What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-10 compared with 2021-03-12 · 277 added, 329 removed, 1389 unchanged (30% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and independent auditors’ reports listed below are included herein:

Reports of Independent Registered Public Accounting Firms from Eide Bailly LLP and Vavrinek, Trine, Day & Co., LLP

The following financial statements and independent auditors’ report listed below are included herein:

Report of Independent Registered Public Accounting Firm (Eide Bailly LLP San Ramon, California PCAOB ID 286 )

Consolidated Balance Sheets – December 31, 2021 and 2020

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Opinion on the Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Sierra Bancorp and Subsidiary (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of Sierra Bancorp and Subsidiary (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control —Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework:

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in

reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

A company’s internal control

over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

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As discussed in Note 4 to the Company’s consolidated financial statements, the Company has a gross loan and lease portfolio of $2.0 billion and related allowance for loan and lease losses of $14.3 million as of December 31, 2021.

The Company’s allowance for loan and lease losses is a material and complex estimate requiring significant management’s judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan and lease portfolio.

The determination of the allowance for loan and lease losses is a material and complex estimate requiring significant management’s judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan and lease portfolio.

The allowance for loan and lease losses includes a general reserve which is determined based on the results of a quantitative and a qualitative analysis of all loans not measured for impairment at the reporting date.

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and the effect of the other external factors such as competition and legal and regulatory requirements.

We identified the allowance for loan and lease losses as a critical matter.

Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.

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• Testing the design and operating effectiveness of controls relating to management’s timely identification of problem loans, appropriate application of loan rating policy, consistency of application of accounting policies and appropriateness of assumptions used in the allowance for loan and lease losses calculation.

● Evaluating the reasonableness of assumptions and sources of data used by management in forming the loss factors by performing retrospective review of historic loan and lease loss experience and analyzing historical data used in developing the assumptions.

• Evaluating the reasonableness of assumptions and sources of data used by management in forming the loss factors by performing retrospective review of historic loan and lease loss experience and

analyzing historical data used in developing the assumptions.

• Evaluating the appropriateness of inputs and factors that the Company used in forming the qualitative loss factors and assessing whether such inputs and factors were relevant, reliable, and reasonable for the purpose used.

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/s/ Eide Bailly LLP

We have served as the Company’s auditor since 2019.

San Ramon, California

March 10, 2022

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Sierra Bancorp and Subsidiary

Porterville, California

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows, for the year ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the entity’s management.

Our responsibility is to express an opinion on these financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to Sierra Bancorp in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Vavrinek, Trine, Day & Co., LLP

We have served as the Company’s auditor since 2019.

Rancho Cucamonga, California

March 14, 2019

Vavrinek, Trine, Day & Co., LLP, who joined Eide Bailly LLP in 2019, had served as the Company’s auditor since 2004.

SIERRA BANCORP AND SUBSIDIARY

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Short-term borrowings

Long-term debt

Subordinated debentures, net

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Short-term borrowings

Long-term debt

Subordinated debentures

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Net interest income

Provision for loan and lease losses

(Benefit) provision for loan and lease losses

Net interest income after provision for loan and lease losses

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Stock based compensation expense

Stock issued-acquisition

Stock repurchase

Cash dividends - $ .74 per share

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Balance, December 31, 2020

Other comprehensive gain, net of tax

Exercise of stock options

Stock based compensation expense

Other comprehensive loss, net of tax

Stock options exercised;

net of shares surrendered for cashless exercises

Restricted stock granted

Restricted stock surrendered due to employee tax liability

Restricted stock forfeited / cancelled

Stock based compensation - stock options

Stock based compensation - restricted stock

Stock repurchase

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(Gain) loss on sales of securities

Loss on disposal of fixed assets

(Gain) loss on disposal of fixed assets

Gain on sale of foreclosed assets

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Stock based compensation expense

Provision for loan and lease losses

(Benefit) provision for loan and lease losses

Depreciation and amortization

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Amortization of core deposit intangible

Increase in interest receivable and other assets

(Decrease) increase in other liabilities

Deferred income tax benefit

Decrease (increase) in interest receivable and other assets

Increase (decrease) in other liabilities

Deferred income tax provision (benefit)

Increase in equity securities

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Proceeds from BOLI death benefit

Net cash from bank acquisition

Net cash used in investing activities

Net increase in partnership investment

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Increase in deposits

Increase (decrease) in borrowed funds

(Decrease) increase in borrowed funds

Increase in repurchase agreements

Increase in fed funds purchased

(Decrease) increase in fed funds purchased

Cash dividends paid

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Stock options exercised

Proceeds from issuance of subordinated debt

Net cash provided by financing activities

(Decrease) increase in cash and due from banks

Increase (decrease) in cash and due from banks

Cash and cash equivalents, beginning of year

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Real estate acquired through foreclosure

Change in unrealized net gains (losses) on securities available-for-sale

Change in unrealized net (losses) gains on securities available-for-sale

Operating right-of-use asset pursuant to adoption of ASU 2016-02

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The Company’s only other direct subsidiaries are Sierra Statutory Trust II, Sierra Capital Trust III and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities.

At December 31, 2020, the Bank operated 40 full service branch offices, an online branch and provides specialized lending services through an agricultural credit center, an SBA center, Mortgage Warehouse lending divisions and a dedicated loan production office in Rocklin, California.

At December 31, 2021, the Bank operated 35 full service branch offices, an online branch and provides specialized lending services through an agricultural credit center, an SBA center, Mortgage Warehouse lending divisions and a dedicated loan production office in Roseville, California.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits.

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Both cash and stock dividends are reported as income.

The Bank’s investment in FHLB stock was approximately $ 10.7 million at both December 31, 2020 and 2019.

The Bank’s investment in FHLB stock was approximately $ 12.4 million at December 31, 2021 and $ 10.7 million at December 31, 2020.

Pursuant to the adoption of ASU 2016-01 on January 1, 2018 , the Company elected the measurement alternative for measuring equity securities without readily determinable fair values at cost less impairment, plus or minus observable price changes in orderly transactions.

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A remeasurement gain of $ 0.9 million, $ 0.4 million and $ 0.2 million was recorded to income during the years ended December 31, 2021, 2020 and 2019, on PCBB stock.

