TriCo Bancshares (NASDAQ:TCBK) (the "Company"), parent company of Tri Counties Bank, today announced net income of $28,362,000 for the quarter ended June 30, 2021, compared to $33,649,000 during the trailing quarter ended March 31, 2021 and $7,430,000 during the quarter ended June 30, 2020. Diluted earnings per share were $0.95 for the second quarter of 2021, compared to $1.13 for the first quarter of 2021 and $0.25 for the second quarter of 2020.

Financial Highlights

Performance highlights and other developments for the Company as of or for the three and six months ended June 30, 2021 included the following:

For the three and six months ended June 30, 2021, the Company's return on average assets was 1.40% and 1.57%, respectively, and the return on average equity was 11.85% and 13.16%, respectively.
Organic loan growth, excluding PPP, totaled $99.2 million (8.6% annualized) for the current quarter and $327.3 million (7.5%) for the trailing twelve-month period.
For the current quarter, net interest margin was 3.58% on a tax equivalent basis as compared to 4.10% in the quarter ended June 30, 2020, and a decrease of 16 basis points from 3.74% in the trailing quarter.
The efficiency ratio was 53.19% as of June 30, 2021, as compared to 50.42% in the trailing quarter and 59.69% in the same quarter of the prior year.
As of June 30, 2021, the Company reported total loans, total assets and total deposits of $4.94 billion, $8.17 billion and $6.99 billion, respectively. As a direct result of the considerable deposit growth in the last 6 quarters, the loan to deposit ratio was 70.72% as of June 30, 2021, as compared to 73.21% at December 31, 2020 and 76.84% at June 30, 2020.
Non-interest bearing deposits as a percentage of total deposits were 40.67% at June 30, 2021, as compared to 39.68% at December 31, 2020 and 39.81% at June 30, 2020.
The average rate of interest paid on deposits, including non-interest-bearing deposits, decreased to 0.05% for the second quarter of 2021 as compared with 0.06% for the trailing quarter, and decreased by 7 basis points from the average rate paid of 0.12% during the same quarter of the prior year.
The balance of PPP loans outstanding at June 30, 2021 totaled $248.6 million and the balance of SBA fees remaining to be accreted totaled $9.0 million. In addition, nearly 90% of all round one PPP loans have been forgiven and repaid.
Noninterest income related to service charges and fees was $10.9 million and $21.4 million for the three and six month periods ended June 30, 2021, representing an increase of 33.8% and 23.8% when compared to the same periods in 2020.
The reversal of provision for credit losses for loans and debt securities was $0.3 million during the quarter ended June 30, 2021, as compared to a reversal of provision expense of $6.1 million during the trailing quarter ended March 31, 2021, and a provision expense totaling $22.2 million for the three month period ended June 30, 2020.
The allowance for credit losses to total loans was 1.74% as of June 30, 2021, compared to 1.93% as of December 31, 2020, and 1.15% as January 1, 2020, following the Company's adoption of CECL. Non-performing assets to total assets were 0.43% at June 30, 2021, as compared to 0.39% as of March 31, 2021, and 0.31% at June 30, 2020.

"The low rate and high liquidity environment in which we currently operate necessitates our continued focus on high quality earning asset growth. Our team's ability to execute our growth strategies while maintaining or improving the efficiency of our operations, as we scale towards $10 billion in total assets, will be critical to our long-term success. We believe that our year-to-date results for 2021 are a reflection of our accomplishments," commented Peter Wiese, EVP and Chief Financial Officer. Rick Smith, President and CEO added; "We are very pleased with the level of non-PPP organic loan growth that has been generated to date, and we remain optimistic regarding expected production and growth the latter half of the year. Additionally, our new loan production offices, located in San Diego, Irvine, and Pasadena will officially open in late Q3. We are pleased with the level of talent we have been able to add to the organization in the southern California geography as well as our legacy footprint, both of which should augment our performance in the latter part of 2021 and beyond."

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Financial results reported in this document are preliminary. Final financial results and other disclosures will be reported in our Quarterly Report on Form 10-Q for the period ended June 30, 2021, and may differ materially from the results and disclosures in this document due to, among other things, the completion of final review procedures, the occurrence of subsequent events, or the discovery of additional information.

Summary Results

For the three and six months ended June 30, 2021, the Company's return on average assets was 1.40% and 1.57%, respectively, while the return on average equity was 11.85% and 13.16%, respectively. For the three and six months ended June 30, 2020, the Company's return on average assets was 0.43% and 0.70%, respectively, while the return on average equity was 3.39% and 5.06%, respectively.

