What changed in this filing

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Item 1. Financial Statements

2022-08-04 compared with 2022-05-05 · 264 added, 151 removed, 824 unchanged (33% of the section changed)

3 unchanged sentences

(dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

2 unchanged sentences

Total cash & cash equivalents

Investment securities available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2022 and December 31, 2021)

Investment securties

Available-for-sale, at fair value (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021)

Held-to-maturity, at amortized cost (fair value of $ 147,147 at June 30, 2022 and $ 0 at December 31, 2021)

Allowance for credit losses on held-to-maturity securities

Net, investment securities held-to-maturity

Loans and leases:

21 unchanged sentences

24,000,000 shares authorized;

15,086,032 and 15,270,010 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

15,090,792 and 15,270,010 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

6 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(dollars in thousands, except per share data, unaudited)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

Interest and dividend income

9 unchanged sentences

Net interest income

Provision for credit losses on loans and leases

Provision (benefit) for credit losses on loans and leases

Benefit for credit losses on unfunded loan commitments

Provision for credit losses on held-to-maturity securities

Net interest income after provision for credit losses

19 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(dollars in thousands, unaudited)

Three months ended March 31,

Other comprehensive loss, before tax:

Unrealized gains on securities:

Unrealized holding loss arising during period

Three months ended June 30,

Six months ended June 30,

Other comprehensive (loss) income, before tax:

Unrealized (loss) gains on securities:

Unrealized holding (loss) gain arising during period

reclassification adjustment for gains included in net income (1)

Other comprehensive loss, before tax

Income tax benefit related to items of other comprehensive loss, net of tax

Other comprehensive loss

Other comprehensive (loss) gain, before tax

Income tax benefit (income) related to items of other comprehensive (loss) income, net of tax

Other comprehensive (loss) income, before tax:

Comprehensive (loss) income

(1) Amounts are included in net gains on investment securities available-for-sale on the Consolidated Statements of Income in noninterest income.

Income tax expense associated with the reclassification adjustment for the three months ended March 31, 2022 and 2021 was $ 305 thousand and $ 0 respectively.

There was no income tax expense associated with the reclassification adjustment for either of the three months ended June 30, 2022 and 2021 .

Income tax expense associated with the reclassification adjustment for the six months ended June 30, 2022 and 2021 were $ 305 thousand and $ 0 , respectively.

The accompanying notes are an integral part of these consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

(dollars in thousands, except per share data, unaudited)

2 unchanged sentences

Income (Loss)

Balance, December 31 2020

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Balance, March 31, 2021

Other comprehensive income, net of tax

Stock compensation costs

Cash dividends - $ 0.21 per share

Balance, June 30, 2021

Balance, March 31, 2022

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Restricted stock forfeited / cancelled

Stock based compensation - stock options

Stock based compensation - restricted stock

Cash dividends - $ 0.23 per share

Balance, June 30, 2022

The accompanying notes are an integral part of these consolidated financial statements.

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(dollars in thousands, except per share data, unaudited)

Comprehensive

Shareholders'

Income (Loss)

Balance, December 31, 2020

Cumulative effect of change in accounting principle (Note 3)

Other comprehensive loss, net of tax

Exercise of stock options

Stock based compensation expense

Cash dividends - $ 0.42 per share

Balance, June 30, 2021

Balance, December 31, 2021

Cumulative change in accounting principle

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Restricted stock surrendered due to employee tax liability

4 unchanged sentences

Cash dividends - $ 0.46 per share

Balance, March 31, 2022

Balance, June 30, 2022

The accompanying notes are an integral part of these consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(dollars in thousands, unaudited)

Three months ended March 31,

Six months ended June 30,

Cash flows from operating activities:

5 unchanged sentences

Stock based compensation expense

Provision for credit losses on loans and leases

Provision (benefit) for credit losses on loans and leases

Provision for credit losses on held-to-maturity securities

Depreciation and amortization

4 unchanged sentences

(Increase) decrease in interest receivable and other assets

Decrease in other liabilities

Deferred income tax benefit (provision)

Increase (decrease) in other liabilities

Deferred income tax benefit

Decrease (increase) in value of restricted bank equity securities

6 unchanged sentences

Principal pay downs on securities available for sale

Net purchases of FHLB stock

Loan originations and payments, net

3 unchanged sentences

Liquidation of bank-owned life insurance

Proceeds from BOLI death benefit

Amortization of debt issuance costs

3 unchanged sentences

Decrease in borrowed funds

Increase in repurchase agreements

Increase in customer repurchase agreements

Cash dividends paid

8 unchanged sentences

Interest paid

Income taxes paid

Supplemental noncash disclosures:

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 2022

Note 1 – The Business of Sierra Bancorp

2 unchanged sentences

The Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish.

As of March 31, 2022, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”).

As of June 30, 2022, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”).

Pursuant to the Financial Accounting Standards Board (“FASB”) standard on the consolidation of variable interest entities, these trusts are not reflected on a consolidated basis in the Company’s financial statements.

5 unchanged sentences

As of the filing date of this report the Bank operates 35 full-service branches and an online branch, and maintains ATMs at all but one of our branch locations as well as seven non-branch locations.

Moreover, the Bank has specialized lending units which focus on agricultural borrowers, SBA loans, and mortgage warehouse lending.

Moreover, the Bank has specialized lending units which focus on agricultural borrowers, commercial real estate, and mortgage warehouse lending.