$ 1.8 million in cumulative remeasurement gains have been recorded as of December 31,

$ 2.7 million in cumulative remeasurement gains have been recorded as of December 31, 2021 on PCBB stock.

Adjustments to the carrying value of PCBB stock were based on a third party valuation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2020 on PCBB stock.

Adjustments to the carrying value of PCBB stock were based on observable activity in the stock.

Loans Held for Sale

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These representations and warranties may require the Company to repurchase loans with underwriting deficiencies as defined per the applicable sales agreements and certain past due loans within 90 days of the sale.

The Company did not experience losses during the years ended December 31, 2020, 2019, or 2018 regarding these representations and warranties.

The Company did no t experience losses during the years ended December 31, 2021, 2020, or 2019 regarding these representations and warranties.

Loans and Leases (Financing Receivables)

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When loans are repaid, any remaining unamortized balances of deferred fees and costs are accounted for through interest income.

Generally, the Company places a loan or lease on nonaccrual status and ceases recognizing interest income when it has become delinquent more than 90 days and/or when Management determines that the repayment of principal and

The Company may decide that it is appropriate to continue to accrue interest on certain loans more than 90 days delinquent if they are well-secured by collateral and collection is in process.

When a loan is placed on nonaccrual status, any accrued but uncollected interest for the loan is reversed out of interest

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collection of interest is unlikely.

The Company may decide that it is appropriate to continue to accrue interest on certain loans more than 90 days delinquent if they are well-secured by collateral and collection is in process.

When a loan is placed on nonaccrual status, any accrued but uncollected interest for the loan is reversed out of interest income in the period in which the loan’s status changed.

income in the period in which the loan’s status changed.

For loans with an interest reserve, i.e., where loan proceeds are advanced to the borrower to make interest payments, all interest recognized from the inception of the loan is reversed when the loan is placed on non-accrual.

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A TDR is generally considered to be in default when it appears likely that the customer will not be able to repay all principal and interest pursuant to the terms of the restructured agreement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is maintained at a level which, in management’s judgment, is adequate to absorb loan and lease losses inherent in the loan and lease portfolio.

The allowance for loan and lease losses is increased by a provision for loan and lease losses, which is charged to expense, and by principal recovered on charged-off balances.

The allowance for loan and lease losses is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

increased by a provision for loan and lease losses, which is charged to expense, and by principal recovered on charged-off balances.

It is reduced by principal charge-offs.

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These agencies may require additions to the allowance for loan and lease losses based on their judgment about information available at the time of their examinations.

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Reserve for Off-Balance Sheet Commitments

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Because the available funds have not yet been disbursed on these commitments the estimated losses are not included in the calculation of the ALLL.

The reserve for off-balance sheet commitments is an estimated loss contingency which is included in other liabilities on the Consolidated Balance Sheets.

The reserve for off-balance sheet commitments is an estimated loss contingency which is included in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

other liabilities on the Consolidated Balance Sheets.

The adjustments to the reserve for off-balance sheet commitments are reported within noninterest expense.

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Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually or more frequently if events and circumstances exist which indicate that an impairment test should be performed.

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There was no impairment recognized for the years ended December 31, 2021, 2020, and 2019.

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Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

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The Company accrues for these future benefits from the effective date of the plan until the director’s or executive’s expected retirement date in a systematic and rational manner.

At the consolidated balance sheet date, the amount of accrued

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

benefits equals the then present value of the benefits expected to be provided to the director or employee, any beneficiaries, and covered dependents in exchange for the director’s or employee’s services to that date.

At the consolidated balance sheet date, the amount of accrued benefits equals the then present value of the benefits expected to be provided to the director or employee, any beneficiaries, and covered dependents in exchange for the director’s or employee’s services to that date.

Comprehensive Income

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Other comprehensive income includes fluctuations in unrealized gains and losses on securities available for sale, net of an adjustment for the effects of realized gains and losses and any applicable tax.

Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income that historically has not been recognized in the calculation of net income.

Comprehensive income is a more inclusive financial

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reporting methodology that includes disclosure of other comprehensive income that historically has not been recognized in the calculation of net income.

Unrealized gains and losses on the Company’s available for sale securities, net of tax, are included in other comprehensive income after adjusting for the effects of realized gains and losses.

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The expected term of stock options granted is based on historical data and represents the period of time that options granted are expected to be outstanding subsequent to vesting, which takes into account that the options are not transferable.

The risk-free interest rate for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the expected term of the stock option is based on the U.S.

The risk-free interest rate for the expected term of the stock option is based on the U.S.

Treasury yield curve in effect at the time of the grant.

The fair value of each stock option is estimated on the date of grant using the following assumptions:

Years Ended December 31,

Dividend yield

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Expected option life

No stock options were granted during the year ended December 31, 2021.

Revenue Recognition

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Service Charges on Deposit Accounts comprise charges on retail and business accounts.

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Business customers can earn credits depending on account type and deposit balances maintained with the Company, which may be used to offset fees.

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Recent Accounting Pronouncements

In January 2016 the FASB issued ASU 2016-01, Financial Instruments–Overall:

Recognition and Measurement of Financial Assets and Financial Liabilities .

This guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments.

Among other things, the guidance in this ASU (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements, and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities.

This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, except for the amendment related to equity securities without readily determinable fair values which should be applied prospectively to equity investments that exist as of the date of adoption.

The Company adopted ASU 2016-01 effective January 1, 2018 , and recorded an increase in equity securities without readily determinable

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

values and noninterest revenue for $ 1.2 million.

In accordance with (iv) above, the Company measured the fair value of its loan portfolio at December 31, 2020 and 2019 using an exit price notion.

See Note 20 Fair Value .

In February 25, 2016, the FASB issued Accounting Standards Update 2016-02 , Leases (Topic 842).

The new standard was issued to increase the transparency and comparability around lease obligations.

Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by bringing lease liabilities onto the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements.

This Update is generally effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The Company has several lease agreements, including 21 branch locations, one administrative office and three offsite ATM locations which fell under the requirements of Topic 842.

Effective January 1, 2019 the Company adopted ASU 2016-02 recording a right of use asset totaling approximately $ 10 million, and a corresponding lease liability .

See Note 6 to the consolidated financial statements for more detailed information.

In September 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

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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 now 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.

