geopolitical events;

the quality and quantity of our deposits;

adverse developments in the financial services industry generally such as the recent bank failures and any related impact on depositor behavior or investor sentiment;

risks related to the sufficiency of liquidity;

the possibility that our recorded goodwill could become impaired, which may have an adverse impact on our earnings and capital;

the costs or effects of mergers, acquisitions or dispositions we may make, as well as whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, or identify and complete favorable transactions in the future, and/or realize the contemplated financial business benefits associated with any such activities;

the regulatory and financial impacts associated with exceeding $10 billion in total assets;

1 unchanged sentence

the ability to execute our business plan in new lending markets;

the future operating or financial performance of the Company, including our outlook for future growth and changes in the level of our nonperforming assets and charge-offs;

the future operating or financial performance of the Company, including our outlook for future growth and changes in the level and direction 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;

the effectiveness of the Company's asset management activities in improving, resolving or liquidating lower-quality assets;

the effect of changes in the financial performance and/or condition of our borrowers;

changes in accounting standards and practices;

possible other-than-temporary impairment of securities held by us due to changes in credit quality or rates;

2 unchanged sentences

the effects of changes in the level or cost of checking or savings account deposits on our funding costs and net interest margin;

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 challenges of attracting, 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;

breaches in data security, including as a result of work from home arrangements;

the vulnerability of the Company's operational or security systems or infrastructure, the systems of third-party vendors or other service providers with whom the Company contracts, and the Company's customers to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and data/security breaches and the cost to defend against and respond to such incidents;

increased data security risks due to work from home arrangements and email vulnerability;

failure to safeguard personal information;

change to U.S.

changes to U.S.

tax policies, including our effective income tax rate;

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

the discontinuation of the London Interbank Offered Rate and other reference rates;

the transition away from the London Interbank Offered Rate toward new interest rate benchmarks;

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

8 unchanged sentences

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 September 30, 2022 reflect the full operational impact of the March 25, 2022 merger with VRB, whereas the results for the nine months ended September 30, 2022 do not include the operating results of VRB for the days prior to the merger date.

Critical Accounting Policies and Estimates

4 unchanged sentences

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.

A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for credit losses related to loans and investment securities, 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, 2022.

Geographical Descriptions

3 unchanged sentences

Financial Highlights

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

• For the three and nine months ended September 30, 2022, the Company’s return on average assets was 1.46% and 1.23%, while the return on average equity was 13.78% and 11.25%, respectively.

The nine-month ratio was impacted by merger related expenses of $6,253,000 during the 2022 period.

• Organic loan growth, excluding PPP and acquired loans, totaled $216.7 million (14.2% annualized) for the current quarter and $824.3 million (17.4% annualized) for the trailing twelve-month period.

• As of September 30, 2022, the Company reported total loans, total assets and total deposits of $6.3 billion, $10.0 billion and $8.7 billion, respectively.

As a direct result of organic loan growth during the quarter, the loan to deposit ratio has increased to 72.9% as of September 30, 2022, as compared to 69.8% as of the trailing quarter.

• The average rate of interest paid on deposits, including non-interest-bearing deposits, of 0.04% has remained unchanged during each of the prior four quarters, and represents 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 $12.7 million for the three month period ended September 30, 2022, an increase of 12.6% when compared to the same period in 2021.

• The provision for credit losses for loans and debt securities was approximately $3.8 million during the quarter ended September 30, 2022, as compared to a provision expense of $2.1 million during the trailing quarter ended June 30, 2022, and a reversal of provision expense totaling $1.4 million for the three month period ended September 30, 2021.

• The allowance for credit losses to total loans was 1.61% as of September 30, 2022, compared to 1.60% as of the trailing quarter end, and 1.72% as of September 30, 2021.

Non-performing assets to total assets were 0.21% at September 30, 2022, as compared to 0.15% as of June 30, 2022, and 0.37% at September 30, 2021.

Performance highlights and other developments for the Company as of or for the three months ended March 31, 2023 included the following:

• For the quarter ended March 31, 2023, the Company’s return on average assets was 1.47%, while the return on average equity was 13.36%.

• Net income was $35.8 million compared to $36.3 million in the trailing quarter, and compared to $20.4 million in the same quarter of the prior year;

Pre-tax pre-provision net revenue was $53.2 million compared to $55.3 million in the trailing quarter, and compared to $36.6 million in the same quarter of the prior year.

• Deposit balances for the quarter ended March 31, 2023, decreased by $303.1 million as compared to December 31, 2022.

The deposit contraction during the quarter resulted in the loan to deposit ratio increasing to 80.0% as of March 31, 2023, as compared to 77.4% as of the trailing quarter.

The Bank did not utilize brokered deposits or FRB borrowing facilities during the 2022 or 2023 periods.

• The efficiency ratio was 50.3% for the three months ended March 31, 2023, as compared to 51.8% for the trailing quarter.

• The provision for credit losses for loans and debt securities was approximately $4.2 million during the quarter ended March 31, 2023, as compared to a provision for credit losses of $4.2 million during the trailing quarter ended December 31, 2022, and a provision for credit losses of $8.3 million for the three-month period ended March 31, 2022.

• The allowance for credit losses to total loans was 1.69% as of March 31, 2023, compared to 1.64% as of the trailing quarter end, and 1.64% as of March 31, 2022.

Non-performing assets to total assets were 0.20% at March 31, 2023, as compared to 0.25% as of December 31, 2022, and 0.17% at March 31, 2022.

• Average yields on earning assets were 4.64%, an increase of 12 basis points over the 4.52% in the trailing quarter and an increase of 118 basis points over March 31, 2022;

net interest margin was 4.21%, a change of 13 basis points from 4.34% in the trailing quarter and a change of 82 basis points from 3.39% as of quarter ended March 31, 2022.

• Balance sheet flexibility anchored in readily accessible sources of liquidity including undrawn borrowing capacities, on-balance sheet cash and unpledged investment securities totaling in excess of $4.4 billion

TRICO BANCSHARES

2 unchanged sentences

Three months ended

September 30, Nine months ended

September 30,

2022 2021 2022 2021

Net interest income $ 93,336 $ 67,924

Reversal of (provision for) credit losses (3,795) 1,435 (14,225) 7,755

Provision for credit losses (4,195) (8,330)

Non-interest income 13,635 15,096

29 unchanged sentences

(1) Fully Taxable Equivalent (FTE)

The Company reported net income of $37,338,000 for the quarter ended September 30, 2022, compared to $31,364,000 during the trailing quarter ended June 30, 2022, and $27,422,000 during the quarter ended September 30, 2021.