In addition, in February 2020 the bank opened a loan production office which is currently located in Roseville, CA.

To support organic growth in the agricultural lending sector the bank also opened a loan production office in Templeton, CA in April 2022.

The Company had total assets of $ 3.4 billion at March 31, 2022, and for a number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley.

The Bank’s deposit accounts, which totaled $ 2.9 billion at March 31, 2022, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

The Company had total assets of $ 3.4 billion at June 30, 2022, and for a number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley.

The Bank’s deposit accounts, which totaled $ 2.9 billion at June 30, 2022, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by U.S.

generally accepted accounting principles (“GAAP”) for complete financial statements.

The accompanying interim unaudited consolidated financial statements have been prepared in a condensed format as allowed under U.S.

generally accepted accounting principles (“GAAP”).

Therefore these financial statements do not include all of the information and footnotes required for complete, audited financial statements as presented in the Company’s Annual Report on Form 10-K.

The information furnished in these interim statements reflects all adjustments that are, in the opinion of Management, necessary for a fair statement of the results for such periods.

7 unchanged sentences

Measurement of Credit Losses on Financial Instruments , which eliminates the probable initial recognition threshold for credit losses in current U.S.

GAAP, and instead requires an organization to record a current estimate of all expected credit losses over the contractual term for financial assets carried at amortized cost (generally loans and held-to-maturity investment securities) in addition to certain off balance-sheet credit exposure.

Under the current expected credit losses (“CECL”)

methodology expected credit losses for financial assets are estimated over the contractual life of the financial asset, adjusted for expected prepayments, considering historical experience, current conditions, and reasonable and supportable forecasts.

GAAP, and instead requires an organization to record a current estimate of all expected credit losses over

the contractual term for financial assets carried at amortized cost (generally loans and held-to-maturity investment securities) in addition to certain off balance-sheet credit exposure.

Under the current expected credit losses (“CECL”) methodology expected credit losses for financial assets are estimated over the contractual life of the financial asset, adjusted for expected prepayments, considering historical experience, current conditions, and reasonable and supportable forecasts.

Additionally, under CECL the accounting for credit losses on available-for-sale debt securities is addressed through an allowance for credit losses which is a change from legacy GAAP which previously required the direct write-down of securities through the other-than-temporary impairment approach.

1 unchanged sentence

The January 1, 2022, increase in the Company’s allowance for credit losses, of $ 9.5 million on loans and leases and $ 0.9 million in off balance sheet credit exposures, net of the impact of deferred taxes, was reflected in a transition adjustment of $ 7.3 million to retained earnings.

There was no cumulative effect adjustment related to our available-for-sale investment portfolio upon adoption.

There was no cumulative effect adjustment related to our available-for-sale investment portfolio upon adoption and the company had no securities designated as held-to-maturity as of January 1, 2022.

Results for reporting periods beginning after December 31, 2021, are presented under CECL whereas prior comparative periods are presented under legacy GAAP.

24 unchanged sentences

Notably, the Company elected the practical expedient available under CECL to exclude accrued interest receivable from the amortized cost basis of all categorizations of loans and investment securities, and resultingly did not estimate reserves on accrued interest receivable balances, as any past due interest income is reversed on a timely basis.

Accrued interest receivable continues to be included in other assets on the Company’s balance sheet and as of March 31, 2022, measured at $ 4.8 million and $ 6.7 million for available-for-sale securities and loans, respectively.

Accrued interest receivable continues to be included in other assets on the Company’s balance sheet and as of June 30, 2022, measured at $ 6.0 million, $ 0.8 million and $ 5.4 million for available-for-sale securities, held-to-maturity securities and

loans, respectively.

During 2022 no accrued interest receivable on loans or available for sale investment securities was reversed against interest income.

For available-for-sale debt securities in an unrealized loss position for which management has an intent to sell the security, or considers it more likely-than-not that the security in question will be sold prior to a recovery of its amortized cost basis, the security will be written down to fair value through a direct charge to income.

For the remainder of available sale debt securities in an unrealized loss position, which don’t meet the previously outlined criteria, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors.

In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in rating by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization.

If management’s evaluation indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for credit loss (“ACL”) is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between the fair value and amortized cost balance of the security in question.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

Similar to practice under legacy GAAP, the Company generally continues to place loans and leases on nonaccrual status when management has determined that the full repayment of principal and collection of contractually agreed upon interest is unlikely or when the loan in question has become delinquent more than 90 days.

19 unchanged sentences

The Company’s policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans and leases evaluated collectively and as such, all nonaccrual loans and leases are individually evaluated for reserves.

of March 31, 2022 the Bank’s nonaccrual loans and leases comprised the entire population of loans and leases individually evaluated.

As of June 30, 2022 the Bank’s nonaccrual loans and leases comprised the entire population of loans and leases individually evaluated.

The Company’s policy is that nonaccrual loans also represent the subset of loans and leases where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if the nonaccrual loan and lease should be categorized as collateral dependent.

1 unchanged sentence

The implementation of CECL also impacted the Company’s ACL on unfunded loan commitments, as this ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company.

The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment.

The funding rate represents management’s estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data.

1 unchanged sentence

Prior period expense has been reclassified for comparative purposes.