On the effective date, institutions will apply the new accounting standard as follows:

for financial assets carried at amortized cost, a cumulative-effect adjustment will be recognized on the balance sheet for any change in the related allowance for loan and lease losses generated by the adoption of the new standard;

any change in the reserve for unfunded commitments, included in other liabilities;

and, debt securities on which other-than-temporary impairment had been recognized prior to the effective date will transition to the new guidance prospectively with no change in their amortized cost basis.

The Company plans to implement CECL on January 1, 2022 and while the exact extent of the impact has not yet been definitively determined, the Company’s calculation as of December 31, 2020 indicates that our allowance for loan and lease losses will increase by approximately $ 8.9 million relative to current levels, under CECL while our reserve for unfunded commitments will increase by approximately $ 0.8 million.

The Company plans to continue to sensitize

SIERRA BANCORP AND SUBSIDIARY

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inputs, assumptions and methodologies within its CECL estimation process during 2021 as we prepare for implementation on January 1, 2022.

In January 2017 the FASB issued ASU 2017-04 , Intangibles – Goodwill and Other (Topic 350):

Simplifying the Accounting for Goodwill Impairment .

This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

All other goodwill impairment guidance will remain largely unchanged.

Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary.

The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts.

Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.

The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019.

We have not been required to record any goodwill impairment to date, and do not expect that this guidance would require us to do so given current circumstances.

In March 2017 the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20):

Premium Amortization on Purchased Callable Debt Securities .

The amendments in this update shorten the amortization period for certain callable debt securities held at a premium, by requiring the premium to be amortized to the earliest call date.

Under prior guidance, the premium on a callable debt security was generally amortized as an adjustment to yield over the contractual life of the instrument, and any unamortized premium was recorded as a loss in earnings upon the debtor’s exercise of a call provision.

Under ASU 2017-08, because the premium is amortized to the earliest call date, entities no longer recognize a loss in earnings if a debt security is called prior to the contractual maturity date.

The amendments did not require an accounting change for securities held at a discount;

discounts will continue to be amortized as an adjustment to yield over the contractual life of the debt instrument.

ASU 2017-08 became effective for public business entities, including the Company, for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

ASU 2017-08, required entities to use a modified retrospective approach, with the cumulative-effect adjustment recognized to retained earnings at the beginning of the period of adoption.

Entities are also required to provide disclosures about a change in accounting principle in the period of adoption.

The Company adopted ASU 2017-08 effective January 1, 2019 with no material impact on our financial statements or operations.

In August 2018 the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, as part of its disclosure framework project.

Pursuant to this guidance, disclosures that will no longer be required include the following:

transfers between Level 1 and Level 2 of the fair value hierarchy;

transfers in and out of Level 3 for nonpublic entities, as well as purchases and issuances and the Level 3 roll forward;

a company’s policy for determining when transfers between any of the three levels have occurred;

the valuation processes used for Level 3 measurements;

and, the changes in unrealized gains or losses presented in earnings for Level 3 instruments held at the balance sheet date for nonpublic entities.

The following are additional disclosure requirements:

for public entities, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date;

for public entities, the range and weighted average of significant unobservable inputs used for Level 3 measurements, although for certain unobservable inputs the entity will be allowed to disclose other quantitative information in place of the weighted average to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs;

for nonpublic entities, some form of quantitative information about significant unobservable inputs used in Level 3 fair value measurements;

and, for certain investments in entities that calculate the net asset value, disclosures will be required about the timing of liquidation and redemption restrictions lapsing if the latter has been communicated to the reporting entity.

The guidance also clarifies that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date.

ASU 2018-13 is effective for all entities in fiscal years beginning after December 15, 2019, including interim

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date.

The Company adopted ASU 2018-13 effective January 1, 2020 which impacts the disclosure requirements for fair value measurement.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326) , which provides transition relief for entities adopting ASU 2016-13.

ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10.

An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).

A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date, in order to maintain the same amortized cost basis before and after the effective date of this update.

Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvements in cash flows expected to be collected should continue to be accreted into income over the remaining life of the asset.

Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption should be recorded in earnings when received.

The fair value option election does not apply to held-to-maturity debt securities.

Entities are required to make this election on an instrument-by-instrument basis.

For public business entities that are SEC filers, including the Company, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company adopted ASU 2019-05 effective January 1, 2020 with no material impact on our financial statements or operations.

The Company implemented CECL on January 1, 2022 .

As a result the Company’s allowance for credit losses increased by $ 10.4 million relative to the balance at December 31, 2021, which included an increase to our reserve for unfunded commitments of $ 0.9 million.

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

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The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations.

In accordance with such guidance, we processed short-term modifications for 311 loans and $ 424.9 million made in response to COVID-19 to borrowers who were current and otherwise not past due.

These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

See Note 4 for further information on remaining non-TDR loan modifications.

The Interagency Guidance and Section 4013 are expected to have a material impact on the Company’s financial statements;

however, this impact cannot be quantified at this time.

In accordance with such guidance, we processed short-term modifications for 311 loans and $ 424.9 million made in response to COVID-19 to borrowers

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

who were current and otherwise not past due.

These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

See Note 4 for further information on remaining non-TDR loan modifications.

The Interagency Guidance and Section 4013 did not have a material impact on the Company’s financial statements.

SECURITIES AVAILABLE-FOR-SALE

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State and political subdivisions

Corporate bonds

Collateralized loan obligations

Total securities

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During the year ended December 31, 2021 the Company realized gains through earnings from the sale and call of 21 debt securities for $ 0.01 million.

The securities were sold with 9 other debt securities, for which a $ 0.04 million loss was realized.

During the year ended December 31, 2019, the Company realized gains through earnings from the sale and call of 74 debt securities for $ 0.2 million.

The securities were sold with 108 other debt securities, for which a $ 0.4 million loss was realized, to improve the structure of the portfolio at year-end.

There were no securities sold during 2021 for which a loss was realized.

During the year ended December 31, 2020, the Company realized gains through earnings from the sale and call of 60 debt securities for $ 0.43 million.

The securities were sold with 8 other debt securities, for which a $ 0.02 million loss was realized, to improve the structure of the portfolio at year end.

The securities were sold with 9 other debt securities, for which a $ 0.04 million loss was realized.

