What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-05 compared with 2022-11-03 · 223 added, 423 removed, 674 unchanged (49% of the section changed)

3 unchanged sentences

(dollars in thousands)

September 30, 2022

March 31, 2023

December 31, 2022

3 unchanged sentences

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)

Available-for-sale, net of zero allowance for credit losses at March 31, 2023 and December 31, 2022

Held-to-maturity, (fair value of $ 325,607 at March 31, 2023 and $ 328,011 at December 31, 2022)

Allowance for credit losses on held-to-maturity securities

Net, investment securities held-to-maturity

Loans and leases:

Gross loans and leases

Deferred loan and lease fees, net

Allowance for credit losses on loans and leases

Net loans and leases

Foreclosed assets

Deferred loan costs (fees), net

Allowance for credit losses on loans

Premises and equipment, net

6 unchanged sentences

Repurchase agreements

Short-term borrowings

Other borrowings

Long-term debt

7 unchanged sentences

24,000,000 shares authorized;

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

15,050,740 and 15,170,372 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital

6 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

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

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

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

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

Interest and dividend income

Loans and leases, including fees

Loans, including fees

Taxable securities

7 unchanged sentences

Net interest income

Provision (benefit) for credit losses on loans and leases

Provision (benefit) for credit losses on unfunded loan commitments

Provision for credit losses on held-to-maturity securities

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Service charges on deposits

Service charges and fees on deposit accounts

Net gains on sale of securities available-for-sale

Increase (decrease) in cash surrender value of life insurance

Total noninterest income

1 unchanged sentence

Salaries and employee benefits

Occupancy and equipment costs

Total noninterest expense

2 unchanged sentences

PER SHARE DATA

Cash dividends

Earnings per share basic

Earnings per share diluted

Average shares outstanding, basic

Average shares outstanding, diluted

Total shareholders' equity (in thousands)

Shares outstanding

Dividends paid (in thousands)

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(dollars in thousands, unaudited)

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

Three months ended March 31,

Other comprehensive gain (loss), before tax:

Unrealized gain (loss) on securities:

Unrealized holding gain (loss) 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, net of tax:

Comprehensive (loss) income

Other comprehensive gain (loss), before tax

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

Other comprehensive gain (loss), net of tax:

Comprehensive income (loss)

(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 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.

Income tax expense associated with the reclassification adjustment for the three months ended March 31, 2023 and 2022 were $ 13 thousand and $ 305 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 SEPTEMBER 30, 2022 AND 2021

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

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

2 unchanged sentences

Income (Loss)

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, December 31, 2021

Cumulative effect of change in accounting principle (Note 3)

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Restricted stock surrendered due to employee tax liability

2 unchanged sentences

Stock based compensation - restricted stock

Cash dividends - $ 0.23 per share

Balance, September 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 NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

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

Comprehensive

Shareholders'

Income (Loss)

Balance, December 31, 2020

Other comprehensive loss, net of tax

Exercise of stock options

Stock based compensation expense

Stock repurchase

Cash dividends - $ 0.23 per share

Balance, September 30, 2021

Balance, March 31, 2022

Balance, December 31, 2022

Cumulative change in accounting principle

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Other comprehensive income, net of tax

Restricted stock granted

Restricted stock surrendered due to employee tax liability

3 unchanged sentences

Stock repurchase

Excise tax on stock repurchase

Cash dividends - $ 0.23 per share

Balance, September 30, 2022

Balance, March 31, 2023

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(dollars in thousands, unaudited)

Nine months ended September 30,

Three months ended March 31,

Cash flows from operating activities:

