What changed in this filing

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Item 1. Financial Statements

2023-08-03 compared with 2023-05-05 · 264 added, 151 removed, 746 unchanged (36% of the section changed)

3 unchanged sentences

(dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

3 unchanged sentences

Investment securities

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)

Available-for-sale, net of zero allowance for credit losses at June 30, 2023 and December 31, 2022

Held-to-maturity, (fair value of $ 318,142 at June 30, 2023 and $ 328,011 at December 31, 2022)

Allowance for credit losses on held-to-maturity securities

20 unchanged sentences

24,000,000 shares authorized;

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

14,811,736 and 15,170,372 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive (loss) income, net

Accumulated other comprehensive loss, net

Total shareholders' equity

3 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022

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

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

Interest and dividend income

5 unchanged sentences

Interest expense

Short-term borrowings

Federal funds purchased and repurchase agreements

Federal Home Loan Bank advances

Long-term debt

Subordinated debentures

1 unchanged sentence

Net interest income

Provision for credit losses

(Benefit) provision for credit losses

Net interest income after provision for credit losses

11 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 MONTHS ENDED MARCH 31, 2023 AND 2022

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(dollars in thousands, unaudited)

Three months ended March 31,

Other comprehensive gain (loss), before tax:

Unrealized gain (loss) on securities:

Unrealized holding gain (loss) arising during period

Three months ended June 30,

Six months ended June 30,

Other comprehensive (loss) gain, before tax:

Unrealized (loss) gain on securities:

Unrealized holding (loss) gain arising during period

reclassification adjustment for gains included in net income (1)

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:

Other comprehensive (loss) gain, before tax

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

Other comprehensive (loss) gain, 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 March 31, 2023 and 2022 were $ 13 thousand and $ 305 thousand, respectively.

Income tax expenses associated with the reclassification adjustment for the three months ended June 30, 2023 and 2022 were $ 0.1 million and $ 0 , respectively.

Income tax expenses associated with the reclassification adjustment for the six months ended June 30, 2023 and 2022 were $ 0.1 million and $ 0.3 million, respectively.

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND 2022

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

1 unchanged sentence

Shareholders'

Income (Loss)

Balance, March 31, 2022

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Restricted stock forfeited / cancelled

Stock based compensation - stock options

Stock based compensation - restricted stock

Cash dividends - $ 0.23 per share

Balance, June 30, 2022

Balance, March 31, 2023

Other comprehensive loss, net of tax

Restricted stock forfeited / cancelled

Restricted stock vested in period

Stock based compensation - stock options

Stock based compensation - restricted stock

Stock repurchase

Excise tax on stock repurchase

Cash dividends - $ 0.23 per share

Balance, June 30, 2023

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

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

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

Comprehensive

Shareholders'

(Loss) Income

Balance, December 31, 2021

Cumulative effect of change in accounting principle (Note 3)

Cumulative change in accounting principle

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Restricted stock surrendered due to employee tax liability

4 unchanged sentences

Cash dividends - $ 0.46 per share

Balance, March 31, 2022

Balance, June 30, 2022

Balance, December 31, 2022

3 unchanged sentences

Restricted stock forfeited / cancelled

Restricted stock vested in period

Stock based compensation - stock options

3 unchanged sentences

Cash dividends - $ 0.46 per share

Balance, March 31, 2023

Balance, June 30, 2023

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(dollars in thousands, unaudited)

Three months ended March 31,

Six months ended June 30,

Cash flows from operating activities:

3 unchanged sentences

Gain on sale on foreclosed assets

Writedowns on foreclosed assets

Stock based compensation expense

Provision for credit losses on loans

(Benefit) provision for credit losses on held-to-maturity securities

Depreciation and amortization

Net amortization on securities premiums and discounts

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

Net accretion of premiums/discounts for loans acquired

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

Amortization of core deposit intangible

Decrease (increase) in interest receivable and other assets

Increase in interest receivable and other assets

Decrease in other liabilities

Deferred income tax (benefit) provision

Deferred income tax benefit

Decrease in value of restricted bank equity securities

8 unchanged sentences

Principal pay downs on securities available for sale

Net purchases of FHLB stock

Loan originations and payments, net

8 unchanged sentences

Increase in deposits

Decrease in borrowed funds

Increase in Fed funds purchased

Decrease in short-term Federal Home Loan Bank advances

Proceeds from long-term Federal Home Loan Bank advances and other debt

(Decrease) increase in customer repurchase agreements

1 unchanged sentence

Repurchases of common stock

Stock options exercised

Net cash provided by financing activities

5 unchanged sentences

Interest paid

Income taxes paid

Supplemental schedule of noncash investing and financing activities:

8 unchanged sentences

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

As of March 31, 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”).

