PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

SIERRA BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

June 30, 2019

December 31, 2018
ASSETS

(unaudited)

(audited)
Cash and due from banks

$
65,711

$
72,439
Interest-bearing deposits in banks

2,079

1,693
Total cash & cash equivalents

67,790

74,132
Securities available-for-sale

577,266

560,479
Loans and leases:

Gross loans and leases

1,777,899

1,731,928
Allowance for loan and lease losses

(9,883)

(9,750)
Deferred loan and lease costs, net

2,831

2,602
Net loans and leases

1,770,847

1,724,780
Foreclosed assets

770

1,082
Premises and equipment, net

28,385

29,500
Goodwill

27,357

27,357
Other intangible assets, net

5,918

6,455
Bank-owned life insurance

49,211

48,153
Other assets

49,488

50,564
    Total assets

$
2,577,032

$
2,522,502

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:

Noninterest bearing

$
658,900

$
662,527
Interest bearing

1,520,198

1,453,813
Total deposits

2,179,098

2,116,340
Repurchase agreements

24,167

16,359
Short-term borrowings

8,500

56,100
Subordinated debentures, net

34,856

34,767
Other liabilities

33,559

25,912
Total liabilities

2,280,180

2,249,478

Commitments and contingent liabilities (Note 7)

Shareholders' equity

Common stock, no par value; 24,000,000 shares authorized; 15,332,550 and 15,300,460 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

113,061

112,507
Additional paid-in capital

3,237

3,066
Retained earnings

176,328

164,117
Accumulated other comprehensive income (loss), net

4,226

(6,666)
Total shareholders' equity

296,852

273,024
    Total liabilities and shareholder's equity

$
2,577,032

$
2,522,502


	June 30, 2020		December 31, 2019
ASSETS	(unaudited)		(audited)
Cash and due from banks	$	88,705	$	65,556
Interest-bearing deposits in banks		67,906		14,521
Total cash & cash equivalents		156,611		80,077
Securities available-for-sale		599,333		600,799
Loans and leases:
Gross loans and leases		2,212,097		1,762,565
Allowance for loan and lease losses		(13,560)		(9,923)
Deferred loan and lease (fees) costs, net		(2,617)		2,896
Net loans and leases		2,195,920		1,755,538
Foreclosed assets		2,893		800
Premises and equipment, net		27,779		27,435
Goodwill		27,357		27,357
Other intangible assets, net		4,844		5,381
Bank-owned life insurance		51,347		50,517
Other assets		43,960		45,915
Total assets	$	3,110,044	$	2,593,819

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	949,662	$	690,950
Interest bearing		1,557,092		1,477,424
Total deposits		2,506,754		2,168,374
Repurchase agreements		41,449		25,711
Short-term borrowings		163,000		20,000
Subordinated debentures, net		35,035		34,945
Other liabilities		36,373		35,504
Total liabilities		2,782,611		2,284,534

Commitments and contingent liabilities (Note 7)

Shareholders' equity
Common stock, 0 par value; 24,000,000 shares authorized; 15,192,838 and 15,284,538 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		112,645		113,179
Additional paid-in capital		3,462		3,307
Retained earnings		195,147		186,867
Accumulated other comprehensive income (loss), net		16,179		5,932
Total shareholders' equity		327,433		309,285
Total liabilities and shareholders’ equity	$	3,110,044	$	2,593,819

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, ~~2019~~2020 AND ~~2018~~2019

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

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018
Interest and dividend income

Loans and leases, including fees

$
24,010

$
21,504

$
47,759

$
41,508
Taxable securities

2,591

2,300

5,207

4,638
Tax-exempt securities

1,072

1,018

2,117

2,034
Federal funds sold and other

115

61

188

180
Total interest income

27,788

24,883

55,271

48,360
Interest expense

Deposits

3,093

1,594

6,048

2,912
Short-term borrowings

26

53

97

66
Subordinated debentures

470

436

954

822
Total interest expense

3,589

2,083

7,099

3,800
Net interest income

24,199

22,800

48,172

44,560
Provision for loan losses

400

300

700

500
Net interest income after provision for loan losses

23,799

22,500

47,472

44,060
Noninterest income

Service charges on deposits

3,151

3,027

6,094

5,974
Other income

2,704

2,402

5,668

4,589
Total noninterest income

5,855

5,429

11,762

10,563
Other operating expense

Salaries and employee benefits

8,994

8,997

18,237

18,180
Occupancy and equipment

2,450

2,451

4,811

4,799
Other

6,212

5,846

12,461

12,202
Total other operating expense

17,656

17,294

35,509

35,181
Income before taxes

11,998

10,635

23,725

19,442
Provision for income taxes

3,169

2,643

6,001

4,740
Net income

$
8,829

$
7,992

$
17,724

$
14,702

PER SHARE DATA

Book value

$
19.36

$
17.06

$
19.36

$
17.06
Cash dividends

$
0.18

$
0.16

$
0.36

$
0.32
Earnings per share basic

$
0.58

$
0.52

$
1.16

$
0.96
Earnings per share diluted

$
0.57

$
0.52

$
1.15

$
0.95
Average shares outstanding, basic

15,329,907

15,254,575

15,320,784

15,243,697
Average shares outstanding, diluted

15,458,320

15,429,129

15,453,212

15,420,886

Total shareholder equity (in thousands)

$
296,852

$
260,238

$
296,852

$
260,238
Shares outstanding

15,332,550

15,258,100

15,332,550

15,258,100
Dividends paid (in thousands)

$
2,759

$
2,441

$
5,513

$
4,878


	Three months ended June 30,					Six months ended June 30,
	2020		2019		2020		2019
Interest and dividend income
Loans and leases, including fees	$	21,683	$	24,010	$	43,796	$	47,759
Taxable securities		2,250		2,591		4,710		5,207
Tax-exempt securities		1,440		1,072		2,778		2,117
Federal funds sold and other		12		115		153		188
Total interest income		25,385		27,788		51,437		55,271
Interest expense
Deposits		893		3,093		2,727		6,048
Short-term borrowings		39		26		75		97
Subordinated debentures		311		470		706		954
Total interest expense		1,243		3,589		3,508		7,099
Net interest income		24,142		24,199		47,929		48,172
Provision for loan and lease losses		2,200		400		4,000		700
Net interest income after provision for loan losses		21,942		23,799		43,929		47,472
Non-interest income
Service charges on deposits		2,618		3,151		5,802		6,094
Other income		4,282		2,704		7,205		5,668
Total non-interest income		6,900		5,855		13,007		11,762
Other operating expense
Salaries and employee benefits		9,266		8,994		19,438		18,237
Occupancy and equipment		2,504		2,450		4,832		4,811
Other		6,263		6,212		11,581		12,461
Total other operating expense		18,033		17,656		35,851		35,509
Income before taxes		10,809		11,998		21,085		23,725
Provision for income taxes		2,506		3,169		4,975		6,001
Net income	$	8,303	$	8,829	$	16,110	$	17,724

PER SHARE DATA
Book value	$	21.55	$	19.36	$	21.55	$	19.36
Cash dividends	$	0.20	$	0.18	$	0.40	$	0.36
Earnings per share basic	$	0.55	$	0.58	$	1.06	$	1.16
Earnings per share diluted	$	0.54	$	0.57	$	1.05	$	1.15
Average shares outstanding, basic		15,191,823		15,329,907		15,226,748		15,320,784
Average shares outstanding, diluted		15,237,655		15,458,320		15,288,009		15,453,212

Total shareholder equity (in thousands)	$	327,433	$	296,852	$	327,433	$	296,852
Shares outstanding		15,192,838		15,332,550		15,192,838		15,332,550
Dividends paid (in thousands)	$	3,038	$	2,759	$	6,097	$	5,513

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, ~~2019~~2020 AND ~~2018~~2019

(dollars in thousands, unaudited)


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Net income	$	8,303	$	8,829	$	16,110	$	17,724
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gain arising during period		4,037		9,324		14,939		15,491
Less: reclassification adjustment for (gains) losses included in net income ⁽¹⁾		(390)		(22)		(390)		(28)
Other comprehensive income, before tax		3,647		9,302		14,549		15,463
Income tax expense related to items of other comprehensive income, net of tax		(1,078)		(2,750)		(4,302)		(4,571)
Other comprehensive income		2,569		6,552		10,247		10,892
Comprehensive income	$	10,872	$	15,381	$	26,357	$	28,616

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018
Net income

$
8,829

$
7,992

$
17,724

$
14,702
Other comprehensive income, before tax:

Unrealized gains (losses) on securities:

Unrealized holding gain (loss) arising during period

9,324

(1,192)

15,491

(8,784)
Less: reclassification adjustment for gains included in net income (1)

(22)

—

(28)

—
Other comprehensive income (loss), before tax

9,302

(1,192)

15,463

(8,784)
Income tax expense related to items of other comprehensive income (loss), net of tax

(2,750)

353

(4,571)

2,598
Other comprehensive income (loss)

6,552

(839)

10,892

(6,186)

Comprehensive income

$
15,381

$
7,153

$
28,616

$
8,516

(1)

~~(1)~~

Amounts are included in net gains on investment securities available-for-sale on the Consolidated Statements of Income in noninterest revenue. Income tax expense associated with the reclassification adjustment for the three months ended June 30, 2020 and 2019 ~~and 2018~~ was $7$115 thousand and $0$7 thousand respectively. Income tax expense associated with the reclassification adjustment for the six months ended June 30, 2020 and 2019 was $115 thousand and ~~2018 was~~ $8 thousand ~~and $0 thousand~~ respectively.

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN ~~STOCKHOLDER’S~~STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED JUNE 30, ~~2019~~2020 AND ~~2018~~2019

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

Accumulated

Additional

Other

Common Stock

Paid In

Retained

Comprehensive

Shareholders'


Shares

Amount

Capital

Earnings

(Loss) Income

Equity
Balance, March 31, 2018

15,246,780

$
111,598

$
2,929

$
148,470

$
(7,677)

$
255,320
Net income

7,992

7,992
Other comprehensive loss, net of tax

(839)

(839)
Exercise of stock options

11,320

141

(33)

108
Stock compensation costs

98

98
Stock issued-acquisition

—
Cash dividends - $0.16 per share

(2,441)

(2,441)
Balance, June 30, 2018

15,258,100

$
111,739

$
2,994

$
154,021

$
(8,516)

$
260,238

Balance, March 31, 2019

15,328,030

$
113,001

$
3,135

$
170,258

$
(2,326)

$
284,068
Net income

8,829

8,829
Other comprehensive income, net of tax

6,552

6,552
Exercise of stock options

4,520

60

(14)

46
Stock compensation costs

116

116
Stock issued-acquisition

—
Cash dividends - $0.18 per share

(2,759)

(2,759)
Balance, June 30, 2019

15,332,550

$
113,061

$
3,237

$
176,328

$
4,226

$
296,852


								Accumulated
				Additional				Other
	Common Stock			Paid In		Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, March 31, 2019	15,328,030	$	113,001	$	3,135	$	170,258	$	(2,326)	$	284,068
Net income							8,829				8,829
Other comprehensive income, net of tax									6,552		6,552
Exercise of stock options	4,520		60		(14)						46
Stock compensation costs					116						116
Cash dividends - $0.18 per share							(2,759)				(2,759)
Balance, June 30, 2019	15,332,550	$	113,061	$	3,237	$	176,328	$	4,226	$	296,852

Balance, March 31, 2020	15,190,038	$	112,600	$	3,367	$	189,882	$	13,610	$	319,459
Net income							8,303				8,303
Other comprehensive income, net of tax									2,569		2,569
Exercise of stock options	2,800		45		(11)						34
Stock compensation costs					106						106
Cash dividends - $0.20 per share							(3,038)				(3,038)
Balance, June 30, 2020	15,192,838	$	112,645	$	3,462	$	195,147	$	16,179	$	327,433

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, ~~2019~~2020 AND ~~2018~~2019

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

Accumulated

Additional

Other

Common Stock

Paid In

Retained

Comprehensive

Shareholders'


Shares

Amount

Capital

Earnings

(Loss) Income

Equity
Balance, December 31, 2017

15,223,360

$
111,138

$
2,937

$
144,197

$
(2,330)

$
255,942
Net income

14,702

14,702
Other comprehensive loss, net of tax

(6,186)

(6,186)
Exercise of stock options

34,740

601

(111)

490
Stock compensation costs

174

174
Stock issued-acquisition

(6)

(6)
Cash dividends - $0.32 per share

(4,878)

(4,878)
Balance, June 30, 2018

15,258,100

$
111,739

$
2,994

$
154,021

$
(8,516)

$
260,238

Balance, December 31, 2018

15,300,460

$
112,507

$
3,066

$
164,117

$
(6,666)

$
273,024
Net income

17,724

17,724
Other comprehensive income, net of tax

10,892

10,892
Exercise of stock options

32,090

554

(96)

458
Stock compensation costs

267

267
Stock issued-acquisition

—
Cash dividends - $0.36 per share

(5,513)

(5,513)
Balance, June 30, 2019

15,332,550

$
113,061

$
3,237

$
176,328

$
4,226

$
296,852


								Accumulated
				Additional				Other
	Common Stock			Paid In		Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, December 31, 2018	15,300,460	$	112,507	$	3,066	$	164,117	$	(6,666)	$	273,024
Net income							17,724				17,724
Other comprehensive income, net of tax									10,892		10,892
Exercise of stock options	32,090		554		(96)						458
Stock compensation costs					267						267
Stock repurchase											—
Cash dividends - $0.36 per share							(5,513)				(5,513)
Balance, June 30, 2019	15,332,550	$	113,061	$	3,237	$	176,328	$	4,226	$	296,852

Balance, December 31, 2019	15,284,538	$	113,179	$	3,307	$	186,867	$	5,932	$	309,285
Net income							16,110				16,110
Other comprehensive income, net of tax									10,247		10,247
Exercise of stock options	20,350		295		(80)						215
Stock compensation costs					235						235
Stock repurchase	(112,050)		(829)				(1,733)				(2,562)
Cash dividends - $0.40 per share							(6,097)				(6,097)
Balance, June 30, 2020	15,192,838	$	112,645	$	3,462	$	195,147	$	16,179	$	327,433

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands, unaudited)


		Six months ended June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	16,110	$	17,724
Gain on sales of securities		(390)		(28)
Loss on disposal of fixed assets		—		28
Loss (gain) on sale on foreclosed assets		2		(37)
Writedowns on foreclosed assets		—		69
Stock compensation costs		235		267
Provision for loan and lease losses		4,000		700
Depreciation and amortization		1,540		1,496
Net amortization on securities premiums and discounts		2,227		2,107
Accretion of discounts for loans acquired and net deferred loan fees		(331)		(505)
Increase in cash surrender value of life insurance policies		(687)		(1,027)
Amortization of core deposit intangible		537		537
Increase in interest receivable and other assets		(2,241)		(1,213)
Increase (decrease) in other liabilities		869		(2,065)
Deferred income tax benefit		(230)		(27)
Increase in equity securities		(447)		(232)
Net amortization of partnership investment		571		900
Net cash provided by operating activities		21,765		18,694

Cash flows from investing activities:
Maturities and calls of securities available for sale		6,195		4,459
Proceeds from sales of securities available for sale		20,298		22,180
Purchases of securities available for sale		(59,578)		(72,330)
Principal pay downs on securities available for sale		47,263		42,288
Net purchases of FHLB stock		—		(833)
Loan originations and payments, net		(446,178)		(46,315)
Purchases of premises and equipment		(1,794)		(330)
Proceeds from sale premises and equipment		—		10
Proceeds from sales of foreclosed assets		32		7,955
Purchase of bank-owned life insurance		(182)		(292)
Liquidation of bank-owned life insurance		39		261
Net cash used in investing activities		(433,905)		(42,947)

Cash flows from financing activities:
Increase in deposits		338,380		62,758
Increase (decrease) in borrowed funds		143,000		(47,600)
Increase in repurchase agreements		15,738		7,808
Cash dividends paid		(6,097)		(5,513)
Repurchases of common stock		(2,562)		—
Stock options exercised		215		458
Net cash provided by financing activities		488,674		17,911

Increase (decrease) in cash and cash equivalents		76,534		(6,342)

Cash and cash equivalents
Beginning of period		80,077		74,132
End of period	$	156,611	$	67,790

Supplemental disclosure of cash flow information:
Interest paid	$	3,941	$	6,917
Income taxes paid	$	—	$	7,600
Supplemental noncash disclosures:
Real estate acquired through foreclosure	$	2,127	$	27
Operating right-of-use asset pursuant to adoption on ASU 2016-02	$	—	$	9,712
Operating lease liability pursuant to adoption of ASU 2016-02	$	—	$	10,336

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

~~Table of Contents~~

~~SIERRA BANCORP~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018~~

~~(dollars in thousands, unaudited)~~

Six months ended June 30,

2019

2018
Cash flows from operating activities:

Net income

$
17,724

$
14,702
Gain on sales of securities

(28)

—
Loss on disposal of fixed assets

28

13
Gain on sale on foreclosed assets

(37)

(713)
Writedowns on foreclosed assets

69

176
Share-based compensation expense

267

174
Provision for loan losses

700

500
Depreciation and amortization

1,496

1,566
Net amortization on securities premiums and discounts

2,107

2,904
Accretion of discounts for loans acquired and net deferred loan fees

(505)

(911)
Increase in cash surrender value of life insurance policies

(1,027)

(626)
Amortization of core deposit intangible

537

484
Increase in interest receivable and other assets

(1,213)

(1,020)
Increase in other liabilities

(2,065)

(5,965)
Deferred income tax benefit

(27)

(962)
Increase in equity securities

(232)

—
Net amortization of partnership investment

900

810
Net cash provided by operating activities

18,694

11,132

Cash flows from investing activities:

Maturities and calls of securities available for sale

4,459

2,310
Proceeds from sales of securities available for sale

22,180

—
Purchases of securities available for sale

(72,330)

(61,999)
Principal pay downs on securities available for sale

42,288

46,363
Net purchases of FHLB stock

(833)

(301)
Loan originations and payments, net

(46,315)

(66,185)
Purchases of premises and equipment

(330)

(2,284)
Proceeds from sale premises and equipment

10

—
Proceeds from sales of foreclosed assets

7,955

3,925
Purchase of bank-owned life insurance

(292)

(327)
Liquidation of bank-owned life insurance

261

—
Net cash from bank acquisition

—

(6)
Net cash used in investing activities

(42,947)

(78,504)

Cash flows from financing activities:

Increase in deposits

62,758

99,536
Decrease in borrowed funds

(47,600)

(21,900)
Increase in repurchase agreements

7,808

9,089
Cash dividends paid

(5,513)

(4,878)
Stock options exercised

458

490
Net cash provided by financing activities

17,911

82,337

(Decrease) increase in cash and due from banks

(6,342)

14,965

Cash and cash equivalents

Beginning of period

74,132

70,137
End of period

$
67,790

$
85,102

Supplemental disclosure of cash flow information:

Interest paid

$
6,917

$
3,914
Income taxes paid

$
7,600

$
10,000
Supplemental noncash disclosures:

Real estate acquired through foreclosure

$
27

$
—
Operating right-of-use asset pursuant to adoption on ASU 2016-02

$
9,712

$
—
Operating lease liability pursuant to adoption of ASU 2016-02

$
10,336

$
—

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

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SIERRA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, ~~2019~~2020

(Unaudited)

Note 1 – The Business of Sierra Bancorp

Sierra Bancorp (the “Company”) is a California corporation headquartered in Porterville, California, and is a registered bank holding company under federal banking laws. The Company was formed to serve as the holding company for Bank of the Sierra (the “Bank”), and has been the Bank’s sole shareholder since August 2001. 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, ~~2019,~~2020, 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. References herein to the “Company” include Sierra Bancorp and its consolidated subsidiary, the Bank, unless the context indicates otherwise.

Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a wide range of retail and commercial banking services via branch offices located throughout California’s South San Joaquin Valley, the Central Coast, Ventura County, the Sacramento area, and neighboring communities. The Bank was incorporated in September 1977, and opened for business in January 1978 as a ~~one-branch~~1-branch bank with $1.5 million in capital. Our growth in the ensuing years has largely been organic in nature, but includes ~~four~~4 whole-bank acquisitions: Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in October 2017. As of the filing date of this report the Bank operates 40 full service branches and an online branch, and maintains ATMs at all but one of our branch locations as well as seven non-branch locations. Moreover, the Bank has specialized lending units which focus on agricultural borrowers, SBA loans, and mortgage warehouse lending. In addition, the bank opened a loan production office in Rocklin, CA in February 2020. The Company had total assets of ~~$2.6~~$3.1 billion at June 30, ~~2019,~~2020, 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 ~~$2.2~~$2.5 billion at June 30, ~~2019,~~2020, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. The information furnished in these interim statements reflects all adjustments that are, in the opinion of Management, necessary for a fair statement of the results for such periods. Such adjustments can generally be considered as normal and recurring unless otherwise disclosed in this Form ~~10‑Q.~~10-Q. In preparing the accompanying financial statements, Management has taken subsequent events into consideration and recognized them where appropriate. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter, or for the full year. Certain amounts reported for ~~2018~~2019 have been reclassified to be consistent with the reporting for ~~2019.~~2020. The interim financial information should be read in conjunction with the Company’s Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2018,~~2019, as filed with the Securities and Exchange Commission (the “SEC”).

Note 3 – Current Accounting Developments

~~In February 2016 the FASB issued ASU 2016‑02,~~ ~~Leases (Topic 842)~~. The intention of this standard is to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. ASU 2016‑02 is generally effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company has leases on 21 branch locations, an administrative office building, and three offsite ATM locations which are considered operating leases and were not previously reflected in our financial statements.

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Pursuant to ASU 2016‑02, on January 1, 2019 these lease agreements were recognized on our consolidated statement of condition as right-of-use assets totaling approximately $10 million, and corresponding lease liabilities. Please see Note 12 to the consolidated financial statements for more detailed disclosure information.

In September 2016 the FASB issued ASU ~~2016‑13,~~ 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 a current estimate of all expected credit losses over the contractual term for financial assets carried at amortized cost. This is commonly referred to as the current expected credit losses (“CECL”) methodology. Expected credit losses for financial assets held at the reporting date will be measured based on historical experience, current conditions, and reasonable and supportable forecasts. Another change

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from existing U.S. GAAP involves the treatment of purchased credit deteriorated assets, which are more broadly defined than purchased credit impaired assets in current accounting standards. When such assets are purchased, institutions will estimate and record an allowance for credit losses that is added to the purchase price rather than being reported as a credit loss expense. Furthermore, ASU ~~2016‑13~~2016-13 updates the measurement of credit losses on available-for-sale debt securities, by mandating that institutions record credit losses on available-for-sale debt securities through an allowance for credit losses rather than the current practice of writing down securities for other-than-temporary impairment. ASU ~~2016‑13~~2016-13 will also require the enhancement of financial statement disclosures regarding estimates used in calculating credit losses. ASU ~~2016‑13~~2016-13 does not change the existing write-off principle in U.S. GAAP or current nonaccrual practices, nor does it change accounting requirements for loans held for sale or certain other financial assets which are measured at the lower of amortized cost or fair value. As a public business entity that is an SEC filer, ASU ~~2016‑13 becomes~~2016-13 became effective for the Company on January 1, 2020 ~~although early application is permitted for 2019.~~. On the effective date, institutions will apply the new accounting standard as follows: for financial assets carried at amortized cost, a cumulative-effect adjustment will be recognized on the balance sheet for any change in the related allowance for loan and lease losses generated by the adoption of the new standard; financial assets classified as purchased credit impaired assets prior to the effective date will be reclassified as purchased credit deteriorated assets as of the effective date, and will be grossed up for the related allowance for expected credit losses created as of the effective date; and, debt securities on which other-than-temporary impairment had been recognized prior to the effective date will transition to the new guidance prospectively with no change in their amortized cost basis. The Company ~~is well~~adopted ASU 2016-13 on January 1, 2020, however, the Company elected under ~~way with transition efforts. We have established an~~Section 4014 of the Coronavirus Aid, Relief and Economic Security (CARES) Act to defer the implementation ~~team which is chaired by our Chief Credit Officer and includes~~of CECL until the ~~Company’s other executive officers, along with certain members~~earlier of ~~our~~when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Although this deferral will still require CECL to be implemented as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit administration and finance departments. Furthermore, after extensive discussion and due diligence, in 2018 we engaged a third-party vendor and purchased a specialized application to assist in our calculation of potential required reserves utilizing the CECL methodology and help validate our current reserving methodology.losses. While the ultimate impact cannot be definitively determined ~~until the implementation date, a preliminary evaluation indicates that~~at this time, we believe the provisions of ASU ~~2016‑13~~2016-13 will ~~likely~~ have a material adverse impact on our consolidated financial statements, particularly the level of our allowance for credit losses and shareholders’ equity. ~~Initial estimates are that our allowance for loan and lease losses could increase by 100% or more relative to current levels if we utilize the discounted cash flow methodology with forecasting.~~

In January 2017 the FASB issued ASU ~~2017‑01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~. Currently, Topic 805 specifies three elements of a business – inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. This led many transactions to be accounted for as business combinations rather than asset purchases under legacy GAAP. The primary goal of ASU 2017‑01 is to narrow the definition of a business, and the guidance in this update provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This reduces the number of transactions that need to be further evaluated. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and we implemented ASU 2017‑01 on a prospective basis effective January 1, 2018. This update affected the accounting treatment used for our branch deposit purchase in the second quarter of 2018, and we expect that it will also impact the way we account for certain branch acquisitions in future periods if the opportunity for such arises.

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~~In January 2017 the FASB issued ASU 2017‑04,~~ 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The amendments in this update ~~are~~were effective for public business entities for fiscal years beginning after December 15, ~~2019. We~~2019. In accordance with ASU 2017-04, the Company performed a qualitative analysis of goodwill during the first and second quarters of 2020, and determined that a quantitative analysis was not necessary at this time. Thus, we have not been required to record any goodwill impairment to date, and after a preliminary review do not expect that this guidance would require us to do so given current circumstances. Nevertheless, we will continue to evaluate ASU 2017‑04 to more definitely determine its potential impact on the Company’s consolidated financial position, results of operations and cash flows.date.

~~In March 2017 the FASB issued ASU 2017‑08,~~ ~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities~~. The amendments in this update will shorten the amortization period for certain callable debt securities held at a premium, by requiring the premium to be amortized to the earliest call date. Under current guidance, the premium on a callable debt security is generally amortized as an adjustment to yield over the contractual life of the instrument, and any unamortized premium is recorded as a loss in earnings upon the debtor’s exercise of a call provision. Under ASU 2017‑08, because the premium will be amortized to the earliest call date, entities will no longer recognize a loss in earnings if a debt security is called prior to the contractual maturity date. The amendments do not require an accounting change for securities held at a discount; discounts will continue to be amortized as an adjustment to yield over the contractual life of the debt instrument. ASU 2017‑08 is effective for public business entities, including the Company, for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. To apply ASU 2017‑08, entities must use a modified retrospective approach, with the cumulative-effect adjustment recognized to retained earnings at the beginning of the period of adoption. The Company adopted ASU 2017‑08 effective January 1, 2019 with no material impact on our financial statements or operations.

In August 2018 the FASB issued ASU ~~2018‑13,~~ 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, as part of its disclosure framework project. Pursuant to this guidance, disclosures that will no longer be required include the following: transfers between Level 1 and Level 2 of the fair value hierarchy; transfers in and out of Level 3 for nonpublic entities, as well as purchases and issuances and the Level 3 roll forward; a company’s policy for determining when transfers between any of the three levels have occurred; the valuation processes used for Level 3 measurements; and, the changes in unrealized gains or losses presented in earnings for Level 3 instruments held at the balance sheet date for nonpublic entities. The following are additional disclosure requirements: for public entities, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date; for public entities, the range and weighted average of significant unobservable inputs used for Level 3 measurements, although for certain unobservable inputs the entity will be allowed to disclose other quantitative information in place of the weighted average to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs; for nonpublic entities, some form of quantitative information about significant unobservable inputs used in Level 3 fair value measurements; and, for certain investments in entities that calculate the net asset value, disclosures will be required about the timing of liquidation and redemption restrictions lapsing if the latter has been communicated to the

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reporting entity. The guidance also clarifies that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date. ASU ~~2018‑13~~2018-13 is effective for all entities in fiscal years beginning after December 15, 2019, including interim periods. Early adoption is permitted. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The Company ~~has evaluated~~adopted ASU 2018-13 effective January 1, 2020 which impacts the ~~potential impact of this guidance, and does not expect~~disclosure requirements for fair value measurement.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326), which provides transition relief for entities adopting ASU 2016-13. ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU ~~2018-13~~2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date, in order to maintain the same amortized cost basis before and after the effective date of this update. Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvements in cash flows expected to be collected should continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption should be recorded in earnings when received. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. For public business entities that are SEC filers, including the Company, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2019-05 effective January 1, 2020. There was no impact to the financial statements of the Company as we did not elect the fair value option on financial instruments upon adoption of ASU 2016-13.

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act, that passed on March 27, 2020, further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructuring (“TDR”) as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 10 for further information on non-TDR loan modifications. The Interagency Guidance and Section 4013 are expected to have a material impact on ~~our~~the Company’s financial ~~statements or operations.~~statements; however, this impact cannot be quantified at this time.

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Note 4 – Share Based Compensation

On March 16, 2017 the Company’s Board of Directors approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective May 24, 2017, the date approved by the Company’s shareholders. The 2017 Plan replaced the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017. Options to purchase ~~335,530~~257,789 shares that were granted under the 2007 Plan were still outstanding as of June 30, ~~2019~~2020 and remain unaffected by that plan’s expiration. The 2017 Plan provides for the issuance of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options to non-employee directors and consultants of the Company. The 2017 Plan also provides for the issuance of restricted stock awards to these same classes of eligible participants, although no restricted stock awards have ever been issued by the Company. The total

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number of shares of the Company’s authorized but unissued stock reserved for issuance pursuant to awards under the 2017 Plan was initially 850,000 shares, and the number remaining available for grant as of June 30, ~~2019~~2020 was ~~667,800.~~551,800. The potential dilutive impact of unexercised stock options is discussed below in Note 5, Earnings per Share.