1 unchanged sentence

Gain on sales of securities

Loss (gain) on disposal of fixed assets

(Gain) loss on disposal of fixed assets

Gain on sale on foreclosed assets

Writedowns on foreclosed assets

Stock based compensation expense

Provision (benefit) for credit losses on loans and leases

Provision for credit losses on held-to-maturity securities

Provision for credit losses on loans

Depreciation and amortization

Net amortization on securities premiums and discounts

Net accretion of premiums/discounts for loans acquired

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

Net (accretion) amortization of premiums/discounts for loans acquired

(Increase) decrease in cash surrender value of life insurance policies

Amortization of core deposit intangible

Increase in interest receivable and other assets

Decrease (increase) in interest receivable and other assets

Decrease in other liabilities

Deferred income tax benefit

Decrease (increase) in value of restricted bank equity securities

Deferred income tax (benefit) provision

Decrease in value of restricted bank equity securities

Excise tax on stock options purchased

Amortization of debt issuance costs

Net amortization of partnership investment

5 unchanged sentences

Principal pay downs on securities available for sale

Net purchases of FHLB stock

Loan originations and payments, net

Purchases of premises and equipment

Proceeds from sale premises and equipment

Proceeds from sale of premises and equipment

Proceeds from sales of foreclosed assets

2 unchanged sentences

Proceeds from BOLI death benefit

Amortization of debt issuance costs

Increase in partnership investment

Net cash (used in) provided by investing activities

Net cash used in investing activities

Cash flows from financing activities:

Increase in deposits

Increase (decrease) in borrowed funds

Increase in customer repurchase agreements

Decrease in borrowed funds

Increase in Fed funds purchased

(Decrease) increase in customer repurchase agreements

Cash dividends paid

Repurchases of common stock

Stock options exercised

Proceeds from issuance of subordinated debt

Net cash provided by financing activities

(Decrease) increase in cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents

3 unchanged sentences

Interest paid

Income taxes paid

Supplemental noncash disclosures:

Supplemental schedule of noncash investing and financing activities:

Real estate acquired through foreclosure

7 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 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”).

As of March 31, 2023, 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.

8 unchanged sentences

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 $ 3.5 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.

The Company had total assets of $ 3.7 billion at March 31, 2023, 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, 2023, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

4 unchanged sentences

Such adjustments can generally be considered as normal and recurring unless otherwise disclosed in this Form 10-Q.

In preparing the accompanying financial statements, Management has taken subsequent events into consideration and recognized them where appropriate.

In preparing the accompanying financial statements, Management has taken subsequent events into consideration, through May 5, 2023 and recognized them where appropriate.

The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter, or for the full year.

Certain amounts reported for 2021 have been reclassified to be consistent with the reporting for 2022.

Certain amounts reported for 2022 have been reclassified to be consistent with the reporting for 2023, none of which impacted net income or shareholders’ equity.

The interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”).

7 unchanged sentences

The Company implemented CECL on January 1, 2022 , using the modified retrospective approach to estimate lifetime expected losses on financial assets measured at amortized cost in addition to certain off balance sheet credit exposures.

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.

The January 1, 2022, increase in the Company’s allowance for credit losses, of $ 9.5 million on loans 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 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.

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 .

The impact to the Allowance for Credit losses (“ACL”) on the Loan Portfolio is broken out at the class level (dollars in thousands, unaudited):

Transition Impact on Allowance for Credit Losses

(dollars in thousands, unaudited)

January 1, 2022

Reserves Under Incurred Loss

Reserves Under CECL

Transition Impact Gross

Impact of Deferred Taxes

Impact to Retained Earnings

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Total real estate

Commercial and industrial

Mortgage warehouse lines

Consumer loans

Total allowance for credit losses - loans

Allowance for credit losses - unfunded loan commitments

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 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 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 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.

It is reduced by principal charge-offs.

The amount of the allowance is based on management’s evaluation of the collectability of the loan and lease portfolio, using information from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

Adjustments are also made for changes in risk profile, credit concentrations, historical trends, and other economic conditions.

The ACL for loans and leases is separated between a collective reserve evaluation, for loans where similar risk characteristics exist and an individual reserve evaluation for loans without similar risk characteristics.

The collective evaluation of loans is performed at the portfolio segment level, using call code as the primary segmentation key but also considering similarity in quantitative reserve methodology.

The Company’s ACL is categorized according to the following portfolio segments:

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

Management utilizes a discounted cash flow methodology to estimate the quantitative portion of collectively evaluated reserves for the 1-4 Family Real Estate, Commercial Real Estate, Commercial & Industrial and Mortgage Warehouse portfolio segments.

