# TRICO BANCSHARES / (TCBK) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TRICO BANCSHARES /'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/356171/000035617123000010/tcbk-20221231.htm
Accession: 0000356171-23-000010
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/TCBK/
All MD&A years: /company/TCBK/mda/
Previous year: /company/TCBK/mda/fy2021/ (FY 2021)
Next year: /company/TCBK/mda/fy2023/ (FY 2023)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

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 consolidated financial statements of the Company and the related notes at Item 8 of this report.

In March 2022, the Company closed the acquisition of Valley Republic Bancorp. Historical periods prior to March 25, 2022 reflect results of legacy Trico Bancshares operations. Subsequent to closing, results reflect all post-acquisition activity. For further information, refer to Note 2 “Business Combinations” of the Notes to Consolidated Financial Statements.

Financial Overview

In 2022, the Company reported net income of $125,419,000, a $7,764,000 or 6.6% increase from the prior year. Earnings per share on a diluted basis for the year were $3.83, down 2.8% from the prior year. The current year net income reported was negatively impacted by acquisition-related expenses totaling $6,253,000, compared to $1,523,000 in the prior year. In 2022, net interest income was reported at $345,976,000, an increase of $74,437,000 or 27.4% from the prior year.

Net interest income on a fully tax equivalent (FTE) basis, a non-GAAP financial measure, was $347,536,000, an increase of $74,926,000, or 27.4%, from 2021. The increase in FTE net interest income reflected the benefit of a $1,352,778,000, or 17.8%, increase in average earning assets in addition to a 30 basis point increase in the FTE net interest marign to 3.88%. Average earning asset growth included an $990,559,000, or 20.3%, increase in average loans and leases and an $573,720,000, or 26.3%, increase in average securities. Average

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balances across earning asset categories reflect organic growth in addition to the late first quarter 2022 VRB acquisition. The increase in average securities was additionally driven by the redeployment of excess liquidity into securities in the first half of 2022. The net interest margin expansion was driven by the higher rate environment driving an increase in loan and lease and investment security yields, partially offset by higher cost of funds and the impact of lower accelerated PPP loan fees recognized upon forgiveness payments from the SBA in 2022.

The provision for credit losses increased $25,245,000 to $18,470,000, primarily due to the acquisition of VRB and organic loan and lease growth. The allowance for credit losses (ACL) was $105,680,000, or 1.64% of total loans and leases, at December 31, 2022, compared to $85,376,000, or 1.74% of total loans and leases, at December 31, 2021. The increase in the total ACL was primarily driven by loan and lease growth, while the overall risk profile of the loan portfolio continued to improve despite management's observation of future recessionary risks.

Noninterest income was $63,046,000, down $618,000, or 1%, from the prior year. Noninterest expense was $216,645,000, up $38,370,000, or 21.5%, from the prior year. The changes in noninterest income and noninterest expense were impacted by the VRB acquisition, completed in March 2022. Noninterest income was additionally negatively impacted by a decline in gain on sale of mortgage loans totaling of $7,238,000, to $2,342,000 for the 2022 year.

The tangible common equity to tangible assets ratio, a non-GAAP financial measure, was 7.6% at December 31, 2022, down 161 basis points from December 31, 2021, primarily due to a decrease in tangible common equity related to elevated interest rates causing an increase in accumulated other comprehensive loss, partially offset by the retention of earnings.

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TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)

[[GREPCENT_TABLE]]
[["Year ended December 31,","2022","","2021","","2020"],["Interest income","$","355,505","","","$","277,047","","","$","267,184"],["Interest expense","(9,529)","","","(5,508)","","","(9,457)"],["Net interest income","345,976","","","271,539","","","257,727"],["(Provision for) benefit from loan losses","(18,470)","","","6,775","","","(42,813)"],["Noninterest income","63,046","","","63,664","","","55,194"],["Noninterest expense","(216,645)","","","(178,275)","","","(182,758)"],["Income before income taxes","173,907","","","163,703","","","87,350"],["Provision for income taxes","(48,488)","","","(46,048)","","","(22,536)"],["Net income","$","125,419","","","$","117,655","","","$","64,814"],["Share Data"],["Earnings per share:"],["Basic","$","3.85","","","$","3.96","","","$","2.17"],["Diluted","$","3.83","","","$","3.94","","","$","2.16"],["Per share:"],["Dividends paid","$","1.10","","","$","1.00","","","$","0.88"],["Book value at period end","$","31.39","","","$","33.64","","","$","31.12"],["Tangible book value at period end (2)","$","21.76","","","$","25.80","","","$","23.09"],["Average common shares outstanding","32,584","","","29,721","","","29,917"],["Average diluted common shares outstanding","32,721","","","29,882","","","30,028"],["Shares outstanding at period end","33,332","","","29,730","","","29,727"],["Financial Ratios"],["During the period:"],["Return on average assets","1.28","%","","1.43","%","","0.91","%"],["Return on average equity","11.67","%","","12.10","%","","7.18","%"],["Net interest margin(1)","3.88","%","","3.58","%","","3.96","%"],["Efficiency ratio","52.97","%","","53.18","%","","58.40","%"],["Average equity to average assets","11.00","%","","11.84","%","","12.66","%"],["Dividend payout ratio","28.54","%","","25.26","%","","40.58","%"],["At period end:"],["Equity to assets","10.54","%","","11.61","%","","12.11","%"],["Total capital to risk-weighted assets","14.19","%","","15.42","%","","15.22","%"],["Balance Sheet Data"],["Total investments","$","2,633,269","","","$","2,427,885","","","$","1,719,102"],["Total loans","6,450,447","","","4,916,624","","","4,763,127"],["Total assets","9,930,986","","","8,614,787","","","7,639,529"],["Total non-interest bearing deposits","3,502,095","","","2,979,882","","","2,581,517"],["Total deposits","8,329,013","","","7,367,159","","","6,505,934"],["Total other borrowings","264,605","","","50,087","","","26,914"],["Total junior subordinated debt","101,040","","","58,079","","","57,635"],["Total shareholders\u2019 equity","1,046,416","","","1,000,184","","","925,114"],["Total tangible equity (2)","$","725,304","","","$","766,943","","","$","686,409"]]
[[/GREPCENT_TABLE]]

(1)Fully taxable equivalent (FTE)

(2)Tangible equity is calculated by subtracting Goodwill and Other intangible assets from total shareholders’ equity. Management believes that tangible equity is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy. Tangible book value is calculated by dividing tangible equity by shares outstanding at period end.

As TriCo Bancshares has not commenced any business operations independent of 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 and net interest income may be presented on a fully tax-equivalent (FTE) basis. The presentation of interest income and net interest income 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 within Item 7 and Item 8 of this report, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income.

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Critical Accounting Policies and Estimates

In preparing the consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.     Our most significant accounting policies and estimates and their related application are discussed below.

Allowance for Credit Losses

The Company’s method for assessing the appropriateness of the allowance for credit losses includes specific allowances for individually analyzed loans, formula allowance factors for pools of credits, and qualitative considerations which include, among other things, current and forecast economic and environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools were based on historical loss experience by product type and prior risk rating.

Management estimates the ACL 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 has 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 current expected credit 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, the pace of change in corporate bond yields, and U.S. gross domestic product.

There is a greater chance that the Company would suffer a loss from a loan that was risk rated less than satisfactory than if the loan was last graded satisfactory. As such, the proper risk grading of loans in the portfolio is important to the determination of the calculation of and determination of adequacy of the allowance for credit losses. Utilizing the historical loss data described above, the Company applies reserve rates within any unique pool based on its loss and risk grade migration. Therefore, within any given pool, a larger loss estimation factor is applied to less than satisfactory loans as compared to those that the Company last graded as satisfactory. The resulting allowance for any pool is the sum of the calculated reserves determined in this manner.

Certain loans are not included in pools of loans that are collectively evaluated. The segregation of these loans is based on the results from analysis of identified credits that meet management’s criteria for specific evaluation. These loans are first reviewed individually to determine if such loans have a unique risk profile that would warrant individual evaluation. Loans where management has concluded that it is probable that the borrower will be unable to pay all amounts due under the original contractual terms are removed from the pools of loans collectively evaluated. They are then specifically reviewed and evaluated individually by management for loss potential by evaluating sources of repayment, including collateral as applicable, and a specified allowance for credit losses is established where necessary. By definition, any loan that management has placed on non-accrual is required to be individually evaluated, however, not all individually evaluated loans need be placed on non-accrual.

Because current economic conditions and forecasts can change and future events make it inherently difficult to predict the anticipated amount of estimated credit losses on loans, management's determination of the appropriateness of the ACL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may move independently of one another, such that improvement in one or certain factors may offset deterioration in others. Management believes that the ACL was adequate as of December 31, 2022.

Other Accounting Policies and Estimates

On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to investments, mortgage servicing rights, fair value measurements, retirement plans, intangible assets and the fair value of acquired assets and liabilities. 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. The Company’s policies related to these estimates can be found in Note 1 in the financial statements at Item 8 of this report.

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

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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.

Results of Operations

Average balances, including 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, certain performance measures including interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (FTE) basis. The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results.