Pursuant to FASB’s standards on stock compensation, the value of each stock option is reflected in our income ~~statement~~statement as employee compensation or directors’ expense by amortizing its grant date fair value over the vesting period of the option. The Company utilizes a Black-Scholes model to determine grant date fair values. A pre-tax charge of ~~$116,000~~$0.1 million was reflected in the Company’s income statement during the second quarter of ~~2019~~2020 and ~~$98,000~~$0.1 million was charged during the second quarter of ~~2018,~~2019, as expense related to stock options. For the first half, the charges totaled ~~$267,000~~$0.2 million in ~~2019~~2020 and ~~$174,000~~$0.3 million in ~~2018.~~2019.

Note 5 – Earnings per Share

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. There were ~~15,329,907~~15,191,823 weighted average shares outstanding during the second quarter of ~~2019~~2020 and ~~15,254,575~~15,329,907 during the second quarter of ~~2018,~~2019, while there were ~~15,320,784~~15,226,748 weighted average shares outstanding during the first six months of ~~2019~~2020 and ~~15,243,697~~15,320,784 during the first six months of ~~2018.~~2019.

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. For the second quarter of ~~2019,~~2020, calculations under the treasury stock method resulted in the equivalent of ~~128,413~~45,832 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of ~~258,202~~367,884 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the second quarter of ~~2018~~2019 the equivalent of ~~174,554~~128,413 shares were added in calculating diluted earnings per share, while ~~106,200~~258,202 anti-dilutive stock options were not factored into the computation. Likewise, for the first half of ~~2019~~2020 the equivalent of ~~132,428~~61,261 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of ~~228,824~~336,123 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of ~~177,189~~132,428 shares and non-inclusion of ~~166,200~~228,824 anti-dilutive options in calculating diluted earnings per share for first half of ~~2018.~~2019.

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 – Financial Instruments with Off-Balance-Sheet Risk

The Company is a party to financial instruments with ~~off‑balance‑~~off-balance-sheet risk in the normal course of business. Those financial instruments currently consist of unused commitments to extend credit and standby letters of credit. They

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involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by counterparties for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as it does for originating loans included on the balance sheet. The following financial instruments represent ~~off‑balance‑sheet~~off-balance-sheet credit risk (dollars in thousands):


	June 30, 2020		December 31, 2019
Commitments to extend credit	$	449,045	$	492,040
Standby letters of credit	$	9,435	$	8,619

June 30,
2019

December 31,
2018
Commitments to extend credit

$
596,001

$
781,987
Standby letters of credit

$
9,529

$
8,966

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Commitments to extend credit consist primarily of the unused or unfunded portions of the following: home equity lines of credit; commercial real estate construction loans, where disbursements are made over the course of construction; commercial revolving lines of credit; mortgage warehouse lines of credit; unsecured personal lines of credit; and formalized (disclosed) deposit account overdraft lines. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn upon, the unused portions of committed amounts do not necessarily represent future cash requirements. Standby letters of credit are issued by the Company to guarantee the performance of a customer to a third party, and the credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers.

At June 30, ~~2019,~~2020, the Company was also utilizing a letter of credit in the amount of $105 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.

Note 8 – Fair Value Disclosures and Reporting, the Fair Value Option and Fair Value Measurements

FASB’s standards on financial instruments, and on fair value measurements and disclosures, require public business entities to disclose in their financial statement footnotes the estimated fair values of financial instruments. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities that are classified as available for sale and any equity securities which have readily determinable fair values be measured and reported at fair value in our statement of financial position. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any of those financial instruments.

Fair value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:

●

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

●

Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

●

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Fair value disclosures for deposits include demand deposits, which are by definition equal to the

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

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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)


		June 30, 2019
			Fair Value Measurements

												June 30, 2020
													Fair Value Measurements
											Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets:
Cash and cash equivalents	$	67,790	$	67,790	$	—	$	—	$	67,790	$	156,611	$	156,611	$	—	$	—	$	156,611
Investment securities available for sale		577,266		—		577,266		—		577,266		599,333		—		599,333		—		599,333
Loans and leases, net held for investment		1,770,838		—		1,791,335		—		1,791,335		2,195,837		—		—		2,240,456		2,240,456
Collateral dependent impaired loans		9		—		9		—		9		83		—		83		—		83


Financial liabilities:
Deposits		2,179,098		658,900		1,520,424		—		2,179,324		2,506,754		949,662		1,557,228		—		2,506,890
Repurchase agreements		24,167		24,167		—		—		24,167		41,449		—		41,449		—		41,449
Short term borrowings		8,500		—		8,500		—		8,500		163,000		—		162,981		—		162,981
Subordinated debentures		34,856		—		28,660		—		28,660		35,035		—		24,507		—		24,507


		December 31, 2018
			Fair Value Measurements

												December 31, 2019
													Fair Value Measurements
											Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets:
Cash and cash equivalents	$	74,132	$	74,132	$	—	$	—	$	74,132	$	80,077	$	80,076	$	—	$	—	$	80,076
Investment securities available for sale		560,479		—		560,479		—		560,479		600,799		—		600,799		—		600,799
Loans and leases, net held for investment		1,724,575		—		1,707,463		—		1,707,463		1,753,846		—		—		1,761,461		1,761,461
Collateral dependent impaired loans		205		—		205		—		205		1,692		—		1,692		—		1,692


Financial liabilities:
Deposits		2,116,340		662,527		1,453,048		—		2,115,575		2,168,374		690,950		1,477,497		—		2,168,447
Repurchase agreements		16,359		16,359		—		—		16,359		25,711		—		25,711		—		25,711
Short term borrowings		56,100		—		56,100		—		56,100		20,000		—		2,000		—		2,000
Subordinated debentures		34,767		—		30,311		—		30,311		34,945		—		30,564		—		30,564

For financial asset categories that were carried on our balance sheet at fair value as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company used the following methods and significant assumptions:

●

Investment securities: Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities.

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●

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

●

Foreclosed assets: Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower of cost or fair value. Fair value is the appraised value less expected selling costs for OREO and some other assets such as mobile homes; fair values for any other foreclosed assets are

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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 re-evaluation 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.

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

Fair Value Measurements – Recurring

(dollars in thousands, unaudited)


	Fair Value Measurements at June 30, 2019, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Realized Gain/(Loss) (Level 3)

											Fair Value Measurements at June 30, 2020, using
											Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Realized Gain/(Loss) (Level 3)
Securities:
U.S. government agencies	$	—	$	15,296	$	—	$	15,296	$	—	$	—	$	1,850	$	—	$	1,850	$	—
Mortgage-backed securities		—		406,091		—		406,091		—		—		375,485		—		375,485		—
State and political subdivisions		—		155,879		—		155,879		—		—		221,998		—		221,998		—
Total available-for-sale securities	$	—	$	577,266	$	—	$	577,266	$	—	$	—	$	599,333	$	—	$	599,333	$	—


	Fair Value Measurements at December 31, 2018, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Realized Gain/(Loss) (Level 3)

											Fair Value Measurements at December 31, 2019, using
											Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Realized Gain/(Loss) (Level 3)
Securities:
U.S. government agencies	$	—	$	15,212	$	—	$	15,212	$	—	$	—	$	12,145	$	—	$	12,145	$	—
Mortgage-backed securities		—		404,733		—		404,733		—		—		400,389		—		400,389		—
State and political subdivisions		—		140,534		—		140,534		—		—		188,265		—		188,265		—
Total available-for-sale securities	$	—	$	560,479	$	—	$	560,479	$	—	$	—	$	600,799	$	—	$	600,799	$	—

Table of Contents

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

Fair Value Measurements – Nonrecurring

(dollars in thousands, unaudited)


	Fair Value Measurements at June 30, 2019, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

									Fair Value Measurements at June 30, 2020, using
									Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Impaired loans
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other construction/land		—		—		—		—		—		—		—		—
1-4 family - closed-end		—		—		—		—		—		—		—		—
Equity lines		—		—		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—		83		—		83
Commercial real estate - non-owner occupied		—		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—
Total real estate		—		—		—		—		—		83		—		83
Agricultural		—		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—		—
Consumer loans		—		9		—		9		—		—		—		—
Total impaired loans	$	—	$	9	$	—	$	9	$	—	$	83	$	—	$	83
Foreclosed assets	$	—	$	770	$	—	$	770	$	—	$	2,893	$	—	$	2,893
Total assets measured on a nonrecurring basis	$	—	$	779	$	—	$	779	$	—	$	2,976	$	—	$	2,976

Fair Value Measurements at December 31, 2018, using


Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

Total
Impaired loans

Real estate:

1-4 family residential construction

$
—

$
—

$
—

$
—
Other construction/land

—

27

—

27
1-4 family - closed-end

—

—

—

—
Equity lines

—

12

—

12
Multi-family residential

—

—

—

—
Commercial real estate - owner occupied

—

—

—

—
Commercial real estate - non-owner occupied

—

—

—

—
Farmland

—

—

—

—
Total real estate

—

39

—

39
Agricultural

—

—

—

—
Commercial and industrial

—

119

—

119
Consumer loans

—

47

—

47
Total impaired loans

$
—

$
205

$
—

$
205
Foreclosed assets

$
—

$
1,082

$
—

$
1,082
Total assets measured on a nonrecurring basis

$
—

$
1,287

$
—

$
1,287

~~Table of Contents~~


	Fair Value Measurements at December 31, 2019, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Impaired loans
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—
Other construction/land		—		—		—		—
1-4 family - closed-end		—		—		—		—
Equity lines		—		—		—		—
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		—		88		—		88
Commercial real estate - non-owner occupied		—		1,605		—		1,605
Farmland		—		—		—		—
Total real estate		—		1,693		—		1,693
Agricultural		—		—		—		—
Commercial and industrial		—		—		—		—
Consumer loans		—		—		—		—
Total impaired loans	$	—	$	1,693	$	—	$	1,693
Foreclosed assets	$	—	$	800	$	—	$	800
Total assets measured on a nonrecurring basis	$	—	$	2,493	$	—	$	2,493

The table above includes collateral-dependent impaired loan balances for which a specific reserve has been established or on which a write-down has been taken. Information on the Company’s total impaired loan balances and specific loss reserves associated with those balances is included in Note 11 ~~below, and in Management’s Discussion and Analysis~~below.

Table of ~~Financial Condition and Results of Operations in the “Nonperforming Assets” and “Allowance for Loan and Lease Losses” sections.~~Contents

The unobservable inputs are based on Management’s best estimates of appropriate discounts in arriving at fair market value. Adjusting any of those inputs could result in a significantly lower or higher fair value measurement. For example, an increase or decrease in actual loss rates would create a directionally opposite change in the fair value of unsecured impaired loans.

Note 9 – Investments

Investment Securities

Although the Company currently has the intent and the ability to hold the securities in its investment portfolio to maturity, the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. Pursuant to FASB’s guidance on accounting for debt and equity securities, available for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’ equity.

The amortized cost and estimated fair value of available-for-sale investment securities are as follows:

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)


	June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	1,775	$	75	$	—	$	1,850
Mortgage-backed securities		364,828		10,668		(11)		375,485
State and political subdivisions		209,760		12,239		(1)		221,998
Total securities	$	576,363	$	22,982	$	(12)	$	599,333


	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	12,125	$	124	$	(104)	$	12,145
Mortgage-backed securities		398,353		3,354		(1,318)		400,389
State and political subdivisions		181,900		6,478		(113)		188,265
Total securities	$	592,378	$	9,956	$	(1,535)	$	600,799

June 30, 2019


Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
U.S. government agencies

$
15,262

$
168

$
(134)

$
15,296
Mortgage-backed securities

405,025

3,261

(2,195)

406,091
State and political subdivisions

150,978

5,000

(99)

155,879
Total securities

$
571,265

$
8,429

$
(2,428)

$
577,266

Table of Contents

December 31, 2018


Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
U.S. government agencies

$
15,553

$
12

$
(353)

$
15,212
Mortgage-backed securities

414,208

398

(9,873)

404,733
State and political subdivisions

140,181

1,206

(853)

140,534
Total securities

$
569,942

$
1,616

$
(11,079)

$
560,479

At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had ~~274~~7 securities and ~~552~~198 securities, respectively, with gross unrealized losses. Management has evaluated those securities as of the respective dates, and does not believe that any of the unrealized losses are other than temporary. Gross unrealized losses on our investment securities as of the indicated dates are disclosed in the table below, categorized by investment type and by the duration of time that loss positions on individual securities have continuously existed (over or under twelve months).

~~Table of Contents~~

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)


	June 30, 2019
	Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value

									June 30, 2020
									Less than twelve months				Twelve months or more
									Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	—	$	—	$	(134)	$	7,825	$	—	$	—	$	—	$	—
Mortgage-backed securities		(22)		7,150		(2,173)		185,159		(3)		4,692		(8)		1,733
State and political subdivisions		(58)		10,870		(41)		4,497		(1)		1,052		—		—
Total	$	(80)	$	18,020	$	(2,348)	$	197,481	$	(4)	$	5,744	$	(8)	$	1,733


	December 31, 2018
	Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value

									December 31, 2019
									Less than twelve months				Twelve months or more
									Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	(54)	$	2,815	$	(299)	$	10,764	$	(32)	$	3,240	$	(72)	$	2,689
Mortgage-backed securities		(717)		69,686		(9,156)		273,230		(494)		100,518		(824)		78,538
State and political subdivisions		(249)		33,864		(604)		22,213		(113)		19,762		—		—
Total	$	(1,020)	$	106,365	$	(10,059)	$	306,207	$	(639)	$	123,520	$	(896)	$	81,227

The table below summarizes the Company’s gross realized gains and losses as well as gross proceeds from the sales of securities, for the periods indicated:

Investment Portfolio - Realized Gains/(Losses)

(dollars in thousands, unaudited)


	Three months ended June 30,					Six months ended June 30,
	2020		2019		2020		2019
Proceeds from sales, calls and maturities of securities available for sale	$	24,063	$	9,985	$	26,493	$	26,639
Gross gains on sales, calls and maturities of securities available for sale		433		33		433		127
Gross losses on sales, calls and maturities of securities available for sale		(43)		(11)		(43)		(99)
Net gains on sale of securities available for sale	$	390	$	$22	$	390	$	28

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018
Proceeds from sales, calls and maturities of securities available for sale

$
9,985

$
2,110

$
26,639

$
2,310
Gross gains on sales, calls and maturities of securities available for sale

33

—

127

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

(11)

—

(99)

—
Net gains on sale of securities available for sale

$
22

$
—

$
28

$
$—

Table of Contents

The amortized cost and estimated fair value of investment securities available-for-sale at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 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.

~~Table of Contents~~

Estimated Fair Value of Contractual Maturities

(dollars in thousands, unaudited)


	June 30, 2019
	Amortized Cost		Fair Value

					June 30, 2020
					Amortized Cost		Fair Value
Maturing within one year	$	7,806	$	7,909	$	4,362	$	4,388
Maturing after one year through five years		180,636		180,310		7,834		8,104
Maturing after five years through ten years		57,344		58,245		29,485		30,823
Maturing after ten years		100,701		104,331		169,854		180,533

Securities not due at a single maturity date:
U.S. government agencies collateralized by mortgage obligations		224,778		226,471
	$	571,265	$	577,266
Mortgage-backed securities						181,945		186,880
Collateralized mortgage obligations						182,883		188,605
					$	576,363	$	599,333


	December 31, 2018
	Amortized Cost		Fair Value

					December 31, 2019
					Amortized Cost		Fair Value
Maturing within one year	$	7,726	$	7,789	$	7,155	$	7,244
Maturing after one year through five years		199,840		195,519		17,008		17,171
Maturing after five years through ten years		47,802		47,661		33,805		34,881
Maturing after ten years		83,606		83,444		136,057		141,114

Securities not due at a single maturity date:
U.S. government agencies collateralized by mortgage obligations		230,968		226,066
	$	569,942	$	560,479
Mortgage-backed securities						189,554		190,488
Collateralized mortgage obligations						208,799		209,901
					$	592,378	$	600,799

At June 30, ~~2019,~~2020, the Company’s investment portfolio included ~~326~~356 “muni” bonds issued by ~~262~~298 different government municipalities and agencies located within 29 different states, with an aggregate fair value of ~~$156~~$222 million. The largest exposure to any single municipality or agency was a combined ~~$2.596~~$4.0 million (fair value) in general obligation bonds issued by the ~~Lindsay (CA) Unified School District.~~Charter Township of Washington County (MI).

The Company’s investments in bonds issued by states, municipalities and political subdivisions are evaluated in accordance with Supervision and Regulation Letter ~~12‑~~12-15 issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Organization Ratings,” and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

Table of Contents

The following table summarizes the amortized cost and fair values of general obligation and revenue bonds in the Company’s investment securities portfolio at the indicated dates, identifying the state in which the issuing municipality or agency operates for our largest geographic concentrations:

Revenue and General Obligation Bonds by Location

(dollars in thousands, unaudited)


	June 30, 2019				December 31, 2018
	Amortized		Fair Market		Amortized		Fair Market

									June 30, 2020				December 31, 2019
									Amortized		Fair Market		Amortized		Fair Market
General obligation bonds	Cost		Value		Cost		Value		Cost		Value		Cost		Value
State of issuance
Texas	$	45,855	$	47,243	$	36,331	$	36,199	$	76,494	$	81,128	$	59,439	$	61,519
California		25,817		26,916		26,928		27,357		27,447		29,067		23,882		25,030
Washington		15,971		16,688		16,036		16,062		23,330		25,023		23,392		24,313
Illinois		7,920		8,179		6,827		6,838
Ohio		7,687		7,793		8,639		8,601
Other (21 and 22 states, respectively)		26,216		26,895		21,530		21,576
Other (21 & 24 states, respectively)										53,652		56,532		49,326		50,725
Total general obligation bonds		129,466		133,714		116,291		116,633		180,923		191,750		156,039		161,587


Revenue bonds
State of issuance
Texas		6,764		6,953		7,526		7,506		7,053		7,452		6,035		6,298
Utah		4,672		4,758		5,364		5,353
Indiana		3,147		3,269		2,641		2,654
Washington		1,744		1,853		1,751		1,780		2,256		2,377		1,737		1,856
Pennsylvania		1,243		1,264		—		—
Other (9 and 11 states, respectively)		3,942		4,068		6,608		6,608
California										364		382		365		380
Other (15 & 13 states, respectively)										19,164		20,037		17,724		18,144
Total revenue bonds		21,512		22,165		23,890		23,901		28,837		30,248		25,861		26,678
Total obligations of states and political subdivisions	$	150,978	$	155,879	$	140,181	$	140,534	$	209,760	$	221,998	$	181,900	$	188,265

The revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as utilities (water, sewer, and power), educational facilities, and general public and economic improvements. The primary sources of revenue for these bonds are delineated in the table below, which shows the amortized cost and fair market values for the largest revenue concentrations as of the indicated dates.

Revenue Bonds by Type

(dollars in thousands, unaudited)


	June 30, 2019				December 31, 2018
	Amortized		Fair Market		Amortized		Fair Market

									June 30, 2020				December 31, 2019
									Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value		Cost		Value		Cost		Value
Revenue source:
Water	$	6,749	$	6,962	$	6,942	$	6,946	$	10,363	$	10,949	$	7,515	$	7,775
Sales Tax		4,376		4,506		2,932		2,901
College & University		3,001		3,092		2,583		2,604
Sewer		1,481		1,512		1,392		1,398		5,219		5,408		4,760		4,811
Other (13 sources)		5,905		6,093		10,041		10,052
Sales tax										3,572		3,743		1,949		1,995
Lease										2,773		2,864		3,596		3,678
Charter school aid										1,565		1,689		1,232		1,290
Other (8 and 8 sources, respectively)										5,345		5,595		6,809		7,129
Total revenue bonds	$	21,512	$	22,165	$	23,890	$	23,901	$	28,837	$	30,248	$	25,861	$	26,678

Low-Income Housing Tax Credit (“LIHTC”) Fund Investments

The Company has the ability to invest in limited partnerships which own housing projects that qualify for federal and/or California state tax credits, by mandating a specified percentage of low-income tenants for each project. The primary investment return comes from tax credits that flow through to investors. Because rent levels are lower than standard

~~Table of Contents~~

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.~~partners for tax purposes.

Table of Contents

The Company made investment commitments to nine different LIHTC fund limited partnerships from 2001 through 2017, 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. Any commitments or contingent commitments for future investment are reflected as a liability. The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on a straight-line basis as an offset to noninterest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of June 30, ~~2019~~2020, our total LIHTC investment book balance was ~~$5.0~~$3.8 million, which includes ~~$1.8~~$0.2 million in remaining commitments for additional capital contributions. There were ~~$269,000~~$0.3 million in tax credits derived from our LIHTC investments that were recognized during the six months ended June 30, ~~2019,~~2020, and amortization expense of ~~$900,000~~$0.3 million associated with those investments was netted against pre-tax noninterest income for the same time period. The Company also recognized a $0.7 million gain during the same period for the sale of a single fund property that was at the end of its tax credit life. 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.

Note 10 – Credit Quality and Nonperforming Assets

Credit Quality Classifications

The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention, substandard and impaired to characterize the associated credit risk. Balances classified as “loss” are immediately charged off. The Company conforms to the following definitions for its risk classifications:

●

Pass: Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller homogeneous loans that are not assessed on an individual basis.

●

Special mention: Loans which have potential issues that deserve the close attention of Management. If left uncorrected, those potential weaknesses could eventually diminish the prospects for full repayment of principal and interest according to the contractual terms of the loan agreement, or could result in deterioration of the Company’s credit position at some future date.

●

Substandard: Loans that have at least one clear and well-defined weakness that could jeopardize the ultimate recoverability of all principal and interest, such as a borrower displaying a highly leveraged position, unfavorable financial operating results and/or trends, uncertain repayment sources or an otherwise deteriorated financial condition.

●

Impaired: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include all nonperforming loans and restructured troubled debt (“TDRs”). A TDR may be nonperforming or performing, depending on its accrual status and the demonstrated ability of the borrower to comply with restructured terms (see “Troubled Debt Restructurings” section below for additional information on TDRs).

Table of Contents

Credit quality classifications for the Company’s loan balances were as follows, as of the dates indicated:

Credit Quality Classifications

(dollars in thousands, unaudited)


	June 30, 2019
	Pass		Special Mention		Substandard		Impaired		Total

											June 30, 2020
											Pass		Special Mention		Substandard		Impaired		Total
Real estate:
1-4 family residential construction	$	105,618	$	—	$	—	$	—	$	105,618	$	89,225	$	—	$	—	$	—	$	89,225
Other construction/land		107,826		97		—		419		108,342		87,747		2,227		—		571		90,545
1-4 family - closed end		212,685		1,758		178		3,997		218,618		172,085		1,635		146		4,205		178,071
Equity lines		46,773		2,006		62		4,868		53,709		38,147		1,955		60		4,156		44,318
Multi-family residential		53,240		—		—		362		53,602		55,577		—		—		344		55,921
Commercial real estate - owner occupied		309,712		5,817		4,418		2,080		322,027		304,684		3,444		3,068		2,667		313,863
Commercial real estate - non-owner occupied		416,719		3,529		3,393		—		423,641		689,589		511		565		627		691,292
Farmland		151,393		1,061		140		25		152,619		132,584		1,040		128		702		134,454
Total real estate		1,403,966		14,268		8,191		11,751		1,438,176		1,569,638		10,812		3,967		13,272		1,597,689


Agricultural		51,333		170		—		6		51,509		48,356		159		—		2		48,516
Commercial and industrial		109,530		13,886		721		837		124,974		208,434		11,213		471		1,383		221,502
Mortgage warehouse		154,954		—		—		—		154,954		338,124		—		—		—		338,124
Consumer loans		7,355		89		70		772		8,286		5,834		54		34		344		6,266
Total gross loans and leases	$	1,727,138	$	28,413	$	8,982	$	13,366	$	1,777,899	$	2,170,386	$	22,238	$	4,472	$	15,001	$	2,212,097


	December 31, 2018
	Pass		Special Mention		Substandard		Impaired		Total

											December 31, 2019
											Pass		Special Mention		Substandard		Impaired		Total
Real estate:
1-4 family residential construction	$	105,676	$	—	$	—	$	—	$	105,676	$	105,979	$	—	$	—	$	—	$	105,979
Other construction/land		108,304		231		—		488		109,023		90,761		98		—		554		91,413
1-4 family - closed end		230,022		1,861		1,310		3,632		236,825		194,572		2,425		164		3,020		200,181
Equity lines		49,346		2,194		64		4,716		56,320		43,111		1,995		72		4,421		49,599
Multi-family residential		54,504		—		—		373		54,877		54,104		—		—		353		54,457
Commercial real estate - owner occupied		292,886		4,192		3,021		1,225		301,324		334,460		4,005		3,384		2,034		343,883
Commercial real estate - non-owner occupied		429,835		2,730		4,354		1,425		438,344		409,289		1,164		11		2,105		412,569
Farmland		148,680		1,073		146		1,642		151,541		142,594		1,048		132		259		144,033
Total real estate		1,419,253		12,281		8,895		13,501		1,453,930		1,374,870		10,735		3,763		12,746		1,402,114


Agricultural		48,517		580		—		6		49,103		47,814		217		—		5		48,036
Commercial and industrial		110,413		15,686		377		1,744		128,220		100,584		13,415		556		977		115,532
Mortgage warehouse		91,813		—		—		—		91,813		189,103		—		—		—		189,103
Consumer loans		7,851		151		39		821		8,862		7,245		85		25		425		7,780
Total gross loans and leases	$	1,677,847	$	28,698	$	9,311	$	16,072	$	1,731,928	$	1,719,616	$	24,452	$	4,344	$	14,153	$	1,762,565

Past Due and Nonperforming Assets

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets. The Company’s foreclosed assets can include mobile homes and/or OREO, which consists of commercial and/or residential real estate properties acquired by foreclosure or similar means that the Company is offering or will offer for sale. Foreclosed assets totaled ~~$770,000~~$2.9 million at June 30, ~~2019,~~2020, and ~~$1.082~~$0.8 million at December 31, ~~2018.~~2019. Gross nonperforming loans totaled ~~$4.120~~$5.8 million at June 30, ~~2019~~2020 and ~~$5.156~~$5.7 million at December 31, ~~2018.~~2019. Loans and leases are classified as nonperforming when reasonable doubt surfaces with regard to the ability of the Company to collect all principal and interest. At that point, we stop accruing interest on the loan or lease in question and reverse any

Table of Contents

previously-recognized interest to the extent that it is uncollected or associated with interest-reserve loans. Any asset for which principal or interest has been in default for 90 days or more is also placed on non-accrual status even if interest is still being received, unless the asset is both well secured and in the process of collection.

Not included in past due and nonperforming assets are loan modifications executed under Section 4013 of the CARES Act. There were 313 customers, for a total of $386.2 million, with payment deferrals under these loan modifications. Approximately $4.9 million in accrued interest has been recognized but not collected on these loans.

An aging of the Company’s loan balances is presented in the following tables, by number of days past due as of the indicated dates:

Loan Portfolio Aging

(dollars in thousands, unaudited)


	June 30, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due⁽¹⁾		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans⁽²⁾
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	89,225	$	89,225	$	—
Other construction/land		—		—		—		—		90,545		90,545		4
1-4 family - closed end		11		684		409		1,104		176,967		178,071		843
Equity lines		84		1,120		349		1,553		42,765		44,318		626
Multi-family residential		—		—		—		—		55,921		55,921		—
Commercial real estate - owner occupied		—		—		989		989		312,874		313,863		1,909
Commercial real estate - non-owner occupied		—		—		628		628		690,664		691,292		627
Farmland		128		—		684		812		133,642		134,454		702
Total real estate		223		1,804		3,059		5,086		1,592,603		1,597,689		4,711

Agricultural		—		—		—		—		48,516		48,516		—
Commercial and industrial		337		16		772		1,125		220,377		221,502		1,086
Mortgage warehouse lines		—		—		—		—		338,124		338,124		—
Consumer		4		32		—		36		6,230		6,266		11
Total gross loans and leases	$	564	$	1,852	$	3,831	$	6,247	$	2,205,850	$	2,212,097	$	5,808

June 30, 2019


30-59
Days
Past Due

60-89
Days
Past Due

90 Days Or
More Past Due(1)

Total
Past Due

Current

Total Financing
Receivables

Non-Accrual
Loans(2)
Real estate:

1-4 family residential
construction

$
—

$
—

$
—

$
—

$
105,618

$
105,618

$
—
Other construction/land

—

—

—

—

108,342

108,342

43
1-4 family - closed end

265

—

409

674

217,944

218,618

1,453
Equity lines

134

—

23

157

53,552

53,709

467
Multi-family residential

—

—

—

—

53,602

53,602

—
Commercial real estate - owner occupied

—

895

97

992

321,035

322,027

1,473
Commercial real estate - non-owner occupied

—

—

—

—

423,641

423,641

—
Farmland

—

—

—

—

152,619

152,619

25
Total real estate

399

895

529

1,823

1,436,353

1,438,176

3,461

Agricultural

—

—

—

—

51,509

51,509

—
Commercial and industrial

203

3

74

280

124,694

124,974

569
Mortgage warehouse lines

—

—

—

—

154,954

154,954

—
Consumer

42

59

19

120

8,166

8,286

90
Total gross loans and leases

$
644

$
957

$
622

$
2,223

$
1,775,676

$
1,777,899

$
4,120

(1)

~~(1)~~

As of June 30, ~~2019~~2020 there were no0 loans over 90 days past due and still accruing.