Management utilizes a Remaining Life Quantitative Reserve Methodology for the Farmland & Agricultural Production, and Consumer portfolio segments.

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 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 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.

Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while any related provision expense has been moved to provision for credit loss expense from its prior presentation in noninterest expense.

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.

4 unchanged sentences

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.

On October 1, 2022, a similar transfer of $ 198.3 million securities from available for sale to held-to-maturity was completed.

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.

A discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and is updated on a quarterly basis.

As of March 31, 2023, an allowance for credit losses of $ 0.06 million had been established on the Bank’s held-to-maturity portfolio which remained unchanged from December 31, 2022.

In March 2023 the FASB issued , ASU No.

2023-02 , “Investments—Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” ASU 2023-02 is intended to improve the accounting and disclosures for investments in tax credit structures.

ASU 2023-02 allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures.

ASU 2023-02 will be effective for the Company on January 1, 2024, though early adoption is permitted, and its adoption is not expected to have a significant effect on the Company’s financial statements.

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 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.

Options to purchase 134,449 shares that were granted under the 2007 Plan were still outstanding as of March 31,

2023 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 September 30, 2022 was 451,577 .

Options to purchase 339,057 shares granted under the 2017 Plan were outstanding as of September 30, 2022.

Options to purchase 402,726 shares granted under the 2017 Plan were outstanding as of March 31, 2023.

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 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.

A pre-tax charge of $ 0.4 million was reflected in the Company’s income statement during the first quarter of 2023 and $ 0.4 million was charged during the first quarter of 2022, as expense related to stock options and restricted stock awards.

Restricted Stock Grants

5 unchanged sentences

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.

There were 29,064 shares granted to employees of the Company during the first three months of 2023.

As of March 31, 2023, there was $ 3.1 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 2.3 years.

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,

The Company’s restricted stock award activity for the three months ended March 31, 2023 and 2022 is summarized below (unaudited):

Three months ended March 31,

Weighted Average Grant-Date Fair Value

1 unchanged sentence

Unvested shares, January 1,

Unvested shares, September 30,

Unvested shares, March 31,

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

Nine months ended September 30,

The Company’s stock option activity during the nine months ended March 31, 2023 and 2022 are summarized below (dollars in thousands, except per share data, unaudited):

Three months ended March 31,

Weighted Average

6 unchanged sentences

Forfeited/Expired

Outstanding at September 30,

Exercisable at September 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 September 30, 2022.

Outstanding at March 31,

Exercisable at March 31,

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 14,954,503 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.

There were 14,971,842 weighted average shares outstanding during the first quarter of 2023 and 15,021,138 during the first quarter of 2022.

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 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.

For the first quarter of 2023, calculations under the treasury stock method resulted in the equivalent of 30,524 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 327,141 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the first quarter of 2022 the equivalent of 99,852 shares were added in calculating diluted earnings per share, while 301,714 anti-dilutive stock options were not factored into the computation.

Note 6 – Comprehensive Income (Loss)

9 unchanged sentences

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

September 30, 2022

March 31, 2023

December 31, 2022

12 unchanged sentences

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.

Unused commitments on mortgage warehouse lines were $ 401.5 million at March 31, 2023 and $ 594.6 million at December 31, 2022.

At March 31, 2023, 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.

9 unchanged sentences

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

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date.

the measurement date.

Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values.

10 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

Fair Value Measurements

6 unchanged sentences

Investment securities held-to-maturity

Loans and leases, net held for investment

Collateral dependent loans

Loans, net held for investment

Individually evaluated collateral dependent loans

Financial liabilities:

Repurchase agreements

Short term borrowings

Long-term debt

Other borrowings

Long-term borrowings

Subordinated debentures

7 unchanged sentences

Investment securities available for sale

Loans and leases, net held for investment

Collateral dependent loans

Investment securities held-to-maturity

Loans, net held for investment

Individually evaluated collateral dependent loans

Financial liabilities:

Repurchase agreements

Short term borrowings

Other borrowings

Long-term borrowings

Subordinated debentures

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:

For financial asset categories that were carried on our balance sheet at fair value as of March 31, 2023 and December 31, 2022, the Company used the following methods and significant assumptions:

● Investment securities :

1 unchanged sentence

● Collateral-dependent loans :

Collateral-dependent loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

Collateral-dependent loans are carried at fair value when foreclosure is probable or repayment is expected through the sale or operation of collateral and borrower is experiencing financial difficulty.