For available-for-sale debt securities in an unrealized loss position for which management has an intent to sell the security or considers it more likely-than-not that the security in question will be sold prior to a recovery of its amortized cost basis, the security will be written down to fair value through a direct charge to income.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

On April 1, 2022 the Company transferred $ 162.1 million of Agency, Mortgaged-Backed and Municipal securities from available-for-sale to held-to maturity.

Because of the implicit and explicit guarantees of the Federal Government on the Agency and Mortgage-Backed securities there is no expectation of future losses on any of these securities.

The Bank’s municipal bonds moved to the held-to-maturity designation all have credit ratings considered investment grade or equivalent.

A discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and a reserve of $ 0.02 million was calculated and charged to provision expense.

Note 4 – Share Based Compensation

1 unchanged sentence

The 2017 Plan replaced the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017.

Options to purchase 172,689 shares that were granted under the 2007 Plan were still outstanding as of March 31, 2022 and remain unaffected by that plan’s expiration.

Options to purchase 172,489 shares that were granted under the 2007 Plan were still outstanding as of June 30, 2022 and remain unaffected by that plan’s expiration.

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

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

The total number of shares of the Company’s authorized but unissued stock reserved for issuance pursuant to awards under the 2017 Plan was initially 850,000 shares, and the number remaining available for grant as of March 31, 2022 was 417,320 .

Options to purchase 436,418 shares granted under the 2017 Plan were outstanding as of March 31, 2022.

Options to purchase 382,311 shares granted under the 2017 Plan were outstanding as of June 30, 2022.

The potential dilutive impact of unexercised stock options is discussed below in Note 5, Earnings per Share.

2 unchanged sentences

Forfeitures are reflected in compensation costs as they occur for both types of awards.

A pre-tax charge of $ 0.4 million was reflected in the Company’s income statement during the first quarter of 2022 and $ 0.2 million was charged during the first quarter of 2021, as expense related to stock options and restricted stock awards.

A pre-tax charge of $ 0.3 million was reflected in the Company’s income statement during the second quarter of 2022 and $ 0.2 million was charged during the second quarter of 2021, as expense related to stock options and restricted stock awards.

For the first half, the charges totaled $ 0.7 million in 2022 and $ 0.5 million in 2021.

Restricted Stock Grants

3 unchanged sentences

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

There were no shares granted to employees and directors of the Company during the first three months of 2022.

There were no shares granted to employees and directors of the Company during the first six months of 2022.

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

As of March 31, 2022, there was $ 2.6 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan.

As of June 30, 2022, there was $ 2.3 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan.

That cost is expected to be amortized over a weighted average period of 2.8 years.

The Company’s time-vested award activity for the three months ended March 31, 2022 and 2021 is summarized below (unaudited):

Three months ended March 31,

The Company’s time-vested award activity for the six months ended June 30, 2022 and 2021 is summarized below (unaudited):

Six months ended June 30,

Weighted Average Grant-Date Fair Value

1 unchanged sentence

Unvested shares, January 1,

Unvested shares March 31,

Unvested shares, June 30,

Stock Option Grants

1 unchanged sentence

The exercise price of each stock option is determined at the time of the grant and may be no less than 100 % of the fair market value of such stock at the time the option is granted.

The Company’s stock option activity during the three months ended March 31, 2022 and 2021 are summarized below (dollars in thousands, except per share data, unaudited):

Three months ended March 31,

The Company’s stock option activity during the six months ended June 30, 2022 and 2021 are summarized below (dollars in thousands, except per share data, unaudited):

Six months ended June 30,

Weighted Average

5 unchanged sentences

Outstanding at January 1,

Outstanding at March 31,

Exercisable at March 31,

(1) The aggregate intrinsic value of stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2022.

Forfeited/Expired

Outstanding at June 30,

Exercisable at June 30,

This amount changes based on changes in the market value of the Company's stock.

1 unchanged sentence

The computation of earnings per share, as presented in the Consolidated Statements of Income, is based on the weighted average number of shares outstanding during each period, excluding unvested restricted stock awards.

There were 15,021,138 weighted average shares outstanding during the first quarter of 2022 and 15,241,190 during the first quarter of 2021.

There were 14,931,701 weighted average shares outstanding during the second quarter of 2022 and 15,243,698 during the second quarter of 2021, while there were 14,976,774 weighted average shares outstanding during the first six months of 2022 and 15,242,451 during the first six months of 2021.

Diluted earnings per share calculations include the effect of the potential issuance of common shares, which for the Company is limited to shares that would be issued on the exercise of “in-the-money” stock options, and unvested restricted stock awards.

For the first quarter of 2022, calculations under the treasury stock method resulted in the equivalent of 72,316 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 354,612 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the first quarter of 2021 the equivalent of 114,700 shares were added in calculating diluted earnings per share, while 351,827 anti-dilutive stock options were not factored into the computation.

For the second quarter of 2021 the equivalent of 132,127 shares were added in calculating diluted earnings per share, while 335,481 anti-dilutive stock options were not factored into the computation.

Likewise, for the first half of 2022 the equivalent of 87,030 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 303,543 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 123,515 shares and non-inclusion of 345,748 anti-dilutive options in calculating diluted earnings per share for first half of 2021.

Note 6 – Comprehensive Income (Loss)

9 unchanged sentences

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

March 31, 2022

June 30, 2022

December 31, 2021

11 unchanged sentences

Standby letters of credit are issued by the Company to guarantee the performance of a customer to a third party, and the credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers.

At March 31, 2022, the Company was also utilizing a letter of credit in the amount of $ 128.6 million issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers.