Net Interest Income

Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on our average interest-earning assets and the effective cost of our interest-bearing liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Risk Factors – Risks Related to Interest Rates.” Following is a summary of the Company’s net interest income for the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","2020"],["Interest income","$","355,505","","","$","277,047","","","$","267,184"],["Interest expense","(9,529)","","","(5,508)","","","(9,457)"],["Net interest income (not FTE)","345,976","","","271,539","","","257,727"],["FTE adjustment","1,560","","","1,071","","","1,069"],["Net interest income (FTE)","$","347,536","","","$","272,610","","","$","258,796"],["Net interest margin (FTE)","3.88","%","","3.58","%","","3.96","%"],["Acquired loans discount accretion:"],["Purchased loan discount accretion","$","5,465","","","$","8,091","","","$","8,171"],["Effect on average loan yield","0.09","%","","0.17","%","","0.19","%"],["Effect of purchased loan discount accretion on net interest margin (FTE)","0.06","%","","0.11","%","","0.13","%"]]
[[/GREPCENT_TABLE]]

Net interest income (FTE) during the year ended December 31, 2022 increased $74,926,000 or 27.5% to $347,536,000 compared against $272,610,000 during the year ended December 31, 2021. The increased amount of net interest income reflects growth in both total average loan and investment balances outstanding and the correlated yields, during 2022. Average loan balances, inclusive of acquisitions, increased by $1,496,541,000 or 30.4% from December 31, 2021. The yield on interest earning assets was 3.98% and 3.65% for the years ended December 31, 2022 and 2021, respectively. This 33 basis point increase in total earning asset yield was primarily attributable to a 11 basis point decrease in total loan yields and a 85 basis point increase in yields on total investments. Of the 11 basis point decrease in yields on loans, a 3 basis point decline was attributable to decreases in market rates, as well as an 8 basis point benefit from the accretion of purchased loans. The costs of total interest bearing liabilities increased 6 basis points to 0.19% during the year ended December 31, 2022, as compared to 0.13% for the year ended December 31, 2021. During the same period, costs associated with interest bearing deposits increased by 2 basis points to 0.10% as compared to 0.08% in the prior year. The increase in interest expense for the year ended December 31, 2022, as compared to the trailing year, was due largely to the increased rate environment for both the interest-bearing deposit expense and other borrowings interest expense.

Net interest income (FTE) during the year ended December 31, 2021 increased $13,814,000 or 5.3% to $272,610,000 compared against $258,796,000 during the year ended December 31, 2020. The increase amount of net interest income reflects growth in total average loan balances outstanding during 2021, which increased by $229,796,000 or 4.9% from December 31, 2020. The yield on interest earning assets was 3.65% and 4.11% for the years ended December 31, 2021 and 2020, respectively. This 46 basis point decrease in total earning asset yield was primarily attributable to a 23 basis point decrease in non-PPP loan yields and a 66 basis point decrease in yields on total investments. Of the 23 basis point decrease in yields on loans, a 21 basis point decline was attributable to decreases in market rates, in addition to 2 basis points from the accretion of purchased loans. The costs of total interest bearing liabilities decreased 12 basis points to 0.13% during the year ended December 31, 2021, as compared to 0.25% for the year ended December 31, 2020. During the same period, costs associated with interest bearing deposits decreased by 10 basis points to 0.08% as compared to 0.18% in the prior year. The decrease in interest expense for the year ended December 31, 2021, as compared to the trailing year, was due largely to the decreased rate environment benefiting both the interest-bearing deposit expense and other borrowings interest expense.

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For more information related to loan interest income, including loan purchase discount accretion, see the Summary of Average Balances, Yields/Rates and Interest Differential and Note 27 to the consolidated financial statements at Part II, Item 8 of this report. The “Yield” and “Volume/Rate” tables shown below are useful in illustrating and quantifying the developments that affected net interest income during 2022 and 2021.

Summary of Average Balances, Yields/Rates and Interest Differential – Yield Tables

The following tables present, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average 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 statutory tax rate applicable during the period presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","2020"],["","Average Balance","","Interest Income/ Expense","","Rates Earned /Paid","","Average Balance","","Interest Income/ Expense","","Rates Earned /Paid","","Average Balance","","Interest Income/ Expense","","Rates Earned /Paid"],["Assets:"],["Loans","$","5,841,770","","","$","282,985","","","4.84","%","","$","4,625,410","","","$","225,626","","","4.88","%","","$","4,361,679","","","$","223,086","","","5.11","%"],["PPP Loans","24,590","","","2,390","","","9.72","%","","250,391","","","16,643","","","6.65","%","","284,326","","","10,635","","","3.74","%"],["Investment securities\u2014taxable","2,459,032","","","60,499","","","2.46","%","","1,914,788","","","30,352","","","1.59","%","","1,302,367","","","28,659","","","2.20","%"],["Investment securities\u2014nontaxable (1)","190,339","","","6,759","","","3.55","%","","160,863","","","4,639","","","2.88","%","","116,717","","","4,636","","","3.97","%"],["Total investments","2,649,371","","","67,258","","","2.54","%","","2,075,651","","","34,991","","","1.69","%","","1,419,084","","","33,295","","","2.35","%"],["Cash at Federal Reserve and other banks","452,300","","","4,432","","","0.98","%","","663,801","","","858","","","0.13","%","","467,376","","","1,237","","","0.26","%"],["Total interest-earning assets","8,968,031","","","357,065","","","3.98","%","","7,615,253","","","278,118","","","3.65","%","","6,532,465","","","268,253","","","4.11","%"],["Other assets","803,570","","","","","","","594,420","","","","","","","590,966"],["Total assets","$","9,771,601","","","","","","","$","8,209,673","","","","","","","$","7,123,431"],["Liabilities and shareholders\u2019 equity:"],["Interest-bearing demand deposits","$","1,720,932","","","$","452","","","0.03","%","","$","1,493,922","","","$","327","","","0.02","%","","$","1,313,804","","","332","","","0.03","%"],["Savings deposits","2,878,189","","","3,356","","","0.12","%","","2,360,605","","","1,256","","","0.05","%","","2,015,134","","","2,595","","","0.13","%"],["Time deposits","302,619","","","881","","","0.29","%","","324,636","","","1,735","","","0.53","%","","397,216","","","3,958","","","1.00","%"],["Total interest-bearing deposits","4,901,740","","","4,689","","","0.10","%","","4,179,163","","","3,318","","","0.08","%","","3,726,154","","","6,885","","","0.18","%"],["Other borrowings","33,410","","","421","","","1.26","%","","43,236","","","22","","","0.05","%","","28,863","","","17","","","0.06","%"],["Junior subordinated debt","91,138","","","4,419","","","4.85","%","","57,844","","","2,168","","","3.75","%","","57,426","","","2,555","","","4.45","%"],["Total interest-bearing liabilities","5,026,288","","","9,529","","","0.19","%","","4,280,243","","","5,508","","","0.13","%","","3,812,443","","","9,457","","","0.25","%"],["Noninterest-bearing deposits","3,492,713","","","","","","","2,837,745","","","","","","","2,289,168"],["Other liabilities","178,163","","","","","","","119,471","","","","","","","119,710"],["Shareholders\u2019 equity","1,074,437","","","","","","","972,214","","","","","","","902,110"],["Total liabilities and shareholders\u2019 equity","$","9,771,601","","","","","","","$","8,209,673","","","","","","","$","7,123,431"],["Net interest spread (2)","","","","","3.79","%","","","","","","3.52","%","","","","","","3.86","%"],["Net interest income and interest margin (3)","","","$","347,536","","","3.88","%","","","","$","272,610","","","3.58","%","","","","$","258,796","","","3.96","%"]]
[[/GREPCENT_TABLE]]

(1)The fully-taxable equivalent (FTE) adjustment for interest income of non-taxable investment securities was $1,560, $1,071, and $1,069 for the years ended December 31, 2022, 2021 and 2020, respectively.

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

(3)Net interest margin is computed by dividing net interest income by total average earning assets.

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Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid – Volume/Rate Tables

The following table sets forth a summary of the changes in the Company’s 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 applicable to both rate and volume have been included in the rate variance. Amounts are calculated on a fully taxable equivalent basis:

[[GREPCENT_TABLE]]
[["","2022 over 2021","","2021 over 2020"],["","Volume","","Rate","","Total","","Volume","","Rate","","Total"],["Increase in interest income:"],["Loans","$","114,211","","","$","(71,105)","","","$","43,106","","","$","20,337","","","$","(11,789)","","","$","8,548"],["Investment securities\u2014taxable","8,653","","","21,494","","","30,147","","","1,753","","","(1,750)","","","3"],["Investment securities\u2014nontaxable","849","","","1,270","","","2,119","","","13,473","","","(11,780)","","","1,693"],["Cash at Federal Reserve and other banks","(275)","","","3,849","","","3,574","","","511","","","(890)","","","(379)"],["Total interest-earning assets","123,438","","","(44,492)","","","78,946","","","36,074","","","(26,209)","","","9,865"],["Increase in interest expense:"],["Interest-bearing demand deposits","45","","","80","","","125","","","54","","","(59)","","","(5)"],["Savings deposits","259","","","1,841","","","2,100","","","449","","","(1,788)","","","(1,339)"],["Time deposits","(117)","","","(737)","","","(854)","","","(726)","","","(1,497)","","","(2,223)"],["Other borrowings","(5)","","","404","","","399","","","9","","","(4)","","","5"],["Junior subordinated debt","1,249","","","1,002","","","2,251","","","19","","","(406)","","","(387)"],["Total interest-bearing liabilities","1,431","","","2,590","","","4,021","","","(195)","","","(3,754)","","","(3,949)"],["Increase in net interest income","$","122,007","","","$","(47,082)","","","$","74,925","","","$","36,269","","","$","(22,455)","","","$","13,814"]]
[[/GREPCENT_TABLE]]

Year Over Year Balance Sheet Change

[[GREPCENT_TABLE]]
[["Ending balances","As of December 31,","","","","Acquired Balances","","Organic $ Change","","Organic % Change"],["($\u2019s in thousands)","2022","","2021","","$ Change"],["Total assets","$","9,930,986","","","$","8,614,787","","","$","1,316,199","","","$","1,363,529","","","$","(47,330)","","","(0.5)","%"],["Total loans","6,450,447","","","4,916,624","","","1,533,823","","","773,390","","760,433","","15.5"],["Total loans, excluding PPP","6,448,845","","","4,855,477","","","1,593,368","","","751,978","","841,390","","17.3"],["Total investments","2,633,269","","","2,427,885","","","205,384","","","109,716","","95,668","","3.9"],["Total deposits","8,329,013","","","7,367,159","","","961,854","","","1,215,479","","","(253,625)","","","(3.4)"],["Total other borrowings","$","264,605","","","$","50,087","","","$","214,518","","","$","\u2014","","","$","214,518","","","428.3","%"]]
[[/GREPCENT_TABLE]]

Provision for Credit Losses

The provision for credit losses during any period is the sum of the allowance for credit losses required at the end of the period and any net charge-offs during the period, less the allowance for credit losses required at the beginning of the period, and less any recoveries during the period. See the Tables labeled “Allowance for Credit Losses – December 31, 2022 and 2021” at Note 5 in Item 8 of Part II of this report for the components that make up the provision for credit losses for the years ended December 31, 2022 and 2021.