(2)

~~(2)~~

Included in total financing receivables

Table of Contents

Loan Portfolio Aging

(dollars in thousands, unaudited)


	December 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due⁽¹⁾		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans⁽²⁾
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	105,979	$	105,979	$	—
Other construction/land		16		—		—		16		91,397		91,413		31
1-4 family - closed end		485		380		659		1,524		198,657		200,181		741
Equity lines		177		10		78		265		49,334		49,599		480
Multi-family residential		—		—		—		—		54,457		54,457		—
Commercial real estate - owner occupied		1,552		—		88		1,640		342,243		343,883		1,440
Commercial real estate - non-owner occupied		500		—		1,605		2,105		410,464		412,569		2,105
Farmland		—		—		—		—		144,033		144,033		258
Total real estate		2,730		390		2,430		5,550		1,396,564		1,402,114		5,055

Agricultural		—		—		—		—		48,036		48,036		—
Commercial and industrial		160		215		—		375		115,157		115,532		651
Mortgage warehouse lines		—		—		—		—		189,103		189,103		—
Consumer		55		12		2		69		7,711		7,780		31
Total gross loans and leases	$	2,945	$	617	$	2,432	$	5,994	$	1,756,571	$	1,762,565	$	5,737

December 31, 2018


30-59
Days
Past Due

60-89
Days
Past Due

90 Days Or
More Past Due(1)

Total
Past Due

Current

Total Financing
Receivables

Non-Accrual
Loans(2)
Real estate:

1-4 family residential
construction

$
—

$
—

$
—

$
—

$
105,676

$
105,676

$
—
Other construction/land

210

—

27

237

108,786

109,023

82
1-4 family - closed end

319

—

775

1,094

235,731

236,825

799
Equity lines

1,471

—

57

1,528

54,792

56,320

408
Multi-family residential

—

—

—

—

54,877

54,877

—
Commercial real estate - owner occupied

183

—

102

285

301,039

301,324

605
Commercial real estate - non-owner occupied

49

—

—

49

438,295

438,344

49
Farmland

1,555

—

—

1,555

149,986

151,541

1,642
Total real estate

3,787

—

961

4,748

1,449,182

1,453,930

3,585

Agricultural

—

—

—

—

49,103

49,103

—
Commercial and industrial

1,567

83

886

2,536

125,684

128,220

1,425
Mortgage warehouse lines

—

—

—

—

91,813

91,813

—
Consumer

95

45

56

196

8,666

8,862

146
Total gross loans and leases

$
5,449

$
128

$
1,903

$
7,480

$
1,724,448

$
1,731,928

$
5,156

(1)

~~(1)~~

As of December 31, ~~2018~~2019 there were no0 loans over 90 days past due and still accruing.

(2)

~~(2)~~

Included in total financing receivables

Troubled Debt Restructurings

A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring (TDR) if the modification constitutes a ~~concession.~~concession, excluding loan modifications that are COVID-19 related and made in accordance with the interagency guidance and the CARES Act as described in Note 3, above. At June 30, ~~2019,~~2020, the Company had a total of ~~$10.276~~$10 million in TDRs, including ~~$1.030~~$0.8 million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance period or even at the time of loan modification. Regardless of the period of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain then the loan will be kept on non-accrual status. Moreover, a TDR is generally considered to be in default when it appears that the customer will not likely be able to repay all principal and interest pursuant to restructured terms.

Table of Contents

The Company may agree to different types of concessions when modifying a loan or lease. The tables below summarize TDRs which were modified during the noted periods, by type of concession:

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)


	Three months ended June 30, 2019
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total

											Three months ended June 30, 2020
											Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:
Other construction/land	$	—	$	—	$	—	$	—	$	—	$	—	$	85	$	—	$	—	$	—	$	85
1-4 family - closed-end		—		—		—		—		—		—		1,325		—		—		—		1,325
Equity lines		—		244		—		—		244		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—		—		178		—		—		—		178
Farmland		—		—		—		—		—		—		—		—		—		—		—
Total real estate loans		—		244		—		—		244		—		1,588		—		—		—		1,588
Agricultural		—		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		—		22		—		52		74		—		28		—		—		—		28
Consumer loans		—		—		—		50		50		—		—		—		—		—		—
Total	$	—	$	266	$	—	$	102	$	368	$	—	$	1,616	$	—	$	—	$	—	$	1,616


	Three months ended June 30, 2018
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total

											Three months ended June 30, 2019
											Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:
Other construction/land	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
1-4 family - closed-end		—		—		—		—		—		—		—		—		—		—		—
Equity lines		—		295		504		—		799		—		244		—		—		—		244
Multi-family residential		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—		—		—		—
Total real estate loans		—		295		504		—		799		—		244		—		—		—		244
Agricultural		—		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		—		63		25		225		313		—		22		—		52		—		74
Consumer loans		—		—		—		—		—		—		—		—		50		—		50
Total	$	—	$	358	$	529	$	225	$	1,112	$	—	$	266	$	—	$	102	$	—	$	368

Table of Contents

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)


		Six months ended June 30, 2019
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total

												Six months ended June 30, 2020
											Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:																					$
Other construction/land	$	—	$	—	$	—	$	—	$	—	$	—	$	85	$	—	$	—	$	—		85
1-4 family - closed-end		—		—		—		—		—		—		1,325		—		—		—		1,325
Equity lines		—		344		—		—		344		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—		—		178		—		—		338		516
Farmland		—		—		—		—		—		—		—		—		—		—		—
Total real estate loans		—		344		—		—		344		—		1,588		—		—		338		1,926
Agricultural		—		—		—		—		—		—		—		—		—				—
Commercial and industrial		94		22		—		52		168		—		28		—		—		—		28
Consumer loans		—		9		—		50		59		—		—		—		—		—		—
Total	$	94	$	375	$	—	$	102	$	571	$	—	$	1,616	$	—	$	—	$	338	$	1,954


		Six months ended June 30, 2018
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total

												Six months ended June 30, 2019
											Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:
Other construction/land	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
1-4 family - closed-end		—		—		—		—		—		—		—		—		—		—		—
Equity lines		—		363		504		—		867		—		344		—		—		—		344
Multi-family residential		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—		—		—		—
Total real estate loans		—		363		504		—		867		—		344		—		—		—		344
Agricultural		—		—		—		—		—		—		—		—		—				—
Commercial and industrial		—		63		25		225		313		94		22		—		52		—		168
Consumer loans		—		—		—		—		—		—		9		—		50		—		59
Total	$	—	$	426	$	529	$	225	$	1,180	$	94	$	375	$	—	$	102	$	—	$	571

Table of Contents

The following tables present, by class, additional details related to loans classified as TDRs during the referenced periods, including the recorded investment in the loan both before and after modification and balances that were modified during the period:

Troubled Debt Restructurings

(dollars in thousands, unaudited)


	Three months ended June 30, 2020
		Pre- Modification		Post- Modification
	Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real estate:
Other construction/land	1	$	86	$	85	$	40	$	41
1-4 family - closed-end	1		1,325		1,325		10		17
Equity lines	0		—		—		—		—
Multi-family residential	0		—		—		—		—
Commercial real estate - owner occupied	1		178		178		8		9
Farmland	0		—		—		—		—
Total real estate loans			1,589		1,588		58		67

Agricultural	0		—		—		—		—
Commercial and industrial	1		28		28		1		2
Consumer loans	0		—		—		—		—
Total		$	1,617	$	1,616	$	59	$	69

Three months ended June 30, 2019

Pre-
Modification

Post-
Modification


Number of
Loans

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment

Reserve
Difference⁽¹⁾

Reserve
Real estate:

Other construction/land

0

$
—

$
—

$
—

$
—
1-4 family - closed-end

0

—

—

—

—
Equity lines

1

244

244

—

1
Multi-family residential

0

—

—

—

—
Commercial real estate - owner occupied

0

—

—

—

—
Farmland

0

—

—

—

—
Total real estate loans

244

244

—

1

Agricultural

0

—

—

—

—
Commercial and industrial

2

74

74

—

45
Consumer loans

1

50

50

(45)

2
Total

$
368

$
368

$
(45)

$
48

(1)

~~(1)~~

This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.


	Three months ended June 30, 2019
		Pre- Modification		Post- Modification
	Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real estate:
Other construction/land	0	$	—	$	—	$	—	$	—
1-4 family - closed-end	0		—		—		—		—
Equity lines	1		244		244		—		1
Multi-family residential	0		—		—		—		—
Commercial real estate - owner occupied	0		—		—		—		—
Farmland	0		—		—		—		—
Total real estate loans			244		244		—		1

Agricultural	0		—		—		—		—
Commercial and industrial	2		74		74		—		45
Consumer loans	1		50		50		(45)		2
Total		$	368	$	368	$	$(45)	$	48

Three months ended June 30, 2018

Pre-
Modification

Post-
Modification


Number of
Loans

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment

Reserve
Difference⁽¹⁾

Reserve
Real estate:

Other construction/land

0

$
—

$
—

$
—

$
—
1-4 family - closed-end

0

—

—

—

—
Equity lines

6

799

799

4

10
Multi-family residential

0

—

—

—

—
Commercial real estate - owner occupied

0

—

—

—

—
Farmland

0

—

—

—

—
Total real estate loans

799

799

4

10

Agricultural

0

—

—

—

—
Commercial and industrial

3

313

313

—

26
Consumer loans

0

—

—

—

—
   Total

$
1,112

$
1,112

$
4

$
36

(1)

~~(1)~~

Table of Contents

Troubled Debt Restructurings

(dollars in thousands, unaudited)


	Six months ended June 30, 2020
		Pre- Modification		Post- Modification
	Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real estate:
Other construction/land	1	$	86	$	85	$	40	$	41
1-4 family - closed-end	1		1,325		1,325		10		17
Equity lines	0		`		—		—		—
Multi-family residential	0		—		—		—		—
Commercial real estate - owner occupied	2		516		516		8		9
Farmland	0		—		—		—		—
Total real estate loans			1,927		1,926		58		67

Agricultural	0		—		—		—		—
Commercial and industrial	1		28		28		1		2
Consumer loans	0		—		—		—		—
Total		$	1,955	$	1,954	$	59	$	69

Six months ended June 30, 2019

Pre-
Modification

Post-
Modification


Number of
Loans

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment

Reserve
Difference⁽¹⁾

Reserve
Real estate:

Other construction/land

0

$
—

$
—

$
—

$
—
1-4 family - closed-end

0

—

—

—

—
Equity lines

2

344

344

—

1
Multi-family residential

0

—

—

—

—
Commercial real estate - owner occupied

0

—

—

—

—
Farmland

0

—

—

—

—
Total real estate loans

344

344

—

1

Agricultural

0

—

—

—

—
Commercial and industrial

4

168

168

(20)

46
Consumer loans

2

59

59

(47)

3
   Total

$
571

$
571

$
$(67)

$
50

(1)

~~(1)~~

Six months ended June 30, 2018

Pre-
Modification

Post-
Modification


Number of
Loans

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment

Reserve
Difference⁽¹⁾

Reserve
Real estate:

Other construction/land

0

$
—

$
—

$
—

$
—
1-4 family - closed-end

0

—

—

—

—
Equity lines

7

867

867

4

12
Multi-family residential

0

—

—

—

—
Commercial real estate - owner occupied

0

—

—

—

—
Farmland

0

—

—

—

—
Total real estate loans

867

867

4

12

Agricultural

0

—

—

—

—
Commercial and industrial

3

313

313

—

26
Consumer loans

0

—

—

—

—
   Total

$
1,180

$
1,180

$
4

$
38


	Six months ended June 30, 2019
		Pre- Modification		Post- Modification
	Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real estate:
Other construction/land	0	$	—	$	—	$	—	$	—
1-4 family - closed-end	0		—		—		—		—
Equity lines	2		344		344		—		1
Multi-family residential	0		—		—		—		—
Commercial real estate - owner occupied	0		—		—		—		—
Farmland	0		—		—		—		—
Total real estate loans			344		344		—		1

Agricultural	0		—		—		—		—
Commercial and industrial	4		168		168		(20)		46
Consumer loans	2		59		59		(47)		3
Total		$	571	$	571	$	$(67)	$	50

(1)

~~(1)~~

The ~~company~~Company had no0 finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the six-month periods ended June 30, ~~2019~~2020 and ~~2018.~~

2019.

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Purchased Credit Impaired Loans

The Company may acquire loans which show evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid, since there is no carryover of the seller’s allowance for loan losses. Potential losses on PCI loans subsequent to acquisition are recognized by an increase in the allowance for loan losses. PCI loans are accounted for individually or are aggregated into pools of loans based on common risk characteristics. The Company projects the amount and timing of expected cash flows, and expected cash receipts in excess of the amount paid for any such loans are recorded as interest income over the remaining life of the loan or pool of loans (accretable yield). The excess of contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Expected cash flows are periodically re-evaluated throughout the life of the loan or pool of loans. If the present value of the expected cash flows is determined at any time to be less than the carrying amount, a reserve is recorded. If the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Our acquisition of Santa Clara Valley Bank in 2014 included certain loans which have shown evidence of credit deterioration since origination, and for which it was probable at acquisition that all contractually required payments would not be collected. The carrying amount and unpaid principal balance of those PCI loans was as follows, as of the dates indicated:

Purchased Credit Impaired Loans:

(dollars in thousands, unaudited)


	June 30, 2019
	Unpaid Principal Balance		Carrying Value

					June 30, 2020
					Unpaid Principal Balance		Carrying Value
Real estate secured	$	96	$	—	$	83	$	83
Total purchased credit impaired loans	$	96	$	—	$	83	$	$83


	~~December 31, 2018~~
	~~Unpaid Principal Balance~~		~~Carrying Value~~
~~Real estate secured~~	$	~~103~~	$	—
~~Total purchased credit impaired loans~~	$	~~103~~	$	—


	December 31, 2019
	Unpaid Principal Balance		Carrying Value
Real estate secured	$	88	$	—
Total purchased credit impaired loans	$	—	$	—

AnThere was 0 allowance for loan losses ~~totaling $96,000 was~~ allocated for PCI loans as of June 30, ~~2019,~~2020, however, an allowance totaling $0.1 million was allocated for PCI loans as ~~compared to $103,000 at~~of December 31, ~~2018.~~2019. There was no0 discount accretion recorded on PCI loans during the six months ended June 30, ~~2019.~~2020.

Note 11 – Allowance for Loan and Lease Losses

The Company’s allowance for loan and lease losses, a contra-asset, is established through a provision for loan and lease losses. The allowance is maintained at a level that is considered adequate to absorb probable losses on certain specifically identified impaired loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when cash payments are received subsequent to the charge off. We employ a systematic methodology, consistent with FASB guidelines on loss contingencies and impaired loans, for determining the appropriate level of the allowance for loan and lease losses and adjusting it to that level at least quarterly. Pursuant to our methodology, impaired loans and leases are individually analyzed and a criticized asset action plan is completed specifying the financial status of the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation plan. A specific loss allowance is created for each impaired loan, if necessary.

The following tables disclose the unpaid principal balance, recorded investment, average recorded investment, and interest income recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required such. Included in the valuation allowance for impaired loans shown in the tables below

~~Table of Contents~~

are specific reserves allocated to TDRs, totaling $~~1.023~~0.7 million at June 30, ~~2019~~2020 and ~~$1.048~~$0.6 million at December 31, ~~2018.~~2019.

Table of Contents

Impaired Loans

(dollars in thousands, unaudited)


	June 30, 2020
	Unpaid Principal Balance⁽¹⁾		Recorded Investment⁽²⁾		Related Allowance		Average Recorded Investment		Interest Income Recognized⁽³⁾
With an allowance recorded
Real estate:
Other construction/land	$	690		571		173		586		21
1-4 family - closed-end		3,379		3,379		71		3,406		58
Equity lines		3,909		3,856		317		3,971		69
Multi-family residential		344		344		18		347		12
Commercial real estate- owner occupied		757		757		11		763		18
Commercial real estate- non-owner occupied		—		—		—		—		—
Farmland		237		237		3		237		—
Total real estate		9,316		9,144		593		9,310		178
Agricultural		2		2		—		4		—
Commercial and industrial		1,282		1,262		671		1,297		9
Consumer loans		382		344		95		361		15
Subtotal		10,982		10,752		1,359		10,972		202
With no related allowance recorded
Real estate:
Other construction/land		—		—		—		—		1
1-4 family - closed-end		826		826		—		845		—
Equity lines		300		300		—		304		2
Commercial real estate- owner occupied		2,029		1,910		—		1,937		—
Commercial real estate- non-owner occupied		627		627		—		634		—
Farmland		465		465		—		467		—
Total real estate		4,247		4,128		—		4,187		3
Agricultural		—		—		—		—		—
Commercial and industrial		142		121		—		206		—
Consumer loans		9		—		—		1		—
Subtotal		4,398		4,249		—		4,394		3
Total	$	15,380	$	15,001	$	1,359	$	15,366	$	205

June 30, 2019


Unpaid Principal
Balance(1)

Recorded
Investment(2)

Related
Allowance

Average
Recorded
Investment

Interest Income
Recognized(3)
With an allowance recorded

Real estate:

Other construction/land

$
554

$
399

$
39

$
667

$
18
1-4 family - closed-end

3,039

3,038

70

3,178

80
Equity lines

4,784

4,730

639

4,941

125
Multi-family residential

362

362

21

378

11
Commercial real estate- owner occupied

823

703

112

262

19
Commercial real estate- non-owner occupied

—

—

—

—

—
Farmland

—

—

—

—

—
Total real estate

9,562

9,232

881

9,426

253
Agricultural

6

6

1

6

—
Commercial and industrial

728

709

303

906

13
Consumer loans

801

763

137

915

28
Subtotal

11,097

10,710

1,322

11,253

294
With no related allowance recorded

Real estate:

Other construction/land

24

20

—

55

—
1-4 family - closed-end

1,001

959

—

1,073

—
Equity lines

162

138

—

183

—
Commercial real estate- owner occupied

1,376

1,377

—

1,927

—
Commercial real estate- non-owner occupied

—

—

—

—

—
Farmland

25

25

—

45

—
Total real estate

2,588

2,519

—

3,283

—
Agricultural

—

—

—

—

—
Commercial and industrial

150

128

—

186

—
Consumer loans

109

9

—

171

—
Subtotal

2,847

2,656

—

3,640

—
Total

$
13,944

$
13,366

$
1,322

$
14,893

$
294

(1)

~~(1)~~

Contractual principal balance due from customer.

(2)

~~(2)~~

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

(3)

~~(3)~~

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

Table of Contents

Impaired Loans

(dollars in thousands, unaudited)


	December 31, 2019
	Unpaid Principal Balance⁽¹⁾		Recorded Investment⁽²⁾		Related Allowance		Average Recorded Investment		Interest Income Recognized⁽³⁾
With an allowance recorded
Real estate:
Other construction/land	$	656	$	537	$	157	$	563	$	32
1-4 family - closed-end		2,298		2,298		58		2,365		146
Equity lines		4,173		4,120		252		4,185		200
Multi-family residential		353		353		17		361		23
Commercial real estate- owner occupied		593		593		6		606		38
Commercial real estate- non-owner occupied		—		—		—		—		—
Farmland		237		237		3		256		—
Total real estate		8,310		8,138		493		8,336		439
Agricultural		5		5		1		6		—
Commercial and industrial		915		896		219		1,140		29
Consumer loans		464		425		114		469		35
Subtotal		9,694		9,464		827		9,951		503
With no related allowance recorded
Real estate:
1-4 family - closed-end	$	755	$	722	$	—	$	726	$	—
Equity lines		326		301		—		310		5
Multi-family residential		—		—		—		—		—
Commercial real estate- owner occupied		1,560		1,440		—		1,477		—
Commercial real estate- non-owner occupied		3,295		2,105		—		3,267		—
Farmland		22		22		—		25		—
Total real estate		6,010		4,607		—		6,382		9
Agricultural		—		—		—		—		—
Commercial and industrial		102		81		—		162		—
Consumer loans		9		—		—		140		15
Subtotal		6,121		4,688		—		6,684		24
Total	$	15,815	$	14,152	$	827	$	16,635	$	527

December 31, 2018


Unpaid Principal
Balance(1)

Recorded
Investment(2)

Related
Allowance

Average
Recorded
Investment

Interest Income
Recognized(3)
With an allowance recorded

Real estate:

Other construction/land

$
593

$
438

$
44

$
648

$
40
1-4 family - closed-end

3,325

3,325

75

3,182

175
Equity lines

4,603

4,550

656

4,368

206
Multi-family residential

373

373

25

359

20
Commercial real estate- owner occupied

842

723

135

740

40
Commercial real estate- non-owner occupied

1,572

1,425

3

1,644

107
Total real estate

11,308

10,834

938

10,941

588
Agricultural

6

6

1

6

—
Commercial and industrial

1,724

1,534

918

1,965

40
Consumer loans

813

764

151

909

61
Subtotal

13,851

13,138

2,008

13,821

689
With no related allowance recorded

Real estate:

Other construction/land

54

50

—

58

—
1-4 family - closed-end

357

307

—

375

3
Equity lines

224

166

—

221

—
Commercial real estate- owner occupied

502

502

—

478

—
Commercial real estate- non-owner occupied

—

—

—

—

—
Farmland

1,642

1,642

—

1,538

—
Total real estate

2,779

2,667

—

2,670

3
Agricultural

—

—

—

—

—
Commercial and industrial

238

211

—

838

—
Consumer loans

182

56

—

273

1
Subtotal

3,199

2,934

—

3,781

4
Total

$
17,050

$
16,072

$
2,008

$
17,602

$
693

(1)

~~(1)~~

Contractual principal balance due from customer.

(2)

~~(2)~~

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

(3)

~~(3)~~

Interest income is recognized on performing balances on a regular accrual ~~basis~~.

basis.

The specific loss allowance for an impaired loan generally represents the difference between the book value of the loan and either the fair value of underlying collateral less estimated disposition costs, or the loan’s net present value as determined by a discounted cash flow analysis. The discounted cash flow approach is typically used to measure impairment on loans for which it is anticipated that repayment will be provided from cash flows other than those generated solely by the disposition or operation of underlying collateral. However, historical loss rates may be used by the Company to determine a specific loss allowance if those rates indicate a higher potential reserve need than the discounted cash flow analysis. Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral value, net of the expected costs of disposition, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required. At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within

Table of Contents

30 to 60 days if a recent appraisal is not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed staff appraisers

~~Table of Contents~~

may update older appraisals based on current market conditions and property value trends. Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required. The specific loss allowance is adjusted, as necessary, once a new appraisal is received. Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired, and current appraisals were available or in process for ~~all~~59% of the Company’s impaired real estate loan balances at June 30, ~~2019.~~2020. Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off against the Company’s allowance for loan and lease losses, with the loan then carried at the fair value of the collateral, as appraised, less estimated costs of disposition if applicable. Once a charge-off or write-down is recorded, it will not be restored to the loan balance on the Company’s accounting books.

Our methodology also provides for the establishment of a “general” allowance for probable incurred losses inherent in loans and leases that are not impaired. Unimpaired loan balances are segregated by credit quality, and are then evaluated in pools with common characteristics. At the present time, pools are based on the same segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other measurable information, the credit classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on Management’s judgment and experience. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that Management believes is appropriate at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the condition of the agricultural industry and other key industries. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was ~~$8.561~~$12.2 million at June 30, ~~2019.~~2020.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended June 30, ~~2019. As~~2020, although as outlined in Note 3 to the consolidated financial statements we ~~add new products~~will substantially update our methodology upon the implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-13 and ~~expand our geographic coverage, and as regulatory and economic environments change,~~related amendments, Financial Instruments – Credit Losses (Topic 326) when the earlier of the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Moreover, we ~~expect~~will continue to enhance our methodology as needed in order to comply with regulatory and accounting requirements, keep pace with the size and complexity of ~~the~~our loan and lease portfolio, and respond to pressures created by external forces. We engage outside firms on a regular basis to assess our methodology and perform independent credit reviews of our loan and lease portfolio. In addition, the FDIC and the California ~~DBO~~Department of Business Oversight (DBO) review the allowance for loan and lease losses as an integral part of their audit and examination processes. Management believes ~~that~~deferring the implementation of “CECL” and continuing with the current incurred loss methodology is appropriate given ~~our size~~the impact of the economic uncertainty surrounding COVID-19 and ~~level~~related governmental and regulatory actions taken in response thereto, such as the stimulus provisions of ~~complexity.~~

the CARES Act.

Table of Contents

The tables that follow detail the activity in the allowance for loan and lease losses for the periods noted:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)


		Three months ended June 30, 2020
		Real Estate		Agricultural Products		Commercial and Industrial ⁽¹⁾		Consumer		Unallocated		Total

Allowance for credit losses:
Beginning balance	$	7,315	$	235	$	2,754	$	1,137	$	12	$	11,453
Charge-offs		—		—		(67)		(286)		—		(353)
Recoveries		3		—		20		237		—		260
Provision		1,532		(3)		908		(239)		2		2,200
Ending balance	$	8,850	$	232	$	3,615	$	849	$	14	$	13,560

	Six months ended June 30, 2020
	Real Estate		Agricultural Products		Commercial and Industrial ⁽¹⁾		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance	$	5,635	$	193	$	2,685	$	1,278	$	132	$	9,923
Charge-offs		—		—		(92)		(903)		—		(995)
Recoveries		74		—		48		510		—		632
Provision		3,141		39		974		(36)		(118)		4,000
Ending balance	$	8,850	$	232	$	3,615	$	849	$	14	$	13,560
Reserves:
Specific	$	593	$	—	$	671	$	95	$	—	$	1,359
General		8,257		232		2,944		754		14		12,201
Ending balance	$	8,850	$	232	$	3,615	$	849	$	14	$	13,560
Loans evaluated for impairment:
Individually	$	13,272	$	2	$	1,383	$	344	$	—	$	15,001
Collectively		1,584,417		48,514		558,243		5,922		—		2,197,096
Ending balance	$	1,597,689	$	48,516	$	559,626	$	6,266	$	—	$	2,212,097

		Year ended December 31, 2019
	Real Estate		Agricultural Products		Commercial and Industrial ⁽¹⁾		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance	$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750
Charge-offs		(1,190)		—		(1,274)		(2,409)		—		(4,873)
Recoveries		647		—		690		1,159		—		2,496
Provision		347		(63)		875		1,289		102		2,550
Ending balance	$	5,635	$	193	$	2,685	$	1,278	$	132	$	9,923
Reserves:
Specific	$	493	$	1	$	219	$	114	$	—	$	827
General		5,142		192		2,466		1,164		132		9,096
Ending balance	$	5,635	$	193	$	2,685	$	1,278	$	132	$	9,923
Loans evaluated for impairment:
Individually	$	12,746	$	5	$	977	$	425	$	—	$	14,153
Collectively		1,389,368		48,031		303,658		7,355		—		1,748,412
Ending balance	$	1,402,114	$	48,036	$	304,635	$	7,780	$	—	$	1,762,565

(1)	Includes mortgage warehouse lines.

Table of Contents

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)


		Three months ended June 30, 2019
	Real Estate		Agricultural Products		Commercial and Industrial ⁽¹⁾		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance	$	6,094	$	219	$	1,914	$	1,129	$	82	$	9,438
Charge-offs		—		—		(254)		(562)		—		(816)
Recoveries		153		—		431		277		—		861
Provision		(278)		(18)		478		288		(70)		400
Ending balance	$	5,969	$	201	$	2,569	$	1,132	$	12	$	9,883

		Six months ended June 30, 2019
	Real Estate		Agricultural Products		Commercial and Industrial ⁽¹⁾		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance	$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750
Charge-offs		—		—		(832)		(1,114)		—		(1,946)
Recoveries		329		—		472		578		—		1,379
Provision		(191)		(55)		535		429		(18)		700
Ending balance	$	5,969	$	201	$	2,569	$	1,132	$	12	$	9,883
Reserves:
Specific	$	881	$	1	$	303	$	137	$	—	$	1,322
General		5,088		200		2,266		995		12		8,561
Ending balance	$	5,969	$	201	$	2,569	$	1,132	$	12	$	9,883
Loans evaluated for impairment:
Individually	$	11,751	$	6	$	837	$	772	$	—	$	13,366
Collectively		1,426,425		51,503		279,091		7,514		—		1,764,533
Ending balance	$	1,438,176	$	51,509	$	279,928	$	8,286	$	—	$	1,777,899

Three months ended June 30, 2019

Real Estate

Agricultural
Products

Commercial and
Industrial (1)

Consumer

Unallocated

Total
Allowance for credit losses:

Beginning balance

$
6,094

$
219

$
1,914

$
1,129

$
82

$
9,438
Charge-offs

—

—

(254)

(562)

—

(816)
Recoveries

153

—

431

277

—

861
Provision

(278)

(18)

478

288

(70)

400
Ending balance

$
5,969

$
201

$
2,569

$
1,132

$
12

$
9,883

Six months ended June 30, 2019


Real Estate

Agricultural
Products

Commercial and
Industrial (1)

Consumer

Unallocated

Total
Allowance for credit losses:

Beginning balance

$
5,831

$
256

$
2,394

$
1,239

$
30

$
9,750
Charge-offs

—

—

(832)

(1,114)

—

(1,946)
Recoveries

329

—

472

578

—

1,379
Provision

(191)

(55)

535

429

(18)

700
Ending balance

$
5,969

$
201

$
2,569

$
1,132

$
12

$
9,883

Reserves:

Specific

$
881

$
1

$
303

$
137

$
—

$
1,322
General

5,088

200

2,266

995

12

8,561
Ending balance

$
5,969

$
201

$
2,569

$
1,132

$
12

$
9,883

Loans evaluated for impairment:

Individually

$
11,751

$
6

$
837

$
772

$
—

$
13,366
Collectively

1,426,425

51,503

279,091

7,514

—

1,764,533
Ending balance

$
1,438,176

$
51,509

$
279,928

$
8,286

$
—

$
1,777,899

Year ended December 31, 2018


Real Estate

Agricultural
Products

Commercial and
Industrial (1)

Consumer

Unallocated

Total
Allowance for credit losses:

Beginning balance

$
4,786

$
208

$
2,772

$
1,231

$
46

$
9,043
Charge-offs

(2,474)

—

(608)

(2,226)

—

(5,308)
Recoveries

374

23

148

1,120

—

1,665
Provision

3,145

25

82

1,114

(16)

4,350
Ending balance

$
5,831

$
256

$
2,394

$
1,239

$
30

$
9,750

Reserves:

Specific

$
937

$
2

$
918

$
151

$
—

$
2,008
General

4,894

254

1,476

1,088

30

7,742
Ending balance

$
5,831

$
256

$
2,394

$
1,239

$
30

$
9,750

Loans evaluated for impairment:

Individually

$
13,501

$
6

$
1,744

$
821

$
—

$
16,072
Collectively

1,440,429

49,097

218,289

8,041

—

1,715,856
Ending balance

$
1,453,930

$
49,103

$
220,033

$
8,862

$
—

$
1,731,928

(1)

~~(1)~~

Includes mortgage warehouse lines.

~~Table of Contents~~

Note 12 – Operating Leases

We lease space under non-cancelable operating leases for 21 branch locations, ~~three~~3 off-site ATM locations, ~~one~~1 administrative building, one loan production office and a warehouse. Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs). Payments for taxes and insurance as well as non-lease components are not included in the accounting of the lease component, but are separately accounted for in occupancy expense. The Company recognized lease expense of ~~$1.095~~$1.1 million ~~during the six month period~~for both six-month periods ended June 30, 2020 and 2019. ~~Lease expense for the six months ended June 30, 2018, prior to the adoption of ASU 2016‑02, was $1.177 million.~~ Most leases include one or more renewal options available to exercise. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. As most of our leases do not provide an implicit rate, we used our incremental borrowing rate in determining the present value of the lease payments.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the six months ended June 30, ~~2019.~~2020.