Diluted earnings per share were $1.12 for the third quarter of 2022, compared to $0.93 for the second quarter of 2022 and $0.92 for the third quarter of 2021.

The Company announced net income of $35.8 million for the quarter ended March 31, 2023, compared to $36.3 million during the trailing quarter ended December 31, 2022, and $20.4 million during the quarter ended March 31, 2022.

Diluted earnings per share were $1.07 for the first quarter of 2023, compared to $1.09 for the fourth quarter of 2022 and $0.67 during the first quarter of 2022..

Results of Operations

4 unchanged sentences

Three months ended

(in thousands) September 30,

2022 June 30,

(in thousands) March 31,

2023 March 31,

2022 Change % Change

17 unchanged sentences

4.15 % 3.29 % 0.86 %

Three months ended September 30, 2022

(dollars in thousands) 2022 2021 Change % Change

Interest income $ 96,366 $ 69,628 $ 26,738 38.4 %

Interest expense (2,260) (1,395) (865) 62.0 %

Fully tax-equivalent adjustment (FTE) (1)

440 265 175 66.0 %

Net interest income (FTE) $ 94,546 $ 68,498 $ 26,048 38.0 %

Net interest margin (FTE) 4.02 % 3.50 %

Acquired loans discount accretion, net:

Amount (included in interest income) $ 714 $ 2,034 $ (1,320) (64.9) %

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

3.99 % 3.40 % 0.59 %

PPP loans yield, net:

Amount (included in interest income) $ 313 $ 3,507 $ (3,194) (91.1) %

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

4.02 % 3.42 % 0.60 %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 1,027 $ 5,541 $ (4,514) (81.5) %

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

3.98 % 3.31 % 0.67 %

Nine months ended September 30, 2022

(dollars in thousands) 2022 2021 Change % Change

Interest income $ 252,516 $ 206,023 $ 46,493 22.6 %

Interest expense (5,440) (4,267) (1,173) 27.5 %

Fully tax-equivalent adjustment (FTE) (1)

1,120 797 323 40.5 %

Net interest income (FTE) $ 248,196 $ 202,553 $ 45,643 22.5 %

Net interest margin (FTE) 3.71 % 3.61 %

Acquired loans discount accretion, net:

Amount (included in interest income) $ 3,714 $ 6,311 $ (2,597) (41.2) %

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

3.65 % 3.50 % 0.15 %

PPP loans yield, net:

Amount (included in interest income) $ 2,374 $ 12,549 $ (10,175) (81.1) %

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

3.69 % 3.53 % 0.16 %

Acquired loans discount accretion and PPP loan yield, net:

Amount (included in interest income) $ 6,088 $ 18,860 $ (12,772) (67.7) %

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

3.63 % 3.41 % 0.22 %

(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.

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

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

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

2 unchanged sentences

and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income.

As a result of the increase in interest rates, the prepayment rate of portfolio loans, inclusive of those acquired at a premium or discount, declined throughout 2022.

During the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, purchased loan discount accretion was $714,000, $1,677,000, and $2,034,000, respectively.

The prepayment speed of portfolio loans, inclusive of those acquired at a premium or discount, is heavily influenced by the rate of change in interest rates.

During the three months ended March 31, 2023, December 31, 2022, and March 31, 2022, purchased loan discount accretion was $1.4 million, $1.8 million, and $1.3 million, respectively.

Summary of Average Balances, Yields/Rates and Interest Differential

4 unchanged sentences

For the three months ended

September 30, 2022 September 30, 2021

March 31, 2023 March 31, 2022

Balance Interest

33 unchanged sentences

(3) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of i nterest-earning assets, then annualized based on the number of days in the given period .

As compared to the same quarter in the prior year, average loan yields, excluding PPP, increased 2 basis points from 4.85% during the three months ended September 30, 2021, to 4.87% during the three months ended September 30, 2022.

The accretion of discounts from acquired loans added 5 and 17 basis points to loan yields during the quarters ended September 30, 2022 and September 30, 2021, respectively.

Therefore, the 2 basis point increase in yields on loans during the comparable three month periods ended September 30, 2022 and 2021 was the net effect of a 14 basis point increase in market loan rates, partially offset by a 12 basis point decline in the accretion of discounts.

The rates paid on interest bearing deposits increased by 1 basis point during the quarter ended September 30, 2022 compared to the trailing quarter.

The cost of interest-bearing deposits remained flat at 8 basis points between the quarter ended September 30, 2022 and 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 remained flat at 0.04% in both the current and trailing quarter, compared to 0.5% in the third quarter of the prior year.

Non-interest bearing deposit balances grew $74.0 million during the three months ended September 30, 2022.

As of September 30, 2022, the ratio of average total noninterest-bearing deposits to total average deposits was 41.6%.

Nine months ended September 30, 2022 Nine months ended September 30, 2021

Balance Income/

Expense Yield/

Balance Income/

Expense Yield/

Loans, excluding PPP $ 5,668,055 $ 201,245 4.75 % $ 4,580,292 $ 168,916 4.93 %

PPP loans 32,287 2,374 9.83 % 300,006 12,549 5.59 %

Investments-taxable 2,487,111 41,695 2.24 % 1,838,023 21,324 1.55 %

Investments-nontaxable (1)

183,772 4,853 3.53 % 129,057 3,453 3.58 %

Total investments 2,670,883 46,548 2.33 % 1,967,080 24,777 1.68 %

Cash at Federal Reserve and other banks 573,252 3,469 0.81 % 656,912 578 0.12 %

Total earning assets 8,944,477 253,636 3.79 % 7,504,290 206,820 3.68 %

Other assets, net 737,721 591,983

Total assets $ 9,682,198 $ 8,096,273

Liabilities and shareholders’ equity

Interest-bearing demand deposits $ 1,724,787 $ 302 0.02 % $ 1,476,987 $ 269 0.02 %

Savings deposits 2,863,447 1,541 0.07 % 2,318,169 965 0.06 %

Time deposits 319,940 676 0.28 % 327,562 1,386 0.57 %

Total interest-bearing deposits 4,908,174 2,519 0.07 % 4,122,718 2,620 0.08 %

Other borrowings 39,609 15 0.05 % 40,732 15 0.05 %

Junior subordinated debt 87,804 2,906 4.42 % 57,790 1,632 3.78 %

Total interest-bearing liabilities 5,035,587 5,440 0.14 % 4,221,240 4,267 0.14 %

Noninterest-bearing deposits 3,435,487 2,790,828

Other liabilities 152,186 121,334

Shareholders’ equity 1,058,938 962,871

Total liabilities and shareholders’ equity $ 9,682,198 $ 8,096,273

Net interest rate spread (1) (2)

3.65 % 3.54 %

Net interest income and margin (1) (3)

$ 248,196 3.71 % $ 202,553 3.61 %

(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.