The following is a summary of the components of the Company's operating results and performance ratios for the periods indicated:

	Three months ended
	June 30,			March 31,
(dollars and shares in thousands)	2021			2021			$ Change		% Change
Net interest income	$	67,083		$	66,440		$	643	1.0	%
Reversal of credit losses	260			6,060			(5,800)		(95.7)	%
Noninterest income	15,957			16,110			(153)		(0.9)	%
Noninterest expense	(44,171)			(41,618)			(2,553)		6.1	%
Provision for income taxes	(10,767)			(13,343)			2,576		(19.3)	%
Net income	$	28,362		$	33,649		$	(5,287)	(15.7)	%
Diluted earnings per share	$	0.95		$	1.13		$	(0.18)	(15.9)	%
Dividends per share	$	0.25		$	0.25		$	—	—	%
Average common shares	29,719			29,727			(8)		(0.03)	%
Average diluted common shares	29,904			29,905			(1)		0.00	%
Return on average total assets	1.40		%	1.75		%
Return on average equity	11.85		%	14.51		%
Efficiency ratio	53.19		%	50.42		%

	Three months ended June 30,
(dollars and shares in thousands)	2021			2020			$ Change		% Change
Net interest income	$	67,083		$	64,659		$	2,424	3.7	%
Reversal of (provision for) credit losses	260			(22,244)			22,504		(101.2)	%
Noninterest income	15,957			11,657			4,300		36.9	%
Noninterest expense	(44,171)			(45,550)			1,379		(3.0)	%
Provision for income taxes	(10,767)			(1,092)			(9,675)		886.0	%
Net income	$	28,362		$	7,430		$	20,932	281.7	%
Diluted earnings per share	$	0.95		$	0.25		$	0.70	280.0	%
Dividends per share	$	0.25		$	0.22		$	0.03	13.6	%
Average common shares	29,719			29,754			(35)		(0.1)	%
Average diluted common shares	29,904			29,883			21		0.1	%
Return on average total assets	1.40		%	0.43		%
Return on average equity	11.85		%	3.39		%
Efficiency ratio	53.19		%	59.89		%

	Six months ended June 30,
(dollars and shares in thousands)	2021			2020			$ Change		% Change
Net interest income	$	133,523		$	127,851		$	5,672	4.4	%
Reversal of (provision for) credit losses	6,320			(30,313)			36,633		(120.8)	%
Noninterest income	32,067			23,477			8,590		36.6	%
Noninterest expense	(85,789)			(90,300)			4,511		(5.0)	%
Provision for income taxes	(24,110)			(7,164)			(16,946)		236.5	%
Net income	$	62,011		$	23,551		$	38,460	163.3	%
Diluted earnings per share	$	2.07		$	0.78		$	1.29	165.4	%
Dividends per share	$	0.50		$	0.44		$	0.06	13.6	%
Average common shares	29,723			30,074			(351)		(1.2)	%
Average diluted common shares	29,904			30,203			(299)		(1.0)	%
Return on average total assets	1.57		%	0.70		%
Return on average equity	13.16		%	5.06		%
Efficiency ratio	51.81		%	59.82		%

SBA Paycheck Protection Program

In March 2020 (Round 1) and subsequently in December 2020 (Round 2), the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was created to help small businesses keep workers employed during the COVID-19 crisis. Tri Counties Bank, through its online portal, facilitated the ability for borrowers to open a new account and submit PPP applications during the entirety of the Programs. The SBA ended PPP and did not accept new borrowing applications, effective May 31, 2021.

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

(dollars in thousands)	June 30, 2021		March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020
Total number of PPP loans outstanding	2,209		2,484		2,310		2,924		2,900

PPP loan balance (Round 1 origination), gross	$	51,547	$	193,958	$	333,982	$	437,793	$	436,731
PPP loan balance (Round 2 origination), gross	197,035		176,316		n/a		n/a		n/a
Total PPP loans, gross outstanding	$	248,582	$	370,274	$	333,982	$	437,793	$	436,731

PPP deferred loan fees (Round 1 origination)	$	477	$	2,358	$	7,212	$	11,846	$	13,300
PPP deferred loan fees (Round 2 origination)	8,513		7,072		n/a		n/a		n/a
Total PPP deferred loan fees outstanding	$	8,990	$	9,430	$	7,212	$	11,846	$	13,300

As of June 30, 2021, the total gross balance outstanding of PPP loans was $248,582,000 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 June 30, 2021 there was approximately $8,990,000 in net deferred fee income remaining to be recognized. During the three and six months ended June 30, 2021, the Company recognized $2,344,000 and $7,304,000, respectively in fees on PPP loans.