At June 30, ~~2019,~~2020, the Company’s right-of-use assets and operating lease liabilities were ~~$9.044~~$7.5 million and ~~$9.655~~$8.0 million, respectively. The weighted average remaining lease term for the lease liabilities was ~~5.3~~7.0 years, and the weighted average discount rate of remaining payments was 5.5 percent. There were no0 lease liabilities from new right-of-use assets

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obtained during the six months ended June 30, ~~2019.~~2020. Cash paid on operating leases was ~~$680,000~~$0.9 million for the six months ended June 30, ~~2019.~~2020.

Maturities of our lease liabilities for all operating leases are as follows (dollars in thousands, unaudited):



	June 30, 2020
2020 ⁽¹⁾	$	1,120
2021		2,020
2022		1,571
2023		1,113
2024		749
Thereafter		3,196
Total		9,769
Less: present value discount		(1,744)
Lease liability ⁽²⁾	$	8,025

Maturities of

Lease Liabilities
2019 (1)

$
1,096
2020

2,204
2021

1,993
2022

1,558
2023

1,119
Thereafter

3,939
Total

11,909
Less: present value discount

(2,254)
Lease liability (2)

$
9,655

(1)

~~(1)~~

Contractual maturities for the six months remaining in ~~2019.~~

2020.

(2)

~~(2)~~

Lease liability is included in other liabilities.

The following table presents the future minimum rental payments under leases with terms in excess of one year as of December 31, ~~2018~~2019 presented in accordance with ASC Topic 840, “Leases”:

December 31, 2018
2019

$
2,190
2020

2,204
2021

1,993
2022

1,558
2023

1,119
Thereafter

3,939
Total

$
13,003


	December 31, 2019
2020	$	2,235
2021		2,023
2022		1,574
2023		1,113
2024		749
Thereafter		3,196
Total undiscounted lease payments	$	10,890

~~Table of Contents~~

Note 13 – Revenue Recognition.

The Company utilizes the guidance found in ASU ~~2014‑~~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. 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. The Company’s revenue streams that are within the scope of and accounted for under Topic 606 include service charges on deposit accounts, debit card interchange fees, and fees levied for other services the Company provides its customers. The guidance does not apply to revenue associated with financial instruments such as loans and investments, and other noninterest income such as loan servicing fees and earnings on bank-owned life insurance, which are accounted for on an accrual basis under other provisions of GAAP. In total, approximately ~~21%~~37.1% and 29.6% of the Company’s noninterest revenue was outside of the scope of the ASC 606 ~~as of~~for the three- and six-month periods ended June 30, ~~2019.~~2020, respectively.

All of the company’s revenue from contracts inwithin the scope of ASC 606 is recognized ~~within~~as noninterest ~~income.~~ income, except for gains on the sale of OREO which is classified as non-interest expense. The following table presents the Company’s

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sources of noninterest income for the three- and six-month periods ended June 30, ~~2019~~2020 and ~~2018.~~2019. Items outside the scope of ASC 606 are noted as such (dollars in thousands, unaudited).


	For the three months ended June 30,				For the six months ended June 30,
	2020		2019		2020		2019
Non-interest income
Service charges on deposits
Returned item and overdraft fees	$	962	$	1,657	$	2,626	$	3,223
Other service charges on deposits		1,656		1,494		3,176		2,871
Debit card interchange income		1,723		1,687		3,355		3,200
Loss on limited partnerships⁽¹⁾		(158)		(450)		(315)		(900)
Dividends on equity investments⁽¹⁾		139		175		333		406
Unrealized gains recognized on equity investments⁽¹⁾		—		232		447		232
Net gains on sale of securities⁽¹⁾		390		22		390		28
Other⁽¹⁾		2,188		1,038		2,995		2,702
Total non-interest income	$	6,900	$	5,855	$	13,007	$	11,762

Non-interest expense
Salaries and employee benefits ⁽¹⁾	$	9,266	$	8,994	$	19,438	$	18,237
Occupancy expense ⁽¹⁾		2,504		2,450		4,832		4,811
Gain on sale of OREO		—		(21)		2		(37)
Other ⁽¹⁾		6,263		6,233		11,579		12,498
Total non-interest expense	$	18,033	$	17,656	$	35,851	$	35,509

For the three months ended June 30,

For the six months ended June 30,


2019

2018

2019

2018
Noninterest income

Service charges on deposits

Returned item and overdraft fees

$
1,657

$
1,575

$
3,223

$
3,142
Other service charges on deposits

1,494

1,452

2,871

2,832
Debit card interchange income

1,687

1,486

3,200

2,885
Loss on limited partnerships(1)

(450)

(405)

(900)

(800)
Dividends on equity investments(1)

175

169

406

394
Unrealized gains recognized on equity investments(1)

232

—

232

—
Net gains on sale of securities(1)

22

—

28

—
Other(1)

1,038

1,152

2,702

2,110
Total noninterest income

$
5,855

$
5,429

$
11,762

$
10,563

(1)

~~(1)~~

Not within scope of ASC 606. Revenue streams are not related to contract with customers and are accounted for on an accrual basis under other provisions of GAAP.

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

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PART I - FINANCIAL INFORMATION

ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form ~~10‑~~10-Q includes forward-looking statements that involve inherent risks and uncertainties. Words such as “expects”, “anticipates”, “believes”, “projects”, and “estimates” or variations of such words and similar expressions are intended to identify forward-looking statements. These statements are based on certain underlying assumptions and are not guarantees of future performance, as they could be impacted by a number of potential risks and developments that cannot be predicted with any degree of certainty. Therefore, actual outcomes and results may differ materially from what is expressed, forecast in, or implied by such forward-looking statements.

A variety of factors could have a material adverse impact on the Company’s financial condition or results of operations, and should be considered when evaluating the Company’s potential future financial performance. They include, but are not limited to, the risk of unfavorable economic conditions in the Company’s market areas; risks associated with the current national emergency with respect to COVID-19 including the impact that national, state, and local responses, including any stimulus or relief efforts, have on customers’ ability to repay loans; the ability for the Company to serve its customers with modified branch operations as well as social distancing guidelines and mandates under state and local stay-at-home orders; risks associated with fluctuations in interest ~~rates;~~rates or a sustained low interest rate environment; liquidity risks; increases in nonperforming assets and credit losses that could occur, particularly in times of weak economic conditions or rising interest rates; reductions in the market value of available-for-sale securities that could result if interest rates increase substantially or an issuer has real or perceived financial difficulties; the Company’s ability to attract and retain skilled employees; the Company’s ability to successfully deploy new technology; the success of acquisitions or branch expansion; and risks associated with the multitude of current and prospective laws and regulations to which the Company is and will be subject. Risk factors that could cause actual results to differ materially from results that might be implied by forward-looking statements include the risk factors disclosed in the Company’s Form ~~10‑K~~10-K for the fiscal year ended December 31, ~~2018.~~2019 and in Item 1A, herein.

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.

Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the Company’s critical accounting policies deal with the following areas: the establishment of the allowance for loan and lease losses, as explained in detail in Note 11 to the consolidated financial statements and in the “Provision for Loan and Lease Losses” and “Allowance for Loan and Lease Losses” sections of this discussion and analysis; the valuation of impaired loans and foreclosed assets, as discussed in Note 11 to the consolidated financial statements; income taxes and related deferred tax assets and liabilities, especially with regard to the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this discussion and analysis; and goodwill and other intangible assets, which are evaluated annually for impairment and for which we have determined that no impairment exists, as discussed in the “Other Assets” section of this discussion and analysis. Critical accounting areas are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations with regard to those areas.

3435

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OVERVIEW OF THE RESULTS OF OPERATIONS

AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

Second Quarter ~~2019~~2020 compared to Second Quarter ~~2018~~2019

~~Net income for the quarter ended June 30, 2019 was $8.829 million, an increase of $837,000, or 10%, relative to~~Second Quarter 2020 net income ~~of $7.992~~was $8.3 million, ~~for the quarter ended June 30, 2018. Basic and~~or $0.54 per diluted ~~earnings~~share, compared to $8.8 million, or $0.57 per diluted share ~~for~~in the second quarter of ~~2019 were $0.58 and $0.57, respectively, compared to $0.52 basic and diluted earnings per share for the second quarter of 2018.~~2019. The Company’s annualized return on average equity was ~~12.27%~~10.30% and annualized return on average assets was ~~1.39%~~1.19% for the quarter ended June 30, ~~2019,~~2020, compared to ~~12.44%~~12.27% and ~~1.34%~~1.39%, respectively, for the same quarter ~~ended June 30, 2018.~~in 2019. The primary drivers behind the variance in second quarter net income are as follows:

●

Net interest income increased by $1.399 million, or 6%, due to growth in average interest-earning assets totaling $151 million, or 7%, partially offset by a drop of three basis points in our net interest margin for the comparative quarters. Organic growth in the average balance of real estate loans was the main factor in the increase in average earning assets. Our net interest margin fell because the cost of interest-bearing liabilities increased more than our yield on interest-earning assets.

The Company’s provision for loan and lease losses was ~~$400,000~~$2.2 million in the second quarter of ~~2019~~2020 relative to ~~$300,000~~$0.4 million in the ~~second~~same quarter of ~~2018.~~

2019. The $1.8 million increase in provision for loan and lease losses is due mostly to the estimated impact that COVID-19 will have on the economy and our loan customers. Management adjusted its qualitative risk factors under our current incurred loss model for economic conditions, changes in the mix of the portfolio due to loans subject to a payment deferral, potential changes in collateral values due to reduced cash flows, and external factors such as government actions. In particular, the uncertainty regarding our customers' ability to repay loans could be adversely impacted by COVID-19 given higher unemployment rates, requests for payment deferrals, temporary business shut-downs, and reduced consumer and business spending.

●

Overall net interest income remained relatively unchanged as declines in loan yields were mostly offset by higher balances and lower interest expense.

~~Total~~●

The $1.0 million favorable increase in noninterest income reflects an increase of $426,000, or 8%, despite a large drop in income generated by bank-owned life insurance (BOLI) associated with deferred compensation plans. Noninterest income for the second quarter of 2019 includes a $232,000 nonrecurring gain resulting from the write up of certain restricted stock pursuantis due to a ~~periodic assessment of its market value, and a $100,000 nonrecurring~~$0.7 million gain from the ~~wrap-up~~termination of a low-income housing tax credit fund ~~investment. It also reflects higher service charges on deposits and an~~investment, a $0.5 million increase in ~~debit card interchange income.~~

~~Total noninterest expense increased by $362,000, or 2%. Compensation costs~~bank-owned life insurance (BOLI) income, and ~~occupancy expenses were roughly the same. However, there was~~ a ~~$615,000 increase in net OREO expense which was largely driven by nonrecurring gains on~~$0.4 million gain from the sale of ~~OREO that helped offset expenses in 2018. That increase was~~debt securities. These increases were partially offset by a ~~$152,000 drop in nonrecurring acquisition costs, and a $198,000~~$0.5 million decline in ~~directors’~~customer service charges.

●

Noninterest expense increased by $0.4 million, or 2%, due mostly to higher deferred compensation ~~costs for the quarterly comparison.~~

expense.

The Company’s provision for income taxes was 26.4% of pre-tax income in the second quarter of 2019 relative to 24.9% in the second quarter of 2018, with the increase resulting from a drop in non-taxable BOLI income and a declining level of tax credits relative to higher taxable income.

First Half ~~2019~~2020 compared to First Half ~~2018~~2019

Net income for the first half of ~~2019~~2020 was ~~$17.724 million, an increase of $3.022~~$16.1 million, or ~~21%, relative~~$1.05 per diluted share, compared to ~~net income of $14.702~~$17.7 million, ~~for the first half of 2018. Basic and~~or $1.15 per diluted ~~earnings per~~ share for the first half of ~~2019 were $1.16 and $1.15, respectively, compared to $0.96 and $0.95 basic and diluted earnings per share, respectively, for the first half of 2018.~~2019. The Company’s annualized return on average equity was ~~12.62%~~10.14% and annualized return on average assets was 1.21% for the six months ended June 30, 2020, compared to a return on equity of 12.62% and return on assets of 1.41% for the six months ended June 30, ~~2019, compared to a return on equity of 11.53% and return on assets of 1.25% for the six months ended June 30, 2018.~~2019. The primary drivers behind the variance in year-to-date net income are as follows:

●

Net interest income was up by $3.612 million, or 8%, due to the positive impact of an increase of $155 million, or 7%, in average interest-earning assets and a 3 basis point increase in our net interest margin.

The ~~Company recorded a $700,000~~Company’s provision for loan and lease losses was $4.0 million in the first half of ~~2019,~~2020 relative to ~~a $500,000 provision in 2018.~~

~~Table of Contents~~

~~Total noninterest income increased by $1.199~~$0.7 million or 11%. The year-to-date variance includes the items noted above in the quarterly summary, except that BOLI income reflects an increase of $401,000 for the year-to-date variance instead of a decline.

Total noninterest expense increased by $328,000, or 1%. As with the quarterly comparison, neither compensation costs nor occupancy expense increased materially but other noninterest expense was up by $259,000, or 2%. The year-to-date variance in other noninterest expense includes a $407,000 increase in net OREO expense and a $156,000 increase in directors’ deferred compensation expense (related to the increase in BOLI income), partially offset by a $415,000 drop in nonrecurring acquisition costs.

~~The Company’s provision for income taxes was 25.3% of pre-tax income~~ for the first half of 2019, ~~relative to 24.4%~~ for the same ~~period~~reasons outlined above in ~~2018. The increase is~~the quarterly comparison.

●

Net interest income was down by $0.2 million or 1% due ~~primarily~~ to ~~higher pretax income and~~the negative impact of a ~~lower level of tax credits.~~

28 basis point decrease in net interest margin.

●

Noninterest income increased by $1.2 million, or 11%, due mostly to the changes described above.

●

Noninterest expense increased by $0.3 million or 1% primarily from increases in salaries and benefits but mitigated somewhat by decreases in FDIC assessments, directors deferred compensation expense and internal review costs.

FINANCIAL CONDITION SUMMARY

June 30, ~~2019~~2020 relative to December 31, ~~2018~~2019

The Company’s assets totaled ~~$2.577~~$3.1 billion at June 30, ~~2019~~2020 relative to ~~$2.523~~$2.6 billion at December 31, 2018. Total liabilities were $2.280 billion at June 30, 2019 compared to $2.249 billion at the end of 2018, and shareholders’ equity totaled $297 million at June 30, 2019 compared to $273 million at December 31, 2018.2019. The following provides a summary of key balance sheet changes during the first six months of ~~2019:~~2020:

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●

The Company’s balance of cash and ~~cash equivalents~~due from banks was ~~down $6~~up by $76.5 million, or 9%96% from December 31, 2019, due to borrowing additional cash on June 30, 2020, for expected mortgage warehouse line utilization.

●

Securities available-for-sale were $599.3 million at June 30, 2020, a decrease of $1.5 million, or less than 1% from December 31, 2019. We sold approximately $20.3 million in certain debt securities during the first half of 2020 as an effort to restructure the portfolio, selling smaller-balance or variable rate SBA and FNMA bonds, as well as certain municipal securities with potential higher credit risk. These sales and normal principal paydowns were mostly offset by bond purchases and increases in unrealized fair value of the bond portfolio.

●

Net loans and leases increased $440.4 million, or 25%, during the first half of 2020 to $2.2 billion at June 30, 2020, due to a ~~drop~~$205.2 million increase in ~~cash items~~non-agricultural real estate loans, $149.0 million increase in ~~process~~mortgage warehouse line utilization, and a $106.0 million increase in commercial and industrial loans due mostly to new SBA Paycheck Protection Program (PPP) loans.

●

Nonperforming assets increased $2.2 million, to $8.7 million during the first half of ~~collection and lower vault cash balances.~~

~~Gross loans increased by $46 million, or 3%,~~2020. This increase was mostly due to ~~higher outstanding balances on mortgage warehouse lines and growth~~$2.1 million in ~~agricultural loans.~~

~~Total nonperforming assets, consisting of non-accrual loans and~~new foreclosed assets, ~~were reduced by $1.348 million, or 22%, due~~from one commercial real estate credit. The single loan which moved to the impact of net loan charge-offs as well as our continued efforts to resolve OREO and nonperforming loan balances. The Company’s ratio of nonperforming assets to total loans plus foreclosed assets was 0.27% at June 30, 2019 compared to 0.36% at December 31, 2018.

Other assets did not change materially, since the increase resulting from operating lease right-of-use assets booked at the beginning of 2019, pursuant to our adoption of FASB’s ASU 2016‑02, was largely offset by our first quarter 2019 collection of a receivable established at the end of 2018 for expected proceeds from the sale of a large foreclosed property.

~~Deposit balances reflect growth of $63 million, or 3%,~~other real estate owned during the first six months of ~~2019. Core non-maturity~~2020, has a pending sale contract.

●

Total deposits reflected growth of $338.4 million, or 16%, during the first half 2020. Non-maturity deposits increased by ~~$31~~$409.1 million or 2%25%, while customer time deposits ~~increased~~declined by ~~$32~~$30.8 million or 7%.

Wholesale brokered deposits decreased by $40.0 million to $10.0 million. Noninterest bearing deposits as a percent of total deposits was 37.9% at June 30, 2020, as compared to 31.9% at December 31, 2019.

●

~~Other liabilities~~Short-term borrowings increased by $8$143.0 million ~~or 30%, due in large part~~ to ~~the operating lease liability booked at the beginning of 2019 pursuant to our adoption of FASB’s ASU 2016‑02.~~

Junior subordinated debentures increased slightly from accretion of the discount on trust-preferred securities gained in the Coast acquisition, but other non-deposit borrowings were reduced by $40 million, or 55%.

~~Total capital of $297~~$163.0 million at June 30, ~~2019~~2020. This increase was due to additional Federal Home Loan Bank (FHLB) overnight borrowings to fund expected increases in our mortgage warehouse line utilization at June 30, 2020. $10.0 million of these FHLB advances were “interest-free”, given to all member banks as part of the FHLB’s “Zero Interest Recovery Advance” program to provide immediate relief to property owners, businesses, and other customers struggling with the financial impacts of the pandemic.

●

Total shareholders’ equity of $327.4 million at June 30, 2020 reflects an increase of ~~$24~~$18.1 million, or 9%6%, relative to year-end ~~2018~~2019 due to capital from the addition of net income, ~~and stock option exercises as well as an $11~~a $10.2 million ~~positive~~favorable swing in accumulated other comprehensive ~~income,~~income/loss, stock options exercised, net of ~~$5.5~~$6.1 million in dividends ~~paid. There were no share~~paid and $2.6 million in stock repurchases ~~executed~~prior to March 15, 2020.

IMPACT OF CORONAVIRUS DISEASE 2019 (COVID-19) PANDEMIC ON THE COMPANY’S OPERATIONS

Overview

On January 31, 2020, the United States Department of Health and Human Services declared a public health emergency with respect to the Coronavirus Disease 2019 (COVID-19). Subsequent to this date, federal, state, and local governmental agencies, regulatory agencies, and the Federal Reserve Board took actions impacting the Company including these more significant items:

●

On March 3, 2020, the Federal Open Market Committee (FOMC) of the Federal Reserve Board lowered the federal funds rate by 50 basis points in its first emergency move since October 2008.

●

On March 4, 2020, the Governor of the state of California declared a state of emergency to help make additional resources available and formalize emergency actions to address COVID-19.

●

On March 6, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued guidance to financial institutions reminding them to include pandemic planning in business continuity plans.

●

Starting on March 9, 2020, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the

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Comptroller of the Currency, and Conference of State Bank Supervisors began issuing various Interagency Guidance Statements to encourage financial institutions to meet the financial needs of customers affected by the Coronavirus.

●

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

●

On March 15, 2020, the FOMC of the Federal Reserve Board lowered the federal funds rate by 100 basis points in its second emergency move in two weeks, this time on a Sunday. In addition, the FOMC announced that it would let banks borrow from the discount window for up to 90 days, reduced the reserve requirement ratios to zero percent, united with five other central banks to ensure dollars are available via swap lines, and increased bond holdings by at least $700 billion.

●

Effective March 20, 2020, the state of California ordered the closure of all non-essential workplaces, restricting non-essential travel, and ordering a state-wide shelter-in-place order. This was followed by extensions of these orders in April and many local municipalities in which the Company operates issued orders mandating additional requirements to protect their citizens. Although many counties in California began phased reopening plans, due to recent increases in cases effective July 13, 2020, the Governor ordered that dine-in restaurants, wineries and tasting rooms, movie theaters, family entertainment centers, zoos and museums, and cardrooms immediately close all indoor operations. Further limitations apply to counties that have been on County Monitoring List for 3 consecutive days.

●

On March 22, 2020, the federal financial institution regulatory agencies (the agencies) issued guidance to financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs). The guidance was subsequently modified on April 7, 2020 to conform with Section 4013 of the Coronavirus Aid, Relief and Economic Security (CARES) Act.

●

On March 27, 2020, the CARES Act was enacted by Congress and signed into law by the President to address the impact of the COVID-19 on the economy. Among other things, the CARES Act provided banking institutions with the option of deferring the implementation of the Current Expected Credit Loss (“CECL”) accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) until later in 2020; confirmed that certain loan modifications would not be treated as a TDR; authorized the Small Business Administration to create the Paycheck Protection Program (PPP) which allows banking institutions to offer a certain amount of forgivable loans to primarily assist with funding payroll for small businesses; and provides a temporary reduction to the minimum ratio under the Community Bank Leverage Ratio framework.

Impact of COVID-19 on the Company’s Operations

●

The Company has not yet experienced any increase in classified assets or nonperforming assets as a result of COVID-19. Further, we have not experienced any charge-offs as a result of COVID-19. However, the Company has taken actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program (PPP) loans. For further information on the principal and interest deferrals, please see the “Nonperforming Assets” section below. However, the change in economic conditions had a material impact on our provision for loan and lease losses. The Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Although this deferral will still require CECL to be implemented as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. The most significant unknown factor is how long economic activity will be impacted by COVID-19, and in turn how deeply that will impact the markets in which we operate. Therefore, more time is needed to assess the impact of this economic uncertainty and related actions taken such as the stimulus provisions of the CARES Act on the Company’s allowance for loan and lease losses under the CECL methodology. It is anticipated that if economic conditions do not improve, in future quarters of 2020, the provision for loan and lease losses could be at the same or higher level as that booked in the first half of 2020.

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●

In addition to the expected increase in provision for loan losses, the Company expects that net interest income will be reduced due to a lower net interest margin as a result of the FOMC’s emergency rate cuts in March 2020. For example, our net interest margin for the six months ended June 30, 2020, was 3.97%, compared to a net interest margin of 4.25% for the same period in 2019. New loans booked in 2020 will be at lower rates and although deposit costs will also decline, deposit costs were already low or at their floors prior to these interest rate cuts. Further, it is expected that the stay-at-home order and record unemployment resulting from the COVID-19 pandemic will reduce consumer spending which will reduce our fee income, primarily from debit and credit card interchange fees. It’s also expected that the Company will offer concessions or certain fee waivers to consumers adversely affected by COVID-19. These actions will likely result in lower deposit service charge income in future periods as compared to 2019.

●

The COVID-19 pandemic has not adversely affected our capital or financial resources. During the first half of 2020, total shareholders’ equity increased by $18.1 million, or 6%, to $327.4 million. The largest component of this was a $10.2 million increase in accumulated other comprehensive income as a result of increases in the value of our investment portfolio due to lower interest rates. If interest rates rise, this component of equity would be expected to decline. In addition, the Company earned $16.1 million in net income in the first half of 2020 and paid dividends of $6.1 million. The Company also declared a twenty cent per share dividend to be paid on August 13, 2020. Although presently not expected, if the Company were to incur significant credit losses as a result of COVID-19’s impact on our customers’ ability to repay loans, capital could be adversely impacted. With respect to liquidity, the Company maintains strong primary and secondary liquidity sources as further described under “Liquidity and Market Risk Management” below.

●

While we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet, this could change in future periods. Certain valuation assumptions and judgments continue to change to account for pandemic-related circumstances such as widening credit spreads. However, we do not anticipate any significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. As of June 30, 2020, our goodwill was not impaired. The Company performed a qualitative assessment of its goodwill during the first ~~six months~~and second quarters of ~~2019.~~

2020 and concluded that it was not more likely than not that a goodwill impairment exists. The Company will continue to monitor its goodwill recorded on the balance sheet for potential impairment. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. At June 30, 2020, we had goodwill of $27.4 million which represented 8% of total equity.

●

The Company continues to serve its customers. Out of our 40 branch locations, five are open with limited lobby hours, while 12 branches have limited lobby hours and a drive-up or walk-up facility. 19 branches are open for drive-up or walk-up only and four branches are currently closed except by appointment. 56% of our back-office and corporate employees are working remotely and it has not adversely affected our operations. In addition, none of our internal controls have changed or are expected to change as a result of the remote work arrangements other than the use of remote approvals. The Company is prepared to continue operating in this manner until it is safe to begin bringing those working remotely back to our corporate offices and branches.

●

To date, the Company did not experience any challenges in implementing its business continuity plans. The Company’s Risk Management team began preparing in late January and early February with ordering of supplies such as hand sanitizer, masks and cleaning supplies, as well as laptops for those who did not have one. This enabled the Company to immediately communicate and implement plans to continue operations in our banking facilities while enabling those non-customer facing employees to immediately begin working remotely. The Company did not face any material resource constraints in implementing these plans.

●

As a financial institution providing essential services, the Company expects continued demand for loans and deposits. As described above, it is expected that certain services may see declines in demand such as debit and credit card interchange given lower consumer spending. While overall net income is expected to decline, it presently is more a function of the interest rate environment than a change in overall demand for loan and deposit products.

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●

The Company loosened its vacation and sick-time policies to accommodate our employees who were affected by COVID-19. The Company has not had any temporary or permanent reductions in staff as a result of COVID-19.

EARNINGS PERFORMANCE

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such

~~Table of Contents~~

as bank-owned life insurance. The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a broad range of banking services to our customers.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income ~~increased by $1.399~~was relatively unchanged at $24.1 million ~~or 6%,~~ for the second quarter of ~~2019 relative~~2020, as compared to the second quarter of ~~2018,~~2019 and decreased by ~~$3.612~~$0.2 million, or ~~8%,~~1% to $47.9 million for the first six months of ~~2019~~2020 in comparison to the first six months of ~~2018.~~2019. The slight decrease in net interest income for the first six months of 2020 as compared to the same period in 2019 is due to a lower net interest margin, partially offset by an increase in average earning assets. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. ~~Net interest income can also be impacted by nonrecurring items, as discussed in greater detail below.~~

The following tables show average balances for significant balance sheet categories and the amount of interest income or interest expense associated with each category for the noted periods. The tables also display calculated yields on each major component of the Company’s investment and loan portfolios, average rates paid on each key segment of the Company’s interest-bearing liabilities, and our net interest margin for the noted periods.

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Table of Contents

Average Balances and Rates

(dollars in thousands, unaudited)


	For the three months ended					For the three months ended
	June 30, 2020					June 30, 2019
Assets	Average Balance ⁽¹⁾		Income/ Expense		Average Rate/Yield ⁽²⁾	Average Balance ⁽¹⁾		Income/ Expense		Average Rate/Yield ⁽²⁾
Investments:
Federal funds sold/due from time	$	53,209	$	12	0.09%	$	18,795	$	115	2.45%
Taxable		403,517		2,250	2.24%		425,498		2,591	2.44%
Non-taxable		216,746		1,440	3.38%		149,555		1,072	3.64%
Total investments		673,472		3,702	2.44%		593,848		3,778	2.74%

Loans and leases:⁽³⁾
Real estate		1,477,380		18,355	5.00%		1,459,871		20,098	5.52%
Agricultural		47,806		452	3.80%		51,285		793	6.20%
Commercial		170,876		1,080	2.54%		120,081		1,537	5.13%
Consumer		6,667		225	13.57%		8,661		292	13.52%
Mortgage warehouse lines		206,669		1,532	2.98%		98,249		1,239	5.06%
Other		2,811		39	5.58%		3,426		51	5.97%
Total loans and leases		1,912,209		21,683	4.56%		1,741,573		24,010	5.53%
Total interest earning assets⁽⁴⁾		2,585,681		25,385	4.01%		2,335,421		27,788	4.82%
Other earning assets		13,190					12,505
Non-earning assets		207,623					204,491
Total assets	$	2,806,494				$	2,552,417
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	134,159	$	71	0.21%	$	120,018	$	88	0.29%
NOW		481,679		83	0.07%		437,040		134	0.12%
Savings accounts		327,833		46	0.06%		289,767		77	0.11%
Money market		125,594		31	0.10%		123,482		43	0.14%
Certificates of deposit, under $100,000		77,888		71	0.37%		90,258		289	1.28%
Certificates of deposit, $100,000 or more		364,874		554	0.61%		399,228		2,178	2.19%
Brokered deposits		19,890		37	0.75%		47,890		284	2.38%
Total interest bearing deposits		1,531,917		893	0.23%		1,507,683		3,093	0.82%
Borrowed funds:
Federal funds purchased		3		—	—		3		—	—
Repurchase agreements		34,217		34	0.40%		21,698		21	0.39%
Short term borrowings		11,716		5	0.17%		845		5	2.37%
TRUPS		35,009		311	3.57%		34,830		470	5.41%
Total borrowed funds		80,945		350	1.74%		57,376		496	3.47%
Total interest bearing liabilities		1,612,862		1,243	0.31%		1,565,059		3,589	0.92%
Demand deposits - non-interest bearing		830,333					655,136
Other liabilities		39,155					43,550
Shareholders' equity		324,144					288,672
Total liabilities and shareholders' equity	$	2,806,494				$	2,552,417
Interest income/interest earning assets					4.01%					4.82%
Interest expense/interest earning assets					0.20%					0.61%
Net interest income and margin⁽⁵⁾			$	24,142	3.81%			$	24,199	4.21%

For the three months ended

For the three months ended

June 30, 2019

June 30, 2018
Assets

Average
Balance (1)

Income/
Expense

Average
Rate/Yield (2)

Average
Balance (1)

Income/
Expense

Average
Rate/Yield (2)
Investments:

Federal funds sold/due from time

$
18,795

$
115

2.45%

$
13,080

$
61

1.87%
Taxable

425,498

2,591

2.44%


424,446

2,300

2.17%
Non-taxable

149,555

1,072

3.64%

141,224

1,018

3.66%
Total investments

593,848

3,778

2.74%

578,750

3,379

2.53%

Loans and leases:(3)



Real estate

1,459,871

20,098

5.52%

1,325,251

17,800

5.39%
Agricultural

51,285

793

6.20%

53,867

753

5.61%
Commercial

120,081

1,537

5.13%

124,320

1,489

4.80%
Consumer

8,661

292

13.52%

9,760

297

12.21%
Mortgage warehouse lines

98,249

1,239

5.06%

89,633

1,126

5.04%
Other

3,426

51

5.97%

2,503

39

6.25%
Total loans and leases

1,741,573

24,010

5.53%

1,605,334

21,504

5.37%
Total interest earning assets (4)


2,335,421

27,788

4.82%

2,184,084

24,883

4.62%
Other earning assets

12,505

10,436

Non-earning assets

204,491

205,446

Total assets

$
2,552,417

$
2,399,966

Liabilities and shareholders' equity

Interest bearing deposits:

Demand deposits

$
120,018

$
88

0.29%

$
139,546

$
109

0.31%
NOW

437,040

134

0.12%

422,619

116

0.11%
Savings accounts

289,767

77

0.11%

301,528

80

0.11%
Money market

123,482

43

0.14%

153,143

37

0.10%
Certificates of deposit, under $100,000

90,258

289

1.28%

81,419

136

0.67%
Certificates of deposit, $100,000 or more

399,228

2,178

2.19%

299,359

1,116

1.50%
Brokered deposits

47,890

284

2.38%

—

—

—
Total interest bearing deposits

1,507,683

3,093

0.82%

1,397,614

1,594

0.46%
Borrowed funds:

Federal funds purchased

3

—

—

7

—

—
Repurchase agreements

21,698

21

0.39%

15,727

16

0.41%
Short term borrowings

845

5

2.37%

7,985

37

1.86%
TRUPS

34,830

470

5.41%

34,651

436

5.05%
Total borrowed funds

57,376

496

3.47%

58,370

489

3.36%
Total interest bearing liabilities

1,565,059

3,589

0.92%

1,455,984

2,083

0.57%
Demand deposits - noninterest bearing

655,136

656,486

Other liabilities

43,550

29,786

Shareholders' equity

288,672

257,710

Total liabilities and shareholders' equity

$
2,552,417

$
2,399,966

Interest income/interest earning assets

4.82%

4.62%
Interest expense/interest earning assets

0.61%

0.38%
Net interest income and margin(5)

$
24,199

4.21%

$
22,800

4.24%

(1)

~~(1)~~

Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(2)

~~(2)~~

Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective tax rate.