As of June 30, 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 $ 3.7 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.

The Company had total assets of $ 3.8 billion at June 30, 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 June 30, 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, through May 5, 2023 and recognized them where appropriate.

In preparing the accompanying financial statements, Management has taken subsequent events into consideration, through August 3, 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.

3 unchanged sentences

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

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 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.

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

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.

13 unchanged sentences

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.

As of June 30, 2023, it was determined that the allowance for credit losses related to held-to-maturity securities is minimal given that most held-to-maturity securities are U.S.

Government sponsored or are highly rated municipal securities.

In March 2023 the FASB issued , ASU No.

5 unchanged sentences

Note 4 – Share Based Compensation

On March 16, 2017, the Company’s Board of Directors approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective May 24, 2017, the date approved by the Company’s shareholders.

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 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 March 31, 2023 was 356,420 .

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

On March 17, 2023, the Company’s Board of Directors approved and adopted the 2023 Equity Compensation Plan (the “2023 Plan”), which became effective May 24, 2023, the date approved by the Company’s shareholders.

The 2023 Plan replaced the Company’s 2017 Stock Incentive Plan (the “2017 Plan”).

Options to purchase 213,800 shares granted under the 2017 Plan and options to purchase 134,449 shares that were granted under the 2007 Plan were still outstanding as of

June 30, 2023, and remain unaffected by that plan’s expiration.

The 2023 Plan provides for the issuance of various types of equity awards, including options, stock appreciation rights, restricted stock awards, restricted share units, performance share awards, dividend equivalents, or any combination thereof.

Such awards may be granted to officers and employees as well as non-employee directors, which awards may be granted on such terms and conditions as are established by the Board of Directors or the Compensation Committee in its discretion.

The total number of shares of the Company’s authorized but unissued stock reserved for issuance pursuant to awards under the 2023 Plan was initially 360,000 shares, and the number remaining available for grant as of June 30, 2023 was unchanged.

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

2 unchanged sentences

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

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

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

For the first half of 2023 and 2022, the charges totaled $ 0.8 million.

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 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.

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

As of June 30, 2023, there was $ 2.6 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 2.1 years.

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,

The Company’s restricted stock award activity for the six months ended June 30, 2023 and 2022 is summarized below (unaudited):

Six months ended June 30,

Weighted Average Grant-Date Fair Value

1 unchanged sentence

Unvested shares, January 1,

Unvested shares, March 31,

Unvested shares, June 30,

Stock Option Grants

The Company has issued equity instruments in the form of Incentive Stock Options and Nonqualified Stock Options to certain officers and directors and may continue to do so under the 2017 Plan.

The Company has issued equity instruments in the form of Incentive Stock Options and Nonqualified Stock Options to certain officers and directors.

No options have been granted since 2020, but the Company could elect to issue under the 2023 Plan.

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 March 31, 2023 and 2022 are summarized below (dollars in thousands, except per share data, unaudited):

Three months ended March 31,

The Company’s stock option activity during the six months ended June 30, 2023 and 2022 are summarized below (dollars in thousands, except per share data, unaudited):

Six months ended June 30,

Weighted Average

6 unchanged sentences

Forfeited/Expired

Outstanding at March 31,

Exercisable at March 31,

(1) The aggregate intrinsic value of stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2023.

Outstanding at June 30,

Exercisable at June 30,

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

1 unchanged sentence

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

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

There were 14,735,568 weighted average shares outstanding during the second quarter of 2023 and 14,931,701 during the second quarter of 2022, while there were 14,853,052 weighted average shares outstanding during the first six months of 2023 and 14,976,774 during the first six months 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 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.

For the second quarter of 2023, calculations under the treasury stock method resulted in the equivalent of 19,196 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 405,229 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the second quarter of 2022 the equivalent of 72,316 shares were added in calculating diluted earnings per share, while 354,612 anti-dilutive stock options were not factored into the computation.

Likewise, for the first half of 2023 the equivalent of 22,456 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 364,219 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 87,030 shares and non-inclusion of 303,543 anti-dilutive options in calculating diluted earnings per share for first half of 2022.