COVID Deferrals

Following the passage of the CARES Act legislation, the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" was issued by federal bank regulators, which offers temporary relief from troubled debt restructuring accounting for loan payment deferrals for certain customers whose businesses are experiencing economic hardship due to Coronavirus. The applicable period for this relief, originally expected to expire on December 31, 2020, was extended through 2021 by way of the Consolidated Appropriations Act.

The following is a summary of COVID related loan customer modifications with outstanding balances as of June 30, 2021:

					Modification Type				Deferral Term
(dollars in thousands)	Modified Loan Balances Outstanding		% of Total Category of Loans		Interest Only Deferral		Principal and Interest Deferral		90 Days		180 Days		Other
Commercial real estate:
CRE non-owner occupied	$	23,811	1.6	%	94.4	%	5.6	%	—	%	81.5	%	18.5	%
CRE owner occupied	2,943		0.5		100.0		—		—		57.1		42.9
Multifamily	26,311		3.2		100.0		—		—		100.0		—
Farmland	—		—		—		—		—		—		—
Total commercial real estate loans	53,065		1.7		97.5		2.5		23.7		89.3		10.7
Consumer loans	—		—		—		—		—		—		—
Commercial and industrial	557		0.1		100.0		—		—		—		100.0
Construction	—		—		—		—		—		—		—
Agriculture production	—		—		—		—		—		—		—
Leases	—		—		—		—		—		—		—
Total modifications	$	53,622	1.1	%	95.7	%	2.5	%	—	%	88.4	%	11.6	%

Of the remaining balance outstanding as of June 30, 2021, $33,350,000 is related to second deferrals which are expected to conclude their modification period by November, 2021 and $2,525,595 is related to third deferrals expected to conclude in October, 2021. The remaining balance of loans with modified terms are scheduled to conclude their modification period during fiscal 2021. However, as long as the current pandemic and recessionary economic conditions continue, it is possible that additional borrowers may request an initial or subsequent modification to their loan terms.

Balance Sheet

Total loans outstanding, excluding PPP, grew to $4.71 billion as of June 30, 2021, an increase of 7.5% over the same quarter of the prior year, and an annualized increase of 8.6% over the trailing quarter. Investments outstanding increased to $2.10 billion as of June 30, 2021, an increase of 28.7% annualized over the trailing quarter. Average earning assets to total average assets continued to increase to 92.8% at June 30, 2021, as compared to 92.7% and 90.6% at March 31, 2021, and June 30, 2020, respectively. The loan to deposit ratio was 70.7% at June 30, 2021, as compared to 72.4% and 76.8% at March 31, 2021, and June 30, 2020, respectively.

Total shareholders' equity increased by $24,241,000 during the quarter ended June 30, 2021, primarily as a result of net income of $28,362,000, plus an increase in accumulated other comprehensive income of $5,206,000, offset by $7,431,000 in cash dividends paid on common stock. As a result, the Company's book value increased to $32.53 per share at June 30, 2021 as compared to $31.71 and $29.76 at March 31, 2021, and June 30, 2020, respectively. The Company's tangible book value per share, a non-GAAP measure, calculated by subtracting goodwill and other intangible assets from total shareholders' equity and dividing that sum by total shares outstanding, was $24.60 per share at June 30, 2021, as compared to $23.72 and $21.64 at March 31, 2021, and June 30, 2020, respectively.

Trailing Quarter Balance Sheet Change

Ending balances	As of June 30,		March 31,		$ Change		Annualized % Change
(dollars in thousands)	2021		2021		$ Change		Annualized % Change
Total assets	$	8,170,365	$	8,031,612	$	138,753	6.9	%
Total loans	4,944,894		4,966,977		(22,083)		(1.8)	%
Total loans, excluding PPP	4,705,302		4,606,133		99,169		8.6	%
Total investments	2,103,575		1,962,780		140,795		28.7	%
Total deposits	$	6,992,053	$	6,863,400	$	128,653	7.5	%

Organic loan growth, excluding PPP, of $99,169,000 or 8.6% on an annualized basis was realized during the quarter ended June 30, 2021, primarily within commercial real estate. In addition, investment security growth was $140,795,000 or 28.7% on an annualized basis as excess liquidity, driven by continued strong deposit growth, was put to use in higher yielding earning assets. Earning asset growth was funded by the continued growth of deposit balances which increased during the second quarter of 2021 by $128,653,000 or 7.5% annualized. SBA forgiveness outpaced net new loan origination activity, resulting in a $22,083,000 or 1.8% annualized decrease in total loans during the second quarter as compared to the trailing quarter.