(3)

~~(3)~~

Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were ~~$(186)~~$(237) thousand and ~~$324~~$(186) thousand for the quarters ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

(4)

~~(4)~~

Non-accrual loans have been included in total loans for purposes of computing total earning assets.

(5)

~~(5)~~

Net interest margin represents net interest income as a percentage of average interest-earning assets.

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Average Balances and Rates
(dollars in thousands, unaudited)
	For the six months ended						For the six months ended
	June 30, 2020						June 30, 2019
Assets	Average Balance ⁽¹⁾		Income/ Expense		Average Rate/Yield ⁽²⁾	Average Balance ⁽¹⁾		Income/ Expense		Average Rate/Yield ⁽²⁾
Investments:
Federal funds sold/due from time	$	45,166	$	153	0.68%	$	15,152	$	188	2.50%
Taxable		406,054		4,710	2.33%		422,217		5,207	2.49%
Non-taxable		206,218		2,778	3.42%		145,962		2,117	3.70%
Total investments		657,438		7,641	2.56%		583,331		7,512	2.79%

Loans and leases:⁽³⁾
Real estate		1,436,145		37,079	5.19%		1,462,061		40,198	5.54%
Agricultural		48,169		1,035	4.32%		50,919		1,573	6.23%
Commercial		139,287		2,176	3.14%		121,332		3,116	5.18%
Consumer		7,124		593	16.74%		8,689		606	14.06%
Mortgage warehouse lines		175,645		2,797	3.20%		80,782		2,166	5.41%
Other		4,027		116	5.79%		3,268		100	6.17%
Total loans and leases		1,810,397		43,796	4.86%		1,727,051		47,759	5.58%
Total interest earning assets⁽⁴⁾		2,467,835		51,437	4.25%		2,310,382		55,271	4.87%
Other earning assets		13,015					12,094
Non-earning assets		202,265					207,038
Total assets	$	2,683,115				$	2,529,514
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	111,445	$	134	0.24%	$	109,692	$	160	0.29%
NOW		469,133		205	0.09%		437,124		260	0.12%
Savings accounts		312,777		119	0.08%		288,776		151	0.11%
Money market		121,421		74	0.12%		126,070		84	0.13%
Certificates of deposit, under $100,000		79,370		205	0.52%		90,301		567	1.27%
Certificates of deposit, $100,000 or more		372,286		1,786	0.96%		390,637		4,216	2.18%
Brokered deposits		30,357		204	1.35%		48,939		610	2.51%
Total interest bearing deposits		1,496,789		2,727	0.37%		1,491,539		6,048	0.82%
Borrowed funds:
Federal funds purchased		3		—	—		560		—	—
Repurchase agreements		30,850		61	0.40%		19,500		39	0.40%
Short term borrowings		8,831		14	0.32%		4,463		58	2.62%
TRUPS		34,986		706	4.06%		34,806		954	5.53%
Total borrowed funds		74,670		781	2.10%		59,329		1,051	3.57%
Total interest bearing liabilities		1,571,459		3,508	0.45%		1,550,868		7,099	0.92%
Demand deposits - non-interest bearing		754,463					654,029
Other liabilities		37,687					41,363
Shareholders' equity		319,506					283,254
Total liabilities and shareholders' equity	$	2,683,115				$	2,529,514
Interest income/interest earning assets					4.25%					4.87%
Interest expense/interest earning assets					0.28%					0.62%
Net interest income and margin⁽⁵⁾			$	47,929	3.97%			$	48,172	4.25%

Average Balances and Rates

(dollars in thousands, unaudited)

For the six months ended

For the six months ended

June 30, 2019

June 30, 2018
Assets

Average
Balance (1)

Income/
Expense

Average
Rate/Yield (2)

Average
Balance (1)

Income/
Expense

Average
Rate/Yield (2)
Investments:

Federal funds sold/due from time

$
15,152

$
188

2.50%

$
21,730

$
180

1.67%
Taxable

422,217

5,207

2.49%

424,760

4,638

2.20%
Non-taxable

145,962

2,117

3.70%

141,399

2,034

3.67%
Total investments

583,331

7,512

2.79%

587,889

6,852

2.54%

Loans and leases:(3)

Real estate

1,462,061

40,198

5.54%

1,290,119

34,444

5.38%
Agricultural

50,919

1,573

6.23%

52,009

1,411

5.47%
Commercial

121,332

3,116

5.18%

125,810

2,869

4.60%
Consumer

8,689

606

14.06%

10,125

590

11.75%
Mortgage warehouse lines

80,782

2,166

5.41%

86,508

2,103

4.90%
Other

3,268

100

6.17%

2,756

91

6.66%
Total loans and leases

1,727,051

47,759

5.58%

1,567,327

41,508

5.34%
Total interest earning assets (4)

2,310,382

55,271

4.87%

2,155,216

48,360

4.58%
Other earning assets

12,094

10,316

Non-earning assets

207,038

203,433

Total assets

$
2,529,514

$
2,368,965

Liabilities and shareholders' equity

Interest bearing deposits:

Demand deposits

$
109,692

$
160

0.29%

$
128,250

$
197

0.31%
NOW

437,124

260

0.12%

415,946

233

0.11%
Savings accounts

288,776

151

0.11%

297,644

155

0.11%
Money market

126,070

84

0.13%

158,951

79

0.10%
Certificates of deposit, under $100,000

90,301

567

1.27%

81,558

244

0.60%
Certificates of deposit, $100,000 or more

390,637

4,216

2.18%

296,704

2,004

1.36%
Brokered deposits

48,939

610

2.51%

—

—

—
Total interest bearing deposits

1,491,539

6,048

0.82%

1,379,053

2,912

0.43%
Borrowed funds:

Federal funds purchased

560

—

—

8

—

—
Repurchase agreements

19,500

39

0.40%

12,783

25

0.39%
Short term borrowings

4,463

58

2.62%

4,484

41

1.84%
TRUPS

34,806

954

5.53%

34,628

822

4.79%
Total borrowed funds

59,329

1,051

3.57%

51,903

888

3.45%
Total interest bearing liabilities

1,550,868

7,099

0.92%

1,430,956

3,800

0.54%
Demand deposits - noninterest bearing

654,029

650,041

Other liabilities

41,363

30,855

Shareholders' equity

283,254

257,113

Total liabilities and shareholders' equity

$
2,529,514

$
2,368,965

Interest income/interest earning assets

4.87%

4.58%
Interest expense/interest earning assets

0.62%

0.36%
Net interest income and margin(5)

$
48,172

4.25%

$
44,560

4.22%

(1)

~~(1)~~

Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(2)

~~(2)~~

Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective tax rate.

(3)

~~(3)~~

Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were ~~$(177)~~$(377) thousand and ~~$463~~$(177) thousand for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

(4)

~~(4)~~

Non-accrual loans have been included in total loans for purposes of computing total earning assets.

(5)

~~(5)~~

Net interest margin represents net interest income as a percentage of average interest-earning assets.

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The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest-earning assets and interest-bearing liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average interest rates. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates, and rate variances are equal to the change in rates multiplied by prior period average balances. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance.

Volume & Rate Variances

(dollars in thousands, unaudited)


	Three months ended June 30,						Six months ended June 30,
	2019 over 2018						2019 over 2018
	Increase (decrease) due to						Increase (decrease) due to

													Three months ended June 30,						Six months ended June 30,
													2020 over 2019						2020 over 2019
													Increase (decrease) due to						Increase (decrease) due to
Assets:	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Investments:
Federal funds sold/due from time	$	27	$	27	$	54	$	(54)	$	62	$	8	$	211	$	(314)	$	(103)	$	372	$	(407)	$	(35)
Taxable		6		285		291		(28)		597		569		(134)		(207)		(341)		(199)		(298)		(497)
Non-taxable		60		(6)		54		66		17		83		482		(114)		368		874		(213)		661
Total investments		93		306		399		(16)		676		660		559		(635)		(76)		1,047		(918)		129
Loans and leases:
Real estate		1,808		490		2,298		4,591		1,163		5,754		241		(1,984)		(1,743)		(713)		(2,406)		(3,119)
Agricultural		(36)		76		40		(30)		192		162		(54)		(287)		(341)		(85)		(453)		(538)
Commercial		(51)		99		48		(102)		349		247		650		(1,107)		(457)		461		(1,401)		(940)
Consumer		(33)		28		(5)		(84)		100		16		(67)		—		(67)		(109)		96		(13)
Mortgage warehouse		108		5		113		(139)		202		63		1,367		(1,074)		293		2,544		(1,913)		631
Other		14		(2)		12		17		(8)		9		(9)		(3)		(12)		23		(7)		16
Total loans and leases		1,810		696		2,506		4,253		1,998		6,251		2,128		(4,455)		(2,327)		2,121		(6,084)		(3,963)
Total interest earning assets	$	1,903	$	1,002	$	2,905	$	4,237	$	2,674	$	6,911	$	2,687	$	(5,090)	$	(2,403)	$	3,168	$	(7,002)	$	(3,834)
Liabilities
Interest bearing deposits:
Demand deposits	$	(15)		(6)	$	(21)	$	(29)	$	(8)	$	(37)	$	10		(27)	$	(17)	$	3	$	(29)	$	(26)
NOW		4		14		18		12		15		27		14		(65)		(51)		19		(74)		(55)
Savings accounts		(3)		—		(3)		(5)		1		(4)		10		(41)		(31)		13		(45)		(32)
Money market		(7)		13		6		(16)		21		5		1		(13)		(12)		(3)		(7)		(10)
Certificates of deposit, under $100,000		15		138		153		26		297		323		(40)		(178)		(218)		(69)		(293)		(362)
Certificates of deposit, $100,000 or more		372		690		1,062		634		1,578		2,212		(187)		(1,437)		(1,624)		(198)		(2,232)		(2,430)
Brokered deposits		—		284		284		—		610		610		(166)		(81)		(247)		(232)		(174)		(406)
Total interest bearing deposits		366		1,133		1,499		622		2,514		3,136		(358)		(1,842)		(2,200)		(467)		(2,854)		(3,321)
Borrowed funds:
Repurchase agreements		6		(1)		5		13		1		14		12		1		13		23		(1)		22
Short term borrowings		(33)		1		(32)		—		17		17		53		(53)		—		44		(88)		(44)
TRUPS		2		32		34		4		128		132		2		(161)		(159)		5		(253)		(248)
Total borrowed funds		(25)		32		7		17		146		163		67		(213)		(146)		72		(342)		(270)
Total interest bearing liabilities		341		1,165		1,506		639		2,660		3,299		(291)		(2,055)		(2,346)		(395)		(3,196)		(3,591)
Net interest income	$	1,562	$	(163)	$	1,399	$	3,598	$	14	$	3,612	$	2,978	$	(3,035)	$	(57)	$	3,563	$	(3,806)	$	(243)

The volume variance calculated for the second quarter of ~~2019~~2020 relative to the second quarter of ~~2018~~2019 was a favorable ~~$1.562~~$3.0 million due to ~~an increase of $151 million, or 7%, in the~~higher average ~~balance~~balances of interest-earning assets, resulting from organic growth in commercial real estate loans, ~~and a $15 million increase~~growth in commercial loans due to our participation in the ~~average balance~~SBA PPP program and higher utilization of ~~investments.~~mortgage warehouse lines. Given the low rate environment, loan demand for our mortgage warehouse lines have increased, as demonstrated by the $1.4 million favorable volume variance. There was an unfavorable rate variance of ~~$163,000~~$3.0 million for the comparative quarters, since the weighted average ~~cost of interest-bearing liabilities increased~~yield on interest-earning assets fell by 3581 basis points while the weighted average ~~yield on interest-earning assets was up~~cost of interest-bearing liabilities decreased by ~~only 20~~61 basis points. The ~~comparative results can also be~~rate variance was negatively impacted by ~~nonrecurring interest items such as interest recoveries on non-accrual~~the following factors: A shift in our earning asset mix into lower-yielding loans ~~interest reversals for loans placed on non-accrual status, accelerated fee recognition~~ and ~~prepayment penalties for premature loan payoffs, and late fees. Nonrecurring items added $65,000 to interest income in the second quarter of~~

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~~2019 relative to $126,000~~investments; increased line utilization of mortgage warehouse lines, $116.2 million in the second quarter of 2018. With regard to yield and rate increases, loan yields have generally risen due to the impact of higher short-term index rates on variable-rate loans and a relatively large volume of new fixed-rate and adjustable-rate loans booked at higher interest rates, although those increases werelow-yielding SBA PPP loans; partially offset by lower costs of time-deposits and other interest-bearing liabilities. The average fees on the ~~impact~~SBA PPP loans was approximately 4.0%. These fees, net of competitive forces as well as a drop in discount accretion on acquisition loans. Investment yields have increased in response to principal reinvested in what has been a rising interest rate environment for muchloan costs, are being accreted over the stated life of the ~~past few years. Rates paid on non-maturity deposits increased slightly~~loan (generally two years), net of loan costs. Our customers with an SBA PPP loan are generally eligible to apply for loan forgiveness after 26 weeks. If a loan is forgiven, upon repayment of principal and interest by the ~~comparative periods, but the weighted average cost~~SBA, any unaccreted fee income, net of interest-bearing liabilities went up primarily because of the addition of brokered deposits, and in response to higher rates paid on time deposits and adjustable-rate trust-preferred securities (“TRUPS”).

~~The Company’s net interest margin, which is tax-equivalent net~~unamortized costs, would be recognized as interest income ~~as a percentage of average interest-earning assets, was affected by the same factors discussed above relative to rate and~~at such time.

The volume variances. Our net interest margin was 4.21% in the second quarter of 2019, down three basis points relative to the second quarter of 2018. The drop in discount accretion on loans from whole-bank acquisitions had a significant impact, enhancing our net interest margin by only five basis points in the second quarter of 2019 as compared to 11 basis points in the second quarter of 2018.

~~Net interest income in~~variance calculated for the first six months of ~~2019~~2020 relative to the first six months of ~~2018~~2019 reflects a favorable variance of ~~$3.598~~$3.6 million ~~attributable to~~and an unfavorable rate variance of $3.8 million. As with the discussion of the volume ~~changes,~~ and ~~a small favorable~~ rate ~~variance. The volume variance~~variances for the ~~half~~quarter, the same is true for the half. The growth in interest earning assets was ~~due primarily~~more than offset by the 62 basis point decrease in yield while interest bearing liabilities increased $20.6 million with a 47 basis point drop in cost. Since the overall decrease in yield on interest earning assets is applied to a larger base than the decline in cost of interest- bearing liabilities it results in an ~~increase of $155~~unfavorable $0.2 million ~~or 7%, in average interest-earning assets.~~net volume/rate difference. The Company’s net interest margin for the first half of ~~2019~~2020 was ~~4.25%~~3.97%, as compared to ~~4.22%~~4.25% in the first half of ~~2018. Nonrecurring~~2019.

The FOMC lowered rates by a total of 150 basis points in March 2020 in two separate emergency actions. These actions have had an unfavorable impact on our net interest margin for the quarter and year to date periods and will most likely have the same unfavorable impact on net interest income ~~totaled $272,000~~through the end of 2020. At June 30, 2020, approximately 15% of our total portfolio, or $317.4 million, consists of variable rate loans. Of these variable rate loans, approximately $102.4 million have floors that limited the overall reduction in rates in the first half. At June 30, 2020, our outstanding fixed rate loans represented 33% of our loan portfolio. The remaining 52% of our loan portfolio at June 30, 2020 consists of adjustable rate loans. However, the majority of these loans (approximately $857.5 million) will not adjust for at least another 3 years. Approximately $64.9 million of these adjustable rate loans will reprice in the next quarter with $22.4 repricing in smaller amounts monthly over the fourth quarter of 2020.

In addition, as described below under Nonperforming Assets, as of June 30, 2020, the Company has modified approximately $386.2million of loans under Section 4013 of the CARES Act. These modifications generally provide for a six-month deferral of both interest and principal. As of June 30, 2020, there is approximately $4.9 million of accrued but uncollected interest related to such modifications. If a portion of this interest is uncollectible, it could impact interest income recognition in future quarters.

Cash balances were increased on June 30, 2020 in anticipation of mortgage warehouse line utilization. For both the quarterly and year to date comparisons, volumes were higher than the same periods in 2019 contributing to the overall unfavorable net volume and rate variance since cash balances earned considerably lower yields than other earning assets. It is expected that these balances will return to more normalized levels later in 2020. Overall average investment securities increased by $45.2 million for the quarter ending June 30, 2020 as compared to June 30, 2019 and by $44.1 million for the first six months of 2020, as compared to 2019. Non-taxable securities increased for both the quarterly and first six-month periods by $67.2 million and $60.3 respectively. The overall investment portfolio had a tax-equivalent yield of 2.80% at June 30, 2020, with an average life of 4.2 years.

Interest expense was $1.2 million in the second quarter of 2020, a decline of $2.3 million, or 65%, compared to the second quarter of 2019 and ~~$227,000 and for~~was $3.5 million in the first ~~six months~~six-months of ~~2018,~~2020, a decline of $3.6 million or 51%, compared to the first six-months of 2019. The significant decline in interest expense for both the quarter and ~~discount accretion on loans from whole-bank acquisitions enhanced our net interest margin~~the half is attributable to a favorable shift in deposit mix as average total time deposits declined by ~~four basis points~~$74.7 million in the second quarter of 2020 as compared to the same quarter in 2019 and by $47.9 million for the first half of ~~2019~~2020 as compared to ~~eight~~the same period in 2019. The average cost of interest-bearing deposits declined by 59 basis points, inor 72%, to 23 basis points for the second quarter of 2020 compared to the second quarter of 2019, and by 45 basis points, or 55% for the first ~~half 2018.~~six-months of 2020 as compared to the same period in 2019.

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PROVISION FOR LOAN AND LEASE LOSSES

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loan and lease losses, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for loan and lease losses. The Company recorded a loan loss provision of ~~$400,000~~$2.2 million in the second quarter of ~~2019 relative~~2020 compared to ~~$300,000~~$0.4 million in the second quarter of ~~2018,~~2019, and a year-to-date loan loss provision totaling ~~$700,000~~$4.0 million in ~~2019~~2020 as compared to ~~$500,000~~$0.7 million for the comparable period in ~~2018. The 2019~~2019. As discussed above, the significant increase in the provision ~~was deemed necessary subsequent~~for loan and lease losses is primarily due to ~~Management’s determination~~management’s estimate of the ~~appropriate level~~impact of increased economic uncertainty with respect to COVID-19 on our customers’ ability to repay loans. There was no increase in the provision for loan and lease losses due to the additional $116.2 million in SBA PPP loans as those loans are guaranteed under a new 7(a) loan program titled the “Paycheck Protection Program” and carry a 100 percent guarantee by the SBA. Management adjusted its qualitative risk factors under our incurred loss model based on information presently available for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows, and external factors such as government actions. In particular, the uncertainty regarding our customers’ ability to repay loans could be adversely impacted by COVID-19 given higher unemployment rates, requests for payment deferrals, temporary business shut-downs, and reduced consumer and business spending.

The Company was subject to the adoption of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, the Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Although this deferral will still require CECL to be adopted as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. There is increased uncertainty on the local, regional, and national economy as a result of local and state stay-at-home orders, as well as relief measures provided at a national, state, and local level. Further, the Company has taken actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program loans. More time is needed to assess the impact of this uncertainty and related actions on the Company’s allowance for loan and lease losses ~~taking into consideration overall credit quality, growth~~under the CECL methodology. It is anticipated that a one-time adjustment to the allowance will be booked as an adjustment through equity, net of taxes, as previously disclosed in ~~outstanding~~Company’s Form 10-K for the fiscal year ended December 31, 2019, for approximately $12 million. The impact of COVID-19 on the Company’s allowance for loan ~~balances,~~ and ~~reserves required for specifically identified impaired loan balances.~~ leases losses under the CECL methodology in the second quarter and first half of 2020 will remain unknown until more information is available with respect to the impact of the economic uncertainty of the impact of COVID-19, net of actions taken to mitigate such impact.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance. The Company recorded net ~~recoveries~~charge-offs of ~~$45,000 on charged-off loans~~$0.1 million in the second quarter of ~~2019,~~2020 as compared to ~~$155,000 in~~ net ~~charge-offs~~recoveries of less than $0.1 million in the second quarter of ~~2018.~~2019. For the first six months, net charge-offs were ~~$567,000~~$0.4 million in ~~2019~~2020 and ~~$407,000~~$0.6 million in ~~2018.~~2019.

~~With the loan loss provision recorded thus far in 2019, we have been able to maintain our~~The allowance for loan and lease losses is at a level that, in Management’s judgment, is adequate to absorb probable loan losses related to specifically-identified impaired loans as well as probable incurred losses in the remaining loan portfolio. The Company’s need for reserve replenishment via a loan loss provision has been favorably impacted in recent periods by the following factors: all of our acquired loans were booked at their fair values at acquisition, and thus did not initially require a loan loss allowance; some charge-offs in 2019 have been recorded against pre-established reserves, which alleviated what otherwise might have been a need for reserve replenishment; loss rates for most loan types have been declining, thus having a positive impact on general reserves required for performing loans; and, new loans booked during and since the great recession have been underwritten using tighter credit standards than was the case for many legacy loans.

The Company’s policies for monitoring the adequacy of the allowance, determining loan balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 11 to the consolidated financial statements, and below, under “Allowance for Loan and Lease Losses.” The process utilized to establish an appropriate allowance for loan and lease losses can result in a high degree of variability in the Company’s loan loss provision, and consequently in our net earnings.

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NONINTEREST INCOME AND NONINTEREST EXPENSE

The following table provides details on the Company’s noninterest income and noninterest expense for the three- and ~~six-month~~six month periods ended June 30, ~~2019~~2020 and ~~2018:~~2019:

Noninterest Income/Expense

(dollars in thousands, unaudited)


	For the three months ended June 30,						For the six months ended June 30,
NON-INTEREST INCOME:	2020		% of Total	2019		% of Total	2020		% of Total	2019		% of Total
Service charges on deposit accounts	$	2,618	37.94%	$	3,151	53.81%	$	5,802	44.61%	$	6,094	51.81%
Other service charges and fees		2,503	36.28%		2,514	42.94%		4,907	37.73%		4,777	40.61%
Net gains on sale of securities available-for-sale		390	5.65%		22	0.38%		390	3.00%		28	0.24%
Bank-owned life insurance		649	9.41%		127	2.17%		687	5.28%		1,027	8.73%
Other		740	10.72%		41	0.70%		1,221	9.38%		(164)	-1.39%
Total non-interest income	$	6,900	100.00%	$	5,855	100.00%	$	13,007	100.00%	$	11,762	100.00%
As a % of average interest-earning assets⁽¹⁾			1.07%			1.01%			1.07%			1.03%

OTHER OPERATING EXPENSE:
Salaries and employee benefits	$	9,266	51.39%	$	8,994	50.93%	$	19,438	54.22%	$	18,237	51.36%
Occupancy costs
Furniture & equipment		619	3.43%		692	3.92%		1,084	3.02%		1,215	3.42%
Premises		1,885	10.45%		1,758	9.96%		3,748	10.45%		3,596	10.13%
Advertising and marketing costs		425	2.36%		560	3.17%		1,026	2.86%		1,252	3.53%
Data processing costs		1,045	5.79%		1,255	7.11%		2,187	6.10%		2,507	7.06%
Deposit services costs		2,229	12.36%		2,124	12.03%		4,025	11.23%		3,893	10.96%
Loan services costs
Loan processing		191	1.06%		205	1.16%		362	1.01%		376	1.06%
Foreclosed assets		62	0.34%		41	0.23%		68	0.19%		61	0.17%
Other operating costs
Telephone & data communications		467	2.59%		317	1.80%		835	2.33%		624	1.76%
Postage & mail		106	0.59%		81	0.46%		174	0.49%		276	0.78%
Other		365	2.02%		459	2.60%		751	2.09%		803	2.26%
Professional services costs
Legal & accounting		357	1.98%		524	2.97%		685	1.91%		935	2.63%
Acquisition costs		—	—		(1)	-0.01%		—	—		22	0.06%
Other professional service		701	3.89%		437	2.48%		947	2.64%		1,374	3.87%
Stationery & supply costs		131	0.73%		101	0.57%		246	0.69%		156	0.44%
Sundry & tellers		184	1.02%		109	0.62%		275	0.77%		182	0.51%
Total non-interest expense	$	18,033	100.00%	$	17,656	100.00%	$	35,851	100.00%	$	35,509	100.00%
As a % of average interest-earning assets⁽¹⁾			2.80%			3.03%			2.94%			3.10%
Efficiency ratio ⁽²⁾⁽³⁾		57.78%			58.17%			58.33%			58.46%

For the three months ended June 30,

For the six months ended June 30,
NONINTEREST INCOME:

2019

% of Total

2018

% of Total

2019

% of Total

2018

% of Total
Service charges on deposit accounts

$
3,151

53.81%

$
3,027

55.76%

$
6,094

51.81%

$
5,974

56.56%
Other service charges and fees

2,514

42.94%

2,225

40.98%

4,777

40.61%

4,375

41.43%
Net gains on sale of securities available-for-sale

22

0.38%

—

—

28

0.24%

—

—
Bank-owned life insurance

127

2.17%

423

7.79%

1,027

8.73%

626

5.93%
Other

41

0.70%

(246)

-4.53%

(164)

-1.39%

(412)

-3.92%
Total noninterest income

$
5,855

100.00%

$
5,429

100.00%

$
11,762

100.00%

$
10,563

100.00%
As a % of average interest-earning assets (1)

1.01%

1.00%

1.03%

0.99%

OTHER OPERATING EXPENSE:

Salaries and employee benefits

$
8,994

50.93%

$
8,997

52.02%

$
18,237

51.36%

$
18,180

51.68%
Occupancy costs

Furniture & equipment

692

3.92%

608

3.52%

1,215

3.42%

1,234

3.51%
Premises

1,758

9.96%

1,843

10.66%

3,596

10.13%

3,565

10.13%
Advertising and marketing costs

560

3.17%

689

3.98%

1,252

3.53%

1,310

3.72%
Data processing costs

1,255

7.11%

1,284

7.42%

2,507

7.06%

2,555

7.26%
Deposit services costs

2,124

12.03%

1,355

7.84%

3,893

10.96%

2,593

7.37%
Loan services costs

Loan processing

205

1.16%

245

1.42%

376

1.06%

566

1.61%
Foreclosed assets

41

0.23%

(574)

-3.32%

61

0.17%

(346)

-0.98%
Other operating costs

Telephone & data communications

317

1.80%

432

2.50%

624

1.76%

759

2.16%
Postage & mail

81

0.46%

235

1.36%

276

0.78%

511

1.45%
Other

459

2.60%

442

2.56%

803

2.26%

769

2.19%
Professional services costs

Legal & accounting

524

2.97%

533

3.08%

935

2.63%

965

2.74%
Acquisition costs

(1)

-0.01%

151

0.87%

22

0.06%

437

1.24%
Other professional service

437

2.48%

653

3.78%

1,374

3.87%

1,232

3.50%
Stationery & supply costs

101

0.57%

344

1.98%

156

0.44%

665

1.89%
Sundry & tellers

109

0.62%

57

0.33%

182

0.51%

186

0.53%
Total noninterest expense

$
17,656

100.00%

$
17,294

100.00%

$
35,509

100.00%

$
35,181

100.00%
As a % of average interest-earning assets (1)

3.03%

3.18%

3.10%

3.29%
Efficiency ratio (2)

58.17%

60.44%

58.46%

63.01%

(1)

~~(1)~~

Annualized

(2)

~~(2)~~

Tax equivalent

(3)	Noninterest expense as a percentage of the sum of net interest income and noninterest income excluding net gains (losses) from securities and bank owned life insurance income.

