What changed in this filing

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Item 1. Business

2022-03-10 compared with 2021-03-12 · 160 added, 158 removed, 666 unchanged (32% of the section changed)

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Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in October 2017.

See the Recent Developments section below for details on our latest acquisitions.

Our recent business activity included the establishment of a Sacramento-area (Rocklin, CA) loan production office in 2020, the Fresno-Palm branch and the purchase of the Lompoc branch in 2018, and opening de novo branches in Bakersfield and Pismo Beach and the acquisition of the Woodlake branch in 2017.

With our latest acquisitions and branching activity, the Bank now maintains administrative offices, a loan production office, and operates 40 full-service branches in the following California locations:

Our recent business activity included the establishment of a Sacramento-area loan production office in January 2020, and the closure of five branches in June 2021.

The Bank now maintains administrative offices, a loan production office, and operates 35 full-service branches in the following California locations:

Administrative Headquarters

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1498 West Olive Avenue

Arroyo Grande:

Arroyo Grande Office

1360 East Grand Avenue

Atascadero Office

7315 El Camino Real

Bakersfield California Office

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Loan Production Office

5701 Lonetree Blvd., Ste.

915 Highland Point Dr., Ste.

Reedley Office

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500 Marsh Street

Sanger Office

1500 7th Street

Santa Barbara:

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21 East Carrillo Street

Santa Clarita:

Santa Clarita Office

26328 Citrus Street

Santa Paula Office

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224 West “F” Street

Tehachapi Old Town Office

21000 Mission Street

Three Rivers:

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Complementing the Bank’s stand-alone offices are specialized lending units which include our Agricultural, SBA and Mortgage Warehouse lending divisions.

We also have ATMs at all but one of our branch locations and seven non-branch locations.

We also have ATMs at all but one of our branch locations and nine non-branch locations.

Furthermore, the Bank is a member of the Allpoint network, which provides our deposit customers with surcharge-free access to over 55,000 ATMs across the United States, Puerto Rico, Mexico, Canada, Australia and the United Kingdom, and customers have access to electronic point-of-sale payment alternatives nationwide via the Pulse network.

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Our lending activities cover real estate, commercial (including small business), mortgage warehouse, agricultural, and consumer loans.

The bulk of our real estate loans are secured by commercial, professional office and agricultural properties, but we also offer commercial construction loans and multifamily credit facilities among other types of loans.

The bulk of our real estate loans are secured by commercial real estate, which includes both owner-occupied and non-owner occupied properties including office, retail, and hotel/motels, but we also offer commercial construction loans, multifamily and agricultural credit facilities among other types of real estate loans.

As noted above, gross loans totaled $2.0 billion at December 31, 2021, and the percentage of our total loan and lease portfolio for each of the principal types of credit we extend was as follows:

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In addition to loans, we offer a wide range of deposit products and services for individuals and businesses including checking accounts, savings accounts, money market demand accounts, time deposits, retirement accounts, and sweep accounts.

The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to

maximum insurable amounts.

We attract deposits throughout our market area via referrals from other customers, direct-mail campaigns, a customer-oriented product mix, and competitive pricing, and by offering convenient locations, drive-through banking, and various other delivery channels.

The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to maximum insurable amounts.

We attract deposits throughout our market area via referrals from existing customers, direct-mail campaigns, a customer-oriented product mix, and competitive pricing, and by offering convenient locations, drive-through banking, and various other delivery channels.

We strive to retain our deposit customers by providing a consistently high level of service.

At December 31, 2020, the consolidated Company had 123,200 deposit accounts totaling $2.6 billion, compared to 125,100 deposit accounts totaling $2.2 billion at December 31, 2019.

We have not engaged in any material research activities related to the development of new products or services during the last two fiscal years.

However, our officers and employees are continually searching for ways to increase public convenience, enhance customer access to payment systems, and enable us to improve our competitive position.

At December 31, 2021, the Company had 123,200 deposit accounts which remained relatively flat with the number of accounts held at December 31, 2020.

Although the number of accounts remained the same, total deposits were $2.8 billion at December 31, 2021, as compared to $2.6 billion at December 31, 2020.

Our officers and employees are continually searching for ways to increase public convenience, enhance customer access to payment systems, and enable us to improve our competitive position with the development of new products and services.

The cost to the Bank for these development, operations, and marketing activities cannot be calculated with any degree of certainty.

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Our business has a modest seasonal component due to the heavy agricultural orientation of the Central Valley, but as our branch network has expanded to include more metropolitan areas, we have become less reliant on the agriculture-related base.

We are not dependent on a single customer or group of related customers for a material portion of our core deposits, but our time deposit balances at December 31, 2020 include $120 million in deposits from the State of California, comprising less than 5% of total deposits.

Furthermore, loan categories that could be considered to be concentrations include loans to lessors of non-residential buildings (32% of total loans);

loans to facilitate real estate credit, including mortgage warehouse lending (13% of total loans);

and loans in the hotel industry (9% of total loans).

We are not dependent on a single customer or group of related customers for a material portion of our core

Furthermore, loan categories that could be considered to be concentrations include commercial real estate loans (67.1%);

with the most concentrated segments in office space (14.8%), retail (12.8%) and loans in the hotel industry (9%).

Our efforts to comply with government and regulatory mandates on consumer protection and privacy, anti-terrorism, and other initiatives have resulted in significant ongoing expense to the Bank, including compliance staffing costs and other expenses associated with compliance-related software.

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The Company’s lending procedures include steps to identify and monitor this exposure in an effort to avoid any related loss or liability.

Recent Developments

On February 1, 2020, the Company added two new loan production teams – one in Northern California and the second one in Southern California.

The Northern team is based in a newly-opened dedicated loan production office in Rocklin, located in the County of Sacramento.

The Southern team is based out of our Santa Clarita Bank branch office located in Los Angeles County.

These two new business development groups created an expansion of the Bank’s footprint throughout Northern and Southern California, offering business loan services not covered by a branch.

On May 18, 2018, the Company purchased most of the deposits of the Lompoc branch of Community Bank of Santa Maria, located in Santa Barbara County.

The purchase also included the Lompoc branch building, the real property on which the building is located, and certain other equipment and fixed assets at their aggregate fair value of $1.7 million.

The Lompoc branch is now operating as a full-service branch of Bank of the Sierra.

Lompoc branch deposits totaled $38 million at the time of purchase, consisting of $32 million in non-maturity deposits and $6 million in time deposits.

