What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 260 added, 444 removed, 415 unchanged (63% of the section changed)

13 unchanged sentences

● the risk of unfavorable economic conditions in the Company’s market areas;

● risks associated with the current national emergency with respect to COVID-19 and its variants, including the impact that national, state, and local responses, including limitations on business and personal activity as well as any stimulus or relief efforts have on customers’ continued ability to repay loans or to resume normal payments following the end of COVID-19 related deferrals granted by the Bank;

● the Company’s delayed implementation of CECL;

● risks associated with fluctuations in interest rates or a sustained low interest rate environment;

● risks associated with fluctuations in interest rates;

● risks associated with inflation;

● liquidity risks, including the ability to effectively manage the additional liquidity from the significant increase in deposits during the COVID-19 pandemic including managing the potential loss of a portion of such deposits;

16 unchanged sentences

In Management’s opinion, the Company’s critical accounting policies deal with the following areas:

● the establishment of the allowance for loan and lease losses, as explained in detail in Note 11 to the consolidated financial statements and in the “Provision for Loan and Lease Losses” and “Allowance for Loan and Lease Losses” sections of this discussion and analysis;

● the valuation of impaired loans and foreclosed assets, as discussed in Note 11 to the consolidated financial statements;

● the establishment of the allowance for credit losses, as explained in detail in Note 10 to the consolidated financial statements and in the “Provision for Credit Losses” and “Allowance for Credit Losses” sections of this discussion and analysis;

● the valuation of individually evaluated loans and foreclosed assets, as discussed in Notes 8 and 10 to the consolidated financial statements;

● income taxes and related deferred tax assets and liabilities, especially with regard to the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this discussion and analysis;

4 unchanged sentences

RESULTS OF OPERATIONS SUMMARY

Third Quarter 2021 compared to Third Quarter 2020

Third quarter 2021 net income was $10.6 million, or $0.69 per diluted share, compared to $10.4 million, or $0.68 per diluted share in the third quarter of 2020.

The Company’s annualized return on average equity was 11.62% and annualized return on average assets was 1.26% for the quarter ended September 30, 2021, compared to 12.34% and 1.34%, respectively, for the same quarter in 2020.

The primary drivers behind the variance in third quarter net income are as follows:

● A $0.6 million negative provision for loan and lease losses as compared to a provision for loan and lease losses of $2.4 million in the same quarter in 2020.

This favorable impact was attributed to continued improvements in the overall economy and lower uncertainty, a reduction in historical loss rates, a decline in specific reserves on

impaired loans, net loan recoveries in 2021, and a change in the mix of loans, and lower outstanding balances of net loans and leases.

First Quarter 2022 compared to First Quarter 2021

First quarter 2022 net income was $7.4 million, or $0.49 per diluted share, compared to $11.1 million, or $0.72 per diluted share in the first quarter of 2021.

The Company’s annualized return on average equity was 8.64% and annualized return on average assets was 0.88% for the quarter ended March 31, 2022, compared to 12.94% and 1.40%, respectively, for the same quarter in 2021.

The primary drivers behind the variance in first quarter net income are as follows:

● Net interest income decreased by $3.8 million mostly due to a 67 bps decline in the yield on earning assets and a shift in mix due to higher levels of average cash invested overnight with the Federal Reserve Bank and lower average loan balances.

● Noninterest income increased $0.4 million or 6% primarily due to increases in checkcard interchange fees from increased usage.

● Noninterest expense increased by $1.6 million, due mostly to a $0.9 million increase in salaries, a $0.4 million increase in deposit servicing costs, and a $0.5 million increase in legal expenses.

Year-to-Date Changes 2021 compared to First Nine-Months of 2020

Net income for the first nine months of 2021 was $33.4 million, or $2.17 per diluted share, compared to $26.5 million, or $1.73 per diluted share for the same period in 2020.

The Company’s annualized return on average equity was 12.60% and annualized return on average assets was 1.36% for the nine months ended September 30, 2021, compared to a return on equity of 10.90% and return on assets of 1.26% for the nine months ended September 30, 2020.

The primary drivers behind the variance in year-to-date net income are as follows:

● A $2.5 million negative provision for loan and lease losses, relative to $6.4 million provision for loan and lease losses in the first nine months of 2020, for the same reasons outlined above in the quarterly comparison.

● Net interest income increased by $6.5 million or 8% due mostly to higher average loan balances and a continued favorable deposit mix, partially offset by a lower net interest margin.

● Noninterest income increased by $0.9 million, or 4%, due to checkcard interchange fees, increases in BOLI income, and increases in the fair market value of equity securities partially offset by the fact that the third quarter of 2020 had certain nonrecurring gains on the sales of investments, and other assets that did not reoccur in the third quarter of 2021.

● Noninterest expense increased $6.2 million, or 11% due mostly to the increases in salary expense, data processing, checkcard processing costs, and professional services expense, including legal costs.

In addition, there was a $0.4 million unfavorable increase in interest expense due to the issuance of subordinated debt during the third quarter of 2021.

● A $0.6 million provision for credit losses on loans and leases as compared to a provision for loan and lease losses of $0.3 million in the same quarter in 2021.

This unfavorable impact was attributed to higher charge-offs partially offset by a reduction in the pooled allowance under the new current expected credit losses (“CECL”) methodology implemented on January 1, 2022.

● Noninterest income decreased $0.8 million or 11% primarily due to a $1.2 million decrease in the change in the annual valuation change of restricted equity investments, as well as BOLI fluctuations associated with deferred compensation plans for $1.2 million.

These negative variances were partially offset by a $1.0 million gain on the sale of investment securities in an effort to rebalance the portfolio by selling longer duration and higher price volatility securities as a hedge against rising interest rates, due to likely persistent inflationary pressures in the near-intermediate term environment.

Service charges on customer deposit accounts declined by $0.1 million, or 4%, to $3.0 million in the first quarter of 2022 as compared to the fourth quarter of 2021.

This same income was $0.3 million higher in the first quarter of 2022 as compared to the first quarter of 2021 due to higher transaction based fees, including analysis fee income.

● Total noninterest expense had a favorable decline of $0.2 million, or 1%, in the first quarter of 2022 as compared to the first quarter of 2021.

Lower occupancy and legal expenses, partially offset by higher salaries and benefits were the primary drivers.

FINANCIAL CONDITION SUMMARY

September 30, 2021 relative to December 31, 2020

The Company’s assets totaled $3.4 billion at September 30, 2021 relative to $3.2 billion at December 31, 2020.

The following provides a summary of key balance sheet changes during the first nine months of 2021:

● Cash and due from banks increased $350.9 million, to $422.4 million during the first nine months of the year due mostly to higher deposit balances coupled with lower loan balances.

● Investment securities increased 35% to $732.3 million from $544.0 million at December 31, 2020, primarily due to bond purchases.

● Gross loans declined $323.3 million due predominantly to a $181.2 million decline in mortgage warehouse line utilization, a $63.0 million decline in real estate loans mostly due to lower commercial real estate and construction loan balances, and a $76.8 million decrease in commercial and industrial loans, which was mostly Small Business Administration Paycheck Protection Program (“SBA PPP”) loan forgiveness.

● Deposits totaled $2.8 billion at September 30, 2021, representing a year-to-date increase of $196.0 million, or 7%.

The growth in deposits came primarily from core transaction and savings accounts, while higher-cost time and wholesale brokered deposits decreased.

● Long-term debt increased to $49.2 million from the issuance of $50 million in ten year 3.25% fixed to floating subordinated notes, net of issuance costs.

● Total shareholders’ equity of $364.5 million at September 30, 2021 reflects an increase of $20.6 million, or 6%, relative to year-end 2020 due to additional capital from the $33.4 million addition of net income, a $3.4 million unfavorable swing in accumulated other comprehensive income/loss, stock options exercised, and restricted stock compensation, net of $9.8 million in dividends paid.

March 31, 2022 relative to December 31, 2021

The Company’s assets totaled $3.4 billion at March 31, 2022 unchanged from December 31, 2021.

The following provides a summary of key balance sheet changes during the first three months of 2022:

● Investment securities increased 5% to $1.0 billion from $973.3 million at December 31, 2021, primarily due to purchases of collateralized loan obligations.

● Gross loan balances remained relatively flat during the first quarter of 2022 with an overall 0.3% change.

The net change did have some offsetting components with the larger fluctuations being a $44.0 million decline in mortgage warehouse line utilization, a $25.8 million decrease in non-owner occupied commercial real estate, and a $16.8 million of decrease in PPP loans.

These declines were mostly offset by a $109.4 million increase in 1-4 family mortgage loans due to purchases of high-quality jumbo mortgage loans.

● Deposits totaled $2.9 billion at March 31,2022, representing a year-to-date increase of $83.4 million, or 3%.

The growth in deposits came primarily from core transaction and savings accounts.

● Total shareholders’ equity of $325.7 million at March 31, 2022 reflects a decrease of $36.8 million, or 10%, relative to year-end 2021 due to net income of $7.4 million, offset by a $3.5 million dividend paid to shareholders, $4.9 million in share repurchases, a $28.9 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities' fair value, and a $7.3 million cumulative effect adjustment for the implementation of ASC 326.

The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

IMPACT OF CORONAVIRUS DISEASE 2019 (COVID-19) PANDEMIC ON THE COMPANY’S OPERATIONS

On January 31, 2020, the United States Department of Health and Human Services declared a public health emergency with respect to the Coronavirus Disease 2019 (COVID-19).

Subsequent to this date, federal, state, and local governmental agencies, regulatory agencies, and the Federal Reserve Board took actions impacting the Company including these more significant items:

● On March 3, 2020, the Federal Open Market Committee (FOMC) of the Federal Reserve Board lowered the federal funds rate by 50 basis points in its first emergency move since October 2008.

● On March 4, 2020, the Governor of the state of California declared a state of emergency to help make additional resources available and formalize emergency actions to address COVID-19.

● On March 6, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued guidance to financial institutions reminding them to include pandemic planning in business continuity plans.

● Starting on March 9, 2020, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Conference of State Bank Supervisors began issuing various Interagency Guidance Statements to encourage financial institutions to meet the financial needs of customers affected by the Coronavirus.

● On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

● On March 15, 2020, the FOMC of the Federal Reserve Board lowered the federal funds rate by 100 basis points in its second emergency move in two weeks, this time on a Sunday.

In addition, the FOMC announced that it would let banks borrow from the discount window for up to 90 days, reduced the reserve requirement ratios to zero percent, united with five other central banks to ensure dollars are available via swap lines, and increased bond holdings by at least $700 billion.

● Effective March 20, 2020, the state of California ordered the closure of all non-essential workplaces, restricting non-essential travel, and ordering a state-wide shelter-in-place order.

This was followed by extensions of these orders in April and many local municipalities in which the Company operates issued orders mandating additional requirements to protect their citizens.