Note 6 – Comprehensive Income (Loss)

9 unchanged sentences

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

March 31, 2023

June 30, 2023

December 31, 2022

2 unchanged sentences

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

home equity lines of credit;

commercial real estate construction loans, where disbursements are made over the course of construction;

commercial revolving lines of credit;

mortgage warehouse lines of credit;

unsecured personal lines of credit;

and formalized (disclosed) deposit account overdraft lines.

mortgage warehouse lines, home equity lines of credit, commercial real estate construction loans, where disbursements are made over the course of construction;

commercial revolving lines of credit, unsecured personal lines of credit and formalized (disclosed) deposit account overdraft lines.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

1 unchanged sentence

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.

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 $ 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.

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

Unused commitments on mortgage warehouse lines were $ 319.4 million at June 30, 2023 and $ 594.6 million at December 31, 2022.

The decline in unused mortgage warehouse commitments is due to the Company strategically reducing exposure of certain lines while increasing the number of overall mortgage warehouse lines.

The ACL on 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.

The ACL on unfunded loan commitments is located in other liabilities while any related provision expense is recorded as a provision for credit losses.

At June 30, 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.

1 unchanged sentence

Management does not believe there are such matters that will have a material effect on the financial statements.

As noted under footnote 3 the adoption of CECL on January 1, 2022 impacted the Company’s ACL on unfunded loan commitments.

Additional information is included in footnote 3.

Note 8 – Fair Value Disclosures and Reporting and Fair Value Measurements

4 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.

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)

March 31, 2023

June 30, 2023

Fair Value Measurements

29 unchanged sentences

Subordinated debentures

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:

For financial asset categories that were carried on our balance sheet at fair value as of June 30, 2023 and December 31, 2022, the Company used the following methods and significant assumptions:

● Investment securities :

13 unchanged sentences

(dollars in thousands, unaudited)

Fair Value Measurements at March 31, 2023, using

Fair Value Measurements at June 30, 2023, using

Quoted Prices in

25 unchanged sentences

Transfers out of Level 3

Balance of recurring Level 3 assets at March 31,

Balance of recurring Level 3 assets at June 30,

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

2 unchanged sentences

(dollars in thousands, unaudited)

Fair Value Measurements at March 31, 2023, using

Fair Value Measurements at June 30, 2023, using

Quoted Prices in

47 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2023

June 30, 2023

Allowance for Credit Losses

34 unchanged sentences

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.

An unrealized loss of $ 29.5 million, on securities transferred from the available-for-sale to held-to-maturity categorization, remains as of June 30, 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.

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 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 Company elected the practical expedient available under CECL to exclude accrued interest receivable from the amortized cost basis of all categorizations of 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 is included in other assets on the Company’s balance sheet and as of June 30, 2023, measured at $ 11.8 million and $ 2.5 million for available-for-sale securities and held-to-maturity securities, respectively.

Accrued interest receivable as of December 31, 2022, on these same classes of investment securities measured at $ 9.3 million and $ 2.7 million, respectively.

During the second quarter and first half of 2023, no interest receivable on available-for-sale or held-to-maturity securities was reversed against interest income and the Company did not have any held-to-maturity debt securities past due.

As of June 30, 2023, an allowance for credit losses of $ 0.02 million had been established on the Bank’s held-to-maturity portfolio, which is a decrease of $ 0.04 million from the December 31, 2022 allowance for credit losses of $ 0.06 million.

The following table summarizes the amortized cost of held-to-maturity municipal bonds aggregated by NRSRO credit rating:

Held-To-Maturity by Credit Rating

(dollars in thousands, unaudited)

Held-To-Maturity

June 30, 2023

December 31, 2022

State and political subdivisions

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

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

In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in 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 unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income.

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)

March 31, 2023

June 30, 2023

Less than twelve months

22 unchanged sentences

(dollars in thousands, unaudited)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

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

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 March 31, 2023 and December 31, 2022 are shown below, grouped by the remaining time to contractual maturity dates.

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at June 30, 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)

March 31, 2023

June 30, 2023

Available-for-Sale

21 unchanged sentences

Collateralized loan obligations

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.

At June 30, 2023, the Company’s investment portfolio included 488 municipal bonds issued by 398 different government municipalities and agencies located within 36 different states, with an aggregate fair value of $ 368.3 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).

9 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2023

June 30, 2023

December 31, 2022

12 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2023

June 30, 2023

December 31, 2022

12 unchanged sentences

Any commitments or contingent commitments for future investment are reflected as a liability.

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

As of March 31, 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.

