What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-03 compared with 2022-08-04 · 210 added, 201 removed, 887 unchanged (32% of the section changed)

3 unchanged sentences

(dollars in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

2 unchanged sentences

Total cash & cash equivalents

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)

Investment securities

Available-for-sale, net of allowance for credit losses of $ 0 at September 30, 2022 and December 31, 2021

Held-to-maturity, (fair value of $ 138,684 at September 30, 2022 and $ 0 at December 31, 2021)

Allowance for credit losses on held-to-maturity securities

14 unchanged sentences

Repurchase agreements

Short-term borrowings

Long-term debt

7 unchanged sentences

24,000,000 shares authorized;

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

15,085,675 and 15,270,010 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

6 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

Interest and dividend income

10 unchanged sentences

Provision (benefit) for credit losses on loans and leases

Benefit for credit losses on unfunded loan commitments

Provision (benefit) for credit losses on unfunded loan commitments

Provision for credit losses on held-to-maturity securities

20 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(dollars in thousands, unaudited)

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

Three months ended September 30,

Nine months ended September 30,

Other comprehensive loss, before tax:

Unrealized loss on securities:

Unrealized holding loss arising during period

reclassification adjustment for gains included in net income (1)

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:

Other comprehensive loss, before tax

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

Other comprehensive loss, net of 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.

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.

Income tax expense associated with the reclassification adjustment for the three months ended September 30, 2022 and 2021 were $ 0 and $ 3 thousand, respectively.

Income tax expense associated with the reclassification adjustment for the nine months ended September 30, 2022 and 2021 were $ 305 thousand and $ 3 thousand, 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 JUNE 30, 2022 AND 2021

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

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

2 unchanged sentences

Income (Loss)

Balance, March 31, 2021

Other comprehensive income, net of tax

Balance, June 30, 2021

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Restricted stock granted

Stock compensation costs

Cash dividends - $ 0.22 per share

Balance, September 30, 2021

Balance, June 30, 2022

Balance, March 31, 2022

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Restricted stock surrendered due to employee tax liability

Restricted stock forfeited / cancelled

2 unchanged sentences

Cash dividends - $ 0.23 per share

Balance, June 30, 2022

Balance, September 30, 2022

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

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

6 unchanged sentences

Stock based compensation expense

Stock repurchase

Cash dividends - $ 0.65 per share

Balance, June 30, 2021

Balance, September 30, 2021

Balance, December 31, 2021

8 unchanged sentences

Cash dividends - $ 0.69 per share

Balance, June 30, 2022

Balance, September 30, 2022

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(dollars in thousands, unaudited)

Six months ended June 30,

Nine months ended September 30,

Cash flows from operating activities:

1 unchanged sentence

Gain on sales of securities

Loss on disposal of fixed assets

Loss (gain) on disposal of fixed assets

Gain on sale on foreclosed assets

5 unchanged sentences

Net amortization on securities premiums and discounts

Amortization (accretion) of premiums (discounts) for loans acquired

Net accretion of premiums/discounts for loans acquired

Decrease (increase) in cash surrender value of life insurance policies

Amortization of core deposit intangible

(Increase) decrease in interest receivable and other assets

Increase (decrease) in other liabilities

Increase in interest receivable and other assets

Decrease in other liabilities

Deferred income tax benefit

10 unchanged sentences

Purchases of premises and equipment

Proceeds from sale premises and equipment

Proceeds from sales of foreclosed assets

3 unchanged sentences

Amortization of debt issuance costs

Increase in partnership investment

Net cash (used in) provided by investing activities

1 unchanged sentence

Increase in deposits

Decrease in borrowed funds

Increase (decrease) in borrowed funds

Increase in customer repurchase agreements

2 unchanged sentences

Stock options exercised

Proceeds from issuance of subordinated debt

Net cash provided by financing activities

11 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

September 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 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”).

As of September 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.

4 unchanged sentences

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

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.

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 at seven non-branch locations.

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

1 unchanged sentence

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 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.

The Company had total assets of $ 3.5 billion at September 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 September 30, 2022, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

11 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.

GAAP, and instead requires an organization to record an estimate of 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.