Although many counties in California began phased reopening plans, due to recent increases in cases effective July 13, 2020, the Governor ordered that dine-in restaurants, wineries and tasting rooms, movie theaters, family entertainment centers, zoos and museums, and cardrooms immediately close all indoor operations.

Effective August 31, 2020, a new simplified, four-tier guideline was implemented for counties to reopen.

However, most counties remained in partially or fully closed states through

On June 15, 2021, the state of California effectively removed most remaining restrictions for fully vaccinated individuals.

● On March 22, 2020, the federal financial institution regulatory agencies (the agencies) issued guidance to financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs).

The guidance was subsequently modified on April 7, 2020 to conform with Section 4013 of the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Further interagency guidance for financial institutions was issued in June, August, and September 2020.

● On March 27, 2020, the CARES Act was enacted by Congress and signed into law by the President to address the impact of the COVID-19 on the economy.

Among other things, the CARES Act provided banking institutions with the option of deferring the implementation of the Current Expected Credit Loss (“CECL”) accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) until later in 2020;

confirmed that certain loan modifications would not be treated as a TDR;

authorized the Small Business Administration to create the Paycheck Protection Program (PPP) which allows banking institutions to offer a certain amount of forgivable loans to primarily assist with funding payroll for small businesses;

and provides a temporary reduction to the minimum ratio under the Community Bank Leverage Ratio framework.

● On December 21, 2020, the Consolidated Appropriation Act, 2021 was enacted by Congress and signed into law by the President on December 27, 2020.

Among other things, this bill provided $600 per person (subject to income limits), included $284 billion in additional forgivable loans via the PPP, extended the suspension of TDR identification, and extended the temporary delay of the implementation of CECL through January 2022.

● On March 10, 2021, the American Rescue Plan Act was enacted by Congress and signed into law by the President on March 11, 2021.

Among other things, this bill provided an additional economic impact payment of $1,400 per-person (subject to income limits), and many other economic incentives and benefits to individuals, businesses, states, municipalities, and tribal governments.

● In 2021, COVID-19 vaccinations began rolling out across the country and in California.

In early April 2021, with over 20 million vaccines administered in California, a Blueprint for a Safer Economy was announced to fully reopen the California economy on June 15, 2021.

● On June 15, 2021, the Governor of California terminated the executive orders that put into place the Stay Home Order and the Blueprint for a Safer Economy.

He also phased out the vast majority of executive actions put in place since March 2020 as part of the pandemic response, leaving a subset of provisions that facilitate the ongoing recovery.

● On September 9, 2021, President Biden announced as part of his six-pronged, comprehensive national strategy to combat COVID-19.

The “Path out of the Pandemic” includes a rule requiring all employers with 100+ employees to ensure their workforce is fully vaccinated or require any workers who remain unvaccinated to produce a negative test result on at least a weekly basis before coming to work.

This Emergency Temporary Standard is currently under White House review.

It is anticipated that this rule will become effective in November 2021 with enforcement actions beginning around January 1, 2022.

Fines for non-compliance are up to $14,000 per violation.

Subsequent to this date, federal, state, and local governmental agencies, regulatory agencies, and the Federal Reserve Board took many actions impacting the Company.

These actions included, among other things, the Federal Open Market Committee (FOMC) reducing the federal funds rate;

California issuing a state-wide shelter-in-place order and various other orders at the state and local levels restricting business operations, closing schools, and thereafter prescribing requirements for reopening;

and various pieces of federal legislation were passed to attempt to address the impact of COVID-19 on the economy.

Impact of COVID-19 on the Company’s Operations

● Starting in April 2020, the Company took actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program (PPP) loans.

The Company had $10.4 million in classified assets at September 30, 2021, from loans modified under the CARES Act, as amended, that are either not expected to make all principal and

interest payments in a timely manner, or will need further modifications or assistance.

For further information on the principal and interest deferrals, please see the “Nonperforming Assets” section below.

● The uncertainty of national and local economic conditions had an impact on our provision for loan and lease losses in 2020 and early 2021.

The Company 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’s decision to defer the adoption of CECL was done primarily to provide additional time to assess better the impact of the COVID-19 pandemic on the expected lifetime credit losses in our loan and lease portfolio.

At the time the decision was made, there was a significant change in economic uncertainty on the local, regional, and national levels as a result of local and state stay-at-home orders, as well as relief measures provided at a national, state, and local level.

● The Company expects that net interest income will continue to be adversely impacted given pressure on the net interest margin as a result of the current interest rate environment.

As described above, in March 2020, the FOMC cut short-term rates by 150 basis points to near zero.

The uncertainty with COVID-19 and the lower targeted fed funds rates also impacted other rates including the Prime Rate and treasury yields, which the Company uses to price many of its loans.

These lower rates impacted our net interest margin.

Our net interest margin for the three months ended September 30, 2021, was 3.46%, compared to a net interest margin of 3.98% for the same period in 2020.

Additional liquidity from significant deposit growth in 2021 coupled with lower loan balances has negatively impacted our net interest margin.

This additional liquidity was mostly deployed in overnight funding resulting in $380.0 million in average overnight cash during the third quarter of 2021 and $256.0 in average balances for the year-to-date period ending September 30,2021.

This overnight funding earned an average rate of 15 and 13 basis points, respectively, for the third quarter and nine-months ending September 30, 2021.

In addition, investment yields have continued to decline given the overall rate environment in 2021.

The overall impact of a lower net interest margin was more than offset by higher earning assets in 2021 as compared to 2020 for the year-to-date comparisons.

However, for the third quarter of 2021 as compared to the same quarter in 2020, the $267.0 million increase in average interest earning balances did not fully offset the impact of the 54 bps decline in yield.

● The COVID-19 pandemic has not adversely affected our capital or financial resources as of September 30, 2021.

During the first nine months of 2021, total shareholders’ equity increased by $20.6 million, or 6%, to $364.5 million.

The Company earned $33.4 million in net income in the first nine months of 2021, but had a $3.4 million decrease in accumulated other comprehensive income as a result of decreases in the value of our investment portfolio due to an uptick in interest rates.

The Company also paid dividends of $9.8 million during the first nine months of 2021.

On October 21, 2021, the Company declared a twenty-two cent per share dividend to be paid on November 11, 2021.

The Company had no loans remaining on deferral, which were modified under the CARES Act, as amended.

● The uncertainty of national and local economic conditions had an impact on our provision for credit losses in early 2022 and on our provision for loan and lease losses in 2021.

The Company implemented the Current Expected Credit Loss ("CECL") accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022, after having elected under Section 4014 of the CARES Act and the Consolidated Appropriations Act, 2021 to defer earlier implementation.

● The Company expects that net interest income may continue to be adversely impacted given pressure on the net interest margin as a result of the current interest rate environment.

Although the FOMC raised the fed funds rate by 25 bps on March 16, 2022, the overall rate environment is still at historical lows.

The FOMC has indicated potential future increases to the overnight fed funds rate but uncertainty as to when and at what rate this may occur still remains.

These lower rates have impacted our net interest margin.

Our net interest margin for the three months ended March 31, 2022, was 3.21%, compared to a net interest margin of 3.93% for the same period in 2021.

Additional liquidity from significant deposit growth in 2021 and the first three months of 2022, coupled with lower loan balances has negatively impacted our net interest margin.

This additional liquidity was mostly deployed in overnight funding resulting in $194.8 million in average overnight cash during the first quarter of 2022.

This overnight funding earned an average rate of 19 basis points, for the first quarter ending March 31, 2022.

In addition, the Company had $1.0 billion in investment securities at average tax effective yield 210 basis points lower than that of current loan yields.

● The COVID-19 pandemic has not adversely affected our capital or financial resources as of March 31, 2022.

During the first three months of 2022, total shareholders’ equity decreased by $36.8 million, or 10%, to $325.7 million.

The Company earned $7.4 million in net income in the first three months of 2022, but had a $28.9 million decrease in accumulated other comprehensive income as a result of decreases in the value of our investment portfolio due to an uptick in interest rates.

If interest rates continue to rise, this component of equity would be expected to further decline.

The Company also paid dividends of $3.5 million and repurchased shares of stock for $4.9 million during the first quarter of 2022.

On April 22, 2022, the Company declared a twenty-three cent per share dividend to be paid on May 12, 2022.

Although presently not expected, if the Company were to incur significant credit losses as a result of COVID-19’s impact on our customers’ ability to repay loans, capital could be adversely impacted.

With respect to liquidity, the Company maintains strong primary and secondary liquidity sources as further described under “Liquidity and Market Risk Management” below.

● We do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet.

Certain valuation assumptions and judgments continue to change to account for pandemic-related circumstances such as widening credit spreads.

However, we do not anticipate any significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

As of September 30, 2021, our goodwill was not impaired.

The Company last performed an assessment of potential impairment to its goodwill at December 31, 2020 and concluded that it was not more likely than not that a goodwill impairment exists.

The Company continues to monitor its goodwill recorded on the balance sheet for potential impairment and did not believe there was any event that would trigger a potential impairment in the first nine months of 2021.

In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.

At September 30, 2021, we had goodwill of $27.4 million which represented 8% of total equity.

● The Company continues to serve its customers.

Several of our branch locations, were closed due to the pandemic, however all of our branch lobbies are now fully open, with the exception of five branch locations that the Company decided to permanently close in June 2021.

Several of our branch locations were closed during the height of the pandemic, but have since re-opened.

Five branch locations were permanently closed in June 2021.

This decision to close these branches was made as a result of a change in customer behaviors brought about by the COVID-19 pandemic along with an efficiency review.

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Overall deposits at these five closed branches increased during the period of time from announcement to closure and consolidation into a nearby branch.

The acceleration of amortization of leasehold improvements for these locations increased depreciation expense by $0.5 million year-to-date 2021.

Most of the staff at these five locations were relocated to existing branches with position vacancies however, four individuals elected to leave the Company.

It is projected that closing these five branch locations in June 2021 will result in annual noninterest expense savings of between $0.8 and $1.0 million.

● All of our back office and corporate office staff have returned to normal work arrangements, although remote and hybrid work provisions are now defined as “normal” work arrangements for certain corporate and back office employees, depending on the nature of the position.

In addition, none of our internal controls have changed or are expected to change as a result of these work arrangements other than the use of remote approvals.

● To date, the Company did not experience any challenges in implementing its business continuity plans.

The Company’s Risk Management team began preparing in early 2020, with ordering of supplies such as hand sanitizer, masks cleaning supplies, as well as laptops for those who did not have one.

This enabled the Company to immediately communicate and implement plans to continue operations in our banking facilities while enabling those non-customer facing employees to immediately begin working remotely.

The Company did not face any material resource constraints in implementing these plans.

● As a financial institution providing essential services, the Company expects continued demand for loans and deposits, albeit at a much slower pace than in 2020.

In addition, mortgage warehouse utilization that resulted from the low rate environment is expected to remain at a lower level than 2020.