At June 30, 2022, the Company was also utilizing a letter of credit in the amount of $ 128.6 million issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers.

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

7 unchanged sentences

Certain individually identified loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value.

FASB’s standard on financial

instruments permits companies to report certain other financial assets and liabilities at fair value, but the Company has not elected the fair value option for any of those financial instruments.

FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but the Company has not elected the fair value option for any of those financial instruments.

Fair value measurement and disclosure standards also establish a framework for measuring fair values.

12 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

Fair Value Measurements

5 unchanged sentences

Investment securities available-for-sale

Investment securities held-to-maturity

Loans and leases, net held for investment

18 unchanged sentences

Subordinated debentures

For financial asset categories that were carried on our balance sheet at fair value as of March 31, 2022 and December 31, 2021, the Company used the following methods and significant assumptions:

For financial asset categories that were carried on our balance sheet at fair value as of June 30, 2022 and December 31, 2021, the Company used the following methods and significant assumptions:

● Investment securities :

4 unchanged sentences

Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower of cost or fair value.

Fair value is the appraised value less expected disposition costs for OREO;

Fair value is the appraised value less expected disposition

costs for OREO;

fair values for any other foreclosed assets are represented by estimated sales proceeds as determined using reasonably available sources.

5 unchanged sentences

(dollars in thousands, unaudited)

Fair Value Measurements at March 31, 2022, using

Fair Value Measurements at June 30, 2022, using

Quoted Prices in

23 unchanged sentences

Transfers out of Level 3

Balance of recurring Level 3 assets at March 31,

All of the Company’s collateralized loan obligations with a fair value of $ 195.7 million as of January 1, 2022 were transferred from Level 3 to Level 2 because observable market data became available due to a significant increase in trading volume for these securities in the first quarter of 2022.

Balance of recurring Level 3 assets at June 30,

All of the Company’s collateralized loan obligations with a fair value of $ 195.7 million as of January 1, 2022 were transferred from Level 3 to Level 2 during the first quarter of 2022 because observable market data became available due to a significant increase in trading volume for these securities during that time.

Assets reported at fair value on a nonrecurring basis are summarized below:

1 unchanged sentence

(dollars in thousands, unaudited)

Fair Value Measurements at March 31, 2022, using

Fair Value Measurements at June 30, 2022, using

Quoted Prices in

42 unchanged sentences

Investment Securities

Although the Company currently has the intent and the ability to hold the securities in its investment portfolio to maturity, 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.

Pursuant to FASB’s guidance on accounting for debt securities, available for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’ equity.

The amortized cost and estimated fair value of available-for-sale investment securities are as follows:

Held-to-maturity securities are carried on the Company’s financial statements at their amortized cost, net of the allowance for credit losses.

The amortized cost, estimated fair value, and allowance for credit losses of available-for-sale and held-to-maturity investment securities are as follows:

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)

March 31, 2022

Allowance for Credit Losses - AFS Securities

June 30, 2022

Allowance for Credit Losses

Estimated Fair

Available-for-sale

government agencies

3 unchanged sentences

Collateralized loan obligations

Total securities

Total available-for-sale securities

Estimated Fair

Allowance for Credit Losses

Held-to-maturity

government agencies

Mortgage-backed securities

State and political subdivisions

Total held-to-maturity securities

December 31, 2021

Allowance for Credit Losses

Estimated Fair

Available-for-sale

government agencies

4 unchanged sentences

Total securities

The Company did not record an ACL on the AFS portfolio at March 31, 2022 or upon implementation on January 1, 2022.

The Company reassessed classification of certain investments and effective April 1, 2022 the Company transferred $ 162.1 million of Agency, Mortgaged-Backed and Municipal securities from available-for-sale to held-to-maturity securities.

The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income.

The related unrealized loss of $ 11.5 million included in other comprehensive income remained in other comprehensive income, to be amortized out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities.

Subsequent to transfer, a discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and a allowance for credit losses of $ 0.02 million was calculated and charged to provision for credit loss expense.

The Company did not have any securities classified as held-to-maturity as of December 31, 2021.

The Company did not record an ACL on the AFS portfolio at June 30, 2022 or upon the implementation of CECL on January 1, 2022.

As of both dates the Company considers the unrealized loss across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value in any case.

The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both January 1, 2022 and March 31, 2022 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold.

The following bullets outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of January 1, 2022 and March 31, 2022 was attributable to credit deterioration and a risk of loss, requiring a reserve.

The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both January 1, 2022 and June 30, 2022 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold.

The following bullets outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of January 1, 2022 and June 30, 2022 was attributable to credit deterioration and a risk of loss, requiring a allowance for credit losses.

● US Government Agencies are supported by the full faith and credit-worthiness of the U.S.

Federal Government and the management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or March 31, 2022.

Federal Government and the management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or June 30, 2022.

● Mortgage-backed securities issued by government sponsored entities (“GSEs”) carry an implicit guarantee by the U.S.

1 unchanged sentence

Federal Government up to a limit, with an implied ability to draw funds beyond the limit.

Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or March 31, 2022.

● Management routinely monitors third party credit grades of the municipal issuers in the Company’s state and political subdivisions portfolio and as of both January 1, 2022 and March 31, 2022 noted that all municipal securities in an unrealized loss position were either investment grade rated or guaranteed.

Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or June 30, 2022.