The Company recorded a provision for credit losses of $18,470,000 during the year ended December 31, 2022, versus a reversal of credit losses totaling $6,775,000 during the trailing year end. The increase in required provisioning during 2022 was largely attributed to the $10,820,000 in day 1 required reserves from loans acquired in connection with the VRB merger in the first quarter of 2022. Additionally, the Company designated certain loans and leases purchased from VRB as PCD, which required $2,037,000 in additional credit reserves as of the acquisition date. 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 remaining increase in the allowance for credit reserves was the result of changes in loan volume and changes in credit quality associated with levels of classified, past due and non-performing loans in addition to changes in qualitative factors.

The Company recorded a reversal of credit loses of $6,775,000 during the year ended December 31, 2021, versus a provision for credit losses totaling $42,813,000 during the trailing year end. The decrease in required provisioning during 2021 was attributed to improvement in both external economic indicators and the Company's internal credit risk assessment under the cohort method including changes in the level of past due and nonperforming loans. Declines in California unemployment levels, reduced concentration risks and an improved gross domestic product outlook contributed to total required qualitative reserves of $59,855,000 as of December 31, 2021, a decline of $2,080,000 or 3.4% from December 31, 2020. Quantitative reserves calculated using the Company's cohort loss model totaled $25,521,000 at December 31, 2021, a decline of $4,391,000 or 14.7% from the trailing period December 31, 2020.

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Net recoveries for the year ended December 31, 2022 totaled $322,000 as compared to $694,000 for the year ended December 31, 2021. Total nonperforming loans declined by 28 basis points to 0.33% of total loans at December 31, 2022 from 0.61% of total loans at December 31, 2021. For further details of the change in nonperforming loans during the period ended December 31, 2022 see the Tables, and associated narratives, labeled “Changes in nonperforming assets during the year ended December 31, 2022” and “Changes in nonperforming assets during the three months ended December 31, 2022” under the heading “Asset Quality and Non-Performing Assets” below.

The following table summarizes the components of the provision for (benefit to) credit losses during the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(dollars in thousands)","2022","","2021","","2020"],["Provision (benefit) to allowance for credit losses","$","17,945","","","$","(7,165)","","","$","42,188"],["Change in reserve for unfunded loan commitments","525","","","390","","","625"],["Total provision for (benefit to) credit losses","$","18,470","","","$","(6,775)","","","$","42,813"]]
[[/GREPCENT_TABLE]]

The provision for credit losses is based on management’s evaluation of inherent risks in the loan portfolio and a corresponding analysis of the allowance for credit losses. Additional discussion on loan quality, our procedures to measure loan impairment, and the allowance for credit losses is provided under the heading “Asset Quality and Non-Performing Assets” below.

Non-interest Income

The following table summarizes the Company’s non-interest income for the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["ATM and interchange fees","$","26,767","","","$","25,356","","","$","21,660"],["Service charges on deposit accounts","16,536","","","14,013","","","13,944"],["Other service fees","4,274","","","3,570","","","3,156"],["Mortgage banking service fees","1,887","","","1,881","","","1,855"],["Change in value of mortgage loan servicing rights","301","","","(872)","","","(2,634)"],["Total service charges and fees","49,765","","","43,948","","","37,981"],["Asset management and commission income","3,986","","","3,668","","","2,989"],["Increase in cash value of life insurance","2,858","","","2,775","","","2,949"],["Gain on sale of loans","2,342","","","9,580","","","9,122"],["Lease brokerage income","820","","","746","","","668"],["Sale of customer checks","1,167","","","459","","","414"],["Gain on sale of investment securities","\u2014","","","\u2014","","","7"],["Gain (loss) on marketable equity securities","(340)","","","(86)","","","64"],["Other","2,448","","","2,574","","","1,000"],["Total other non-interest income","13,281","","","19,716","","","17,213"],["Total non-interest income","$","63,046","","","$","63,664","","","$","55,194"]]
[[/GREPCENT_TABLE]]

Non-interest income decreased by $618,000 or 1.0% to $63,046,000 during the twelve months ended December 31, 2022, compared to $63,664,000 during the same period ended December 31, 2021. Generally, the increases in recurring non-interest income service charges and fees reflected during 2022 is the result of the VRB merger closing in March of 2022, and therefore, not reflected in 2021 operating results. As an offset, increases in interest rates during 2022 led to significant declines in mortgage lending related activity, resulting in a decrease of $7,238,000 in gain from the sale of loans, as compared to the trailing year then ended.

Non-interest income increased by $8,470,000 or 15.3% to $63,664,000 during the twelve months ended December 31, 2021, compared to $55,194,000 during the same period ended December 31, 2020. ATM and interchange fees improved $3,696,000 or 17.1% as a result of increased use due to relaxed social distancing guidelines during the year ended December 31, 2021 when compared to the same period in the prior year. Additionally, during the year ended 2020, there was substantial downward pressure on interest rates following the COVID-19 pandemic, resulting in a decline in the fair value of mortgage servicing rights totaling $2,634,000 during the period. Other non-interest income increased $1,574,000 during the twelve months ended December 31, 2021, largely attributed to an increase of $804,000 in the change of fair value of non-readily marketable equity investments and a $204,000 increase in proceeds from life insurance, respectively, as compared to the trailing 12 months ended.

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Non-interest Expense

The following table summarizes the Company’s other non-interest expense for the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Base salaries, net of deferred loan origination costs","$","84,861","","","$","69,844","","","$","70,164"],["Incentive compensation","17,908","","14,957","","","10,022"],["Benefits and other compensation costs","27,083","","21,550","","","31,935"],["Total salaries and benefits expense","129,852","","","106,351","","","112,121"],["Occupancy","15,493","","","14,910","","","14,528"],["Data processing and software","14,660","","","13,985","","","13,504"],["Equipment","5,733","","","5,358","","","5,704"],["Intangible amortization","6,334","","","5,464","","","5,723"],["Advertising","3,694","","","2,899","","","2,827"],["ATM and POS network charges","6,984","","","6,040","","","5,433"],["Professional fees","4,392","","","3,657","","","3,222"],["Telecommunications","2,298","","","2,253","","","2,601"],["Regulatory assessments and insurance","3,142","","","2,581","","","1,594"],["Merger and acquisition expenses","6,253","","","1,523","","","\u2014"],["Postage","1,147","","","710","","","1,068"],["Operational losses","1,000","","","964","","","1,168"],["Courier service","2,013","","","1,214","","","1,414"],["Gain on sale or acquisition of foreclosed assets","(481)","","","(233)","","","(234)"],["(Gain) loss on disposal of fixed assets","(1,070)","","","(439)","","","67"],["Other miscellaneous expense","15,201","","","11,038","","","12,018"],["Total other non-interest expense","86,793","","","71,924","","","70,637"],["Total non-interest expense","$","216,645","","","$","178,275","","","$","182,758"],["Average full-time equivalent staff","1,169","","1,039","","","1,093"]]
[[/GREPCENT_TABLE]]

Non-interest expense increased by $38,370,000 (21.5%) to $216,645,000 during the year ended December 31, 2022 as compared to $178,275,000 for the trailing twelve month period. Generally, the increases in recurring non-interest expenses and FTEs during 2022 is the result of the VRB merger closing in March of 2022, and therefore, not reflected in 2021 operating results.

Salaries and benefit expense decreased $5,770,000 (5.1%) to $129,852,000 during the year ended December 31, 2021 as compared to $106,351,000 for the trailing twelve month period. Base salaries, net of deferred loan origination costs remained nearly flat, decreasing by $320,000 (0.4%) to $84,861,000 due to a decrease in average full time equivalent employees to 1,039 from 1,093 in the prior year-to-date period, offset by a higher average wage per employee due to both, the addition of personnel with elevated technical skillets to adhere to elevated regulatory expectations and annual merit increases. Commissions and incentive compensation increased $4,935,000 (49.2%) to $14,957,000 during 2021 compared to 2020 primarily due to increased organic non-PPP loan originations as borrower interaction and business demands for loans improved following the disruption from COVID-19 and related mandates in 2020. Benefits and other compensation costs decreased by $10,385,000 (32.5%) to $21,550,000 during the year ended December 31, 2021 as compared to $31,935,000 for the trailing twelve month period, caused by declines in expenses associated with retirement obligations and insurance costs.

Merger and acquisition expenses associated with our 2022 acquisition of VRB totaled $1,523,000 during the year ended December 31, 2021 and $6,253,000 in 2022. Further, during the year ended December 31, 2021, expenses totaling approximately $1,745,000 are attributable to the Company's recently opened loan production offices, of which approximately $1,430,000 relates to salaries and benefits.

During 2018, the FDIC's Deposit Insurance Fund's (DIF) reserves exceeded the minimum set by the Dodd-Frank Act and the Company, with total assets less than $10 billion, was entitled to receive credits to offset a portion of its assessments. As a result, during the year ended December 31, 2020, the Bank received credits of $610,000, which contributed to the lower regulatory assessments and insurance expense during the period. There were no credits provided to the Bank during 2021 or 2022.