Average Trailing Quarter Balance Sheet Change

Qtrly avg balances	As of June 30,		As of March 31,		$ Change		Annualized % Change
(dollars in thousands)	2021		2021		$ Change		Annualized % Change
Total assets	$	8,128,674	$	7,808,912	$	319,762	16.4	%
Total loans	4,978,465		4,763,025		215,440		18.1	%
Total loans, excluding PPP	4,646,188		4,407,150		239,038		21.7	%
Total investments	2,007,090		1,775,035		232,055		52.3	%
Total deposits	$	6,943,081	$	6,653,754	$	289,327	17.4	%

The increase in average total loans of $215,440,000, or 18.1% on an annualized basis, during the second quarter of 2021 was benefited by both the timing of organic loan origination activity early in the quarter as well as the Company's purchase of a pool of single family residential mortgages totaling approximately $101,466,000 which occurred on the final day of the first quarter, and thus minimally impacted the March 31, 2021 average balances while fully benefiting the average balances in the second quarter. The significant growth in both ending and average balances of investment securities was a direct result of management's focus on the deployment of excess cash balances which remained elevated due to continued deposit growth during the quarter.

Year Over Year Balance Sheet Change

Ending balances	As of June 30,
(dollars in thousands)	2021		2020		$ Change		% Change
Total assets	$	8,170,365	$	7,360,071	$	810,294	11.0	%
Total loans	4,944,894		4,801,405		143,489		3.0	%
Total loans, excluding PPP	4,705,302		4,377,974		327,328		7.5	%
Total investments	2,103,575		1,353,728		749,847		55.4	%
Total deposits	$	6,992,053	$	6,248,258	$	743,795	11.9	%

As discussed in previous quarters, the PPP program generated significant increases in volume during the twelve months ended June 30, 2021 for both loan and deposit balances. Other forms of stimulus payments have further elevated deposit levels during the same period. While excess deposit proceeds are ratably being allocated to the purchase of investment securities with medium term durations to improve overall margin, we expect to maintain above average levels of liquidity through 2021, as the economic impacts of COVID-19 and amount of future stimulus both remain uncertain. Investment securities increased to $2,103,575,000 at June 30, 2021, a change of $749,847,000 or 55.4% from $1,353,728,000 at June 30, 2020.

Net Interest Income and Net Interest Margin

The following is a summary of the components of net interest income for the periods indicated:

	Three months ended
	June 30,			March 31,
(dollars in thousands)	2021			2021			$ Change		% Change
Interest income	$	68,479		$	67,916		$	563	0.8	%
Interest expense	(1,396)			(1,476)			80		(5.4)	%
Fully tax-equivalent adjustment (FTE) ⁽¹⁾	255			277			(22)		(7.9)	%
Net interest income (FTE)	$	67,338		$	66,717		$	621	0.9	%
Net interest margin (FTE)	3.58		%	3.74		%

Acquired loans discount accretion, net:
Amount (included in interest income)	$	2,566		$	1,712		$	854
Net interest margin less effect of acquired loan discount accretion⁽¹⁾	3.44		%	3.64		%			(0.20)	%
PPP loans yield, net:
Amount (included in interest income)	$	3,179		$	5,863		$	(2,684)
Net interest margin less effect of PPP loan yield ⁽¹⁾	3.61		%	3.59		%			0.02	%
Acquired loans discount accretion and PPP loan yield, net:
Amount (included in interest income)	$	5,745		$	7,575		$	(1,830)
Net interest margin less effect of acquired loan discount accretion and PPP loan yield ⁽¹⁾	3.47		%	3.49		%			(0.02)	%

	Three months ended June 30,
(dollars in thousands)	2021			2020			$ Change		% Change
Interest income	$	68,479		$	67,148		$	1,331	2.0	%
Interest expense	(1,396)			(2,489)			1,093		(43.9)	%
Fully tax-equivalent adjustment (FTE) ⁽¹⁾	255			286			(31)		(10.8)	%
Net interest income (FTE)	$	67,338		$	64,945		$	2,393	3.7	%
Net interest margin (FTE)	3.58		%	4.10		%