Further, it is expected that SBA PPP loans will continue to be forgiven, with most expected to be forgiven in 2021.

In addition, it is expected that the Company’s strategic shift to focus more on loan categories other than non-owner occupied real estate will result in lower overall loan originations in 2021 than in 2020 and may not outpace overall paydowns or line utilization reductions in 2021.

● The Company loosened its vacation and sick-time policies to accommodate our employees who were affected by COVID-19.

The Company hired an additional 28 temporary employees throughout the pandemic related to higher demand for loan processing and forgiveness, and to provide enhanced customer service.

Those temporary assignments ended in the second quarter of 2021, although many of those employees have been redeployed within other areas of the Company.

● As a financial institution providing essential services, the Company expects continued demand for loans and deposits.

In addition, mortgage warehouse utilization that resulted from the low rate environment is expected to remain at a lower levels.

Further, it is expected that SBA PPP loans will continue to be forgiven, with the remainder expected to be forgiven in 2022.

EARNINGS PERFORMANCE

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The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money.

The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as bank-owned life insurance and certain non-debt investments.

The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a broad range of banking services to our customers.

The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as BOLI and investment gains.

The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income decreased $1.4 million to $26.7 million, for the third quarter of 2021 over the third quarter of 2020 and increased $6.5 million, or 8% to $82.5 million for the first nine months of 2021 in comparison to the first nine months of 2020.

For the third quarter of 2021 as compared to the same quarter in 2020, average loan balances decreased $161.9 million, or 7%, primarily due to $144.6 million, or a 55% decrease in the utilization of mortgage warehouse lines, and a $86.4 million, or 38% decrease in commercial loans, from the forgiveness of SBA PPP loans.

These decreases were partially offset by a $75.4 million increase in real estate loan balances, primarily from the purchase of $121.6 million in mortgage loan pools, later in the third quarter of 2021.

The average yield on the overall loan portfolio increased 5 basis points, while there was a 2 bps favorable decrease in the cost of interest-bearing liabilities for the third quarter of 2021 as compared to the same quarter in 2020.

For the first nine months of 2021 as compared to the same period in 2020, average loan balances increased $254.3 million or 13%, primarily due to increases in real estate loans of $301.7 million or 20%.

The increase in the aforementioned average loan balances were the major driver in the increase in net interest income with a 18 bps decrease in loan yield partially offsetting the increase in volume.

There was a 17 bps favorable decrease in the yield on interest bearing liabilities driven by an increase in lower or no cost core deposits and a decrease in higher cost time deposits for the first nine months of 2021 as compared to the same period in 2020.

Net interest income decreased $3.8 million to $24.8 million, for the first quarter of 2022 over the first quarter of 2021.

For the first quarter of 2022 as compared to the same quarter in 2021, average loan balances decreased $415.3 million, or 18%, primarily due to $181.6 million, or a 75% decrease in the utilization of mortgage warehouse lines, a $126.0 million, or 7% decrease in real estate secured loans, and a $94.5 million, or 49% decrease in commercial loans, mostly from the forgiveness of SBA PPP loans.

Ag production loans were also down $12.2 million or 26%.

The average yield on the overall loan portfolio decreased 21 basis points, while there was a 8 bps unfavorable increase in the cost of interest-bearing liabilities for the first quarter of 2022 as compared to the same quarter in 2021.

The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities.

5 unchanged sentences

For the three months ended

September 30, 2021

September 30, 2020

Rate/Yield (2)

Interest-earning due from banks

Total investments

Loans and leases:

Mortgage warehouse lines

Total loans and leases

Total interest earning assets (4)

Other earning assets

Non-earning assets

Liabilities and shareholders' equity

Interest bearing deposits:

Demand deposits

Savings accounts

Certificates of deposit, under $100,000

Certificates of deposit, $100,000 or more

Brokered deposits

Total interest bearing deposits

Borrowed funds:

Federal funds purchased

Repurchase agreements

Short term borrowings

Long-term debt

Subordinated debentures

Total borrowed funds

Total interest bearing liabilities

Demand deposits - noninterest bearing

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Interest income/interest earning assets

Interest expense/interest earning assets

Net interest income and margin (5)

(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(2) Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective tax rate.

(3) Loans are gross of the allowance for possible loan losses.

Loan fees have been included in the calculation of interest income.

Net loan fees and loan acquisition FMV amortization were $1.0 million and $1.3 million for the quarters ended September 30, 2021 and 2020, respectively.

(4) Non-accrual loans have been included in total loans for purposes of computing total earning assets.

(5) Net interest margin represents net interest income as a percentage of average interest earning assets.

Average Balances and Rates

(Dollars in Thousands, Unaudited)

For the nine months ended

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Rate/Yield (2)

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Savings accounts

Certificates of deposit, under $100,000

Certificates of deposit, $100,000 or more

Time Deposits

Brokered deposits

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Loan fees have been included in the calculation of interest income.

Net loan fees and loan acquisition FMV amortization were $3.4 million and $0.9 million for the nine months ended September 30, 2021 and 2020, respectively.

Net loan fees and loan acquisition FMV amortization were $0.4 million and $1.4 million for the quarters ended March 31, 2022 and 2021, respectively.

(4) Non-accrual loans have been included in total loans for purposes of computing total earning assets.

5 unchanged sentences

(dollars in thousands, unaudited)

Three months ended September 30,

Nine months ended September 30,

2021 over 2020

Three months ended March 31,

2022 over 2021

Increase (decrease) due to

Federal funds sold/due from time

7 unchanged sentences

Savings accounts

Certificates of deposit, under $100,000

Certificates of deposit, $100,000 or more

Time Deposits

Brokered deposits

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(1) Subtotals are a sum of the categories above and are not recalculated on the portfolio totals.

The volume variance calculated for the third quarter of 2021 relative to the third quarter of 2020 was an unfavorable $0.8 million due to lower average balances of interest earning assets, resulting from a decrease in mortgage warehouse line utilization coupled with a decrease in commercial loans, mostly from the forgiveness of SBA PPP loans, partially offset by an increase in real estate loans.

There was an unfavorable rate variance of $0.6 million for the comparative quarters

since the weighted average yield on interest earning assets fell by 54 basis points and the weighted average cost of interest-bearing liabil ities decreased by 2 basis points.

The volume variance calculated for the first three months of 2022 relative to the first three months of 2021 was an unfavorable $2.0 million due to lower average balances of interest earning assets, resulting from a decrease in all categories of loans, partially offset by an increase in investment balances.

There was an unfavorable rate variance of $1.5 million for the comparative quarters since the weighted average yield on interest earning assets decreased by 67 basis points and the weighted average cost of interest-bearing liabilities increased by 8 basis points.

There was also an

unfavorable mix variance of $0.3 million primarily from the issuance of subordinated debentures issued at 3.25% in September of 2021.

The rate variance was negatively impacted by the following factors:

high average balances of cash and due from banks earning on average 15 bps, new loans and investments having lower yields overall, including low-yielding 1-4 SFD mortgage loans and SBA PPP loans.

These negative factors were slightly offset by an increase in lower costs of time-deposits and other interest-bearing liabilities.

The average fees on the SBA PPP loans was approximately 5.5%.

These fees, net of loan costs, are being accreted over the stated life of the loan (generally two years for PPP loans generated in 2020 and 5 years for PPP loans generated in 2021), net of loan costs.

Our customers with an SBA PPP loan are generally eligible to apply for loan forgiveness after 24 weeks.

After the 24-week covered period, PPP borrowers have ten months to apply for forgiveness.

During this period, payments are not due on the loan.

If a loan is forgiven, upon repayment of principal and interest by the SBA, any unaccreted fee income, net of unamortized costs, would be recognized as interest income at such time.

The decrease in rate on interest earning assets was more than the net volume/rate decrease in interest bearing liabilities and resulted in an unfavorable $1.4 million net volume/rate difference.

The Company’s net interest margin for the third quarter of 2021 was 3.46%, as compared to 3.98% for the third quarter of 2020.

The volume variance calculated for the first nine months of 2021 relative to the first nine months of 2020 reflects a favorable volume variance of $10.9 million and an unfavorable rate variance of $4.4 million, resulting from organic growth in commercial real estate loans.

The growth in interest earning assets was partially offset by the 43 basis point decrease in yield while interest bearing liabilities increased $174.4 million with a 17 basis point drop in cost.

Since the volume variances outweighed the declines in yield there was a favorable $6.5 million net volume/rate difference.

The Company’s net interest margin for the first nine months of 2021 was 3.66%, as compared to 3.97% in the first nine months of 2020.

As described above, a lower rate environment precipitated by two interest rate cuts by the Federal Open Market Committee totaling 150 bps in March 2020 and other economic uncertainty negatively impacted our yield on existing adjustable and variable rate portfolio loans and created a lower initial interest rate for new loan volumes.

At September 30, 2021, approximately 9% of our total portfolio, or $192.7 million, consists of variable rate loans.

Of these variable rate loans, approximately $69.9 million have floors that limited the overall reduction in rates.

At September 30, 2021, our outstanding fixed rate loans represented 22% of our loan portfolio.

The remaining 69% of our loan portfolio at September 30, 2021 consists of adjustable-rate loans;

60% of these loans (approximately $883 million) will not begin adjusting for at least another 3 years, but up to 10 years.

high average balances of cash and due from banks earning on average 19 bps, new loans and investments having lower yields overall, including low-yielding purchased 1-4 SFD mortgage loans.

Increased costs on interest bearing liabilities also had a negative impact on the variance primarily from the issuance of subordinated debt mentioned above.

The Company’s net interest margin for the first quarter of 2022 was 3.21%, as compared to 3.93% for the first quarter of 2021.

At March 31, 2022, approximately 7% of our total portfolio, or $142.6 million, consists of variable rate loans.

Of these variable rate loans, approximately $22.0 million have floors.

At March 31, 2022, our outstanding fixed rate loans represented 28% of our loan portfolio.

The remaining 65% of our loan portfolio at March 31, 2022 consists of adjustable-rate loans;

78% of these loans (approximately $1.0 billion) will not begin adjusting for at least another 3 years, but up to 10 years.

These loans are typically adjustable every five years after the initial adjustment.

Approximately $47.8 million of these adjustable-rate loans have the ability to reprice next quarter.

Cash balances for the quarter and year to date comparisons continue to increase and have a negative impact on our net interest margin since cash balances earn considerably lower yields than other earning assets.

Average cash and due from banks was $379.6 million, an increase of $372.7 million for the third quarter of 2021 as compared to the third quarter of 2020 and was $256.0 million, an increase of $223.6 million for the first nine months of 2021 as compared to the same period in 2020.

Overall average investment securities increased by $56.2 million for the third quarter of September 30, 2021 as compared to September 30, 2020 and decreased by $12.9 million for the first nine months of 2021 as compared to the same period in 2020.