Net interest income (FTE) during the three months ended March 31, 2023, decreased $5.6 million or 5.6% to $93.7 million compared to $99.3 million during the three months ended December 31, 2022.

In addition, net interest margin declined 13 basis points to 4.21%, compared to the trailing quarter.

The decrease in net interest income is primarily attributed to an additional $3.0 million in deposit interest expense and $2.4 million in additional interest expense on other borrowings, both due to increases in interest rates as compared to the trailing quarter, respectively.

Total interest income was effectively unchanged as compared to the trailing quarter, down $0.1 million or 0.1%.

As compared to the same quarter in the prior year, average loan yields, excluding PPP, increased 56 basis points from 4.65% during the three months ended March 31, 2022, to 5.21% during the three months ended March 31, 2023.

The accretion of discounts from acquired loans added 9 and 7 basis points to loan yields during the quarters ended March 31, 2023 and March 31, 2022, respectively.

The rates paid on interest bearing deposits increased by 25 basis points during the quarter ended March 31, 2023, compared to the trailing quarter.

The cost of interest-bearing deposits increased by 37 basis points between the quarter ended March 31, 2023, and the same quarter of the prior year.

In addition, the level of noninterest-bearing deposits decreased by $290.3 million quarter over quarter but remains $320.1 million above quarter ended March 31, 2022.

As of March 31, 2023, the ratio of average total noninterest-bearing deposits to total average deposits was 41.0%, as compared to 42.9% and 40.6% at December 31, 2022 and March 31, 2022, respectively.

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

1 unchanged sentence

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

Three months ended September 30, 2022

compared with three months ended September 30, 2021

(in thousands) Volume Rate Total

Increase (decrease) in interest income:

Loans, including PPP $ 36,188 $ (20,957) $ 15,231

Investment securities (1)

8,193 1,949 10,142

Cash at Federal Reserve and other banks (146) 1,686 1,540

Total interest-earning assets 44,235 (17,322) 26,913

Increase (decrease) in interest expense:

Interest-bearing demand deposits 20 (17) 3

Savings deposits 75 282 357

Time deposits — (223) (223)

Other borrowings (1) — (1)

Junior subordinated debt 395 334 729

Total interest-bearing liabilities 489 376 865

Increase (decrease) in net interest income $ 43,746 $ (17,698) $ 26,048

Nine months ended September 30, 2022 compared with nine months ended September 30, 2021

Three months ended March 31, 2023

compared with three months ended March 31, 2022

(in thousands) Volume Rate Total

14 unchanged sentences

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

Net interest income (FTE) during the three months ended September 30, 2022 increased $26,048,000 or 27.6% to $94,546,000 compared to $68,498,000 during the three months ended September 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 $8,193,000 and $36,188,000, respectively, despite lower yields on loans partially offsetting those earnings by $20,957,000.

In addition, interest income on cash reserves improved by $1,686,000 due to the increase in rates.

Following the VRB merger during the first quarter of 2022, larger average balances of subordinated debt has resulted in $729,000 of additional net interest expense.

Net interest income (FTE) during the nine months ended September 30, 2022 increased $45,643,000 or 22.5% to $248,196,000 compared to $202,553,000 during the nine months ended September 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 $12,020,000 and $86,269,000, respectively, despite lower yields on loans partially offsetting those earnings by $64,115,000.

Following the VRB merger during the first quarter of 2022, larger average balances of subordinated debt has resulted in $1,274,000 of additional net interest expense.

Net interest income (FTE) during the three months ended March 31, 2023 increased $25.5 million to $93.7 million compared to $68.2 million during the three months ended March 31, 2022.

The overall increase in net interest income (FTE) was due to increases in both average investment and loan balances, which resulted in improvements totaling $0.8 million and $16.1 million, respectively, and higher yields further improving those earnings by $8.4 million and $8.6 million, respectively.

Increasing interest rates boosted interest expenses on on interest-bearing liabilities, most significantly deposits and other borrowings, resulting in a net increase of $3.8 million and $2.8 million, respectively.

Asset Quality and Credit Loss Provisioning

During the three months ended September 30, 2022, the Company recorded a provision for credit losses of $3,795,000, as compared to a $2,100,000 provision during the trailing quarter, and a reversal of provision expense of $1,435,000 during the third quarter of 2021.

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

During the three months ended March 31, 2023, the Company recorded a provision for credit losses of $4.2 million, as compared to $4.2 million during the trailing quarter, and $8.3 million during the first quarter of 2022.

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

Three months ended

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

(dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2022

Addition to (reversal of) allowance for credit losses $ 4,315 $ 4,300 $ 8,205

Addition to reserve for unfunded loan commitments

Addition to (reversal of) reserve for unfunded loan commitments

(120) (55) 125

Total provision for (reversal of) credit losses $ 4,195 $ 4,245 $ 8,330

The allowance for credit losses (ACL) was $108.4 million as of March 31, 2023, a net increase of $2.7 million over the immediately preceding quarter.

The addition to the allowance for credit losses of $4.3 million during the quarter was the net effect of changes in required reserves due to qualitative factors, individually analyzed credits and quantitative reserves under the cohort model.

On a comparative basis, the provision for credit losses of $8.2 million during the three months ended March 31, 2022 was largely the result of day 1 required reserves from loans acquired in connection with the Valley Republic Bank merger in the same period.

For the current quarter, the qualitative components of the ACL resulted in a net increase in required reserves totaling approximately $4.7 million due to increased uncertainty in US economic policy, and the ramifications on local and statewide unemployment rates.

Meanwhile, the quantitative component of the ACL decreased reserve requirements by approximately $1.9 million over the trailing quarter due to a decline in needed specific reserves on loans.

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

Three months ended Nine months ended

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

Three months ended

(dollars in thousands) March 31, 2023 March 31, 2022

Balance, beginning of period $ 105,680 $ 85,376

4 unchanged sentences

Balance, end of period $ 108,407 $ 96,049

The allowance for credit losses (ACL) was $101,488,000 as of September 30, 2022, a net increase of $3,544,000 over the immediately preceding quarter.

The provision for credit losses of $3,500,000 during the quarter was the net effect of increases in required reserves due to qualitative factors and individually analyzed credits.

In addition to the aforementioned quarterly increase, the provision for credit losses of $13,645,000 during the nine months ended September 30, 2022 was comprised of $10,820,000 in association with the loans acquired from Valley Republic Bank in the first quarter of 2022, and a net provision for credit losses of $2,825,000 associated with organic loan portfolio growth and the net changes in quantitative and qualitative factors associated with overall borrower performance.

For the quarter, the qualitative components of the ACL resulted in a net increase in required reserves, despite continued improvement in US employment rates, due to increased uncertainty in the global economic markets, concentration risks in commercial lending and the rapid rise in interest rates.

Meanwhile, the quantitative component of the ACL increased reserve requirements over the trailing quarter due to loan volume growth and increases in specific reserves totaling approximately $1,237,000.

The Company utilizes a forecast period of approximately eight quarters and obtains the forecast data from publicly available sources as of the balance sheet date.

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

Inflation remains elevated from continued disruptions in the supply chain and high energy prices Despite the expected continued benefit to the net interest income of the Company from the elevated rate environment, Management notes the rapid intervals of rate increases by the Federal Reserve and flattening or inversion of the yield curve, have boosted expectations of the US entering a recession within 12 months and has led to the lowest levels of consumer sentiment in decades.

As compared to historical norms, inflation remains elevated from continued disruptions in the supply chain, wage pressures, and higher living costs such as housing and food prices Despite the expected continued benefit to the net interest income of the Company from the elevated rate environment, Management notes the rapid intervals of rate increases by the Federal Reserve and flattening or inversion of the yield curve, have boosted expectations of the US entering a recession within 12 months.

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 $551,000 during the quarter ended September 30, 2022 to $6,471,000, as compared to $5,920,000 at June 30, 2022.

Non-performing loans were $17,471,000 at September 30, 2022, an increase of $5,546,000 from $11,925,000 as of June 30, 2022, and a decrease of $11,319,000 from $28,790,000 as of September 30, 2021.

The current quarter change in non-performing assets is nearly entirely attributed to a single agriculture production relationship, which also was the primary contributor to the increase in specific reserves for the quarter.

Loans past due 30 days or more increased by $2.9 million during the quarter ended March 31, 2023 to $7.9 million, as compared to $4.9 million at December 31, 2022 but decreased by $0.5 million compared to the March 31, 2022 past due balance of $8.4 million.

Non-performing loans were $16.0 million at March 31, 2023, a decrease of $5.3 million from $21.3 million as of December 31, 2022, and a decrease of $1.9 million from $14.1 million as of March 31, 2022.

Of the $16.0 million loans designated as non-performing, approximately $10.2 million are less than 30 days past due as of March 31, 2023.

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

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

March 31, % of Loans Outstanding December 31, % of Loans Outstanding March 31, % of Loans Outstanding

(dollars in thousands) 2023 2022 2022

5 unchanged sentences

Loans past due 30+ days to total loans 0.12 % 0.08 % 0.14 %

The ratio of classified loans increased to 0.86% as of September 30, 2022 as compared to 0.77% in the trailing quarter, but improved by 17 basis points from the equivalent period in 2021.

The Company's criticized loan balances increased during the current quarter by approximately $27,846,000 to $180,486,000 as of September 30, 2022.

There were no charge-offs incurred in connection with these loans and management continues to work toward resolution with the borrowers.

There were two properties added to other real estate owned totaling $443,000 during the quarter ended September 30, 2022, and two disposals totaling $394,000.

As of September 30, 2022, other real estate owned consisted of nine properties with a carrying value of approximately $3,441,000.

Non-performing assets of $20,912,000 at September 30, 2022 represented 0.21% of total assets, a slight change but generally in line with the $15,304,000 or 0.15% and $31,440,000 or 0.37% as of June 30, 2022 and September 30, 2021, respectively.

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:

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

Total number of PPP loans outstanding 16 450 1,449

PPP loan balance (TCBK round 1 origination), gross $ 433 $ 2,544 $ 9,302

PPP loan balance (TCBK round 2 origination), gross 533 60,767 148,159

Acquired PPP loan balance (VRB origination), gross 1,003 — —

Total PPP loans, gross outstanding $ 1,969 $ 63,311 $ 157,461

PPP deferred loan fees (Round 1 origination) — 1 40

PPP deferred loan fees (Round 2 origination) 27 2,163 5,973

Total PPP deferred loan fees (costs) outstanding $ 27 $ 2,164 $ 6,013

As of September 30, 2022, there was approximately $27,000 in net deferred fee income remaining to be recognized.

During the three months ended September 30, 2022, the Company recognized $291,000 in fees on PPP loans as compared with $872,000 and $2,984,000 for the three months ended June 30, 2022 and September 30, 2021, respectively.

Based on the payment guarantee provided by the SBA as well as the expected short-term duration of the PPP loans acquired from VRB, the fair value of these loans approximates the principal balance outstanding as of the merger date, and therefore, no purchase discount was recorded.

The ratio of classified loans decreased to 1.00% as of March 31, 2023 as compared to 1.11% in the trailing quarter, but increased by 16 basis points from the equivalent period in 2022.

The Company's criticized loan balances decreased during the current quarter by $9.0 million to $189.5 million as of March 31, 2023.

There were no changes to Other Real Estate Owned balances during the first quarter of 2023.

As of March 31, 2023, other real estate owned consisted of nine properties with a carrying value of approximately $3.4 million.

Non-performing assets of $19.5 million at March 31, 2023 represented 0.20% of total assets, generally in line with the $24.8 million or 0.25% and $17.0 million or 0.17% as of December 31, 2022 and March 31, 2022, respectively.

Non-interest Income

1 unchanged sentence

Three months ended

September 30,

(in thousands) 2023 2022 $ Change % Change

11 unchanged sentences

Gain on sale of investment securities (164) — (164) n/m

(Loss) gain on marketable equity securities (115) (14) (101) 721.4 %

Other 459 139 320 230.2 %

Total other non-interest income 2,958 3,830 (872) (22.8) %

Total non-interest income $ 15,640 $ 15,095 $ 545 3.6 %

Non-interest income increased $545,000 or 3.6% to $15,640,000 during the three months ended September 30, 2022, compared to $15,095,000 during the quarter ended September 30, 2021.