Acquired loans discount accretion, net:
Amount (included in interest income)	$	2,566		$	2,587		$	(21)
Net interest margin less effect of acquired loan discount accretion⁽¹⁾	3.44		%	3.94		%			(0.50)	%
PPP loans yield, net:
Amount (included in interest income)	$	3,179		$	2,356		$	823
Net interest margin less effect of PPP loan yield ⁽¹⁾	3.61		%	4.14		%			(0.53)	%
Acquired loans discount accretion and PPP loan yield, net:
Amount (included in interest income)	$	5,745		$	4,943		$	802
Net interest margin less effect of acquired loan discount accretion and PPP loan yield ⁽¹⁾	3.47		%	3.98		%			(0.51)	%

	Six months ended June 30,
(dollars in thousands)	2021			2020			$ Change		% Change
Interest income	$	136,395		$	133,665		$	2,730	2.0	%
Interest expense	(2,872)			(5,814)			2,942		(50.6)	%
Fully tax-equivalent adjustment (FTE) ⁽¹⁾	532			557			(25)		(4.5)	%
Net interest income (FTE)	$	134,055		$	128,408		$	5,647	4.4	%
Net interest margin (FTE)	3.66		%	4.22		%

Acquired loans discount accretion, net:
Amount (included in interest income)	$	4,278		$	4,335		$	(57)
Net interest margin less effect of acquired loan discount accretion⁽¹⁾	3.54		%	4.08		%			(0.54)	%
PPP loans yield, net:
Amount (included in interest income)	$	9,042		$	2,356		$	6,686
Net interest margin less effect of PPP loan yield ⁽¹⁾	3.59		%	4.25		%			(0.66)	%
Acquired loans discount accretion and PPP loan yield, net:
Amount (included in interest income)	$	13,320		$	6,691		$	6,629
Net interest margin less effect of acquired loans discount and PPP loan yield ⁽¹⁾	3.46		%	4.11		%			(0.65)	%

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

Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the dollar impact of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining unaccreted discount or unamortized premium is immediately taken into interest income; and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income. As a result of the decrease in interest rates, the prepayment rate of portfolio loans, inclusive of those acquired at a premium or discount, increased during the second quarter of 2021. During the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, purchased loan discount accretion was $2,566,000, $1,712,000, and $2,587,000, respectively.

The following table shows the components of net interest income and net interest margin on a fully tax-equivalent (FTE) basis for the quarterly periods indicated:

ANALYSIS OF CHANGE IN NET INTEREST MARGIN ON EARNING ASSETS (unaudited, dollars in thousands)

	Three months ended						Three months ended						Three months ended
	June 30, 2021						March 31, 2021						June 30, 2020
	Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate
Assets
Loans, excluding PPP	$	4,646,188	$	57,125	4.93	%	$	4,407,150	$	54,573	5.02	%	$	4,363,481	$	56,053	5.23	%
PPP loans	332,277		3,179		3.84	%	355,875		5,863		6.68	%	292,569		2,356		3.24	%
Investments-taxable	1,875,056		7,189		1.54	%	1,649,980		6,394		1.57	%	1,251,873		7,689		2.47	%
Investments-nontaxable ⁽¹⁾	132,034		1,106		3.36	%	125,055		1,200		3.89	%	119,860		1,238		4.15	%
Total investments	2,007,090		8,295		1.66	%	1,775,035		7,594		1.74	%	1,371,733		8,927		2.62	%
Cash at Federal Reserve and other banks	559,026		135		0.10	%	701,666		163		0.09	%	338,082		98		0.12	%
Total earning assets	7,544,581		68,734		3.65	%	7,239,726		68,193		3.82	%	6,365,865		67,434		4.26	%
Other assets, net	584,093						569,186						661,870
Total assets	$	8,128,674					$	7,808,912					$	7,027,735
Liabilities and shareholders' equity
Interest-bearing demand deposits	$	1,490,247	$	77	0.02	%	$	1,430,943	$	76	0.02	%	$	1,293,007	$	64	0.02	%
Savings deposits	2,316,889		308		0.05	%	2,228,281		329		0.06	%	1,968,374		644		0.13	%
Time deposits	324,867		443		0.55	%	336,605		532		0.64	%	409,242		1,105		1.09	%
Total interest-bearing deposits	4,132,003		828		0.08	%	3,995,829		937		0.10	%	3,670,623		1,813		0.20	%
Other borrowings	40,986		5		0.05	%	32,709		4		0.05	%	26,313		4		0.06	%
Junior subordinated debt	57,788		563		3.91	%	57,688		535		3.76	%	57,372		672		4.71	%
Total interest-bearing liabilities	4,230,777		1,396		0.13	%	4,086,226		1,476		0.15	%	3,754,308		2,489		0.27	%
Noninterest-bearing deposits	2,811,078						2,657,925						2,266,671
Other liabilities	126,674						123,986						126,351
Shareholders' equity	960,145						940,775						880,405
Total liabilities and shareholders' equity	$	8,128,674					$	7,808,912					$	7,027,735
Net interest rate spread^{(1) (2)}					3.52	%					3.67	%					3.99	%
Net interest income and margin^{(1) (3)}			$	67,338	3.58	%			$	66,717	3.74	%			$	64,945	4.10	%