In accordance with GAAP, the Company recorded a $1.2 million deposit purchase premium in connection with the transaction and is amortizing that amount on a straight line basis over eight years.

Recent Accounting Pronouncements

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The banking business in California is generally highly competitive, including in our market areas.

Continued consolidation within the banking industry has heightened competition in recent periods, following on the heels of a relatively large number of FDIC-assisted takeovers of failed banks and other acquisitions of troubled financial institutions in the aftermath

of the Great Recession.

Continued consolidation within the banking industry has heightened competition in recent periods, including many bank transactions within our market in 2021.

There are also a number of unregulated companies competing for business in our markets, with financial products targeted at profitable customer segments.

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Based on June 30, 2021, FDIC combined market share data for the 29 cities within which the Company currently maintains branches, the largest portion of deposits belongs to Wells Fargo Bank with (22.2%) of total combined deposits, followed by Bank of America (16.8%), JPMorgan Chase (12.7%), and Union Bank (7.3%).

Bank of the Sierra ranks sixth on the 2020 market share list with 4.6% of total deposits.

Bank of the Sierra ranks fifth on the 2021 market share list with 4.7% of total deposits.

In Tulare County, however, where the Bank was originally formed, we rank first for deposit market share with 18.9% of total deposits at June 30, 2021 and had the largest number of branch locations (13, including our online branch).

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The Company recognizes that a diverse workforce brings fresh perspectives that can help strengthen and improve how we serve our communities.

In response to the COVID-19 pandemic the Company established remote work arrangements with staff in an effort to consider the health and safety of its employees.

In response to the COVID-19 pandemic, in 2020 the Company established remote work arrangements with staff in an effort to consider the health and safety of its employees.

At December 31, 2021, the Company had 132 employees working remotely.

The Company is monitoring the current environment surrounding the pandemic and is evaluating all remote work arrangements.

It is anticipated that certain positions may continue with a remote work arrangement once the pandemic is over due to efficiencies gained from such arrangements.

The Company is monitoring the current environment surrounding the pandemic and is evaluating all remote and hybrid work arrangements.

It is anticipated that certain positions may continue with a remote or hybrid work arrangement once the pandemic is over due to efficiencies gained from such arrangements.

There were no known adverse effects on financial reporting systems, internal controls over financial reporting and disclosure control and procedures from the remote work arrangements.

No employees were terminated or suspended due to the COVID-19 pandemic, although certain branch positions that became vacant because of attrition were not immediately replaced due to temporary lobby closures and limited lobby hours.

It is anticipated that approximately 20 staff vacancies will be filled after branches return to normal lobby hours sometime in March of 2021, although the exact timing of such cannot be currently determined with any degree of certainty.

No employees were terminated or suspended due directly to the COVID-19 pandemic.

The Company has long been committed to comprehensive and competitive compensation and benefits programs as the Company recognizes that it operates in intensely competitive environments for talent.

Retention of skilled and highly trained employees is critical to the Company’s strategy of being a trusted resource to its communities and strengthening relationships with its clients through employees.

On January 1, 2022, the Company increased its minimum wage to $20 per hour in an effort to attract and retain skilled and highly trained employees.

Community banking is often considered a relationship banking model rather than a purely transactional banking model.

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Furthering the Company’s philosophy to attract and retain a pool of talented and motivated employees who will continue to advance the purpose and contribute to the Company’s overall success, compensation and benefits programs include:

equity based compensation plan, health/dental/vision insurances, supplemental insurance, life insurance, 401(K) plan, benefits under the Family Medical Leave Act, workers’ compensation, paid vacation and sick days, holiday pay, training/education, leave for bereavement, military service and jury duty.

an equity-based compensation plan, health/dental/vision insurances, supplemental insurance, life insurance, 401(K) plan, benefits under the Family Medical Leave Act, workers’ compensation, paid vacation and sick days, holiday pay, training/education, leave for bereavement, military service and jury duty.

The Company invests in its employees’ future by sponsoring and prioritizing continued education throughout its employee ranks.

The Company encourages its employees to participate in educational activities, which improve or maintain their skills in their current position, as well as to enhance future opportunities at the Company.

The Company's employees are notified periodically of available internal course offerings and educational seminars run by outside parties, including but not limited to the American Bankers Association and Bankers Compliance Group.

The Company encourages and requires certain of its employees to participate in educational activities and training curriculum, which improve or maintain their skills in their current position, as well as to enhance future opportunities at the Company.

Employees are also encouraged to continue their higher education at accredited colleges and universities and may receive assistance from the Company for their participation.

In order to develop a workforce that aligns with the Company’s corporate values, it regularly sponsors local community events so that its employees can better integrate themselves in communities.

The Company believes that employees’ well-

being and personal and professional development is fostered by outreach to the communities it serves.

The Company’s employees’ desire for active community involvement enables the Company to sponsor a number of local community events and initiatives, including food drives that resulted in 20,000 pounds of food and resources for local food pantries during the COVID-19 pandemic.

The Company believes that employees’ well-being and personal and professional development is fostered by outreach to the communities it serves.

The Company’s employees’ desire for active community involvement enables the Company to sponsor a number of local community events and initiatives, including food drives for local food pantries during the COVID-19 pandemic.

Website Access

Copies of our Annual Report on 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (www.sierrabancorp.com) as soon as reasonably practicable after we have filed the material with, or furnished it to, the United States Securities and Exchange Commission (“SEC”).

Copies can also be obtained by accessing the SEC’s website (www.sec.gov).

Regulation and Supervision

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Since the statutory interim final rule could cease to be effective at any time before December 31, 2020, the agencies issued a separate interim final rule pursuant to section 201(b) of EGRRCPA that provides a graduated transition from the temporary 8-percent community bank leverage ratio requirement to the 9-percent community bank leverage ratio requirement as established under the 2019 final rule (transition interim final rule).

Specifically, the transition interim final rule provides that, once the statutory interim final rule ceases to apply, the community bank leverage ratio will be 8 percent in the second quarter through fourth quarter of calendar year 2020, 8.5 percent in calendar year 2021, and 9 percent thereafter.

8.5 percent in calendar year 2021, and 9 percent thereafter.

The transition interim final rule also modifies the two-quarter grace period for a qualifying community banking organization to account for the graduated increase in the community bank leverage ratio requirement.

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Capital levels, as measured by these standards, are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

Pursuant to the adoption of final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for all U.S.

banks and bank holding companies with more than $500 million in assets, minimum regulatory requirements for both the quantity and quality of capital held by the Company and the Bank increased effective January 1, 2015.