During the year ended December 31, 2019 the Company realized gains through earnings from the sale and call of

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

74 debt securities for $ 0.2 million.

The securities were sold with 108 other debt securities, for which a $ 0.4 million loss was realized, to improve the structure of the portfolio at year end.

At December 31, 2021 and 2020, the Company had 99 and 2 securities with unrealized gross losses, respectively.

6 unchanged sentences

State and political subdivisions

Corporate bonds

Collateralized loan obligations

December 31, 2020

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Maturing after ten years

Securities not due at a single maturity date:

Mortgage-backed securities

Collateralized mortgage obligations

Securities available-for-sale with amortized costs totaling $ 224.1 million and estimated fair values totaling $ 232.0 million were pledged to secure other contractual obligations and short-term borrowing arrangements at December 31, 2020 (see Note 10).

Securities available-for-sale with amortized costs totaling $ 233.0 million and estimated fair values totaling $ 234.8 million were pledged to secure other contractual obligations and short-term borrowing arrangements at December 31, 2019 (see Note 10).

Collateralized loan obligations

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities available-for-sale with amortized costs totaling $ 166.3 million and estimated fair values totaling $ 167.2 million were pledged to secure other contractual obligations and short-term borrowing arrangements at December 31, 2021 (see Note 10).

At December 31, 2021, the Company’s investment portfolio included securities issued by 335 different government municipalities and agencies located within 33 states with a fair value of $ 304.3 million.

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Secured by residential properties

Secured by farm land

Secured by farmland

Total real estate loans

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Mortgage warehouse lines

Deferred loan and lease origination (fee) cost, net

Deferred loan and lease origination cost, net

Allowance for loan and lease losses

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(1) Includes mortgage warehouse lines

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reserves based on method of evaluation for impairment:

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Commercial and industrial (1)

Total loan and lease loss reserves

Total loan loss reserves

(1) Includes mortgage warehouse lines

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the recorded investment in nonaccrual loans and loans past due over 30 days as of December 31, 2021 and December 31, 2020 (dollars in thousands, except footnotes):

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Subsequent payments received from the customer are applied to principal, and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required.

As of December 31, 2020 there were 13 customers, for a total of $ 29.5 million, with payment deferrals either under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, that are not included in the table above.

As of December 31, 2021 there was 1 customer relationship, for a total of $ 10.4 million, with payment deferrals either under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, that are not included in the table above.

SIERRA BANCORP AND SUBSIDIARY

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With an Allowance Recorded

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multifamily residential

Commercial real estate - owner occupied

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With no Related Allowance Recorded

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multifamily residential

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Total real estate

Commercial and industrial

Consumer loans

(1) Contractual principal balance due from customer.

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With an Allowance Recorded

1-4 family residential construction

Other construction/land

2 unchanged sentences

Commercial real estate- owner occupied

Commercial real estate- non-owner occupied

Total real estate

2 unchanged sentences

With no Related Allowance Recorded

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multifamily residential

Commercial real estate- owner occupied

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With an Allowance Recorded

1-4 family residential construction

Other construction/land

2 unchanged sentences

Commercial real estate- owner occupied

Commercial real estate- non-owner occupied

Total real estate

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With no Related Allowance Recorded

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multifamily residential

Commercial real estate- owner occupied

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(3) Interest income is recognized on performing balances on a regular accrual basis.

Included in loans above are troubled debt restructurings that were classified as impaired.

The Company had $ 0.4 million and $ 0.4 million in commercial loans, $ 0.1 million and $ 0 in agricultural loans, $ 5.4 million and $ 13.0 million in real estate secured loans and $ 0.2 million and $ 0.2 million in consumer loans, which were modified as troubled debt restructurings and consequently classified as impaired at December 31, 2021 and 2020, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Included in loans above are troubled debt restructurings that were classified as impaired.

The Company had $ 0.4 million and $ 0.5 million in commercial loans, $ 13.0 million and $ 8.2 million in real estate secured loans and $ 0.2 million and $ 0.4 million in consumer loans, which were modified as troubled debt restructurings and consequently classified as impaired at December 31, 2020 and 2019, respectively.

Additional commitments to existing customers with restructured loans totaled $ 0.04 million and $ 0.05 million at December 31, 2021 and 2020, respectively.

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Certain loans have been pledged to secure short-term borrowing arrangements (see Note 10).

These loans totaled $ 1.1 billion and $ 777.7 million at December 31, 2020 and 2019, respectively.

These loans totaled $ 808.8 million and $ 1.1 billion at December 31, 2021 and 2020, respectively.

Salaries and employee benefits totaling $ 1.0 million, $ 3.3 million, and $ 3.7 million, have been deferred as loan and lease origination costs to be amortized over the estimated lives of the related loans and leases for the years ended December 31, 2021, 2020, and 2019, respectively.

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Troubled debt restructurings

1-4 family residential construction

Other construction/land

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Consumer loans

Small Business Administration Loans

December 31, 2020

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Difference (1)

1-4 family residential construction

Other construction/land

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Consumer loans

Small Business Administration Loans

(1) This represents the increase or (decrease) in the allowance for loans and lease losses reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan and lease loss methodology.

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Real estate secured

Commercial and industrial

Total purchased credit impaired loans

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Real estate secured

Commercial and industrial

Total purchased credit impaired loans

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Less accumulated depreciation and amortization

Construction in progress

Depreciation and amortization included in occupancy and equipment expense totaled $ 3.1 million, $ 2.8 million, and $ 2.8 million, for the years ended December 31, 2021, 2020, and 2019, respectively.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OPERATING LEASES

On January 1, 2019, we adopted a new accounting standard which required the recognition of certain operating leases on our balance sheet as lease right-of-use assets (reported as a component of other assets) and related lease liabilities (reported as a component of other liabilities).

See Note 2–Summary of Significant Accounting Policies.

The Company leases space under non-cancelable operating leases for 21 branch locations, three off-site ATM locations, one administrative building and a warehouse.

The Company leases space under non-cancelable operating leases for 18 branch locations, four off-site ATM locations, one administrative building, one loan production office and a warehouse.

Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs).

Payments for taxes and insurance as well as non-lease components are not included in the accounting of the lease component, but are separately accounted for in occupancy expense.

The Company recognized lease expense of $ 2.2 million for the years ended December 31, 2020 and 2019.