Generally, the increases in recurring non-interest income items reflects the VRB merger timing.

As noted above, decreasing mortgage related activity reduced the gain on sale of loans recorded during the quarter by $1,457,000 or 80.3%, as compared to the three months ended September 30, 2021.

Further, changes in the value of mortgage service rights, while lesser in magnitude, typically have an inverse relationship with changes in mortgage banking activities.

Nine months ended September 30,

(in thousands) 2022 2021 $ Change % Change

ATM and interchange fees $ 19,941 $ 18,935 $ 1,006 5.3 %

Service charges on deposit accounts 12,433 10,339 2,094 20.3 %

Other service fees 3,183 2,682 501 18.7 %

Mortgage banking service fees 1,422 1,406 16 1.1 %

Change in value of mortgage servicing rights 443 (691) 1,134 (164.1) %

Total service charges and fees 37,422 32,671 4,751 14.5 %

Increase in cash value of life insurance 2,049 2,062 (13) (0.6) %

Asset management and commission income 2,946 2,738 208 7.6 %

Gain on sale of loans 2,145 7,908 (5,763) (72.9) %

Lease brokerage income 648 542 106 19.6 %

Sale of customer checks 871 342 529 154.7 %

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

Loss on marketable equity securities (346) (59) (287) 486.4 %

Gain on marketable equity securities 42 (137) 179 (130.7) %

Other 232 504 (272) (54.0) %

1 unchanged sentence

Total non-interest income $ 13,635 $ 15,096 $ (1,461) (9.7) %

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

Non-interest income decreased $1.5 million or 9.7% to $13.6 million during the three months ended March 31, 2023, compared to $15.1 million during the quarter ended March 31, 2022.

Total service charges and fees declined by $0.5 million or 4.3% during the period, of which $0.9 million is due to waived or reversed fees related to the network outage disclosed in the Company's 8-K filed with the SEC on February 14, 2023.

In addition, the declining mortgage related activity resulting from elevated interest rates reduced income recorded from the sale of loans by $1.0 million or 83.5%, as compared to the three months ended March 31, 2022.

Non-interest Expense

1 unchanged sentence

Three months ended

September 30,

(in thousands) 2023 2022 $ Change % Change

12 unchanged sentences

Regulatory assessments and insurance 792 720 72 10.0 %

Merger and acquisition expense — 651 (651) n/m

Postage 287 156 131 84.0 %

Operational losses 492 244 248 101.6 %

Courier service 497 286 211 73.8 %

Gain on sale or acquisition of foreclosed assets (148) (144) (4) 2.8 %

Loss (gain) on disposal of fixed assets 4 (19) 23 (121.1) %

Other miscellaneous expense 4,008 3,159 849 26.9 %

Total other non-interest expense 20,937 19,533 1,404 7.2 %

Total non-interest expense $ 54,465 $ 45,807 $ 8,658 18.9 %

Average full time equivalent staff 1,198 1,049 149 14.2 %

Generally, the increases in recurring non-interest expense items reflect the VRB merger timing of March 25, 2022, and therefore, related expenses for the combined entities, less certain realized cost savings, are only being captured within the most recent three months ended September 30, 2022.

Total non-interest expense increased $8,658,000 or 18.9% to $54,465,000 during the three months ended September 30, 2022 as compared to $45,807,000 for the quarter ended September 30, 2021.

Total salaries and benefits expense increased by $7,254,000 or 27.6% to $33,528,000, largely from a net increase of 99 full-time equivalent positions following the aforementioned merger with VRB, the build out of other loan production and compliance teams, and the continued strength of organic growth within the loan portfolio driving incentive compensation expense.

Nine months ended September 30,

(in thousands) 2022 2021 $ Change % Change

Base salaries, net of deferred loan origination costs $ 62,762 $ 50,721 $ 12,041 23.7 %

Incentive compensation 11,697 11,025 672 6.1 %

Benefits and other compensation costs 18,782 16,939 1,843 10.9 %

Total salaries and benefits expense 93,241 78,685 14,556 18.5 %

Occupancy 11,536 11,197 339 3.0 %

Data processing and software 10,558 10,092 466 4.6 %

Equipment 4,208 4,060 148 3.6 %

Intangible amortization 4,632 4,271 361 8.5 %

Advertising 2,445 2,080 365 17.5 %

ATM and POS network charges 4,850 4,489 361 8.0 %

Professional fees 3,281 2,730 551 20.2 %

Telecommunications 1,660 1,719 (59) (3.4) %

Regulatory assessments and insurance 2,327 1,903 424 22.3 %

Merger and acquisition expense 6,253 651 5,602 n/m

Merger and acquisition expense — 4,032 (4,032) (100.0) %

Postage 299 228 71 31.1 %

Operational losses 765 665 100 15.0 %

Operational losses (gain) 435 (183) 618 (337.7) %

Courier service 339 414 (75) (18.1) %

Gain on sale or acquisition of foreclosed assets (246) (210) (36) 17.1 %

Gain on disposal of fixed assets (1,069) (445) (624) 140.2 %

Loss on disposal of fixed assets — (1,078) 1,078 (100.0) %

Other miscellaneous expense 3,483 2,485 998 40.2 %

2 unchanged sentences

Average full time equivalent staff 1,219 1,084 135 12.5 %

The changes in non-interest expense for the nine months ended September 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 nine months ended September 30, 2022, as compared to 28.1% for the year ended December 31, 2021.

Generally, the increases in recurring non-interest expense items reflect the VRB merger closing on March 25, 2022, and therefore, related expenses for the combined entities, less certain realized cost savings, are largely only being captured within the most recent three months ended March 31, 2023.

Total non-interest expense increased $7.3 million or 15.8% to $53.8 million during the three months ended March 31, 2023 as compared to $46.4 million for the quarter ended March 31, 2022.

Total salaries and benefits expense increased by $5.8 million or 21.6% to $32.6 million, largely from a net increase of 135 full-time equivalent positions, 99 of which resulted from the aforementioned merger with VRB.

Professional fees increased by $0.7 million which was directly associated with the cybersecurity incident disclosed in the Company's 8-K filed with the SEC on February 14, 2023.

While management has accrued for costs incurred through the balance sheet date that are probable and reasonably estimable, additional expenses will be incurred in future periods as management works to complete its investigation of the incident.