● Management routinely monitors third party credit grades of the municipal issuers in the Company’s state and political subdivisions portfolio and as of both January 1, 2022 and June 30, 2022 noted that all municipal securities in an unrealized loss position were either investment grade rated or guaranteed.

On a quarterly basis management receives financial information from a third-party service related to underlying issuer’s financial stability.

In addition, management performs annual reviews of the underlying municipal issuers financial statements in order to evaluate stability and repayment capacity and has noted no concerns with any of the bonds in the Company’s State and Local portfolio.

As of both January 1, 2022 and March 31, 2022 management concluded that no reserve was warranted on any of the Company’s municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.

As of both January 1, 2022 and June 30, 2022 management concluded that no allowance for credit losses was warranted on any of the Company’s municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.

● The Company has invested in corporate debt issuances of other financial institutions.

Various financial metrics of each of the issuing financial institutions are reviewed by management quarterly, these metrics include credit quality, reserve adequacy, capital, profitability and capital.

Following review of the financial metrics available for each of the underlying institutions as of January 1, 2022 and March 31, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution.

● The Company has invested in AA and AAA tranches of various collateralized debt obligations, which are securitizations of commercial loans.

Following review of the financial metrics available for each of the underlying institutions as of January 1, 2022 and June 30, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution.

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 Company has invested exclusively in AA and AAA tranches of various collateralized debt obligations, which are securitizations of commercial loans.

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.

Management monitors the credit rating of these investments on a quarterly basis in addition to various performance metrics available through a third-party informational service.

Following review of financial metrics as of both January 1, 2022 and March 31, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rate spreads, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

At March 31, 2022 and December 31, 2021, the Company had 568 securities and 98 securities, respectively, with gross unrealized losses.

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.

Following review of financial metrics as of both January 1, 2022 and June 30, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest

rate spreads, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

At June 30, 2022 and December 31, 2021, the Company had 961 securities and 98 securities, respectively, with gross unrealized losses.

Gross unrealized losses on our investment securities as of the indicated dates are disclosed in the table below, categorized by investment type and by the duration of time that loss positions on individual securities have continuously existed (over or under twelve months).

1 unchanged sentence

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

Less than twelve months

Twelve months or more

Available-for-sale

government agencies

3 unchanged sentences

Collateralized loan obligations

Total available-for-sale

June 30, 2022

Less than twelve months

Twelve months or more

Held-to-maturity

government agencies

Mortgage-backed securities

State and political subdivisions

Total held-to-maturity

December 31, 2021

1 unchanged sentence

Twelve months or more

Available-for-sale

government agencies

3 unchanged sentences

Collateralized loan obligations

Total available-for-sale

The table below summarizes the Company’s gross realized gains and losses as well as gross proceeds from the sales of securities, for the periods indicated:

1 unchanged sentence

(dollars in thousands, unaudited)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

Proceeds from sales, calls and maturities of securities available for sale

2 unchanged sentences

Net gains on sale of securities available for sale

The amortized cost and estimated fair value of investment securities available-for-sale at March 31, 2022 and December 31, 2021 are shown below, grouped by the remaining time to contractual maturity dates.

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at June 30, 2022 and December 31, 2021 are shown below, grouped by the remaining time to contractual maturity dates.

The expected life of investment securities may not be consistent with contractual maturity dates since the issuers of the securities might have the right to call or prepay obligations with or without penalties.

1 unchanged sentence

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

Available-for-Sale

Held-to-Maturity

Amortized Cost

Maturing within one year

6 unchanged sentences

December 31, 2021

Available-for-Sale

Held-to-Maturity

Amortized Cost

Maturing within one year

5 unchanged sentences

Collateralized loan obligations

At March 31, 2022, the Company’s investment portfolio included 400 “muni” bonds issued by 334 different government municipalities and agencies located within 33 different states, with an aggregate fair value of $ 286.4 million.

The largest exposure to any single municipality or agency was a combined $ 4.0 million (fair value) in general obligation bonds issued by the Alvin Independent School District of Brazoria County (TX).

At June 30, 2022, the Company’s investment portfolio included 442 “muni” bonds issued by 368 different government municipalities and agencies located within 34 different states, with an aggregate fair value of $ 299.7 million.

The largest exposure to any single municipality or agency was a combined $ 5.7 million (fair value) in general obligation bonds issued by the City of New York (NY).

In addition, the Company owned 40 subordinated debentures issued by bank holding companies totaling $ 46.5 million (fair value).

At December 31, 2021, the Company’s investment portfolio included 403 “muni” bonds issued by 335 different government municipalities and agencies located within 33 states, with an aggregate fair value of $ 304.3 million.

The largest exposure to any single municipality or agency was $ 4.0 million (fair value) in three bonds issued by the Charter Township of Washington.

In addition, the company owned 23 subordinated debentures issued by bank holding companies totaling $ 28.5 million (fair value).

The Company’s investments in bonds issued by corporations, states, municipalities and political subdivisions are evaluated in accordance with Financial Institution Letter 48-2012, issued by the FDIC, “Revised Standards of Creditworthiness for Investment Securities,” and other regulatory guidance.

4 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

8 unchanged sentences

Total obligations of states and political subdivisions

The revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as utilities (water, sewer, and power), educational facilities, and general public and economic improvements.

economic improvements.

The primary sources of revenue for these bonds are delineated in the table below, which shows the amortized cost and fair market values for the largest revenue concentrations as of the indicated dates.