Furthermore, a capital class known as Common Equity Tier 1 capital was established in addition to Tier 1 capital and Tier 2 capital, and most financial institutions were given the option of a one-time election to continue to exclude accumulated other comprehensive income (“AOCI”) from regulatory capital.

The Company has exercised its option to exclude AOCI from regulatory capital.

The final rules also increased capital requirements for certain categories of assets, including higher-risk construction and real estate loans, certain past-due or nonaccrual loans, and certain exposures related to securitizations.

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the Tier 1 capital of banking organizations with total consolidated assets of less than $15 billion at December 31, 2009, subject to a limit of 25% of Tier 1 capital.

All of the Company’s trust preferred securities were issued prior to that date and continue to qualify as Tier 1 capital.

Our Common Equity Tier 1 capital includes common stock, additional paid-in capital, and retained earnings, less the following:

disallowed goodwill and intangibles, disallowed deferred tax assets, and any insufficient additional capital to cover the deductions.

The Company has elected to exclude accumulated other comprehensive income (“AOCI”) from regulatory capital.

In addition, all of the Company’s trust preferred securities qualify for treatment as Tier 1 Capital, subject to a limit of 25% of Tier 1 capital.

Tier 1 capital is generally defined as the sum of core capital elements, less the following:

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Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases, and on the payment of discretionary bonuses to executive management.

Based on our capital levels at December 31, 2020 and 2019, the Company and the Bank met all capital adequacy requirements to which they are subject, including utilizing the Capital Simplification for Qualifying Community Bank Organization as applicable.

Based on our capital levels at December 31, 2021 and 2020, the Company and the Bank met all capital adequacy requirements to which they are subject, including utilizing the Capital Simplification for Qualifying Community Bank

Organization as applicable.

For more information on the Company’s capital, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation – Capital Resources.

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We could see continued attention and resources devoted by the Company to ensure compliance with the statutory and regulatory requirements engendered by Dodd-Frank.

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law.

The Act made significant changes that impact corporate taxation, including the reduction of the maximum federal income tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions.

The reduced tax rate had a favorable impact on our tax expense beginning in 2018, as our blended marginal income tax rate dropped to 29.6% in 2018 from 42.1% in 2017.

The tax rate reduction also resulted in an adjustment to our deferred tax assets and liabilities to reflect their value to the Company at the lower federal tax rate of 21%, with such revaluation required in the period in which the legislation was enacted.

As a result of this change, we reduced our net deferred tax asset by $2.71 million via a charge to our income tax provision in December 2017.

Deposit Insurance

The Bank’s deposits are insured up to maximum applicable limits under the Federal Deposit Insurance Act, and the Bank is subject to deposit insurance assessments to maintain the FDIC’s Deposit Insurance Fund (the “DIF”).

The Bank’s deposits are insured up to maximum applicable limits under the Federal Deposit Insurance Act (generally $250,000 per depositor), and the Bank is subject to deposit insurance assessments to maintain the FDIC’s Deposit Insurance Fund (the “DIF”).

In October 2010, the FDIC adopted a revised restoration plan to ensure that the DIF’s designated reserve ratio (“DRR”) reaches 1.35% of insured deposits by September 30, 2020, the deadline mandated by the Dodd-Frank Act.

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Furthermore, the restoration plan proposed an increase in the DRR to 2% of estimated insured deposits as a long-term goal for the fund.

On September 30, 2018, the DIF ratio reached 1.36 percent.

Because the ratio exceeded 1.35 percent, two deposit insurance assessment changes occurred under FDIC regulations:

On September 30, 2018, the DIF ratio reached 1.36 %.

Because the ratio exceeded 1.35 %, two deposit insurance assessment changes occurred under FDIC regulations:

surcharges on large banks (total consolidated assets of $10 billion or more) ended, with the last surcharge on large banks being collected on December 28, 2018;

and, banks with total consolidated assets of less than $10 billion were awarded credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15 percent to 1.35 percent, to be applied when the reserve ratio is at least 1.38 percent.

and, banks with total consolidated assets of less than $10 billion were awarded credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15 % to 1.35 %, to be applied when the reserve ratio is at least 1.38 percent.

Bank of the Sierra received credits to reduce our FDIC assessments.

As noted above, the Dodd-Frank Act provided for a permanent increase in FDIC deposit insurance per depositor from $100,000 to $250,000 retroactive to January 1, 2008.

Furthermore, effective in the second quarter of 2011, FDIC deposit insurance premium assessment rates were adjusted, and the assessment base was established as an institution’s total assets less tangible equity.

We are generally unable to control the amount of premiums that we are required to pay for FDIC deposit insurance.

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The CRA further requires the agencies to consider a financial institution’s efforts in meeting its community credit needs when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or the formation of holding companies.

In measuring a bank’s compliance with its CRA obligations, the regulators utilize a performance-based evaluation system under which CRA ratings are determined by the bank’s actual lending, service, and investment performance, rather than on the extent to which the institution conducts needs assessments, documents community outreach activities or complies with other procedural requirements.

procedural requirements.

In connection with its assessment of CRA performance, the FDIC assigns a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The Bank most recently received a “needs to improve” CRA assessment rating in December 2020.

On September 21, 2020, the FDIC issued an advance notice of proposed rulemaking on updating the agency’s three-decade-old CRA regulations.

The objectives of the new rules include, more effectively meeting the needs of low-to-moderate-income communities and address disparities in credit access, increasing the clarity consistency and transparency of supervisory expectations and standards regarding where activities are assessed, which activities count and how eligible activities are assessed, while minimizing data collection burden, tailoring CRA supervision based on size, business model, local market conditions, etc., updating standards to reflect changes in banking over time, including the increased use of mobile and internet delivery channels, promoting community engagement, strengthening the special treatment of minority depository institutions, and recognizing that CRA and fair lending responsibilities are mutually reinforcing.

The Company intends to monitor this proposal so that our CRA efforts are in compliance with any changes to the old rules once implemented.

The objectives of the new rules include, more effectively meeting the needs of low-to-moderate-income communities and address disparities in credit access, increasing the clarity consistency and transparency of supervisory expectations and standards regarding where activities are assessed, which activities qualify and how eligible activities are assessed, while minimizing data collection burden, tailoring CRA supervision based on size, business model, local market conditions, etc., updating standards to reflect changes in banking over time, including the increased use of mobile and internet delivery channels, promoting community engagement, strengthening the special treatment of minority depository institutions, and recognizing that CRA and fair lending responsibilities are mutually reinforcing.