Lease expense for the year ending December 31, 2018 prior to the adoption of ASU 2016-02, was $ 2.3 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

recognized lease expense of $ 2.2 million for the years ended December 31, 2021, 2020 and 2019.

Most leases include one or more renewal options available to exercise.

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The weighted average remaining lease term for the lease liabilities was 6.8 years, and the weighted average discount rate of remaining payments was 5.5 percent for the year ended December 31, 2020.

Lease liabilities from new right-of-use assets obtained during the year ending December 31, 2020 and December 31, 2019 were $ 0.6 million and $ 0 , respectively .

Lease liabilities from new right-of-use assets obtained during the year ending December 31, 2021 and December 31, 2020 were $ 0.5 million and $ 0.6 million, respectively.

There were no variable lease costs for the years ending December 31, 2021 and 2020.

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Any stock deemed in excess is automatically repurchased by the FHLB at cost.

Interest-bearing deposits consisted of the following (dollars in thousands):

Interest bearing demand deposits

Time, under $250,000

Time, $250,000 or more

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at year-end 2021 and 2020 were $ 115.2 million and $ 225.4 million, respectively.

Aggregate annual maturities of time deposits were as follows (dollars in thousands):

Year Ending December 31,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest expense recognized on interest-bearing deposits consisted of the following (dollars in thousands):

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interest rate

As of December 31:

Repurchase agreements

Short term borrowings

interest rate

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Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances.

The advances were collateralized by $ 1.1 billion of first mortgage loans under a blanket lien arrangement at year end 2020.

The advances were collateralized by $ 808.8 million of first mortgage loans under a blanket lien arrangement at year end 2021.

Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow up to the total of $ 888.8 million at year-end 2021, with a remaining borrowing capacity of $ 732.2 million if sufficient additional collateral was pledged.

The Company had no borrowings at December 31, 2020 and 2019, respectively from the FRB.

The Company had no borrowings at December 31, 2021 and 2020 from the FRB.

The Company was eligible to borrow up to $ 50.6 million from FRB at year end 2021, which was collateralized by $ 66.1 million in first mortgage loans under a blanket lien arrangement.

The Company had no long-term borrowings at December 31, 2020 and 2019, respectively.

The Company had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $ 275.0 million and $ 80.0 million at December 31, 2020 and 2019, respectively, at interest rates which vary with

The Company had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $ 305.0 million and $ 275.0 million at December 31, 2021 and 2020, respectively, at interest rates which vary with market conditions.

There was no balance outstanding under these lines of credit at December 31, 2021 and $ 100.0 million outstanding at December 31, 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

market conditions.

There was $ 100.0 million and $ 0 outstanding under these lines of credit at December 31, 2020 and December 31, 2019, respectively.

LONG-TERM DEBT

At year-end, long-term debt was as follows (dollars in thousands):

Unamortized Debt Issuance Costs

Fixed - floating rate subordinated debentures, due 2031 (1)

(1) 3.25 % fixed rate for five years then floating rate at 253.5 basis points over 3-month term SOFR.

SUBORDINATED DEBENTURES

Sierra Statutory Trust II (“Trust II”), Sierra Capital Trust III (“Trust III”), and Coast Bancorp Statutory Trust II (“Trust IV”), (collectively, the “Trusts”) exist solely for the purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.

For financial reporting purposes, the Trusts are not consolidated and the Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) held by the Trusts and issued and guaranteed by the Company are reflected in the Company’s consolidated balance sheet in accordance with provisions of ASC Topic 810.

Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to twenty-five percent of the Company’s Tier 1 capital on a pro forma basis.

At December 31, 2021, all $ 35.3 million of the Company’s trust preferred securities qualified as Tier 1 capital.

During the first quarter of 2004, Sierra Statutory Trust II issued 15,000 Floating Rate Capital Trust Pass-Through Securities (TRUPS II), with a liquidation value of $ 1,000 per security, for gross proceeds of $ 15,000,000 .

The entire proceeds of the issuance were invested by Trust II in $ 15,464,000 of Subordinated Debentures issued by the Company, with identical maturity, re-pricing and payment terms as the TRUPS II.

The Subordinated Debentures, purchased by Trust II, represent the sole assets of the Trust II.

Those Subordinated Debentures mature on March 17, 2034, bear a current interest rate of 2.97 % (based on 3-month LIBOR plus 2.75 %), with re-pricing and payments due quarterly.

Those Subordinated Debentures are currently redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Bank, on any March 17 th , June 17 th , September 17 th , or December 17 th .

The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture.

The TRUPS II are subject to mandatory redemption to the extent of any early redemption of the related Subordinated Debentures and upon maturity of the Subordinated Debentures on March 17, 2034 .

Trust II has the option to defer payment of the distributions for a period of up to five years , subject to certain conditions, including that the Company may not pay dividends on its common stock during such period.

The TRUPS II issued in the offering were sold in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.

The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TRUPS II.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the second quarter of 2006, Sierra Capital Trust III issued 15,000 Floating Rate Capital Trust Pass-Through Securities (TRUPS III), with a liquidation value of $ 1,000 per security, for gross proceeds of $ 15,000,000 .

The entire proceeds of the issuance were invested by Trust III in $ 15,464,000 of Subordinated Debentures issued by the Company, with identical maturity, repricing and payment terms as the TRUPS III.

The Subordinated Debentures, purchased by Trust III, represent the sole assets of the Trust III.

Those Subordinated Debentures mature on September 23, 2036 , bear a current interest rate of 1.62 % (based on 3-month LIBOR plus 1.40 %), with repricing and payments due quarterly.

Those Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Bank, on any March 23 rd , June 23 rd , September 23 rd , or December 23 rd .

The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture.

The TRUPS III are subject to mandatory redemption to the extent of any early redemption of the related Subordinated Debentures and upon maturity of the Subordinated Debentures on September 23, 2036.

Trust III has the option to defer payment of the distributions for a period of up to five years , subject to certain conditions, including that the Company may not pay dividends on its common stock during such period.

The TRUPS III issued in the offering were sold in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.

The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TRUPS III.

During the third quarter of 2016, the Company acquired Coast Bancorp Statutory Trust II, which had issued 7,000 Floating Rate Capital Trust Pass-Through Securities (TRUPS IV), with a liquidation value of $ 1,000 per security, for gross proceeds of $ 7,000,000 .