Total noninterest income reflects increases of ~~$426,000,~~$1.0 million, or 8%18%, for the quarterly comparison and ~~$1.199~~$1.2 million, or 11% for the year-to-date ~~period. Those increases include nonrecurring gains recorded~~comparison. BOLI income increased by $0.5 million as compared to the second quarter of 2019 but decreased $0.3 million for the first half of 2020 as compared to the same period in 2019. These variances are due mostly to fluctuations in underlying values of assets in the specific account BOLI policies that are designed to have similar assets to those in the deferred compensation plans. Thus, the higher quarterly values in BOLI policies are offset by higher deferred compensation expense reflected primarily in director fees expense and vice versa for the first six months of 2020 compared to 2019. At June 30, 2020, there was $43.0 million in BOLI policies associated with the deferred compensation plans and $8.3 million in separate account BOLI policies. Complementing the change in BOLI income for the quarterly and year to date comparison was a $0.7 and $1.4 million increase respectively, in other noninterest income due to the wrap up of a low- income housing tax credit fund along with a $0.4 million gain on the sale of debt securities.

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There was a $0.5 million decrease in service charges on deposit accounts mostly from lower returned items and overdraft fees for the quarterly comparison and $0.3 million decrease for the year to date comparison. The Company expects that service charges on deposit accounts could continue to decline in future quarters based on reduced customer activity and increased waivers due to COVID-19.

Additionally in the “other” category of noninterest income the Company reflected a $0.2 million decrease in the second quarter from the valuation of restricted stock held by the Company as required under FASB ASU 2016-01, but an increase of $0.2 million for the year to date comparison. This stock is related to an equity investment in Pacific Coast Bankers’ Bank and is adjusted when financial information becomes available, generally in the late first quarter of each year. This stock was revalued in the first quarter of 2020, but was not revalued in 2019 until the second quarter. In addition, noninterest income includes a valuation adjustment related to investments in low-income housing credit investments. This valuation adjustment was a reduction of income of $0.2 million in the second quarter of 2020 as compared to a $0.5 million reduction in the second quarter of 2019, ~~including $232,000 from the write up of certain restricted stock pursuant to a periodic assessment of its market value~~ and ~~$100,000 from the wrap-up of a low-income housing tax credit fund investment. Total noninterest income was an annualized 1.01% of average interest-earning assets~~$0.3 million in the ~~second quarter~~first half of ~~2019 relative~~2020 compared to ~~1.00%~~$0.9 million in ~~the second quarter of 2018, and 1.03% for the first six months of 2018 relative to 0.99% for the first six months of 2018.~~2019.

Service charges on deposit accounts increased by $124,000, or 4%, in the second quarter of 2019 relative to the second quarter of 2018 and by $120,000, or 2%, for the comparative year-to-date periods due to a higher number of deposit accounts and a higher level of account activity . Other service charges, commissions, and fees increased by $289,000, or 13%, for the second quarter comparison and $402,000, or 9%, for the year-to-date period due in large part to a higher level of debit card interchange fees. There were minimal net gains on investment securities in 2019, and none in 2018.

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BOLI income fell by $296,000, or 70%, in the second quarter of 2019 but reflects an increase of $401,000, or 64%, for the first six months of 2019, in comparison to the same periods in 2018. BOLI income is derived from two types of policies owned by the Company, namely “separate account” and “general account” life insurance, and the change in BOLI income in 2019 relative to 2018 is due almost entirely to fluctuations in separate account BOLI income. The Company had $7.2 million invested in separate account BOLI at June 30, 2019, which produces income that helps offset expense accruals for deferred compensation accounts the Company maintains on behalf of certain directors and senior officers. Those accounts have returns pegged to participant-directed investment allocations that can include equity, bond, or real estate indices, and are thus subject to gains or losses which often contribute to significant fluctuations in income (and associated expense accruals). The Company recorded a loss of $118,000 on separate account BOLI in the second quarter of 2019 relative to a gain of $176,000 in the second quarter of 2018, for an absolute decline of $294,000. For the first six months, net gains on separate account BOLI totaled $544,000 in 2019 as compared $136,000 in 2018, for an increase of $408,000. As noted, gains and losses on separate account BOLI are related to expense accruals or reversals associated with participant gains and losses on deferred compensation balances, thus their net impact on taxable income tends to be minimal. The Company’s books also reflect a net cash surrender value of $42.0 million for general account BOLI at June 30, 2019. General account BOLI generates income that helps offset expenses associated with executive salary continuation plans, director retirement plans and other employee benefits. Interest credit rates on general account BOLI do not change frequently so the income has typically been fairly consistent.

The “Other” category under noninterest income often reflects negative amounts because it includes amortization expense associated with our investments in low-income housing tax credit funds and other limited partnership investments, which is netted against other noninterest income. This line item also includes gains and losses on the disposition of assets other than OREO, rent on bank-owned property other than OREO, dividends on restricted stock (including our equity investment in the Federal Home Loan Bank), and other miscellaneous income. Other noninterest income has favorable variances of $287,000 for the second quarter and $248,000 for the first six months. It was impacted by nonrecurring items in the second quarter of 2019, as noted above, namely the $232,000 write up of certain restricted stock and the $100,000 gain from the conclusion of a low-income housing tax credit fund investment.

Total noninterest expense increased by ~~$362,000,~~$0.4 million, or 2%, in the second quarter of ~~2019~~2020 relative to the second quarter of ~~2018,~~2019, and by ~~$328,000,~~$0.3 million, or 1%, in the first six months of ~~2019~~2020 as compared to the first six months of 2018. The variances in other noninterest expense include increases in net OREO expense, largely driven by nonrecurring OREO gains that helped offset expenses in 2018, and the offsetting impact of lower nonrecurring acquisition costs in 2019. The absolute increase in foreclosed asset costs was $615,000 for the second quarter comparison, and $407,000 for the comparative year-to-date periods. Acquisition costs were minimal in 2019, but totaled $151,000 in the second quarter of 2018 and $437,000 for the first half of 2018. Noninterest expense dropped to ~~3.03%~~2.8% of average earning assets in the second quarter of ~~2019~~2020 from ~~3.18%~~3.03% for the second quarter of ~~2018,~~2019 and was ~~3.10%~~2.94% of average earning assets for the first six months of ~~2019~~2020 relative to ~~3.29%~~3.10% for the first six months of ~~2018.~~2019.

~~The largest component~~Salaries and Benefits were $0.3 million, or 3%, higher in the second quarter of ~~operating expense, salaries and employee benefits, did not change materially in 2019~~2020 as compared to 2018, as selective staff reductions offset salary adjustments in the normal course of business and an increase stemming from a drop in deferred loan origination salaries. Salaries directly related to successful loan originations are removed from compensation expense and amortized as loan costs over the life of the related loans, which reduces current period compensation expense. Loan origination salaries that were deferred from current expense totaled $832,000 in the second quarter of 2019 and ~~$992,000~~$1.2 million higher for the first six months of 2020 compared to the same period in 2019. The reason for this increase is due to several factors, including merit increases for employees due to annual performance evaluations for 2020. These increases were mitigated by the impact of deferred salaries related to loan origination costs, which were $0.8 million higher in the second quarter of ~~2018, and $1.816 million in the first six months of 2019~~2020 relative to $2.032 million in the first six months of 2018, representing reductions of $160,000 and $216,000, respectively, due to variability in successful organic loan origination activity. The Company had 529 full-time equivalent employees at June 30, 2019 relative to 565 at June 30, 2018. Salaries and benefits were 51% of total operating expense for the second quarter and first six months of 2019, in comparison to 52% in the second quarter and first six months of 2018.

As with compensation expense, total occupancy expense was roughly the same in 2019 as in 2018. Other expense categories were well-controlled for the most part and were favorably impacted by efficiency gains in some areas. A notable exception was Deposit Services Costs, which increased due in part to higher ATM costs resulting in large part from nonrecurring expenditures for upgrades and repairs. Deposit costs were also unfavorably impacted by a mid-first quarter 2019 reclassification of statement costs from supplies and postage expense to Deposit Services Costs, which

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~~totaled $399,000 for~~ the second quarter of 2019, and $656,000 for the first six months. Other Professional Service expense fell by $216,000 for the quarter but increased by $142,000 for the year-to-date comparison due to variability in directors deferred compensation accruals, related to changes in BOLI income. As discussed above, variances in overhead expense also include increases in foreclosed asset expenses that were partially offset by the positive impact of lower nonrecurring acquisition costs.

~~The Company’s tax-equivalent overhead efficiency ratio was 58.17% in the second quarter of 2019 relative to 60.44% in the second quarter of 2018, and was 58.46%~~$0.5 million higher for the first six months of ~~2019 in comparison~~2020 compared to ~~63.01% for~~ the same period in ~~2018.~~2019. There have not been any permanent or temporary reductions in employees as a result of COVID-19.

Occupancy expenses were roughly the same for the respective comparative periods. Further, other noninterest expense categories as a whole was relatively unchanged for the second quarter 2020 as compared to the second quarter in 2019 but was $0.9 million lower for the first half of 2020 as compared to the same period in 2019. The ~~overhead~~variance for year-to-date 2020 compared to the same period in 2019 was primarily driven by a $0.7 million, or 30%, decline in professional services expenses. Those professional services variances include a $0.2 million decrease in FDIC assessments due to the Small Bank Assessment credits applied against FDIC deposit insurance costs, a $0.2 million decrease in deferred compensation expense for directors, which is linked to the changes in BOLI income, and a $0.2 million reduction in consulting costs.

The Company’s tax-equivalent efficiency ratio was 57.78% in the second quarter 2020 as compared to 58.17% in the same quarter of 2019, and 58.33% for the first six months of 2020 and 58.46% for the comparative period in 2019. The efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income; the provision for loan losses and investment gains/losses are excluded from the equation. ~~Our overhead~~Given the expected decline in net interest income due to the lower rate environment in 2020, it is expected that the efficiency ratio ~~improved~~could increase in ~~2019 due to a higher level of net interest and noninterest income, combined with limited increases in noninterest expense.~~2020.

PROVISION FOR INCOME TAXES

The Company sets aside a provision for income taxes on a monthly basis. The amount of that provision is ~~determined~~determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent ~~differences,~~differences, and then subtracting available tax credits. Permanent differences include but are not limited to tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax deductions. Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds. The Company’s provision for income taxes was ~~26.4%~~23.2% of pre-tax income in the second quarter of ~~2019~~2020 relative to ~~24.9%~~26.4% in the second quarter of ~~2018,~~2019, and ~~25.3%~~23.6% of pre-tax income for the first half of ~~2019~~2020 relative to ~~24.4%~~25.3% for the same

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period in ~~2018.~~2019. The ~~increase~~decrease for ~~2019~~the 2020 quarterly comparison is due primarily to ~~higher pretax income~~an increase in partially tax exempt municipal bond interest and ~~a lower~~tax exempt BOLI income. Although the comparison for the first six months was also positively impacted by an increased level of ~~tax credits; the quarterly comparison~~municipal bond interest it was also negatively impacted by a lower level of tax-exempt BOLI income.

BALANCE SHEET ANALYSIS

EARNING ASSETS

The Company’s interest-earning assets are comprised of investments and loans, and the composition, growth characteristics, and credit quality of both of those components are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.

INVESTMENTS

~~INVESTMENTS~~

The Company’s investments ~~can~~may at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our Federal Reserve Bank ~~(“FRB”)~~ account, and overnight fed funds sold. The Company’s investments can serve several ~~purposes:~~purposes, including the following: 1) they can provide liquidity ~~to even out cash flows from the loan and deposit activities of customers;~~for potential funding needs; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with ~~maturity and interest rate~~structural characteristics that can be changed more readily than ~~the~~ loan ~~portfolio, to better match changes in the~~or deposit ~~base and other funding sources of the Company;~~portfolios, as might be required for interest rate risk management purposes; 4) they are another interest-earning option for the placement of surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. Surplus ~~FRB~~ balances in our Federal Reserve Bank account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity. Aggregate investments totaled ~~$579~~$667.2 million, or ~~22%~~21% of total assets at June 30, ~~2019~~2020, and ~~$562~~$615.3 million, or ~~22%~~24% of total assets at December 31, ~~2018.~~2019.

We had no fed funds sold at the end of the reporting periods, and interest-bearing balances held primarily in our Federal Reserve Bank account totaled $2 million at June 30, 2019 and December 31, 2018. The Company’s investment securities portfolio had a book balance of $577 million at June 30, 2019, reflecting a net increase of $17 million, or 3%, for the first six months of 2019. The Company carries investments at their fair market values. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. The

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expected average life for bonds in our investment portfolio was ~~3.9~~4.2 years and their average effective duration was ~~2.8~~2.9 years at June 30, ~~2019,~~2020, down from an expected average life of ~~4.1~~4.4 years and an average effective duration of ~~3.3~~3.2 years at year-end ~~2018.~~2019.

The following table sets forth the amortized cost and fair market value of Company’s investment portfolio by investment type as of the dates noted:

Investment Portfolio

(dollars in thousands, unaudited)


	June 30, 2019				December 31, 2018
	Amortized		Fair Market		Amortized		Fair Market
	Cost		Value		Cost		Value

									June 30, 2020				December 31, 2019
									Amortized		Fair Market		Amortized		Fair Market
									Cost		Value		Cost		Value
Available for Sale
U.S. government agencies	$	15,262	$	15,296	$	15,553	$	15,212	$	1,775	$	1,850	$	12,125	$	12,145
Mortgage-backed securities		405,025		406,091		414,208		404,733		364,828		375,485		398,353		400,389
State and political subdivisions		150,978		155,879		140,181		140,534		209,760		221,998		181,900		188,265
Total securities	$	571,265	$	577,266	$	569,942	$	560,479	$	576,363	$	599,333	$	592,378	$	600,799

The net unrealized gain on our investment portfolio, or the amount by which aggregate fair market values exceeded amortized cost, was $6$23.0 million at June 30, ~~2019, an absolute difference of $15~~2020, a $14.6 million increase relative to the net unrealized ~~loss~~gain of $9$8.4 million at December 31, ~~2018.~~2019. The change was caused by ~~the favorable impact of~~ declining long-term market interest rates on fixed-rate bond ~~values. The balance~~

Table of ~~U.S. Government agency securities in our portfolio increased slightly during the first six months of 2019 due primarily to higher market~~ Contents

values. ~~Mortgage-backed securities also increased marginally, since bond purchases and positive changes in fair market values exceeded the impact of prepayments and bond sales.~~ Municipal bond balances ~~increased by $15 million, or 11%,~~comprise 37% of our total securities portfolio at June 30, 2020, as ~~bond purchases and higher market valuations offset the impact of bond sales, maturities and redemptions.~~compared to 31% at December 31, 2019. Municipal bonds purchased ~~in recent periods~~ have strong underlying ratings, and we review all municipal bonds in our portfolio every quarter for potential impairment.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, repurchase agreements, and other purposes as required or permitted by law totaled ~~$223~~$242.4 million at June 30, ~~2019~~2020 and ~~$217~~$234.8 million at December 31, ~~2018,~~2019, leaving ~~$354~~$356.9 million in unpledged debt securities at June 30, ~~2019~~2020 and ~~$343~~$366.0 million at December 31, ~~2018.~~2019. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled ~~$62~~$60.5 million at June 30, ~~2019~~2020 and $9$71.0 million at December 31, ~~2018.~~2019.

LOAN AND LEASE PORTFOLIO

Gross loans and leases reflect a net increase of ~~$46~~$449.5 million, or 3%26%, growing to ~~$1.778~~$2.212 billion at June 30, ~~2019~~2020 from ~~$1.732~~$1.763 billion at December 31, ~~2018~~2019 due ~~primarily~~ to organic growth in commercial real estate loans, an increase in commercial and industrial loans from our participation in the SBA PPP program and an increase in outstanding balances on mortgage warehouse lines.

A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances in the table are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs. While not reflected in the loan totals and not currently comprising a material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of, loans to non-affiliated investors.

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Loan and Lease Distribution

(dollars in thousands, unaudited)


	June 30, 2019		December 31, 2018

					June 30, 2020		December 31, 2019
Real estate:
1-4 family residential construction	$	105,618	$	105,676	$	89,225	$	105,979
Other construction/land		108,342		109,023		90,545		91,413
1-4 family - closed-end		218,618		236,825		178,071		200,181
Equity lines		53,709		56,320		44,318		49,599
Multi-family residential		53,602		54,877		55,921		54,457
Commercial real estate - owner occupied		322,027		301,324		313,863		343,883
Commercial real estate - non-owner occupied		423,641		438,344		691,292		412,569
Farmland		152,619		151,541		134,454		144,033
Total real estate		1,438,176		1,453,930		1,597,689		1,402,114
Agricultural		51,509		49,103		48,516		48,036
Commercial and industrial		124,974		128,220		221,502		115,532
Mortgage warehouse lines		154,954		91,813		338,124		189,103
Consumer loans		8,286		8,862		6,266		7,780
Total loans and leases	$	1,777,899	$	1,731,928	$	2,212,097	$	1,762,565
Percentage of Total Loans and Leases
Real estate:
1-4 family residential construction		5.94%		6.10%		4.03%		6.01%
Other construction/land		6.09%		6.29%		4.09%		5.19%
1-4 family - closed-end		12.30%		13.67%		8.05%		11.36%
Equity lines		3.02%		3.25%		2.00%		2.81%
Multi-family residential		3.01%		3.17%		2.53%		3.09%
Commercial real estate - owner occupied		18.11%		17.40%		14.19%		19.51%
Commercial real estate - non-owner occupied		23.83%		25.32%		31.26%		23.42%
Farmland		8.58%		8.75%		6.08%		8.17%
Total real estate		80.88%		83.95%		72.23%		79.55%
Agricultural		2.90%		2.84%		2.19%		2.73%
Commercial and industrial		7.03%		7.40%		10.01%		6.55%
Mortgage warehouse lines		8.72%		5.30%		15.29%		10.73%
Consumer loans		0.47%		0.51%		0.28%		0.44%
Total loans and leases		100.00%		100.00%		100.00%		100.00%

For the first six months of ~~2019, total~~2020, gross loans were up by $449.5 million, or 26%, including increases of $149.0 million in mortgage warehouse lines, $205.2 million increase in non-agricultural real estate loans, ~~declined by $16~~and a $106.0 million ~~or 1%,~~increase in commercial and industrial loans. Mortgage warehouse loan balances increased due to ~~a drop~~market factors favorably impacting line utilization due to both mortgage originations and refinancing activity. Mortgage warehouse utilization was 79.2% at June 30, 2020, as compared to 58.7% at December 31, 2019. Future utilization of ~~$18 million in closed-end residential~~the mortgage warehouse lines could be impacted if the economic impacts of the COVID-19 pandemic reduce the demand for mortgages.

Non-agricultural real estate loan balances increased due to deliberate and concentrated efforts of our Northern and Southern market loan production teams. The growth in these markets was mostly due to commercial real estate and was the primary driver of our $278.7 million increase in non-owner occupied commercial real estate loans.

Residential real estate loans have been declining since the Company made the deliberate decision to discontinue such lending at the end of 2018, thus maturing balances and prepayments are no longer being replaced. Commercial real estate loans, on the other hand, grew by a net $6 million, or 1%, with a slight shift into loans secured by owner-occupied properties from loans secured by non-owner occupied properties. That said, heightened competitive forces have had an adverse impact on our ability to grow

Total commercial real estate loan balances increased in ~~recent periods. Loans secured~~2020 by ~~farmland were up slightly, and agricultural production loans increased by $2~~$248.7 million ~~or 5%, for~~due to an increase in non-owner occupied properties. In the first ~~six months~~quarter of ~~2019.~~2020, the Company hired lending teams to focus primarily on commercial real estate loans in our northern and southern markets. At June 30, 2020 the Bank’s regulatory credit concentration of commercial real estate loans (CRE), as defined in the Interagency Guidance dated, December 12, 2006, was 304%.

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Management employs heightened risk management practices with respect to CRE lending, including board and management oversight, strategic planning, development and underwriting standards, risk assessment and monitoring through market analysis, and stress testing. At June 30, 2020 we have concluded that we have an acceptable and well-managed concentration in CRE lending under the foregoing standards.

The 91.8% increase in Commercial and ~~industrial loan and lease balances reflect a net decline of $3~~Industrial loans from $115.5 million or 3%. The Company’s only loan category to experience significant growth during the first six months of 2019 was mortgage warehouse lines, as utilization on those lines doubled to 46% at June 30, 2019 from 23% at December 31, 2018. The increase is the result of market factors favorably impacting home refinancing and purchase activity, as well as heightened business development efforts and internal pricing adjustments enacted2019 to $221.5 million was primarily driven by the Company’s participation in the Small Business Administration’s PPP as authorized by the CARES Act. The Company ~~mid-second~~began accepting and funding loans under this program in April 2020. As of June 30, 2020, the Company obtained approval from the Small Business Administration and has funded PPP loans for approximately 1,242 customers totaling $116.2 million.

The recent growth in loans, in particular, real estate loans was accomplished without relaxing any of the Company’s credit standards that had been tightened after the great recession. Instead, the growth came by diversifying geography with new loan teams announced in the first quarter ~~2019.~~

~~Management remains focused on~~2020 in our Northern and Southern California markets. Those loan teams have maintained these enhanced underwriting standards through the pandemic and have not compromised credit quality loan growth, but this year there appear to be fewer lending opportunities which meet our credit and yield criteria and competition for those loans has intensified. Moreover, we are still experiencing occasional surges in prepayments as well as significant fluctuations in mortgage warehouse lending, thuswhen sourcing new loans. However, no assurance can be ~~provided with regard~~given as to ~~future net growth in aggregate loan balances.~~how these loans will perform over their lifetime.

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NONPERFORMING ASSETS

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, in addition to foreclosed assets which can include mobile homes and OREO. If the Company grants a concession to a borrower in financial difficulty, the loan falls into the category of a ~~troubled debt restructuring (“TDR”).~~TDR. TDRs may be classified as either nonperforming or performing loans depending on their underlying characteristics and circumstances. The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:

Nonperforming assets and performing troubled debt restructurings

(dollars in thousands, unaudited)


	June 30, 2020		December 31, 2019		June 30, 2019
NON-ACCRUAL LOANS:
Real estate:
Other construction/land	$	4	$	31	$	43
1-4 family - closed-end		843		741		1,454
Equity lines		626		480		467
Commercial real estate - owner occupied		1,909		1,440		1,472
Commercial real estate - non-owner occupied		627		2,105		—
Farmland		702		258		25
TOTAL REAL ESTATE		4,711		5,055		3,461
Agriculture		—		—		—
Commercial and industrial		1,086		651		569
Consumer loans		11		31		90
TOTAL NONPERFORMING LOANS		5,808		5,737		4,120

Foreclosed assets		2,893		800		770
Total nonperforming assets	$	8,701	$	6,537	$	4,890
Performing TDRs⁽¹⁾	$	9,192	$	8,415	$	9,246
Nonperforming loans as a % of total gross loans and leases		0.26%		0.33%		0.23%
Nonperforming assets as a % of total gross loans and leases and foreclosed assets		0.39%		0.37%		0.27%

June 30,
2019

December 31,
2018

June 30,
2018
NON-ACCRUAL LOANS:

Real estate:

Other construction/land

$
43

$
82

$
66
1-4 family - closed-end

1,454

799

804
Equity lines

467

408

430
Commercial real estate - owner occupied

1,472

605

257
Commercial real estate - non-owner occupied

—

49

85
Farmland

25

1,642

32
TOTAL REAL ESTATE

3,461

3,585

1,674
Agriculture

—

—

—
Commercial and industrial

569

1,425

1,333
Consumer loans

90

146

86
TOTAL NONPERFORMING LOANS

4,120

5,156

3,093

Foreclosed assets

770

1,082

2,112
Total nonperforming assets

$
4,890

$
6,238

$
5,205
Performing TDRs (1)

$
9,246

$
10,920

$
11,981
Nonperforming loans as a % of total gross loans and leases

0.23%

0.30%

0.19%
Nonperforming assets as a % of total gross loans and leases and foreclosed assets

0.27%

0.36%

0.32%

(1)

~~(1)~~

Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate the ratios disclosed in this table.

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Total nonperforming assets ~~were reduced~~increased by ~~$1.348~~$2.2 million, or ~~22%~~33.1%, during the first six months of ~~2019,~~2020. The increase resulted from $2.1 million in new foreclosed assets due to ~~reductions resulting from net charge-offs and our continued focus on~~the impact of one commercial real estate credit ~~quality improvement.~~that went into foreclosure. The ~~$4 million balance~~commercial property that went into other real estate owned has a pending contract. None of these increases were due to COVID-19. As a result of the increase in the gross loan portfolio, the Company’s ratio of nonperforming assets to loans decreased to 0.26% at June 30, ~~2019 includes certain TDRs~~2020, from 0.33% at December 31, 2019. All of the Company’s impaired assets are periodically reviewed, and ~~other loans that were paying as agreed, but which met~~are either well-reserved based on current loss expectations, or are carried at the ~~technical definition~~fair value of ~~nonperforming loans and were thus classified as such.~~ the underlying collateral net of expected disposition costs.

As shown in the table, we also had $9$9.2 million in loans classified as performing TDRs on which we were still accruing interest as of June 30, ~~2019, a reduction~~2020, an increase of ~~$1.674~~$0.8 million, or ~~15%~~9%, relative to December 31, ~~2018.~~2019.

Foreclosed assets had a carrying value of ~~$770,000~~$2.9 million at June 30, 2020, comprised of 9 properties classified as OREO and two mobile homes relative to year-end 2019 ~~comprised~~when foreclosed assets consisted of 10 properties classified as OREO and ~~one~~two mobile ~~home. This represents a reduction of $312,000, or 29%, relative to year-end 2018 when foreclosed assets totaled $1.082 million, consisting of 11~~homes. Two very-low value properties ~~classified as OREO. The balance reduction came from write-downs on OREO and the sale of a few small properties~~were sold during the first six months ~~of 2019.~~2020. All foreclosed assets are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

~~Total nonperforming assets were 0.27% of gross loans and leases plus foreclosed assets at June 30, 2019, down from 0.36% at December 31, 2018 and 0.32% at June 30, 2018.~~ An action plan is in place for each of our non-accruing loans and foreclosed assets and they are all being actively managed. Collection efforts are continuously pursued for all

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nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company is providing deferrals to certain customers and taking advantage of Section 4013 of the CARES Act, which provides that such deferrals do not result in treatment of such loan as a TDR. These deferrals typically provide deferrals of both principal and interest for 180 days. Interest continues to accrue during the deferral period. At the end of the deferral period, for term loans, payments will be applied to accrued interest first and after the accrued interest is paid in full, the loan will be re-amortized with the maturity extended. For lines of credit, the borrower must repay the accrued interest at the end of the deferral period or take out a second credit facility to repay the accrued interest. As of June 30, 2020, 313 customers, for a total of $386.2 million, had executed a loan modification under Section 4013 of the CARES Act. Approximately 97% of these loan deferrals were for commercial customers with 38% or $145.0 million of these modifications, in the hospitality industry. In addition, there were $98.7 million, or 26%, that are lessors of real estate, both commercial and residential; $45.5 million, or 12%, in the dairy industry; and $28.7 million, or 7%, related to convenience stores, and $2.7 million, or 0.7%, in the healthcare industry. Of the commercial deferrals, there were $10.1 million that were unsecured. Consumer deferrals totaled $11.2 million, of which $7.5 million were mortgage related. While these modified loans are not classified as nonperforming or classified assets at June 30, 2020, we will continue to monitor these loans during the deferral period and if circumstances change, we may downgrade the loan to a criticized asset or consider it a troubled debt restructuring. If a portion of the customers are not able to resume payments after the deferral period, it likely could result in higher classified and/or nonperforming assets, reversals of interest income, and/or higher charge-offs.

ALLOWANCE FOR LOAN AND LEASE LOSSES

The allowance for loan and lease losses, a contra-asset, is established through periodic provisions for loan and lease losses. It is maintained at a level that is considered adequate to absorb probable losses on specifically identified impaired loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off.

As described above, the Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. The Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic and related stimulus and relief efforts on the expected lifetime credit losses.

The Company’s allowance for loan and lease losses was ~~$9.9~~$13.6 million at June 30, ~~2019, a slight~~2020, an increase of $3.6 million, or 36.7%, relative to December 31, ~~2018~~2019 resulting from a ~~$700,000~~$4.0 million loan loss provision ~~plus recoveries~~ recorded during the ~~six-month period,~~first six

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months of 2020, less $0.4 million in net charge-offs during the same period. The additional loan loss provision in the first half of 2020 was precipitated primarily by qualitative factors associated with economic uncertainty during these unprecedented times. No additional loan ~~balances charged-off against~~loss was necessary for the ~~allowance. Because~~$116.2 million in SBA PPP loans added during the quarter ending June 30, 2020, as those loans carry a 100 percent guarantee by the SBA under a new 7(a) loan program titled the “Paycheck Protection Program”. For further information regarding the Company's decision to defer the implementation of CECL under Section 4014 of the CARES Act, as well as further detail on the increase in provision during the second quarter of 2020, please see the discussion above under Provision for Loan and Lease Losses. The allowance was ~~proportionate with loan growth,~~0.61% of total loans at June 30, 2020, and 0.56% at both December 31, 2019 and June 30, 2019. The ratio of the allowance for loan and lease losses was 0.56% of total loans at June 30, 2019, December 31, 2018 and June 30, 2018. The ratio of the Company’s allowance to total loans has been at relatively low levels in recent periods, as facilitated by the following circumstances: some charge-offs have been recorded against pre-established reserves, alleviating the need for reserve replenishment; acquisition loans were booked at their fair values, and thus did not initially require a loan loss allowance; favorable trends in loan loss rates have had a positive impact on general reserves established for performing loans; and, new loans booked during and since the great recession have been underwritten using tighter credit standards than was the case for many legacy loans. The ratio of the allowance to nonperforming loans was ~~239.88%~~233.47% at June 30, ~~2019,~~2020, relative to ~~189.10%~~172.96% at December 31, ~~2018~~2019 and ~~295.38%~~239.88% for June 30, 2019. Management's detailed analysis indicates that the Company's allowance for loan and lease losses should be sufficient to cover credit losses inherent in loan and lease balances outstanding as of June 30, 2020, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the allowance. With respect to exposures related to the COVID-19 pandemic, the Company had 83 relationships in the hospitality industry totaling $222.5 million at June 30, ~~2018.~~ 2020. In addition to loans in the hospitality sector, we have approximately $17.0 million of loans in the oil and gas industry, and $66.0 million of loans to retail businesses at June 30, 2020.

A separate allowance of ~~$384,000~~$0.3 million for potential losses inherent in unused commitments is included in other liabilities at June 30, ~~2019.~~

2020.

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The following table summarizes activity in the allowance for loan and lease losses for the noted periods:

Allowance for Loan and Lease Losses

(dollars in thousands, unaudited)


	For the three months ended		For the three months ended		For the six months ended		For the six months ended		For the year ended
	June 30,		June 30,		June 30,		June 30,		December 31,
Balances:	2020		2019		2020		2019		2019
Average gross loans and leases outstanding during period ⁽¹⁾	$	1,912,209	$	1,741,573	$	1,810,397	$	1,727,051	$	1,753,748
Gross loans and leases outstanding at end of period	$	2,212,097	$	1,777,899	$	2,212,097	$	1,777,899	$	1,762,565

Allowance for loan and lease losses:
Balance at beginning of period	$	11,453	$	9,438	$	9,923	$	9,750	$	9,750
Provision charged to expense		2,200		400		4,000		700		2,550
Charge-offs
Real estate
1-4 family residential construction		—		—		—		—		—
Other construction/land		—		—		—		—		—
1-4 family - closed-end		—		—		—		—		—
Equity lines		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		—		—
Commercial real estate- non-owner occupied		—		—		—		—		1,190
Farmland		—		—		—		—		—
Total real estate		—		—		—		—		1,190
Agricultural		—		—		—		—		—
Commercial and industrial		67		254		92		832		1,274
Consumer loans		286		562		903		1,114		2,409
Total	$	353	$	816	$	995	$	1,946	$	4,873
Recoveries
Real estate
1-4 family residential construction		—		—		—		—		—
Other construction/land		—		—		34		—		2
1-4 family - closed-end		3		4		6		9		148
Equity lines		—		2		34		23		150
Multi-family residential		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		—		—
Commercial real estate- non-owner occupied		—		147		—		297		347
Farmland		—		—		—		—		—
Total real estate		3		153		74		329		647
Agricultural		—		—		—		—		—
Commercial and industrial		20		431		48		472		690
Consumer loans		237		277		510		578		1,159
Total	$	260	$	861	$	632	$	1,379	$	2,496
Net loan charge offs	$	93	$	(45)	$	363	$	567	$	2,377
Balance at end of period	$	13,560	$	9,883	$	13,560	$	9,883	$	9,923

RATIOS
Net charge-offs to average loans and leases (annualized)		0.02%		-0.01%		0.04%		0.07%		0.14%
Allowance for loan losses to gross loans and leases at end of period		0.61%		0.56%		0.61%		0.56%		0.56%
Allowance for loan losses to nonperforming loans		233.47%		239.88%		233.47%		239.88%		172.96%
Net loan charge-offs to allowance for loan losses at end of period		0.69%		-0.46%		2.68%		5.74%		23.95%
Net loan charge-offs to provision for loan losses		4.23%		-11.25%		9.08%		81.00%		93.22%

For the three
months

For the three
months

For the six
months

For the six
months

For the year


ended June 30,

ended June 30,

ended June 30,

ended June 30,

ended December 31,
Balances:

2019

2018

2019

2018

2018
Average gross loans and leases outstanding during period (1)

$
1,741,573

$
1,605,334

$
1,727,051

$
1,567,327

$
1,625,732
Gross loans and leases outstanding at end of period

$
1,777,899

$
1,624,344

$
1,777,899

$
1,624,344

$
1,731,928

Allowance for Loan and Lease Losses:

Balance at beginning of period

$
9,438

$
8,991

$
9,750

$
9,043

$
9,043
Provision charged to expense

400

300

700

500

4,350
Charge-offs

Real estate

1-4 family residential construction

—

—

—

—

—
Other construction/land

—

—

—

—

4
1-4 family - closed-end

—

—

—

5

5
Equity lines

—

104

—

125

125
Multi-family residential

—

—

—

—

—
Commercial real estate- owner occupied

—

—

—

—

—
Commercial real estate- non-owner occupied

—

—

—

—

2,341
Farmland

—

—

—

—

—
TOTAL REAL ESTATE

—

104

—

130

2,475
Agricultural

—

—

—

—

—
Commercial and industrial

254

68

832

101

608
Consumer loans

562

523

1,114

1,088

2,225
Total

$
816

$
695

$
1,946

$
1,319

$
5,308
Recoveries

Real estate

1-4 family residential construction

—

—

—

—

—
Other construction/land

—

—

—

—

—
1-4 family - closed-end

4

3

9

5

10
Equity lines

2

19

23

82

134
Multi-family residential

—

—

—

—

—
Commercial real estate- owner occupied

—

230

—

229

230
Commercial real estate- non-owner occupied

147

—

297

—

—
Farmland

—

—

—

—

—
TOTAL REAL ESTATE

153

252

329

316

374
Agricultural

—

—

—

—

22
Commercial and industrial

431

17

472

45

148
Consumer loans

277

271

578

551

1,121
Total

$
861

$
540

$
1,379

$
912

$
1,665
Net loan charge offs (recoveries)

$
(45)

$
155

$
567

$
407

$
3,643
Balance at end of period

$
9,883

$
9,136

$
9,883

$
9,136

$
9,750

RATIOS

Net charge-offs to average loans and leases (annualized)

-0.01%

0.04%

0.07%

0.05%

0.22%
Allowance for loan losses to gross loans and leases at end of period

0.56%

0.56%

0.56%

0.56%

0.56%
Allowance for loan losses to nonperforming loans

239.88%

295.38%

239.88%

295.38%

189.10%
Net loan charge-offs to allowance for loan losses at end of period

-0.46%

1.70%

5.74%

4.45%

37.36%
Net loan charge-offs to provision for loan losses

-11.25%

51.67%

81.00%

81.40%

83.75%

(1)

~~(1)~~

Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

As reflected in the table above, the Company recorded a loan loss provision of $400,000 in the second quarter of 2019 compared to $300,000 in the second quarter of 2018, and a loan loss provision of $700,000 for the first half of 2019 relative to $500,000 for the first half of 2018. Net balances recovered on previously charged-off loans were $45,000 in the second quarter of 2019, while net loans charged off against the allowance totaled $155,000 in the second quarter of

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2018. Net charge-offs were $567,000 for the first six months of 2019 relative to $407,000 during the first six months of 2018. Any shortfall in the allowance identified pursuant to our analysis of remaining probable losses is covered by quarter-end. The “Provision for Loan and Lease Losses” section above includes additional details on our provision and its relationship to actual charge-offs.

The Company’s allowance for loan and lease losses at June 30, ~~2019~~2020 represents Management’s best estimate of probable losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance. Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

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OFF-BALANCE SHEET ARRANGEMENTS

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. It is unlikely that all unused commitments will ultimately be drawn down. Unused commitments to extend credit totaled ~~$596~~$449.0 million at June 30, ~~2019~~2020 and ~~$782~~$492.0 million at December 31, ~~2018,~~2019, representing approximately ~~34%~~20% of gross loans outstanding at June 30, ~~2019~~2020 and ~~45%~~28% at December 31, ~~2018.~~2019. The drop in unused commitments is due in large part to the increase in outstanding balances on mortgage warehouse ~~lines, but commercial and residential construction loan commitments have also declined.~~lines. The Company also had undrawn letters of credit issued to customers totaling ~~$10~~$9.4 million at June 30, ~~2019~~2020 and $9$8.6 million at December 31, ~~2018.~~2019. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of ~~the~~ commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form ~~10‑Q~~10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments.

In addition to unused commitments to provide credit, the Company is utilizing a $105 million letter of credit 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 that are pledged to the FHLB by the Company. For more information on the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements located elsewhere herein.

OTHER ASSETS

Interest-earning cash balances were discussed above in the “Investments” section, but the Company also maintains a certain level of cash on hand in the normal course of business as well as non-earning deposits at other financial institutions. Our balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the amount of cash held at our branches, and our reserve requirement among other things, and it is subject to significant fluctuations in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to, and borrowings from, correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, we ~~will~~could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity into longer-term, higher-yielding bonds. The Company’s balance of non-earning cash and due from banks was ~~$66~~$88.7 million at June 30, ~~2019~~2020 relative to ~~$72~~$65.6 million at December 31, ~~2018, with the decrease~~2019. The increase is primarily due ~~primarily~~ to ~~a reduction in vault cash and a lower amount~~maintaining higher amounts of cash items in process of collection. The average balance of non-earning cash and due from banks, which is a better measure for ascertaining trends, was $60 million for the first six months of 2019 relative to $61 million for the year in 2018. The reduction in the average balance ison hand due to ~~concentrated efforts~~lack of certainty from our armored cash delivery vendor during the COVID-19 pandemic due to ~~improve cash management efficiency.~~potential staffing issues and governmental stay-at-home orders.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.” Net premises and equipment ~~declined~~increased by ~~$1.115~~$0.3 million ~~or 4%,~~ during the first six months of ~~2019 as the result of depreciation recorded on fixed assets.~~2020. Goodwill was $27 million at June 30, ~~2019,~~2020, unchanged ~~for~~during the first six months of ~~2019, but other intangible assets were down $537,000, or 8%, due~~2020. As mentioned above, the Company performed a qualitative assessment of goodwill impairment during the second quarter 2020 and determined that a quantitative analysis was not required at this time. The Company will continue to ~~amortization expense recorded on core deposit intangibles. The Company’s~~

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~~goodwill and other intangible assets are evaluated annually~~monitor its Goodwill for potential impairment ~~and pursuant to that analysis Management has concluded that no impairment exists as of June 30, 2019.~~given the COVID-19 pandemic. Bank-owned life insurance, with a balance of ~~$49~~$51.3 million at June 30, ~~2019,~~2020, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

The aggregate balance of “Other assets” was $49.5 million at June 30, 2019, compared to $50.6 million at December 31, 2018. While the ending balance is down only $1 million, or 2%, there were significant changes within other assets during the first six months of 2019 including the following: a $9.0 million increase resulting from operating lease assets booked at the beginning of 2019, pursuant to our adoption of FASB’s ASU 2016‑02; a reduction of $7.6 million resulting from our first quarter 2019 collection of a receivable established at the end of 2018 for expected proceeds from the sale of a large foreclosed property; a $4.5 million reduction in our deferred tax asset; a $1.5 million increase in current prepaid taxes; and, a $1.0 million increase in restricted stock. At June 30, 2019, the balance of other assets included as its largest components a $12.7 million investment in restricted stock, an operating lease right-of-use asset totaling $9.0 million, accrued interest receivable totaling $8.9 million, a net deferred tax asset of $4.1 million, a $5.0 million investment in low-income housing tax credit funds, and a $3.0 million investment in a small business investment corporation. Restricted stock is comprised of Federal Home Loan Bank of San Francisco stock held in conjunction with our FHLB borrowings and an equity investment in a correspondent bank, neither of which is deemed to be marketable or liquid. Our net deferred tax asset is evaluated as of every reporting date pursuant to FASB guidance, and we have determined that no impairment exists.

DEPOSITS AND INTEREST BEARING LIABILITIES

DEPOSITS

~~DEPOSITS~~

Deposits represent another key balance sheet category impacting the Company’s net interest ~~margin~~income and profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity accounts such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type ~~for the three- and six-month periods ended June 30, 2019 and 2018~~ is included in the Average Balances and Rates tables appearing above, in the section titled “Net

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Interest Income and Net Interest Margin.” A distribution of the Company’s deposits by type, showing the period-end balance and percentage of total deposits, is presented as of the dates indicated in the following table.

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Deposit Distribution

(dollars in thousands, unaudited)


	June 30, 2019		December 31, 2018
Noninterest bearing demand deposits	$	658,900	$	662,527

					June 30, 2020		December 31, 2019
Non-interest bearing demand deposits					$	949,662	$	690,950
Interest bearing demand deposits		129,733		101,243		144,215		91,212
NOW		441,030		434,483		497,601		458,600
Savings		289,872		283,953		346,262		294,317
Money market		117,010		123,807		125,419		118,933
Time, under $250,000		225,937		212,901		199,061		211,916
Time, $250,000 or more		266,616		247,426		234,534		252,446
Brokered deposits		50,000		50,000		10,000		50,000
Total deposits	$	2,179,098	$	2,116,340	$	2,506,754	$	2,168,374


Percentage of Total Deposits
Noninterest bearing demand deposits		30.24%		31.31%
Non-interest bearing demand deposits						37.89%		31.86%
Interest bearing demand deposits		5.95%		4.78%		5.75%		4.21%
NOW		20.24%		20.53%		19.85%		21.15%
Savings		13.30%		13.42%		13.81%		13.57%
Money market		5.37%		5.85%		5.00%		5.48%
Time, under $250,000		10.37%		10.06%		7.94%		9.77%
Time, $250,000 or more		12.24%		11.69%		9.36%		11.64%
Brokered deposits		2.29%		2.36%		0.40%		2.31%
Total		100.00%		100.00%		100.00%		100.00%

Deposit balances reflect net growth of ~~$63~~$338.4 million, or 3%16%, during the first six months of ~~2019. Non-maturity~~2020. Time deposits were ~~up $31~~$443.6 million at June 30, 2020 as compared to $514.4 million at December 31, 2019. The $70.8 million decline in time-deposits was a result of a $40 million reduction in brokered deposits and a $30.8 million in other time-deposits. The Company chose not to renew brokered deposits given the growth in non-maturity deposits of $409.1 million, or 2%24.7%, ~~while customer time deposits increased by $32 million, or 7%, and wholesale brokered deposits were unchanged.~~during the first six months of 2020. All of our non-maturity deposit growth was organic in ~~nature, but it does include some seasonal increases in deposit balances.~~nature.

Management is of the opinion that a relatively high level of core customer deposits is one of the Company’s key strengths, and we continue to strive for core deposit retention and growth. ~~Our deposit-targeted promotions are still favorably impacting growth in~~In particular, the ~~number~~Company’s ratio of ~~accounts and it is expected that balances in these accounts will grow over time consistent with our past experience, although given the current highly competitive market for~~noninterest-bearing deposits ~~no assurance can be provided with regard~~ to ~~future increases in core deposit balances.~~total deposits was 37.9% at June 30, 2020 as compared to 31.9% at December 31, 2019.

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

Total non-deposit interest-bearing liabilities ~~were down $40~~increased by $158.8 million, or ~~37%~~197%, ~~for~~during the first six months of ~~2019,~~2020 primarily due to ~~a drop~~an increase in borrowings from the FHLB ~~that was partially offset by an increase in customer repurchase agreements. The Company had $8.5 million in borrowings from the FHLB at June 30, 2019 relative~~primarily to ~~$56.1 million at December 31, 2018, and there were no overnight federal funds purchased from other correspondent banks or advances from the FRB on our books at June 30, 2019 or December 31, 2018.~~fund increased temporary utilization of mortgage warehouse lines. Repurchase agreements totaled ~~$24~~$41.4 million at June 30, ~~2019~~2020 relative to a balance of ~~$16~~$25.7 million at year-end ~~2018, for an increase of $8 million.~~2019. 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. The Company had junior subordinated debentures totaling $35.0 million at both June 30, 2020 and December

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~~debentures totaling $34.9 million at June 30,~~31, 2019, ~~and $34.8 million at December 31, 2018,~~ in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities. ~~The small increase resulted from the amortization of discount on junior subordinated debentures that were part of our acquisition of Coast Bancorp in 2016.~~

OTHER NONINTEREST BEARING LIABILITIES

Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts. The Company’s balance of other liabilities ~~increased by $8~~was $36.4 million ~~or 30%, during the first six months of 2019 due in large part~~at June 30, 2020 as compared to ~~the liability established as an offset to the operating lease right-of-use asset noted above.~~$35.5 million at December 31, 2019.

LIQUIDITY AND MARKET RISK MANAGEMENT

LIQUIDITY

Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by Management on a monthly basis, with various stress scenarios applied to assess our ability to meet liquidity needs under unusual or adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored and we are committed to maintaining adequate liquidity resources to draw upon should unexpected needs arise.

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet these short-term needs, we can borrow overnight funds from other financial institutions, draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources. ~~Availability on lines of credit from correspondent banks and the FHLB totaled $542 million at~~

At June 30, ~~2019. An additional $59 million in credit is available from the FHLB if~~2020 and December 31, 2019, the Company ~~were~~had the following sources of primary and secondary liquidity ($ in thousands):


Primary and Secondary Liquidity Sources		June 30, 2020		December 31, 2019
Cash and Due From Banks	$	88,705	$	80,076
Unpledged Investment Securities		356,903		366,012
Excess Pledged Securities		60,462		70,955
FHLB Borrowing Availability		293,454		443,200
Unsecured Lines of Credit		80,000		80,000
Funds Available through Fed Discount Window		60,102		59,198
Totals	$	939,626	$	1,099,441

In addition to ~~pledge sufficient collateral~~the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market. At June 30, 2020, the Company applied for and ~~maintain the required amount of FHLB stock. The Company was also eligible~~received approval to borrow ~~approximately $74~~$116.2 million atfrom the Federal Reserve ~~Discount Window based on~~Bank for a Paycheck Protection Program Lending Facility (PPPLF). The PPPLF provides the Company with the ability to pledge any PPP loan to the Federal Reserve Bank and obtain funding at 35 basis points. Further, any loans pledged ~~assets at June 30, 2019. Furthermore, funds can~~to the PPPLF will be ~~obtained by drawing down excess cash that might be available~~excluded from the regulatory leverage capital ratio. Due to the Company’s liquidity throughout the first half of 2020 it elected not to utilize the PPPLF during the quarter. The Company will continue to evaluate whether it should utilize the PPPLF in the ~~Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the~~third quarter 2020.

The Company ~~can raise immediate cash~~performs regular stress tests on its liquidity and at this time, believes that we have sufficient primary and secondary liquidity sources for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As of June 30, 2019, unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $416 million of the Company’s investment balances, as compared to $352 million at December 31, 2018. Other sources of potential liquidity include but are not necessarily limited to any outstanding fed funds sold and vault cash. operations.

The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $105 million at June 30, ~~2019~~2020 and ~~$95 million at~~ December 31, ~~2018.~~2019. Other sources of liquidity included the brokered deposit market, deposit listing services, and the ability to offer local time-deposit campaigns. Management is of the opinion that available investments and other potentially

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liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity ~~needs.~~needs and that its liquidity has not been adversely impacted by COVID-19.

The Company’s net loans to assets and available investments to assets ratios were ~~69%~~71.0% and ~~16%~~15.6%, respectively, at June 30, ~~2019,~~2020, as compared to internal policy guidelines of “less than 78%” and “greater than 3%.” Other liquidity ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to total assets, including ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at June 30, ~~2019.~~2020. The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current strong levels.

The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, interest on trust preferred securities, shareholder dividends, and stock repurchases. Its primary source of funds is dividends from the Bank, since the holding company does not conduct regular banking operations. As of June 30, 2020, the holding company maintained a cash balance of $15.3 million. Management anticipates that with the available cash and the continued ability for the Bank ~~will have sufficient earnings~~ to provide dividends to the holding company, that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future. Both

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the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2018~~2019 which was filed with the SEC.

INTEREST RATE RISK MANAGEMENT

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.

To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform monthly earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios. The model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).

In addition to a stable rate scenario, which presumes that there are no changes in interest rates, we typically use at least six other interest rate scenarios in conducting our rolling ~~12‑~~12-month net interest income simulations: upward shocks of 100, 200, and 300 basis points, and downward shocks of 100, 200, and 300 basis points. Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations ~~in light of~~considering economic conditions and expectations at the time. Given the current near zero interest rate environment it is unlikely that rates could decline much further beyond the downward shock of 100 basis points, therefore the downward shock scenarios of 200 and 300 basis points are temporarily being suspended after concurrence by the Company’s Board of Directors. We currently utilize an additional upward rate shock scenario of 400 basis points. Pursuant to policy guidelines, we generally attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock. As

Table of ~~June 30, 2019 the~~Contents

The Company had the following estimated net interest income sensitivity ~~profile,~~profiles, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

Immediate Change in Rate

-300 bp
-200 bp
-100 bp
+100 bp
+200 bp
+300 bp
+400 bp
Change in Net Int. Inc. (in $000’s)
-$15,810
-$8,442
-$3,729
+$1,202
+$1,847
+$2,481
+$2,573
% Change
-16.39%
-8.75%
-3.86%
+1.25%
+1.91%
+2.57%
+2.67%


	June 30, 2020				June 30, 2019
Immediate change in Interest Rates (basis points)	% Change in Net Interest Income		$ Change in Net Interest Income		% Change in Net Interest Income		$ Change in Net Interest Income
+400		5.4%	$	5,373		2.7%	$	2,573
+300		4.5%	$	4,477		2.6%	$	2,481
+200		3.5%	$	3,529		1.9%	$	1,847
+100		2.3%	$	2,308		1.3%	$	1,202
Base
(100)		-6.3%	$	(6,235)		-3.9%	$	(3,729)

Our ~~current~~ simulations for both periods represented indicate that the Company’s net interest income will increase ~~slightly~~ over the next 12 months in a rising rate environment, but a continued drop in interest rates could have a substantial negative impact. ~~In prior periods~~However for the ~~simulations~~period ended June 30, 2020, given the 150-basis point decrease in the target federal funds rate in March 2020 and the drop in the 5-year and 10-year Treasury yields in the first six months of 2020, it is unlikely to see dramatic rate decreases unless rates go negative. We have seen a drop in projected ~~sizeable gains in~~ net interest income across all scenarios and an exacerbated negative impact in ~~rising~~declining rate scenarios ~~but~~in recent periods, resulting from the impact of interest rate reductions and balance sheet changes ~~such as the addition of fixed-rate loans and adjustable-rate~~including an increase in loans with ~~longer reset~~variable rate characteristics (mortgage warehouse loans), the runoff of loans which had rates fixed for periods in excess of a year, and ~~the increase~~a shift in ~~short-term interest rates over the past few years have significantly diminished that effect.~~our deposit mix toward time deposits. If there were an immediate and sustained upward adjustment of 100 basis points in interest rates, all else being equal, net interest income over the next 12 months is projected to improve by ~~$1.202~~$2.3 million, or ~~1.25%~~2.30%, for the period ending June 30, 2020 and $1.2 million, or 1.3%, for the period ended June 30, 2019, relative to a stable interest rate scenario, with the favorable variance increasing ~~marginally~~ as interest rates rise higher. If interest rates were to decline by 100 basis points, however, net interest income would likely be ~~around $3.729~~$6.2 million lower or -6.3% for the period ended June 30, 2020, and $3.7 million lower or –3.9% for the period ended June 30, 2019, than in a stable interest rate ~~scenario, for a negative variance of 3.86%.~~scenario. The unfavorable variance increases when rates drop ~~200 or 300 basis points,~~are due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While we view material interest rate reductions as unlikely in the near term, the potential percentage ~~drop~~decline in net interest income in the “down ~~300~~100 basis points” interest

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rate scenario exceeds our internal policy guidelines ~~and we will continue to monitor our interest rate risk profile and implement remedial changes as deemed appropriate.~~for the period ended June 30, 2020

In addition to the net interest income simulations shown above, we run stress scenarios for the unconsolidated Bank modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the Bank in the most recent economic cycle, and unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas). When a static balance sheet and a stable interest rate ~~environment~~environment are assumed, projected annual net interest income is ~~close to~~more than $1 million lower than in our standard simulation. However, the stressed simulations reveal that the Company’s greatest potential pressure on net interest income would result from excessive non-maturity deposit runoff and/or unfavorable deposit rate changes in rising rate scenarios.

The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate fluctuations. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at anticipated replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change ~~substantially~~substantially over time, as is evident in the tables below for the periods ending June 30, 2020 and 2019, respectively, as the Company’s balance sheet evolves and interest rate and yield curve assumptions are updated.

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The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates. Our EVE had been increasing due to asset growth and rising discount rates, which result in a larger benefit assessed to non-maturity deposits, but that trend reversed in the second quarter of 2019 as loan growth slowed and interest rates started to fall. The ~~table~~tables below ~~shows~~show estimated changes in the Company’s EVE, ~~as of June 30, 2019,~~ under different interest rate scenarios relative to a base case of current interest rates:

Immediate Change in Rate

-300 bp
-200 bp
-100 bp
+100 bp
+200 bp
+300 bp
+400 bp
Change in EVE (in $000’s)
-$147,454
-$162,983
-$84,297
+$43,571
+$69,015
+$83,884
+$92,095
% Change
-24.95%
-27.58%
-14.27%
+7.37%
+11.68%
+14.20%
+15.58%


	June 30, 2020				June 30, 2019
Immediate change in Interest Rates (basis points)	% Change in Fair Value of Equity		$ Change in Fair Value of Equity		% Change in Fair Value of Equity		$ Change in Fair Value of Equity
+400		36.5%	$	195,263		15.6%	$	92,095
+300		32.1%	$	171,790		14.2%	$	83,884
+200		25.2%	$	134,702		11.7%	$	69,015
+100		14.5%	$	77,398		7.4%	$	43,571
Base
(100)		-11.1%	$	(59,340)		-14.3%	$	(84,297)

The table shows that our EVE will generally deteriorate in moderate declining rate scenarios, but should benefit from a ~~parallel~~parallel shift upward in the yield curve. The ~~decline in EVE reverses somewhat as interest rates drop more than 200 basis points, while the~~ rate of increase in EVE ~~begins to taper off~~accelerates the higher interest rates rise. This ~~phenomenon~~increase in sensitivity is caused by the ~~relative durations of our fixed-rate assets and liabilities, combined with optionality inherent~~increase in ~~our balance sheet.~~gross deposits, namely, an increase in noninterest bearing deposits. We also run stress scenarios for the unconsolidated Bank’s EVE to simulate the possibility of adverse movement in loan ~~prepayment~~prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular, with material unfavorable variances occurring relative to the standard simulations shown above as decay rates are increased. Furthermore, while not as extreme as the variances produced by increasing non-maturity deposit decay rates, EVE also displays a relatively high level of sensitivity to unfavorable changes in deposit rate betas in rising interest rate scenarios.

CAPITAL RESOURCES

The Company had total shareholders’ equity of ~~$296.9~~$327.4 million at June 30, ~~2019,~~2020, comprised of ~~$113.0~~$112.6 million in common stock, ~~$3.2~~$3.5 million in additional paid-in capital, ~~$176.3~~$195.1 million in retained earnings, and accumulated other comprehensive income of ~~$4.2~~$16.2 million. At the end of ~~2018,~~2019, total shareholders’ equity was ~~$273.0~~$309.3 million. The increase

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~~for~~ during the first six months of ~~2019~~2020 is due to the addition of capital from net income and stock options exercised as well as a ~~$10.9~~$10.3 million favorable swing in accumulated other comprehensive income, ~~(moving from a $6.7 million loss to $4.2 million income),~~ net of the impact of cash dividends ~~paid.~~paid and share repurchases. There were norepurchases totaling 112,050 shares at a weighted average cost of $22.86 per share ~~repurchases~~ executed by the Company during the ~~six months ended June 30, 2019.~~first quarter of 2020. The Company has 268,301 shares authorized to repurchase under the current repurchase program. The Company suspended its stock repurchase program on March 16, 2020 and continues to evaluate when or if we will restart repurchasing shares.

The Company uses a variety of measures to evaluate its capital adequacy, including ~~risk-based capital and~~the leverage ratios ~~that are~~which is calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. The following table sets forth the consolidated Company’s and the Bank’s regulatory capital ratios as of the dates indicated.

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Regulatory Capital Ratios


					Minimum		Minimum
					Requirement		Required
	June 30,		December 31,		to be		Community Bank
	2020		2019		Well Capitalized ⁽³⁾		Leverage Ratio ^{(2) (4)}
Sierra Bancorp
Common Equity Tier 1 Capital to Risk-Weighted Assets⁽¹⁾	N/A		13.27	%	6.50	%	N/A
Tier 1 Capital to Risk-weighted Assets ⁽¹⁾	N/A		14.98	%	8.00	%	N/A
Total Capital to Risk-weighted Assets ⁽¹⁾	N/A		15.48	%	10.00	%	N/A
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") ⁽¹⁾	N/A		11.91	%	5.00	%	N/A


Bank of the Sierra
Common Equity Tier 1 Capital to Risk-Weighted Assets ⁽¹⁾	N/A		14.75	%	6.50	%	N/A
Tier 1 Capital to Risk-weighted Assets ⁽¹⁾	N/A		14.75	%	8.00	%	N/A
Total Capital to Risk-weighted Assets ⁽¹⁾	N/A		15.25	%	10.00	%	N/A
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")	10.87	%	11.73	%	5.00	%	8.00	%

June 30,

December 31,

Minimum Requirement


2019

2018

to be Well Capitalized

Sierra Bancorp

Common Equity Tier 1 Capital to Risk-Weighted Assets

12.95
%
12.61
%
6.50
%
Tier 1 Capital to Risk-weighted Assets

14.68
%
14.38
%
8.00
%
Total Capital to Risk-weighted Assets

15.19
%
14.89
%
10.00
%
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

11.73
%
11.49
%
5.00
%

Bank of the Sierra

Common Equity Tier 1 Capital to Risk-Weighted Assets

14.57
%
14.25
%
6.50
%
Tier 1 Capital to Risk-weighted Assets

14.57
%
14.25
%
8.00
%
Total Capital to Risk-weighted Assets

15.08
%
14.77
%
10.00
%
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

11.64
%
11.39
%
5.00
%

(1)	Current data is not applicable as the Bank adopted the Community Bank Leverage Ratio Framework as of the first quarter of 2020.

(2)	The minimum required Community Bank Leverage Ratio is 9.00%, but the CARES Act temporarily lowers this to 8% as described below.

(3)	The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.

(4)

If the subsidiary bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework, it is deemed to be “well capitalized” under all other regulatory capital requirements. The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s Leverage Ratio falls below the minimum under the Community Bank Leverage Ratio Framework.

~~Our risk-based~~The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital ~~ratios increased during~~adequacy for qualifying community banking organizations. A qualifying community banking organization that opts into the ~~first six months of 2019, as growth in risk-based~~community bank leverage ratio framework and maintains a leverage ratio greater than 9 percent will be considered to have met the minimum capital ~~outpaced growth in risk-adjusted assets. Our~~requirements, the capital ~~ratios are strong relative to the median for peer financial institutions, and remain well above the threshold~~ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject. A qualifying community banking organization with a leverage ratio of greater than 9 percent may opt into the community bank leverage ratio framework if has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5 percent or less of total consolidated assets. Further, the bank must not be an advance approaches banking organization.