The provisions for income taxes applicable to income before taxes for the years ended December 31, 2022, 2021 and 2020 differ from amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory

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federal income tax rate are reconciled as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Federal statutory income tax rate","21.0","%","","21.0","%","","21.0","%"],["State income taxes, net of federal tax benefit","7.9","","","7.9","","","7.7"],["Tax-exempt interest on municipal obligations","(0.7)","","","(0.5)","","","(0.9)"],["Tax-exempt life insurance related income","(0.4)","","","(0.5)","","","(0.8)"],["Low income housing and other tax credits","(3.7)","","","(2.6)","","","(4.8)"],["Low income housing tax credit amortization","3.6","","","2.2","","","4.1"],["Compensation and benefits","(0.2)","","","(0.1)","","","0.4"],["Non-deductible merger expenses","0.1","","","0.1","","","\u2014"],["Other","0.3","","","0.6","","","(0.9)"],["Effective Tax Rate","27.9","%","","28.1","%","","25.8","%"]]
[[/GREPCENT_TABLE]]

The effective tax rate on income was 27.9%, 28.1%, and 25.8% in 2022, 2021, and 2020, respectively. The effective tax rate was greater than the Federal statutory rates of 21% due to the combination of state tax expenses of 7.9% in 2022, 7.9% in 2021, and 7.7% in 2020. These increases in tax expense were partially offset by Federal tax-exempt interest income of $5,462,000, $3,069,000, and $3,566,000, respectively, Federal and State tax-exempt income of $3,167,000, $3,478,000, and $3,447,000, respectively, from increase in cash value and gain on death benefit of life insurance, low income housing tax credits and losses, net of amortization of $192,000, $620,000, and $619,000, respectively, and equity compensation excess tax benefits, net of non-deductible compensation of $1,966,000, $1,495,000, and $403,000, respectively. The low-income housing tax credits and the equity compensation excess tax benefits represent direct reductions in tax expense. In addition, the 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided the Company with an opportunity to file amended federal tax returns and generate refunds of approximately $805,000 during the year ended December 31, 2020. The items noted above resulted in an effective combined Federal and State income tax rate that differed from the combined Federal and State statutory income tax rate of approximately 29.6% during the three years ended 2022, 2021 and 2020.

Financial Condition

Restricted Equity Securities

Restricted equity securities were $17,250,000 at December 31, 2022 and December 31, 2021. The entire balance of restricted equity securities at December 31, 2022 and 2021 represents the Bank’s investment in the Federal Home Loan Bank of San Francisco (“FHLB”).

FHLB stock is carried at par and does not have a readily determinable fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.

Loans

The Bank concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial loans), consumer loans, commercial loans (including agricultural loans), and real estate construction loans.  The interest rates charged for the loans made by the Bank vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Bank and prevailing money market rates indicative of the Bank’s cost of funds.

The majority of the Bank’s loans are direct loans made to individuals, farmers and local businesses. The Bank relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Bank 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.

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Loan Portfolio Composition

The following table shows the Company’s loan balances, including net deferred loan fees, at the dates indicated:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(dollars in thousands)","2022","","2021","","2020"],["Commercial real estate","$","4,359,083","","","$","3,306,054","","","$","2,951,902"],["Consumer","1,240,743","","","1,071,551","","","952,108"],["Commercial and industrial, excluding PPP","568,319","","","198,208","","","199,557"],["SBA PPP loans","1,602","","","61,147","","","326,770"],["Construction","211,560","","","222,281","","","284,842"],["Agriculture production","61,414","","","50,811","","","44,164"],["Leases","7,726","","","6,572","","","3,784"],["Total loans","$","6,450,447","","","$","4,916,624","","","$","4,763,127"],["Allowance for credit losses","$","(105,680)","","","$","(85,376)","","","$","(91,847)"]]
[[/GREPCENT_TABLE]]

During the year ended 2022, the Company acquired loans totaling $773,390,000 in connection with the merger with VRB in March of 2022, inclusive of approximately $68,513,000 in loans with credit deterioration. During 2021, the Company purchased pools of SFR 1-4 1st DT (consumer) loans totaling approximately $101,466,000, inclusive of loan premiums. As of December 31, 2022 and 2021, the total remaining balances outstanding from these purchases equaled approximately $804,382,000 and $94,973,000, respectively. During 2020, the Company purchased $41,126,000 in loans, with $30,080,000 outstanding as of December 31, 2022.

The following table shows the Company’s loan balances, including net deferred loan fees, as a percentage of total loans at the dates indicated:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(dollars in thousands)","2022","","2021","","2020"],["Commercial real estate","67.6","%","","67.2","%","","62.0","%"],["Consumer","19.2","%","","21.8","%","","20.0","%"],["Commercial and industrial, excluding PPP","8.8","%","","4.1","%","","4.2","%"],["SBA PPP loans","\u2014","%","","1.2","%","","6.9","%"],["Construction","3.3","%","","4.5","%","","6.0","%"],["Agriculture production","1.0","%","","1.1","%","","0.9","%"],["Leases","0.1","%","","0.1","%","","0.1","%"],["Total loans","100","%","","100","%","","100","%"],["Allowance for credit losses","1.64","%","","1.74","%","","1.93","%"]]
[[/GREPCENT_TABLE]]

At December 31, 2022, loans including net deferred loan costs, totaled $6,450,447,000 which was a 31.2% ($1,533,823,000) increase over the balance at the end of December 31, 2021. At December 31, 2021 loans, including net deferred loan costs, totaled $4,916,624,000 which was a 3.2% ($153,497,000) increase over the balances at the end of 2020. At December 31, 2020 loans, including net deferred loan costs, totaled $4,763,127,000 which was a 10.6% ($455,761,000) increase over the balances at the end of 2019.

In March 2020, the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was created to help small businesses keep workers employed during the COVID-19 crisis. As a SBA Preferred Lender, the Company was able to provide PPP loans to small business customers. The SBA ended PPP and did not accept new borrowing applications, effective May 31, 2021.

As of December 31, 2022 and 2021, the total gross balances outstanding of PPP loans was $1,617,000 and $63,311,000, respectively, as compared to total PPP originations of $640,410,000. In connection with the origination of these loans, the Company earned approximately $25,299,000 in loan fees, offset by deferred loan costs of approximately $1,245,000, the net of which will be recognized over the earlier of loan maturity (between 24-60 months), repayment or receipt of forgiveness confirmation. As of December 31, 2022, nearly all PPP loans originated have been forgiven and repaid by the SBA and there was approximately $15,000 in net deferred fee income remaining to be recognized. During the year ended December 31, 2022, the Company recognized approximately $2,149,000 in fees on PPP loans as compared with $14,148,000 for the year ended December 31, 2021.

From time to time the Bank may be presented with the opportunity to purchase individual or pools of loans in whole or in part outside of a transaction that would be considered a business combination. As of December 31, 2022 and 2021, the outstanding carrying value of purchased loans that were not acquired in a business combination totaled $167,014,000 and $159,373,000, respectively.

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Asset Quality and Nonperforming Assets

Nonperforming Assets

The following tables set forth the amount of the Bank’s nonperforming assets as of the dates indicated. “Performing non-accrual 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:

[[GREPCENT_TABLE]]
[["","December 31,"],["(dollars in thousands)","2022","","2021","","2020","","2019","","2018"],["Performing nonaccrual loans","$","19,543","","","$","27,713","","","$","22,896","","","$","11,266","","","$","22,689"],["Nonperforming nonaccrual loans","1,770","","","2,637","","","3,968","","","5,579","","","4,805"],["Total nonaccrual loans","21,313","","","30,350","","","26,864","","","16,845","","","27,494"],["Loans 90 days past due and still accruing","8","","","\u2014","","","\u2014","","","19","","","\u2014"],["Total nonperforming loans","21,321","","","30,350","","","26,864","","","16,864","","","27,494"],["Foreclosed assets","3,439","","","2,594","","","2,844","","","2,541","","","2,280"],["Total nonperforming assets","$","24,760","","","$","32,944","","","$","29,708","","","$","19,405","","","$","29,774"],["U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans","$","225","","","$","756","","","$","811","","","$","992","","","$","1,173"],["Nonperforming assets to total assets","0.25","%","","0.38","%","","0.39","%","","0.30","%","","0.47","%"],["Nonperforming loans to total loans","0.33","%","","0.61","%","","0.56","%","","0.39","%","","0.68","%"],["Allowance for credit losses to nonperforming loans","516","%","","281","%","","342","%","","182","%","","119","%"]]
[[/GREPCENT_TABLE]]

Changes in nonperforming assets during the year ended December 31, 2022

The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2022:

[[GREPCENT_TABLE]]
[["(in thousands)","Balance at December 31, 2021","","Additions","","Advances/ Paydowns, net","","Charge-offs/ Write-downs","","Transfers to Foreclosed Assets","","Balance at December 31, 2022"],["Commercial real estate:"],["CRE non-owner occupied","$","7,899","","","$","2,214","","","$","(8,374)","","","$","\u2014","","","$","\u2014","","","$","1,739"],["CRE owner occupied","5,036","","","3,861","","","(3,675)","","","\u2014","","","(284)","","","4,938"],["Multifamily","4,457","","","\u2014","","","(4,332)","","","\u2014","","","\u2014","","","125"],["Farmland","3,020","","","2,498","","","(3,139)","","","(294)","","","(313)","","","1,772"],["Total commercial real estate loans","20,412","","","8,573","","","(19,520)","","","(294)","","","(597)","","","8,574"],["Consumer:"],["SFR 1-4 1st DT","3,596","","","2,005","","","(1,003)","","","\u2014","","","(378)","","","4,220"],["SFR HELOCs and junior liens","3,801","","","2,578","","","(2,827)","","","(22)","","","(375)","","","3,155"],["Other","71","","","164","","","(35)","","","(124)","","","\u2014","","","76"],["Total consumer loans","7,468","","","4,747","","","(3,865)","","","(146)","","","(753)","","","7,451"],["Commercial and industrial","2,415","","","3,741","","","(1,933)","","","(697)","","","\u2014","","","3,526"],["Construction","55","","","464","","","(28)","","","\u2014","","","\u2014","","","491"],["Agriculture production","\u2014","","","5,373","","","(4,094)","","","\u2014","","","\u2014","","","1,279"],["Leases","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total nonperforming loans","30,350","","","22,898","","","(29,440)","","","(1,137)","","","(1,350)","","","21,321"],["Foreclosed assets","2,594","","","203","","","(708)","","","\u2014","","","1,350","","","3,439"],["Total nonperforming assets","$","32,944","","","$","23,101","","","$","(30,148)","","","$","(1,137)","","","$","\u2014","","","$","24,760"]]
[[/GREPCENT_TABLE]]

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

Nonperforming assets decreased by $8,184,000 (24.8%) to $24,760,000 at December 31, 2022 from $32,944,000 at December 31, 2021. The decrease in nonperforming assets during 2022 was the result of net paydowns, sales or upgrades of nonperforming loans to performing status totaling $29,440,000, which was partially offset by $22,898,000 of additions to non-performing loans and net charge-offs of $1,137,000.