The Company is monitoring this proposal so that our CRA efforts are in compliance with any changes to the old rules once implemented.

The FDIC never finalized the proposed rule, but it is anticipated that there will be inter-agency action on a proposed and final rule related to CRA soon.

Privacy and Data Security

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The statute also directed federal regulators, including the Federal Reserve and the FDIC, to establish standards for the security of consumer information, and requires financial institutions to disclose their privacy policies to consumers annually.

Effective January 2020, the California Consumer Privacy Act (“CCPA”) added required notice about personal information we collect, use, share, and disclose for business purposes.

The CCPA provides California residents rights regarding their personal information specifically related to exercising access, data portability and deletion rights.

There are also California breach notification and disclosure requirements.

On November 23, 2021, the federal banking agencies issued a final rule requiring banking organizations that experience a computer-security incident to notify its primary Federal regulator of the occurrence of an event that rises to the level of a “notification incident.” Generally, a notification incident occurs when a banking organization has suffered a computer-security incident that has a reasonable likelihood of materially disrupting or degrading the banking organization or its operations.

The rule requires an affected banking organization to notify its primary Federal regulator as soon as possible and no later than 36 hours after the banking organization has determined that a notification incident has occurred.

The rule also requires bank service providers to notify each affected banking organization if that bank service provider experiences a computer-security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four or more hours.

The rule becomes effective on April 1, 2022, with a compliance date of May 1, 2022.

The Electronic Funds Transfer Act, as implemented by the Federal Reserve’s Regulation E, governs transfers initiated through automated teller machines (“ATMs”), point-of-sale terminals, and other electronic banking services.

Regulation E prohibits financial institutions from assessing an overdraft fee for paying ATM and one-time point-of-sale debit card transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions.

Regulation E prohibits financial institutions from assessing an overdraft fee for paying ATM and one-time point-of-sale debit card transactions unless the customer affirmatively opts into the overdraft service for those types of transactions.

The opt-in provision establishes requirements for clear disclosure of fees and terms of overdraft services for ATM and one-time debit card transactions.

The rule does not apply to other types of transactions, such as check automated clearinghouse (“ACH”) and recurring debit card transactions.

Additionally, in November 2010 the FDIC issued its Overdraft Guidance on automated overdraft service programs, to ensure that a bank mitigates the risks associated with offering automated overdraft payment programs and complies with all consumer protection laws and regulations.

Additionally, in November 2010 the FDIC issued its Overdraft Guidance on automated overdraft service programs, to ensure that a bank mitigates the risks associated with offering automated

overdraft payment programs and complies with all consumer protection laws and regulations.

The Company continuously evaluates its overdraft practices and monitors potential legislative and regulatory changes to overdraft rules.

Consumer Financial Protection and Financial Privacy

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The CFPB’s functions include investigating consumer complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer financial products and services.

CFPB regulations and guidance apply to all financial

institutions, including the Bank, although only banks with $10 billion or more in assets are subject to examination by the CFPB.

CFPB regulations and guidance apply to all financial institutions, including the Bank, although only banks with $10 billion or more in assets are subject to examination by the CFPB.

Banks with less than $10 billion in assets, including the Bank, are examined for compliance by their primary federal banking agency.

In January 2013, the CFPB issued final regulations governing consumer mortgage lending.

Certain rules which became effective in January 2014 impose additional requirements on lenders, including the directive that lenders need to ensure the ability of their borrowers to repay mortgages.

The CFPB also finalized a rule on escrow accounts for higher priced mortgage loans and a rule expanding the scope of the high-cost mortgage provision in the Truth in Lending Act.

The CFPB also issued final rules implementing provisions of the Dodd-Frank Act that relate to mortgage servicing.

In November 2013 the CFPB issued a final rule on integrated and simplified mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, which became effective in October 2015.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices.

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The Bank continues to be subject to numerous other federal and state consumer protection laws that extensively govern its relationship with its customers.

Those laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Service Members Civil Relief Act, and respective state-law counterparts to these laws, as well as state usury laws and laws regarding unfair and deceptive acts and practices.

Those laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Service Members Civil Relief Act, the Americans With Disabilities Act, and respective state-law counterparts to these laws, as well as state usury laws and laws regarding unfair and deceptive acts and practices.

These and other laws require disclosures including the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Company’s ability to raise interest rates and otherwise subject the Company to substantial regulatory oversight.

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Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”), together with Dodd-Frank, relaxed prior interstate branching restrictions under federal law by permitting, subject to regulatory approval, state and federally chartered commercial banks to establish branches in states where the laws permit banks chartered in such states to establish branches.

The Interstate Act requires regulators to consult with community organizations before

permitting an interstate institution to close a branch in a low-income area.

and federally chartered commercial banks to establish branches in states where the laws permit banks chartered in such states to establish branches.

The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.

Federal banking agency regulations prohibit banks from using their interstate branches primarily for deposit production and the federal banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

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As a part of their regulatory oversight, the federal regulators have issued guidelines on sound risk management practices with respect to a financial institution’s concentrations in commercial real estate (“CRE”) lending activities.

These guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market.

The guidelines identify certain concentration levels that, if exceeded, will expose the institution to additional supervisory

analysis with regard to the institution’s CRE concentration risk.

These guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to

unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market.

The guidelines identify certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk.

The guidelines, as amended, are designed to promote appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans.

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At December 31, 2021, the Bank’s total CRE loans as defined in the regulatory guidelines represented 249% of Tier 1 risk-based capital plus allowance for loan and lease losses, and the Bank’s CRE loan portfolio has increased by more than 50% during the prior 36 month period.

Therefore, the Bank believes that the guidelines are applicable to it as it has a potential concentration in CRE loans.

The Bank and its board of directors have discussed the guidelines and believe that the Bank’s underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are sufficient to address the risk management of CRE under the guidelines.

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Future economic conditions cannot be predicted, and recurrent deterioration in the economies of the nation as a whole or in the Company’s markets could have an adverse effect, which could be material, on our business, financial condition, results of operations and future prospects, and could cause the market price of the Company’s stock to decline.

California’s San Joaquin Valley, where the Company is headquartered and has many of its branch locations, was particularly hard hit by the COVID-19 pandemic and its effect on the economy.

Unemployment levels have historically been elevated in the San Joaquin Valley, including Tulare County which is our geographic center, but recessionary conditions, precipitated by the COVID-19 Great Lockdown, pushed unemployment rates to exceptionally high levels in 2020.