1 unchanged sentence

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

1 unchanged sentence

Revenue source:

Sales tax revenue

Intergovernmental agreement

Other (9 and 9 sources, respectively)

4 unchanged sentences

Because rent levels are lower than standard market rents and the projects are generally highly leveraged, each project also typically generates tax-deductible operating losses that are allocated to the limited partners for tax purposes.

The Company currently has investments in two different LIHTC fund limited partnerships made in 2014 and 2015, both of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act.

The Company currently has investments in three different LIHTC fund limited partnerships made in 2014, 2015, and 2022, all of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act.

We utilize the cost method of accounting for our LIHTC fund investments, under which we initially record on our balance sheet an asset that represents the total cash expected to be invested over the life of the partnership.

1 unchanged sentence

The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on a straight-line basis as an offset to noninterest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of March 31, 2022, our total LIHTC investment book balance was $ 2.8 million, which includes $ 0.1 million in remaining commitments for additional capital contributions.

There were $ 0.1 million in tax credits derived from our LIHTC investments that were recognized during the three months ended March 31, 2022, and amortization expense of $ 0.1 million associated with those investments was netted against pre-tax noninterest income for the same time period.

As of June 30, 2022, our total LIHTC investment book balance was $ 7.7 million, which includes $ 5.1 million in remaining commitments for additional capital contributions.

There were $ 0.3 million in tax credits derived from our LIHTC investments that were recognized during the six months ended June 30, 2022, and amortization expense of $ 0.2 million associated with those investments was netted against pre-tax noninterest income for the same time period.

Our LIHTC investments are evaluated annually for potential impairment, and we have concluded that the carrying value of the investments is stated fairly and is not impaired.

As of December 31, 2021, our total LIHTC investment book balance was $ 2.9 million, which includes $ 0.1 million in remaining commitments for additional capital contributions.

There were $ 0.5 million in tax credits derived from our LIHTC investments that were recognized during the year ended December 31, 2022, and amortization expense of $ 0.5 million associated with those investments was netted against pre-tax noninterest income for the same time period.

Note 10 – Loans and Leases and Allowance for Credit Losses

We adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of January 1, 2022.

Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current guidance and have not been included below as of March 31, 2022.

Under CECL, disclosures are required on the amortized cost basis, whereas legacy GAAP required presentation on the recorded investment basis, with the primary difference being net deferred fees and costs.

Unless specifically noted otherwise, March 31, 2022 disclosures are prepared on the amortized cost basis and December 31, 2021 disclosures present information according to the recorded investment basis.

The following table presents loans by class as of March 31, 2022 and December 31, 2021.

Accrued interest receivable on loans of $ 6.7 million and $ 6.8 million at March 31, 2022 and December 31, 2021 respectively is not included in the loans included in the table below but is included in other assets on the Company’s balance sheet.

The March 31, 2022, balance in 1-4 family closed end loans reflects first quarter 2022 purchase of $ 125.2 million.

Unless specifically noted otherwise,

June 30, 2022 disclosures are prepared on the amortized cost basis and December 31, 2021 disclosures present information according to the recorded investment basis.

The following table presents loans by class as of June 30, 2022 and December 31, 2021.

Accrued interest receivable on loans of $ 5.4 million and $ 6.8 million at June 30, 2022 and December 31, 2021 respectively is not included in the loans included in the table below but is included in other assets on the Company’s balance sheet.

The June 30, 2022, balance in 1-4 family closed end loans reflects year-to-date 2022 loan purchase of $ 173.1 million.

The majority of the disclosures in this footnote are prepared at the class level which is equivalent to the call report classification or call code classification.

The final table in this section separates a rollforward of the Allowance for Credit Losses at the portfolio segment level.

The final table in this section separates a roll forward of the Allowance for Credit Losses at the portfolio segment level.

Loan And Lease Distribution

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

13 unchanged sentences

Net loans and leases

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without individually evaluated reserves as of March 31, 2022:

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without individually evaluated reserves as of June 30, 2022:

Nonaccrual Loans and Leases

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

Nonaccrual Loans

38 unchanged sentences

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

The Company recognized $ 0 in interest on nonaccrual loans during the first quarter 2022 and would have recognized an additional $ 0.1 million on nonaccrual loans had those loans not been designated as nonaccrual.

The following table presents the amortized cost basis of collateral-dependent loans by class as of March 31, 2022:

The Company recognized $ 0 in interest on nonaccrual loans during the second quarter 2022 and would have recognized an additional $ 0.6 million on nonaccrual loans had those loans not been designated as nonaccrual.

The following table presents the amortized cost basis of collateral-dependent loans by class as of June 30, 2022:

Collateral Dependent Loans

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

Amortized Cost

11 unchanged sentences

Total loans and leases

Absent the significant deterioration of the collateral value of Farmland securing several loans to a single borrower, which were downgraded to non-accrual and collateral dependent during the first quarter of 2022 there were no significant changes in the population of collateral dependent loans, or in the valuations of the related collateral.

All of the Company’s collateral dependent loans had appraised collateral values which exceed the amortized cost basis of the related loan as of March 31, 2022, which the company has applied discounts against.

The weighted-average loan to value of the Company’s collateral-dependent loans as of March 31, 2022, was 18 %.

No collateral-dependent loans were in the process of foreclosure as of March 31, 2022.