The entire proceeds of the issuance were invested by Trust IV in $ 7,217,000 of Subordinated Debentures issued by Coast Bancorp with identical maturity, re-pricing and payment terms as the TRUPS IV.

The Subordinated Debentures, purchased by Trust IV, represent the sole assets of the Trust IV.

Those Subordinated Debentures mature on December 15, 2037 , bear a current interest rate of 1.70 % (based on 3-month LIBOR plus 1.50 %), with re-pricing and payments due quarterly.

Those Subordinated Debentures are currently redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Bank, on any March 15 th , June 15 th , September 15 th , or December 15 th .

The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture.

The TRUPS IV are subject to mandatory redemption to the extent of any early redemption of the related Subordinated Debentures and upon maturity of the Subordinated Debentures on December 15, 2037.

Coast Bancorp Statutory Trust II has the option to defer payment of the distributions for a period of up to five years , subject to certain conditions, including that the Company may not pay dividends on its common stock during such period.

The TRUPS IV issued in the offering were sold in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.

The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TRUPS IV.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provision for income taxes follows (dollars in thousands):

Year Ended December 31,

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of the net deferred tax asset, included in other assets, are as follows (dollars in thousands):

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Net deferred tax assets

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The expense for income taxes differs from amounts computed by applying the statutory Federal income tax rates to income before income taxes.

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Excess tax benefit of stock-based compensation

Cash surrender value - life insurance

Effective tax rate

The Company is subject to federal income tax and income tax of the state of California.

Our federal income tax returns for the years ended December 31, 2017, 2018 and 2019 are open to audit by the federal authorities and our California state tax returns for the years ended December 31, 2016, 2017, 2018 and 2019 are open to audit by the state authorities.

The Company is subject to federal income tax and income tax of various states.

Our federal income tax returns for the years ended December 31, 2018 , 2019 and 2020 are open to audit by the federal authorities and our California

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

state tax returns for the years ended December 31, 2017 , 2018, 2019 and 2020 are open to audit by the state authorities.

The Company has net operating loss carry forwards of approximately $ 4.8 million for federal income and approximately $ 6.9 million for California franchise tax purposes.

3 unchanged sentences

We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months

SUBORDINATED DEBENTURES

At December 31, 2020, all $ 35.1 million of the Company’s trust preferred securities qualified as Tier 1 capital.

The entire proceeds of the issuance were invested by Trust II in $ 15,464,000 of Subordinated Debentures issued by the Company, with identical maturity, re-pricing and payment terms as the TRUPS II.

The Subordinated Debentures, purchased by Trust II, represent the sole assets of the Trust II.

Those Subordinated Debentures mature on March 17,

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2034, bear a current interest rate of 2.98 % (based on 3-month LIBOR plus 2.75 %), with re-pricing and payments due quarterly.

The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture.

The TRUPS II are subject to mandatory redemption to the extent of any early redemption of the related Subordinated Debentures and upon maturity of the Subordinated Debentures on March 17, 2034 .

The TRUPS II issued in the offering were sold in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.

The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TRUPS II.

The entire proceeds of the issuance were invested by Trust III in $ 15,464,000 of Subordinated Debentures issued by the Company, with identical maturity, repricing and payment terms as the TRUPS III.

The Subordinated Debentures, purchased by Trust III, represent the sole assets of the Trust III.

Those Subordinated Debentures mature on September 23, 2036 , bear a current interest rate of 1.64 % (based on 3-month LIBOR plus 1.40 %), with repricing and payments due quarterly.

The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture.

The TRUPS III are subject to mandatory redemption to the extent of any early redemption of the related Subordinated Debentures and upon maturity of the Subordinated Debentures on September 23, 2036.

The TRUPS III issued in the offering were sold in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.

The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TRUPS III.

The entire proceeds of the issuance were invested by Trust IV in $ 7,217,000 of Subordinated Debentures issued by Coast Bancorp with identical maturity, re-pricing and payment terms as the TRUPS IV.

The Subordinated Debentures, purchased by Trust IV, represent the sole assets of the Trust IV.

Those Subordinated Debentures mature on December 15, 2037 , bear a current interest rate of 1.72 % (based on 3-month LIBOR plus 1.50 %), with re-pricing and payments due quarterly.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture.

The TRUPS IV are subject to mandatory redemption to the extent of any early redemption of the related Subordinated Debentures and upon maturity of the Subordinated Debentures on December 15, 2037.

The TRUPS IV issued in the offering were sold in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.

The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TRUPS IV.

COMMITMENTS AND CONTINGENCIES

Letter of Credit

The Company holds two letters of credit with the Federal Home Loan Bank of San Francisco totaling $ 104,854,000 .

A $ 100,000,000 letter of credit is pledged to secure public deposits at December 31, 2020 and a $ 4,854,000 standby letter of credit was obtained on behalf of one of our customers to guarantee financial performance.

The Company holds two letters of credit with the Federal Home Loan Bank of San Francisco totaling $ 128.6 million.

A $ 125.0 million letter of credit is pledged to secure public deposits at December 31, 2021 and a $ 3.6 million standby letter of credit was obtained on behalf of one of our customers to guarantee financial performance.

Should the standby letter of credit be drawn upon, the customer would reimburse the Company from an existing line of credit.

9 unchanged sentences

The Company uses the same credit policies in making commitments and letters of credit as it does for loans included on the balance sheet.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following financial instruments represent off-balance-sheet credit risk (dollars in thousands):

2 unchanged sentences

Standby letters of credit

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commitments to extend credit consist primarily of the unused or unfunded portions of the following:

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The Company extends commercial, real estate mortgage, real estate construction and consumer loans to customers primarily in the South Central San Joaquin Valley of California, specifically Tulare, Fresno, Kern, Kings and Madera counties;

the Southern California corridor between Santa Paula and Santa Clarita in the counties of Ventura and Los Angeles;

and the Coastal counties of San Luis Obispo, Ventura and Santa Barbara.

1 unchanged sentence

Although the Company’s loan portfolio is diversified, there is a relationship in those regions between the local agricultural economy and the economic performance of loans made to non-agricultural customers.

Contingencies

The Company is subject to legal proceedings and claims which arise in the ordinary course of business.