● Foreclosed assets :

3 unchanged sentences

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

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

Fair values for other foreclosed assets are

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

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

2 unchanged sentences

(dollars in thousands, unaudited)

Fair Value Measurements at September 30, 2022, using

Fair Value Measurements at March 31, 2023, using

Quoted Prices in

22 unchanged sentences

Balance of recurring Level 3 assets at January 1,

Total gains or losses for the period:

Included in other comprehensive income

Transfers out of Level 3

Balance of recurring Level 3 assets at September 30,

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 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 September 30, 2022, using

Fair Value Measurements at March 31, 2023, using

Quoted Prices in

3 unchanged sentences

Unobservable Inputs

Collateral dependent loans

Individually evaluated collateral dependent loans

1-4 family residential construction

16 unchanged sentences

Unobservable Inputs

Collateral dependent loans

Individually evaluated collateral dependent loans

1-4 family residential construction

22 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

Allowance for Credit Losses

23 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

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 the available-for-sale designation to the held-to-maturity designation.

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.

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 September 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.

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 September 30, 2022.

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

Federal Government, as the GSEs can draw funds from the U.S.

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 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 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, 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 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.

On October 1, 2022, a similar transfer of $ 198.3 million securities from available for sale to held-to-maturity was completed.

The securities were transferred at their fair value as of the transfer date, with the related unrealized gain or loss as of the date of transfer included in the amortized cost basis of the transferred security and subject to amortization or accretion over each security’s remaining life.

An unrealized loss of $ 30.1 million, on securities transferred from the available-for-sale to held-to-maturity categorization, remains as of March 31, 2023 and is included in accumulated other comprehensive income, net of tax.

The remaining unrealized loss on the securities transferred from available-for-sale to held-to-maturity, will be accreted over the remaining term of the securities, with the amortized-cost basis of these securities and accumulated comprehensive income each increasing over time.

A discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and is updated on a quarterly basis.

As of March 31, 2023, an allowance for credit losses of $ 0.06 million had been established on the Bank’s held-to-maturity portfolio which remained unchanged from December 31, 2022.

All of the Company’s held-to-maturity municipal bonds were AAA, AA, or A rated and have been determined to be investment grade as of March 31, 2023 and December 31, 2022.

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.

1 unchanged sentence

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

Less than twelve months

22 unchanged sentences

(dollars in thousands, unaudited)

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

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

Gross gains on sales, calls and maturities of securities available for sale

Gross losses on sales, calls and maturities of securities available for sale

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 September 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 March 31, 2023 and December 31, 2022 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)

September 30, 2022

March 31, 2023

Available-for-Sale

21 unchanged sentences

Collateralized loan obligations

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.

At March 31, 2023, the Company’s investment portfolio included 499 municipal bonds issued by 409 different government municipalities and agencies located within 37 different states, with an aggregate fair value of $ 383.9 million.

The largest exposure to any single municipality or agency was a combined $ 5.2 million (fair value) in general obligation bonds issued by the City of New York (NY).

In addition, the Company owned 51 subordinated debentures issued by bank holding companies totaling $ 52.0 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.

At December 31, 2022, the Company’s investment portfolio included 501 municipal bonds issued by 406 different government municipalities and agencies located within 37 states, with an aggregate fair value of $ 381.0 million.

The largest exposure to any single municipality or agency was a combined $ 5.1 million (fair value) in general obligation bonds issued by the City of New York (NY).

In addition, the company owned 51 subordinated debentures issued by bank holding companies totaling $ 57.4 million (fair value).

