TRICO BANCSHARES / - Quarter Report: 2022 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

___________________


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended: June 30, 2022


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to

Commission File Number: 000-10661

___________________

(Exact Name of Registrant as Specified in Its Charter)

___________________


CA						94-2792841
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification Number)

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange
on which registered

Common Stock

TCBK

The NASDAQ Stock Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

☒

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:

Common stock, no par value: 33,346,427 shares outstanding as of August 5, 2022.

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TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS


			Page
PART I – FINANCIAL INFORMATION			3
Item 1 – Financial Statements (Unaudited)			3
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			43
Item 3 – Quantitative and Qualitative Disclosures about Market Risk			63
Item 4 – Controls and Procedures			64
PART II – OTHER INFORMATION			65
Item 1 – Legal Proceedings			65
Item 1A – Risk Factors			65
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			65
Item 6 – Exhibits			66
Signatures			67

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GLOSSARY OF ACRONYMS AND TERMS

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:


ACL			Allowance for Credit Losses
AFS			Available-for-Sale
AOCI			Accumulated Other Comprehensive Income
ASC			Accounting Standards Codification
CARES			Coronavirus Aid, Relief and Economic Security Act
CDs			Certificates of Deposit
CDI			Core Deposit Intangible
CECL			Current Expected Credit Loss
COVID-19			Coronavirus Disease
CRE			Commercial Real Estate
CMO			Collateralized mortgage obligation
DFPI			State Department of Financial Protection and Innovation
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
FHLB			Federal Home Loan Bank
FRB			Federal Reserve Board
FTE			Fully taxable equivalent
GAAP			Generally Accepted Accounting Principles (United States of America)
HELOC			Home equity line of credit
HTM			Held-to-Maturity
NPA			Nonperforming assets
OCI			Other Comprehensive Income
PCD			Purchase Credit Deteriorated
PPP			Paycheck Protection Program
ROUA			Right-of-Use Asset
RSU			Restricted Stock Unit
SBA			Small Business Administration
SERP			Supplemental Executive Retirement Plan
SFR			Single Family Residence
TDR			Troubled Debt Restructuring
VRB			Valley Republic Bancorp
XBRL			eXtensible Business Reporting Language

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)


	June 30, 2022		December 31, 2021
Assets:
Cash and due from banks	$	49,630	$	57,032
Cash at Federal Reserve and other banks	439,238		711,389
Cash and cash equivalents	488,868		768,421
Investment securities:
Marketable equity securities	2,706		2,938
Available for sale debt securities, net of allowance for credit losses of $—	2,606,065		2,207,938
Held to maturity debt securities, net of allowance for credit losses of $—	176,794		199,759
Restricted equity securities	17,250		17,250
Loans held for sale	1,216		3,466
Loans	6,113,421		4,916,624
Allowance for credit losses	(97,944)		(85,376)
Total loans, net	6,015,477		4,831,248
Premises and equipment, net	73,811		78,687
Cash value of life insurance	132,857		117,857
Accrued interest receivable	25,861		19,292
Goodwill	307,942		220,872
Other intangible assets, net	20,074		12,369
Operating leases, right-of-use	27,154		25,665
Other assets	224,536		109,025
Total assets	$	10,120,611	$	8,614,787
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand	$	3,604,237	$	2,979,882
Interest-bearing	5,152,538		4,387,277
Total deposits	8,756,775		7,367,159
Accrued interest payable	755		928
Operating lease liability	29,283		26,280
Other liabilities	155,529		112,070
Other borrowings	35,089		50,087
Junior subordinated debt	101,003		58,079
Total liabilities	9,078,434		7,614,603
Commitments and contingencies (Note 9)
Shareholders’ equity:
Preferred stock, no par value: 1,000,000 shares authorized, zero issued and outstanding at June 30, 2022 and December 31, 2021	—		—
Common stock, no par value: 50,000,000 shares authorized; 33,350,974 and 29,730,424 issued and outstanding at June 30, 2022 and December 31, 2021, respectively	696,441		532,244
Retained earnings	491,705		466,959
Accumulated other comprehensive (loss) income, net of tax	(145,969)		981
Total shareholders’ equity	1,042,177		1,000,184
Total liabilities and shareholders’ equity	$	10,120,611	$	8,614,787

See accompanying notes to unaudited condensed consolidated financial statements.

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Interest and dividend income:
Loans, including fees	$	69,918	$	60,304	$	127,663	$	120,740
Investments:
Taxable securities	14,036		6,934		23,998		13,111
Tax exempt securities	1,323		851		2,265		1,774
Dividends	314		255		575		472
Interest bearing cash at Federal Reserve and other banks	1,364		135		1,649		298
Total interest and dividend income	86,955		68,479		156,150		136,395
Interest expense:
Deposits	848		828		1,527		1,765
Other borrowings	5		5		10		9
Junior subordinated debt	1,056		563		1,643		1,098
Total interest expense	1,909		1,396		3,180		2,872
Net interest income	85,046		67,083		152,970		133,523
Provision for (reversal of) credit losses	2,100		(260)		10,430		(6,320)
Net interest income after credit loss provision (reversal)	82,946		67,343		142,540		139,843
Non-interest income:
Service charges and fees	13,044		10,930		24,740		21,406
Gain on sale of loans	542		2,847		1,788		6,094
Gain on sale of investment securities	—		—		—		—
Asset management and commission income	1,039		947		1,926		1,781
Increase in cash value of life insurance	752		745		1,390		1,418
Other	1,053		488		1,682		1,368
Total non-interest income	16,430		15,957		31,526		32,067
Non-interest expense:
Salaries and related benefits	34,370		27,081		62,967		52,411
Other	21,894		17,090		39,744		33,378
Total non-interest expense	56,264		44,171		102,711		85,789
Income before provision for income taxes	43,112		39,129		71,355		86,121
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 per share	$	0.25	$	0.25	$	0.50	$	0.50

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In thousands; unaudited)


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Net income	$	31,364	$	28,362	$	51,738	$	62,011
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period	(68,611)		5,206		(147,008)		(3,484)
Change in minimum pension liability	—		—		58		—
Change in joint beneficiary agreements	—		—		—		(629)
Other comprehensive income (loss)	(68,611)		5,206		(146,950)		(4,113)
Comprehensive income (loss)	$	(37,247)	$	33,568	$	(95,212)	$	57,898

See accompanying notes to unaudited condensed consolidated financial statements.

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data; unaudited)


	Shares of Common Stock	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at March 31, 2021	29,727,122	$	531,367	$	408,211	$	2,961	$	942,539
Net income				28,362				28,362
Other comprehensive income						5,206		5,206
Stock options exercised	1,675	28						28
RSU vesting		405						405
PSU vesting		221						221
RSUs released	42,511							—
PSUs released	—							—
Repurchase of common stock	(55,014)	(983)		(1,568)				(2,551)
Dividends paid ($0.25 per share)				(7,430)				(7,430)
Three months ended June 30, 2021	29,716,294	$	531,038	$	427,575	$	8,167	$	966,780

Balance at March 31, 2022	33,837,935	$	706,672	$	479,868	$	(77,358)	$	1,109,182
Net income				31,364				31,364
Other comprehensive loss						(68,611)		(68,611)
Stock options exercised	12,000	201						201
RSU vesting		714						714
PSU vesting		216						216
RSUs released	45,482							—
PSUs released	—							—
Issuance of common stock	—							—
Repurchase of common stock	(544,443)	(11,362)		(11,168)				(22,530)
Dividends paid ($0.25 per share)				(8,359)				(8,359)
Three months ended June 30, 2022	33,350,974	$	696,441	$	491,705	$	(145,969)	$	1,042,177

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data; unaudited)


	Shares of Common Stock	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at January 1, 2021	29,727,214	$	530,835	$	381,999	$	12,280	$	925,114
Net income				62,011				62,011
Other comprehensive loss						(4,113)		(4,113)
Stock options exercised	1,675	28						28
RSU vesting		757						757
PSU vesting		406						406
RSUs released	42,712							—
PSUs released	—							—
Repurchase of common stock	(55,307)	(988)		(1,573)				(2,561)
Dividends paid ($0.50 per share)				(14,862)				(14,862)
Six months ended June 30, 2021	29,716,294	$	531,038	$	427,575	$	8,167	$	966,780

Balance at January 1, 2022	29,730,424	$	532,244	$	466,959	$	981	$	1,000,184
Net income				51,738				51,738
Other comprehensive loss						(146,950)		(146,950)
Stock options exercised	15,325	256						256
RSU vesting		1,279						1,279
PSU vesting		463						463
RSUs released	45,482							—
PSUs released	—							—
Issuance of common stock	4,105,518	173,585						173,585
Repurchase of common stock	(545,775)	(11,386)		(11,200)				(22,586)
Dividends paid ($0.50 per share)				(15,792)				(15,792)
Six months ended June 30, 2022	33,350,974	$	696,441	$	491,705	$	(145,969)	$	1,042,177

See accompanying notes to unaudited condensed consolidated financial statements.

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)


	For the six months ended June 30,
	2022		2021
Operating activities:
Net income	$	51,738	$	62,011
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization	2,962		3,357
Amortization of intangible assets	2,930		2,862
Provision for (reversal of) credit losses on loans	10,145		(6,385)
Amortization of investment securities premium, net	6,297		2,855

Originations of loans for resale	(50,254)		(129,684)
Proceeds from sale of loans originated for resale	53,806		135,353
Gain on sale of loans	(1,788)		(6,094)
Change in market value of mortgage servicing rights	(410)		459
Provision for losses on foreclosed assets	—		9
Gain on transfer of loans to foreclosed assets	(97)		(20)
Gain on sale of foreclosed assets	—		(46)
Operating lease expense payments	(2,815)		(2,430)
Gain on disposal of fixed assets	(1,073)		(426)
Increase in cash value of life insurance	(1,390)		(1,418)

Loss on marketable equity securities	232		45
Equity compensation vesting expense	1,742		1,163
Change in:
Interest receivable	(3,175)		1,081
Interest payable	(699)		(336)
Amortization of operating lease ROUA	2,930		2,645
Other assets and liabilities, net	1,059		(6,195)
Net cash from operating activities	72,140		58,806

Investing activities:
Proceeds from maturities of securities available for sale	151,486		180,046
Proceeds from maturities of securities held to maturity	22,752		48,269

Purchases of securities available for sale	(654,691)		(620,634)
Loan origination and principal collections, net	(423,606)		(79,803)
Loans purchased	—		(101,466)
Proceeds from sale of other real estate owned	—		756
Proceeds from sale of premises and equipment	6,689		2,700
Purchases of premises and equipment	(2,223)		(854)
Cash acquired from VRB, net of cash consideration paid	426,883		—
Net cash used by investing activities	(472,710)		(570,986)

Financing activities:
Net change in deposits	174,137		486,119
Net change in other borrowings	(14,998)		13,645
Repurchase of common stock, net of option exercises	(22,586)		(2,561)
Dividends paid	(15,792)		(14,862)
Exercise of stock options	256		28
Net cash from financing activities	121,017		482,369
Net change in cash and cash equivalents	(279,553)		(29,811)

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Cash and cash equivalents, beginning of period	768,421		669,551
Cash and cash equivalents, end of period	$	488,868	$	639,740
Supplemental disclosure of noncash activities:
Unrealized loss on securities available for sale	$	(208,710)	$	(4,945)
Loans transferred to held-for-sale	12,044		—
Market value of shares tendered in-lieu of cash to pay for exercise of options and/or related taxes	829		451
Obligations incurred in conjunction with leased assets	3,867		1,308
Loans transferred to foreclosed assets	688		102
Supplemental disclosure of cash flow activity:
Cash paid for interest expense	3,353		3,208
Cash paid for income taxes	12,000		33,300

See accompanying notes to unaudited condensed consolidated financial statements.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

TriCo Bancshares (the “Company” or “we”) is a California corporation organized to act as a bank holding company for Tri Counties Bank (the “Bank”). The Company and the Bank are headquartered in Chico, California. The Bank is a California-chartered bank that is engaged in the general commercial banking business in 31 California counties. The consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States of America and general practices in the banking industry. All adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. The financial statements include the accounts of the Company. All inter-company accounts and transactions have been eliminated in consolidation.