In the opinion of management, the amount of ultimate liability with respect to such actions, of which the Company is aware, will not materially affect the consolidated financial position or results of operations of the Company.

Legal Matters

In the ordinary course of our business, the Company is subject to legal proceedings and claims which we believe are incidental to the operation of our business.

The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict.

Upon consultation with legal counsel and based on information currently available to us, management does not expect the amount of any resulting liability, in addition to amounts already accrued and taking into consideration insurance which may be applicable, to have a material adverse effect on the consolidated financial position or results of operations of the Company.

Given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to banking (including laws and regulations governing consumer protection,

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

fair lending, privacy, information security and anti-money laundering and anti-terrorism laws), we like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.

The Company has established litigation and legal reserves, where appropriate, in accordance with FASB guidance over loss contingencies (ASC 450).

The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations.

SHAREHOLDERS’ EQUITY

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Repurchases are generally made in the open market at market prices.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share

A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows:

A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows (dollars in thousands, except per share data):

For the Years Ended December 31,

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Options to purchase 172,689 shares that were granted under the 2007 Plan were still outstanding as of December 31, 2021, and remain unaffected by that plan’s expiration.

The 2017 Plan provides for the issuance of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options to non-employee directors and consultants of the Company.

The 2017 Plan provides for the issuance of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to non-employee directors and consultants of the Company.

The 2017 Plan also provides for the issuance of restricted stock awards to these same classes of eligible participants.

3 unchanged sentences

Options also terminate in the event an optionee ceases to be employed by or to serve as a director of the Company or its subsidiaries, and the vested portion thereof must be exercised within a specified period after such cessation of employment or service.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the Company’s stock option activity follows (shares in thousands, except exercise price):

6 unchanged sentences

Beginning of year

Exercised or released

Outstanding, end of year

8 unchanged sentences

$ 0.3 million in cash was received from the exercise of 25,452 shares during the period ended December 31, 2021, with a related tax benefit of $ 0.1 million.

$ 0.8 million in cash was received from the exercise of 66,470 shares during the period ended December 31, 2020, with a related tax benefit of $ 0.5 million.

$ 1.1 million in cash was received from the exercise of 83,261 shares during the period ended December 31, 2019, with a related tax benefit of $ 0.3 million.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is using the Black-Scholes model to value stock options.

1 unchanged sentence

GAAP, charges of $ 0.1 million, $ 0.4 million, and $ 0.5 million are reflected in the Company’s income statements for the years ended December 31, 2021, 2020, and 2019, respectively, as pre-tax compensation and directors’ expense related to stock options.

The related tax benefit of these options is $ 0.1 million, for each of the years ended December 31, 2020, 2019, and 2018.

The related tax benefit of these options is $ 0.03 million for the year ended December 31, 2021, and $ 0.1 million for the two years ended December 31, 2020 and 2019.

Unamortized compensation expense associated with unvested stock options outstanding at December 31, 2021 was $ 0.4 million, which will be recognized over a weighted average period of 2.9 years.

4 unchanged sentences

Restricted stock awards are valued utilizing the fair value of the Company’s stock at the grant date.

During the year ending 2020,

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

148,885 shares were granted to employees and directors of the Company.

During the year ending 2021, 73,912 shares were granted to employees and directors of the Company.

These awards are expensed on a straight-line basis over the vesting period.

Compensation expense related to restricted stock units for the years ended December 31, 2021, 2020 and 2019 was $ 0.9 million, $ 0.2 million, and $ 0 respectively, and the recognized income tax benefit related to this expense was $ 0.3 million, $ 0.1 million, and $ 0 , respectively.

As of December 31, 2021, there was $ 3.0 million of unamortized compensation and directors’ cost related to unvested restricted stock awards granted under the 2017 plan.

That cost is expected to be amortized over a weighted average period of 3.2 years.

The total fair value of shares vested during the year ended December 31, 2021 was $ 0.7 million.

There were no shares vested during the years ended December 31, 2020 and 2019.

A summary of the Company’s nonvested shares for the year follows (shares in thousands, except grant date fair value):

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Failure to meet capital requirements can initiate regulatory action.

SIERRA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

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The community bank leverage ratio removes the requirement for qualifying banking organizations to calculate and report risk-based capital but rather only requires a Tier 1 to average assets (leverage) ratio.

Qualifying banking

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than required minimums will be considered to have satisfied the generally applicable risk based and leverage capital requirements in the agencies' capital rules (generally applicable rule) and, if applicable, will be considered to have met the well capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act.

Qualifying banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than required minimums will be considered to have satisfied the generally applicable risk based and leverage capital requirements in the agencies' capital rules (generally applicable rule) and, if applicable, will be considered to have met the well capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act.

Under the interim final rules the community bank leverage ratio minimum requirement is 8% as of December 31, 2020, 8.5% for calendar year 2021, and 9% for calendar year 2022 and beyond.

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As of December 31, 2021, both the Company and Bank were qualifying community banking organizations as defined by the federal banking agencies and elected to measure capital adequacy under the CBLR framework.

Actual and required capital amounts (in thousands) and ratios are presented below at year end.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Actual and required capital amounts (dollars in thousands) and ratios are presented below at year end.

To Be Well Capitalized Under Prompt Corrective Action Regulations (CBLR Framework)

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Bank of the Sierra

Required for Capital Adequacy Purposes

To Be Well Capitalized Under Prompt Corrective Action Regulations

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Capital Amount

Common Equity Tier 1 Capital Ratio

Sierra Bancorp and subsidiary

Bank of the Sierra

Tier 1 Risk-Based Capital Ratio

Sierra Bancorp and subsidiary

Bank of the Sierra

Total Risk-Based Capital Ratio

Sierra Bancorp and subsidiary

Bank of the Sierra

Tier 1 (Core) Capital to average total assets

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Bank of the Sierra

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dividend Restrictions

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The plans provide for annual benefits for up to fifteen years after retirement or death.

The benefit obligation under these plans totaled $ 5.1 million and $ 5.3 million and was fully accrued for the years ended December 31, 2020 and 2019, respectively.

The benefit obligation under these plans totaled $ 5.1 million and was fully accrued for both of the years ended December 31, 2021 and 2020.