California’s San Joaquin Valley, where the Company is headquartered and has many of its branch locations, has been particularly hard hit by the COVID-19 pandemic and its effect on the economy.

Unemployment levels have historically been elevated in the San Joaquin Valley, including Tulare County which is the Company’s geographic center, but recessionary conditions, precipitated by the COVID-19 Great Lockdown, pushed unemployment rates to exceptionally high levels in 2020.

The highest unemployment rate for Tulare County pre-pandemic was 19.3% in March 2010;

the unemployment rate reached that same high of 19.3% again in April 2020.

The Tulare county unemployment rate declined to 8.8% by December 2020, an uptick from the 8.1% unemployment rate for November 2020.

In addition, as discussed below in connection with challenges facing the agricultural industry, the persistence of a California drought could have a significant

negative impact on unemployment rates in our market areas.

Furthermore, a drop in oil prices like the decline experienced in recent years could also negatively impact unemployment rates, particularly in Kern County.

The Tulare County unemployment rate declined

to 8.4% by December 2021, an uptick from the 8.2% unemployment rate for November 2021, which was the lowest unemployment point of 2021.

In addition, as discussed below in connection with challenges facing the agricultural industry, the persistence of a California drought could have a significant negative impact on unemployment rates in our market areas.

Furthermore, although oil prices have recently been experiencing record highs, a drop in oil prices could also negatively impact unemployment rates, particularly in Kern County.

These conditions have impacted and are expected in the future to impact-our business, results of operations, and financial condition negatively, including through lower revenue from certain of our fee-based businesses;

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deposit flows;

and continued client draws on lines of credit as well as our participation in the Small Business Administration Paycheck Protection Program.

and continued client draws on lines of credit.

Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.

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● Demand for our products and services may decline, and deposit balances may decrease making it difficult to grow assets and income.

● The decline in the target federal funds rate could decrease yields on our existing and new assets that exceed the decline in our cost of interest-bearing liabilities, which may reduce our net interest margin.

● Our borrowers’ actual payment performance may be worse than anticipated as loan deferrals related to the COVID-19 pandemic expire, and we may experience potential adverse impact from loan modifications and payment deferrals despite their implementation consistent with recent regulatory guidance.

● The impact of the adoption of the CECL standard in 2022, which is highly dependent on unemployment rate forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net income.

● The continued low interest rate environment, including the target federal funds rate could decrease yields on our existing and new assets that exceed the decline in our cost of interest-bearing liabilities, which may reduce our net interest margin.

● The impact of the CECL standard in 2022, which is highly dependent on unemployment rate forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net income.

While governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth, the success of these measures is unknown, and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic.

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Our Traditional Service Delivery Channels may be Impacted by the COVID-19 Pandemic .

In light of the external COVID-19 threat, the Board of Directors and senior management are continuously monitoring the situation, providing frequent communications, and making adjustments and accommodations for both external clients and our employees.

For the most part, branches remain open to serve our customers and local communities, with modified hours and strict social distancing protocols in place as well as limiting most of our branches to walk-up or drive-up visits.

In light of the continued external COVID-19 threat, the Board of Directors and senior management are continuously monitoring the situation, providing frequent communications, and making adjustments and accommodations for both external clients and our employees.

For the most part, branches remain open to serve our customers and local communities, with modified hours and strict social distancing protocols in place as well as at times limiting certain of our branches to walk-up or drive-up visits.

Our customers have been encouraged to utilize branch alternatives such as our ATMs, online banking, and mobile banking application in lieu of in-branch transactions.

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If the pandemic worsens, resurges or lasts for an extended period of time, to protect the health of the Company’s workforce and our customers, we may need to enact further precautionary measures to help minimize the risks to our employees and customers, thus potentially altering our service delivery channels and operations over a prolonged period.

These changes to our traditional service delivery channels may

negatively impact our customers’ experience of banking with us, result in loss of service fees, and increase costs through equipment and services needed to support a remote workforce, and therefore negatively impact our financial condition and results of operation.

These changes to our traditional service delivery channels may negatively impact our customers’ experience of banking with us, result in loss of service fees, and increase

costs through equipment and services needed to support a remote workforce, and therefore negatively impact our financial condition and results of operation.

Section 1.02 Risks Relating to the Bank and our Business

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Economic conditions are currently stressed although appear relatively stable in most of our local markets.

The State of California has imposed mandatory restrictions on travel and prescribed rules and protocols that have directly and indirectly impacted many sectors in our local economy.

The hospitality segment which is strained due to the stay at home order in place off and on throughout 2020 and the first 25 days of 2021.

Adverse developments, such as, among other things, health epidemics or pandemics (or expectations about them) like the novel coronavirus, international trade disputes, inflation risks, oil price volatility, the level of U.S.

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● a lack of demand for loans, or other products and services offered by us;

● an inability to retain and recruit employees due to competition for labor;

● increased competition for loans or other earning assets;

● a decline in the value of our loans or other assets secured by real estate;

● a decrease in deposit balances due to increased pressure on the liquidity of our customers;

● an impairment of our investment securities;

● a credit impairment of our investment securities;

● an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us, which in turn could result in higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

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The speed and absolute level of increase or decrease in interest rates can have a material impact on the net interest income and economic value of equity of the Bank depending on the asset liability profile at any point in time.

In addition, different parts of the yield curve could change by different amounts causing the yield curve to steepen, flatten, or even invert.

A flattening or inversion of the yield curve could have a particularly negative impact on the Company’s earnings.

Changes in market interest rates could have a material adverse effect on the Company’s asset quality, loan origination volume, financial condition, results of operations, and cash flows.

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Challenges in the agricultural industry could have an adverse effect on our customers and their ability to make payments to us, particularly in view of recent drought conditions in California and disruptions involving international trade.

Difficulties experienced by the agricultural industry have led to relatively high levels of

nonperforming assets in previous economic cycles.

Difficulties experienced by the agricultural industry have led to relatively high levels of nonperforming assets in previous economic cycles.

This is due to the fact that a considerable portion of our borrowers are involved in, or are impacted to some extent by, the agricultural industry.

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For example, consumers can maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits.

Additionally, the use of blockchain and related technology may cause further disintermediation away from banks.

Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks.

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The loss of these revenue streams and access to lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Moreover, with the large number of bank failures in the past decade, some customers continue to be concerned about the extent to which their deposits are insured by the FDIC.

Moreover, some customers continue to be concerned about the extent to which their deposits are insured by the FDIC.

Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with their bank is fully insured.

At December 31, 2021, the Bank estimates it had uninsured deposits of $930 million.

Decreases in deposits may adversely affect our funding costs and net income.

Ultimately, competition can and does increase our cost of funds, reduce loan yields and drive down our net interest margin, thereby reducing profitability.

It can also make it more difficult for us to continue to increase the size of our loan portfolio and deposit base, and could cause us to rely more heavily on wholesale borrowings which are generally more expensive than retail deposits.

It can also make it more difficult for us

to continue to increase the size of our loan portfolio and deposit base, and could cause us to rely more heavily on wholesale borrowings which are generally more expensive than retail deposits.

We may not be able to continue to attract and retain employees, and our efforts to compete for talent may reduce our profitability.

The Company recognizes that community banking is based on relationships and a core part of the Company’s service strategy is to recruit and develop employees that build these relationships with customers, vendors, and other employees.

In addition to offering a competitive base salary or wage, the company offers comprehensive benefits, including training.

Due to continued turnover, the Company increased its minimum wage to $20 per hour effective January 1, 2022, in an effort to attract and retain employees at all levels.

The Company’s employees are critical to the Company’s ability to develop and grow relationships with its clients.

Recruiting talent within the Company’s footprint has always been a fundamental strategy whenever possible but has been recently complemented with offering existing and new employee’s opportunities for remote and/or hybrid work arrangements if possible.

However, it is recognized that competition for talent by both banks and non-banks is fierce and that overall expenses may be negatively affected by higher per employee costs or could result in lower staffing levels which would result in a reduced ability to serve our customers, could result in gaps of experience in certain areas, or cause the Company to engage higher cost temporary staff or consultants.

The value of the securities in our investment portfolio may be negatively affected by market disruptions, adverse credit events or fluctuations in interest rates, which could have a material adverse impact on capital levels.

Our available-for-sale investment securities are reported at their estimated fair values, and fluctuations in fair values can result from changes in market interest rates, rating agency actions, issuer defaults, illiquid markets and limited investor demand, among other things.

Under current accounting rules, as long as the change in the fair value of a security is not considered to be “other than temporary,” we directly increase or decrease accumulated other comprehensive income in shareholders’ equity by the amount of the change in fair value, net of the tax effect.

Under current accounting rules we directly increase or decrease accumulated other comprehensive income in shareholders’ equity by the amount of the change in fair value, net of the tax effect.

Because of the size of our fixed income bond portfolio relative to total assets, a relatively large increase in market interest rates, in particular, could result in a material drop in fair values and, by extension, our capital.

Investment securities that have an amortized cost in excess of their current fair value at the end of a reporting period are also evaluated for other-than-temporary impairment.

If such impairment is indicated, the difference between the amortized cost and the fair value of those securities will be recorded as a charge in our income statement, which could also have a material adverse effect on our results of operations and capital levels.

The Company has a significant amount of Collateralized Loan Obligations;

a change in credit events, demand or other factors could decrease the spread to the index which could have a negative impact in the value of those bonds.

Non-government and non-US agency investment securities that have an amortized cost in excess of their current fair value at the end of a reporting period are also evaluated for potential credit impairment.

If such credit impairment is indicated, the difference between the amortized cost and the fair value of those securities will be recorded as a charge in our income statement, which could also have a material adverse effect on our results of operations and capital levels.

We are exposed to the risk of environmental liabilities with respect to properties to which we obtain title .

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Loans on commercial buildings represented approximately 61.2% of all real estate loans, while construction/development and land loans were 1.3%, loans secured by residential properties accounted for 19.6%, and loans secured by farmland were 5.4% of real estate loans.

The Company’s $8.6 million balance of nonperforming assets at December 31, 2020 includes nonperforming real estate loans totaling $6.3 million, and $1.0 million in OREO.

The Company’s $4.6 million balance of

nonperforming assets at December 31, 2021, includes nonperforming real estate loans totaling $3.1 million, and $0.1 million in OREO.

In past recessionary periods, the residential real estate market experienced significant deflation in property values and foreclosures occurred at relatively high rates during and after the recession.

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Commercial and agricultural real estate, commercial construction and land development, and commercial and industrial loans and leases (including agricultural production loans but excluding mortgage warehouse loans), which comprised approximately 75.0% of our total loan portfolio as of December 31, 2021, expose the Company to a greater risk of loss than residential real estate and consumer loans, which were a smaller percentage of the total loan portfolio.

Commercial real estate and land development loans typically involve relatively large balances to a borrower or a group of related borrowers, and an adverse development with respect to a larger

commercial loan relationship would expose us to greater risk of loss than would issues involving a smaller residential mortgage loan or consumer loan.

Commercial real estate and land development loans typically involve relatively large balances to a borrower or a group of related borrowers, and an adverse development with respect to a larger commercial loan relationship would expose us to greater risk of loss than would issues involving a smaller residential mortgage loan or consumer loan.

Moreover, banking regulators give commercial real estate loans extremely close scrutiny due to risks relating to the cyclical nature of the real estate market and risks for lenders with high concentrations of such loans.

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Any required increase in our allowance for loan and lease losses could adversely affect our net income, and any requirement that we maintain higher capital levels could adversely impact financial performance measures including earnings per share and return on equity.

If the Company grows commercial real estate loans, it could be limited based on levels of regulatory capital.

Therefore, the ability to grow loans significantly is dependent upon the Company’s ability to diversify its loan portfolio through recruitment of lending teams, hiring of specialized support personnel including underwriters and portfolio managers, and the ability to monitor new risks in the loan portfolio.

Repayment of our commercial loans is often dependent on the cash flows of the borrowers, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

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Our nonperforming loans may return to elevated levels, which would negatively impact earnings, possibly in a material way depending on the severity.

We do not record interest income on non-accrual loans, thereby adversely affecting income levels.

We do not record interest income on non-accrual loans, thereby adversely

affecting income levels.

Furthermore, when we receive collateral through foreclosures and similar proceedings, we are required to record the collateral at its fair market value less estimated selling costs, which may result in charges against our allowance for loan and lease losses if that value is less than the book value of the related loan.

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There can be no assurance that we will avoid increases in nonperforming loans in the future.

We may experience loan and lease losses in excess of our allowance for such losses.

We may experience credit losses in excess of our allowance for such losses.

We endeavor to limit the risk that borrowers might fail to repay;

nevertheless, losses can and do occur.