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Changes in nonperforming assets during the year ended December 31, 2021

The following table shows the activity in the balance of nonperforming assets for the year ended December 31, 2021:

[[GREPCENT_TABLE]]
[["(in thousands)","Balance at December 31, 2020","","Additions","","Advances/ Paydowns, net","","Charge-offs/ Write-downs","","Transfers to Foreclosed Assets","","Balance at December 31, 2021"],["Commercial real estate:"],["CRE non-owner occupied","$","3,110","","","$","6,357","","","$","(1,568)","","","$","\u2014","","","$","\u2014","","","$","7,899"],["CRE owner occupied","4,061","","","2,408","","","(1,415)","","","(18)","","","\u2014","","","5,036"],["Multifamily","\u2014","","","4,568","","","(111)","","","\u2014","","","\u2014","","","4,457"],["Farmland","1,538","","","2,029","","","(421)","","","(126)","","","\u2014","","","3,020"],["Total commercial real estate loans","8,709","","","15,362","","","(3,515)","","","(144)","","","\u2014","","","20,412"],["Consumer:"],["SFR 1-4 1st DT","5,094","","","174","","","(978)","","","(145)","","","(549)","","","3,596"],["SFR HELOCs and junior liens","6,148","","","1,446","","","(3,260)","","","(30)","","","(503)","","","3,801"],["Other","167","","","194","","","(37)","","","(253)","","","\u2014","","","71"],["Total consumer loans","11,409","","","1,814","","","(4,275)","","","(428)","","","(1,052)","","","7,468"],["Commercial and industrial","2,182","","","2,683","","","(980)","","","(1,470)","","","\u2014","","","2,415"],["Construction","4,546","","","67","","","(4,531)","","","(27)","","","\u2014","","","55"],["Agriculture production","18","","","120","","","(138)","","","\u2014","","","\u2014","","","\u2014"],["Leases","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total nonperforming loans","26,864","","","20,046","","","(13,439)","","","(2,069)","","","(1,052)","","","30,350"],["Foreclosed assets","2,844","","","(9)","","","(1,293)","","","\u2014","","","1,052","","","2,594"],["Total nonperforming assets","$","29,708","","","$","20,037","","","$","(14,732)","","","$","(2,069)","","","$","\u2014","","","$","32,944"]]
[[/GREPCENT_TABLE]]

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

Nonperforming assets increased by $3,236,000 (10.9%) to $32,944,000 at December 31, 2021 from $29,708,000 at December 31, 2020. The increase in nonperforming assets during 2021 was the result of new nonperforming loans of $20,037,000, which was partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $13,439,000, dispositions of foreclosed assets totaling $1,293,000, and net charge-offs of $2,069,000.

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

The following table shows the activity in the balance of nonperforming assets for the quarter ended December 31, 2022:

[[GREPCENT_TABLE]]
[["(in thousands)","Balance at September 30, 2022","","Additions","","Advances/ Paydowns, net","","Charge-offs/ Write-downs (1)","","Transfers to Foreclosed Assets","","Balance at December 31, 2022"],["Commercial real estate:"],["CRE non-owner occupied","$","2,032","","","$","\u2014","","","$","(293)","","","$","\u2014","","","$","\u2014","","","$","1,739"],["CRE owner occupied","1,778","","","3,213","","","(53)","","","\u2014","","","\u2014","","","4,938"],["Multifamily","132","","","\u2014","","","(7)","","","\u2014","","","\u2014","","","125"],["Farmland","695","","","1,772","","","(695)","","","\u2014","","","\u2014","","","1,772"],["Total commercial real estate loans","4,637","","","4,985","","","(1,048)","","","\u2014","","","\u2014","","","8,574"],["Consumer:"],["SFR 1-4 1st DT","3,255","","","1,283","","","(99)","","","\u2014","","","(219)","","","4,220"],["SFR HELOCs and junior liens","3,365","","","486","","","(674)","","","(22)","","","\u2014","","","3,155"],["Other","61","","","23","","","(7)","","","(1)","","","\u2014","","","76"],["Total consumer loans","6,681","","","1,792","","","(780)","","","(23)","","","(219)","","","7,451"],["Commercial and industrial","660","","","3,030","","","(114)","","","(50)","","","\u2014","","","3,526"],["Construction","120","","","379","","","(8)","","","\u2014","","","\u2014","","","491"],["Agriculture production","5,373","","","\u2014","","","(4,094)","","","\u2014","","","\u2014","","","1,279"],["Leases","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total nonperforming loans","17,471","","","10,186","","","(6,044)","","","(73)","","","(219)","","","21,321"],["Foreclosed assets","3,441","","","92","","","(313)","","","\u2014","","","219","","","3,439"],["Total nonperforming assets","$","20,912","","","$","10,278","","","$","(6,357)","","","$","(73)","","","$","\u2014","","","$","24,760"]]
[[/GREPCENT_TABLE]]

(1) Charge-offs and write-downs exclude deposit overdraft charge-offs.

Nonperforming assets increased during the fourth quarter of 2022 by $3,848,000 (18.4%) to $24,760,000 at December 31, 2022 compared to $20,912,000 at September 30, 2022. The increase in nonperforming assets during the fourth quarter of 2022 was the result of new nonperforming loans of $10,186,000, that were partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $6,044,000, and net charge-offs of $73,000 in non-performing loans. The current quarter change in non-performing assets is nearly entirely attributed to a single CRE relationship, which is considered well-secured as of the current period end.

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Changes in nonperforming assets during the three months ended December 31, 2021

The following table shows the activity in the balance of nonperforming assets for the quarter ended December 31, 2021:

[[GREPCENT_TABLE]]
[["(in thousands)","Balance at September 30, 2021","","Additions","","Advances/ Paydowns, net","","Charge-offs/ Write-downs (1)","","Transfers to Foreclosed Assets","","Balance at December 31, 2021"],["Commercial real estate:"],["CRE non-owner occupied","$","7,713","","","$","581","","","$","(395)","","","$","\u2014","","","$","\u2014","","","$","7,899"],["CRE owner occupied","4,877","","","273","","","(114)","","","\u2014","","","\u2014","","","5,036"],["Multifamily","4,560","","","\u2014","","","(103)","","","\u2014","","","\u2014","","","4,457"],["Farmland","1,147","","","1,992","","","(119)","","","\u2014","","","\u2014","","","3,020"],["Total commercial real estate loans","18,297","","","2,846","","","(731)","","","\u2014","","","\u2014","","","20,412"],["Consumer:"],["SFR 1-4 1st DT","3,833","","","131","","","(368)","","","\u2014","","","\u2014","","","3,596"],["SFR HELOCs and junior liens","4,034","","","585","","","(285)","","","(30)","","","(503)","","","3,801"],["Other","84","","","28","","","(17)","","","(24)","","","\u2014","","","71"],["Total consumer loans","7,951","","","744","","","(670)","","","(54)","","","(503)","","","7,468"],["Commercial and industrial","2,407","","","201","","","(169)","","","(24)","","","\u2014","","","2,415"],["Construction","15","","","67","","","\u2014","","","(27)","","","\u2014","","","55"],["Agriculture production","120","","","\u2014","","","(120)","","","\u2014","","","\u2014","","","\u2014"],["Leases","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total nonperforming loans","28,790","","","3,858","","","(1,690)","","","(105)","","","(503)","","","30,350"],["Foreclosed assets","2,650","","","\u2014","","","(559)","","","\u2014","","","503","","","2,594"],["Total nonperforming assets","$","31,440","","","$","3,858","","","$","(2,249)","","","$","(105)","","","$","\u2014","","","$","32,944"]]
[[/GREPCENT_TABLE]]

(1) Charge-offs and write-downs exclude deposit overdraft charge-offs.

Nonperforming assets increased during the fourth quarter of 2021 by $1,504,000 (4.8%) to $32,944,000 at December 31, 2020 compared to $31,440,000 at September 30, 2021. The increase in nonperforming assets during the fourth quarter of 2021 was the result of new nonperforming loans of $3,858,000, that were partially offset by net paydowns, sales or upgrades of nonperforming loans to performing status totaling $1,690,000, dispositions of foreclosed assets totaling $559,000, and net charge-offs of $105,000 in non-performing loans.

The $3,858,000 in new nonperforming loans during the fourth quarter of 2021 was comprised of, most notably, an increase of $1,992,000 and $1,633,000, respectively, on separate farmland relationships, both of which have been individually evaluated for collectability under the collateral methodology. Reserves of approximately $275,000 have been recorded in connections with these relationships has been recorded as of December 31, 2021.

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Allowance for Credit Losses - Investment Securities

The Company evaluates available for sale 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. During the years ended December 31, 2022 and 2021, no allowance for credit losses nor impairment recognized in earnings related to available for sale investment securities was recorded.

