What changed in this filing

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Item 1. Financial Statements

2023-11-02 compared with 2023-08-03 · 179 added, 212 removed, 798 unchanged (33% of the section changed)

3 unchanged sentences

(dollars in thousands)

June 30, 2023

September 30, 2023

December 31, 2022

3 unchanged sentences

Investment securities

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)

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

Held-to-maturity, (fair value of $ 290,956 at September 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;

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

14,702,079 and 15,170,372 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

Additional paid-in capital

6 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

Interest and dividend income

36 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(dollars in thousands, unaudited)

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

Other comprehensive (loss) gain, before tax:

Unrealized (loss) gain on securities:

Unrealized holding (loss) gain arising during period

Unrealized loss on securities:

Unrealized holding loss arising during period

reclassification adjustment for gains included in net income (1)

Other comprehensive (loss) gain, before tax

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

Other comprehensive (loss) gain, net of tax:

Other comprehensive loss, before tax

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

Other comprehensive loss, net of tax:

Comprehensive 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 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.

There were no income tax expenses associated with the reclassification adjustment for the three months ended September 30, 2023 and 2022.

Income tax expenses associated with the reclassification adjustment for the nine months ended September 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 JUNE 30, 2023 AND 2022

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

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

1 unchanged sentence

Shareholders'

Balance, March 31, 2022

Balance, June 30, 2022

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Restricted stock surrendered due to employee tax liability

Restricted stock forfeited / cancelled

2 unchanged sentences

Cash dividends - $ 0.23 per share

Balance, September 30, 2022

Balance, June 30, 2023

Balance, March 31, 2023

Other comprehensive loss, net of tax

Restricted stock forfeited / cancelled

Restricted shares withheld for taxes

Restricted stock vested in period

4 unchanged sentences

Cash dividends - $ 0.23 per share

Balance, June 30, 2023

Balance, September 30, 2023

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

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

11 unchanged sentences

Stock repurchase

Stock issued-acquisition

Cash dividends - $ 0.69 per share

Balance, June 30, 2022

Balance, September 30, 2022

Balance, December 31, 2022

1 unchanged sentence

Restricted stock granted

Restricted stock surrendered due to employee tax liability

Restricted shares withheld for taxes

Restricted stock forfeited / cancelled

5 unchanged sentences

Cash dividends - $ 0.69 per share

Balance, June 30, 2023

Balance, September 30, 2023

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(dollars in thousands, unaudited)

Six months ended June 30,

Nine months ended September 30,

Cash flows from operating activities:

16 unchanged sentences

Decrease in value of restricted bank equity securities

Excise tax on stock options purchased

Excise tax on stock repurchases

Amortization of debt issuance costs

13 unchanged sentences

Liquidation of bank-owned life insurance

Increase in partnership investment

Proceeds from BOLI death benefit

3 unchanged sentences

Increase in Fed funds purchased

Decrease in short-term Federal Home Loan Bank advances

Increase in short-term Federal Home Loan Bank advances

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

21 unchanged sentences

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

As of June 30, 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 September 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 $ 3.8 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.

The Company had total assets of $ 3.7 billion at September 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 September 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 August 3, 2023 and recognized them where appropriate.

In preparing the accompanying financial statements, Management has taken subsequent events into consideration, through November 2, 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

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.

14 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 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.

As of September 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.

5 unchanged sentences

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.

On October 9, 2023, the FASB issued ASU 2023-06, “ Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification of Initiative.” ASU 2023-06 amends the disclosure or presentation

requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”).

The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were “redundant, duplicative, overlapping, outdated, or superseded.” The new guidance is intended to align U.S.

GAAP requirements with those of the SEC and to facilitate the application of U.S.

GAAP for all entities.

ASU 2023-06 applies to all reporting entities within the scope of the amended subtopics.

Note that some of the amendments introduced by the ASU are technical corrections or clarifications of the FASB’s current disclosure or presentation requirements.

The effective date for each amendment of ASU 2023-06 will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

The Company will apply the amendments in ASU 2023-06 prospectively after the effective dates.

The adoption of this standard is not expected to have a significant effect on the Company’s financial statements.

Note 4 – Share Based Compensation

1 unchanged sentence

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.

Options to purchase 210,800 shares granted under the 2017 Plan and options to purchase 132,649 shares that were granted under the 2007 Plan were still outstanding as of September 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 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.

A pre-tax charge of $ 0.4 million was reflected in the Company’s income statement during the third quarter of 2023 and $ 0.3 million during the third quarter of 2022, as expense related to stock options and restricted stock awards.

For the first nine months of 2023 and 2022, the charges totaled $ 1.2 million and $ 1.0 million, respectively.

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 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.

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

As of September 30, 2023, there was $ 2.2 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 1.9 years.

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,

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

Nine months ended September 30,

Weighted Average Grant-Date Fair Value

1 unchanged sentence

Unvested shares, January 1,

Unvested shares, June 30,

Unvested shares, September 30,

Stock Option Grants

2 unchanged sentences

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

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

Six months ended June 30,

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

Nine months ended September 30,

Weighted Average

6 unchanged sentences

Forfeited/Expired

Outstanding at June 30,

Exercisable at June 30,

(1) The aggregate intrinsic value of stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2023.

Outstanding at September 30,

Exercisable at September 30,

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

1 unchanged sentence

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

There were 14,735,568 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.

There were 14,583,132 weighted average shares outstanding during the third quarter of 2023 and 14,954,503 during the third quarter of 2022, while there were 14,762,231 weighted average shares outstanding during the first nine months of 2023 and 14,968,242 during the first nine 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 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.

For the third quarter of 2023, calculations under the treasury stock method resulted in the equivalent of 53,345 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 278,374 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the third quarter of 2022 the equivalent of 59,545 shares were added in calculating diluted earnings per share, while 303,387 anti-dilutive stock options were not factored into the

Likewise, for the first nine months of 2023 the equivalent of 29,465 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 326,036 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 78,641 shares and non-inclusion of 299,404 anti-dilutive options in calculating diluted earnings per share for first nine months of 2022.

Note 6 – Comprehensive Income (Loss)

9 unchanged sentences

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

June 30, 2023

September 30, 2023

December 31, 2022

8 unchanged sentences

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.

Unused commitments on mortgage warehouse lines were $ 254.4 million at September 30, 2023 and $ 594.6 million at December 31, 2022.

The decline in unused mortgage warehouse commitments is due to the Company strategically reducing total exposure on certain individual 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.

1 unchanged sentence

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.

At September 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.

20 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

Fair Value Measurements

7 unchanged sentences

Loans, net held for investment

Individually evaluated collateral dependent loans

Financial liabilities:

19 unchanged sentences

Subordinated debentures

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:

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

● Investment securities :

7 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

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 June 30, 2023, using

Fair Value Measurements at September 30, 2023, using

Quoted Prices in

25 unchanged sentences

Transfers out of Level 3

Balance of recurring Level 3 assets at June 30,

Balance of recurring Level 3 assets at September 30,

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

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

The Company had no assets reported at fair value on a nonrecurring basis at September 30, 2023.

Assets reported at fair value on a nonrecurring basis at September 30, 2022 are summarized in the table below:

Fair Value Measurements – Nonrecurring

(dollars in thousands, unaudited)

Fair Value Measurements at June 30, 2023, using

Quoted Prices in

Active Markets for

Identical Assets

Observable Inputs

Unobservable Inputs

Individually evaluated collateral dependent loans

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

Consumer loans

Total collateral dependent loans

Foreclosed assets

Total assets measured on a nonrecurring basis

Fair Value Measurements at December 31, 2022, using

5 unchanged sentences

Individually evaluated collateral dependent loans

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

Other commercial

Consumer loans

14 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2023

September 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 $ 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.

An unrealized loss of $ 28.9 million, on securities transferred from the available-for-sale to held-to-maturity categorization, remains as of September 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.

3 unchanged sentences

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 is included in other assets on the Company’s balance sheet and as of September 30, 2023, measured at $ 12.1 million and $ 1.7 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.

During the third quarter and first nine months 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 September 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:

2 unchanged sentences

Held-To-Maturity

June 30, 2023

September 30, 2023

December 31, 2022

8 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

Less than twelve months

22 unchanged sentences

(dollars in thousands, unaudited)

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

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

2 unchanged sentences

Net gains on sale of securities available for sale

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

June 30, 2023

September 30, 2023

Available-for-Sale

21 unchanged sentences

Collateralized loan obligations

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.

At September 30, 2023, the Company’s investment portfolio included 485 municipal bonds issued by 395 different government municipalities and agencies located within 36 different states, with an aggregate fair value of $ 336.5 million.

The largest exposure to any single municipality or agency was a combined $ 4.8 million (fair value) in general obligation bonds issued by the City of New York (NY).

9 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

December 31, 2022

12 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

December 31, 2022

9 unchanged sentences

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

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

The Company currently has investments in five different LIHTC fund limited partnerships made in 2014, 2015, two in 2022, and one in 2023, all of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act.

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

1 unchanged sentence

The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on 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.

As of September 30, 2023, our total LIHTC investment book balance was $ 14.6 million, which includes $ 11.2 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, 2023, and “below the line” amortization expense of $ 0.5 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.

11 unchanged sentences

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.

Accrued interest receivable on loans of $ 5.3 million and $ 6.4 million at September 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 September 30, 2023 and December 31, 2022.

The December 31, 2022 balance in residential real estate 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.

2 unchanged sentences

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

December 31, 2022

Residential real estate

Commercial real estate

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

Other commercial

Mortgage warehouse lines

3 unchanged sentences

Allowance for credit losses

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 places 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.

3 unchanged sentences

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:

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

Nonaccrual Loans

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

Nonaccrual Loans

2 unchanged sentences

Loans Past Due 90+ Accruing

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Residential real estate

Total real estate

Commercial and industrial

Other commercial

Consumer loans

December 31, 2022

3 unchanged sentences

Loans Past Due 90+ Accruing

1-4 family - closed-end

Residential real estate

Total real estate

Commercial and industrial

Other commercial

Consumer loans

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:

The Company did not recognize any interest on nonaccrual loans during the three and nine months ended September 30, 2023, and would have recognized an additional $ 0.004 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 third quarter and first nine months of 2023, $ 0.001 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 September 30, 2023, and December 31, 2022:

Collateral Dependent Loans

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

December 31, 2022

3 unchanged sentences

Individual Reserves

1-4 family - closed-end

Commercial real estate - owner occupied

Residential real estate

Total real estate

Commercial and industrial

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:

Other commercial

During the first nine months of 2023 the amortized cost balance of collateral-dependent loans declined by $ 19.3 million due to the foreclosure and subsequent sale of Farmland and other Commercial 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 12 % at September 30, 2023.

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

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

Past Due Loans

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

30-59 Days Past Due

3 unchanged sentences

Loans not Past Due

Residential real estate

Commercial real estate

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

Other commercial

Mortgage warehouse lines

6 unchanged sentences

Loans not Past Due

Residential real estate

Commercial real estate

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

Other commercial

Mortgage warehouse lines

2 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 or six months ended June 30, 2023.

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.

There were no payment defaults on loans previously modified in the preceding 12 months for either of the periods ending September 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.

For the three and nine months ended September 30, 2022, there were no new Troubled Debt Restructures (TDR) 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 June 30, 2023 and December 31, 2022:

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

Loan Credit Quality by Vintage

(dollars in thousands, unaudited)

June 30, 2023

September 30, 2023

Term Loans Amortized Cost Basis by Origination Year

1 unchanged sentence

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

Residential real estate

Special mention

Commercial real estate

Special mention

Other construction/land

Special mention

Commercial and industrial

Other commercial

Special mention

9 unchanged sentences

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

Residential real estate

Special mention

Commercial real estate

Special mention

Other construction/land

Special mention

Commercial and industrial

Other commercial

Special mention

5 unchanged sentences

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

As of June 30, 2023 the Company had no loans categorized as PCD.

As of September 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.

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.

Management calculates the quantitative portion of collectively evaluated reserves for all loan categories, with the exception of Farmland, Agricultural Production and Consumer loans, using a discounted cash flow (“DCF”) methodology.

For purposes of calculating the quantitative portion of collectively evaluated reserves on Farmland, Agricultural Production, and Consumer categories a Remaining Life methodology is utilized.

For purposes of estimating the Company’s ACL, Management generally evaluates collectively evaluated loans by Federal Call code in order to group loans with similar risk characteristics together, however management has grouped loans in selected call codes together in determining portfolio segments, due to similar risk characteristics and reserve methodologies used for certain call code classifications.

For purposes of calculating the quantitative portion of collectively evaluated reserves on Farmland, Agricultural Production, and Consumer categories a Remaining Life methodology is utilized.

The DCF quantitative reserve methodology incorporates the consideration of probability of default (“PD”) and loss given default (“LGD”) estimates to estimate periodic losses.

9 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 June 30, 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 September 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.

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

10 unchanged sentences

Although collectively evaluated reserves are generally calculated separately at the call code or loan class level, management has grouped loan classes with similar risk characteristics into the following portfolio segments:

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

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

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

Residential Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse and Consumer loans.

Loans secured by Residential Real Estate have a different profile from loans secured by Commercial Real Estate.

Generally, the borrowers for Residential Real Estate loans are consumers whereas borrowers for Commercial Real Estate are often businesses.

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

4 unchanged sentences

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

As of June 30, 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:

As of September 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 September 30, 2023 and 2022:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

1-4 Family Real Estate

Residential Real Estate

Commercial Real Estate

3 unchanged sentences

Allowance for credit losses:

Balance, March 31, 2023

Balance, June 30, 2023

Provision for credit losses

Ending allowance balance:

1-4 Family Real Estate

Residential Real Estate

Commercial Real Estate

3 unchanged sentences

Allowance for credit losses:

Balance, March 31, 2022

Balance, June 30, 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:

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

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

1-4 Family Real Estate

Residential Real Estate

Commercial Real Estate

6 unchanged sentences

Ending allowance balance:

1-4 Family Real Estate

Residential Real Estate

Commercial Real Estate

7 unchanged sentences

Ending allowance balance:

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

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

Note 11 – Goodwill

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,

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

Nine months ended September 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 June 30, 2023.

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

Note 12 – Borrowings and Other Arrangements

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

June 30, 2023

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

September 30, 2023

December 31, 2022

4 unchanged sentences

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 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.

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 $ 362.8 million at September 30, 2023 and $ 237.0 million at December 31, 2022.

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

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.

At September 30, 2023, $ 75.0 million of the federal funds purchased were from the Federal Home Loan Bank.

Secured Federal Home Loan Bank Borrowings (2) – At September 30, 2023 and December 31, 2022, the Company had secured available lines of credit with the FHLB totaling $ 657.5 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.

At September 30, 2023 and December 31, 2022 the Company had borrowing capacity under this line totaling $ 383.9 million and $ 42.3 million, respectively.

We had no outstanding borrowings on this line of credit as of September 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 $ 73.7 million at June 30, 2023 relative to a balance of $ 109.2 million at December 31, 2022.

Repurchase agreements totaled $ 94.9 million at September 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 June 30, 2023, was $ 49.3 million and December 31, 2022 was $ 49.2 million.

The balance of the Company’s long-term debt, net of unamortized issuance costs, at September 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.

2 unchanged sentences

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.

At September 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

5 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 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.

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

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

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

For the three months ended June 30,

Six months ended June 30,

For the three months ended September 30,

Nine months ended September 30,

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