4 unchanged sentences

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

The majority of the Bank’s loan and lease portfolio consists of loans, so hereafter within this document references to the loan and lease portfolio in general will reference loans as opposed to loans and leases.

The following table illustrates the impact of the adoption of CECL, and the transition away from the incurred loss method, on January 1, 2022 .

20 unchanged sentences

Allowance for credit losses - unfunded loan commitments

The Company currently categorizes all of its loans and leases as held-for-investment and following CECL implementation, reports loans and leases on the amortized cost basis.

The Company currently categorizes all of its loans as held-for-investment and following CECL implementation, reports loans on the amortized cost basis.

The Company’s amortized cost basis is comprised of the principal balance outstanding, net of remaining purchase discount or premium and any deferred fees or costs.

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 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.

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.

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

Accrued interest receivable continues to be included in other assets on the Company’s balance sheet and as of September 30, 2022, measured at $ 8.3

million, $ 0.5 million and $ 4.7 million for available-for-sale securities, held-to-maturity securities and loans, respectively.

Due to loans being placed on nonaccrual status, during the third quarter of 2022 an immaterial amount of interest receivable on loans was reversed against interest income and $ 0.1 million of reversed interest for the nine months ended September 30, 2022.

For the same time periods no interest receivable on held-to-maturity or available for sale investment securities was reversed against interest income.

Similar to practice under legacy GAAP, the Company continues to place loans 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.

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

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

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

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

Once a loan and lease is on non-accrual status subsequent payments received from the customer are applied to principal, and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required.

Generally, loans and leases are not restored to accrual status until the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Similar to practice under legacy GAAP, the ACL on the loan portfolio is a valuation allowance deducted from the recorded balance in loans and leases.

However, under CECL the ACL represents principal which is not expected to be collected over the contractual life of the loans and leases, adjusted for expected prepayment, whereas under legacy GAAP the allowance represented only losses already incurred as of the balance sheet date.

Generally, loans are not restored to accrual status until the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Similar to practice under legacy GAAP, the ACL on the loan portfolio is a valuation allowance deducted from the recorded balance in loans.

However, under CECL the ACL represents principal which is not expected to be collected over the contractual life of the loans, adjusted for expected prepayment, whereas under legacy GAAP the allowance represented only losses already incurred as of the balance sheet date.

The ACL is increased by a provision for credit losses charged to expense, and by principal recovered on charged-off balances.

9 unchanged sentences

Within the portfolio segments utilizing the DCF quantitative reserve methodology, management has made the election to adjust the effective interest rate to consider the impact of expected prepayments.

Loans and leases where similar risk characteristics exist are evaluated for the ACL in the collective reserve evaluation.

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.

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.

It is the Company’s policy that the only loans and leases where the credit quality has deteriorated to the point where foreclosure is probable are the Company’s nonaccrual loans and leases.

Loans where similar risk characteristics exist are evaluated for the ACL in the collective reserve evaluation.

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

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

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

It is the Company’s policy that the only loans and leases where the credit quality has deteriorated to the point where foreclosure is probable are the Company’s nonaccrual loans.

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

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.

3 unchanged sentences

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.

In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in ratings 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.

Any unrealized loss 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.

5 unchanged sentences

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

Options to purchase 161,089 shares that were granted under the 2007 Plan were still outstanding as of September 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 June 30, 2022 was 418,912 .

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

Options to purchase 339,057 shares granted under the 2017 Plan were outstanding as of September 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 $ 0.3 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.

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

For the first nine months, the charges totaled $ 1.0 million in 2022 and $ 0.7 million in 2021.

Restricted Stock Grants

The Company’s Restricted Stock Awards are awards of time-vested, non-transferrable shares of common stock and are available to be granted to the Company’s employees and directors.

The vesting period of Restricted Stock Awards is determined at the time the awards are issued, and different awards may have different vesting terms;

The Company’s Restricted Stock Awards are awards of either time-vested or performance-based shares.

The Restricted Stock Awards are non-transferrable shares of common stock and are available to be granted to the Company’s employees and directors.

The vesting period of Restricted Stock Awards is determined at the time the awards are issued, and different awards may have different vesting terms or performance measures;

provided, however, that no installment of any Restricted Stock Award shall become vested less than one year from the grant date.