For the quarter ending September 30, 2021 over the same period for 2020, average non-taxable securities increased $32.7 million and taxable securities increased $23.5 million.

For the first nine months of 2021 over the same period for 2020, average non-taxable securities increased $28.6 million and taxable securities decreased $41.5 million due mostly to prepayments on mortgage-backed securities.

Partially offsetting the decrease to taxable securities were purchases of subordinated debentures of bank holding companies and collateralized loan obligations.

The overall investment portfolio had a tax-equivalent yield of 2.44% at September 30, 2021, with an average life of 4.9 years.

Interest expense was $0.9 million in the third quarter of 2021, a decline of $0.1 million, or 6%, compared to the third quarter of 2020 and was $2.7 million in the first nine-months of 2021, a decline of $1.8 million or 39%.

The decline in interest expense for both the quarter and the nine months is attributable to a favorable shift in deposit mix as average total time deposits declined by $134.8 million, or 31%, in the third quarter of 2021 as compared to the same quarter in 2020 and by $96.5 million, or 22% for the first nine months of 2021 as compared to the same period in 2020.

The average cost of interest-bearing deposits declined by 2 basis points to 14 basis points for the third quarter of 2021

compared to the third quarter of 2020, and by 15 basis points to 14 basis points for the first nine-months of 2021 as compared to the same period in 2020.

Non-interest bearing demand deposits increased $146.3 million or 15% for the third quarter of 2021 as compared to the third quarter of 2020 and increased $222.3 million or 27% for the first nine-months of 2021 as compared to the same period in 2020.

PROVISION FOR LOAN AND LEASE LOSSES

Cash balances for the quarterly comparisons have increased and have a negative impact on our net interest margin since cash balances earn considerably lower yields than other earning assets.

Average cash and due from banks was $194.8 million, an increase of $118.3 million for the first quarter of 2021.

Overall average investment securities increased by $494.9 million for the first quarter of March 31, 2022 as compared to March 31, 2021.

For the quarter ending March 31, 2022 over the same period for 2021, average non-taxable securities increased $67.6 million and taxable securities increased $427.3 million.

The overall investment portfolio had a tax-equivalent yield of 2.22% at March 31, 2022, with an average life of 6.21 years.

Interest expense was $1.3 million in the first quarter of 2022, an increase of $0.4 million, or 47%, compared to the first quarter of 2021.

The increase in interest expense for the quarter is primarily attributable to the issuance of subordinated debentures in September of 2021 at 3.25%.

The average cost of interest-bearing deposits decreased by 1 basis point to 13 basis points for the first quarter of 2022 compared to the first quarter of 2021, while the average cost of borrowed funds increased 43 basis points for the first quarter of 2022 as compared to the same period in 2021.

Non-interest bearing demand deposits increased $116.6 million or 12% for the first quarter of 2022 as compared to the first quarter of 2021.

PROVISION FOR CREDIT LOSSES ON LOANS AND LEASES

Upon implementation the Company recorded a $10.4 million increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.

Credit risk is inherent in the business of making loans.

The Company sets aside an allowance for loan and lease losses, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for loan and lease losses.

The Company recorded a net benefit related to loan and lease loss provision of $0.6 million in the third quarter of 2021 relative to a provision of $2.4 million in the third quarter of 2020, and a year-to-date net benefit for loan and lease loss provision of $2.5 million in 2021 as compared to $6.4 million loan and lease loss provision expense for the same period in 2020.

The Company's $3.0 million, or 126%, favorable decline in provision for loan and lease losses in the third quarter of 2021 as compared to the third quarter of 2020, and the $8.8 million favorable decrease, or 139% in the first nine months of 2021 compared to the same period in 2020 is due mostly to lower historical loan loss rates, a decline in outstanding balances on loans, a change in the mix of loans, and net year-to-date 2021 recoveries of previously charged-off loan balances.

During the first nine months of 2021, Management adjusted its qualitative risk factors under our current incurred loss model for improved economic conditions, improvements in the severity and volume of past due loans, and a reduction in the level of concentrations of credit in non-owner occupied real estate loans.

There was no provision for loan and lease losses, or related allowance for loan and leases losses, associated with the SBA PPP loans as those loans carry a full guarantee by the SBA, subject to the financial institution meetings its Bank Secrecy Act obligations and other diligence requirements in making such loans.

As described above, the Company was subject to the adoption in the first quarter of 2020 of the Current Expected Credit Loss ("CECL") accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326).

Prior to the close of the first quarter of 2020, the Company elected under Section 4014 of the Coronavirus Aid, Relief, and Economic Security (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.

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

The Company’s decision to defer the adoption of CECL was done primarily to provide additional time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses.

Further, the Company has taken actions to serve our communities during the pandemic, including permitting short-term payment deferrals to current customers, as well as originating bridge loans and SBA PPP loans.

Upon the adoption of CECL on January 1, 2022, the Company is expected to record the anticipated increase in the allowance for credit losses as an adjustment to equity, net of deferred taxes.

The Company has taken actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA PPP loans.

As described below under Nonperforming Assets, since April 2020, the Company modified approximately $425.9 million of loans under either Section 4013 of the CARES Act or the April 7, 2020 Interagency statement that offered some practical expedients for loan modifications.

These modifications generally provided for a six-month deferral of both interest and principal and the vast majority of the customers on deferral resumed making scheduled payments upon the expiration of the deferral.

As of September, 30, 2021, the Company had $10.4 million in remaining loan modifications;

all loans are fully secured by real estate.

These deferrals had an impact on how the Company internally grades its loans and as such had an impact on the overall provision under the incurred loss method.

The continued performance on these loans after the end of the deferral period could impact future provision.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance.

The Company recorded net charge-offs of $0.2 million in the third quarter of 2021 as compared to $0.3 million for the comparative period of 2020.

For the first nine months of 2021, the Company recorded net recoveries of $0.3 million as compared to net charge-offs of $0.7 million for the same period of 2020.

The allowance for loan and lease losses is at a level that, in Management’s judgment, is adequate to absorb probable loan losses related to specifically identified impaired loans as well as probable incurred losses in the remaining loan portfolio.

The Company’s policies for monitoring the adequacy of the allowance, determining loan balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 11 to the consolidated financial statements, and below, under “Allowance for Loan and Lease Losses.” The process utilized to establish an appropriate allowance for loan and lease losses can result in a high degree of variability in the Company’s loan loss provision, and consequently in our net earnings.

The Company sets aside an allowance for credit losses on loans and leases, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for credit losses on loans and leases.

The Company recorded an expense related to a credit loss provision for loans and leases of $0.6 million in the first quarter of 2022 relative to a provision for loan and lease losses of $0.3 million in the first quarter of 2021.

The higher provision for credit losses in the first quarter of 2022 over the same quarter in 2021, was primarily due to the impact of a $1.8 million in net charge-offs in the first quarter of 2022, partially offset by a decrease in the allowance for credit losses for loans evaluated on a pool basis.

The increase in net charge-offs in the first quarter of 2022 was primarily related to a single loan relationship that defaulted in late March 2022 upon the discovery of new information.

No additional allowance was booked for this loan individually evaluated for expected losses.

The first quarter of 2022 decrease in the allowance for credit losses evaluated on a pooled basis was primarily due to a decline in the qualitative factors resulting from improvements in regional economic factors.

Specifically identifiable and quantifiable credit losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance.

The Company recorded net charge-offs of $1.8 million in the first quarter of 2022 as compared to net recoveries of $0.3 million for the comparative period of 2021.

The allowance for credit losses on loans and leases is at a level that, in Management’s judgment, is adequate to absorb probable credit losses on loans related to individually identified loans as well as probable incurred credit losses in the remaining loan portfolio.

The Company’s policies for monitoring the adequacy of the allowance, determining loan balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 10 to the consolidated financial statements, and below, under “Allowance for Credit Losses.” The process utilized to establish an appropriate credit allowance for losses on loans and leases can result in a high degree of variability in the Company’s credit loss provision, and consequently in our net earnings.

NONINTEREST INCOME AND NONINTEREST EXPENSE

The following table provides details on the Company’s noninterest income and noninterest expense for the three and nine month periods ended September 30, 2021 and 2020:

The following table provides details on the Company’s noninterest income and noninterest expense for the three and nine month periods ended March 31, 2022 and 2021:

Noninterest Income/Expense

(dollars in thousands, unaudited)

For the three months ended September 30,

For the nine months ended September 30,

For the three months ended March 31,

Noninterest income:

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(2) Tax equivalent

(3) Noninterest expense as a percentage of the sum of net interest income and noninterest income excluding net gains (losses) from securities and bank owned life insurance income.

(3) The efficiency ratio is a non-GAAP measure and is a calculation of noninterest expense as a percentage of the sum of net interest income and noninterest income excluding net gains (losses) from securities and bank owned life insurance income.

Noninterest Income:

Total noninterest income reflects increases of $0.4 million, or 6%, for the quarter ended September 30, 2021 as compared to the same quarter in 2020, and $0.9 million, or 4% for the year-to-date period ended September 30, 2021 as compared to the same period in 2020.

Service charges on deposit accounts increased by $0.2 million or 8%, for the quarterly comparison and decreased $0.1 million or 1%, for the year-to-date comparison.

The variances for both periods were due to increases and decreases, respectively in overdraft fees, due to volume fluctuations.

Other service charges and fees increased $0.4 million or 15% for the third quarter of 2021 and $1.1 million or 15% for the first nine months of 2021 as compared to the same period in 2020.

For both the quarter and the year-to-date comparisons the positive variance was due to increased check-card interchange fees due to increased usage of customer debit cards.

The Company recognized a $0.4 million gain from the sale of debt securities in the second quarter of 2020.

The same gain in 2021 was very minor, thus resulting in a negative variance of $0.4 million for the first nine months of 2021 as compared to the same period in 2020.

BOLI income decreased by $0.3 million as compared to the third quarter of 2021 and increased $0.4 million for the first nine months of 2021 as compared to the same period in 2020.

These variances are due mostly to fluctuations in underlying values of assets in the specific account BOLI policies that are designed to have similar assets to those in the deferred compensation plans.

Thus, the higher quarterly and year-to-date values in BOLI policies are offset by higher deferred compensation expense reflected primarily in director fees expense.

At September 30, 2021, there was $44.0 million in BOLI policies and $11.0 million in separate account BOLI policies associated with the deferred compensation plans.

In the “other” category of noninterest income the Company reflected a $0.1 million increase in the third quarter of 2021 as compared to the third quarter of 2020 and a $0.2 million decrease in the first nine months of 2021 as compared to the same period in 2020.

The quarterly comparison includes a $0.8 million non-recurring gain resulting from the wrap-up of a low-income housing tax credit fund investment in the third quarter of 2020, partially offset by a $0.6 million favorable change in costs of the same low-income housing tax credit fund investment.

A recovery of legal expenses from a prior year for $0.2 million also was recorded in the third quarter of 2021.