The Company has five capital subsidiary business trusts (collectively, the “Capital Trusts”) that issued trust preferred securities, including two organized by the Company and three acquired with the acquisition of North Valley Bancorp. For financial reporting purposes, the Company’s investments in the Capital Trusts of $1,751,000 are accounted for under the equity method and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. See the footnote 'Junior Subordinated Debt' for additional information on borrowings outstanding.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”). The Company believes that the disclosures made are adequate to make the information not misleading.

Segment and Significant Group Concentration of Credit Risk

The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into one business segment that it denotes as community banking.

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.

Reclassification

Some items in the prior year consolidated financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

Cash and Cash Equivalents

Net cash flows are reported for loan and deposit transactions and other borrowings. For purposes of the consolidated statement of cash flows, cash, due from banks with original maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents.

Allowance for Credit Losses - Securities

The Company measures expected credit losses on HTM debt securities on a collective basis by major security type, then further disaggregated by sector and bond rating. Accrued interest receivable on HTM debt securities totaled was considered insignificant at June 30, 2022 and is therefore excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current condition and reasonable and supportable forecasts based on current and expected changes in credit ratings and default rates. Based on the implied guarantees of the U. S. Government or its agencies related to certain of these investment securities, and the absence of any historical or expected losses, substantially all qualify for a zero loss assumption.

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Management has separately evaluated its HTM investment securities from obligations of state and political subdivisions utilizing the historical loss data represented by similar securities over a period of time spanning nearly 50 years. As a result of this evaluation, management determined that the expected credit losses associated with these securities is not significant for financial reporting purposes and therefore, no allowance for credit losses has been recognized.

The Company evaluates AFS debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the allowance for credit losses and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount is recognized in earnings with a corresponding adjustment to the security's amortized cost basis. In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers' financial condition, among other factors. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. No security credit losses were recognized during the three and six month periods ended June 30, 2022 and 2021, respectively.

Loans

Loans that management has the intent and ability to hold until maturity or payoff are reported at principle amount outstanding, net of deferred loan fees and costs. Loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal, or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is considered probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loan is estimated to be fully collectible as to both principal and interest. Accrued interest receivable is not included in the calculation of the allowance for credit losses.

Allowance for Credit Losses - Loans

The ACL is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Regardless of the determination that a charge-off is appropriate for financial accounting purposes, the Company manages its loan portfolio by continually monitoring, where possible, a borrower's ability to pay through the collection of financial information, delinquency status, borrower discussion and the encouragement to repay in accordance with the original contract or modified terms, if appropriate.

Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over the remaining life. The Company identified and accumulated loan cohort historical loss data beginning with the fourth quarter of 2008 and through the current period. In situations where the Company's actual loss history was not statistically relevant, the loss history of peers, defined as financial institutions with assets greater than three billion and less than ten billion, were utilized to create a minimum loss rate. Adjustments to historical loss information are made for differences in relevant current loan-specific risk characteristics, such as historical timing of losses relative to the loan origination. In its loss forecasting framework, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios incorporate variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to changes in environmental conditions, such as California unemployment rates, household debt levels and U.S. gross domestic product.

A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The ACL on a TDR is measured using the same method as all other portfolio loans, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest rate of the loan.

PCD assets are assets acquired at a discount that is due, in part, to credit quality deterioration since origination. PCD assets are accounted for in accordance with ASC 326-20 and are initially recorded at fair value, by taking the sum of the present value of expected future cash flows and an allowance for credit losses, at acquisition. The allowance for credit losses for PCD assets is recorded through a gross-up of reserves on the balance sheet, while the allowance for acquired non-PCD assets, such as loans, is recorded through the provision for credit losses on the income statement, consistent with originated loans. Subsequent to acquisition, the allowance for credit losses for PCD loans will generally follow the same forward-looking estimation, provision, and charge-off process as non-PCD acquired and originated loans.

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The Company has identified the following portfolio segments to evaluate and measure the allowance for credit loss:

Commercial real estate:

Commercial real estate - Non-owner occupied: These commercial properties typically consist of buildings which are leased to others for their use and rely on rents as the primary source of repayment. Property types are predominantly office, retail, or light industrial but the portfolio also has some special use properties. As such, the risk of loss associated with these properties is primarily driven by general economic changes or changes in regional economies and the impact of such on a tenant’s ability to pay. Ultimately this can affect occupancy, rental rates, or both. Additional risk of loss can come from new construction resulting in oversupply, the costs to hold or operate the property, or changes in interest rates. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty years.

Commercial real estate - Owner occupied: These credits are primarily susceptible to changes in the financial condition of the business operated by the property owner. This may be driven by changes in, among other things, industry challenges, factors unique to the operating geography of the borrower, change in the individual fortunes of the business owner, general economic conditions and changes in business cycles. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven more by general economic conditions, the underlying collateral may have devalued more and thus result in larger losses in the event of default. The terms on these loans at origination typically have maturities from five to ten years with amortization periods from fifteen to thirty years.

Multifamily: These commercial properties are generally comprised of more than four rentable units, such as apartment buildings, with each unit intended to be occupied as the primary residence for one or more persons. Multifamily properties are also subject to changes in general or regional economic conditions, such as unemployment, ultimately resulting in increased vacancy rates or reduced rents or both. In addition, new construction can create an oversupply condition and market competition resulting in increased vacancy, reduced market rents, or both. Due to the nature of their use and the greater likelihood of tenant turnover, the management of these properties is more intensive and therefore is more critical to the preclusion of loss.

Farmland: While the Company has few loans that were originated for the purpose of the acquisition of these commercial properties, loans secured by farmland represent unique risks that are associated with the operation of an agricultural businesses. The valuation of farmland can vary greatly over time based on the property's access to resources including but not limited to water, crop prices, foreign exchange rates, government regulation or restrictions, and the nature of ongoing capital investment needed to maintain the quality of the property. Loans secured by farmland typically represent less risk to the Company than other agriculture loans as the real estate typically provides greater support in the event of default or need for longer term repayment.

Consumer loans:

SFR 1-4 1st DT Liens: The most significant drivers of potential loss within the Company's residential real estate portfolio relate general, regional, or individual changes in economic conditions and their effect on employment and borrowers cash flow. Risk in this portfolio is best measured by changes in borrower credit score and loan-to-value. Loss estimates are based on the general movement in credit score, economic outlook and its effects on employment and the value of homes and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate.

SFR HELOCs and Junior Liens: Similar to residential real estate term loans, HELOCs and junior liens performance is also primarily driven by borrower cash flows based on employment status. However, HELOCs carry additional risks associated with the fact that most of these loans are secured by a deed of trust in a position that is junior to the primary lien holder. Furthermore, the risk that as the borrower's financial strength deteriorates, the outstanding balance on these credit lines may increase as they may only be canceled by the Company if certain limited criteria are met. In addition to the allowance for credit losses maintained as a percent of the outstanding loan balance, the Company maintains additional reserves for the unfunded portion of the HELOC.

Other: The majority of consumer loans are secured by automobiles, with the remainder primarily unsecured revolving debt (credit cards). These loans are susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value, if any. Typically non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of those factors. Credit card loans are unsecured and while collection efforts are pursued in the event of default, there is typically limited opportunity for recovery. Loss estimates are based on the general movement in credit score, economic outlook and its effects on employment and the Bank’s historical loss experience adjusted to reflect the economic outlook and the unemployment rate.

Commercial and Industrial:

Repayment of these loans is primarily based on the cash flow of the borrower, and secondarily on the underlying collateral provided by the borrower. A borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, collateral includes accounts receivable, inventory, or equipment. Collateral securing these loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Actual and forecast changes in gross domestic product are believed to be corollary to losses associated with these credits.

Construction:

While secured by real estate, construction loans represent a greater level of risk than term real estate loans due to the nature of the additional risks associated with the not only the completion of construction within an estimated time period and budget, but also the need to either sell the building or reach a level of stabilized occupancy sufficient to generate the cash flows necessary to support debt

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service and operating costs. The Company seeks to mitigate the additional risks associated with construction lending by requiring borrowers to comply with lower loan to value ratios and additional covenants as well as strong tertiary support of guarantors. The loss forecasting model applies the historical rate of loss for similar loans over the expected life of the asset as adjusted for macroeconomic factors.

Agriculture Production:

Repayment of agricultural loans is dependent upon successful operation of the agricultural business, which is greatly impacted by factors outside the control of the borrower. These factors include adverse weather conditions, including access to water, that may impact crop yields, loss of livestock due to disease or other factors, declines in market prices for agriculture products, changes in foreign exchange, and the impact of government regulations. In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the business. Consequently, agricultural production loans may involve a greater degree of risk than other types of loans.

Leases:

The loss forecasting model applies the historical rate of loss for similar loans over the expected life of the asset. Leases typically represent an elevated level of credit risk as compared to loans secured by real estate as the collateral for leases is often subject to a more rapid rate of depreciation or depletion. The ultimate severity of loss is impacted by the type of collateral securing the exposure, the size of the exposure, the borrower’s industry sector, any guarantors and the geographic market. Assumptions of expected loss are conditioned to the economic outlook and the other variables discussed above.

Unfunded commitments:

The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the consolidated balance sheet in other liabilities.

Accounting Standards Pending Adoption

FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This ASU clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, and to introduce new disclosure requirements there within. Amendments in this ASU are effective for the Company beginning after December 31, 2023, with early adoption permitted. Management is evaluating the extent to which this standard will impact the consolidated financial statements..

FASB issued ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU addresses feedback received from adopters of CECL, specifically regarding accounting guidance for TDRs and disclosures of gross write-offs by year of loan origination. Accounting guidance for TDRs by creditors will be eliminated under this amendment, while also enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Amendments in this ASU are effective for the Company beginning after December 31, 2022, with early adoption permitted. Management is evaluating the extent to which this will impact the consolidated financial statements.

FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform by providing optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The election to apply the optional relief for existing fair value and cash flow hedge accounting relationships may be made on a hedge-by-hedge basis and across multiple reporting periods. Amendments in this ASU are effective for the Company through December 31, 2022. As the Company has an insignificant number of instruments that are applicable to this ASU, management has determined that no impact to the valuations of these instruments are applicable for financial reporting purposes.

Note 2 - Business Combinations

On March 25, 2022, the Company completed its acquisition of Valley Republic Bancorp (VRB), including the merger of Valley Republic Bank into Tri Counties Bank, with Tri Counties Bank as the surviving entity, in accordance with the terms of the merger agreement dated as of July 27, 2021. The cash and stock transaction was valued at approximately $174.0 million in aggregate, based on TriCo's closing stock price of $42.48 on March 25, 2022. Under the terms of the merger agreement, the Company issued approximately 4.1 million shares, in addition to approximately $431,000 in cash paid out for settlement of stock option awards at VRB.

VRB was headquartered in Bakersfield, California, and had four branch locations at acquisition in and around Bakersfield, which all now operate as branches for Tri Counties Bank, and a loan production office in Fresno, California. The Company's overlapping Bakersfield branch was consolidated into the acquired VRB branch during the quarter ended June 30, 2022, and the Company anticipates the VRB loan production office in Fresno will be consolidated with the nearby legacy loan production office during the third quarter of 2022.

The acquisition of VRB has been accounted for as a business combination. We recorded the fair values based on the valuations available as of reporting date. In accordance with business combination accounting guidance, we will continue to evaluate these fair values for up to

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one year following the merger date of March 25, 2022. While management believes the information available and presented below provide a reasonable basis for estimating fair value, we may obtain additional information and evidence during the measurement period that could result in changes to the estimated fair value amounts. Valuations subject to change include, but are not limited to, loans and leases, deposits, deferred tax items, and certain other assets and liabilities.