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 six months of 2022.

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

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.

These awards are expensed on a straight-line basis over the vesting period and consider the probability of meeting the performance criteria.

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

As of September 30, 2022, there was $ 2.0 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 2.7 years.

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,

The Company’s restricted stock award activity for the nine months ended September 30, 2022 and 2021 is summarized below (unaudited):

Nine months ended September 30,

Weighted Average Grant-Date Fair Value

1 unchanged sentence

Unvested shares, January 1,

Unvested shares, June 30,

Unvested shares, September 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 six months ended June 30, 2022 and 2021 are summarized below (dollars in thousands, except per share data, unaudited):

Six months ended June 30,

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

Nine months ended September 30,

Weighted Average

6 unchanged sentences

Forfeited/Expired

Outstanding at June 30,

Exercisable at June 30,

(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 June 30, 2022.

Outstanding at September 30,

Exercisable at September 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 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.

There were 14,954,503 weighted average shares outstanding during the third quarter of 2022 and 15,257,367 during the third quarter of 2021, while there were 14,968,242 weighted average shares outstanding during the first nine months of 2022 and 15,247,477 during the first nine 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 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.

For the third quarter of 2022, calculations under the treasury stock method resulted in the equivalent of 59,545 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 303,387 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the third quarter of 2021 the equivalent of 86,176 shares were added in calculating diluted earnings per share, while 327,346 anti-dilutive stock options were not factored into the computation.

Likewise, for the first nine months of 2022 the equivalent of 78,641 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 299,404 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 121,772 shares and non-inclusion of 339,546 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):

June 30, 2022

September 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 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.

Included in unused commitments are mortgage warehouse lines which are mostly in the form of repo lines and are unconditionally cancellable.

Unused commitments on mortgage warehouse lines were $ 488.4 million at September 30, 2022 and $ 272.8 million at December 31, 2021.

At September 30, 2022, the Company was also utilizing a letter of credit in the amount of $ 127.9 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.

17 unchanged sentences

Fair value disclosures for deposits include demand deposits, which are, by definition, equal to the amount payable on demand at the reporting date.

Fair value calculations for loans and leases reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality adjustments based on risk characteristics of various financial instruments, among other things.

Fair value calculations for loans reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality adjustments based on risk characteristics of various financial instruments, among other things.

Since the estimates are subjective and involve uncertainties and matters of significant judgment they cannot be determined with precision, and changes in assumptions could significantly alter the fair values presented.

2 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2022

September 30, 2022

Fair Value Measurements

10 unchanged sentences

Repurchase agreements

Short term borrowings

Long-term debt

14 unchanged sentences

Subordinated debentures

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:

For financial asset categories that were carried on our balance sheet at fair value as of September 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 June 30, 2022, using

Fair Value Measurements at September 30, 2022, using

Quoted Prices in

23 unchanged sentences

Transfers out of Level 3

Balance of recurring Level 3 assets at June 30,

Balance of recurring Level 3 assets at September 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.

2 unchanged sentences

(dollars in thousands, unaudited)

Fair Value Measurements at June 30, 2022, using

Fair Value Measurements at September 30, 2022, using

Quoted Prices in

47 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2022

September 30, 2022

Allowance for Credit Losses

24 unchanged sentences

Total securities

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.

Upon transfer, a discounted-cash-flow reserve calculation was prepared for the securities transferred into the held-to-maturity designation and an allowance for credit losses of $ 0.02 million was recorded 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 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.

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

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 September 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 September 30, 2022 was attributable to credit deterioration and a risk of loss, requiring an 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 June 30, 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 September 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 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.

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 September 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 September 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 in order to monitor the 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 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.

As of both January 1, 2022 and September 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 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.

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

Following review of the financial metrics available for each

of the underlying institutions as of January 1, 2022 and September 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 ongoing quarterly reviews.

● The Company has invested exclusively in AA and AAA tranches of various collateralized loan 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 ongoing quarterly 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 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.

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 on available-for-sale securities was recorded as of June 30, 2022.

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).

Following review of financial metrics as of both January 1, 2022 and September 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.