See also "Part II - Other Information - Item 1A — Risk Factors beginning on page 57.

The Company’s effective tax rate was 26.8% for the quarter ended March 31, 2023, as compared to 27.9% for the year ended December 31, 2022.

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 September 30, June 30, Annualized

Ending balances March 31, December 31, Annualized

(dollars in thousands) 2023 2022 $ Change

1 unchanged sentence

Total loans 6,422,421 6,450,447 (28,026) (1.7)

Total loans, excluding PPP 6,312,348 6,095,667 216,681 14.2 %

Total investments 2,577,769 2,633,269 (55,500) (8.4)

Total deposits 8,025,865 8,329,013 (303,148) (14.6)

Organic loan growth, excluding PPP, of $216,681,000 or 14.2% on an annualized basis was realized during the quarter ended September 30, 2022, primarily within commercial real estate.

During the quarter, and exclusive of PPP balance changes, loan originations/draws totaled approximately $737.0 million while payoffs/repayments of loans totaled $536.0 million, which compares to origination/draws and payoff/repayments activity during the three months ended June 30, 2022 of $697.0 million and $397.0 million, respectively.

management believes that loan pipelines remain sufficient to support loan growth, loan pipeline activity may moderate as customer awareness of the rising interest rate environment weighs more heavily on their decision making criteria.

Investment security balances decreased $134,670,000 or 19.2% on an annualized basis as the result of declines in market values grew, and prepayments or maturities from the portfolio were utilized to augment the Company's overall balance sheet position.

Deposit balances also decreased, with a change of $101,006,000 or 4.6% annualized during the period.

Other borrowings 434,140 264,605 169,535 256.3

Loans outstanding declined by $28.0 million or 1.7% on an annualized basis during the quarter ended March 31, 2023.

During the quarter, loan originations/draws totaled approximately $357.0 million while payoffs/repayments of loans totaled $389.0 million, which compares to originations/draws and payoffs/repayments during the trailing quarter ended of $470.0 million and $343.0 million, respectively.

While management believes the loan pipeline remains sufficient to support the Company's objectives, origination activity continues to moderate due to customer sensitivity from the rising interest rate environment and the Company's continued focus on disciplined underwriting.

Investment security balances decreased $55.5 million or 8.4% on an annualized basis as the result of prepayments/maturities totaling approximating $65.8 million and proceeds from sale of $24.2 million, partially offset by increases in the market value of securities of $34.6 million.

Management seeks to utilize excess cash flows from the investment security portfolio to support loan growth or reduce borrowings thus resulting in an improved mix of earning assets.

Deposit balances decreased by $303.1 million or 14.6% annualized during the period.

Cash flow needs were supported by net increases in short-term FHLB advances which totaled $434.1 million as of the quarter ended March 31, 2023.

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

Ending balances As of September 30, 2022 Acquired Balances Organic

$ Change Organic

Ending balances As of March 31, % Change

(dollars in thousands) 2023 2022 $ Change

4 unchanged sentences

Total deposits 8,025,865 8,714,477 (688,612) (7.9)

Non-PPP loan balances have increased as a result of organic activities by approximately $824.3 million during the twelve month period ending September 30, 2022.

Investment securities increased to $2.7 billion at September 30, 2022, an organic change of $225.4 million or 9.7% from the prior year.

When combined with balances acquired from Valley Republic Bank, this represents an increase of nearly $1.8 billion in earning assets during the last twelve months.

Total other borrowings 434,140 36,184 397,956 1,099.8

Non-PPP loan balances increased as a result of organic activities by approximately $625.5 million or 10.8% during the twelve-month period ending March 31, 2023.

Over the same period deposit balances have declined by $688.6 million or 7.9%.

The Company has offset these declines through the deployment of excess cash balances and proceeds from short-term FHLB borrowings.

As of March 31, 2023, short-term borrowings from the FHLB totaled $394.1 million and had an interest rate of 5.11%.

Investment Securities

Investment securities available for sale increased $272,327,000 to $2,480,265,000 as of September 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 nine months ended September 30, 2022 and 2021, respectively.

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

September 30, 2022 December 31, 2021

Investment securities available for sale decreased $46.6 million to $2.4 billion as of March 31, 2023, compared to December 31, 2022.

The decrease is attributed to $56.9 million in calls and principal repayments, partially offset by $34.7 million in market value appreciation.

In addition, proceeds from the sale of investment securities totaled $24.2 million for the three months ended March 31, 2023, resulting in gross realized losses of $0.16 million.

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

The following table presents the available for sale debt securities portfolio by major type as of March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

(in thousands) Fair Value % Fair Value %

5 unchanged sentences

Asset backed securities 427,364 17.8 % 439,767 17.9 %

Non-agency collateralized mortgage obligations 347,568 14.0 % 341,997 15.5 %

Non-agency mortgage backed 335,375 13.9 % 340,946 13.9 %

Total debt securities available for sale $ 2,405,812 100.0 % $ 2,452,438 100.0 %

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(in thousands) Amortized

5 unchanged sentences

Total debt securities held to maturity $ 152,067 100.0 % $ 160,983 100.0 %

Investment securities held to maturity decreased $31,721,000 to $168,038,000 as of September 30, 2022, as compared to December 31, 2021.

This decrease is attributable to calls and principal repayments of $31,421,000, and amortization of net purchase premiums of $6,564,000.

The Company concentrates its lending activities in six principal areas:

Investment securities held to maturity decreased $8.9 million to $152.1 million as of March 31, 2023, as compared to December 31, 2022.

This decrease is attributable to calls and principal repayments of $8.8 million, and amortization of net purchase premiums of $0.1 million.

The Company focuses its primary lending activities in six principal areas:

commercial real estate loans, consumer loans, commercial and industrial loans, construction loans, agriculture production loans and leases.

The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Company and prevailing money market rates indicative of the Company’s cost of funds.

The majority of the Company’s loans are direct loans made to individuals, farmers and local businesses.

The Company relies substantially

on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions.

The interest rates charged for the loans made by the Company vary with the degree of risk, the size and duration 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, and local or regional businesses which service a variety of industries.

The Company relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions.

The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.