We have established an allowance for estimated loan and lease losses in our accounting records based on:

At December 31, 2021, we established an allowance for estimated loan and lease losses in our accounting records based on:

● historical experience with our loans;

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● the quality of the collateral underlying our loans.

As of January 1, 2022, we adopted the provisions of ASU 2016-13 (commonly referred to as “CECL”) with an adjustment to equity, net of taxes for the difference between the allowance for loan and lease losses and the allowance for credit losses.

Therefore, on January 1, 2022, the Company recorded a $10.4 million increase in the allowance for credit losses, which includes a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.

See Note 2 to the consolidated financial statements under “Recent Accounting Pronouncements” for additional details on ASU 2016-13 and its expected impact on the Company.

The allowance for credit losses can be affected by changes in economic forecasts, especially national employment rates;

changes in actual loan prepayment speeds, actual levels of charge-offs, changes to the level of nonaccrual loans, and changes to management’s estimate of items not otherwise considered as part of the quantitative calculation of the allowance.

At any given date, we maintain an allowance for loan and lease losses that we believe is adequate to absorb specifically identified probable losses as well as any other losses inherent in our loan portfolio as of that date.

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We cannot be sure that we will identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on loans that have been so identified.

Changes in economic, operating and other conditions which are beyond our control, including interest rate fluctuations, deteriorating collateral values, and changes in the financial condition of borrowers may lead to an increase in our estimate of probable losses, or could cause actual loan and lease losses to exceed our current allowance.

In addition, the FDIC and the DFPI, as part of their supervisory functions, periodically review our allowance for loan and lease losses.

Such agencies may require us to increase our provision for loan and lease losses or to recognize further losses based on their judgment, which may be different from that of our Management.

Any such increase in the allowance required by regulators could also hurt our business.

Such agencies may identify additional considerations for us to address with respect to our allowance for credit losses which may cause us to increase our allowance for credit losses.

Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value of the collateral.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property.

However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and an error in fact or judgment could adversely affect the reliability of the appraisal.

However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and an

error in fact or judgment could adversely affect the reliability of the appraisal.

In addition, events occurring after the initial appraisal may cause the value of the real estate to decrease.

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We depend on our executive officers and key personnel to implement our business strategy, and could be harmed by the loss of their services.

We believe that our continued growth and success depends in large part upon the skills of our management team and other key personnel.

We believe that our continued growth and success depends in large part upon the skills of our executive management team and other key personnel.

The competition for qualified personnel in the financial services industry is intense, and the loss of key personnel or an inability to attract, retain or motivate key personnel could adversely affect our business.

If we are not able to retain our existing key personnel or attract additional qualified personnel, our business operations could be impaired.

We may incur significant losses as a result of ineffective risk management processes and strategies.

We seek to monitor and control our risk exposure through a comprehensive enterprise risk framework.

While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgements that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes.

Section 1.05 Risks Related to our Other Accounting Estimates

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In some cases, we could be required to apply a new or revised standard retroactively, resulting in a retrospective adjustment to prior financial statements.

One significant pronouncement is ASU 2016-13, which was released by the FASB in 2016 and which the Company was initially required to adopt no later than January 1, 2020 (before statutory optional deferrals as described below).

ASU 2016-13 included changes to the methodology for determining the amount of the allowance for credit losses, among other things.

The new credit loss model is a substantial change from the previous standard in place, as it required the Company to calculate its allowance on the basis of current expected credit losses over the lifetime of its loans (commonly referred to as the “CECL” model), instead of losses inherent in the portfolio as of a point in time.

Upon implementation, institutions are required to record a cumulative-effect balance sheet adjustment for financial assets carried at amortized cost for any change in the related allowance for loan and lease losses generated by the adoption of the new standard.

The Company’s preliminary evaluation indicates that when adopted, the provisions of ASU 2016-13 would impact our consolidated financial statements, particularly the level of our reserve for credit losses and shareholders’ equity, which could materially affect our financial condition and future results of operations.

In March 2020, the Company initially elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020.

In December 2020, the Consolidated Appropriations Act, 2021 extended the deferral of implementation of CECL from December 31, 2020, to the earlier of the first day of the fiscal year, beginning after the national emergency terminates or January 1, 2022.

The Company will continue to postpone implementation in order to provide additional time to assess better the impact of the COVID-19 pandemic on the expected lifetime credit losses.

See Note 2 to the consolidated financial statements under “Recent Accounting Pronouncements” for additional details on ASU 2016-13 and its expected impact on the Company.

There are risks resulting from the extensive use of models .

We rely on quantitative models to measure risks and estimate certain financial values.

Models may be used to measure interest rate and other market risks, predicting or estimating losses, assessing capital adequacy, assisting with identifying compliance risk, as well as to estimate the value of financial instruments and balance sheet items.

Poorly designed or implemented models could result in business decisions made based on the use of models being adversely affected due to the inaccuracy of that information.

Models are often based on historical experience to predict future outcome and new experiences or events which are not part of historical experience could significantly increase model imprecision and reliability.

Model inputs can also include information provided by third parties, such as economic forecasts or macroeconomic variables upon which we rely.

Our reliance on models continues to increase as rules, guidance and expectations change including the additional model used in the determination of our allowance for credit losses, which we adopted on January 1, 2022.

Section 1.06 Risks Related to our Growth Strategy

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In addition to organic growth and the establishment of de novo branches, over the past several years we have engaged in expansion through acquisitions of branches and whole institutions.

We may continue to pursue this growth strategy, within our current footprint and/or via geographic expansion, but there are risks associated with any such expansion.

We may reestablish this growth strategy, within our current footprint and/or via geographic expansion, but there are risks associated with any such expansion.

Those risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating acquired businesses, facing resistance from customers or employees, being unable to profitably deploy assets acquired in the transaction, and regulatory compliance risks.

To the extent we issue capital stock in connection with additional transactions, if any, these transactions and related stock issuances may have a dilutive effect on earnings per share and share ownership.

The subsidiary’s CRA rating could also negatively affect the Company’s acquisition strategy as the CRA requires the banking agencies to consider a financial institution’s efforts in meeting its community credit needs when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or the formation of holding companies.

Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully integrate the operations of the acquired company.

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Section 1.07 Legislative and Regulatory Risks

We are subject to extensive government regulation that could limit or restrict our activities, which in turn may adversely impact our ability to increase our assets and earnings .

We are subject to extensive government regulation that could limit or restrict our activities which may include crypto currency and legalized marijuana business activities, which in turn may adversely impact our ability to increase our assets and earnings .