Fully taxable equivalent (FTE). All yields and rates are calculated using specific day counts for the period and year as applicable.
Net interest spread is the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

Net interest income (FTE) during the three months ended June 30, 2021 increased $621,000 or 0.9% to $67,338,000 compared to $66,717,000 during the three months ended March 31, 2021. Over the same period, net interest margin decreased 16 basis points to 3.58% as compared to 3.74% in the trailing quarter. The 16 basis point decrease is primarily attributed to a 9 basis point decrease in non-PPP loan yields, as well as a 284 basis point decline in PPP loans, which yielded 3.84% as of June 30, 2021 as compared to 6.68% for the trailing quarter ended March 31, 2021. The quarterly decrease in yield on PPP loans was due to a deceleration of deferred loan fee accretion stemming from nearly 90% of the Round 1 PPP loans being forgiven by the SBA and repaid. The aforementioned yield decline was partially offset by a 2 basis point improvement in the rate paid on interest-bearing liabilities.

As compared to the same quarter in the prior year, average loan yields, excluding PPP, decreased 30 basis points from 5.23% during the three months ended June 30, 2020, to 4.93% during the three months ended June 30, 2021. The 30 basis point decrease in yields on loans during the comparable three month periods ended June 30, 2021 and 2020 was entirely attributable to decreases in market rates. Loan fees as the accretion of discounts from acquired loans added 17 basis points to loan yields during the quarter ended June 30, 2021 and 24 basis points during the quarter ended June 30, 2020. The index utilized in a significant portion of the Company's variable rate loans, Wall Street Journal Prime, has remained unchanged at 3.25% since March 15, 2020, when it was reduced from 4.25%.

The decline in interest expense when compared to both the trailing quarter and the same quarter from the prior year was primarily attributed to reductions in the rates offered on deposit products. As a result, the cost of interest-bearing deposits decreased by 2 basis points as of June 30, 2021, to 0.08% from 0.10% at March 31, 2021. In addition, the growth of noninterest-bearing deposits continues to benefit the average cost of total deposits as compared to historical periods. Specifically, the ratio of average total noninterest-bearing deposits to total average deposits was 40.5% and 39.9% as of June 30, 2021 and March 31, 2021, respectively, as compared to 38.2% in the quarter ended June 30, 2020. As a result, the average cost of total deposits decreased to 0.05% at June 30, 2021, compared to 0.12% in the same period of 2020.

ANALYSIS OF CHANGE IN NET INTEREST MARGIN ON EARNING ASSETS (unaudited, dollars in thousands)

	Six months ended June 30, 2021						Six months ended June 30, 2020
	Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate
Assets
Loans, excluding PPP	$	4,527,329	$	111,698	4.98	%	$	4,346,419	$	112,311	5.20	%
PPP loans	344,011		9,042		5.30	%	146,285		2,356		3.24	%
Investments-taxable	1,763,140		13,583		1.55	%	1,235,672		16,261		2.65	%
Investments-nontaxable ⁽¹⁾	128,564		2,306		3.62	%	118,992		2,413		4.08	%
Total investments	1,891,704		15,889		1.69	%	1,354,664		18,674		2.77	%
Cash at Federal Reserve and other banks	629,952		298		0.10	%	266,752		881		0.66	%
Total earning assets	7,392,996		136,927		3.73	%	6,114,120		134,222		4.41	%
Other assets, net	575,138						653,006
Total assets	$	7,968,134					$	6,767,126
Liabilities and shareholders' equity
Interest-bearing demand deposits	$	1,461,377	$	153	0.02	%	$	1,269,452	$	233	0.04	%
Savings deposits	2,272,830		637		0.06	%	1,918,918		1,706		0.18	%
Time deposits	330,703		975		0.59	%	419,638		2,425		1.16	%
Total interest-bearing deposits	4,064,910		1,765		0.09	%	3,608,008		4,364		0.24	%
Other borrowings	36,870		9		0.05	%	24,552		9		0.07	%
Junior subordinated debt	57,739		1,098		3.83	%	57,324		1,441		5.06	%
Total interest-bearing liabilities	4,159,519		2,872		0.14	%	3,689,884		5,814		0.32	%
Noninterest-bearing deposits	2,734,922						2,059,242
Other liabilities	123,233						123,481
Shareholders' equity	950,460						894,519
Total liabilities and shareholders' equity	$	7,968,134					$	6,767,126
Net interest rate spread^{(1) (2)}					3.59	%					4.09	%
Net interest income and margin^{(1) (3)}			$	134,055	3.66	%			$	128,408	4.22	%