The year-to-date comparisons were impacted by a $0.6 million favorable variance in low-income housing tax credit fund investments offset by $1.5 million in non-recurring gains in the first nine months of 2020 from the wrap up of low-income housing tax credit fund investments.

The year-to-date comparison was also favorably impacted by a $0.4 million increase in the valuation of the Company’s equity investment in Pacific Coast Bankers’ Bank.

Total noninterest income reflected a decrease of $0.8 million, or 11%, for the quarter ended March 31, 2022 as compared to the same quarter in 2021 due mostly to lower BOLI income and a decrease in the fair market value adjustment for an equity investment, partially offset by a gain on the sale of investment securities.

Service charges on deposit accounts increased by $0.3 million or 10%, for the quarterly comparison.

The variance was primarily due to increases in overdraft fees and analysis fees on treasury management customers.

Other service charges and fees increased $0.2 million or 9% for the first quarter of 2022 as compared to the same period in 2021 mainly due to an increase in debit card interchange fees from higher usage.

Gains of the sales of securities were $1.0 million for the first quarter of 2022.

There were no sales in the comparable quarter of 2021.

The sale in the first quarter of 2022 was a strategic effort to rebalance the portfolio by selling longer duration and higher price volatility securities as a hedge against rising interest rates, due to likely persistent inflationary pressures in the near-intermediate term environment.

BOLI income decreased by $1.2 million for the first quarter of 2022 as compared to the first quarter of 2021.

The variance is due mostly to fluctuations in underlying values of assets in the specific account BOLI policies that are designed to have similar assets to those in the deferred compensation plans.

Thus, the lower quarterly values in BOLI policies are offset by lower deferred compensation expense reflected primarily in director fees expense.

At March 31, 2022, there was $43.5 million in BOLI policies and $10.1 million in separate account BOLI policies associated with the deferred compensation plans.

In the “other” category of noninterest income the Company reflected a $1.1 million decrease in the first quarter of 2022 as compared to the first quarter of 2021.

The quarterly comparison includes a $1.2 million change in the valuation adjustment of the Company’s equity investment in Pacific Coast Bankers’ Bank.

The valuation of restricted stock held by the Company is required under FASB ASU 2016-01.

This stock is related to an equity investment in Pacific Coast Bankers’ Bank and is adjusted when financial information and an updated valuation report becomes available, generally in the late first quarter of each year.

Noninterest Expense:

Total noninterest expense increased by $1.6 million, or 8%, in the third quarter of 2021 relative to the third quarter of 2020, and by $6.2 million, or 11%, in the first nine months of 2021 as compared to the same period in 2020.

Noninterest expense dropped to 2.66% of average earning assets in the third quarter of 2021 down from 2.70% for the third quarter of 2020 and was 2.67% of average earning assets for the first nine months of 2021 relative to 2.85% for the same period in 2020.

The tax-equivalent efficiency ratio was 59.75% in the third quarter of 2021 as compared to 53.74% in the same quarter of 2020 and was 58.30% for the first nine months of 2021 as compared to 56.64% for the same period in 2020.

Total noninterest expense had a favorable decline of $0.1 million in the first quarter of 2022 as compared to the first quarter of 2021.

The tax-equivalent efficiency ratio was 67.08% in the first quarter of 2022 as compared to 56.43% in the same quarter of 2021.

The efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income;

the provision for loan losses and investment gains/losses are excluded from the equation.

The Company continues to actively consider a wide variety of operational efficiency opportunities, and noninterest income enhancements, however challenges in net interest income from softening loan demand make it difficult to predict further improvements of the efficiency ratio.

Salaries and Benefits were $0.9 million, or 9%, higher in the third quarter of 2021 as compared to the third quarter of 2020 and $3.1 million, or 10%, higher for the first nine months of 2021 compared to the same period in 2020.

expense deferrals related to the decrease in loan originations were primarily responsible for the negative variance;

there was a decrease in salary deferrals of $0.5 million for the quarterly comparison and $2.2 million for the year-to-date comparison.

There were 482 full-time equivalent employees at September 30, 2021 as compared to 491 at September 30, 2020.

Occupancy expenses were $0.2 million lower for the third quarter of 2021 as compared to the same quarter in 2020 and $0.1 million higher for the first nine months of 2021 as compared to the same period in 2020.

The primary reason for decrease in the quarterly comparison was the closure of five branch facilities earlier in the year, which included the early termination of two leases immediately.

The acceleration of leasehold improvements was responsible for the slight increase in the year-to-date comparison.

Other noninterest expense increased $0.9 million, or 12% for the third quarter 2021 as compared to the third quarter in 2020, and increased $3.1 million, or 17% for the first nine months of 2021 as compared to the same period in 2020.

The variance for the third quarter of 2021 compared to the same period in 2020 was primarily driven by an increase of $0.6 million in legal and accounting costs due mostly to an increase in litigation costs.

Additionally, there were increases of $0.3 million in data processing costs resulting from increases in core banking system expenses, and $0.4 million in increase in checkcard processing costs due to higher debit card usage.

These higher costs were partially offset by a $0.4 million decrease in foreclosed assets costs, due to the sale of all but two bank owned properties.

For the year-over-year comparison the categories of increase were the same as with the quarterly comparison, along with a $0.3 million increase in FDIC assessments and a $0.3 million increase in deferred compensation expense for directors, which is linked to the changes in BOLI income.

the provision for credit losses on loans and leases and investment gains/losses are excluded from the equation.

The ratio spiked higher in the first three months of 2022 despite lower noninterest expense because the denominator of the equation, net interest income and noninterest income was lower during the same period, mainly due to lower interest earning assets.

Salaries and benefits were $0.7 million higher in the first quarter of 2022 as compared to the first quarter of 2021.

The increase in the year-over-year quarterly comparison is due to several factors, including merit increases for employees due to annual performance evaluations during the period, higher payroll taxes in the first quarter, and the strategic hiring of lending and management staff.

Overall full-time equivalent employees were 484 at March 31, 2022 as compared to 508 at March 31, 2021.

Occupancy expense was $0.2 million lower for the first quarter of 2022 as compared to the same quarter last year.

We closed five branch facilities in the second quarter of 2021 which impacted the decrease for the year over year quarterly comparison.

Further, other noninterest expense categories were $0.7 million lower for the first quarter 2022 as compared to the first quarter in 2021.

The principal decreases were in loan services costs mostly from the write up of the provision for credit losses on unfunded commitments for $0.1 million, a favorable variance in foreclosed asset costs for $0.1 million as all but one OREO property was sold in 2021, thus our carrying costs have decreased and a $0.8 million decrease in professional services costs.

The positive variance in professional services costs came mostly from a decrease in directors deferred compensation expense which is linked to the fluctuations in BOLI income.

PROVISION FOR INCOME TAXES

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Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds.

The Company's provision for income taxes was 24.1% of pre-tax income in the third quarter of 2021 relative to 23.4% in the third quarter of 2020, and 25.0% of pre-tax income for the first nine months of 2021 relative to 23.5% for the same period in 2020.

The increase in effective tax rate in the third quarter of 2021 is due to tax credits and tax-exempt income representing a smaller percentage of total taxable income.

The Company's provision for income taxes was 27.0% of pre-tax income in the first quarter of 2022 relative to 25.5% in the first quarter of 2021.

The increase in effective tax rate in the first quarter of 2022 is due to tax credits and tax-exempt income representing a smaller percentage of total taxable income.

BALANCE SHEET ANALYSIS

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Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.

The Company’s investments may at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest earning balances in our

Federal Reserve Bank account, and overnight fed funds sold.

The Company’s investments can serve several purposes, including the following:

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and 5) they can provide partially tax exempt income.

The investment portfolio is reflected on the balance sheet as investment securities and totaled $732.3 million, or 21% of total assets at September 30, 2021, and $544.0 million, or 17% of total assets at December 31, 2020.

In addition, within the Cash and Due from Banks account on the balance sheet was $356.2 million of surplus interest earning balances in our Federal Reserve Bank account at September 30, 2021, as compared to $3.5 million at December 31, 2020.

The investment portfolio is reflected on the balance sheet as investment securities and totaled $1.03 billion, or 30% of total assets at March 31, 2022, and $973.3 million, or 29% of total assets at December 31, 2021.

In addition, within the Cash and Due from Banks account on the balance sheet was $186.4 million of surplus interest earning balances in our Federal Reserve Bank account at March 31, 2022, as compared to $193.2 million at December 31, 2021.

Surplus balances in our Federal Reserve Bank account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity.

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We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

The expected average life for bonds in our investment portfolio was 4.9 years and their average effective duration was 3.2 years at September 30, 2021, up from an expected average life of 4.2 years and an average effective duration of 2.4 years at year-end 2020.

The expected average duration was 3.0 years at March 31, 2022, as compared to an average effective duration of 3.2 years at year-end 2021.

The following table sets forth the amortized cost and fair market value of Company’s investment portfolio by investment type as of the dates noted:

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(dollars in thousands, unaudited)

September 30, 2021

March 31, 2022

December 31, 2021

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Total securities

The net unrealized gain on our investment portfolio, or the amount by which aggregate fair market values exceeded amortized cost, was $21.3 million at September 30, 2021, a $4.9 million decrease relative to the net unrealized gain of $26.1 million at December 31, 2020.

The net unrealized loss on our investment portfolio, or the amount by which amortized cost exceeded aggregate fair market values, was $25.1 million at March 31, 2022, a $41.0 million swing relative to the net unrealized gain of $15.9 million at December 31, 2021.

The change was caused by increased long-term market interest rates on fixed-rate bond values.

Municipal bond balances comprise 40% of our total securities portfolio (fair value) at September 30, 2021, and 42% at December 31, 2020.

Since the declines in market values were primarily attributable to changes in interest rates and volatility in the financial markets and not a result of an expected credit loss, no allowance for credit losses was recorded as of March 31, 2022.

Municipal bond balances comprise 28% of our total securities portfolio (fair value) at March 31, 2022, and 31% at December 31, 2021.

Municipal bonds purchased have strong underlying ratings, and we review all municipal bonds in our portfolio every quarter for potential impairment.

The corporate bonds purchased in 2021 are exclusively subordinated debentures of bank holding companies.

The corporate bonds purchased in the first three months 2022 and throughout 2021 are exclusively subordinated debentures of bank holding companies.

These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews.

The purchases of collateralized loan obligations (“CLOs”) in the third quarter of 2021 is were exclusively AAA and AA rated tranches.

Each purchase is subject to a credit and structure review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews.

The AAA and AA-rated CLO purchases were primarily a balance sheet diversification strategy as management continues to utilize available liquidity.

In addition to

providing asset class diversification given the high level of real estate backed earning assets on the balance sheet, these floating rate CLOs are more asset sensitive which complements the longer-term fixed-rate earning assets.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, customer repurchase agreements, and other purposes as required or permitted by law totaled $148.2 million at September 30, 2021 and $232.0 million at December 31, 2020, leaving $584.1 million in unpledged debt securities at September 30, 2021 and $312.0 million at December 31, 2020.

Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $43.2 million at September 30, 2021 and $52.9 million at December 31, 2020.

The purchases of collateralized loan obligations (“CLOs”) are exclusively AAA and AA rated tranches.

Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews.

The AAA and AA-rated CLO purchases were primarily a balance sheet diversification strategy to utilize available liquidity without adding duration.

In addition to providing asset class diversification given the high level of real estate backed earning assets on the balance sheet, these floating rate CLOs are more asset sensitive which complements the longer-term fixed-rate earning assets.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, customer repurchase agreements, and other purposes as required or permitted by law totaled $160.7 million at March 31, 2022 and $167.2 million at December 31, 2021, leaving $864.3 million in unpledged debt securities at March 31, 2022 and $806.1 million at December 31, 2021.

Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $40.4 million at March 31, 2022 and $47.0 million at December 31, 2021.

LOAN AND LEASE PORTFOLIO

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The balances in the table are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs.

While not reflected in the loan totals and not currently comprising a material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of, loans to non-affiliated investors.

While not reflected in the loan totals and not currently comprising a

material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of, loans to non-affiliated investors.

Loan and Lease Distribution

(dollars in thousands, unaudited)

September 30, 2021

March 31, 2022

December 31, 2021

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Total loans and leases

Percentage of Total Loans and Leases

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Total real estate

Commercial and industrial

Mortgage warehouse lines

Consumer loans

Total loans and leases

Gross loans and leases at $2.1 billion, reflected a decrease of $323.3 million, or 13%, at September 30, 2021 from $2.5 billion at December 31, 2020 due mostly to declines in commercial real estate and construction loan balances, outstanding balances on mortgage warehouse lines, as well as the forgiveness of SBA PPP loans.

Balances on mortgage warehouse lines were down $181.2 million or 59% during the first nine months of 2021.

Mortgage warehouse utilization was 33% at September 30, 2021, as compared to 71% at December 31, 2020.

Allowance for credit losses on loans

Total loans and leases, net

Gross loans and leases at $2.0 billion, remained relatively flat during the first quarter of 2022 with an overall 0.3% change.

The net change did have some offsetting components with the larger fluctuations being a $44.0 million decline on mortgage warehouse line utilization.

There was also a $25.8 million decrease in non-owner occupied commercial real estate, and a $16.8 million of decrease in Small Business Administration’s Paycheck Protection Program (“PPP”) loans.

These declines were mostly offset by a $109.4 million increase in 1-4 family mortgage loans due to purchases of high-quality jumbo mortgage loans designed as a bridge to organic loan growth as the Bank’s core pipeline continues to improve with the recent hiring of loan teams which will further diversify the loan portfolio by specializing in various categories of agricultural real estate and agricultural production loans.

The Company’s regulatory commercial real estate concentration ratio decreased to 234% at March 31, 2022 as compared to 248% at December 31, 2021.

Regarding line utilization, unused commitments, excluding mortgage warehouse and consumer overdraft lines, were $224.4 million at March 31, 2022, compared to $242.3 million at December 31, 2021.

Total utilization excluding mortgage warehouse and consumer overdraft lines was 61% at March 31, 2022, compared to 61% at December 31, 2021.

Mortgage warehouse utilization was 16% at March 31, 2022, as compared to 28% at December 31, 2021.

Utilization of mortgage warehouse lines in the future could be impacted by fluctuations in interest rates, seasonality, and other factors affecting home purchasing or refinancing demand including economic uncertainty.

There was a net decrease of $63.0 million in real estate secured loans, primarily from construction and other commercial real estate loans as the Company strategically lowered its regulatory commercial real estate concentration ratio from 378% at December 31, 2020 to 308% at September 30, 2021, although it is expected to moderately increase this concentration ratio during the fourth quarter of 2021 and into 2022.

At September 30, 2021 we have concluded that we have an acceptable and well-managed concentration in CRE lending as defined in the Interagency Guidance dated December 12, 2006.

The overall decline in real estate secured loans during 2021 was partially offset by an increase of $80.4 million in 1-4 family residential real estate loans due to the $121.6 million purchase of high quality jumbo mortgage loans during the third quarter of 2021.

These loan purchases were designed as a bridge to organic loan growth as the Bank’s core loan pipeline continues to improve and the hiring of one or more loan teams that is expected to occur during the fourth quarter of 2021.

If successfully hired, the loan teams are anticipated to further diversify the loan portfolio by specializing in various categories of commercial and industrial loans.

The 37% decrease in Commercial and Industrial loans from $209.0 million at December 31, 2020 to $132.3 million at September 30, 2021 was primarily driven by loan forgiveness precipitated by the Company’s participation in the Small Business Administration’s PPP as authorized by the CARES Act.

The Company began accepting and funding loans under this program in April 2020.

There were 642 loans for $50.7 million outstanding at September 30, 2021, compared to 1,274 loans for $117.2 million at December 31, 2020.

During the first nine months of 2021, the SBA forgave $117.9 million of PPP loans.

The Company is working to buildout a more robust Commercial and Industrial loan origination group and platform, including small business loans, in order to complement its commitment to serving its commercial real estate customers.

As expected, PPP loans continue to decline as borrowers receive forgiveness on these loans.

There were 160 loans for $15.0 million outstanding at March 31, 2022, compared to 438 loans for $31.8 million at December 31, 2021.

NONPERFORMING ASSETS

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, in addition to foreclosed assets which is primarily OREO, but can included other foreclosed assets.

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, in addition to foreclosed assets which is primarily OREO, but can include other foreclosed assets.

If the Company grants a concession to a borrower in financial difficulty, the loan falls into the category of a TDR, unless the modification was granted under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement.

TDRs may be classified as either nonperforming or performing loans depending on their underlying characteristics and

circumstances.

TDRs may be classified as either nonperforming or performing loans depending on their underlying characteristics and circumstances.

The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:

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(dollars in thousands, unaudited)

September 30, 2021

March 31, 2022

December 31, 2021

September 30, 2020

March 31, 2021

NON-ACCRUAL LOANS:

Other construction/land

1-4 family - closed-end

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(1) Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate the ratios disclosed in this table.

Total nonperforming assets decreased by $1.7 million, or 20%, to $6.9 million during the first nine months of 2021.

The Company's ratio of nonperforming loans to gross loans increased to 0.32% at September 30, 2021 from 0.31% at December 31, 2020;

this was due to a decrease in the gross loan and lease portfolio, since nonperforming loans decreased $0.8 million during the same period.

All of the Company's impaired assets are periodically reviewed and are either well-reserved based on current loss expectations or are carried at the fair value of the underlying collateral, net of expected disposition costs.

As shown in the table, we also had $5.5 million in loans classified as performing TDRs on which we were still accruing interest as of September 30, 2021, a decrease of $5.9 million, or 52%, relative to December 31, 2020.

Foreclosed assets had a carrying value of $0.1 million at September 30, 2021 comprised of 2 properties classified as OREO as compared to 7 properties for $1.0 million at December 31, 2020.

Total nonperforming assets increased by $25.9 million, to $30.6 million during the first three months of 2022, primarily as a result of one relationship in the dairy industry consisting of four separate loans.

These loans were written down by $1.96 million in the first quarter of 2022 and no further allowance for credit losses was deemed necessary on these loans.

The Company's ratio of nonperforming loans to gross loans increased to 1.54% at March 31, 2022 from 0.23% at December 31, 2021;

due primarily to the loan relationship downgrade previously mentioned.

All of the Company's nonperforming assets are periodically reviewed and are either well-reserved based on current loss expectations or are carried at the fair value of the underlying collateral, net of expected disposition costs.

As shown in the table, we also had $4.6 million in loans classified as performing TDRs on which we were still accruing interest as of March 31, 2022, a decrease of $0.3 million, or 7%, relative to December 31, 2021.

Foreclosed assets had a carrying value of $0.1 million at March 31, 2022 and December 31, 2021 comprised of one property classified as OREO.

All foreclosed assets are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

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Collection efforts are continuously pursued for all nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company had $1.3 million in loans past due 30-59 days at September 30, 2021.

This is a decrease of $0.8 million over the balance at December 31, 2020.

The Company had $3.0 million in loans past due 30-59 days at March 31, 2022.

This is an increase of $0.8 million over the balance at December 31, 2021.

All of these past due loans are under management supervision and every effort is being taken to assist the borrowers and manage credit risk in this regard.

As described above, the Company is providing loan modifications to certain customers and taking advantage of either Section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, which provides that such modifications do not result in treatment of such loan as a TDR.

As described above, the Company provided loan modifications to certain customers and took advantage of either Section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, which provides that such modifications do not result in treatment of such loan as a TDR.

Since April 2020, the Company modified approximately $426 million of its loans under this guidance.

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For lines of credit, the borrower must repay the accrued interest at the end of the deferral period or take out a second credit facility to repay the accrued interest.

As of September 30, 2021, the Company had $10.4 million for one customer relationship remaining in loan modifications under Section 4013 of the CARES Act.

The $10.4 million remaining on deferral is fully secured by real estate collateral.

We monitor these loans during the deferral period and if circumstances change, we may downgrade the loan to a criticized asset.

An additional modification, if necessary, could also result in the loan being treated as a TDR or classified asset.

If some of the customers are not able to resume payments after the deferral period, it likely could result in higher classified and/or nonperforming assets, reversals of interest income, and/or higher charge-offs.

At September 30, 2021, all of the $10.4 million in outstanding modifications already are internally graded as classified assets.

ALLOWANCE FOR LOAN AND LEASE LOSSES

The allowance for loan and lease losses, a contra-asset, is established through periodic provisions for loan and lease losses.

It is maintained at a level that is considered adequate to absorb probable losses on specifically identified impaired loans, as well as probable incurred losses inherent in the remaining loan portfolio.

As of March 31, 2022, there were no loans remaining on deferral with the Company.

ALLOWANCE FOR CREDIT LOSSES – LOANS AND LEASES RECEIVABLE

The allowance for credit losses on loans and leases, a contra-asset, is established through periodic provisions for credit losses on loans and leases.

It is maintained at a level that is considered adequate to measure expected losses on individually identified loans, as well as expected losses inherent in the remaining loan portfolio.

Specifically identifiable and quantifiable losses are immediately charged off against the allowance;

recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off.

As described above, the Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until January 1, 2022.

The Company made this election as it believed that the deferral provided additional time to better assess the impact of the COVID-19 pandemic and related stimulus and relief efforts on the expected lifetime credit losses.

The Company’s allowance for loan and lease losses was $15.6 million at September 30, 2021, a decrease of $2.1 million, or 12%, relative to December 31, 2020 resulting from a $2.5 million loan loss benefit recorded during the first nine months of 2021, plus a $0.3 million in net recoveries during the same period.