Allowance for Credit Losses - Held to Maturity Investment Securities

In addition to credit losses associated with the Company's loan portfolio, the CECL standard requires that loss estimates be developed for securities classified as held-to-maturity (HTM). As of December 31, 2022, the Company's HTM investment portfolio had a carrying value of approximately $160,983,000 and was comprised of $154,830,000 in obligations backed by U.S. government agencies and $6,153,000 in obligations of states and political subdivisions. As the 96.1% of the HTM portfolio consisted of investment securities where payment performance has an implicit or explicit guarantee from the U.S. government and where no history of credit losses exist, management believes that indicators for zero loss are present and therefore, no loss reserves were recognized in conjunction with the adoption of the CECL standard. Further, management 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. Based on this evaluation, management determined that the expected credit losses associated with these securities is less than significant for financial reporting purposes. Therefore, during the year ended December 31, 2022 no allowance for credit losses related to HTM securities was recorded.

Allowance for Credit Losses - 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 the estimated time of default. While the provision for credit losses associated with unfunded commitments is included in "provision for (benefit from) credit losses" on the consolidated statement of income, the reserve for unfunded commitments is maintained on the consolidated balance sheet in other liabilities.

The Components of the Allowance for Credit Losses

The following table sets forth the Bank’s allowance for credit losses related to loans as of the dates indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","December 31,"],["(dollars in thousands)","2022","","2021","","2020","","2019","","2018"],["Allowance for credit losses:"],["Qualitative and forecast factor allowance","$","70,777","","","$","59,855","","","$","61,935","","","$","12,146","","","$","11,577"],["Quantitative (Cohort) model allowance reserves","32,489","","","24,539","","","28,462","","","17,529","","","18,689"],["Total allowance for credit losses","103,266","","","84,394","","","90,397","","","29,675","","","30,266"],["Allowance for individually evaluated loans","2,414","","","982","","","1,450","","","935","","","2,194"],["Allowance for PCI loan losses","n/a","","n/a","","n/a","","6","","","122"],["Total allowance for credit losses","$","105,680","","","$","85,376","","","$","91,847","","","$","30,616","","","$","32,582"],["Ratio of allowance for credit losses to gross loans","1.64","%","","1.74","%","","1.93","%","","0.71","%","","0.81","%"]]
[[/GREPCENT_TABLE]]

Based on the current conditions of the loan portfolio, management believes that the $105,680,000 allowance for credit losses at December 31, 2022 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

The credit quality of the Company’s loan portfolio, as measured by trends in the volume of past due loans, non-accrual loans, net loan charge-offs (recoveries) and risk grades, remained stable throughout the year. On a year over year basis, improved trends in the actual and forecasted levels of unemployment and GDP further contributed to the lower ratio of credit reserves as a percentage of total loans outstanding. One notable exception to the improved qualitative reserves was caused by the observed volatility and increase in corporate debt yields, signaling greater risk of default.

The allowance for credit losses increased by $20,304,000 during the year ended December 31, 2022 which is primarily reflective of the acquisition of VRB during March 2022, organic growth within the loan portfolio improvement in both the Company's qualitative and quantitative factors, and increase in reserve on individually analyzed loans. Ex-growth in loans outstanding, quantitative factors from the cohort model improved slightly during the year as a result of continued improvement in the Company's loss experience as a percentage of

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total loans outstanding; 2) reductions in past due loans, and 3) avoidance of loan concentrations. However, specific reserves did increase by $1,432,000 as compared to the previous year end, but still remain at historically modest levels.

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

The following table summarizes the allocation of the allowance for credit losses between loan types:

[[GREPCENT_TABLE]]
[["","","","December 31,"],["(in thousands)","2022","","2021","","2020","","2019","","2018"],["Commercial real estate","$","61,381","","","$","51,140","","","$","53,693","","","$","11,995","","","$","12,944"],["Consumer","24,639","","","23,474","","","25,148","","","10,084","","","11,051"],["Commercial and industrial","13,597","","","3,862","","","4,252","","","4,867","","","5,610"],["Construction","5,142","","","5,667","","","7,540","","","3,388","","","2,497"],["Agriculture production","906","","","1,215","","","1,209","","","261","","","480"],["Leases","15","","","18","","","5","","","21","","","\u2014"],["Total allowance for credit losses","$","105,680","","","$","85,376","","","$","91,847","","","$","30,616","","","$","32,582"]]
[[/GREPCENT_TABLE]]

The following table summarizes the allocation of the allowance for credit losses between loan types as a percentage of the total allowance for credit losses:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2022","","2021","","2020","","2019","","2018"],["Commercial real estate","58.1","%","","59.9","%","","58.5","%","","39.2","%","","39.7","%"],["Consumer","23.3","%","","27.5","%","","27.4","%","","32.9","%","","33.9","%"],["Commercial and industrial","12.9","%","","4.5","%","","4.6","%","","15.9","%","","16.9","%"],["Construction","4.9","%","","6.6","%","","8.2","%","","11.0","%","","7.7","%"],["Agriculture production","0.9","%","","1.4","%","","1.3","%","","0.9","%","","1.8","%"],["Leases","\u2014","%","","0.1","%","","\u2014","%","","0.1","%","","\u2014","%"],["Total allowance for credit losses","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

The following table summarizes the allocation of the allowance for credit losses between loan types as a percentage of total loans in each of the loan categories listed:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2022","","2021","","2020","","2019","","2018"],["Commercial real estate","1.41","%","","1.55","%","","1.82","%","","0.42","%","","0.49","%"],["Consumer","1.99","%","","2.19","%","","2.62","%","","1.05","%","","1.18","%"],["Commercial and industrial","2.39","%","","1.49","%","","0.81","%","","1.81","%","","2.24","%"],["Construction","2.43","%","","2.55","%","","2.65","%","","1.36","%","","1.36","%"],["Agriculture production","1.48","%","","2.39","%","","2.74","%","","1.82","%","","1.85","%"],["Leases","0.19","%","","0.27","%","","0.13","%","","1.63","%","","\u2014","%"],["Total allowance for credit losses","1.64","%","","1.74","%","","1.93","%","","0.71","%","","0.81","%"]]
[[/GREPCENT_TABLE]]

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The following tables summarize the net charge-off (recovery) activity in the allowance for credit/loan losses as a percentage of loans for the years indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["Ratios:","2022","","2021","","2020","","2019","","2018"],["Net charge-offs (recoveries) during period to average loans outstanding during period"],["Commercial real estate:","","","","","","","","","(0.01)","%"],["CRE non-owner occupied","\u2014","%","","\u2014","%","","0.01","%","","(0.09)","%","","n/a"],["CRE owner occupied","\u2014","%","","(0.11)","%","","\u2014","%","","0.13","%","","n/a"],["Multifamily","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","%","","n/a"],["Farmland","0.01","%","","0.07","%","","0.12","%","","\u2014","%","","n/a"],["Consumer:","","","","","","","","","(0.01)","%"],["SFR 1-4 1st DT liens","\u2014","%","","0.02","%","","(0.08)","%","","(0.01)","%","","n/a"],["SFR HELOCs and junior liens","\u2014","%","","0.33","%","","(0.06)","%","","(0.26)","%","","n/a"],["Other","0.20","%","","0.32","%","","0.41","%","","0.54","%","","n/a"],["Commercial and industrial","0.17","%","","0.28","%","","0.04","%","","0.64","%","","0.26","%"],["Construction","\u2014","%","","0.01","%","","\u2014","%","","\u2014","%","","\u2014","%"],["Agriculture production","\u2014","%","","(0.05)","%","","(0.05)","%","","(0.02)","%","","(0.01)","%"],["Leases","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","%"],["Provision for (benefit from) credit losses to average loans outstanding during period","0.29","%","","(0.15)","%","","0.92","%","","(0.04)","%","","0.07","%"],["Allowance for credit losses to loans at year-end","1.64","%","","1.74","%","","1.93","%","","0.71","%","","0.81","%"]]
[[/GREPCENT_TABLE]]

Generally, losses are triggered by non-performance by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying collateral less any estimated costs associated with the disposition of the collateral.

Foreclosed Assets, Net of Allowance for Losses

The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the years indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Balance at December 31, 2021","","Additions","","Advances/ Capitalized Costs/Other","","Sales","","Valuation Adjustments","","Balance at December 31, 2022"],["Land & Construction","$","154","","","$","313","","","$","\u2014","","","$","(313)","","","$","\u2014","","","$","154"],["Residential real estate","1,257","","","751","","","\u2014","","","(392)","","","93","","","1,709"],["Commercial real estate","1,183","","","283","","","\u2014","","","\u2014","","","110","","","1,576"],["Total foreclosed assets","$","2,594","","","$","1,347","","","$","\u2014","","","$","(705)","","","$","203","","","$","3,439"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Balance at December 31, 2020","","Additions","","Advances/ Capitalized Costs/Other","","Sales","","Valuation Adjustments","","Balance at December 31, 2021"],["Land & Construction","$","154","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","154"],["Residential real estate","1,507","","","1,052","","","\u2014","","","(1,458)","","","156","","","1,257"],["Commercial real estate","1,183","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","1,183"],["Total foreclosed assets","$","2,844","","","$","1,052","","","$","\u2014","","","$","(1,458)","","","$","156","","","$","2,594"]]
[[/GREPCENT_TABLE]]

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Deposit Portfolio Composition

The following table shows the Company’s deposit balances at the dates indicated:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(dollars in thousands)","2022","","2021","","2020"],["Noninterest-bearing demand","$","3,502,095","","","$","2,979,882","","","$","2,581,517"],["Interest-bearing demand","1,718,541","","","1,568,682","","","1,414,908"],["Savings","2,884,378","","","2,520,959","","","2,164,942"],["Time certificates, over $250,000","46,350","","","44,652","","","73,147"],["Other time certificates","177,649","","","252,984","","","271,420"],["Total deposits","$","8,329,013","","","$","7,367,159","","","$","6,505,934"]]
[[/GREPCENT_TABLE]]

Total uninsured deposits were estimated to be approximately $2,701,000,000 at December 31, 2022.