The following table summarizes the consideration paid for VRB and the amounts of assets acquired and liabilities assumed that were recorded at the acquisition date (in thousands):


	Valley Republic Bancorp March 25, 2022
Fair value of consideration transferred:
Fair value of shares issued	$	173,585
Cash consideration	431
Total fair value of consideration transferred	174,016
Assets acquired:
Cash and cash equivalents	427,314
Securities available for sale	109,716

Loans and leases	771,353
Premises and equipment	4,658
Cash value of life insurance	13,609
Core deposit intangible	10,635
Other assets	26,244
Total assets acquired	1,363,529
Liabilities assumed:
Deposits	(1,215,479)
Subordinated debt	(47,236)
SERP liability	(3,352)
Other liabilities	(10,516)
Total liabilities assumed	(1,276,583)
Total net assets acquired	86,946
Goodwill recognized	$	87,070

Note 3 - Investment Securities

The amortized cost, estimated fair values and allowance for credit losses of investments in debt securities are summarized in the following tables:


	June 30, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	1,671,797	$	363	$	(135,329)	$	1,536,831
Obligations of states and political subdivisions	333,709		305		(30,320)		303,694
Corporate bonds	7,659		—		(115)		7,544
Asset backed securities	448,742		104		(14,654)		434,192
Non-agency collateralized mortgage obligations	353,260		—		(29,456)		$	323,804
Total debt securities available for sale	$	2,815,167	$	772	$	(209,874)	$	2,606,065




Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	170,337	$	12	$	(5,679)	$	164,670
Obligations of states and political subdivisions	6,457		41		(26)		6,472
Total debt securities held to maturity	$	176,794	$	53	$	(5,705)	$	171,142

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	December 31, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	1,260,226	$	8,193	$	(11,030)	$	1,257,389
Obligations of states and political subdivisions	187,197		5,832		(785)		192,244
Corporate bonds	6,722		34		—		6,756
Asset backed securities	408,329		2,354		(1,131)		409,552
Non-agency collateralized mortgage obligations	345,856		—		(3,859)		341,997
Total debt securities available for sale	$	2,208,330	$	16,413	$	(16,805)	$	2,207,938
Debt Securities Held to Maturity
Obligations of U.S. government agencies	192,068		8,131		—		200,199
Obligations of states and political subdivisions	7,691		250		—		7,941
Total debt securities held to maturity	$	199,759	$	8,381	$	—	$	208,140

There were no sales of investment securities during the three and six months ended June 30, 2022 and 2021, respectively. Investment securities with an aggregate carrying value of $551,717,000 and $423,892,000 at June 30, 2022 and December 31, 2021, respectively, were pledged as collateral for specific borrowings, lines of credit or local agency deposits.

The amortized cost and estimated fair value of debt securities at June 30, 2022 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2022, obligations of U.S. government corporations and agencies with a cost basis totaling $1,617,707,000 consist almost entirely of residential real estate mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At June 30, 2022, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 6.54 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

As of June 30, 2022, the contractual final maturity for available for sale and held to maturity investment securities is as follows:


Debt Securities	Available for Sale				Held to Maturity
(in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Due in one year	$	14,470	$	14,303	$	—	$	—
Due after one year through five years	123,099		118,336		1,645		1,655
Due after five years through ten years	423,389		409,143		13,742		13,605
Due after ten years	2,254,209		2,064,283		161,407		155,882
Totals	$	2,815,167	$	2,606,065	$	176,794	$	171,142

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Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:


June 30, 2022:	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	1,268,144	$	(108,243)	$	206,484	$	(27,086)	$	1,474,628	$	(135,329)
Obligations of states and political subdivisions	262,159		(28,483)		8,564		(1,837)		270,723		(30,320)
Corporate bonds	6,044		(115)		—		—		6,044		(115)
Asset backed securities	308,125		(9,125)		120,128		(5,529)		428,253		(14,654)
Non-agency collateralized mortgage obligations	277,384		(28,979)		14,579		(477)		291,963		(29,456)
Total debt securities available for sale	$	2,121,856	$	(174,945)	$	349,755	$	(34,929)	$	2,471,611	$	(209,874)

Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	164,158	$	(5,679)	$	—	$	—	$	164,158	$	(5,679)
Obligations of states and political subdivisions	545		(26)		$	—	$	—	545		(26)
Total debt securities held to maturity	$	164,703	$	(5,705)	$	—	$	—	$	164,703	$	(5,705)


December 31, 2021:	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Debt Securities Available for Sale
Obligations of U.S. government agencies	$	947,108	$	(9,737)	$	44,086	$	(1,293)	$	991,194	$	(11,030)
Obligations of states and political subdivisions	56,154		(785)		—		—		56,154		(785)
Asset backed securities	62,792		(259)		109,748		(872)		172,540		(1,131)
Non-agency collateralized mortgage obligations	327,045		(3,859)		—		—		327,045		(3,859)
Total debt securities available for sale	$	1,393,099	$	(14,640)	$	153,834	$	(2,165)	$	1,546,933	$	(16,805)

Obligations of U.S. government agencies: The unrealized losses on investments in obligations of U.S. government agencies are caused by interest rate increases and illiquidity. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, there is no impairment on these securities and there has been no allowance for credit losses recorded. At June 30, 2022, 243 debt securities representing obligations of U.S. government agencies had unrealized losses with aggregate depreciation of 7.92% from the Company’s amortized cost basis.

Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, there is no impairment on these securities and there has been no allowance for credit losses recorded as of June 30, 2022. At June 30, 2022, 201 debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of 10.06% from the Company’s amortized cost basis.

Corporate bonds: The unrealized losses on investments in corporate bonds were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, there is no impairment on these securities and there has been no allowance for credit losses recorded as of June 30, 2022. At June 30, 2022, 6 debt securities representing corporate bonds had unrealized losses with aggregate depreciation of 1.87% from the Company’s amortized cost basis.

Asset backed securities: The unrealized losses on investments in asset backed securities were caused by increases in required yields by investors for these types of securities. At the time of purchase, each of these securities was rated AA or AAA and through June 30, 2022 has

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not experienced any deterioration in credit rating. At June 30, 2022, 37 asset backed securities had unrealized losses with aggregate depreciation of 3.31% from the Company’s amortized cost basis. The Company continues to monitor these securities for changes in credit rating or other indications of credit deterioration. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, there is no impairment on these securities and there has been no allowance for credit losses recorded as of June 30, 2022.

Non-agency collateralized mortgage obligations: The unrealized losses on investments in non-agency collateralized mortgage obligations were caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, there is no impairment on these securities and there has been no allowance for credit losses recorded as of June 30, 2022. At June 30, 2022, 20 debt securities representing corporate bonds had unrealized losses with aggregate depreciation of 9.16% from the Company’s amortized cost basis.

The Company monitors credit quality of debt securities held-to-maturity through the use of credit rating. The Company monitors the credit rating on a monthly basis. The following table summarizes the amortized cost of debt securities held-to-maturity at the dates indicated, aggregated by credit quality indicator:


	June 30, 2022				December 31, 2021
	AAA/AA/A		BBB/BB/B		AAA/AA/A		BBB/BB/B
	(In thousands)				(In thousands)
Debt Securities Held to Maturity
Obligations of U.S. government agencies	$	170,337	$	—	$	192,068	$	—
Obligations of states and political subdivisions	6,457		—		7,691		—
Total debt securities held to maturity	$	176,794	$	—	$	199,759	$	—

Note 4 – Loans

A summary of loan balances follows:


(in thousands)	June 30, 2022		December 31, 2021
Commercial real estate:
CRE non-owner occupied	$	1,993,848	$	1,603,141
CRE owner occupied	933,589		706,307
Multifamily	869,970		823,500
Farmland	252,486		173,106
Total commercial real estate loans	4,049,893		3,306,054
Consumer:
SFR 1-4 1st DT liens	718,690		666,960
SFR HELOCs and junior liens	384,813		337,513
Other	59,486		67,078
Total consumer loans	1,162,989		1,071,551
Commercial and industrial	507,685		259,355
Construction	313,646		222,281
Agriculture production	71,373		50,811
Leases	7,835		6,572
Total loans, net of deferred loan fees and discounts	$	6,113,421	$	4,916,624
Total principal balance of loans owed, net of charge-offs	$	6,160,388	$	4,946,653
Unamortized net deferred loan fees	(13,867)		(13,922)
Discounts to principal balance of loans owed, net of charge-offs	(33,100)		(16,107)
Total loans, net of unamortized deferred loan fees and discounts	$	6,113,421	$	4,916,624
Allowance for credit losses on loans	$	(97,944)	$	(85,376)

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

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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. PPP loan balances included in commercial and industrial loan totals above were $17,754,000 and $61,147,000, net of approximately $318,000 and $2,164,000 in deferred fee income as of June 30, 2022 and December 31, 2021, respectively. During the three months ended June 30, 2022, the Company recognized $872,000 in fees on PPP loans as compared with $974,000 and $2,344,000 for the three months ended March 31, 2022 and June, 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.

Note 5 – Allowance for Credit Losses

For the periods indicated, the following tables summarize the activity in the allowance for credit losses on loans which is recorded as a contra asset, and the reserve for unfunded commitments which is recorded on the balance sheet within other liabilities:


	Allowance for credit losses – Three months ended June 30, 2022
(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Commercial real estate:
CRE non-owner occupied	$	28,055	$	—	$	—	$	26	$	28,081
CRE owner occupied	12,071		—		1		548		12,620
Multifamily	11,987		—		—		(192)		11,795
Farmland	2,879		—		—		75		2,954
Total commercial real estate loans	54,992		—		1		457		55,450
Consumer:
SFR 1-4 1st DT liens	10,669		—		1		(359)		10,311
SFR HELOCs and junior liens	10,843		—		153		595		11,591
Other	2,167		(166)		76		(48)		2,029
Total consumer loans	23,679		(166)		230		188		23,931
Commercial and industrial	9,042		(235)		124		1,048		9,979
Construction	7,437		—		—		85		7,522
Agriculture production	883		—		1		162		1,046
Leases	16		—		—		—		16
Allowance for credit losses on loans	$	96,049	$	(401)	$	356	$	1,940	$	97,944
Reserve for unfunded commitments	3,915		—		—		160		4,075
Total	$	99,964	$	(401)	$	356	$	2,100	$	102,019


	Allowance for credit losses – Six months ended June 30, 2022
(in thousands)	Beginning Balance		ACL on PCD Loans		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Commercial real estate:
CRE non-owner occupied	$	25,739	$	746	$	—	$	—	$	1,596	$	28,081
CRE owner occupied	10,691		63		—		1		1,865		12,620
Multifamily	12,395		—		—		—		(600)		11,795
Farmland	2,315		764		(294)		—		169		2,954
Total commercial real estate loans	51,140		1,573		(294)		1		3,030		55,450
Consumer:
SFR 1-4 1st DT liens	10,723		144		—		41		(597)		10,311
SFR HELOCs and junior liens	10,510		—		—		328		753		11,591
Other	2,241		—		(285)		147		(74)		2,029
Total consumer loans	23,474		144		(285)		516		82		23,931
Commercial and industrial	3,862		81		(565)		1,011		5,590		9,979
Construction	5,667		201		—		—		1,654		7,522
Agriculture production	1,215		38		—		2		(209)		1,046
Leases	18		—		—		—		(2)		16
Allowance for credit losses on loans	$	85,376	$	2,037	$	(1,144)	$	1,530	$	10,145	$	97,944
Reserve for unfunded commitments	3,790		—		—		—		285		4,075
Total	$	89,166	$	2,037	$	(1,144)	$	1,530	$	10,430	$	102,019

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In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various econometrics, including California unemployment, gross domestic product, and corporate bond yields. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results.

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.

Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. For PCD loans and leases, the initial estimate of expected credit losses is recognized in the ACL on the date of acquisition using the same methodology as other loans and leases held-for-investment. The following table provides a summary of loans and leases purchased as part of the VRB acquisition with credit deterioration at acquisition:


	As of March 25, 2022
(in thousands)	Commercial Real Estate		Consumer		Commercial and Industrial		Construction		Agriculture Production		Total
Par value	$	27,237	$	3,877	$	2,674	$	25,645	$	9,080	$	68,513
ACL at acquisition	(1,573)		(144)		(81)		(201)		(38)		(2,037)
Non-credit discount	(2,305)		(360)		(47)		(232)		(12)		(2,956)
Purchase price	$	23,359	$	3,373	$	2,546	$	25,212	$	9,030	$	63,520

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	Allowance for credit losses – Year ended December 31, 2021
(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (benefit)		Ending Balance
Commercial real estate:
CRE non-owner occupied	$	29,380	$	—	$	12	$	(3,653)	$	25,739
CRE owner occupied	10,861		(18)		794		(946)		10,691
Multifamily	11,472		—		—		923		12,395
Farmland	1,980		(126)		—		461		2,315
Total commercial real estate loans	53,693		(144)		806		(3,215)		51,140
Consumer:
SFR 1-4 1st DT liens	10,117		(145)		13		738		10,723
SFR HELOCs and junior liens	11,771		(29)		1,127		(2,359)		10,510
Other	3,260		(577)		361		(803)		2,241
Total consumer loans	25,148		(751)		1,501		(2,424)		23,474
Commercial and industrial	4,252		(1,470)		755		325		3,862
Construction	7,540		(27)		—		(1,846)		5,667
Agriculture production	1,209		—		24		(18)		1,215
Leases	5		—		—		13		18
Allowance for credit losses on loans	$	91,847	$	(2,392)	$	3,086	$	(7,165)	$	85,376
Reserve for unfunded commitments	3,400		—		—		390		3,790
Total	$	95,247	$	(2,392)	$	3,086	$	(6,775)	$	89,166


	Allowance for credit losses – Three months ended June 30, 2021
(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision		Ending Balance
Commercial real estate:
CRE non-owner occupied	$	26,434	$	—	$	—	$	(406)	$	26,028
CRE owner occupied	9,874		—		—		589		10,463
Multifamily	12,371		—		—		825		13,196
Farmland	1,724		—		—		226		1,950
Total commercial real estate loans	50,403		—		—		1,234		51,637
Consumer:
SFR 1-4 1st DT liens	10,665		—		1		(37)		10,629
SFR HELOCs and junior liens	11,079		—		512		(890)		10,701
Other	2,860		(86)		59		(213)		2,620
Total consumer loans	24,604		(86)		572		(1,140)		23,950
Commercial and industrial	4,464		(301)		79		269		4,511
Construction	5,476		—		—		(525)		4,951
Agriculture production	988		—		2		17		1,007
Leases	6		—		—		—		6
Allowance for credit losses on loans	$	85,941	$	(387)	$	653	$	(145)	$	86,062
Reserve for unfunded commitments	3,580		—		—		(115)		3,465
Total	$	89,521	$	(387)	$	653	$	(260)	$	89,527

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	Allowance for credit losses – Six months ended June 30, 2021
(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision		Ending Balance
Commercial real estate:
CRE non-owner occupied	$	29,380	$	—	$	2	$	(3,354)	$	26,028
CRE owner occupied	10,861		—		1		(399)		10,463
Multifamily	11,472		—		—		1,724		13,196
Farmland	1,980		—		—		(30)		1,950
Total commercial real estate loans	53,693		—		3		(2,059)		51,637
Consumer:
SFR 1-4 1st DT liens	10,117		—		11		501		10,629
SFR HELOCs and junior liens	11,771		—		797		(1,867)		10,701
Other	3,260		(279)		165		(526)		2,620
Total consumer loans	25,148		(279)		973		(1,892)		23,950
Commercial and industrial	4,252		(334)		215		378		4,511
Construction	7,540		—		—		(2,589)		4,951
Agriculture production	1,209		—		22		(224)		1,007
Leases	5		—		—		1		6
Allowance for credit losses on loans	91,847		(613)		1,213		(6,385)		86,062
Reserve for unfunded commitments	3,400		—		—		65		3,465
Total	$	95,247	$	(613)	$	1,213	$	(6,320)	$	89,527

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans, and (iv) delinquency within the portfolio. The Company analyzes loans individually to classify the loans as to credit risk and grading. This analysis is performed annually for all outstanding balances greater than $1,000,000 and non-homogeneous loans, such as commercial real estate loans, unless other indicators, such as delinquency, trigger more frequent evaluation. Loans below the $1,000,000 threshold and homogenous in nature are evaluated as needed for proper grading based on delinquency and borrower credit scores.

The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows:

•Pass – This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital.

•Special Mention – This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention.

•Substandard – This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well-defined workout/rehabilitation program.

•Doubtful – This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans.

•Loss – This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the quarter in which the loss is identified.

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Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the period indicated:


	Term Loans Amortized Cost Basis by Origination Year – As of June 30, 2022
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Commercial real estate:
CRE non-owner occupied risk ratings
Pass	$	246,267	$	303,771	$	143,028	$	225,073	$	156,816	$	782,384	$	96,689	$	—	$	1,954,028
Special Mention	—		—		—		8,707		395		22,033		1,346		—		32,481
Substandard	—		997		817		—		1,074		4,451		—		—		7,339
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total CRE non-owner occupied risk ratings	$	246,267	$	304,768	$	143,845	$	233,780	$	158,285	$	808,868	$	98,035	$	—	$	1,993,848




Commercial real estate:
CRE owner occupied risk ratings
Pass	$	148,623	$	193,911	$	130,357	$	70,285	$	50,755	$	274,723	$	35,255	$	—	$	903,909
Special Mention	—		14,344		238		—		289		7,568		—		—		22,439
Substandard	—		726		—		—		1,167		4,357		991		—		7,241
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total CRE owner occupied risk ratings	$	148,623	$	208,981	$	130,595	$	70,285	$	52,211	$	286,648	$	36,246	$	—	$	933,589


Commercial real estate:
Multifamily risk ratings
Pass	$	80,607	$	285,352	$	98,519	$	71,369	$	107,010	$	197,381	$	29,592	$	—	$	869,830
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		140		—		—		140
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total multifamily loans	$	80,607	$	285,352	$	98,519	$	71,369	$	107,010	$	197,521	$	29,592	$	—	$	869,970


Commercial real estate:
Farmland risk ratings
Pass	$	17,196	$	54,856	$	18,882	$	23,927	$	14,421	$	43,218	$	51,535	$	—	$	224,035
Special Mention	—		—		—		—		1,278		879		13,911		—		16,068
Substandard	—		—		335		1,869		1,901		7,915		363		—		12,383
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total farmland loans	$	17,196	$	54,856	$	19,217	$	25,796	$	17,600	$	52,012	$	65,809	$	—	$	252,486


Consumer loans:
SFR 1-4 1st DT liens risk ratings
Pass	$	87,716	$	274,083	$	141,996	$	37,081	$	31,437	$	127,661	$	—	$	3,414	$	703,388
Special Mention	—		—		—		284		3,316		4,954		—		420		8,974
Substandard	—		296		—		—		1,050		4,510		—		472		6,328
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total SFR 1st DT liens	$	87,716	$	274,379	$	141,996	$	37,365	$	35,803	$	137,125	$	—	$	4,306	$	718,690

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	Term Loans Amortized Cost Basis by Origination Year – As of June 30, 2022
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Consumer loans:
SFR HELOCs and Junior Liens
Pass	$	424	$	—	$	—	$	—	$	—	$	156	$	367,648	$	8,860	$	377,088
Special Mention	—		—		—		—		—		50		2,730		264		3,044
Substandard	—		—		—		—		—		—		3,791		890		4,681
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total SFR HELOCs and Junior Liens	$	424	$	—	$	—	$	—	$	—	$	206	$	374,169	$	10,014	$	384,813




Consumer loans:
Other risk ratings
Pass	$	7,929	$	15,101	$	12,241	$	13,438	$	6,472	$	2,452	$	834	$	—	$	58,467
Special Mention	—		—		99		155		191		161		66		—		672
Substandard	1		—		53		87		90		87		29		—		347
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total other consumer loans	$	7,930	$	15,101	$	12,393	$	13,680	$	6,753	$	2,700	$	929	$	—	$	59,486


Commercial and industrial loans:
Commercial and industrial risk ratings
Pass	$	111,414	$	88,509	$	32,281	$	29,168	$	9,402	$	13,044	$	218,448	$	1,002	$	503,268
Special Mention	—		95		24		1,770		100		53		193		—		2,235
Substandard	—		—		—		145		35		1,140		733		129		2,182
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total commercial and industrial loans	$	111,414	$	88,604	$	32,305	$	31,083	$	9,537	$	14,237	$	219,374	$	1,131	$	507,685


Construction loans:
Construction risk ratings
Pass	$	24,931	$	85,165	$	105,793	$	77,674	$	3,028	$	5,333	$	—	$	—	$	301,924
Special Mention	—		—		—		11,504		—		—		—		—		11,504
Substandard	—		—		—		85		—		133		—		—		218
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total construction loans	$	24,931	$	85,165	$	105,793	$	89,263	$	3,028	$	5,466	$	—	$	—	$	313,646


Agriculture production loans:
Agriculture production risk ratings
Pass	$	304	$	2,759	$	1,509	$	1,642	$	3,158	$	1,300	$	46,337	$	—	$	57,009
Special Mention	—		—		1,804		—		123		35		6,440		—		8,402
Substandard	—		—		—		—		—		—		5,962		—		5,962
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total agriculture production loans	$	304	$	2,759	$	3,313	$	1,642	$	3,281	$	1,335	$	58,739	$	—	$	71,373

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	Term Loans Amortized Cost Basis by Origination Year – As of June 30, 2022
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Leases:
Lease risk ratings
Pass	$	7,835	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$7,835
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total leases	$	7,835	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	7,835




Total loans outstanding:
Risk ratings
Pass	$	733,246	$	1,303,507	$	684,606	$	549,657	$	382,499	$	1,447,652	$	846,338	$	13,276	$	5,960,781
Special Mention	—		14,439		2,165		22,420		5,692		35,733		24,686		684		105,819
Substandard	1		2,019		1,205		2,186		5,317		22,733		11,869		1,491		46,821
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total loans outstanding	$	733,247	$	1,319,965	$	687,976	$	574,263	$	393,508	$	1,506,118	$	882,893	$	15,451	$	6,113,421


	Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2021
(in thousands)	2021		2020		2019		2018		2016		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Commercial real estate:
CRE non-owner occupied risk ratings
Pass	$	275,305	$	127,299	$	199,764	$	133,046	$	224,581	$	543,430	$	49,899	$	—	$	1,553,324
Special Mention	—		—		8,386		399		4,390		20,612		1,732		—		35,519
Substandard	—		—		—		1,382		739		12,177		—		—		14,298
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total CRE non-owner occupied risk ratings	$	275,305	$	127,299	$	208,150	$	134,827	$	229,710	$	576,219	$	51,631	$	—	$	1,603,141


Commercial real estate:
CRE owner occupied risk ratings
Pass	$	178,092	$	104,571	$	63,979	$	48,721	$	55,399	$	203,431	$	22,745	$	—	$	676,938
Special Mention	15,515		—		—		289		2,964		3,833		—		—		22,601
Substandard	—		—		858		1,214		455		4,241		—		—		6,768
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total CRE owner occupied risk ratings	$	193,607	$	104,571	$	64,837	$	50,224	$	58,818	$	211,505	$	22,745	$	—	$	706,307


Commercial real estate:
Multifamily risk ratings
Pass	$	278,942	$	100,752	$	71,822	$	109,374	$	85,932	$	146,984	$	25,236	$	—	$	819,042
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		4,305		—		—		153		—		—		4,458
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total multifamily loans	$	278,942	$	100,752	$	76,127	$	109,374	$	85,932	$	147,137	$	25,236	$	—	$	823,500

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	Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2021
(in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Commercial real estate:
Farmland risk ratings
Pass	$	43,601	$	17,399	$	20,223	$	15,119	$	9,129	$	18,455	$	37,612	$	—	$	161,538
Special Mention	—		—		—		—		1,197		2,519		1,491		—		5,207
Substandard	—		—		2,895		—		578		1,371		1,517		—		6,361
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total farmland loans	$	43,601	$	17,399	$	23,118	$	15,119	$	10,904	$	22,345	$	40,620	$	—	$	173,106