Fully taxable equivalent (FTE). All yields and rates are calculated using specific day counts for the period and year as applicable.
Net interest spread is the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

Interest Rates and Loan Portfolio Composition

During the quarter ended June 30, 2021, market interest rates, including many rates that serve as reference indices for variable rate loans, showed signs of upward improvement during April and May before ultimately retreating in June of 2021. This prolonged retraction in rates continues to apply downward pressure on the portfolio. As of June 30, 2021, the Company's loan portfolio consisted of approximately $4.9 billion in outstanding principal with a weighted average coupon rate of 4.25%, inclusive of the PPP program loans. Excluding PPP loans, the Company's loan portfolio has approximately $4.7 billion outstanding with a weighted average coupon rate of 4.42% as of June 30, 2021. Included in the June 30, 2021 loan total, exclusive of PPP loans, are variable rate loans totaling $3.0 billion of which 88.9% or $2.7 billion were at their floor rate. The remaining variable rate loans totaling $340.0 million, which carried a weighted average coupon rate of 4.89% as of June 30, 2021, are subject to further rate adjustment. If those remaining variable rate loans were to collectively, through future rate adjustments, be reduced to their respective floors, they would have a weighted average coupon rate of approximately 4.29% which would result in the reduction of the weighted average coupon rate of the total loan portfolio, exclusive of PPP loans, from 4.42% to approximately 4.38%.

As of December 31, 2020, the Company's loan portfolio consisted of approximately $4.80 billion in outstanding principal with a weighted average coupon rate of 4.35%, inclusive of the PPP program loans. Excluding PPP loans, the Company's loan portfolio has approximately $4.47 billion outstanding with a weighted average coupon rate of 4.60% as of December 31, 2020. Included in the December 31, 2020 loan total, exclusive of PPP loans, are variable rate loans totaling $3.02 billion of which 88.2% or $2.66 billion were at their floor rate. The remaining variable rate loans totaling $357.0 million, which carried a weighted average coupon rate of 5.03% as of December 31, 2020, are subject to further rate adjustment. If those remaining variable rate loans were to collectively, through future rate adjustments, be reduced to their respective floors, they would have a weighted average coupon rate of approximately 4.36% which would result in the reduction of the weighted average coupon rate of the total loan portfolio, exclusive of PPP loans, from 4.60% to approximately 4.55%.

Asset Quality and Credit Loss Provisioning

During the three months ended June 30, 2021, the Company recorded a reversal of provision for credit losses of $260,000, as compared to a reversal of provision for credit losses of $6,060,000 during the trailing quarter, and a provision expense of $22,244,000 during the second quarter of 2020.

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

	Three months ended
(dollars in thousands)	June 30, 2021		March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020
Addition to (reversal of) allowance for credit losses	$	(145)	$	(6,240)	$	4,450	$	7,649	$	22,089
Addition to (reversal of) reserve for unfunded loan commitments	(115)		180		400		—		155
Total provision for credit losses	$	(260)	$	(6,060)	$	4,850	$	7,649	$	22,244

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

	Three months ended				Six months ended
(dollars in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Balance, beginning of period	$	85,941	$	57,911	$	91,847	$	30,616
Impact from adoption of ASU 2016-13	—		—		—		18,913
Provision for (reversal of) credit losses	(145)		22,089		(6,385)		30,089
Loans charged-off	(387)		(491)		(613)		(1,001)
Recoveries of previously charged-off loans	653		230		1,213		1,122
Balance, end of period	$	86,062	$	79,739	$	86,062	$	79,739

The allowance for credit losses (ACL) was $86,062,000 as of June 30, 2021, a net increase of $121,000 over the immediately preceding quarter. The reversal of allowance for credit losses of $145,000 was necessary as the net recoveries totaling $266,000 during the quarter were in excess of the required changes in quantitative and qualitative reserve components. More specifically, the portfolio-wide qualitative indicator associated with the forecast levels of US unemployment reduced the required credit reserves by $2,294,000, while the qualitative factors associated with portfolio concentration risks, stemming from second quarter loan growth, added approximately $1,708,000 to the credit expense on loans as of June 30, 2021.