The loan loss benefit in the first nine months of 2021 was precipitated primarily by the decrease in loan balances, the impact of loan recoveries and improved historical loan loss rates.

No allowance for loan and lease losses was considered necessary for the SBA PPP loans as those loans carry a 100% guarantee under the “Paycheck Protection Program”, subject to certain diligence requirements by the issuing financial institution.

For further information regarding the Company's decision to defer the implementation of CECL under Section 4014 of the CARES Act, as well as further detail on the decrease in the provision for loan and lease losses during the first nine months of 2021, please see the discussion above under Provision for Loan and Lease Losses.

The allowance for loan and lease losses was 0.73% of total loans at September 30, 2021, 0.72% at December 31, 2020 and 0.65% at September 30, 2020.

The ratio of the allowance for loan and lease losses to nonperforming loans was 230.1% at September 30, 2021, relative to 233.5% at December 31, 2020 and 216.9% for September 30, 2020.

Management's detailed analysis indicates that the Company's allowance for loan and lease losses should be sufficient to cover credit losses inherent in loan and lease balances outstanding as of September 30, 2021, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the allowance.

A separate allowance of $0.2 million for potential losses inherent in unused commitments is included in other liabilities at September 30, 2021, as compared to $0.3 million at December 31, 2020 and September 30, 2020.

The following table summarizes activity in the allowance for loan and lease losses for the noted periods:

Allowance for Loan and Lease Losses

After deferring implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) under section 4014 of the CARES Act, the Company implemented CECL on January 1, 2022 .

The Company's allowance for credit losses on loans and leases was $22.5 million at March 31, 2022, as compared to $14.3 million at December 31, 2021, and $18.3 million at March 31, 2021.

The $8.3 million increase in the allowance for credit losses on loan and leases during the first quarter of 2022 is due to a $9.5 million one-time adjustment from the implementation of CECL on January 1, 2022, a $0.6 million provision for credit losses on loan and leases, and net loan charge-offs of $1.8 million.

The allowance was 1.14% of total loans at March 31, 2022, 0.72% of total loans at December 31, 2021, and 0.80% of total loans at March 31, 2021.

Management's detailed analysis indicates that the Company's allowance for credit losses on loan and leases should be sufficient to cover credit losses for the life of the loan and leases outstanding as of March 31, 2022, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the loan and lease loss allowance.

A separate allowance of $1.0 million for potential credit losses inherent in unused commitments is included in other liabilities at March 31, 2022, as compared to $0.2 million at December 31, 2021.

As mentioned previously a $0.9 million one-time adjustment was recorded to the reserve for unfunded commitments on January 1, 2022 upon the implementation of CECL.

The following table summarizes activity in the credit allowance for losses on loans and leases for the noted periods:

Allowance for Credit Losses on Loans and Leases

(dollars in thousands, unaudited)

2 unchanged sentences

For the year ended

September 30,

Average gross loans and leases outstanding during period (1)

Gross loans and leases outstanding at end of period

Allowance for loan and lease losses:

Allowance for credit losses on loans and leases:

Balance at beginning of period

Adoption of ASC 326

Provision charged to expense

17 unchanged sentences

Consumer loans

Net loan (recoveries) charge offs

Net loan charge offs (recoveries)

Balance at end of period

Net (recoveries) charge-offs to average loans and leases (annualized)

Allowance for loan losses to gross loans and leases at end of period

Allowance for loan losses to nonperforming loans

Net loan (recoveries) charge-offs to allowance for loan losses at end of period

Net loan (recoveries) charge-offs to provision for loan losses

Net charge-offs (recoveries) to average loans and leases (annualized)

Allowance for credit losses on loans and leases to gross loans and leases at end of period

Allowance for credit losses on loans and leases to nonperforming loans

Net loan charge-offs (recoveries) to allowance for credit losses on loans and leases at end of period

Net loan charge-offs (recoveries) to provision for credit losses on loans and leases

(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

The Company’s allowance for loan and lease losses at September 30, 2021 represents Management’s best estimate of probable losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance.

Furthermore, fluctuations in credit quality, changes in economic

conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

The Company’s credit allowance for losses on loans and leases at March 31, 2022 represents Management’s best estimate of expected losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance.

Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

OFF-BALANCE SHEET ARRANGEMENTS

1 unchanged sentence

It is unlikely that all unused commitments will ultimately be drawn down.

Unused commitments to extend credit, which included standby letters of credit, totaled $540.0 million at September 30, 2021 and $449.9 million at December 31, 2020, representing approximately 25% of gross loans outstanding at September 30, 2021 and 18% at December 31, 2020.

The increase in unused commitments is due in large part to the increase in unfunded commitments on mortgage warehouse lines.

The Company also had undrawn FHLB letters of credit issued to customers totaling $4.9 million at both September 30, 2021 and December 31, 2020.

Unused commitments to extend credit, which included standby letters of credit, totaled $582 million at March 31, 2022 and $561 million at December 31, 2021, representing approximately 29% of gross loans outstanding at March 31, 2022 and 28% at December 31, 2021.

The decrease in unused commitments is due in large part to the decrease in loan balances with unfunded commitments.

The Company also had undrawn letters of credit issued to customers totaling $3.6 million at March 31, 2022 and December 31, 2021.

The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used.

However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments.

In addition to unused commitments to provide credit, the Company is utilizing a $100 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain local agency deposits which totaled $76.2 million at September 30, 2021.

In addition to unused commitments to provide credit, the Company is utilizing a $125 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain local agency deposits which totaled $78.3 million at March 31, 2022.

That letter of credit is backed by loans that are pledged to the FHLB by the Company.

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If a “long” position is prevalent, we could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity into investments or loans, subject to the bank’s risk tolerances.

The Company’s balance of non-earning cash and due from banks was $66.2 million at September 30, 2021 relative to $67.9 million at December 31, 2020.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.” Net premises and equipment decreased by $3.0 million during the first nine months of 2021, to $24.5 million.

This decline was primarily a result of the closure of five branch locations in the second quarter of 2021.

Goodwill was $27 million at September 30, 2021, unchanged during the first nine months of 2021.

As mentioned above, the Company performed a qualitative assessment of goodwill impairment during the fourth quarter 2020 and determined that a quantitative analysis was not required.

There have been no triggering events in the first nine months of 2021 that would require the Company to perform a Goodwill impairment test, however the Company will continue to monitor its Goodwill for potential impairment.

Bank-owned life insurance, with a balance of $55.0 million at September 30, 2021, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

The Company’s balance of non-earning cash and due from banks was $66.0 million at March 31, 2022 relative to $63.1 million at December 31, 2021.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”

Net premises and equipment decreased by $0.3 million during the first three months of 2022, to $23.2 million.

This decline was primarily a result of normal depreciation during the quarter net of new purchases.

Goodwill was $27.4 million at March 31, 2022, unchanged during the first three months of 2022.

Goodwill is tested for impairment annually, unless events and circumstances exist which indicate that an impairment test should be performed.

A Goodwill impairment test was last performed during the fourth quarter 2021 and determined that no impairment existed.

There have been no triggering events in the first three months of 2022 that would require the Company to perform a Goodwill impairment test, however the Company will continue to monitor its Goodwill for potential impairment.

Bank-owned life insurance, with a balance of $53.6 million at March 31, 2022, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

DEPOSITS AND INTEREST BEARING LIABILITIES

Deposits represent another key balance sheet category impacting the Company’s net interest income and profitability metrics.

Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved

to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity accounts such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts.

Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity accounts such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts.

Information concerning average balances and rates paid by deposit type is included in the Average Balances and Rates tables appearing above, in the section titled “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits by type, showing the period-end balance and percentage of total deposits, is presented as of the dates indicated in the following table.

1 unchanged sentence

(dollars in thousands, unaudited)

September 30, 2021

March 31, 2022

December 31, 2021

7 unchanged sentences

Brokered deposits

Deposit balances reflect net growth of $196.0 million, or 7%, during the first nine months of 2021.

Time deposits were $290.8 million at September 30, 2021 as compared to $412.9 million at December 31, 2020.

Brokered deposits decreased $40.0 million at September 30, 2021 to $60.0 million as compared to $100.0 million at December 31, 2020.

Time deposits declined $122.1 million for the first nine months of 2021 due mostly to the non-renewal of $120.0 million in public time deposits.

Non-maturity deposit growth of $358.2 million for the first nine months of 2021 was primarily the result of increases in balances of existing customers as the total number of customers was relatively unchanged.

Deposit balances reflect net growth of $83.4 million, or 3%, during the first three months of 2022.

Time deposits were $293.7 million at March 31, 2022 as compared to $293.9 million at December 31, 2021.

Brokered deposits were unchanged at $60.0 million at March 31, 2022 from December 31, 2021.

Non-maturity deposit growth of $83.6 million for the first three months of 2022 was primarily the result of increases in balances of existing customers as the total number of customers was relatively unchanged.

Management is of the opinion that a relatively high level of core customer deposits is one of the Company’s key strengths, and we continue to strive for core deposit retention and growth.

In particular, the Company’s ratio of noninterest-bearing deposits to total deposits was 39.4% at September 30, 2021 as compared to 36.0% at December 31, 2020.

In particular, the Company’s ratio of noninterest-bearing deposits to total deposits was 38.6% at March 31, 2022 as compared to 39.0% at December 31, 2021.

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures.

The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes.

The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily

satisfy funding needs from increased loan demand, and for other short-term purposes.

The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

Total non-deposit interest-bearing liabilities decreased by $40.1 million, or 18%, during the first nine months of 2021 primarily due to a decrease in federal funds purchased and borrowings from the FHLB.

Repurchase agreements totaled $92.6 million at September 30, 2021 relative to a balance of $39.1 million at year-end 2020.

Repurchase agreements

represent “sweep accounts”, where certain customers have elected to have their commercial deposit balances above a specified threshold transferred at the close of each business day into non-deposit investments accounts.

Total non-deposit interest-bearing liabilities increased by $0.9 million, during the first three months of 2022 primarily due to an increase in customer repurchase agreements.

Repurchase agreements totaled $107.8 million at March 31,2022 relative to a balance of $106.9 million at year-end 2021.

Repurchase agreements represent “sweep accounts”, where certain customers have elected to have their commercial deposit balances above a specified threshold transferred at the close of each business day into non-deposit investments accounts.

The balance in the investment account is used to have the customer purchase securities or a perfected interest in specifically identified pledged securities from the bank, which are then repurchased by the bank from the customer the next business day.

Long term debt increased to $49.2 million from the issuance of $50 million in 3.25% fixed – floating subordinated debt with a ten-year maturity in the third quarter of 2021.

The Company’s Board approved a $25 million contribution of additional capital to the Bank in the fourth quarter of 2021.

The Company plans to utilize the remainder of the funds for general corporate purposes, which may include repurchasing shares, among other things.