Consumer loans:
SFR 1-4 1st DT liens risk ratings
Pass	$	268,743	$	159,860	$	40,661	$	30,880	$	36,197	$	113,519	$	—	$	3,527	$	653,387
Special Mention	—		—		286		3,282		416		1,476		—		383		5,843
Substandard	1,103		—		—		1,089		256		4,758		—		524		7,730
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total SFR 1st DT liens	$	269,846	$	159,860	$	40,947	$	35,251	$	36,869	$	119,753	$	—	$	4,434	$	666,960


Consumer loans:
SFR HELOCs and Junior Liens
Pass	$	494	$	—	$	—	$	—	$	—	$	185	$	317,381	$	9,675	$	327,735
Special Mention	—		—		—		—		—		53		3,655		832		4,540
Substandard	—		—		—		—		—		2		4,164		1,072		5,238
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total SFR HELOCs and Junior Liens	$	494	$	—	$	—	$	—	$	—	$	240	$	325,200	$	11,579	$	337,513


Consumer loans:
Other risk ratings
Pass	$	20,920	$	15,939	$	17,316	$	8,016	$	2,137	$	1,079	$	612	$	—	$	66,019
Special Mention	—		46		157		233		98		51		69		—		654
Substandard	—		53		96		94		67		85		10		—		405
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total other consumer loans	$	20,920	$	16,038	$	17,569	$	8,343	$	2,302	$	1,215	$	691	$	—	$	67,078


Commercial and industrial loans:
Commercial and industrial risk ratings
Pass	$	92,972	$	17,933	$	27,335	$	11,335	$	6,355	$	6,774	$	89,358	$	860	$	252,922
Special Mention	—		2,417		69		152		71		80		116		—		2,905
Substandard	—		—		146		152		804		414		1,832		180		3,528
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total commercial and industrial loans	$	92,972	$	20,350	$	27,550	$	11,639	$	7,230	$	7,268	$	91,306	$	1,040	$	259,355

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	Term Loans Amortized Cost Basis by Origination Year – As of December 31, 2021
(in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Construction loans:
Construction risk ratings
Pass	$	66,318	$	79,567	$	58,383	$	4,849	$	1,716	$	8,148	$	—	$	—	$	218,981
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	2,675		472		—		—		—		153		—		—		3,300
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total construction loans	$	68,993	$	80,039	$	58,383	$	4,849	$	1,716	$	8,301	$	—	$	—	$	222,281


Agriculture production loans:
Agriculture production risk ratings
Pass	$	2,068	$	878	$	1,393	$	801	$	940	$	853	$	43,686	$	—	$	50,619
Special Mention	—		—		—		150		—		42		—		—		192
Substandard	—		—		—		—		—		—		—		—		—
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total agriculture production loans	$	2,068	$	878	$	1,393	$	951	$	940	$	895	$	43,686	$	—	$	50,811


Leases:
Lease risk ratings
Pass	$	6,572	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	6,572
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total leases	$	6,572	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	6,572


Total loans outstanding:
Risk ratings
Pass	$	1,234,027	$	624,198	$	500,876	$	362,141	$	422,386	$	1,042,858	$	586,529	$	14,062	$	4,787,077
Special Mention	15,515		2,463		8,898		4,505		9,136		28,666		7,063		1,215		77,461
Substandard	3,778		525		8,300		3,931		2,899		23,354		7,523		1,776		52,086
Doubtful/Loss	—		—		—		—		—		—		—		—		—
Total loans outstanding	$	1,253,320	$	627,186	$	518,074	$	370,577	$	434,421	$	1,094,878	$	601,115	$	17,053	$	4,916,624

Table of Contents

The following table shows the ending balance of current and past due originated loans by loan category as of the date indicated:


	Analysis of Past Due Loans - As of June 30, 2022
(in thousands)	30-59 days		60-89 days		> 90 days		Total Past Due Loans		Current		Total
Commercial real estate:
CRE non-owner occupied	$	—	$	—	$	1,222	$	1,222	$	1,992,626	$	1,993,848
CRE owner occupied	75		111		273		459		933,130		933,589
Multifamily	—		—		—		—		869,970		869,970
Farmland	335		—		—		335		252,151		252,486
Total commercial real estate loans	410		111		1,495		2,016		4,047,877		4,049,893
Consumer:
SFR 1-4 1st DT liens	76		387		291		754		717,936		718,690
SFR HELOCs and junior liens	858		396		915		2,169		382,644		384,813
Other	194		39		86		319		59,167		59,486
Total consumer loans	1,128		822		1,292		3,242		1,159,747		1,162,989
Commercial and industrial	58		282		150		490		507,195		507,685
Construction	—		84		—		84		313,562		313,646
Agriculture production	88		—		—		88		71,285		71,373
Leases	—		—		—		—		7,835		7,835
Total	$	1,684	$	1,299	$	2,937	$	5,920	$	6,107,501	$	6,113,421


	Analysis of Past Due Loans - As of December 31, 2021
(in thousands)	30-59 days		60-89 days		> 90 days		Total Past Due Loans		Current		Total
Commercial real estate:
CRE non-owner occupied	$	226	$	37	$	—	$	263	$	1,602,878	$	1,603,141
CRE owner occupied	271		127		273		671		705,636		706,307
Multifamily	—		—		—		—		823,500		823,500
Farmland	—		—		575		575		172,531		173,106
Total commercial real estate loans	497		164		848		1,509		3,304,545		3,306,054
Consumer:
SFR 1-4 1st DT liens	—		13		362		375		666,585		666,960
SFR HELOCs and junior liens	36		361		1,212		1,609		335,904		337,513
Other	109		7		28		144		66,934		67,078
Total consumer loans	145		381		1,602		2,128		1,069,423		1,071,551
Commercial and industrial	146		245		166		557		258,798		259,355
Construction	—		90		—		90		222,191		222,281
Agriculture production	48		—		—		48		50,763		50,811
Leases	—		—		—		—		6,572		6,572
Total	$	836	$	880	$	2,616	$	4,332	$	4,912,292	$	4,916,624

Table of Contents

The following table shows the ending balance of non accrual loans by loan category as of the date indicated:


	Non Accrual Loans
	As of June 30, 2022						As of December 31, 2021
(in thousands)	Non accrual with no allowance for credit losses		Total non accrual		Past due 90 days or more and still accruing		Non accrual with no allowance for credit losses		Total non accrual		Past due 90 days or more and still accruing
Commercial real estate:
CRE non-owner occupied	$	2,161	$	2,161	$	—	$	7,899	$	7,899	$	—
CRE owner occupied	1,441		1,441		—		4,763		5,036		—
Multifamily	140		140		—		4,457		4,457		—
Farmland	363		363		—		452		3,020		—
Total commercial real estate loans	4,105		4,105		—		17,571		20,412		—
Consumer:
SFR 1-4 1st DT liens	3,323		3,323		—		3,594		3,595		—
SFR HELOCs and junior liens	2,879		3,315		—		3,285		3,801		—
Other	30		108		—		48		71		—
Total consumer loans	6,232		6,746		—		6,927		7,467		—
Commercial and industrial	539		954		—		1,904		2,416		—
Construction	120		120		—		15		55		—
Agriculture production	—		—		—		—		—		—
Leases	—		—		—		—		—		—
Sub-total	10,996		11,925		—		26,417		30,350		—
Less: Guaranteed loans	(115)		—		—		(713)		(775)
Total, net	$	10,881	$	11,925	$	—	$	25,704	$	29,575	$	—

Interest income on non accrual loans that would have been recognized during the three months ended June 30, 2022 and 2021, if all such loans had been current in accordance with their original terms, totaled $237,000 and $524,000, respectively. Interest income actually recognized on these originated loans during the three months ended June 30, 2022 and 2021 was $6,000 and $159,000, respectively.

Interest income on non accrual loans that would have been recognized during the six months ended June 30, 2022 and 2021, if all such loans had been current in accordance with their original terms, totaled $404,000 and $1,060,000, respectively. Interest income actually recognized on these originated loans during the six months ended June 30, 2022 and 2021 was $13,000 and $176,000, respectively.

Table of Contents

The following tables present the amortized cost basis of collateral dependent loans by class of loans as of the following periods:


	As of June 30, 2022
(in thousands)	Retail		Office		Warehouse		Other		Multifamily		Farmland		SFR-1st Deed		SFR-2nd Deed		Automobile/Truck		A/R and Inventory		Equipment		Total
Commercial real estate:
CRE non-owner occupied	$	1,060	$	104	$	—	$	997	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	2,161
CRE owner occupied	273		—		1,168		—		—		—		—		—		—		—		—		1,441
Multifamily	—		—		—		—		140		—		—		—		—		—		—		140
Farmland	—		—		—		—		—		363		—		—		—		—		—		363
Total commercial real estate loans	1,333		104		1,168		997		140		363		—		—		—		—		—		4,105
Consumer:
SFR 1-4 1st DT liens	—		—		—		—		—		—		3,323		—		—		—		—		3,323
SFR HELOCs and junior liens	—		—		—		—		—		—		1,433		1,337		—		—		—		2,770
Other	—		—		—		27		—		—		—		—		56		—		16		99
Total consumer loans	—		—		—		27		—		—		4,756		1,337		56		—		16		6,192
Commercial and industrial	—		—		—		—		—		—		—		—		—		838		93		931
Construction	—		—		—		—		—		—		122		—		—		—		—		122
Agriculture production	—		—		—		—		—		—		—		—		—		—		—		—
Leases	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	1,333	$	104	$	1,168	$	1,024	$	140	$	363	$	4,878	$	1,337	$	56	$	838	$	109	$	11,350


	As of December 31, 2021
(in thousands)	Retail		Office		Warehouse		Other		Multifamily			Farmland		SFR -1st Deed		SFR -2nd Deed		Automobile/Truck		A/R and Inventory		Equipment		Total
Commercial real estate:
CRE non-owner occupied	$	2,591	$	1,253	$	1,545	$	7,272	$	—		$	—	$	—	$	—	$	—	$	—	$	—	$	12,661
CRE owner occupied	—		—		—		—		—			—		—		—		—		—		—		—
Multifamily	—		—		—		—		4,458			—		—		—		—		—		—		4,458
Farmland	—		—		—		—		—		—	1,027		—		—		—		—		—		1,027
Total commercial real estate loans	2,591		1,253		1,545		7,272		4,458			1,027		—		—		—		—		—		18,146
Consumer:
SFR 1-4 1st DT liens	—		—		—		—		—			—		3,589		—		—		—		—		3,589
SFR HELOCs and junior liens	—		—		—		—		—			—		1,649		1,636		—		—		—		3,285
Other	—		—		—		43		—			—		—		—		5		—		5		53
Total consumer loans	—		—		—		43		—			—		5,238		1,636		5		—		5		6,927
Commercial and industrial	—		—		—		—		—			—		—		—		—		2,162		112		2,274
Construction	—		—		—		—		—			—		15		—		—		—		—		15
Agriculture production	—		—		—		—		—			—		—		—		—		—		—		—
Leases	—		—		—		—		—			—		—		—		—		—		—		—
Total	$	2,591	$	1,253	$	1,545	$	7,315	$	4,458		$	1,027	$	5,253	$	1,636	$	5	$	2,162	$	117	$	27,362

Table of Contents

The following tables show certain information regarding TDRs that occurred during the periods indicated:


	TDR information for the three months ended June 30, 2022
(dollars in thousands)	Number	Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision		Number that defaulted during the period	Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Commercial real estate:
CRE non-owner occupied	—	$	—	$	—	$	—	—	$	—	$	—
CRE owner occupied	—	—		—		—		—	—		—
Multifamily	—	—		—		—		—	—		—
Farmland	—	—		—		—		—	—		—
Total commercial real estate loans	—	—		—		—		—	—		—
Consumer:
SFR 1-4 1st DT liens	—	—		—		—		—	—		—
SFR HELOCs and junior liens	—	—		—		—		2	146		—
Other	—	—		—		—		—	—		—
Total consumer loans	—	—		—		—		2	146		—
Commercial and industrial	—	—		—		—		1	22		—
Construction	—	—		—		—		—	—		—
Agriculture production	—	—		—		—		—	—		—
Leases	—	—		—		—		—	—		—
Total	—	$	—	$	—	$	—	3	$	168	$	—