We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the DFPI and the FDIC.

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These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law.

The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business, profitability or growth strategy.

The laws and regulations applicable to the banking industry, or the regulatory enforcement of new and existing laws could change at any time and we cannot predict the effects of these changes on our business, profitability or growth strategy.

Increased regulation could increase our cost of compliance and adversely affect profitability.

Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties, as well as imposing limitations on a bank’s ability to implement components of its business plan, such as expansion through mergers and acquisitions or the opening of new branch offices.

In addition, changes in regulatory requirements may add

costs associated with compliance efforts.

In addition, changes in regulatory requirements may add costs associated with compliance efforts.

Furthermore, government policy and regulation, particularly as implemented through the Federal Reserve, significantly affect credit conditions.

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In the event that deteriorating economic conditions increase bank failures, the FDIC ensures payments of deposits up to insured limits from the DIF.

Although the Bank’s FDIC insurance assessments have not increased as a result of changes in recent periods, and could possibly even be reduced in the near term, there can be no assurance that the FDIC will not increase assessment rates in the future or that the Bank will not be subject to higher assessment rates as a result of a change in its risk category, either of which could have an adverse effect on the Bank’s earnings.

in the future or that the Bank will not be subject to higher assessment rates as a result of a change in its risk category, either of which could have an adverse effect on the Bank’s earnings.

Previously enacted and potential future regulations could have a significant impact on our business, financial condition and results of operations.

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If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate.

These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be

corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship.

Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.

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Department of Justice, federal banking agencies and other federal agencies are responsible for enforcing these laws and regulations.

A challenge to an institution’s compliance with fair lending laws and regulations, or receiving a less than satisfactory CRA rating, could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines.

Private parties may also challenge an institution’s performance under fair lending laws in private class action litigation.

A challenge to an institution’s compliance with fair lending laws and regulations, receiving a less than satisfactory CRA rating, or challenges related to other consumer protection laws could

result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines.

Private parties may also challenge an institution’s performance under consumer compliance laws in private class action litigation.

Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

We derive fee income from charging customers for fees that could be subject to increased scrutiny by the regulators.

There has been increased scrutiny of certain fees charged to consumers, including overdrafts in recent years.

Changes to the Company’s overdraft practices as a result of changes in regulations or rules impact the collection of overdraft or insufficient fund fees could negatively impact the Company’s earnings.

In 2021, the Company recognized $4.9 million of income from overdraft fees which could be impacted due to changes in the way overdraft fees are charged.

In addition, the Company has a significant level of income from money service businesses.

In 2021, the Company recognized approximately $1.9 million in fees related to money service businesses.

Changes in regulatory oversight of money service businesses could negatively impact the Company’s number of money service businesses it serves and the related income from such customers.

Section 1.08 Risks Related to our Common Stock

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● domestic and international economic factors unrelated to our performance.

The stock market and, more specifically, the market for financial institution stocks, has experienced significant volatility in the past including all of 2020 and the first quarter of 2021.

The stock market and, more specifically, the market for financial institution stocks, has experienced significant volatility in the past including all of 2020 and 2021 and the first quarter of 2022.

As a result, the market price of our common stock has at times been unpredictable and could be in the future, as well.

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Information concerning the Company’s dividend policy and historical dividend practices is set forth in Item 5 below under “Dividends.” However, no assurance can be given that our future performance will justify the payment of dividends in any particular year.

Your investment may be diluted because of our ability to offer stock to others, and from the exercise of stock options.

Your investment may be diluted because of our ability to offer stock to others, and from the exercise of stock options or issuance of restricted stock.

The shares of our common stock do not have preemptive rights, which means that you may not be entitled to buy additional shares if shares are offered to others in the future.

We are authorized to issue up to 24,000,000 shares of common stock, and as of December 31, 2020 we had 15,388,423 shares of common stock outstanding.

We are authorized to issue up to

24,000,000 shares of common stock, and as of December 31, 2021, we had 15,270,010 shares of common stock outstanding.

Except for certain limitations imposed by NASDAQ, nothing restricts our ability to offer additional shares of stock for fair value to others in the future.

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Furthermore, when our directors and officers exercise in-the-money stock options or receive restricted stock units, your ownership in the Company is diluted.

As of December 31, 2020, there were outstanding options

to purchase an aggregate of 495,489 shares of our common stock with an average exercise price of $23.67 per share.

As of December 31, 2021, there were outstanding options to purchase an aggregate of 415,870 shares of our common stock with an average exercise price of $24.15 per share.

There were also 165,131 shares of restricted stock units outstanding which vest over periods ranging from 1 year to 5 years from initial issuance.

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In recent periods there has been a rise in fraudulent electronic activity, security breaches, and cyber-attacks, including in the banking sector.

Some financial institutions have reported breaches of their websites and systems which have involved

sophisticated and targeted attacks intended to misappropriate sensitive or confidential information, destroy or corrupt data, disable or degrade service, disrupt operations and/or sabotage systems.

Some financial institutions have reported breaches of their websites and systems which have involved sophisticated and targeted attacks intended to misappropriate sensitive or confidential information, destroy or corrupt data, disable or degrade service, disrupt operations and/or sabotage systems.

These breaches can remain undetected for an extended period of time.

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If personal, non-public, confidential or proprietary customer information in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss.

This could occur, for example, if information was erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

This could occur, for example, if information was erroneously provided to parties who are not

permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully remediated.

Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems could result in losses that are difficult to detect.

We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control

(for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability.

We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability.

We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their employees) and to the risk that our (or our vendors’) business continuity and data security efforts might prove to be inadequate.

In addition, the Company is named as a defendant in lawsuits from time-to-time.

Even if the case has no basis, there are costs to defend, and the Company may determine that it should settle certain suits even if there is no liability.

The costs of lawsuits, whether merited or not, have a negative impact on the Company’s expenses.

The occurrence of any of these risks could result in a diminished ability to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition and results of operations, perhaps materially.

We are subject to claims and litigation which could adversely affect our profitability or cause us reputational harm .

The company, and certain of our directors or officers, may be involved, from time to time in litigation or investigations.

If claims or legal actions, whether founded or unfounded, are not resolved favorably, they may result in significant financial liability.

Although we establish accruals for legal matters as required and certain expenses and liabilities may be covered by insurance, the amount of any loss ultimately incurred in relation to legal claims and litigation may be substantially higher than the amounts accrued and/or insured.

We may be adversely affected by the financial stability of other financial institutions.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business