The following table shows the Company’s loan balances, net deferred loan costs and discounts, as of the dates indicated:

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

(in thousands) March 31, 2023 December 31, 2022

Commercial real estate $ 4,353,959 67.8 % $ 4,359,083 67.6 %

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) September 30,

(in thousands) March 31,

2023 December 31,

9 unchanged sentences

Allowance for credit losses to nonperforming loans 676 % 516 %

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

(in thousands) Balance at

June 30, 2022 New NPA /

Adjustments Pay-downs

/Upgrades Charge-offs/ (1)

Assets Balance at September 30, 2022

Commercial real estate:

CRE non-owner occupied $ 2,161 $ — $ (129) $ — $ — $ 2,032

CRE owner occupied 1,441 648 (27) — (284) 1,778

Multifamily 140 — (8) — — 132

Farmland 363 335 (3) — — 695

Total commercial real estate loans 4,105 983 (167) — (284) 4,637

SFR 1-4 1st DT liens 3,323 349 (258) — (159) 3,255

SFR HELOCs and junior liens 3,315 479 (429) — — 3,365

Other 108 15 (2) (60) — 61

Total consumer loans 6,746 843 (689) (60) (159) 6,681

Commercial and industrial 954 67 (279) (82) — 660

Construction 120 — — — — 120

Agriculture production — 5,373 — — — 5,373

Leases — — — — — —

Total nonperforming loans 11,925 7,266 (1,135) (142) (443) 17,471

Foreclosed assets 3,379 13 (394) — 443 3,441

Total nonperforming assets $ 15,304 $ 7,279 $ (1,529) $ (142) $ — $ 20,912

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

Nonperforming assets increased during the three months ended September 30, 2022 by $5,608,000 or 36.6% to $20,912,000 at September 30, 2022 compared to $15,304,000 at June 30, 2022.

The increase in nonperforming assets during the third quarter of 2022 was primarily the result of nonperforming loans added during the period totaling $7,266,000.

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 September 30, 2022.

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

In the third quarter of 2022, the Company recorded $142,000 in loan charge-offs and $125,000 in deposit overdraft charge-offs less $281,000 in loan recoveries and $29,000 in deposit overdraft recoveries, which collectively resulted in $44,000 of net recoveries.

Changes in nonperforming assets during the nine months ended September 30, 2022

Changes in nonperforming assets during the three months ended March 31, 2023

(in thousands) Balance at

2 unchanged sentences

/Upgrades Charge-offs/ (1)

Assets Balance at September 30, 2022

Assets Balance at March 31, 2023

Commercial real estate:

15 unchanged sentences

Total nonperforming assets $ 24,760 1,332 (4,966) (1,662) — $ 19,464

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

Nonperforming assets decreased during the three months ended March 31, 2023 by $5.3 million or 21.4% to $19.5 million compared to $24.8 million at December 31, 2022.

The decrease in nonperforming assets during the first quarter of 2023 was primarily the result of nonperforming loan pay-downs/upgrades, which totaled $5.0 million during the quarter and charge-offs of $1.7 million.

The nonperforming loans added during the period totaled $1.3 million.

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, 2023.

Loan charge-offs during the three months ended March 31, 2023

In the first quarter of 2023, the Company recorded $1.7 million in loan charge-offs and $0.01 million in deposit overdraft charge-offs less $0.1 million in loan recoveries and $0.1 million in deposit overdraft recoveries, which collectively resulted in $1.6 million in net charge-offs.

(in thousands)

The Components of the Allowance for Credit Losses for Loans

The following table sets forth the allowance for credit losses as of the dates indicated:

(in thousands) September 30,

The following table sets forth the allowance for credit losses for loans as of the dates indicated:

(in thousands) March 31,

2023 December 31,

2021 September 30,

2022 March 31,

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 $101,488,000 allowance for loan losses at September 30, 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 $108.4 million allowance for loan losses at March 31, 2023 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) September 30, 2022 December 31, 2021 September 30, 2021

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

(in thousands) March 31, 2023 December 31, 2022 March 31, 2022

Commercial real estate $ 64,937 59.9 % 61,381 58.1 % $ 54,992 57.3 %

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) September 30, 2022 December 31, 2021 September 30, 2021

(in thousands) March 31, 2023 December 31, 2022 March 31, 2022

Commercial real estate 1.49 % 1.41 % 1.43 %

7 unchanged sentences

Three months ended

September 30, Nine months ended

September 30,

(in thousands) 2023 2022

15 unchanged sentences

Agriculture production — —

Leases — — — —

Total loans charged-off (1,758) (743)

4 unchanged sentences

Multifamily — —

Farmland — — — —

SFR 1-4 1st DT liens — 40

SFR HELOCs and junior liens 65 175

Other 53 97 200 262

Commercial and industrial 53 887

1 unchanged sentence

Agriculture production 1 1

Leases — — — —

Total recoveries of previously charged-off loans 170 1,174

3 unchanged sentences

Ratios (annualized):

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

Provision for credit losses (benefit from reversal of) to average loans outstanding during period 0.11 % (0.12) % 0.48 % (0.32) %

Net (charge-offs) recoveries during period to average loans outstanding during period (0.10) % 0.03 %

Provision for credit losses to average loans outstanding during period 0.27 % 0.66 %

Foreclosed Assets, Net of Allowance for Losses

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

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, 2023:

(in thousands) Balance at

1 unchanged sentence

Adjustments Transfers

from Loans Balance at September 30, 2022

from Loans Balance at March 31, 2023

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

2 unchanged sentences

Total foreclosed assets $ 3,439 $ — $ — $ — $ 3,439

During the three months ended September 30, 2022, the Company’s deposits decreased by $101,006,000.

During the 12-month period ended September 30, 2022, the Company's deposits have increased by $1,418,947,000, including $1,215,479,000 that were acquired through the VRB merger.

During the three months ended March 31, 2023, the Company’s deposits decreased by $303.1 million to $8.7 billion at quarter end.

There were no brokered deposits included in the deposit balances as of March 31, 2023 and December 31, 2022, respectively.

Off-Balance Sheet Arrangements

6 unchanged sentences

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

During the three and nine month period ended September 30, 2022, the Company repurchased 45,132 and 571,881 shares with a market value of $2,059,000 and $23,809,000, respectively.

Management's decisions as to the timing and extent of share repurchases is influenced by a variety of factors, including but not limited to;

the market ask price for TCBK stock, internal capital adequacy projections and projected regulatory capital ratios.

Total shareholders' equity decreased by $51,839,000 during the quarter ended September 30, 2022, as a result of an increase in accumulated other comprehensive losses of $76,740,000, share repurchases totaling approximately $2,059,000 and cash dividend payments on common stock of $10,004,000, partially offset by net income of $37,338,000.