The following table summarizes available-for-sale debt securities that were in an unrealized loss position for which an ACL has not been recorded, based on the length of time the individual securities have been in an unrealized loss position, including the number of available-for-sale debt securities in an unrealized loss position, as of the dates indicated below.

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)

June 30, 2022

September 30, 2022

Less than twelve months

Twelve months or more

Number of Securities

Available-for-sale

5 unchanged sentences

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

Number of Securities

Available-for-sale

8 unchanged sentences

(dollars in thousands, unaudited)

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 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 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 amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at September 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)

June 30, 2022

September 30, 2022

Available-for-Sale

21 unchanged sentences

Collateralized loan obligations

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.

At September 30, 2022, the Company’s investment portfolio included 503 “muni” bonds issued by 415 different government municipalities and agencies located within 37 different states, with an aggregate fair value of $ 363.1 million.

The largest exposure to any single municipality or agency was a combined $ 5.0 million (fair value) in general obligation bonds issued by the City of New York (NY).

9 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2022

September 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.

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)

June 30, 2022

September 30, 2022

December 31, 2021

9 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 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.

The Company currently has investments in four different LIHTC fund limited partnerships made in 2014, 2015, and two in 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 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.

As of September 30, 2022, our total LIHTC investment book balance was $ 10.2 million, which includes $ 7.5 million in remaining commitments for additional capital contributions.

There were $ 0.4 million in tax credits derived from our LIHTC investments that were recognized during the nine months ended September 30, 2022, and amortization expense of $ 0.3 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.

3 unchanged sentences

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 June 30, 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,

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.

Unless specifically noted otherwise, September 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 September 30, 2022 and December 31, 2021.

Accrued interest receivable on loans of $ 4.7 million and $ 6.8 million at September 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 September 30, 2022 balance in 1-4 family closed end loans reflects year-to-date 2022 loan purchases 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 or call code classification.

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

1 unchanged sentence

(dollars in thousands, unaudited)

June 30, 2022

September 30, 2022

December 31, 2021

9 unchanged sentences

Consumer loans

Less net deferred loan fees and costs

Net deferred loan fees and costs

Loans and leases, amortized cost basis

1 unchanged sentence

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 June 30, 2022:

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

Nonaccrual Loans and Leases

(dollars in thousands, unaudited)

June 30, 2022

September 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 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:

The Company did not recognize any interest on nonaccrual loans during 2022 and would have recognized an additional $ 0.6 million in interest income 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 September 30, 2022:

Collateral Dependent Loans

(dollars in thousands, unaudited)

June 30, 2022

September 30, 2022

Amortized Cost

11 unchanged sentences

Total loans and leases

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:

During the third quarter the amortized cost balance of collateral-dependent loans declined by $ 1.7 million due to declines resulting from upgrades and payoffs.

The weighted average loan-to-value ratio of collateral dependent loans was 93 % at September 30, 2022.

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

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

Past Due Loans and Leases

(dollars in thousands, unaudited)

June 30, 2022

September 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 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.

At September 30, 2022, the Company had a total of $ 4.9 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.

However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance period or even

at the time of loan modification.

However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance

period or even at the time of loan modification.

Regardless of the period of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain, then the loan will be kept on non-accrual status.

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 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

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

For the three and nine months ended September 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 June 30, 2021

Three months ended September 30, 2021

Rate Modification

9 unchanged sentences

Consumer loans

Six months ended June 30, 2021

Nine months ended September 30, 2021

Rate Modification

11 unchanged sentences

(dollars in thousands, unaudited)

Three months ended June 30, 2021

Three months ended September 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.

Six months ended June 30, 2021

Nine months ended September 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 or six-month periods ending June 30, 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 nine-month periods ending September 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 June 30, 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 September 30, 2022:

Loan and Lease Credit Quality by Vintage

(dollars in thousands, unaudited)

Term Loans and Loans Amortized Cost Basis by Origination Year

Term Loans and Leases Amortized Cost Basis by Origination Year

Revolving Loans Amortized Cost

1-4 family construction

Special Mention

Other construction/land

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

As of September 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.

10 unchanged sentences

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 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.

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 the

consideration of current and expected 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 June 30, 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 September 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.

18 unchanged sentences

1-4 Family Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse and Consumer loans.

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.