Long-Term Debt

See Note 13 to the consolidated financial statements at Item 8 of this report for information about the Company’s other borrowings and long-term debt.

Junior Subordinated Debt

See Note 14 to the consolidated financial statements at Item 8 of this report for information about the Company’s junior subordinated debt.

Equity

See Note 16 and Note 26 in the consolidated financial statements at Item 8 of this report for a discussion of shareholders’ equity and regulatory capital, respectively. Management believes that the Company’s capital is adequate to support anticipated growth, meet the cash dividend requirements of the Company and meet the future risk-based capital requirements of the Bank and the Company.

On February 25, 2021 the Board of Directors approved the authorization to repurchase 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. 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. The following table shows the repurchases made by the Company during 2022 under the 2021 Plan:

[[GREPCENT_TABLE]]
[["Period","","Total number of shares purchased","","Average price paid per share","","Maximum number of shares remaining that may yet be purchased under the 2021 Plan"],["January 1, 2022 - December 31, 2022","","576,881","","$41.67","","1,359,802"]]
[[/GREPCENT_TABLE]]

Market Risk Management

Overview. The goal for managing the assets and liabilities of the Bank is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Bank to undue interest rate risk. The Board of Directors has overall responsibility for the Company’s interest rate risk management policies. The Bank has an Asset and Liability Management Committee which establishes and monitors guidelines to control the sensitivity of earnings and the fair value of certain assets and liabilities as may be caused by changes in interest rates. The Company does not hold any financial instruments that are not maintained in US dollars and is not party to any contracts that may be settled or repaid in a denomination other than US dollars.

Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. Market value of equity is the net present value of estimated cash flows from the Bank’s assets, liabilities and off-balance sheet items. The Bank uses simulation models to forecast net interest margin and market value of equity.

Simulation of net interest margin and market value of equity under various interest rate scenarios is the primary tool used to measure interest rate risk. The Bank estimated the potential impact of changing interest rates on net interest margin and market value of equity using computer-modeling techniques. A balance sheet forecast is prepared using inputs of actual loan, securities and interest-bearing liability (i.e. deposits/borrowings) positions as the beginning base.

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In the simulation of net interest income and market value of equity, the forecast balance sheet is processed against various interest rate scenarios. These various interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and rate ramp and or shock scenarios including -300, -200, -100, +100, +200, and +300 basis points around the flat scenario. At December 31, 2022, the overnight Federal funds rate, the rate primarily used in these interest rate shock scenarios, was 4.25%. 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 shock scenario over a twelve month period utilizing the Company's specific mix of interest earning assets and interest bearing liabilities as of December 31, 2022.

[[GREPCENT_TABLE]]
[["Interest Rate Risk Simulations:Change in InterestRates (Basis Points)","Estimated Change in Net Interest Income (NII) (as % of NII)","","Estimated Change in Market Value of Equity (MVE) (as % of MVE)"],["+300 (shock)","(2.5)","%","","(4.1)","%"],["+200 (shock)","(1.7)","%","","(2.4)","%"],["+100 (shock)","(0.7)","%","","(0.3)","%"],["+ 0 (flat)","\u2014","","","\u2014"],["-100 (shock)","(2.2)","%","","(3.9)","%"],["-200 (shock)","(6.5)","%","","(12.9)","%"],["-300 (shock)","(9.9)","%","","(26.1)","%"]]
[[/GREPCENT_TABLE]]

These simulations indicate that given a “flat” balance sheet size scenario, and if interest-bearing checking, savings and money market interest rates track the general interest rate changes by the rate shock values listed above, the Company’s balance sheet is slightly liability sensitive over a twelve month time horizon for both a rates up and rates down shock scenario. “Asset sensitive” implies that net interest income increases when interest rates rise and decrease when interest rates decrease. “Liability sensitive” implies that net interest income decreases when interest rates rise and increase when interest rates decrease.“Neutral sensitivity” implies that net interest income does not change when interest rates change. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs.

The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of interest rate deviations. In addition, the simulation results noted above contain various assumptions such as a flat balance sheet, and the rate that deposit interest rates change instantaneously as general interest rates change. Therefore, they do not reflect likely actual results, but serve as estimates of interest rate risk. More specifically, the Company's pre-existing low cost of funds, and the presumption that depositors will not accept a negative rate environment, does not allow management the ability to meaningfully adjust the cost of deposits below zero. In addition, many of the Company's loans and investment securities are considered fixed rate interest earning assets. Therefore, in an instantaneous upward rate shock scenario, management would expect the cost of interest bearing liabilities to reprice faster than interest earning assets.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding tables. For example, although certain of the Company’s assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain of the Company’s asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in the preceding tables. Further, a change in U.S. Treasury rates accompanied by a change in the shape of the treasury yield curve could result in different estimations from those presented herein. Accordingly, the results in the preceding tables should not be relied upon as indicative of actual results in the event of changing market interest rates. Additionally, the resulting estimates of changes in market value of equity are not intended to represent, and should not be construed to represent, estimates of changes in the underlying value of the Company.

Interest rate sensitivity is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities. One aspect of these repricing characteristics is the time frame within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. An analysis of the repricing time frames of interest-bearing assets and liabilities is sometimes called a “gap” analysis because it shows the gap between assets and liabilities repricing or maturing in each of a number of periods. Another aspect of these repricing characteristics is the relative magnitude of the repricing for each category of interest earning asset and interest-bearing liability given various changes in market interest rates. Gap analysis gives no indication of the relative magnitude of repricing given various changes in interest rates. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity gaps are measured as the difference between the volumes of assets and liabilities in the Company’s current portfolio that are subject to repricing at various time horizons.

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The following interest rate sensitivity table shows the Company’s repricing gaps as of December 31, 2022. In this table transaction deposits, which may be repriced at will by the Company, have been included in the less than 3-month category. The inclusion of all of the transaction deposits in the less than 3-month repricing category causes the Company to appear liability sensitive. Because the Company may reprice its transaction deposits at will, transaction deposits may or may not reprice immediately with changes in interest rates.

Due to the limitations of gap analysis, as described above, the Company does not actively use gap analysis in managing interest rate risk. Instead, the Company relies on the more sophisticated interest rate risk simulation model described above as its primary tool in measuring and managing interest rate risk.

[[GREPCENT_TABLE]]
[["As of December 31, 2022","Repricing within:"],["(dollars in thousands)","Less than 3 months","","3 - 6 months","","6 - 12 months","","1 - 5 years","","Over 5 years"],["Interest-earning assets:"],["Cash at Federal Reserve and other banks","$","10,907","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Securities","493,948","","","74,824","","","148,098","","","772,025","","","1,127,097"],["Loans","1,226,279","","","320,707","","","626,504","","","3,206,718","","","937,043"],["Total interest-earning assets","1,731,134","","","395,531","","","774,602","","","3,978,743","","","2,064,140"],["Interest-bearing liabilities"],["Transaction deposits","5,220,636","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Time","68,913","","","42,059","","","53,919","","","59,892"],["Other borrowings","264,605","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Junior subordinated debt","101,040","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total interest-bearing liabilities","$","5,655,194","","","$","42,059","","","$","53,919","","","$","59,892","","","$","\u2014"],["Interest sensitivity gap","$","(3,924,060)","","","$","353,472","","","$","720,683","","","$","3,918,851","","","$","2,064,140"],["Cumulative sensitivity gap","$","(3,924,060)","","","$","(3,570,588)","","","$","(2,849,905)","","","$","1,068,946","","","$","3,133,086"],["As a percentage of earning assets:"],["Interest sensitivity gap","(43.2)","%","","3.9","%","","7.9","%","","43.2","%","","22.7","%"],["Cumulative sensitivity gap","(43.2)","%","","(39.3)","%","","(31.4)","%","","11.8","%","","34.5","%"]]
[[/GREPCENT_TABLE]]

Liquidity

Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Consolidated Statement of Cash Flows. Net cash used by investing activities, excluding cash acquired from VRB, totaled $1,149,582,000 in 2022. Net increases in loan balances from both originations and purchases used approximately $761,357,000 of cash, while purchases of investment securities, net of calls and maturities, used approximately $392,806,000 of cash.

Liquidity may also be impacted from liabilities through changes in deposits and borrowings outstanding. These activities are included under financing activities in the Consolidated Statement of Cash Flows. In 2022, financing activities used funds totaling $100,862,000, resulting from a decline of $253,625,000 in deposits, $35,797,000 in dividend payments, and an additional $27,148,000 used toward the repurchase of common stock, partially offset by an increase in cash from short term borrowings totaling $214,518,000. In addition, at December 31, 2022, the Company had loans and securities available to pledge towards future borrowings from the Federal Home Loan Bank and the Federal Reserve Bank of up to $2,485,905,000 and $299,689,000, respectively. As of December 31, 2022, the Company had $80,460,000 of other borrowings as described in Note 13 of the consolidated financial statements of the Company and the related notes at Item 8 of this report. While these sources are expected to continue to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions. Liquidity is also provided or used through the results of operating activities. In 2022, operating activities provided cash of $162,895,000 and primarily from net income of $125,419,000.

The Company’s investment securities, excluding held-to-maturity securities, plus cash and cash equivalents in excess of reserve requirements totaled $2,559,668,000 at December 31, 2022, which was 25.8% of total assets at that time. This was a decrease of $416,691,000 from $2,976,359,000 and 34.5% of total assets as of December 31, 2021.

Loan demand during 2023 will depend in part on economic and competitive conditions. The Company emphasizes the solicitation of non-interest bearing demand deposits and money market checking deposits, which are the least sensitive to interest rates. The outlook for deposit balances during 2023 is subject to actions from the Federal Reserve, heightened competition, the success of the Company’s sales

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efforts, delivery of superior customer service and market conditions. In addition to the Federal Reserve's increase in interest rates, quantitative tightening through reduction of the Federal balance sheet is expected to place downward pressure on deposits balances during 2023. Depending on economic conditions, interest rate levels, and a variety of other conditions, proceeds from the sale or maturity of investment securities may be used to fund loans, or reduce short-term borrowings. However, due to concerns such as uncertainty in the general economic environment, competition and political uncertainty, loan demand and levels of customer deposits are not certain and forecasted changes in those balances are subject to significant volatility and uncertainty. At December 31, 2022, we believe the Company has sufficient liquidity and capital resources to meet its cash flow obligations over the next 12 months and for the foreseeable future.