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 the proportional amortization method as a “below the line” expense, over the time period in which the tax credits and tax benefits are expected to be received.

As of June 30, 2023, our total LIHTC investment book balance was $ 9.8 million, which includes $ 7.0 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, 2023, and “below the line” amortization expense of $ 0.3 million associated with those investments was recorded 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.

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.

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 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 Company elected the practical expedient available under CECL to exclude accrued interest receivable from the amortized cost basis of all categorizations of loans, 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 on loans of $ 5.1 million and $ 6.4 million at June 30, 2023 and December 31, 2022, respectively is included in other assets on the Company’s balance sheet.

The following table presents loans by class as of June 30, 2023 and December 31, 2022.

The December 31, 2022 balance in 1-4 family closed end loans reflects year-to-date 2022 loan purchases of $ 173.1 million.

3 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2023

June 30, 2023

December 31, 2022

11 unchanged sentences

Allowance for credit losses

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 :

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 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 proceeds are advanced to the borrower to make interest payments, all interest recognized from the inception of the loan is reversed when the loan is placed on nonaccrual.

Once a loan is on nonaccrual 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.

The following tables present the amortized cost basis of nonaccrual loans, according to loan class, with and without individually evaluated reserves as of June 30, 2023 and December 31, 2022:

Nonaccrual Loans

(dollars in thousands, unaudited)

March 31, 2023

June 30, 2023

Nonaccrual Loans

2 unchanged sentences

Loans Past Due 90+ Accruing

1-4 family residential construction

Other construction/land

1-4 family - closed-end

1 unchanged sentence

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Total real estate

Commercial and industrial

Mortgage warehouse lines

Consumer loans

December 31, 2022

3 unchanged sentences

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

Commercial real estate - non-owner occupied

Total real estate

Commercial and industrial

Mortgage warehouse lines

Consumer loans

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 March 31, 2023 and December 31, 2022:

The Company did not recognize any interest on nonaccrual loans during the three and six months ended June 30, 2023, and would have recognized an additional $ 0.02 million and $ 0.06 million, respectively, in interest income on nonaccrual loans had those loans not been designated as nonaccrual.

Due to loans being placed on nonaccrual status, during the second quarter and first half of 2023, $ 0.05 million and $ 0.3 million respectively, of interest receivable on loans was reversed against interest income .

The following table presents the amortized cost basis of collateral-dependent loans by class as of June 30, 2023, and December 31, 2022:

Collateral Dependent Loans

(dollars in thousands, unaudited)

March 31, 2023

June 30, 2023

December 31, 2022

3 unchanged sentences

Individual Reserves

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

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:

During the first half of 2023 the amortized cost balance of collateral-dependent loans declined by $ 19.0 million due to the foreclosure and subsequent sale of Farmland and other Agricultural collateral related to a single borrower during the first quarter of 2023, as well as declines resulting from upgrades and payoffs.

The weighted average loan-to-value ratio of collateral dependent loans was 27 % at June 30, 2023.

There were no collateral dependent loans in the process of foreclosure as of June 30, 2023.

The following tables presents the aging of the amortized cost basis in past-due loans, according to class, as of June 30, 2023 and December 31, 2022:

Past Due Loans

(dollars in thousands, unaudited)

March 31, 2023

June 30, 2023

30-59 Days Past Due

29 unchanged sentences

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.

There were no payment defaults on loans previously modified in the preceding 12 months for either of the periods ending June 30, 2023 and 2022.

The Company had no additional funds committed on loans which have been modified to borrowers experiencing financial difficulty.

For the three and six months ended June 30, 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 by credit quality classification in addition to loan vintage as of March 31, 2023:

The following tables present the amortized cost of loans by credit quality classification in addition to loan vintage as of June 30, 2023 and December 31, 2022:

Loan Credit Quality by Vintage

(dollars in thousands, unaudited)

June 30, 2023

Term Loans Amortized Cost Basis by Origination Year

Revolving Loans Amortized Cost

Revolving Loans Converted to Term Loans

Other construction/land

16 unchanged sentences

Gross Charge-Offs

Loan Credit Quality by Vintage

(dollars in thousands, unaudited)

December 31, 2022

Term Loans Amortized Cost Basis by Origination Year

Revolving Loans Amortized Cost

Revolving Loans Converted to Term Loans

Other construction/land

1-4 family - closed-end

Special mention

Multi-family residential

Special mention

Commercial real estate - OO

Special mention

Commercial real estate - NOO

Special mention

Commercial and industrial

Special mention

Mortgage warehouse lines

Consumer loans

Special mention

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 March 31, 2023 the Company had no loans categorized as PCD.