The following table presents the aging of the amortized cost basis in past-due loans, according to class, as of March 31, 2022:

During the second quarter the amortized cost balance of collateral-dependent loans declined by $ 1.3 million due to declines resulting from upgrades and payoffs, partially offset by additional collateral dependent loans downgraded during the quarter.

The weighted average loan-to-value ratio of collateral dependent loans was 91 % at June 30, 2022.

There were no collateral dependent loans in the process of foreclosure as of June 30, 2022

The following table presents the aging of the amortized cost basis in past-due loans, according to class, as of June 30, 2022:

Past Due Loans and Leases

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

30-59 Days Past Due

33 unchanged sentences

A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring (TDR) if the modification constitutes a concession.

At March 31, 2022, the Company had a total of $ 5.6 million in TDRs, including $ 1.0 million in TDRs that were on non-accrual status.

At June 30, 2022, the Company had a total of $ 5.1 million in TDRs, including $ 0.3 million in TDRs that were on non-accrual status.

Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms.

3 unchanged sentences

The Company may agree to different types of concessions when modifying a loan or lease.

The tables below summarize TDRs which were modified during the noted periods, by type of concession:

The tables below summarize TDRs which were modified during the three and six months ended June 30, 2021, by type of concession.

For the three and six months ended June 30, 2022, there were no new TDRs and no modifications of existing TDRs

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)

Three months ended March 31, 2022

Three months ended June 30, 2021

Rate Modification

Interest Only Modification

Interest Only

Rate & Term Modification

7 unchanged sentences

Consumer loans

Three months ended March 31, 2021

Six months ended June 30, 2021

Rate Modification

Interest Only

Interest Only Modification

Rate & Term Modification

9 unchanged sentences

(dollars in thousands, unaudited)

Three months ended March 31, 2022

Three months ended June 30, 2021

Difference ⁽ ¹ ⁾

7 unchanged sentences

(1) This represents the change in the ACL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.

Three months ended March 31, 2021

Six months ended June 30, 2021

Difference ⁽ ¹ ⁾

7 unchanged sentences

The Company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three-month period ending March 31, 2022 and 2021.

The Company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three or six-month periods ending June 30, 2022 and 2021.

The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention and substandard to characterize and qualify the associated credit risk.

5 unchanged sentences

Substandard – Loans classified as substandard are those loans with clear and well-defined weaknesses such as a highly leveraged position, unfavorable financial operating results and/or trends, or uncertain repayment sources or poor financial condition, which may jeopardize ultimate recoverability of the debt.

The following tables present the amortized cost of loans and leases by credit quality classification in addition to loan and lease vintage as of March 31, 2022:

The following tables present the amortized cost of loans and leases by credit quality classification in addition to loan and lease vintage as of June 30, 2022:

Loan and Lease Credit Quality by Vintage

37 unchanged sentences

Due to the immaterial balance in the Company’s PCI loans as of December 31, 2021 management elected not to transition these loans into the PCD designation.

As of March 31, 2022 the Company had no loans categorized as PCD.

As of June 30, 2022 the Company had no loans categorized as PCD.

As noted in footnote 3, on January 1, 2022 the Company implemented CECL and increased our ACL, previously the allowance for loan and lease losses, with a $ 9.5 million cumulative adjustment.

6 unchanged sentences

The loss rate data has been regressed against benchmark economic indicators, for which reasonable and supportable forecasts exist, in the development of the call-code specific regression models.

Regression models are refreshed on an annual basis, in order to pull in more recent loss rate data.

Regression models are generally refreshed on an annual basis, in order to pull in more recent loss rate data.

Reasonable and supportable forecasts of the selected economic metric are then input into the regression model to calculate an expected default rate.

1 unchanged sentence

The Company utilizes a four-quarter forecast period, after which the expected default rates revert to the historical average for each call code, over a four-quarter reversion period, on a straight-line basis.

The prepayment assumptions applied to expected cash flows over the contractual life of the loans, are based on Bank specific prepayment history, specific to each call code, and subject to update on an annual basis.

LGD utilized in the DCF is derived from the application of the Frye-Jacobs theory which

relates LGD to PD based on historical peer data, as calculated by a third-party.

The prepayment assumptions applied to expected cash flow over the contractual life of the loans are estimated based on historical, bank-specific experience, peer data and current conditions and circumstances including the level of interest rates.

The prepayment assumptions may be updated by

Management in the event that changing conditions impact Management’s estimate or additional historical data gathered has resulted in the need for a reevaluation.

LGD utilized in the DCF is derived from the application of the Frye-Jacobs theory which relates LGD to PD based on historical peer data, as calculated by a third-party.

Economic forecasts are considered over a four-quarter forecast period, with reversion to mean occurring on a straight-line basis over four quarters.

The call code regression models utilized upon implementation of CECL on January 1, 2022, and as of March 31, 2022, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate.

The call code regression models utilized upon implementation of CECL on January 1, 2022, and as of June 30, 2022, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate.

Management selected the National Unemployment Rate as the driver of quantitative portion of collectively reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling, the availability of forecasts including the quarterly FOMC forecast, and given the widespread familiarity of stakeholders with this economic metric.