	TDR information for the three months ended June 30, 2021
(dollars in thousands)	Number	Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision		Number that defaulted during the period	Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Commercial real estate:
CRE non-owner occupied	1	$	706	$	706	$	706	—	$	—	$	—
CRE owner occupied	—	—		—		—		—	—		—
Multifamily	—	—		—		—		—	—		—
Farmland	—	—		—		—		—	—		—
Total commercial real estate loans	1	706		706		706		—	—		—
Consumer:
SFR 1-4 1st DT liens	—	—		—		—		—	—		—
SFR HELOCs and junior liens	—	—		—		—		—	—		—
Other	—	—		—		—		—	—		—
Total consumer loans	—	—		—		—		—	—		—
Commercial and industrial	2	2,000		2,000		293		—	—		—
Construction	—	—		—		—		—	—		—
Agriculture production	—	—		—		—		—	—		—
Leases	—	—		—		—		—	—		—
Total	3	$	2,706	$	2,706	$	999	—	$	—	$	—

Table of Contents


	TDR Information for the six months ended June 30, 2022
(dollars in thousands)	Number	Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision		Number that defaulted during the period	Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Commercial real estate:
CRE non-owner occupied	—	$	—	$	—	$	—	—	$	—	$	—
CRE owner occupied	—	—		—		—		—	—		—
Multifamily	—	—		—		—		—	—		—
Farmland	3	1,228		1,440		—		—	—		—
Total commercial real estate loans	3	1,228		1,440		—		—	—		—
Consumer:
SFR 1-4 1st DT liens	—	—		—		—		—	—		—
SFR HELOCs and junior liens	—	—		—		—		3	231		—
Other	—	—		—		—		—	—		—
Total consumer loans	—	—		—		—		3	231		—
Commercial and industrial	—	—		—		—		1	22		—
Construction	—	—		—		—		—	—		—
Agriculture production	—	—		—		—		—	—		—
Leases	—	—		—		—		—	—		—
Total	3	$	1,228	$	1,440	$	—	4	$	253	$	—


	TDR Information for the six months ended June 30, 2021
(dollars in thousands)	Number	Pre-mod outstanding principal balance		Post-mod outstanding principal balance		Financial impact due to TDR taken as additional provision		Number that defaulted during the period	Recorded investment of TDRs that defaulted during the period		Financial impact due to the default of previous TDR taken as charge- offs or additional provisions
Commercial real estate:
CRE non-owner occupied	2	$	1,023	$	1,018	$	1,020	—	$	—	$	—
CRE owner occupied	1	740		742		742		—	—		—
Multifamily	—	—		—		—		—	—		—
Farmland	—	—		—		—		3	847		—
Total commercial real estate loans	3	1,763		1,760		1,762		3	847		—
Consumer:
SFR 1-4 1st DT liens	—	—		—		—		—	—		—
SFR HELOCs and junior liens	—	—		—		—		—	—		—
Other	—	—		—		—		—	—		—
Total consumer loans	—	—		—		—		—	—		—
Commercial and industrial	5	2,316		2,310		603		1	247		—
Construction	—	—		—		—		—	—		—
Agriculture production	—	—		—		—		—	—		—
Leases	—	—		—		—		—	—		—
Total	8	$	4,079	$	4,070	$	2,365	4	$	1,094	$	—

Table of Contents

The Company also modified the terms of select loans in an effort to assist borrowers that were not related to the COVID-19 pandemic. If the borrower was experiencing financial difficulty and a concession was granted, the Company considered such modifications as troubled debt restructurings. Modifications classified as TDRs can include one or a combination of the following: rate modifications, term extensions, interest only modifications, either temporary or long-term, payment modifications, and collateral substitutions/additions. The objective of the modifications was to increase loan repayments by customers and thereby reduce net charge-offs. The modified loans are included in impaired loans for purposes of determining the level of the allowance for credit losses.

For all new TDRs, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral dependent, the impairment is measured on the net present value difference between the expected cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above.

Typically if a TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting from default of previously modified TDR’s are noted above. Loans that defaulted within the twelve month period subsequent to modification were not considered significant for financial reporting purposes.

Note 6 - Leases

The Company records a ROUA on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company also records a lease liability on the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is lessee of real estate property for branches, ATM locations, and general administration and operations. The Company has elected not to include short-term leases (i.e. leases with initial terms of 12 month or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, such as changes in the consumer price index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes and insurance were unknown and not determinable at lease commencement and therefore, were not included in the determination of the Company’s ROUA or lease liability.

The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the amount of lease liability and adjusted for prepaid or accrued lease payments, remaining lease incentives, unamortized direct costs (if any), and impairment (if any).

The following table presents the components of lease expense for the periods ended:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Operating lease cost	$	1,469	$	1,267	$	2,788	$	2,526
Short-term lease cost	80		61		133		122
Variable lease cost	7		(1)		9		(3)
Sublease income	—		(11)		—		(24)
Total lease cost	$	1,556	$	1,316	$	2,930	$	2,621

The following table presents supplemental cash flow information related to leases for the periods ended:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	1,523	$	1,226	$	2,815	$	2,430
ROUA obtained in exchange for operating lease liabilities	$	—	$	—	$	3,867	$	1,308

Table of Contents

The following table presents the weighted average operating lease term and discount rate as of the period ended:


	June 30,
	2022		2021
Weighted-average remaining lease term (years)	8.7		9.8
Weighted-average discount rate	2.91	%	3.03	%

At June 30, 2022, future expected operating lease payments are as follows:


(in thousands)
Periods ending December 31,
2022	$	2,859
2023	5,148
2024	4,697
2025	4,017
2026	3,612
Thereafter	13,378
	33,711
Discount for present value of expected cash flows	(4,428)
Lease liability at June 30, 2022	$	29,283

Note 7 - Deposits

A summary of the balances of deposits follows:


(in thousands)	June 30, 2022		December 31, 2021
Noninterest-bearing demand	$	3,604,237	$	2,979,882
Interest-bearing demand	1,796,580		1,568,682
Savings	3,028,787		2,520,959
Time certificates, $250,000 or more	49,908		44,652
Other time certificates	277,263		252,984
Total deposits	$	8,756,775	$	7,367,159

Certificate of deposit balances of zero and $1,000,000 from the State of California were included in time certificates, over $250,000, at June 30, 2022 and December 31, 2021, respectively. The Company participated in a deposit program offered by the State of California whereby the State made deposits at the Company’s request subject to collateral and credit worthiness constraints, generally more favorable than other wholesale funding sources available to the Company. Overdrawn deposit balances of $1,257,000 and $2,324,000 were classified as consumer loans at June 30, 2022 and December 31, 2021, respectively.

Note 8 - Subordinated Debentures

The following table summarizes the terms and recorded balances of each debenture as of the date indicated (dollars in thousands):


				Coupon Rate (Variable) 3 mo. LIBOR +		June 30, 2022				December 31, 2021
Subordinated Debt Series	Maturity Date	Face Value				Current Coupon Rate		Recorded Book Value		Recorded Book Value
TriCo Cap Trust I	10/7/2033	$	20,619	3.05	%	4.09	%	$	20,619	$	20,619
TriCo Cap Trust II	7/23/2034	20,619		2.55	%	3.73	%	20,619		20,619
North Valley Trust II	4/24/2033	6,186		3.25	%	4.54	%	5,454		5,403
North Valley Trust III	7/23/2034	5,155		2.80	%	3.98	%	4,338		4,291
North Valley Trust IV	3/15/2036	10,310		1.33	%	3.16	%	7,274		7,147
VRB Subordinated - 6%	3/29/2029	16,000		Fixed		6.00	%	17,280		—
VRB Subordinated - 5%	8/27/2035	20,000		Fixed		5.00	%	25,419		—
		$	98,889					$	101,003	$	58,079

Table of Contents

The VRB - 6% Subordinated Debt issuance has a fixed rate of 6.00% through March 29, 2024, then indexed to the three-month LIBOR plus 3.5% through the maturity date. The VRB - 5% Subordinated Debt issuance is fixed at 5.00% through August 27, 2025, then indexed to the three-month LIBOR plus 4.9% through the maturity date.

Note 9 - Commitments and Contingencies

The following table presents a summary of the Bank’s commitments and contingent liabilities:


(in thousands)	June 30, 2022		December 31, 2021
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans	$	620,564	$	409,950
Consumer loans	713,831		628,791
Real estate mortgage loans	417,232		333,764
Real estate construction loans	289,964		213,563
Standby letters of credit	38,633		21,871
Deposit account overdraft privilege	123,278		125,670

Note 10 - Shareholders’ Equity

Dividends Paid

The Bank paid to the Company cash dividends in the aggregate amounts of $27,723,000 and $8,367,000 during the three months ended June 30, 2022 and 2021, respectively, and $35,505,000 and $16,139,000, respectively, during the equivalent six month periods then ended. The Bank is regulated by the FDIC and the DFPI. Absent approval from the Commissioner of the DFPI, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period.

Stock Repurchase Plan

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 2021 Repurchase Plan has no expiration date (in accordance with applicable laws and regulations) and during the three and six month periods ending June 30, 2022, the Company repurchased 526,749 shares with a market value of $21,750,000, respectively. During the three and six month periods ending June 30, 2021, the Company repurchased 45,354 shares with a market value of $2,101,000. As of June 30, 2022, approximately 1,410,000 shares remained available for repurchase under the 2021 Repurchase Plan.

In connection with approval of the 2021 Repurchase Plan, the Company’s previous repurchase program adopted on November 12, 2019 (the 2019 Repurchase Plan) was terminated. Under the 2019 Repurchase Plan, the Company repurchased 223 shares during the six months ended June 30, 2021.

Stock Repurchased Under Equity Compensation Plans

The Company's shareholder-approved equity compensation plans permit award recipients the option tender recently vested shares in lieu of cash for the payment of exercise price, if applicable, and the tax withholding on such shares. During the three months ended June 30, 2022 and 2021, equity award holders tendered 3,687 and zero shares, respectively, of the Company’s common stock in connection with option exercises. During the six months ended June 30, 2022 and 2021, equity award holders tendered 5,019 and zero shares, respectively, of the Company’s common stock in connection with option exercises. Equity holders also tendered 14,007 and 9,660 shares in connection with the tax withholding requirements of other share based awards during the three months ended June 30, 2022 and 2021, respectively, and 14,007 and 9,730 during the six months ended June 30, 2022 and 2021, respectively. In total, shares of the Company's common stock tendered had market values of $775,000 and $450,000 during the quarters ended June 30, 2022 and 2021, respectively, and $830,000 and $452,000 during the year to date periods ended June 30, 2022 and 2021. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day an option is exercised or the share based award vests. Stock repurchased under equity incentive plans are not included in the total of stock repurchased under the 2021 or 2019 Stock Repurchase Plans.

Note 11 - Stock Options and Other Equity-Based Incentive Instruments

On April 16, 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (2019 Plan) which was approved by shareholders on May 21, 2019. The 2019 Plan allows for up to 1,500,000 shares to be issued in connection with equity-based incentives. The Company’s 2009 Equity Incentive Plan (2009 Plan) expired on March 26, 2019. While no new awards can be granted under the 2009 Plan, existing grants continue to be governed by the terms, conditions and procedures set forth in any applicable award agreement.

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Stock option activity during the six months ended June 30, 2022 is summarized in the following table:


	Number of Shares	Weighted Average Exercise Price
Outstanding at December 31, 2021	78,825	$	19.28
Options granted	—	—
Options exercised	(15,325)	16.69
Options forfeited	—	—
Outstanding at June 30, 2022	63,500	$	19.90

The following table shows the number, weighted-average exercise price, intrinsic value, and weighted average remaining contractual life of options exercisable, options not yet exercisable and total options outstanding as of June 30, 2022:


	Currently Exercisable		Currently Not Exercisable		Total Outstanding
Number of options	63,500		—		63,500
Weighted average exercise price	$	19.90	$	—	$	19.90
Intrinsic value (in thousands)	$	1,634	$	—	$	1,634
Weighted average remaining contractual term (yrs.)	1.0		0 years		1.0

As of June 30, 2022 all options outstanding are fully vested and are expected to be exercised prior to expiration. The Company did not modify any option grants during 2021 or the six months ended June 30, 2022.