5 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

December 31, 2022

12 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

December 31, 2022

2 unchanged sentences

Sales tax revenue

Intergovernmental agreement

Local or GTD housing

Other (9 and 10 sources, respectively)

8 unchanged sentences

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 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.

As of March 31, 2023, our total LIHTC investment book balance was $ 9.9 million, which includes $ 7.4 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 $ 0.2 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.

1 unchanged sentence

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

Note 10 – Loans 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 September 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, 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 following table presents loans by class as of March 31, 2023 and December 31, 2022.

Accrued interest receivable on loans of $ 5.2 million and $ 6.4 million at March 31, 2023 and December 31, 2022 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 December 31, 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.

Loan And Lease Distribution

Loan Distribution

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

December 31, 2022

1-4 family residential construction

Other construction/land

8 unchanged sentences

Net deferred loan fees and costs

Loans and leases, amortized cost basis

Loans, amortized cost basis

Allowance for credit losses

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 September 30, 2022:

Nonaccrual Loans and Leases

The following tables present the amortized cost basis of nonaccrual loans, according to loan class, with and without individually evaluated reserves as of March 31, 2023 and December 31, 2022 :

Nonaccrual Loans

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

Nonaccrual Loans

12 unchanged sentences

Consumer loans

The following table presents the impaired loans as of December 31, 2021, according to loan class, with and without an individually evaluated reserve according to the recorded investment basis.

Impaired loans as of December 31, 2021 included both nonaccrual loans and performing TDRs.

A separate breakout of nonaccrual loans by class as of December 31, 2021 is included in the past due loans table as of December 31, 2021, later in this footnote.

December 31, 2022

Unpaid Principal

Average Recorded

Interest Income

Investment (2)

Related Allowance

Recognized (3)

With an Allowance Recorded

Nonaccrual Loans

With no allowance for credit loss

With an allowance for credit loss

Loans Past Due 90+ Accruing

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

2 unchanged sentences

Commercial and industrial

Mortgage warehouse lines

Consumer loans

With no Related Allowance Recorded

1-4 family - closed-end

Commercial real estate - owner occupied

Total real estate

Commercial and industrial

(1) Contractual principal balance due from customer.

(2) Principal balance on Company’s books, less any direct charge offs.

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

The Company did not recognize any interest on nonaccrual loans during 2022 and would have recognized an additional $ 0.04 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:

The following table presents the amortized cost basis of collateral-dependent loans by class as of March 31, 2023 and December 31, 2022:

Collateral Dependent Loans

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

December 31, 2022

Amortized Cost

Individual Reserves

Amortized Cost

Individual Reserves

1-4 family residential construction

8 unchanged sentences

Consumer loans

Total loans and leases

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

During the first quarter of 2023 the amortized cost balance of collateral-dependent loans declined by 18.6 million due to the foreclosure and subsequent sale of Farmland and other Agricultural collateral related to a single borrower, as well as declines resulting from upgrades and payoffs.

The weighted average loan-to-value ratio of collateral dependent loans was 17 % at March 31, 2023.

There were no collateral dependent loans in the process of foreclosure as of March 31, 2023.

The following tables presents the aging of the amortized cost basis in past-due loans, according to class, as of March 31, 2023 and December 31, 2022:

Past Due Loans

(dollars in thousands, unaudited)

September 30, 2022

March 31, 2023

30-59 Days Past Due

3 unchanged sentences

Loans not Past Due

1-4 family residential construction

Other construction/land

7 unchanged sentences

Consumer loans

Total loans and leases

The following table presents the aging of the recorded investment in past-due and nonaccrual loans, according to class, as of December 31, 2021:

December 31, 2022

Total Financing

30-59 Days Past Due

60-89 Days Past Due

Loans Past Due 90+ Days

Total Past Due

1-4 family residential construction

Loans not Past Due

Other construction/land

3 unchanged sentences

Commercial real estate - non-owner occupied

Total real estate loans

Total real estate

Commercial and industrial

1 unchanged sentence

Consumer loans

Total gross loans and leases

(1) Included in Total Financing Receivables

(2) As of December 31, 2021 there were no loans over 90 days past due and still accruing.