13 unchanged sentences

● Changes in loan categorization concentrations

● Other external factors, which include, the influence of peer data on estimated quantitative reserves, residual COVID-19 related risk, impact of government stimulus, reliance on the National Unemployment rate as opposed to the California unemployment rate in the calculation of quantitative reserves, the expected impact of fluctuations in interest rate levels on the life of the Company’s loans

● Other external factors, which include, the influence of peer data on estimated quantitative reserves, residual COVID-19 related risk, expected impact of current and expected inflationary environment, reliance on the National Unemployment rate as opposed to the California unemployment rate in the calculation of quantitative reserves, the expected impact of current and expected geo-political conditions

The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of numeric frameworks and management judgement, to determine risk categorizations in each of the Q-factors presented above.

3 unchanged sentences

Loans secured by 1-4 family residences have a different profile from loans secured by Commercial Real Estate.

Generally, the borrowers for 1-4 Family loans are consumers whereas borrowers for Commercial Real Estate are often businesses.

Generally, the borrowers for 1-4 Family loans are consumers whereas borrowers for

Commercial Real Estate are often businesses.

The COVID-19 pandemic illustrated how these different categories of real estate loans were subject to different risks, which was exacerbated by the widespread work-from-home model adopted by many companies during and since the pandemic.

Farmland and Agricultural Production loans are included in a single

segment as these loans are often times to the same borrowers, facing the same risks relating to commodity prices, water supply and drought conditions in addition to other environmental concerns.

Farmland and Agricultural Production loans are included in a single segment as these loans are often times to the same borrowers, facing the same risks relating to commodity prices, water supply and drought conditions in addition to other environmental concerns.

Commercial & Industrial loans are separated into a unique segment given the uniqueness of these loans, which are often revolving and secured by other business assets as opposed to real estate.

2 unchanged sentences

Management individually evaluates loans that do not share risk characteristics with other loans when estimating reserves.

As of March 31, 2022, the only loans that Management considered to have different risk characteristics from other loans sharing the same Federal Call Report code were loans designated nonaccrual.

The following table presents the activity in the allowance for credit losses by portfolio segment for the quarter ended March 31, 2022:

As of June 30, 2022, the only loans that Management considered to have different risk characteristics from other loans sharing the same Federal Call Report code were loans designated nonaccrual.

The following table presents the activity in the allowance for credit losses by portfolio segment for the quarter ended June 30, 2022:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

6 unchanged sentences

Allowance for credit losses:

Balance, March 31, 2022

Provision for credit losses

Ending allowance balance:

The $ 0.3 million increase in the Company’s loan portfolio ACL in the second quarter 2022 from $ 22.5 million at March 31, 2022 to $ 22.8 million at June 30, 2022, is primarily a reflection of growth in loan balances recognized in the second quarter 2022.

The following table presents the activity in the allowance for credit losses by portfolio segment for the six months ended June 30, 2022:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

1-4 Family Real Estate

Commercial Real Estate

Farmland & Agricultural Production

Commercial & Industrial

Mortgage Warehouse

Allowance for credit losses:

Balance, December 31, 2021

2 unchanged sentences

Ending allowance balance:

The $ 1.2 million reduction in the Company’s Loan Portfolio ACL in the first quarter, from $ 23.7 million upon implementation on January 1, 2022 and $ 22.5 million as of March 31, 2022 primarily reflects a narrowing of the gap between the current and expected California unemployment rate and the National unemployment rate as of March 31, 2022 compared with December 31, 2021.

The charge-offs of $ 2.0 million in the Farmland & Agricultural Production segment during the first quarter 2022 reflects a change in the expected valuation of collateral on a single loan relationship.

Management considers this charge-off to be a unique circumstance and not indicative of an increased level of risk in the Farmland & Agricultural Production segment.

The following table presents the activity in the allowance for loan losses by portfolio segment for the quarter ended March 31, 2021:

Three months ended March 31, 2021

The $ 0.9 million decline in the Company’s loan portfolio ACL between the $ 23.7 million ACL recognized upon implementation of CECL on January 1, 2022 and the $ 22.8 million as of June 30, 2022, reflects a narrowing of the gap between the California unemployment rate and the National Unemployment rate during the first six months of 2022, compared with December 31, 2021.

The $ 2.2 million in charge-offs recognized in the Farmland and Agricultural Production portfolio segment is primarily the result of a reduction in the expected valuation of collateral on a single loan relationship, recorded in the first quarter 2022.

The $ 1.9 million charge-off in Commercial Real Estate was recognized during the second quarter, when Management became aware of a borrower’s reduced ability to service their loan primarily as a result of increased vacancy rates related to the remote work which has increased following the pandemic.

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2021:

Three months ended June 30, 2021

Commercial and

2 unchanged sentences

Beginning balance

(Benefit) provision

Ending balance

Six months ended June 30, 2021

Commercial and

Industrial (1)

Allowance for credit losses:

Beginning balance

(Benefit) provision

Ending balance

Loans evaluated for impairment:

3 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

11 unchanged sentences

All of the Company’s revenue from contracts within the scope of ASC 606 is recognized as noninterest income, except for gains on the sale of OREO which is classified as noninterest expense.

The following table presents the Company’s sources of noninterest income for the three-month periods ended March 31, 2022 and 2021.

The following table presents the Company’s sources of noninterest income for the three and six-month periods ended June 30, 2022 and 2021.

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

For the three months ended March 31,

For the three months ended June 30,

Six months ended June 30,

Noninterest income

13 unchanged sentences

Total noninterest expense

Percentage of noninterest revenue not within scope of ASC 606.

Percentage of noninterest income not within scope of ASC 606.

(1) Not within scope of ASC 606.

3 unchanged sentences

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 1. Financial Statements