As of June 30, 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.

14 unchanged sentences

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

The call code regression models utilized upon implementation of CECL on January 1, 2022, and as of March 31, 2023, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate.

The call code regression models utilized upon implementation of CECL on January 1, 2022, and as of June 30, 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.

10 unchanged sentences

● Changes in the experience, ability, and depth of lending management and other relevant staff

● Changes in the volume and severity of past due, non-accruals loans, and adversely classified loans, as reflected in changes of the relative level of loans classified as substandard and special mention

● Changes in the volume and severity of past due, nonaccruals loans, and adversely classified loans, as reflected in changes of the relative level of loans classified as substandard and special mention

● Changes in the quality of the Bank’s loan review processes

14 unchanged sentences

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

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:

As of June 30, 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 June 30, 2023 and 2022:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

6 unchanged sentences

Allowance for credit losses:

Balance, March 31, 2023

Provision for credit losses

Ending allowance balance:

1-4 Family Real Estate

Commercial Real Estate

Farmland & Agricultural Production

Commercial & Industrial

Mortgage Warehouse

Allowance for credit losses:

Balance, March 31, 2022

Provision for credit losses

Ending allowance balance:

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

The following tables present the activity in the allowance for credit losses by portfolio segment for the six months ended June 30, 2023 and 2022:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

1-4 Family Real Estate

Commercial Real Estate

Farmland & Agricultural Production

Commercial & Industrial

Mortgage Warehouse

Allowance for credit losses:

Balance, December 31, 2022

11 unchanged sentences

Ending allowance balance:

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

There were no significant changes in the Company’s loan portfolio ACL in the first half 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,

The following table discloses changes in the carrying value of goodwill for the six months ended June 30, 2023 and 2022 (dollars in thousands, unaudited):

Six months ended June 30,

Net carrying value at beginning of period

3 unchanged sentences

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.

Therefore, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment at June 30, 2023.

Note 12 – Borrowings and Other Arrangements

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

March 31, 2023

The following table summarizes the Company’s other borrowings as of June 30, 2023 and December 31, 2022:

June 30, 2023

December 31, 2022

Overnight Fed funds purchased (1)

Overnight FHLB advance (2)

Short-term FHLB advance (2)

Long-term FHLB advance (2)

1 unchanged sentence

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.

Federal Funds Purchased (1) – The Company had unsecured available lines of credit with correspondent banks and the Federal Home Loan Bank for short-term borrowings totaling $ 339.8 million at June 30, 2023 and $ 237.0 million at December 31, 2022.

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

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 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.

At June 30, 2023, $ 90.0 million of the federal funds purchased were from the Federal Home Loan Bank.

Secured Federal Home Loan Bank Borrowings (2) – At June 30, 2023 and December 31, 2022, the Company had secured available lines of credit with the FHLB totaling $ 656.3 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 and investments.

At June 30, 2023 and December 31, 2022 the Company had borrowing capacity under this line totaling $ 256.8 million and $ 42.3 million, respectively.

We had no outstanding borrowings on this line of credit as of June 30, 2023 and December 31, 2022.

The increase in this line was due to the pledging of certain Collateralized Loan Obligations.

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.

Repurchase agreements totaled $ 73.7 million at June 30, 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 both March 31, 2023 and December 31, 2022 was $ 49.2 million.

The balance of the Company’s long-term debt, net of unamortized issuance costs, at June 30, 2023, was $ 49.3 million 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 March 31, 2023 and December 31, 2022 the Company’s trust preferred securities totaled $ 35.5 million.

Trust preferred securities are variable rate instruments which were benchmarked against the London Interbank Offered Rate (LIBOR) plus a spread until LIBOR was phased out on June 30, 2023.

These instruments are benchmarked against the Secured Overnight Financing Rate (SOFR), effective June 30, 2023.

At June 30, 2023, and December 31, 2022 the Company’s trust preferred securities totaled $ 35.6 million and $ 35.5 million, respectively.

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.

2 unchanged sentences

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.

These gains were immaterial for each of the three and six months ended June 30, 2023 and 2022.

The following table presents the Company’s sources of noninterest income for the three month periods ended June 30, 2023 and 2022.

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

For the three months ended March 31,

For the three months ended June 30,

Six months ended June 30,

For the year ended December 31,

15 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements