What changed in this filing

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Item 1. Financial Statements

2024-05-06 compared with 2023-11-02 · 240 added, 267 removed, 710 unchanged (42% of the section changed)

3 unchanged sentences

(dollars in thousands)

September 30, 2023

March 31, 2024

December 31, 2023

3 unchanged sentences

Investment securities

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

Net, investment securities held-to-maturity

Deferred loan costs (fees), net

Available-for-sale, net of zero allowance for credit losses

Held-to-maturity, net of allowance for credit losses of $ 16 and $ 16

Total investment securities

Deferred loan costs, net

Allowance for credit losses on loans

17 unchanged sentences

24,000,000 shares authorized;

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

14,645,298 and 15,170,372 shares issued and outstanding at March 31, 2024, and December 31, 2023, respectively

Additional paid-in capital

6 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

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

FOR THE THREE MONTHS ENDED MARCH 31, 2024, and 2023

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

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

Interest and dividend income

11 unchanged sentences

Net interest income

(Benefit) provision for credit losses

Credit loss expense - loans

Credit loss expense - unfunded commitments

Net interest income after provision for credit losses

1 unchanged sentence

Service charges and fees on deposit accounts

Net gains on sale of securities available-for-sale

Increase (decrease) in cash surrender value of life insurance

Net (loss) gain on sale of securities available-for-sale

Net gain on sale of fixed assets

Increase in cash surrender value of life insurance

Realized gain on available-for-sale securities

Total noninterest income

16 unchanged sentences

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2024, and 2023

(dollars in thousands, unaudited)

Three months ended September 30,

Nine months ended September 30,

Other comprehensive (loss) gain, before tax:

Unrealized loss on securities:

Unrealized holding loss arising during period

reclassification adjustment for gains included in net income (1)

Other comprehensive loss, before tax

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

Other comprehensive loss, net of tax:

Comprehensive income (loss)

Three months ended March 31,

Other comprehensive gain, before tax:

Unrealized gain on securities:

Unrealized holding gain arising during period

reclassification adjustment for losses (gains) included in net income (1)

Other comprehensive gain, before tax

Income tax expense related to items of other comprehensive gain

Other comprehensive gain, net of tax:

Comprehensive income

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

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.

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

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

Comprehensive

Shareholders'

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

Stock based compensation - stock options

Stock based compensation - restricted stock

Cash dividends - $ 0.23 per share

Balance, September 30, 2022

Balance, June 30, 2023

Other comprehensive loss, net of tax

Restricted shares withheld for taxes

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, September 30, 2023

Income tax expenses associated with the reclassification adjustment for the three months ended March 31, 2024, and 2023, was $ 0.8 million and $ 0.01 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 NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

FOR THE THREE MONTHS ENDED MARCH 31, 2024, and 2023

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

1 unchanged sentence

Shareholders'

(Loss) Income

Balance, December 31, 2022

Cumulative change in accounting principle

Other comprehensive loss, net of tax

Stock options exercised, net of shares surrendered for cashless exercises

Other comprehensive gain, net of tax

Restricted stock granted

Restricted stock surrendered due to employee tax liability

3 unchanged sentences

Stock repurchase

Stock issued-acquisition

Excise tax on stock repurchase

Cash dividends - $ 0.23 per share

Balance, September 30, 2022

Balance, March 31, 2023

Balance, December 31, 2023

Other comprehensive income, net of tax

Other comprehensive gain, net of tax

Restricted stock granted

7 unchanged sentences

Cash dividends - $ 0.23 per share

Balance, September 30, 2023

Balance, March 31, 2024

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

FOR THE THREE MONTHS ENDED MARCH 31, 2024, AND 2023

(dollars in thousands, unaudited)

Nine months ended September 30,

Three months ended March 31,

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Gain on sales of securities

(Gain) loss on disposal of fixed assets

Gain on sale on foreclosed assets

Writedowns on foreclosed assets

Loss (gain) on sales of securities

Realized gain on securities transaction

Gain on disposal of fixed assets

Stock based compensation expense

Provision for credit losses on loans

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

Depreciation and amortization

1 unchanged sentence

Net accretion of premiums/discounts for loans acquired

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

Increase in cash surrender value of life insurance policies

Amortization of core deposit intangible

Increase in interest receivable and other assets

Decrease in interest receivable and other assets

Decrease in other liabilities

1 unchanged sentence

Decrease in value of restricted bank equity securities

Excise tax on stock repurchases

Amortization of debt issuance costs

4 unchanged sentences

Proceeds from sales of securities available for sale

Purchases of securities available for sale

Purchase of securities available for sale

Principal pay downs on securities available for sale

Net purchases of FHLB stock

Loan originations and payments, net

3 unchanged sentences

Purchase of bank-owned life insurance

Liquidation of bank-owned life insurance

Increase in partnership investment

Proceeds from BOLI death benefit

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Increase in deposits

Increase in Fed funds purchased

Increase 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

(Decrease) increase in Fed funds purchased

Decrease in short-term Federal Home Loan Bank advances

Increase (decrease) in customer repurchase agreements

Cash dividends paid

Repurchases of common stock

Stock options exercised

Net cash provided by financing activities

Increase (decrease) in cash and cash equivalents

Net cash (used in) provided by financing activities

Increase in cash and cash equivalents

Cash and cash equivalents

3 unchanged sentences

Interest paid

Income taxes paid

Supplemental schedule of noncash investing and financing activities:

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

March 31, 2024

Note 1 – The Business of Sierra Bancorp

2 unchanged sentences

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

As of 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”).

As of March 31, 2024, 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.

7 unchanged sentences

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

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

The Company had total assets of $ 3.7 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.

To support organic growth in the agricultural and commercial lending sectors the Bank opened a loan production office in Templeton, CA in April 2022.

The Company had total assets of $ 3.6 billion at March 31, 2024, 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 $ 2.8 billion at March 31, 2024, 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 November 2, 2023 and recognized them where appropriate.

In preparing the accompanying financial statements, Management has taken subsequent events into consideration, through May 6, 2024 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.

2 unchanged sentences

Note 3 – Current Accounting Developments

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.

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

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

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

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

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

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.

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

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

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

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

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

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.

In March 2023 the FASB issued , ASU No.

1 unchanged sentence

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

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

ASU 2023-02 allows entities

to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

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

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

ASU 2023-02 was effective for the Company on January 1, 2024, and its adoption did not 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”).

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.

6 unchanged sentences

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

In November 2023 the FASB issued, ASU No.

2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.” ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually.

ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

ASU 2023-07 was adopted by the Company on January 1, 2024, and did not have a significant impact on the financial statements.

In December 2023 the FASB issued, ASU 2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state, and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold.

ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things.

ASU 2023-09 is effective for us on January 1, 2025, though early adoption is permitted.

ASU 2023-09 is not expected to have a significant impact on the 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 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.

Options to purchase 191,600 shares granted under the 2017 Plan and options to purchase 130,649 shares that were granted under the 2007 Plan were still outstanding as of March 31, 2024, 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 September 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 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.

A pre-tax charge of $ 0.5 million was reflected in the Company’s income statement during the first quarter of 2024 and $ 0.4 million during the first quarter of 2023, as expense related to stock options and restricted stock awards.

Restricted Stock Grants

5 unchanged sentences

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

There were 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.

There were 36,114 shares granted to employees of the Company during the first three months of 2024.

As of March 31, 2024, there was $ 3.4 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan.

That cost is expected to be amortized over a weighted average period of 2.3 years.

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

Nine months ended September 30,

The Company’s restricted stock award activity for the three months ended March 31, 2024, and 2023 is summarized below (unaudited):

Three months ended March 31,

Weighted Average Grant-Date Fair Value

1 unchanged sentence

Unvested shares, January 1,

Unvested shares, September 30,

Unvested shares, March 31,

Stock Option Grants

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 nine months ended September 30, 2023 and 2022 are summarized below (dollars in thousands, except per share data, unaudited):

Nine months ended September 30,

The Company’s stock option activity during the three months ended March 31, 2024, and 2023 are summarized below (dollars in thousands, except per share data, unaudited):

Three months ended March 31,

Weighted Average

6 unchanged sentences

Forfeited/Expired

Outstanding at September 30,

Exercisable at September 30,

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

Outstanding at March 31,

Exercisable at March 31,

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

1 unchanged sentence

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

There were 14,583,132 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.

There were 14,508,468 weighted average shares outstanding during the first quarter of 2024 and 14,971,842 during the first quarter of 2023.

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

For the third quarter of 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)

As presented in the Consolidated Statements of Comprehensive Income (Loss), comprehensive income (loss) includes net income and other comprehensive income (loss).

The Company’s only source of other comprehensive income (loss) is unrealized gains and losses on available-for-sale investment securities.

Investment gains or losses that were realized and reflected in net income of the current period, which had previously been included in other comprehensive income (loss) as unrealized holding gains or losses in the period in which they arose, are considered to be reclassification adjustments that are excluded from other comprehensive income (loss) in the current period.

For the first quarter of 2024, calculations under the treasury stock method resulted in the equivalent of 45,159 , shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 268,991 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the first quarter of 2023 the equivalent of 30,524 shares were added in calculating diluted earnings per share, while 327,141 anti-dilutive stock options were not factored into the computation.

Note 6 – Comprehensive Income

As presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive income.

The Company’s only source of other comprehensive income is unrealized gains and losses on available-for-sale investment securities.

Investment gains or losses that were realized and reflected in net income of the current period, which had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose, are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.

Note 7 – Commitments and Contingent Liabilities

5 unchanged sentences

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

September 30, 2023

March 31, 2024

December 31, 2023

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 $ 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.

Unused commitments on mortgage warehouse lines were $ 206.4 million at March 31, 2024, and $ 204.5 million at December 31, 2023.

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 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 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.

At March 31, 2024, the Company was also utilizing a letter of credit in the amount of $ 127.9 million issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers.

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

17 unchanged sentences

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

Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:

Carrying amounts and estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:

Fair Value of Financial Instruments

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

Fair Value Measurements

6 unchanged sentences

Investment securities held-to-maturity

Loans, net held for investment

Financial liabilities:

1 unchanged sentence

Other borrowings

Long-term borrowings

Long-term debt

Subordinated debentures

8 unchanged sentences

Investment securities held-to-maturity

Loans, net held for investment

Individually evaluated collateral dependent loans

Financial liabilities:

1 unchanged sentence

Other borrowings

Long-term borrowings

Long-term debt

Subordinated debentures

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:

For financial asset categories that were carried on our balance sheet at fair value as of March 31, 2024, and December 31, 2023, the Company used the following methods and significant assumptions:

● Investment securities :

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

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

fair values for any other foreclosed assets are represented by estimated sales proceeds as

determined using reasonably available sources.

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

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

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

2 unchanged sentences

(dollars in thousands, unaudited)

Fair Value Measurements at September 30, 2023, using

Fair Value Measurements at March 31, 2024, using

Quoted Prices in

19 unchanged sentences

(dollars in thousands, unaudited)

Collateralized Loan Obligations

Corporate Bonds

2 unchanged sentences

Included in other comprehensive income

Transfers out of Level 3

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.

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:

Balance of recurring Level 3 assets at March 31,

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

Fair Value Measurements – Nonrecurring

(dollars in thousands, unaudited)

Fair Value Measurements at March 31, 2024, using

Quoted Prices in

Active Markets for

Identical Assets

Observable Inputs

Unobservable Inputs

Individually evaluated collateral dependent loans

Residential real estate

Commercial real estate

Other construction/land

Total real estate

Other commercial

Consumer loans

Total collateral dependent loans

Foreclosed assets

Total assets measured on a nonrecurring basis

Fair Value Measurements at December 31, 2023, using

5 unchanged sentences

Individually evaluated collateral dependent loans

Residential real estate

Commercial real estate

Other construction/land

Total real estate

16 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

Allowance for Credit Losses

31 unchanged sentences

Total held-to-maturity securities

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

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

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

An unrealized loss of $ 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.

An unrealized loss of $ 27.9 million, on securities transferred from the available-for-sale to held-to-maturity categorization, remains as of March 31, 2024, 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.

2 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.

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 September 30, 2023, measured at $ 12.1 million and $ 1.7 million for available-for-sale securities and held-to-maturity securities, respectively.

The Company elected the practical expedient available under the current expected credit losses (“CECL”) accounting standard 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 March 31, 2024, measured at $ 9.6 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 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.

During the first quarter of 2024 , 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 March 31, 2024, an allowance for credit losses of $ 0.02 million had been established on the Bank’s held-to-maturity portfolio, which is unchanged from the December 31, 2023, allowance for credit losses.

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

2 unchanged sentences

Held-To-Maturity

September 30, 2023

March 31, 2024

December 31, 2023

8 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

Less than twelve months

22 unchanged sentences

(dollars in thousands, unaudited)

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

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

1 unchanged sentence

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

Net gains on sale of securities available for sale

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at September 30, 2023, and December 31, 2022 are shown below, grouped by the remaining time to contractual maturity dates.

Net (loss) gain 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, 2024, and December 31, 2023 (dollars in thousands), 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.

Estimated Fair Value of Contractual Maturities

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

Available-for-Sale

21 unchanged sentences

Collateralized loan obligations

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.

At March 31, 2024, the Company’s investment portfolio included 227 municipal bonds issued by 191 different government municipalities and agencies located within 28 different states, with an aggregate fair value of $ 219.8 million.

The largest exposure to any single municipality or agency was a combined $ 5.3 million (fair value) in general obligation bonds issued by the City of New York (NY).

9 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

December 31, 2023

8 unchanged sentences

Total obligations of states and political subdivisions

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

economic improvements.

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

1 unchanged sentence

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

December 31, 2023

13 unchanged sentences

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

As of March 31, 2024, our total LIHTC investment book balance was $ 13.8 million, which includes $ 10.1 million in remaining commitments for additional capital contributions.

There were approximately $ 0.3 million in tax credits derived from our LIHTC investments that were recognized during the three months ended March 31, 2024, and “below the line” amortization expense of $ 0.6 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.

As of December 31, 2023, our total LIHTC investment book balance was $ 14.4 million, which includes $ 10.5 million in remaining commitments for additional capital contributions.

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

There were $ 0.7 million in tax credits derived from our LIHTC investments that were recognized during the year ended December 31, 2023, and “below the line” amortization expense of $ 0.7 million associated with those investments was netted against pre-tax noninterest income for the same time period.

The Company’s investments in qualified affordable housing projects, and small business investment companies meet the definition of a variable interest entity as the entities are structured such that the limited partner investors lack substantive voting rights.

Pursuant to the FAS standard on the consolidation of variable interest entities, these investments are not reflected on a consolidated basis in the Company’s financial statements.

Note 10 – Loans and Allowance for Credit Losses

1 unchanged sentence

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.

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.

2 unchanged sentences

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 $ 5.3 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 Company elected the practical expedient available under CECL to exclude accrued interest receivable from the amortized cost basis of all categorizations of loans, and as a result 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 $ 6.8 million and $ 5.6 million at March 31, 2024, and December 31, 2023, respectively is included in other assets on the Company’s balance sheet.

The following table presents loans by class as of March 31, 2024, and December 31, 2023.

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)

September 30, 2023

March 31, 2024

December 31, 2023

15 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 September 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 March 31, 2024, and December 31, 2023:

Nonaccrual Loans

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

Nonaccrual Loans

3 unchanged sentences

Residential real estate

Commercial real estate

Total real estate

7 unchanged sentences

Residential real estate

Commercial real estate

Total real estate

1 unchanged sentence

Consumer loans

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:

The Company did not recognize any interest on nonaccrual loans during the three months ended March 31, 2024, and would have recognized an additional $ 0.003 million in interest income on nonaccrual loans had those loans not been designated as nonaccrual.

Due to loans being placed on nonaccrual status, during the three months ended March 31, 2023, $ 0.04 million 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 March 31, 2024, and December 31, 2023:

Collateral Dependent Loans

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

December 31, 2023

4 unchanged sentences

Residential real estate

Commercial real estate

Total real estate

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:

During the first three months of 2024 the amortized cost balance of collateral-dependent loans increased by $ 6.2 million due primarily to a single agriculture real estate secured loan, offset by declines resulting from upgrades and payoffs.

The weighted average loan-to-value ratio of collateral dependent loans was 100 % at March 31, 2024.

There were no collateral dependent loans in the process of foreclosure as of March 31, 2024.

The following tables presents the aging of the amortized cost basis in past-due loans, according to class, as of March 31, 2024, and December 31, 2023:

Past Due Loans

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

30-59 Days Past Due

24 unchanged sentences

Loan Modifications

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

There were no modifications to borrowers experiencing financial difficulty, including principal forgiveness, rate reductions, payment deferral, or term extension, during the three or nine months ended September 30, 2023.

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.

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing principal forgiveness, rate reductions, payment deferral, or term extension.

When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

In some cases, the Company provides multiple types on concessions on one loan.

Typically, one type of concession, such as a term extension, is granted initially.

If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period.

The combination is at least two of the following:

principal forgiveness, rate reduction, payment deferral, and/or term extension.

The following table presents the amortized cost basis of loans at March 31, 2024 that were both experiencing financial difficulty and modified during the quarter ended March 31, 2024, by class and by type of modification.

The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below (dollars in thousands):

Loans to Borrowers Experiencing Financial Difficulty

(dollars in thousands, unaudited)

March 31, 2024

Principal Forgiveness

Term Extension

Combination Term Extension Interest Rate Reduction

Total Class of Financing Receivable

Residential real estate

Commercial real estate

Other construction/land

Total real estate

Other commercial

Consumer loans

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the year ended March 31, 2024:

Borrower Experiencing Financial Difficulty - Financial Effect

(dollars in thousands, unaudited)

March 31, 2024

Principal Forgiveness

Weighted-Average Interest Rate Reduction

Weighted-Average Term Extension (years)

Residential real estate

Commercial real estate

Other construction/land

Other commercial

Mortgage warehouse lines

Consumer loans

There were no payment defaults on loans previously modified in the preceding 12 months for either of the quarters ending March 31, 2024, and 2023.

For the purpose of this disclosure the Company defines a payment default as 90 days past due.

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

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 September 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 March 31, 2024, and December 31, 2023:

Loan Credit Quality by Vintage

(dollars in thousands, unaudited)

September 30, 2023

March 31, 2024

Term Loans Amortized Cost Basis by Origination Year

7 unchanged sentences

Special mention

Other commercial

16 unchanged sentences

Special mention

Other commercial

3 unchanged sentences

Special mention

Gross charge-offs

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

1 unchanged sentence

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

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

As of March 31, 2024, 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.

1 unchanged sentence

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.

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”)

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

10 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 September 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 March 31, 2024, 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.

26 unchanged sentences

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

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)

Residential Real Estate

Commercial Real Estate

Farmland & Agricultural Production

Commercial & Industrial

Mortgage Warehouse

Allowance for credit losses:

Balance, June 30, 2023

Provision for credit losses

Ending allowance balance:

Residential Real Estate

Commercial Real Estate

Farmland & Agricultural Production

Commercial & Industrial

Mortgage Warehouse

Allowance for credit losses:

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 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:

As of March 31, 2024, 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, 2024, and 2023:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

7 unchanged sentences

Balance, December 31, 2023

Provision for credit losses

(Benefit) provision for credit losses

Ending allowance balance:

6 unchanged sentences

Balance, December 31, 2022

Impact of adopting ASC 326

Provision for credit losses

(Benefit) provision for credit losses

Ending allowance balance:

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

There were no significant changes in the Company’s loan portfolio ACL in the first quarter of 2024.

Note 11 – Goodwill

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

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

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

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

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

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

The balance of goodwill at the three months beginning and ended March 31, 2024 and 2023 was $ 27.4 million.

There was no acquired goodwill or impairment for the three months ended March 31, 2024 and 2023.

The Company performs its annual goodwill impairment tests annually, or more often if events or circumstances indicate the carrying value may not be recoverable.

The annual assessment date was changed to October 1 in 2023 as it was December 31 in 2022, to allow more time for evaluation of impairment.

The Company performed its annual Step 1 goodwill impairment assessment as of October 1, 2023, using a market approach.

Based on the results of the Company’s goodwill impairment assessment, the Company determined that the fair value of its reporting unit, which was at the consolidated level, exceeded the carrying value.

Management continues to evaluate whether or not a triggering event occurs, or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount before the next annual test in 2024, and has concluded no such events have occurred.

Therefore, goodwill was not impaired as of March 31, 2024, and there were no impairment charges related to the Company’s goodwill recorded during the quarter ended March 31, 2024.

Note 12 – Borrowings and Other Arrangements

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

September 30, 2023

The following table summarizes the Company’s other borrowings as of March 31, 2024, and December 31, 2023:

March 31, 2024

December 31, 2023

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 $ 362.8 million at September 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 $ 504.8 million at March 31, 2024, and $ 374.8 million at December 31, 2023.

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

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.

Secured Federal Home Loan Bank Borrowings (2) – At March 31, 2024, and December 31, 2023, the Company had secured available lines of credit with the FHLB totaling $ 676.8 million and $ 586.7 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 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.

At March 31, 2024, and December 31, 2023, the Company had borrowing capacity under this line totaling $ 376.2 million and $ 392.0 million, respectively.

The Company had no outstanding borrowings on this line of credit as of March 31, 2024, and December 31, 2022.

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

Repurchase agreements totaled $ 94.9 million at September 30, 2023 relative to a balance of $ 109.2 million at December 31, 2022.

Repurchase agreements totaled $ 121.9 million at March 31, 2024, relative to a balance of $ 107.1 million at December 31, 2023.

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

The balance of the Company’s long-term debt, net of unamortized issuance costs, at September 30, 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, was $ 49.3 million at March 31, 2024, and December 31, 2023.

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

At March 31, 2024, and December 31, 2023, the Company’s trust preferred securities totaled $ 35.7 million.

Note 13 – Revenue Recognition

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

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

The core principle of this guidance is that an entity should recognize revenue

to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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

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 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.

These gains were immaterial for each of the three months ended March 31, 2024, and 2023, and the year ended December 31, 2023.

The following table presents the Company’s sources of noninterest income.

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

For the three months ended September 30,

Nine months ended September 30,

For the three months ended March 31,

For the year ended December 31,

4 unchanged sentences

Debit card interchange income

Gain (loss) on limited partnerships (1)

Loss on limited partnerships (1)

Dividends on equity investments (1)

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

Net gains on sale of securities (1)

Unrealized losses recognized on equity investments (1)

Net (loss) gain on sale of securities (1)

Total noninterest income

5 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