Activity related to restricted stock unit awards during the six months ended June 30, 2022 is summarized in the following table:


	Service Condition Vesting RSUs	Market Plus Service Condition Vesting RSUs
Outstanding at December 31, 2021	103,517	99,763
RSUs granted	41,617	—
RSUs added through dividend and performance credits	1,277	—
RSUs released	(45,482)	—
RSUs forfeited/expired	(1,375)	(1,572)
Outstanding at June 30, 2022	99,554	98,191

The 99,554 of service condition vesting RSUs outstanding as of June 30, 2022 include a feature whereby each RSU outstanding is credited with a dividend amount equal to any common stock cash dividend declared and paid, and the credited amount is divided by the closing price of the Company’s stock on the dividend payable date to arrive at an additional amount of RSUs outstanding under the original grant. The dividend credits follow the same vesting requirements as the RSU awards and are not considered participating securities. The 99,554 of service condition vesting RSUs outstanding as of June 30, 2022 are expected to vest, and be released, on a weighted-average basis, over the next 0.9 years. The Company expects to recognize $3,351,000 of pre-tax compensation costs related to these service condition vesting RSUs between June 30, 2022 and their vesting dates. The Company did not modify any service condition vesting RSUs during 2021 or during the six months ended June 30, 2022.

The 98,191 of market plus service condition vesting RSUs outstanding as of June 30, 2022 are expected to vest, and be released, on a weighted-average basis, over the next 1.0 years. The Company expects to recognize $1,090,000 of pre-tax compensation costs related to these RSUs between June 30, 2022 and their vesting dates. As of June 30, 2022, the number of market plus service condition vesting RSUs outstanding that will actually vest, and be released, may be reduced to zero or increased to 147,287 depending on the total return of the Company’s common stock versus the total return of an index of bank stocks from the grant date to the vesting date. The Company did not modify any market plus service condition vesting RSUs during 2021 or during the six months ended June 30, 2022.

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Note 12 - Non-interest Income and Expense

The following table summarizes the Company’s non-interest income for the periods indicated:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
ATM and interchange fees	$	6,984	$	6,558	$	13,227	$	12,419
Service charges on deposit accounts	4,163		3,462		7,997		6,731
Other service fees	1,279		914		2,161		1,785
Mortgage banking service fees	482		467		945		930
Change in value of mortgage servicing rights	136		(471)		410		(459)
Total service charges and fees	13,044		10,930		24,740		21,406
Increase in cash value of life insurance	752		745		1,390		1,418
Asset management and commission income	1,039		947		1,926		1,781
Gain on sale of loans	542		2,847		1,788		6,094
Lease brokerage income	238		249		396		359
Sale of customer checks	441		116		545		235
Gain on sale of investment securities	—		—		—		—
(Loss) gain on marketable equity securities	(94)		8		(231)		(45)
Other	468		115		972		819
Total other non-interest income	3,386		5,027		6,786		10,661
Total non-interest income	$	16,430	$	15,957	$	31,526	$	32,067

The components of non-interest expense were as follows:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Base salaries, net of deferred loan origination costs	$	22,169	$	17,537	$	40,385	$	33,048
Incentive compensation	4,282		4,322		6,865		7,902
Benefits and other compensation costs	6,491		5,222		12,463		11,461
Total salaries and benefits expense	32,942		27,081		59,713		52,411
Occupancy	3,996		3,700		7,571		7,426
Data processing and software	3,596		3,201		7,109		6,403
Equipment	1,453		1,207		2,786		2,724
Intangible amortization	1,702		1,431		2,930		2,862
Advertising	818		734		1,455		1,114
ATM and POS network charges	1,781		1,551		3,156		2,797
Professional fees	1,233		1,046		2,109		1,640
Telecommunications	564		564		1,085		1,145
Regulatory assessments and insurance	779		618		1,499		1,230
Merger and acquisition expense	2,221		—		6,253		—
Postage	313		124		541		322
Operational losses	456		212		273		421
Courier service	486		288		900		582
Gain on sale or acquisition of foreclosed assets	(98)		(15)		(98)		(66)
Loss (gain) on disposal of fixed assets	5		(426)		(1,073)		(426)
Other miscellaneous expense	4,017		2,855		6,502		5,204
Total other non-interest expense	23,322		17,090		42,998		33,378
Total non-interest expense	$	56,264	$	44,171	$	102,711	$	85,789

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Note 13 - Earnings Per Share

Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock units (RSUs), and are determined using the treasury stock method. Earnings per share have been computed based on the following:


	Three months ended June 30,
(in thousands)	2022		2021
Net income	$	31,364	$	28,362
Average number of common shares outstanding	33,561		29,719
Effect of dilutive stock options and restricted stock	144		185
Average number of common shares outstanding used to calculate diluted earnings per share	33,705		29,904
Options excluded from diluted earnings per share because of their antidilutive effect	—		—


	Six months ended June 30,
(in thousands)	2022		2021
Net income	$	51,738	$	62,011
Average number of common shares outstanding	31,815		29,723
Effect of dilutive stock options and restricted stock	148		181
Average number of common shares outstanding used to calculate diluted earnings per share	31,963		29,904
Options excluded from diluted earnings per share because of their antidilutive effect	—		—

Note 14 – Comprehensive Income (Loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet identified as accumulated other comprehensive income (AOCI), such items, along with net income, are components of other comprehensive income (loss) (OCI).

The components of other comprehensive income (loss) and related tax effects are as follows:

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	Three months ended June 30,				Six months ended June 30, 2022
(in thousands)	2022		2021		2022		2021
Unrealized holding losses (gains) on available for sale securities before reclassifications	$	(97,408)	$	7,392	$	(208,710)	$	(4,945)
Amounts reclassified out of AOCI:
Realized gains on debt securities	—		—		—		—



Unrealized holding losses (gains) on available for sale securities after reclassifications	(97,408)		7,392		(208,710)		(4,945)
Tax effect	28,797		(2,186)		61,702		1,461
Unrealized holding losses (gains) on available for sale securities, net of tax	(68,611)		5,206		(147,008)		(3,484)
Change in unfunded status of the supplemental retirement plans before reclassifications	5		(49)		92		(98)
Amounts reclassified out of AOCI:
Amortization of prior service cost	(7)		(15)		(14)		(29)
Amortization of actuarial losses	2		64		4		127

Total amounts reclassified out of accumulated other comprehensive (loss) income	(5)		49		(10)		98
Change in unfunded status of the supplemental retirement plans after reclassifications	—		—		82		—
Tax effect			—		(24)		—
Change in unfunded status of the supplemental retirement plans, net of tax	—		—		58		—
Change in joint beneficiary agreement liability before reclassifications	—		—		—		(629)
Tax effect	—		—		—		—
Change in joint beneficiary agreement liability before reclassifications, net of tax	—		—		—		(629)
Total other comprehensive (loss) income	$	(68,611)	$	5,206	$	(146,950)	$	(4,113)

The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:


(in thousands)	June 30, 2022		December 31, 2021
Net unrealized loss on available for sale securities	$	(208,710)	$	(392)
Tax effect	61,426		116
Unrealized holding loss on available for sale securities, net of tax	(147,284)		(276)
Unfunded status of the supplemental retirement plans	2,481		2,399
Tax effect	(733)		(709)
Unfunded status of the supplemental retirement plans, net of tax	1,748		1,690
Joint beneficiary agreement liability	(433)		(433)
Tax effect	—		—
Joint beneficiary agreement liability, net of tax	(433)		(433)
Accumulated other comprehensive (loss) income	$	(145,969)	$	981

Note 15 - Fair Value Measurement

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Marketable equity securities, debt securities available-for-sale, loans held for sale, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application impairment write-downs of individual assets.

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The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observable nature of the assumptions used to determine fair value. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Marketable equity securities and debt securities available for sale - Marketable equity securities and debt securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities classified as Level 3 during any of the periods covered in these financial statements.

Loans held for sale - Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to recurring fair value adjustments as Level 2.

Individually evaluated loans - Loans are not recorded at fair value on a recurring basis. However, from time to time, certain loans have individual risk characteristics not consistent with a pool of loans and is individually evaluated for credit reserves. Loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are typically individually evaluated. The fair value of these loans are estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the loan as nonrecurring Level 3.

Foreclosed assets - Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.

Mortgage servicing rights - Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3.

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):

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Fair value at June 30, 2022	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,706	$	2,706	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government corporations and agencies	1,536,831		—		1,536,831		—
Obligations of states and political subdivisions	303,694		—		303,694		—
Corporate bonds	7,544		—		7,544		—
Asset backed securities	434,192		—		434,192		—
Non-agency collateralized mortgage obligations	323,804		—		323,804		—
Loans held for sale	1,216		—		1,216		—
Mortgage servicing rights	6,667		—		—		6,667
Total assets measured at fair value	$	2,616,654	$	2,706	$	2,607,281	$	6,667


Fair value at December 31, 2021	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,938	$	2,938	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government corporations and agencies	1,257,389		—		1,257,389		—
Obligations of states and political subdivisions	192,244		—		192,244		—
Corporate bonds	6,756		—		6,756		—
Asset backed securities	409,552		—		409,552		—
Non-agency collateralized mortgage obligations	341,997		—		341,997		—
Loans held for sale	3,466		—		3,466		—
Mortgage servicing rights	5,874		—		—		5,874
Total assets measured at fair value	$	2,220,216	$	2,938	$	2,211,404	$	5,874

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between any levels during the six months ended June 30, 2022, or the year ended December 31, 2021.

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the time periods indicated. Had there been any transfer into or out of Level 3 during the time periods indicated, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands):


Three months ended June 30,	Beginning Balance		Transfers into (out of) Level 3	Change Included in Earnings		Issuances		Ending Balance
2022: Mortgage servicing rights	$	6,405	—	$	136	$	126	$	6,667
2021: Mortgage servicing rights	$	5,607	—	$	(471)	$	467	$	5,603


Six months ended June 30,	Beginning Balance		Transfers into (out of) Level 3	Change Included in Earnings		Issuances		Ending Balance
2022: Mortgage servicing rights	$	5,874	—	$	410	$	383	$	6,667
2021: Mortgage servicing rights	$	5,092	—	$	(459)	$	970	$	5,603

The key unobservable inputs used in determining the fair value of mortgage servicing rights are mortgage prepayment speeds and the discount rate used to discount cash projected cash flows. Generally, any significant increases in the mortgage prepayment speed and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the mortgage prepayment speed and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement).

The following table presents quantitative information about recurring Level 3 fair value measurements at June 30, 2022 and December 31, 2021:

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As of June 30, 2022:

Fair Value
(in thousands)

Valuation
Technique

Unobservable
Inputs

Range,
Weighted
Average

Mortgage Servicing Rights

6,667

Discounted cash flow

Constant prepayment rate

8% - 15%; 8.4%

Discount rate

10% - 14%; 12%

As of December 31, 2021:

Mortgage Servicing Rights

5,874

Discounted cash flow

Constant prepayment rate

11% - 15.8%; 12.5%

Discount rate

10% - 14%; 12%

The tables below present the recorded investment in assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated (in thousands):


June 30, 2022	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
Fair value:

Foreclosed assets	375		—		—		375		98
Total assets measured at fair value	$	375	$	—	$	—	$	375	$	98


December 31, 2021	Total		Level 1	Level 2	Level 3		Total Losses
Fair value:
Individually evaluated loans	$	3,683	—	—	$	3,683	$	(1,105)
Foreclosed assets	—		—	—	—		—
Total assets measured at fair value	$	3,683	—	—	$	3,683	$	(1,105)


June 30, 2021	Total		Level 1	Level 2	Level 3		Total Losses
Fair value:
Individually evaluated loans	$	4,912	—	—	$	4,912	$	(1,604)
Foreclosed assets	123		—	—	123		21
Total assets measured at fair value	$	5,035	—	—	$	5,035	$	(1,583)

The individually evaluated loan amounts above represent collateral dependent loans that have been adjusted to fair value. When the Company identifies a collateral dependent loan with unique risk characteristics, the Company evaluates the need for an allowance using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If the Company determines that the value of the loan is less than the recorded investment in the loan, the Company recognizes this impairment and adjust the carrying value of the loan to fair value through the allowance for credit losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.