Troubled Debt Restructurings

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 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.

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 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 September 30, 2021

Rate Modification

Interest Only

Rate & Term Modification

Term & Interest Modification

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Total real estate loans

Commercial and industrial

Consumer loans

Nine months ended September 30, 2021

Rate Modification

Interest Only Modification

Rate & Term Modification

Term & Interest Modification

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Total real estate loans

Commercial and industrial

Consumer loans

Troubled Debt Restructurings

(dollars in thousands, unaudited)

Three months ended September 30, 2021

Difference ⁽ ¹ ⁾

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Total real estate loans

Commercial and industrial

Consumer loans

(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.

Nine months ended September 30, 2021

Difference ⁽ ¹ ⁾

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Total real estate loans

Commercial and industrial

Consumer loans

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.

Loan Modifications

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

There were no modifications to borrowers experiencing financial difficulty, including principal forgiveness, rate reductions, payment deferral, or term extension, during the three months ended March 31, 2023.

For the three months ended March 31, 2022, there were no new TDRs and no modifications of existing TDRs.

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 September 30, 2022:

Loan and Lease Credit Quality by Vintage

The following tables present the amortized cost of loans by credit quality classification in addition to loan vintage as of March 31, 2023:

Loan Credit Quality by Vintage

(dollars in thousands, unaudited)

Term Loans and Leases Amortized Cost Basis by Origination Year

Term Loans Amortized Cost Basis by Origination Year

Revolving Loans Amortized Cost

Other construction/land

Special Mention

1-4 family - closed-end

14 unchanged sentences

Special mention

The following table presents the Company’s loan portfolio on the recorded investment basis, according to loan class and credit grade as of December 31, 2021:

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate owner occupied

Commercial real estate non-owner occupied

Total real estate

Commercial and industrial

Mortgage warehouse lines

Consumer loans

Total gross loans and leases

Gross charge-offs

CECL replaces the legacy accounting for loans designated as purchased credit impaired (“PCI”) with loans designated as purchased credit deteriorated (“PCD”).

1 unchanged sentence

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 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.

As of March 31, 2023 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 losses, with a $ 9.5 million cumulative adjustment.

The Company’s ACL is calculated quarterly, with any difference in the calculated ACL and the recorded ACL trued-up through an entry to the provision for credit losses.

9 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 the

consideration of current and expected conditions and circumstances including the level of interest rates.

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.

1 unchanged sentence

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 September 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 March 31, 2023, 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.

4 unchanged sentences

As current and expected conditions, may vary compared with conditions over the historical lookback period, which is utilized in the calculation of quantitative reserves, management considers whether additional or reduced reserve levels on collectively evaluated loans may be warranted given the consideration of a variety of qualitative factors.

Several of the following qualitative factors (“Q-factors”) considered by management reflect the legacy regulatory guidance on Q-factors, whereas several others represent factors unique to the Company or unique to the current time period.

Several of the following qualitative factors (“Q-

factors”) considered by management reflect the legacy regulatory guidance on Q-factors, whereas several others represent factors unique to the Company or unique to the current time period.

● Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices

11 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.

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.

5 unchanged sentences

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

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:

As of March 31, 2023, 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 tables present the activity in the allowance for credit losses by portfolio segment for the quarters ended March 31, 2023 and 2022:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

6 unchanged sentences

Allowance for credit losses:

Balance, June 30, 2022

Balance, December 31, 2022

Provision for credit losses

Ending allowance balance:

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

(dollars in thousands, unaudited)

1-4 Family Real Estate

8 unchanged sentences

Ending allowance balance:

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 nine months ended September 30, 2021:

Three months ended September 30, 2021

Commercial and

Industrial (1)

Allowance for credit losses:

Beginning balance

(Benefit) provision

Ending balance

Nine months ended September 30, 2021

Commercial and

Industrial (1)

Allowance for credit losses:

Beginning balance

(Benefit) provision

Ending balance

Loans evaluated for impairment:

Ending balance

There were no significant changes in the Company’s loan portfolio ACL in the first quarter of 2023.