As a result, the Company’s book value was $29.71 per share at September 30, 2022 as compared to $31.25 and $33.05 at June 30, 2022, and September 30, 2021, respectively.

Changes in the book value were also impacted by the issuance of common stock associated with the acquisition of VRB.

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 $19.92 per share at September 30, 2022, as compared to $21.41 and $25.16 at June 30, 2022, and September 30, 2021, respectively.

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 months ended March 31, 2023 and 2022, the Company repurchased 150,000 and zero shares with market values of $7.0 million and $0, respectively.

Total shareholders' equity increased by $43.8 million during the quarter ended March 31, 2023, as a result of an improvement in accumulated other comprehensive losses of $24.4 million and net income of $35.8 million, partially offset by cash dividend payments on common stock of approximately $9.9 million.

As a result, the Company’s book value was $32.84 per share at March 31, 2023, as compared to $31.39 and $32.78 at December 31, 2022, and March 31, 2022, 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 $23.22 per share at March 31, 2023, as compared to $21.76 and $23.04 at December 31, 2022, and March 31, 2022, respectively.

Trailing Quarter Balance Sheet Change

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Ratio Minimum

5 unchanged sentences

See Note 10 and Note 16 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.

As of September 30, 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, depository 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.

As of March 31, 2023, 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, depository 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.

The Company’s principal source of asset liquidity is cash maintained at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities classified as available for sale.

As of September 30, 2022, Federal Reserve required 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 nine months of 2022 generated cash flows from operations of $107,991,000 compared to $99,919,000 during the first nine months of 2021.

Net cash used by investing activities was $648,487,000 for the nine months ended September 30, 2022, compared to net cash used by investing activities of $752,929,000 during the nine months ending 2021.

Financing activities provided $18,584,000 during the nine months ended September 30, 2022, compared to $723,695,000 used during the nine months ended September 30, 2021.

During the nine months ended September 30, 2022 cash acquired in connection with the VRB merger of $426,883,000 and proceeds from the maturity of available for sale securities of $212,501,000 were the largest contributors to the source of funding that facilitated net organic loan growth of approximately $626,000,000 and net organic investment security growth of approximately $162,000,000, inclusive of changes in the fair value of available for sale investment securities, compared to an increase of deposit balances of $730,888,000 during the same period in 2021.

The Company's primary sources of liquidity include the following for the periods indicated:

(dollars in thousands) March 31, 2023 December 31, 2022

Borrowing capacity at correspondent banks and FRB $ 2,853,219 $ 2,815,594

borrowings outstanding (394,095) (216,700)

Unpledged available-for-sale investment securities

1,883,353 1,990,451

Cash held or in transit with FRB

67,468 56,910

Total primary liquidity $ 4,409,945 $ 4,862,738.3

At March 31, 2023, the Company's primary sources of liquidity represented 54.9% of total deposits and 190.7% of estimated total uninsured deposits, respectively.

As a secondary source of liquidity, the Company's held-to-maturity investment securities had a fair value of $142.1 million, including approximately $9.9 million in net unrealized losses or 0.6% of after tax total shareholders' equity.

The Company’s profitability during the first three months of 2023 generated cash flows from operations of $39.0 million compared to $34.8 million during the first three months of 2022.

Net cash from investing activities was $115.3 million for the three months ended March 31, 2023, compared to net cash used by investing activities of $121.9 million during the three months ending 2022.

Financing activities used $151.1 million during the three months ended March 31, 2023, compared to providing $110.5 million during the three months ended March 31, 2022.

During the three months ended March 31, 2023 deposit balance decreases of $303.1 million was the largest detractor of funding, which attributed to the increase in other borrowings of $169.5 million during the same period.

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 following table identified certain liquidity source and capacity available to the Company as of the dates indicated:

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

FHLB advances

Borrowing capacity $ 2,434,714 $ 2,251,285

Amount utilized — —

Letters of credit — —

Amount available 2,434,714 2,251,285

FRB discount window

Borrowing capacity $ 255,603 $ 184,694

Amount utilized — —

Amount available 255,603 184,694

Unsecured lines of credit available $ 60,000 $ 60,000

Unencumbered debt securities $ 2,071,334 $ 1,984,241

These contractual obligations are otherwise consistent with similar balances or totals as of December 31, 2022.

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.

2 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 $25,796,000 and $22,291,000 of cash during the nine months ended September 30, 2022 and 2021, respectively.

Dividends paid by the Company to holders of its common stock used $10.0 million and $7.4 million of cash during the three months ended March 31, 2023 and 2022, respectively.

The Company’s liquidity is dependent on dividends received from the Bank.

8 unchanged sentences

For a reconciliation of these non-GAAP financial measures, see the tables below:

Three months ended Nine months ended

(dollars in thousands) September 30,

2022 June 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three months ended

(dollars in thousands) March 31,

2023 December 31,

2022 March 31,

Net interest margin

13 unchanged sentences

Net interest margin less effect of acquired loan discount accretion and PPP yields, net (Non-GAAP) 4.15 % 4.27 % 3.29 %

Three months ended Nine months ended

(dollars in thousands) September 30,

2022 June 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three months ended

(dollars in thousands) March 31,

2023 December 31,

2022 March 31,

Pre-tax pre-provision return on average assets or equity

Net income (GAAP) $35,833 $36,343 $20,374

Exclude income tax expense 14,148 11,748 11,534 33,765 35,644

Exclude provision for income taxes 13,149 14,723 7,869

Exclude provision (benefit) for credit losses 4,195 4,245 8,330

6 unchanged sentences

Pre-tax pre-provision return on average equity (Non-GAAP) (annualized) 19.83 % 21.59 % 14.70 %

Three months ended Nine months ended

(dollars in thousands) September 30,

2022 June 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three months ended

(dollars in thousands) March 31,

2023 December 31,

2022 March 31,

Return on tangible common equity

9 unchanged sentences

Three months ended

(dollars in thousands) September 30,

2022 June 30,

2022 March 31,

(dollars in thousands) March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Tangible shareholders' equity to tangible assets

8 unchanged sentences

Three months ended

(dollars in thousands) September 30,

2022 June 30,

2022 March 31,

(dollars in thousands) March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Tangible common shareholders' equity per share

3 unchanged sentences

Tangible common shareholders' equity (tangible book value) per share (Non-GAAP) $23.22 $21.76 $19.92 $21.41 $23.04

*****************

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