The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on real estate owned for fair value adjustments based on the fair value of the real estate.

The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.

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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2022:

June 30, 2022

Fair Value
(in thousands)

Valuation
Technique

Unobservable Inputs

Range,
Weighted Average

Foreclosed assets (Residential real estate)

375

Sales comparison
approach

Adjustment for differences between
comparable sales

Not meaningful
N/A

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2021:

December 31, 2021

Fair Value
(in thousands)

Valuation
Technique

Unobservable Inputs

Range,
Weighted Average

Individually evaluated loans

3,683

Sales comparison
approach
Income approach

Adjustment for differences between
comparable sales;
Capitalization rate

Not meaningful
N/A

Fair values for financial instruments are management’s estimates of the values at which the instruments could be exchanged in a transaction between willing parties. The Company uses the exit price notion when measuring the fair value of financial instruments. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates.


	June 30, 2022				December 31, 2021
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Level 1 inputs:
Cash and due from banks	$	49,630	$	49,630	$	57,032	$	57,032
Cash at Federal Reserve and other banks	439,238		439,238		711,389		711,389
Level 2 inputs:
Securities held to maturity	176,794		171,142		199,759		208,140
Restricted equity securities	17,250		N/A		17,250		N/A

Level 3 inputs:
Loans, net	6,015,477		6,050,367		4,831,248		4,880,044
Financial liabilities:
Level 2 inputs:
Deposits	8,756,775		8,751,521		7,367,159		7,366,422
Other borrowings	35,089		35,089		50,087		50,087
Level 3 inputs:
Junior subordinated debt	101,003		106,750		58,079		57,173


(in thousands)	Contract Amount		Fair Value		Contract Amount		Fair Value
Off-balance sheet:
Level 3 inputs:
Commitments	$	2,041,591	$	20,416	$	1,586,068	$	15,861
Standby letters of credit	38,633		386		21,871		219
Overdraft privilege commitments	123,278		1,233		125,670		1,257

Note 16 - Regulatory Matters

The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s

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capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. The following tables present actual and required capital ratios as of June 30, 2022 and December 31, 2021 for the Company and the Bank under applicable Basel III Capital Rules. The minimum capital amounts presented include the minimum required capital levels as of June 30, 2022 and December 31, 2021 based on the then phased-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.


	Actual				Required for Capital Adequacy Purposes				Required to be Considered Well Capitalized
As of June 30, 2022:	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated	$	1,050,849	14.13	%	$	781,114	10.50	%	N/A		N/A
Tri Counties Bank	$	1,044,231	14.04	%	$	780,703	10.50	%	$	743,526	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	914,966	12.30	%	$	632,330	8.50	%	N/A		N/A
Tri Counties Bank	$	951,178	12.79	%	$	631,997	8.50	%	$	594,821	8.00	%
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	858,486	11.54	%	$	520,743	7.00	%	N/A		N/A
Tri Counties Bank	$	951,178	12.79	%	$	520,468	7.00	%	$	483,292	6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	914,966	9.35	%	$	391,612	4.00	%	N/A		N/A
Tri Counties Bank	$	951,178	9.72	%	$	391,241	4.00	%	$	489,052	5.00	%


	Actual				Required for Capital Adequacy Purposes			Required to be Considered Well Capitalized
As of December 31, 2021:	Amount		Ratio			Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated	$	893,294	15.42	%		$	608,258	10.50	%	N/A		N/A
Tri Counties Bank	$	884,255	15.28	%		$	607,610	10.50	%	$	578,676	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	820,654	14.17	%		$	492,399	8.50	%	N/A		N/A
Tri Counties Bank	$	811,713	14.03	%		$	491,875	8.50	%	$	462,941	8.00	%
Common equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	764,319	13.19	%		$	405,505	7.00	%	N/A		N/A
Tri Counties Bank	$	811,713	14.03	%		$	405,073	7.00	%	$	376,140	6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	820,654	9.88	%		$	332,205	4.00	%	N/A		N/A
Tri Counties Bank	$	811,713	9.77	%		$	332,196	4.00	%	$	415,245	5.00	%

As of June 30, 2022 and December 31, 2021, capital levels at the Company and the Bank exceed all capital adequacy requirements under the Basel III Capital Rules. Also, at June 30, 2022 and December 31, 2021, the Bank’s capital levels exceeded the minimum amounts necessary to be considered well capitalized under the current regulatory framework for prompt corrective action.

The Basel III Capital Rules require for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the risk-based capital ratios but not the leverage ratio. At June 30, 2022, the Company and the Bank are in compliance with the capital conservation buffer requirement.

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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

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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

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.

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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.

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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		%

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	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.

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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 interest-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.

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	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.

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	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.

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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.

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.

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	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

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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.

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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.

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	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,

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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.

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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		%

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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.

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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	%

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


(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	%

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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)		%

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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.

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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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Based on the changes in interest rates occurring subsequent to December 31, 2021, the following update of the Company’s assessment of market risk as of June 30, 2022 is being provided. These updates and changes should be read in conjunction with the additional quantitative and qualitative disclosures in our Annual Report on Form 10-K for the year ended December 31, 2021.

During the quarter ended June 30, 2022, market interest rates (including many rates that serve as reference indices for variable rate loans) increased, and experienced a significant amount of volatility. This is providing a moderate lift to the loan portfolio's yield, driven by new loan originations and the approximately $875,000,000 in variable floating rate loans outstanding tied to the Wall Street Prime index. However, market competition stemming from loan to deposit ratios being at historic lows remains elevated, and approximately $2.51 billion in variable rate loans outstanding are generally tied to the 5-year US Treasury rate and subject to reprice quarterly, subsequent to the expiration of a fixed rate period of three months to five years from origination. As of June 30, 2022, the Company's loan portfolio consisted of approximately $6.1 billion in outstanding principal with a weighted average coupon rate of 4.39%, inclusive of the PPP program loans. Excluding PPP loans, the Company's loan portfolio has approximately $6.09 billion outstanding with a weighted average coupon rate of 4.40% as of June 30, 2022.

Management funds the acquisition of nearly all of its earning assets through its core deposit gathering activities. As of June 30, 2022, non-interest bearing deposits increased by approximately $21,000,000 from the trailing quarter end, and represented 41.2% of total deposits. Further, during the quarter ended June 30, 2022, the cost of interest bearing deposits were 0.05% and the cost of total deposits were 0.04%. With the intent of maximizing net interest income and maintaining healthy credit quality, management intends to continue to carefully deploy any excess liquidity and migrate certain earning assets into higher yielding categories, when available (shifting proceeds from investment security prepayment or maturity into loans, for example).

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As of June 30, 2022 the overnight Federal funds rate, the rate primarily used in these interest rate shock scenarios, was 1.58%. Based on the historical nature of these rates in the United States not falling below zero, management believes that a shock scenario that reduces interest rates below zero would not provide meaningful results and therefore, have not been modeled. These scenarios assume that 1) interest rates increase or decrease evenly (in a “ramp” fashion) over a twelve-month period and remain at the new levels beyond twelve months or 2) that interest rates change instantaneously (“shock”). The simulation results shown below assume no changes in the structure of the Company’s balance sheet over the twelve months being measured.

The following table summarizes the estimated effect on net interest income and market value of equity to changing interest rates as measured against a flat rate (no interest rate change) instantaneous parallel shock scenario over a twelve month period utilizing a interest sensitivity (GAP) analysis based on the Company's specific mix of interest earning assets and interest bearing liabilities as of June 30, 2022.

Interest Rate Risk Simulations:


Change in Interest Rates (Basis Points)	Estimated Change in Net Interest Income (NII) (as % of NII)		Estimated Change in Market Value of Equity (MVE) (as % of MVE)
+200 (shock)	1.0	%	1.4	%
+100 (shock)	0.7	%	1.8	%
+ 0 (flat)	—		—
-100 (shock)	(6.0)	%	(9.9)	%
-200 (shock)	nm		nm

Basic assumptions include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and may not be realized and, as a result, actual results will differ from our projections. More specifically, non-maturity deposit assumptions include savings accounts that reprice in the third month of the time horizon while all other non-maturity deposits are scheduled to reprice in the sixtieth month. In addition, variances in the timing, magnitude and frequency of interest rate changes, overall market conditions including volumes and pricing, and changes in management strategies, among other factors, will also result in variances between the projected and actual results.

These projections are based on the current interest rate environment and a static balance sheet mix of earning assets and interest sensitive liabilities. While market interest rates have been volatile in recent months, the impact of those changes on the Company's mix of assets and liabilities may not correlate directly to changes in the Company's net interest income or market value of equity. In addition, the Company's ability to reprice deposit costs downward in a falling interest rate scenario is generally constrained under the assumption that negative deposit rates will not be introduced.

Item 4. Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2022. Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.

During the three months ended June 30, 2022, there were no changes in our internal controls or in other factors that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

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PART II – OTHER INFORMATION

Item 1 - Legal Proceedings

Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Item 1A - Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our 2021 Annual Report on Form 10-K, which could materially affect our business, financial condition, or results of operations. In the first quarter of 2022, we identified the following additional risk factor:

Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company’s results of operations and financial condition. The macroeconomic environment in the United States is susceptible to global events and volatility in financial markets. For example, trade negotiations between the U.S. and other nations remain uncertain and could adversely impact economic and market conditions for the Company and its clients and counterparties. In addition, global demand for products may exceed supply during the economic recovery from the COVID-19 pandemic, and such shortages may cause inflation, adversely impact consumer and business confidence, and adversely affect the economy as well as the Company’s financial condition and results.

Specifically, on February 24, 2022, Russian military forces invaded Ukraine, and sustained conflict and disruption in the region is likely. Although the length, impact and outcome of the ongoing war in Ukraine is highly unpredictable, this conflict could lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, changes in consumer or purchaser preferences as well as increase in cyberattacks and espionage. The extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time. Any of the above-mentioned factors could affect our business, financial condition and operating results. Any such disruptions may also magnify the impact of other risks described in this Quarterly Report on Form 10-Q and our Form 10-K for the year ended December 31, 2021.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

The following table shows the repurchases made by the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the periods indicated:


Period	(a) Total number of shares purchased (1)	(b) Average price paid per share		(c) Total number of shares purchased as of part of publicly announced plans or programs	(d) Maximum number of shares that may yet be purchased under the plans or programs at period end (2)
April 1-30, 2022	186,819	$	38.74	182,473	1,754,210
May 1-31, 2022	227,713	41.50		224,248	1,529,962
June 1-30, 2022	129,911	44.77		120,028	1,409,934
Total	544,443			526,749

(1)Includes shares purchased by the Company’s Employee Stock Ownership Plan in open market purchases and shares tendered by employees pursuant to various other equity incentive plans. See Notes 10 and 11 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchased under equity compensation plans.

(2)Does not include shares that may be purchased by the Company’s Employee Stock Ownership Plan and pursuant to various other equity incentive plans. See Note 10 to the condensed consolidated financial statements at Item 1 of Part I of this report, for a discussion of the Company’s stock repurchase plan.

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Item 6 – Exhibits

EXHIBIT INDEX


Exhibit No.						Exhibit

2.1						Agreement and Plan of Reorganization dated as of July 27, 2021, by and between TriCo Bancshares and Valley Republic Bancorp (incorporated by reference to Exhibit in TriCo's current report on Form 8-K filed on July 28, 2021).

31.1						Rule 13a-14(a)/15d-14(a) Certification of CEO

31.2						Rule 13a-14(a)/15d-14(a) Certification of CFO

32.1						Section 1350 Certification of CEO

32.2						Section 1350 Certification of CFO

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

*Management contract or compensatory plan or arrangement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


			TRICO BANCSHARES
			(Registrant)

Date: August 8, 2022			/s/ Peter G. Wiese
			Peter G. Wiese
			Executive Vice President and Chief Financial Officer
			(Duly authorized officer and principal financial and chief accounting officer)