The expense recognized under these arrangements totaled $ 0.4 million, $ 0.2 million and $ 0.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Salary continuation benefits paid to former directors or executives of the Company or their beneficiaries totaled $ 0.4 million, $ 0.3 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018.

Salary continuation benefits paid to former directors or executives of the Company or their

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

beneficiaries totaled $ 0.4 million, $ 0.4 million and $ 0.3 million for the years ended December 31, 2021, 2020 and 2019.

Certain officers of the Company have supplemental life insurance policies with death benefits available to the officers’ beneficiaries.

In connection with these plans the Company has purchased, or acquired through merger, single premium life insurance policies with cash surrender values totaling $ 43.2 million and $ 42.5 million at December 31, 2020 and 2019, respectively.

Officer and Director Deferred Compensation Plan

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The related administrative expense was not material for the years ended December 31, 2021, 2020 and 2019.

In connection with this plan, life insurance policies with cash surrender values totaling $ 9.3 million and $ 8.0 million at December 31, 2020 and 2019, respectively, are included on the consolidated balance sheet in other assets.

In connection with this plan, life insurance policies with cash surrender values totaled $ 11.0 million and $ 9.3 million at December 31, 2021 and 2020, respectively.

401(k) Savings Plan

The 401(k) savings plan (the “Plan”) allows participants to defer, on a pre-tax basis, up to 15 % of their salary (subject to Internal Revenue Service limitations) and accumulate tax-deferred earnings as a retirement fund.

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make a discretionary contribution to match a specified percentage of the first 6 % of the participants’ contributions annually.

The Bank may make a discretionary contribution to match a specified percentage of the first 6 % of the participants’ contributions annually.

The amount of the matching contribution was 95 %, 90 % and 95 % for the years ended December 31, 2021, 2020 and 2019, respectively.

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Total other noninterest income

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OTHER NONINTEREST EXPENSE

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During the normal course of business, the Bank enters into loans with related parties, including executive officers and directors.

These loans are made with substantially the same terms, including rates and collateral, as loans to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

unrelated parties.

These loans are made with substantially the same terms, including rates and collateral, as loans to unrelated parties.

The following is a summary of the aggregate activity involving related party borrowers (dollars in thousands):

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Amounts repaid

Effect of changes in composition of related parties

Balance, end of year

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Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

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The Company used the following methods and significant assumptions to estimate fair values for each category of financial asset noted below:

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, live trading desk pricing from brokerages, or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities.

In certain circumstances live trading desk pricing from brokerages and third party internal models are used to value debt securities that we classify as Level 3.

Collateral-dependent impaired loans :

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Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals.

Fair values for other foreclosed assets are

Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution.

If impairment is determined to exist, the book value of a foreclosed asset is immediately written down to its estimated impaired value through the income statement, thus the carrying amount is equal to the fair value and there is no valuation allowance.

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adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution.

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):

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State and political subdivisions

Corporate bonds

Collateralized loan obligations

Total available-for-sale securities

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Total available-for-sale securities

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2021 and 2020 (dollars in thousands):

Collateralized Loan Obligations

Corporate Bonds

Balance of recurring Level 3 assets at January 1,

Balance of recurring Level 3 assets at December 31,

The following table presents quantitative information about recurring level 3 fair value measurements at December 31, 2021 (dollars in thousands):

Valuation Technique(s)

Unobservable Input(s)

Weighted Average

Corporate Bonds

New issue pricing

Risk appetite

Secondary market pricing

Market volatility

Credit quality of issuer

Credit spread

Collateralized Loan Obligations

New issue pricing

Constant prepayment rate

Secondary market pricing

Credit quality of issuer

Recovery rate

Credit spread

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There were no assets measured at fair value on a recurring basis with level 3 fair value measurements at December 31, 2020.

Assets and liabilities measured at fair market value on a non-recurring basis are summarized below (dollars in thousands):

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Foreclosed assets

The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis at December 31, 2021 (dollars in thousands):

Valuation Technique(s)

Unobservable Input(s)

Weighted Average

Impaired loans - commercial and industrial

Fair value of collateral

Collateral discount

There were no assets measured at fair value on a non-recurring basis with level 3 fair value measurements at December 31, 2020.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Disclosures include estimated fair values for financial instruments for which it is practicable to estimate fair value.

These estimates are made as of the respective balance sheet dates based on relevant market data and information

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

about the financial instruments.

These estimates are made as of the respective balance sheet dates based on relevant market data and information about the financial instruments.

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.

In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors.

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other factors.

These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

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For cash and cash equivalents and fed funds sold, the carrying amount is estimated to be fair value.

The fair values of investment securities are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for specific securities are not readily available.

The fair values of investment securities are determined by obtaining quoted prices on nationally recognized securities exchanges, live trading desk pricing from brokerages, or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for specific securities are not readily available.

Loans and leases :

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Interest bearing

Fed funds purchased and repurchase agreements

Short-term borrowings

Repurchase agreements

Long-term borrowings

Subordinated debentures

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Standby letters of credit

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Carrying amount and estimated fair values of financial instruments were as follows (dollars in thousands):

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Subordinated debentures

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Off-balance-sheet financial instruments:

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The Company had no impairment losses during the years ended December 31, 2021, 2020 and 2019.

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REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Noninterest Income.

The following table presents the Company’s sources of Noninterest Income for the twelve months ended December 31, 2020 and 2019.

Items outside the scope of ASC 606 are noted as such.

The following table presents the Company’s sources of Noninterest Income for the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

twelve months ended December 31, 2021 and 2020.

Items outside the scope of ASC 606 are noted as such (dollars in thousands).

Year Ended December 31,

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Occupancy expense (1)

Gains on sale or OREO

Gains on sale of OREO

Total noninterest expense

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Other liabilities

Long-term debt

Subordinated debentures

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Dividend from subsidiary

Gain on sale of securities

Other operating income

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Decrease in other assets

(Decrease) increase in other liabilities

Increase (decrease) in other liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Cash paid in acquisitions, net

Investment in subsidiary

Net cash used by investing activities

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Dividends paid

Net cash used in financing activities

Net decrease (increase) in cash and cash equivalents

Issuance of debentures, net

Net cash provided by (used) in financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

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Cash dividend per share

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2020 Quarter Ended

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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 8. Financial Statements and Supplementary Data