The Company had junior subordinated debentures totaling $35.3 million and $35.1 million at September 30, 2021 and December 31, 2020, respectively, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

The Company had Long term debt totaling $49.2 million and $49.1 million at March 31, 2022 and December 31, 2021, respectively, in the form of 3.25% fixed – floating subordinated debt with a ten-year maturity and junior subordinated debentures totaling $35.3 million at both March 31, 2022 and December 31, 2021, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

OTHER NONINTEREST BEARING LIABILITIES

Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts.

The Company’s balance of other liabilities was $80.6 million at September 30, 2021 as compared to $35.1 million at December 31, 2020.

The $45.5 million increase in the first nine months of 2021 was attributed to a forward settling investment securities accrual.

The Company’s balance of other liabilities was $36.0 million at March 31, 2022 as compared to $35.6 million at December 31, 2021.

LIQUIDITY AND MARKET RISK MANAGEMENT

5 unchanged sentences

To meet these short-term needs, we can borrow overnight funds from other financial institutions, draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources.

At September 30, 2021 and December 31, 2020, the Company had the following sources of primary and secondary liquidity ($ in thousands):

At March 31, 2022 and December 31, 2021, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

Primary and secondary liquidity sources

September 30, 2021

March 31, 2022

December 31, 2021

6 unchanged sentences

In addition to the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market.

The significant increase in cash and cash equivalents during 2021 is due mostly to continued deposit growth coupled with decreases in loans, but partially offset by increases in investments.

Utilization of this excess liquidity is expected to

come from a combination of new loans, including loan purchases, and new investment purchases.

Cash and cash equivalents during the first three months of 2022, declined $4.0 million due to increases in investment securities.

Utilization of remaining excess liquidity is expected to come from a combination of new loans, including loan purchases, and new investment purchases.

In addition, it is possible that a portion of the deposits built-up during the COVID-19 pandemic could be withdrawn by customers.

3 unchanged sentences

The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $100 million at September 30, 2021 and December 31, 2020.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at March 31, 2022 and December 31, 2021.

Other sources of liquidity include the brokered deposit market, deposit listing services, and the ability to offer local time-deposit campaigns.

Management is of the opinion that available investments and other potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs and that its liquidity has not been adversely impacted by COVID-19.

The Company’s net loans to assets and available investments to assets ratios were 62.08% and 28.57%, respectively, at September 30, 2021, as compared to internal policy guidelines of “less than 78%” and “greater than 3%.” Other liquidity ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to total assets, including ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at September 30, 2021.

The Company’s primary liquidity ratio and net loans to deposits were 40.43% and 69.19%, respectively, at March 31, 2022, as compared to internal policy guidelines of “greater than 15%” and “less than 95%.” Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at March 31, 2022, are also periodically reviewed by Management and the Board.

The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current strong levels.

The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, interest on trust preferred securities and subordinated debt, shareholder dividends, and share repurchases.

Its primary source of funds is dividends from the Bank, since the holding company does not conduct regular banking operations, however the holding company did raise $50 million in cash from the issuance of subordinated debt in the third quarter of 2021.

As of September 30, 2021, the holding company maintained a cash balance of $53.7 million, but expects to contribute $25.0 million in capital to the Bank in the fourth quarter of 2021.

Management anticipates that with the available cash on hand remaining after the capital infusion to the Bank, the holding company still has sufficient liquidity to meet its funding requirements for the foreseeable future.

Its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations.

As of March 31, 2022, the holding company maintained a cash balance of $11.6 million.

Management anticipates that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future.

Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 which was filed with the SEC.

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The Company had the following estimated net interest income sensitivity profiles over one-year, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Immediate change in Interest Rates (basis points)

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$ Change in Net Interest Income

For the period ended September 30, 2021, management believes that the Company was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining considerably in the down shocks.

For period ended September 30, 2020, management believed that the Company was generally asset sensitive, with overall sensitivity declining with larger rate shocks and declining overall in the down shock and up 400 basis point shock.

The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at September 30, 2021 as compared to September 30, 2020, is due mostly to the level of overnight cash held as an interest bearing deposit at the Federal Reserve Bank.

At September 30, 2021, the Company had $356.2 million in overnight cash with the Federal Reserve Bank compared to $3.5 million at September 30, 2020.

As this cash is held overnight, any change in interest rate in the model would increase the yield on such overnight cash immediately, therefore, increasing the Company’s asset sensitivity.

The simulation for the period ending September 30, 2021 indicates that the Company’s net interest income will increase over the next 12 months in a rising rate environment in all scenarios, but a continued drop in interest rates could have a substantial negative impact.

As described above, the rate of increase is significantly greater than the September 30, 2020 scenario due to considerably more cash on hand, and to a lesser extent the impact of interest rate increases on loans with variable and adjustable-rate characteristics.

In the up 400 basis point shock scenario, expected net interest income over the next twelve months increases $17.4 million, or 16%, to $125.5 million at September 30, 2021 compared to a 0.4% decrease or $0.4 million for the same period in 2020.

The reason that the modeled asset level of asset sensitivity declined at September 30, 2020 with each increase in the parallel rate shock is because of the level of overnight borrowing at such date.

With each subsequently larger rate shock, the cost of overnight borrowing increased more than the modeled increase in earning asset rates which caused the level of sensitivity to decline as the rate shocks increased in magnitude at September 30, 2020.

Over the next twelve months, surplus cash is projected to decline due to expected earning asset purchases and core loan growth as our pipelines begin to increase.

For the periods ending March 31, 2022 and March 31, 2021, management believes that the Company was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining considerably in the down shocks.

The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at March 31, 2022 as compared to March 31, 2021, is due primarily to the change in the structure of the balance sheet with the addition of $392.4 million in variable rate collateralized loan obligations and cash on hand of $253.5 million.

In the up 400 basis point shock scenario, expected net interest income over the next twelve months increases $14.3 million, or 13%, to $122.05 million at March 31, 2022 compared to a 7.2% increase or $7.7 million for the same period in 2021.

Over the next twelve months, $253.5 million in surplus cash is projected to decline due to expected core loan growth as our pipelines begin to increase with the addition of several loan teams and the opening of the Templeton LPO mentioned earlier.

Further, a portion of the significant increase in deposits during the COVID-19 pandemic could be withdrawn by customers.

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If there was an immediate downward adjustment, it is anticipated that interest income would decline.

The reason for the drop in net interest income is because most deposit products are at or below their modeled floors of 0.10% and cannot be re-priced lower, while non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment.

The reason for the drop in net interest income is because many deposit products are at or below their modeled floors of 0.15% or 0.20 % and cannot be re-priced lower, while non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment.

Due to the historically low current rate environment, we view any material interest rate reductions as unlikely in the near term.

However, the potential percentage drop in net interest income in the “down 100 basis points” interest rate scenario exceeds our internal policy guidelines and we will continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate.

If there was an immediate downward adjustment of 100 basis points in interest rates, net interest income would drop $8.3 million or a negative variance of 8%.

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The modeled economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed.

The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate fluctuations.

interest rate fluctuations.

Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at anticipated replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios.

An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time, as is evident in the tables below for the periods ending September 30, 2021 and 2020, respectively, as the Company’s balance sheet evolves and interest rate and yield curve assumptions are updated.

An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time, as is evident in the tables below for the periods ending March 31, 2022 and 2021, respectively, as the Company’s balance sheet evolves and interest rate and yield curve assumptions are updated.

The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity.

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In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates.

Our EVE increased in the past twelve months due to asset and deposit growth.

Our EVE decreased in the past twelve months due to asset composition changes.

The tables below show estimated changes in the Company’s EVE as modeled under different interest rate scenarios relative to a base case of current interest rates:

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Immediate change in Interest Rates (basis points)

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The rate of increase in EVE accelerates the higher interest rates rise.

This increase in sensitivity is caused by the increase in gross deposits, namely, an increase in noninterest bearing deposits.

This increase in sensitivity is caused by the increase in gross deposits, namely, an increase in noninterest bearing deposits which become more valuable as interest rates rise.

We also run stress scenarios for the unconsolidated Bank’s EVE to simulate the possibility of adverse movement in loan prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates.

Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular, with material unfavorable variances occurring relative to the standard simulations shown above as decay rates are increased.

Furthermore, while not as

extreme as the variances produced by increasing non-maturity deposit decay rates, EVE also displays a relatively high level of sensitivity to unfavorable changes in deposit rate betas in rising interest rate scenarios.

Furthermore, while not as extreme as the variances produced by increasing non-maturity deposit decay rates, EVE also displays a relatively high level of sensitivity to unfavorable changes in deposit rate betas in rising interest rate scenarios.

CAPITAL RESOURCES

The Company had total shareholders’ equity of $364.5 million at September 30, 2021, comprised of $114.1 million in common stock, $3.7 million in additional paid-in capital, $231.7 million in retained earnings, and accumulated other comprehensive income of $15.0 million.

The Company had total shareholders’ equity of $325.7 million at March 31, 2022, comprised of $111.7 million in common stock, $4.3 million in additional paid-in capital, $227.4 million in retained earnings, and accumulated other comprehensive loss of $17.7 million.

At the end of 2021, total shareholders’ equity was $362.5 million.

The increase during the first nine months of 2021 is due to the addition of capital from net income, stock options exercised and restricted stock accrued.

These positive changes were partially offset by a $3.4 million unfavorable swing in accumulated other comprehensive income, net and the impact of cash dividends paid.

The decrease in equity during the first quarter of 2022 is due to net income of $7.4 million, offset by a $3.5 million dividend paid to shareholders, $4.9 million in share repurchases, a $28.9 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities' fair value and a $7.3 million decrease in retained earnings due to the cumulative effect of a change in accounting principal from the implementation of CECL, topic 326.

The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

The Company approved a new share repurchase program (the 2021 Share Repurchase Plan) on October 21, 2021 and authorized one million shares to be repurchased under this plan.

The previous 2003 Share Repurchase Plan was cancelled and the 268,301 shares remaining in that plan were incorporated into the 2021 Share Repurchase Plan.

No shares have been repurchased year-to-date under either plan.

were 182,562 shares repurchased in the first quarter of 2022, with 630,000 shares remaining to be repurchased under the 2021 Share Repurchase Plan.

The Company uses a variety of measures to evaluate its capital adequacy, including the leverage ratio which is calculated separately for the Company and the Bank.

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Regulatory Capital Ratios

September 30,

Community Bank

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Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") (3)

(1) The minimum required Community Bank Leverage Ratio is 9.00%, but the CARES Act temporarily lowers this to 8.5% as described below.

Sierra Bancorp

Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") (3)

(1) The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.

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The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s Leverage Ratio falls below the minimum under the Community Bank Leverage Ratio Framework.

(3) The Company has elected to phase in the impact of implementing CECL on regulatory capital over a three-year period.

The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital adequacy for qualifying community banking organizations.

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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-Q

Item 2. Management’s Discussion and Analysis