Note 11 – Goodwill

The following table discloses changes in the carrying value of goodwill for the three months ended March 31, 2023 and 2022 (dollars in thousands, unaudited):

Three Months Ended March 31,

Net carrying value at beginning of period

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value.

Bank of the Sierra (the “Bank”) is the only subsidiary of the Company that meets the materiality criteria necessary to be deemed an operating segment, and because the Company exists primarily for the purpose of holding the stock of the Bank we have determined that only one unified operating segment or reporting unit (the consolidated Company) exists.

The fair value of the consolidated Company is its market capitalization, as determined by quoted prices in active markets, plus a sales control premium, as determined by analyzing recent mergers and acquisitions.

If the Company’s market capitalization plus a control premium exceeds recorded shareholders’ equity (the book value), it can be reasonably presumed that no impairment exists.

Therefore, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment at March 31, 2023.

Note 12 – 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.

The following table summarizes the Company’s other borrowings as of March 31, 2023 and December 31, 2022:

March 31, 2023

December 31, 2022

Overnight Fed funds purchased (1)

Overnight FHLB advance (2)

Long-term FHLB advance (2)

Total other borrowings

The Company has established secured and unsecured lines of credit under which it may borrow funds from time to time on a term or overnight basis from the FHLB, FRB, and other correspondent banks.

Federal Funds Purchased (1) – The Company had unsecured available lines of credit with correspondent banks for short-term borrowings totaling $ 309.0 million at March 31, 2022 and $ 237.0 million at December 31, 2022.

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 Home Loan Bank Borrowings (2) – At March 31, 2023 and December 31, 2022, the Company had available lines of credit with the FHLB totaling $ 762.7 million and $ 718.8 million, respectively, based on eligible collateral of certain loans and investment securities.

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.

At March 31, 2023 and December 31, 2022 the Company had borrowing capacity under this line totaling $ 40.3 million and $ 42.3 million, respectively.

We had no outstanding borrowings on this line of credit as of March 31, 2023 and December 31, 2022.

Repurchase Agreements – Repurchase agreements represent “sweep accounts”, where commercial deposit balances above a specified threshold are transferred at the close of each business day into non-deposit accounts secured by investment securities.

Repurchase agreements totaled $ 94.1 million at March 31, 2023 relative to a balance of $ 109.2 million at December 31, 2022.

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.

The balance of the Company’s long-term debt, net of unamortized issuance costs, at both March 31, 2023 and December 31, 2022 was $ 49.2 million.

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.

At March 31, 2023 and December 31, 2022 the Company’s trust preferred securities totaled $ 35.5 million.

Note 13 – Revenue Recognition

The Company utilizes the guidance found in ASU 2014-09, Revenue from Contracts with Customers (ASC 606), when accounting for certain noninterest income.

The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which

the entity expects to be entitled in exchange for those goods or services.

Sufficient information should be provided to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

1 unchanged sentence

The guidance does not apply to revenue associated with financial instruments such as loans and investments, and other noninterest income such as loan servicing fees and earnings on bank-owned life insurance, which are accounted for on an accrual basis under other provisions of GAAP.

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 nine-month periods ended September 30, 2022 and 2021.

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

These gains were immaterial for both of the three months ended March 31, 2023 and 2022.

The following table presents the Company’s sources of noninterest income for the three month periods ended March 31, 2023 and 2022.

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

For the three months ended September 30,

Nine months ended September 30,

For the three months ended March 31,

For the year ended December 31,

Noninterest income

8 unchanged sentences

Total noninterest income

Noninterest expense

Salaries and employee benefits (1)

Occupancy expense (1)

Gain on sale of OREO

Total noninterest expense

Percentage of noninterest income not within scope of ASC 606.

(1) Not within scope of ASC 606.

Revenue streams are not related to contract with customers and are accounted for on an accrual basis under other provisions of GAAP.

Revenue streams are not related to contracts with customers and are accounted for under other provisions of GAAP.

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