The Company utilizes a forecast period of approximately eight quarters and obtains the forecast data from publicly available sources as of the balance sheet date. This forecast data continues to evolve and included significant shifts in the magnitude of changes for both the unemployment and GDP factors leading up to the balance sheet date. Management noted that the majority of economic forecasts utilized in the ACL calculation seem to have rebounded slightly in the current quarter, coinciding with the widespread availability of vaccines, continued easing of occupancy and social distancing restrictions, and continued government stimulus efforts.

Loans past due 30 days or more decreased by $1,258,000 during the quarter ended June 30, 2021 to $9,292,000, as compared to $10,550,000 at March 31, 2021. Non-performing loans were $32,705,000 at June 30, 2021, an increase of $3,764,000 and $11,975,000, respectively, from $28,941,000 and $20,730,000 as of March 31, 2021, and June 30, 2020, respectively.

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

	June 30,			% of Total Loans		March 31,			% of Total Loans		June 30,			% of Total Loans
(dollars in thousands)	2021					2021					2020
Risk Rating:
Pass	$	4,756,381		96.2	%	$	4,765,180		95.9	%	$	4,698,393		97.9	%
Special Mention	130,232			2.6	%	143,677			2.9	%	61,883			1.3	%
Substandard	58,281			1.2	%	58,120			1.2	%	41,129			0.9	%
Total	$	4,944,894				$	4,966,977				$	4,801,405

Classified loans to total loans	1.18		%			1.17		%			0.86		%
Loans past due 30+ days to total loans	0.19		%			0.19		%			0.35		%

The Company's loan portfolio for non-classified loans (loans graded special mention or better) remains consistent for the quarter ended June 30, 2021, as compared to the trailing quarter March 31, 2021, representing 98.8% of total loans outstanding, respectively. Loans risk graded special mention decreased by approximately $13,445,000 during the quarter ended June 30, 2021 as compared to the trailing quarter, while loans risk graded substandard increased modestly by $161,000 over the same period of the prior year. The reduction in special mention risk graded credits was largely the result of two relationships being upgraded, totaling $9,747,000. The total balance of substandard risk graded credits remained consistent as of the current and trailing quarters; although, the Company did benefit from the payoff of one credit, which was subsequently offset by a separate credit that was downgraded to substandard.

There was one addition to other real estate owned totaling approximately $101,000 during the quarter ended June 30, 2021 and there was one sale for proceeds of approximately $184,000, which generated a net gain of $15,000 for the quarter. As of June 30, 2021, other real estate owned consisted of six properties with a carrying value of approximately $2,248,000.

Allocation of Credit Loss Reserves by Loan Type

	As of June 30, 2021				As of December 31, 2020				As of June 30, 2020
(dollars in thousands)	Amount		% of Loans Outstanding		Amount		% of Loans Outstanding		Amount		% of Loans Outstanding
Commercial real estate:
CRE - Non Owner Occupied	$	26,028	1.70	%	$	29,380	1.91	%	$	26,091	1.63	%
CRE - Owner Occupied	10,463		1.59	%	10,861		1.74	%	8,710		1.50	%
Multifamily	13,196		1.59	%	11,472		1.79	%	8,581		1.49	%
Farmland	1,950		1.13	%	1,980		1.30	%	1,468		0.97	%
Total commercial real estate loans	51,637		1.62	%	53,693		1.82	%	44,850		1.54	%
Consumer:
SFR 1-4 1st Liens	10,629		1.61	%	10,117		1.83	%	8,015		1.58	%
SFR HELOCs and Junior Liens	10,701		3.29	%	11,771		3.59	%	12,108		3.38	%
Other	2,620		3.73	%	3,260		4.20	%	3,042		3.73	%
Total consumer loans	23,950		2.27	%	25,148		2.62	%	23,165		2.45	%

Commercial and Industrial	4,511		1.00	%	4,252		0.81	%	4,018		0.63	%
Construction	4,951		2.47	%	7,540		2.65	%	6,775		2.43	%
Agricultural Production	1,007		2.40	%	1,209		2.74	%	919

TriCo Bancshares Announces Quarterly Results