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.

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.

4 unchanged sentences

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

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:

As of September 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 September 30, 2022:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

6 unchanged sentences

Allowance for credit losses:

Balance, March 31, 2022

Balance, June 30, 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:

The $ 1.0 million increase in the Company’s loan portfolio ACL in the third quarter of 2022 from $ 22.8 million at June 30, 2022 to $ 23.8 million at September 30, 2022, is primarily attributable to an increase in reserves on a single collateral-dependent loan relationship as a result of a decline in management’s estimate of net realizable value on the related collateral.

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables

10 unchanged sentences

Ending allowance balance:

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

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

Three months ended September 30, 2021

Commercial and

4 unchanged sentences

Ending balance

Six months ended June 30, 2021

Nine months ended September 30, 2021

Commercial and

7 unchanged sentences

Ending balance

Note 11 – Long-Term Debt

Long-Term Debt

(dollars in thousands, unaudited)

June 30, 2022

December 31, 2021

Debt Issuance

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

Total long-term debt

(1) 3.25 % fixed rate for five years, then floating rate beginning October 1, 2026 at 253.5 basis points over 3-month term SOFR adjusted quarterly .

Note 11 – Borrowings and Other Arrangements

Federal Funds Purchased – The Company had unsecured available lines of credit with correspondent banks for short-term borrowings totaling $ 305.0 million at September 30, 2022 and December 31, 2021.

In general, interest rates on these lines approximate the federal funds target rate.

We had no borrowings under these credit facilities at September 30, 2022 or December 31, 2021.

Federal Home Loan Bank Borrowings – As of September 30, 2022 and December 31, 2021, the Company had available lines of credit with the FHLB totaling $ 724.0 million and $ 787.5 million, respectively, based on eligible collateral of certain loans.

At September 30, 2022 and December 31, 2021 the Company had $ 103.1 million and $ 0 in FHLB overnight borrowings, respectively.

Federal Reserve Line of Credit – The Company has an available line of credit with the Federal Reserve Bank of San Francisco secured by certain loans.

At September 30, 2022 and December 31, 2021 the Company had borrowing capacity under this line totaling $ 34.2 million and $ 50.6 million, respectively.

We had no outstanding borrowings on this line of credit as of September 30, 2022 and December 31, 2021.

Long-Term Debt – The Company has long-term debt in the form of fixed to floating rate subordinated debentures with a fixed rate of 3.25 % until September 30, 2026, then floating rate at 253.5 basis points over 3-month term SOFR until maturity on October 1, 2031.

The balance of the Company’s long-term debt, net of unamortized issuance costs, at September 30, 2022 and December 31, 2021 was $ 49.2 million and $ 49.1 million, respectively.

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

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

At September 30, 2022 and December 31, 2021 the Company’s trust preferred securities totaled $ 35.4 million and $ 35.3 million, respectively.

Note 12 – Revenue Recognition

5 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 and six-month periods ended June 30, 2022 and 2021.

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

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

For the three months ended June 30,

Six months ended June 30,

For the three months ended September 30,

Nine months ended September 30,

Noninterest income

3 unchanged sentences

Debit card interchange income

Loss on limited partnerships (1)

Gain (loss) on limited partnerships (1)

Dividends on equity investments (1)

Unrealized gains recognized on equity investments (1)

Unrealized (losses) gains recognized on equity investments (1)

Net gains on sale of securities (1)

3 unchanged sentences

Occupancy expense (1)

(Gain) loss on sale of OREO

Gain on sale of OREO

Total noninterest expense

3 unchanged sentences

With regard to noninterest income associated with customer contracts, the Company has determined that transaction prices are fixed, and performance obligations are satisfied as services are rendered, thus there is little or no judgment involved in the timing of revenue recognition under contracts that are within the scope of ASC 606.

Note 13 – Subsequent Events

Effective October 1 , 2022, the Company transferred $ 198.3 million of “available-for-sale” investments to “held-to-maturity”.

Those securities were transferred at fair market value on the date of the transfer.

The transfer was initiated to reduce the effect of potential future rate increases on the available-for-sale portfolio, mark-to-market, other comprehensive income and equity.

PART I - FINANCIAL INFORMATION

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