The principal cash requirements of the Company are dividends on common stock when declared. The Company is dependent upon the payment of cash dividends by the Bank to service its commitments. Shareholder dividends are expected to continue subject to the Board’s discretion and 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 meet this payment schedule. Dividends from the Bank are subject to certain regulatory restrictions.

The maturity distribution of certificates of deposit in denominations of $100,000 or more is set forth in the following table. These deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain higher yields elsewhere if available.

Certificates of Deposit in Denominations of $250,000 or More

[[GREPCENT_TABLE]]
[["","Amounts as of December 31,"],["(dollars in thousands)","2022","","2021"],["Time remaining until maturity:"],["Less than 3 months","$","7,653","","","$","12,978"],["3 months to 6 months","8,284","","","6,741"],["6 months to 12 months","17,662","","","11,451"],["More than 12 months","12,751","","","13,482"],["Total","$","46,350","","","$","44,652"]]
[[/GREPCENT_TABLE]]

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Loan maturities

Loan demand also affects the Company’s liquidity position. The following table presents the maturities of loans, net of deferred loan costs, at December 31, 2022:

[[GREPCENT_TABLE]]
[["","Within One Year","","After One But Within Five Years","","After Five But Within 15 Years","","After 15 Years","","Total"],["","(dollars in thousands)"],["Loans with predetermined interest rates:"],["Commercial Real Estate","$","58,681","","","$","415,410","","","$","1,177,462","","","$","21,758","","","$","1,673,311"],["Consumer","89,992","","","54,531","","","121,461","","","478,171","","","744,155"],["Commercial & Industrial","57,689","","","168,275","","","53,708","","","8,048","","","287,720"],["Construction","10,691","","","13,509","","","26,041","","","11,054","","","61,295"],["Agricultural Production","177","","","8,553","","","10,265","","","\u2014","","","18,995"],["Leases","\u2014","","","7,726","","","\u2014","","","\u2014","","","7,726"],["Total loans with predetermined interest rates","217,230","","","668,004","","","1,388,937","","","519,031","","","2,793,202"],["Loans with floating interest rates:"],["Commercial Real Estate","86,848","","","513,917","","","2,023,972","","","61,035","","","2,685,772"],["Consumer","30,309","","","45,984","","","104,617","","","315,678","","","496,588"],["Commercial & Industrial","98,532","","","151,275","","","12,572","","","19,822","","","282,201"],["Construction","44,044","","","41,890","","","57,839","","","6,492","","","150,265"],["Agricultural Production","32,320","","","9,730","","","360","","","9","","","42,419"],["Leases","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total loans with floating interest rates","292,053","","","762,796","","","2,199,360","","","403,036","","","3,657,245"],["Total loans","$","509,283","","","$","1,430,800","","","$","3,588,297","","","$","922,067","","","$","6,450,447"]]
[[/GREPCENT_TABLE]]

Investment maturities

The maturity distribution and yields of the investment portfolio at December 31, 2022 is presented in the following tables. The timing of the maturities indicated in the tables below is based on final contractual maturities. Most mortgage-backed securities return principal throughout their contractual lives. As such, the weighted average life of mortgage-backed securities based on outstanding principal balance is usually significantly shorter than the final contractual maturity indicated below. Yields on tax exempt securities are shown on a tax equivalent basis.

[[GREPCENT_TABLE]]
[["","Within One Year","","After One Year but Through Five Years","","After Five Years but Through Ten Years","","After Ten Years","","Total"],["","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield"],["","(dollars in thousands)"],["Debt Securities Available for Sale"],["Obligations of US government agencies","$","55,851","","","0.40","%","","$","69,863","","","0.72","%","","$","83,555","","","2.57","%","","$","1,163,500","","","2.16","%","","$","1,372,769","","","2.04","%"],["Obligations of states and political subdivisions","260","","","2.64","%","","2,504","","","3.51","%","","70,490","","","3.09","%","","219,951","","","3.34","%","","293,205","","","3.28","%"],["Corporate bonds","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","5,751","","","4.95","%","","\u2014","","","\u2014","%","","5,751","","","4.95","%"],["Asset backed securities","\u2014","","","\u2014","%","","6,397","","","3.08","%","","227,870","","","5.34","%","","205,500","","","4.83","%","","439,767","","","5.07","%"],["Non-agency collateralized mortgage obligations","\u2014","","","\u2014","%","","41,352","","","4.66","%","","7,796","","","2.20","%","","291,798","","","2.49","%","","340,946","","","2.74","%"],["Total debt securities available for sale","$","56,111","","","0.46","%","","$","120,116","","","2.21","%","","$","395,462","","","4.25","%","","$","1,880,749","","","2.62","%","","$","2,452,438","","","2.81","%"],["Debt Securities Held to Maturity"],["Obligations of US government agencies","$","\u2014","","","\u2014","%","","$","2,662","","","2.32","%","","$","10,206","","","2.40","%","","$","141,962","","","2.72","%","","$","154,830","","","2.69","%"],["Obligations of states and political subdivisions","\u2014","","","\u2014","%","","1,068","","","4.55","%","","4,515","","","3.07","%","","570","","","3.76","%","","6,153","","","3.39","%"],["Total debt securities held to maturity","$","\u2014","","","\u2014","%","","$","3,730","","","2.96","%","","$","14,721","","","2.60","%","","$","142,532","","","2.73","%","","$","160,983","","","2.72","%"]]
[[/GREPCENT_TABLE]]

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Off-Balance Sheet Items

The Bank has certain ongoing commitments under leases. See Note 11 of the financial statements at Item 8 of this report for the terms. These commitments do not significantly impact operating results. As of December 31, 2022, commitments to extend credit and commitments related to the Bank’s deposit overdraft privilege product were the Bank’s only financial instruments with off-balance sheet risk. The Bank has not entered into any material contracts for financial derivative instruments such as futures, swaps, options, etc. Commitments to extend credit were $2,215,159,000 and $1,607,939,000 at December 31, 2022 and 2021, respectively, and represent 34.3% of the total loans outstanding at year-end 2022 versus 32.7% at December 31, 2021. Commitments related to the Bank’s deposit overdraft privilege product totaled $126,634,000 and $125,670,000 at December 31, 2022 and 2021, respectively.

Certain Contractual Obligations

The following chart summarizes certain contractual obligations of the Company as of December 31, 2022:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","Total","","Less than one year","","1-3 years","","3-5 years","","More than 5 years"],["Time deposits","$","223,999","","","$","164,107","","","$","57,736","","","$","2,156","","","$","\u2014"],["Other collateralized borrowings, fixed rate, as of December 31, 2022 of 0.05%, payable on January 3, 2023","47,905","","","47,905","","\u2014","","","\u2014","","","\u2014"],["Overnight borrowing at FHLB, fixed rate, as of December 31, 2022 of 4.65%, payable on January 3, 2023","216,700","","","216,700","","\u2014","","","\u2014","","","\u2014"],["Junior subordinated debt:"],["TriCo Trust I(1)","20,619","","","\u2014","","","\u2014","","","\u2014","","","20,619"],["TriCo Trust II(2)","20,619","","","\u2014","","","\u2014","","","\u2014","","","20,619"],["North Valley Trust II(3)","5,503","","","\u2014","","","\u2014","","","\u2014","","","5,503"],["North Valley Trust III(4)","4,383","","","\u2014","","","\u2014","","","\u2014","","","4,383"],["North Valley Trust IV(5)","7,393","","","\u2014","","","\u2014","","","\u2014","","","7,393"],["VRB Subordinated - 6%(6)","17,187","","","\u2014","","","\u2014","","","\u2014","","","17,187"],["VRB Subordinated - 5%(7)","25,336","","","\u2014","","","\u2014","","","\u2014","","","25,336"],["Operating lease obligations","33,262","","","5,522","","","13,863","","","7,342","","","6,535"],["Deferred compensation(8)","697","","","177","","","348","","","172","","","\u2014"],["Supplemental retirement plans(8)","22,455","","","2,073","","","4,253","","","3,616","","","12,513"],["Total contractual obligations","$","646,058","","","$","436,484","","","$","76,200","","","$","13,286","","","$","120,088"]]
[[/GREPCENT_TABLE]]

(1)Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a quarterly basis beginning October 7, 2008, matures October 7, 2033.

(2)Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.55%, callable in whole or in part by the Company on a quarterly basis beginning July 23, 2009, matures July 23, 2034.

(3)Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.25%, callable in whole or in part by the Company on a quarterly basis beginning April 24, 2008, matures April 24, 2033.

(4)Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.80%, callable in whole or in part by the Company on a quarterly basis beginning July 23, 2009, matures July 23, 2034.

(5)Junior subordinated debt, adjustable rate of three-month LIBOR plus 1.33%, callable in whole or in part by the Company on a quarterly basis beginning March 15, 2011, matures March 15, 2036.

(6)Junior subordinated debt, fixed rate of 6% until March 29, 2024, then floating rate of three-month LIBOR plus 3.52% until maturity in 2029. Redeemable in whole or in part by the Company beginning March 29, 2024.

(7)Junior subordinated debt, fixed rate of 5% until August 27, 2025, then floating rate of 90-day average SOFR plus 4.90% until maturity in 2035. Redeemable in whole or in part by the Company beginning August 27, 2025.

(8)These amounts represent known certain payments to participants under the Company’s deferred compensation and supplemental retirement plans. See Note 22 in the financial statements at Item 8 of this report for additional information related to the Company’s deferred compensation and supplemental retirement plan liabilities.