The final rule became effective January 1, 2020 and banks that meet the qualifying criteria can elect to use the community bank leverage framework starting with the quarter ended March 31, 2020. The CARES Act reduced the required community bank leverage ratio to 8% until the earlier of December 31, 2020, or the national emergency is declared over. The federal bank regulatory agencies adopted an interim final rule to implement this change from the CARES Act. The Company and the Bank ~~to be classified as “well capitalized,”~~meet the ~~highest rating of~~criteria outlined in the ~~categories defined under the Bank Holding Company Act~~final rule and the ~~Federal Deposit Insurance Corporation Improvement Act of 1991. We do not foresee any circumstances that would cause~~interim final rule and have adopted the ~~Company or~~community bank leverage ratio framework in the ~~Bank to be less than well capitalized, although no assurance can be given that this will not occur.~~first quarter 2020.

PART I – FINANCIAL INFORMATION

Item 3

QUALITATIVE & QUANTITATIVE DISCLOSURES

ABOUT MARKET RISK

The information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”

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PART I – FINANCIAL INFORMATION

Item 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized, and reported within the time periods specified by the SEC.

Changes in Internal Controls

There were no significant changes in the Company’s internal controls over financial reporting that occurred in the ~~second quarter~~first six months of ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The Company is involved in various legal proceedings in the normal course of business. In the opinion of Management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 1A: RISK FACTORS

~~There were no material changes from the~~The following risk factors ~~disclosed~~supplement the risks described in the Company’s Form ~~10‑K~~10-K under Item 1A, “Risk Factors” for ~~the fiscal~~its year ended December 31, ~~2018.~~2019 filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. The ongoing COVID-19 pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent filings with the U.S. Securities and Exchange Commission.

Our business, results of operations, and financial condition have been, and will likely continue to be, adversely affected by the ongoing COVID-19 pandemic.

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets; global supply chain disruptions; and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the United States, but also specifically in California, where all of our operations and a large majority of our customers are located.

These conditions have impacted and are expected in the future to impact-our business, results of operations, and financial condition negatively, including through lower revenue from certain of our fee-based businesses; lower net interest income resulting from lower interest rates and increased loan delinquencies; increased provisions for credit losses; impairments on the securities we hold; and decreased demand for certain of our products and services. Additionally, our liquidity and regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets; deposit flows; and continued client draws on lines of credit as well as our participation in the Small Business Administration Paycheck Protection Program. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. Negative impacts from these conditions also may include:

•

Collateral securing our loans may decline in value, which could increase credit losses in our loan portfolio and increase the allowance for loan losses.

•

Demand for our products and services may decline, and deposit balances may decrease making it difficult to grow assets and income.

•

The decline in the target federal funds rate could decrease yields on our assets that exceed the decline in our cost of interest-bearing liabilities, which may reduce our net interest margin.

•

The impact of the adoption of the CECL standard, which is highly dependent on unemployment rate forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net income.

While governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth, the success of these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic. Further, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on our business, while our participation in other measures could result in reputational harm, litigation, or regulatory and government actions, proceedings, or penalties.

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The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume, particularly in California.

Our Traditional Service Delivery Channels may be Impacted by the COVID-19 Pandemic

In light of the external COVID-19 threat, the Board of Directors and senior management are continuously monitoring the situation, providing frequent communications, and making adjustments and accommodations for both external clients and our employees. All branches remain open to serve our customers and local communities, with modified hours and strict social distancing protocols in place as well as limiting our branches to walk-up, drive-up or appointment only customer visits. Our customers have been encouraged to utilize branch alternatives such as using our ATMs, online banking, and mobile banking application in lieu of in-branch transactions. In addition, many employees are working remotely and travel as well as face-to-face meeting restrictions are in effect. Further, given the increase of the risk of cybersecurity incidents during the pandemic, we have enhanced our cybersecurity protocols. If the pandemic worsens, resurges or lasts for an extended period of time, to protect the health of the Company’s workforce and our customers, we may need to enact further precautionary measures to help minimize the risks to our employees and customers, thus potentially altering our service delivery channels and operations over a prolonged period. These changes to our traditional service delivery channels may negatively impact our customers’ experience of banking with us, result in loss of service fees, and increase costs through equipment and services needed to support a remote workforce, and therefore negatively impact our financial condition and results of operation.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In September 2016 the Board authorized 500,000 shares of common stock for repurchase, subsequent to the completion of previous stock buyback plans. The authorization of shares for repurchase does not provide assurance that a specific quantity of shares will be repurchased, and the program can be suspended at any time at Management’s discretion. After a lengthy deferral of repurchase activity, the Company resumed share repurchases in mid-August 2019 through March 2020. The ~~Company did not~~following table provides information concerning the Company’s stock repurchase ~~any shares in~~transactions during the second quarter of ~~2019 and in fact has not engaged in repurchase activity since the fourth quarter of 2016, thus there were 478,954 authorized shares remaining available for repurchase at June 30, 2019.~~ Management has recently explored the possibility of resuming stock repurchase activity. If a decision is made to pursue that course of action, Management intends to file an 8-K at the appropriate time.2020:


Stock Repurchases
		April 30, 2020		May 31, 2020		June 30, 2020
Total shares repurchased		—		—		—
Average per share price	$	N/A	$	N/A	$	N/A
Number of shares purchased as part of a publicly announced plan or program		—		—		—
Maximum number of shares remaining for purchase under a plan or program		380,351		380,351		380,351

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

~~ITEM 5: OTHER INFORMATION~~

~~Not applicable~~

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ITEM 6: EXHIBITS


	Exhibit #		Description
~~2.1~~		~~Agreement and Plan of Consolidation by and among Sierra Bancorp, Bank of the Sierra and Santa Clara Valley Bank, N.A., dated as of July 17, 2014 (1)~~
~~2.2~~		~~Agreement and Plan of Reorganization and Merger, dated as of January 4, 2016 by and between Sierra Bancorp and Coast Bancorp (2)~~
~~2.3~~		Agreement and Plan of Reorganization and Merger, dated as of April 24, 2017 by and between Sierra Bancorp and OCB Bancorp, as amended by Amendment No. 1 thereto dated May 4, 2017 and Amendment No. 2 thereto dated June 6, 2017 (3)
3.1		Restated Articles of Incorporation of Sierra Bancorp ~~(4)~~(1)
3.2		Amended and Restated By-laws of Sierra Bancorp ~~(5)~~(2)
4.1		Description of Securities (3)
10.1		Salary Continuation Agreement for Kenneth R. Taylor ~~(6)~~(4)*
10.2		Salary Continuation Agreement and Split Dollar Agreement for James F. Gardunio ~~(7)~~(5)*
10.3		Split Dollar Agreement for Kenneth R. Taylor ~~(8)~~(6)*
10.4		Director Retirement and Split dollar Agreements Effective October 1, 2002, for Albert Berra, Morris Tharp, and Gordon Woods ~~(8)~~(6)*
10.5		401 Plus Non-Qualified Deferred Compensation Plan ~~(8)~~(6)*
10.6		Indenture dated as of March 17, 2004 between U.S. Bank N.A., as Trustee, and Sierra Bancorp, as Issuer ~~(9)~~(7)
10.7		Amended and Restated Declaration of Trust of Sierra Statutory Trust II, dated as of March 17, 2004 ~~(9)~~(7)
10.8		Indenture dated as of June 15, 2006 between Wilmington Trust Co., as Trustee, and Sierra Bancorp, as Issuer ~~(10)~~(8)
10.9		Amended and Restated Declaration of Trust of Sierra Capital Trust III, dated as of June 15, 2006 ~~(10)~~(8)
10.10		2007 Stock Incentive Plan ~~(11)~~(9)
10.11		Sample Retirement Agreement Entered into with Each Non-Employee Director Effective January 1, 2007 ~~(12)~~(10)*
10.12		Salary Continuation Agreement for Kevin J. McPhaill ~~(12)~~(10)*
10.13		First Amendment to the Salary Continuation Agreement for Kenneth R. Taylor ~~(12)~~(10)*
10.14		Second Amendment to the Salary Continuation Agreement for Kenneth R. Taylor ~~(13)~~(11)*
10.15		First Amendment to the Salary Continuation Agreement for Kevin J. McPhaill ~~(14)~~(12)*
10.16		Indenture dated as of September 20, 2007 between Wilmington Trust Co., as Trustee, and Coast Bancorp, as Issuer ~~(15)~~(13)
10.17		Amended and Restated Declaration of Trust of Coast Bancorp Statutory Trust II, dated as of September 20, 2007 ~~(15)~~(13)
10.18		First Supplemental Indenture dated as of July 8, 2016, between Wilmington Trust Co. as Trustee, Sierra Bancorp as the “Successor Company”, and Coast Bancorp ~~(15)~~(13)
10.19		2017 Stock Incentive Plan ~~(16)~~(14)*
10.20		Employment agreements dated as of December 27, 2018 for Kevin McPhaill, CEO, Kenneth Taylor, CFO, James Gardunio, Chief Credit Officer, and Michael Olague, Chief Banking Officer ~~(17)~~(15)*
10.21		Employment agreement dated as of March 15, 2019 for Matthew Macia, Chief Risk Officer ~~(18)~~(16)*
1110.22		~~Statement~~Employment agreement dated as of ~~Computation~~November 15, 2019 for Christopher Treece, Chief Financial Officer (17)*
10.23		Employment agreement dated as of ~~Per Share Earnings (19)~~January 17, 2020 for Jennifer Johnson, Chief Administrative Officer (18)*
31.1		Certification of Chief Executive Officer (Section 302 Certification)
31.2		Certification of Chief Financial Officer (Section 302 Certification)
32		Certification of Periodic Financial Report (Section 906 Certification)
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

(1)

~~(1)~~

~~Filed as an Exhibit to the Form 8‑K filed with the SEC on July 18, 2014 and incorporated herein by reference.~~

~~(2)~~

~~Filed as an Exhibit to the Form 8‑K filed with the SEC on January 5, 2016 and incorporated herein by reference.~~

~~(3)~~

Original agreement filed as an exhibit to the Form 8‑K filed with the SEC on April 25, 2017 and incorporated herein by reference, and amendments thereto filed as appendices to the proxy statement/prospectus included in the Form S‑4/A filed with the SEC on July 24, 2017 and incorporated herein by reference.

~~(4)~~

Filed as Exhibit 3.1 to the Form ~~10‑Q~~10-Q filed with the SEC on August 7, 2009 and incorporated herein by reference.

(2)

~~(5)~~

Filed as an Exhibit to the Form ~~8‑K~~10-K filed with the SEC on March 12, 2020.

(3)	Filed as an Exhibit to the Form 8-K filed with the SEC on February 21, 2007 and incorporated herein by reference.

(4)

~~(6)~~

Filed as Exhibit 10.5 to the Form ~~10‑Q~~10-Q filed with the SEC on May 15, 2003 and incorporated herein by reference.

(5)

~~(7)~~

Filed as an Exhibit to the Form ~~8‑K~~8-K filed with the SEC on August 11, 2005 and incorporated herein by reference.

(6)

~~(8)~~

Filed as Exhibits 10.10, 10.18 through 10.20, and 10.22 to the Form ~~10‑K~~10-K filed with the SEC on March 15, 2006 and incorporated herein by reference.

(7)

~~(9)~~

Filed as Exhibits 10.9 and 10.10 to the Form ~~10‑Q~~10-Q filed with the SEC on May 14, 2004 and incorporated herein by reference.

(8)

~~(10)~~

Filed as Exhibits 10.26 and 10.27 to the Form ~~10‑Q~~10-Q filed with the SEC on August 9, 2006 and incorporated herein by reference.

(9)

~~(11)~~

Filed as Exhibit 10.20 to the Form ~~10‑K~~10-K filed with the SEC on March 15, 2007 and incorporated herein by reference.

(10)

~~(12)~~

Filed as Exhibits 10.1 through 10.3 to the Form ~~8‑K~~8-K filed with the SEC on January 8, 2007 and incorporated herein by reference.

(11)

~~(13)~~

Filed as Exhibit 10.23 to the Form ~~10‑K~~10-K filed with the SEC on March 13, 2014 and incorporated herein by reference.

(12)

~~(14)~~

Filed as Exhibit 10.24 to the Form ~~10‑Q~~10-Q filed with the SEC on May 7, 2015 and incorporated herein by reference.

(13)

~~(15)~~

Filed as Exhibits 10.1 through 10.3 to the Form ~~8‑K~~8-K filed with the SEC on July 11, 2016 and incorporated herein by reference.

(14)

~~(16)~~

Filed as Exhibit 10.1 to the Form ~~8‑K~~8-K filed with the SEC on March 17, 2017 and incorporated herein by reference.

(15)

~~(17)~~

Filed as Exhibits 99.1 through 99.4 to the Form ~~8‑K~~8-K filed with the SEC on December 28, 2018 and incorporated by reference.

(16)

~~(18)~~

Filed as Exhibit 99.2 to the Form ~~8‑K~~8-K filed with the SEC on March 18, 2019 and incorporated by reference.

(17)

~~(19)~~

~~Computation of earnings per share is~~Filed as Exhibit 99.1 to the Form 8-K filed with the SEC on November 11, 2019 and incorporated by ~~reference to Note 5~~reference.

(18)	Filed as Exhibit 99.1 to the ~~Financial Statements included herein.~~ Form 8-K filed with the SEC on January 21, 2020 and incorporated by reference.

*Indicates management contract or compensatory plan or arrangement.

5965

Table of Contents

~~SIGNATURES~~

SIGNATURES

Pursuant to the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:


August 6, 2020
~~August 7, 2019~~		/s/ Kevin J. McPhaill
Date		SIERRA BANCORP
		Kevin J. McPhaill
		President & Chief Executive Officer
		(Principal Executive Officer)

August ~~7, 2019~~6, 2020		/s/ ~~Kenneth R. Taylor~~Christopher G. Treece
Date		SIERRA BANCORP
		~~Kenneth R. Taylor~~Christopher G. Treece
		Chief Financial Officer
August 6, 2020		~~(Principal Financial and~~ /s/ Cindy L. Dabney
Date		SIERRA BANCORP
		Cindy L. Dabney
		Principal Accounting ~~Officer)~~Officer

6066


California	33-0937517
~~California~~	~~33-0937517~~
(State of Incorporation)	(IRS Employer Identification No)


Large Accelerated Filer	☐	Accelerated Filer:	☒
Non-accelerated Filer:	☐	Smaller Reporting Company:	☐
Emerging Growth Company:	☐


						Page
Part I - Financial Information						1
	Item 1. Financial Statements (Unaudited)					1
		Consolidated Balance Sheets				1
		Consolidated Statements of Income				2
		Consolidated Statements of Comprehensive Income				3
		Consolidated Statements of Changes In Stockholder’s Equity				4
		Consolidated Statements of Cash Flows				6
		Notes to Consolidated Financial Statements (Unaudited)				7

	Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations				34	35
		Forward-Looking Statements			34	35
		Critical Accounting Policies			34	35
		Overview of the Results of Operations and Financial Condition			35	36
		Earnings Performance			36	40
			Net Interest Income and Net Interest Margin		37	40
			Provision for Loan and Lease Losses		41	45
			Noninterest Income and Noninterest Expense		42	46
			Provision for Income Taxes		44	47
		Balance Sheet Analysis			44	48
			Earning Assets		44	48
				Investments	44	48
				Loan and Lease Portfolio	45	49
				Nonperforming Assets	47	51
				Allowance for Loan and Lease Losses	48	52
				Off-Balance Sheet Arrangements	50	55
			Other Assets		50	55
			Deposits and Interest-Bearing Liabilities		51	55
				Deposits	51	55
				Other Interest-Bearing Liabilities	52	56
			Noninterest Bearing Liabilities		53	57
		Liquidity and Market Risk Management			53	57
		Capital Resources			55	60

	Item 3. Qualitative & Quantitative Disclosures about Market Risk				56	61

	Item 4. Controls and Procedures				57	62

Part II - Other Information					58	63
	Item 1. - Legal Proceedings				58	63
	Item 1A. - Risk Factors				58	63
	Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds				58	64
	Item 3. - Defaults upon Senior Securities				58	64
	Item 4. - Mine Safety Disclosures				58	64
	Item 5. - Other Information				58	64
	Item 6. - Exhibits				59	65

Signatures					60	66


	June 30, 2019		December 31, 2018
ASSETS	(unaudited)		(audited)
Cash and due from banks	$	65,711	$	72,439
Interest-bearing deposits in banks		2,079		1,693
Total cash & cash equivalents		67,790		74,132
Securities available-for-sale		577,266		560,479
Loans and leases:
Gross loans and leases		1,777,899		1,731,928
Allowance for loan and lease losses		(9,883)		(9,750)
Deferred loan and lease costs, net		2,831		2,602
Net loans and leases		1,770,847		1,724,780
Foreclosed assets		770		1,082
Premises and equipment, net		28,385		29,500
Goodwill		27,357		27,357
Other intangible assets, net		5,918		6,455
Bank-owned life insurance		49,211		48,153
Other assets		49,488		50,564
Total assets	$	2,577,032	$	2,522,502

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing	$	658,900	$	662,527
Interest bearing		1,520,198		1,453,813
Total deposits		2,179,098		2,116,340
Repurchase agreements		24,167		16,359
Short-term borrowings		8,500		56,100
Subordinated debentures, net		34,856		34,767
Other liabilities		33,559		25,912
Total liabilities		2,280,180		2,249,478

Commitments and contingent liabilities (Note 7)

Shareholders' equity
Common stock, no par value; 24,000,000 shares authorized; 15,332,550 and 15,300,460 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		113,061		112,507
Additional paid-in capital		3,237		3,066
Retained earnings		176,328		164,117
Accumulated other comprehensive income (loss), net		4,226		(6,666)
Total shareholders' equity		296,852		273,024
Total liabilities and shareholder's equity	$	2,577,032	$	2,522,502


	Three months ended June 30,					Six months ended June 30,
	2019		2018		2019		2018
Interest and dividend income
Loans and leases, including fees	$	24,010	$	21,504	$	47,759	$	41,508
Taxable securities		2,591		2,300		5,207		4,638
Tax-exempt securities		1,072		1,018		2,117		2,034
Federal funds sold and other		115		61		188		180
Total interest income		27,788		24,883		55,271		48,360
Interest expense
Deposits		3,093		1,594		6,048		2,912
Short-term borrowings		26		53		97		66
Subordinated debentures		470		436		954		822
Total interest expense		3,589		2,083		7,099		3,800
Net interest income		24,199		22,800		48,172		44,560
Provision for loan losses		400		300		700		500
Net interest income after provision for loan losses		23,799		22,500		47,472		44,060
Noninterest income
Service charges on deposits		3,151		3,027		6,094		5,974
Other income		2,704		2,402		5,668		4,589
Total noninterest income		5,855		5,429		11,762		10,563
Other operating expense
Salaries and employee benefits		8,994		8,997		18,237		18,180
Occupancy and equipment		2,450		2,451		4,811		4,799
Other		6,212		5,846		12,461		12,202
Total other operating expense		17,656		17,294		35,509		35,181
Income before taxes		11,998		10,635		23,725		19,442
Provision for income taxes		3,169		2,643		6,001		4,740
Net income	$	8,829	$	7,992	$	17,724	$	14,702

PER SHARE DATA
Book value	$	19.36	$	17.06	$	19.36	$	17.06
Cash dividends	$	0.18	$	0.16	$	0.36	$	0.32
Earnings per share basic	$	0.58	$	0.52	$	1.16	$	0.96
Earnings per share diluted	$	0.57	$	0.52	$	1.15	$	0.95
Average shares outstanding, basic		15,329,907		15,254,575		15,320,784		15,243,697
Average shares outstanding, diluted		15,458,320		15,429,129		15,453,212		15,420,886

Total shareholder equity (in thousands)	$	296,852	$	260,238	$	296,852	$	260,238
Shares outstanding		15,332,550		15,258,100		15,332,550		15,258,100
Dividends paid (in thousands)	$	2,759	$	2,441	$	5,513	$	4,878


								Accumulated
				Additional				Other
	Common Stock			Paid In		Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, March 31, 2018	15,246,780	$	111,598	$	2,929	$	148,470	$	(7,677)	$	255,320
Net income							7,992				7,992
Other comprehensive loss, net of tax									(839)		(839)
Exercise of stock options	11,320		141		(33)						108
Stock compensation costs					98						98
Stock issued-acquisition											—
Cash dividends - $0.16 per share							(2,441)				(2,441)
Balance, June 30, 2018	15,258,100	$	111,739	$	2,994	$	154,021	$	(8,516)	$	260,238

Balance, March 31, 2019	15,328,030	$	113,001	$	3,135	$	170,258	$	(2,326)	$	284,068
Net income							8,829				8,829
Other comprehensive income, net of tax									6,552		6,552
Exercise of stock options	4,520		60		(14)						46
Stock compensation costs					116						116
Stock issued-acquisition											—
Cash dividends - $0.18 per share							(2,759)				(2,759)
Balance, June 30, 2019	15,332,550	$	113,061	$	3,237	$	176,328	$	4,226	$	296,852


	June 30, 2019		December 31, 2018
Commitments to extend credit	$	596,001	$	781,987
Standby letters of credit	$	9,529	$	8,966


	June 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due(1)		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans(2)
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	105,618	$	105,618	$	—
Other construction/land		—		—		—		—		108,342		108,342		43
1-4 family - closed end		265		—		409		674		217,944		218,618		1,453
Equity lines		134		—		23		157		53,552		53,709		467
Multi-family residential		—		—		—		—		53,602		53,602		—
Commercial real estate - owner occupied		—		895		97		992		321,035		322,027		1,473
Commercial real estate - non-owner occupied		—		—		—		—		423,641		423,641		—
Farmland		—		—		—		—		152,619		152,619		25
Total real estate		399		895		529		1,823		1,436,353		1,438,176		3,461

Agricultural		—		—		—		—		51,509		51,509		—
Commercial and industrial		203		3		74		280		124,694		124,974		569
Mortgage warehouse lines		—		—		—		—		154,954		154,954		—
Consumer		42		59		19		120		8,166		8,286		90
Total gross loans and leases	$	644	$	957	$	622	$	2,223	$	1,775,676	$	1,777,899	$	4,120


	June 30, 2019
	Unpaid Principal Balance(1)		Recorded Investment(2)		Related Allowance		Average Recorded Investment		Interest Income Recognized(3)
With an allowance recorded
Real estate:
Other construction/land	$	554	$	399	$	39	$	667	$	18
1-4 family - closed-end		3,039		3,038		70		3,178		80
Equity lines		4,784		4,730		639		4,941		125
Multi-family residential		362		362		21		378		11
Commercial real estate- owner occupied		823		703		112		262		19
Commercial real estate- non-owner occupied		—		—		—		—		—
Farmland		—		—		—		—		—
Total real estate		9,562		9,232		881		9,426		253
Agricultural		6		6		1		6		—
Commercial and industrial		728		709		303		906		13
Consumer loans		801		763		137		915		28
Subtotal		11,097		10,710		1,322		11,253		294
With no related allowance recorded
Real estate:
Other construction/land		24		20		—		55		—
1-4 family - closed-end		1,001		959		—		1,073		—
Equity lines		162		138		—		183		—
Commercial real estate- owner occupied		1,376		1,377		—		1,927		—
Commercial real estate- non-owner occupied		—		—		—		—		—
Farmland		25		25		—		45		—
Total real estate		2,588		2,519		—		3,283		—
Agricultural		—		—		—		—		—
Commercial and industrial		150		128		—		186		—
Consumer loans		109		9		—		171		—
Subtotal		2,847		2,656		—		3,640		—
Total	$	13,944	$	13,366	$	1,322	$	14,893	$	294


	Maturities of
	Lease Liabilities
2019 (1)	$	1,096
2020		2,204
2021		1,993
2022		1,558
2023		1,119
Thereafter		3,939
Total		11,909
Less: present value discount		(2,254)
Lease liability (2)	$	9,655


	December 31, 2018
2019	$	2,190
2020		2,204
2021		1,993
2022		1,558
2023		1,119
Thereafter		3,939
Total	$	13,003


	For the three months ended June 30,				For the six months ended June 30,
	2019		2018		2019		2018
Noninterest income
Service charges on deposits
Returned item and overdraft fees	$	1,657	$	1,575	$	3,223	$	3,142
Other service charges on deposits		1,494		1,452		2,871		2,832
Debit card interchange income		1,687		1,486		3,200		2,885
Loss on limited partnerships(1)		(450)		(405)		(900)		(800)
Dividends on equity investments(1)		175		169		406		394
Unrealized gains recognized on equity investments(1)		232		—		232		—
Net gains on sale of securities(1)		22		—		28		—
Other(1)		1,038		1,152		2,702		2,110
Total noninterest income	$	5,855	$	5,429	$	11,762	$	10,563


	For the three months ended					For the three months ended
	June 30, 2019					June 30, 2018
Assets	Average Balance (1)		Income/ Expense		Average Rate/Yield (2)	Average Balance (1)		Income/ Expense		Average Rate/Yield (2)
Investments:
Federal funds sold/due from time	$	18,795	$	115	2.45%	$	13,080	$	61	1.87%
Taxable		425,498		2,591	2.44%		424,446		2,300	2.17%
Non-taxable		149,555		1,072	3.64%		141,224		1,018	3.66%
Total investments		593,848		3,778	2.74%		578,750		3,379	2.53%

Loans and leases:(3)
Real estate		1,459,871		20,098	5.52%		1,325,251		17,800	5.39%
Agricultural		51,285		793	6.20%		53,867		753	5.61%
Commercial		120,081		1,537	5.13%		124,320		1,489	4.80%
Consumer		8,661		292	13.52%		9,760		297	12.21%
Mortgage warehouse lines		98,249		1,239	5.06%		89,633		1,126	5.04%
Other		3,426		51	5.97%		2,503		39	6.25%
Total loans and leases		1,741,573		24,010	5.53%		1,605,334		21,504	5.37%
Total interest earning assets (4)		2,335,421		27,788	4.82%		2,184,084		24,883	4.62%
Other earning assets		12,505					10,436
Non-earning assets		204,491					205,446
Total assets	$	2,552,417				$	2,399,966
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	120,018	$	88	0.29%	$	139,546	$	109	0.31%
NOW		437,040		134	0.12%		422,619		116	0.11%
Savings accounts		289,767		77	0.11%		301,528		80	0.11%
Money market		123,482		43	0.14%		153,143		37	0.10%
Certificates of deposit, under $100,000		90,258		289	1.28%		81,419		136	0.67%
Certificates of deposit, $100,000 or more		399,228		2,178	2.19%		299,359		1,116	1.50%
Brokered deposits		47,890		284	2.38%		—		—	—
Total interest bearing deposits		1,507,683		3,093	0.82%		1,397,614		1,594	0.46%
Borrowed funds:
Federal funds purchased		3		—	—		7		—	—
Repurchase agreements		21,698		21	0.39%		15,727		16	0.41%
Short term borrowings		845		5	2.37%		7,985		37	1.86%
TRUPS		34,830		470	5.41%		34,651		436	5.05%
Total borrowed funds		57,376		496	3.47%		58,370		489	3.36%
Total interest bearing liabilities		1,565,059		3,589	0.92%		1,455,984		2,083	0.57%
Demand deposits - noninterest bearing		655,136					656,486
Other liabilities		43,550					29,786
Shareholders' equity		288,672					257,710
Total liabilities and shareholders' equity	$	2,552,417				$	2,399,966
Interest income/interest earning assets					4.82%					4.62%
Interest expense/interest earning assets					0.61%					0.38%
Net interest income and margin(5)			$	24,199	4.21%			$	22,800	4.24%


Average Balances and Rates
(dollars in thousands, unaudited)
	For the six months ended						For the six months ended
	June 30, 2019						June 30, 2018
Assets	Average Balance (1)		Income/ Expense		Average Rate/Yield (2)	Average Balance (1)		Income/ Expense		Average Rate/Yield (2)
Investments:
Federal funds sold/due from time	$	15,152	$	188	2.50%	$	21,730	$	180	1.67%
Taxable		422,217		5,207	2.49%		424,760		4,638	2.20%
Non-taxable		145,962		2,117	3.70%		141,399		2,034	3.67%
Total investments		583,331		7,512	2.79%		587,889		6,852	2.54%

Loans and leases:(3)
Real estate		1,462,061		40,198	5.54%		1,290,119		34,444	5.38%
Agricultural		50,919		1,573	6.23%		52,009		1,411	5.47%
Commercial		121,332		3,116	5.18%		125,810		2,869	4.60%
Consumer		8,689		606	14.06%		10,125		590	11.75%
Mortgage warehouse lines		80,782		2,166	5.41%		86,508		2,103	4.90%
Other		3,268		100	6.17%		2,756		91	6.66%
Total loans and leases		1,727,051		47,759	5.58%		1,567,327		41,508	5.34%
Total interest earning assets (4)		2,310,382		55,271	4.87%		2,155,216		48,360	4.58%
Other earning assets		12,094					10,316
Non-earning assets		207,038					203,433
Total assets	$	2,529,514				$	2,368,965
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	109,692	$	160	0.29%	$	128,250	$	197	0.31%
NOW		437,124		260	0.12%		415,946		233	0.11%
Savings accounts		288,776		151	0.11%		297,644		155	0.11%
Money market		126,070		84	0.13%		158,951		79	0.10%
Certificates of deposit, under $100,000		90,301		567	1.27%		81,558		244	0.60%
Certificates of deposit, $100,000 or more		390,637		4,216	2.18%		296,704		2,004	1.36%
Brokered deposits		48,939		610	2.51%		—		—	—
Total interest bearing deposits		1,491,539		6,048	0.82%		1,379,053		2,912	0.43%
Borrowed funds:
Federal funds purchased		560		—	—		8		—	—
Repurchase agreements		19,500		39	0.40%		12,783		25	0.39%
Short term borrowings		4,463		58	2.62%		4,484		41	1.84%
TRUPS		34,806		954	5.53%		34,628		822	4.79%
Total borrowed funds		59,329		1,051	3.57%		51,903		888	3.45%
Total interest bearing liabilities		1,550,868		7,099	0.92%		1,430,956		3,800	0.54%
Demand deposits - noninterest bearing		654,029					650,041
Other liabilities		41,363					30,855
Shareholders' equity		283,254					257,113
Total liabilities and shareholders' equity	$	2,529,514				$	2,368,965
Interest income/interest earning assets					4.87%					4.58%
Interest expense/interest earning assets					0.62%					0.36%
Net interest income and margin(5)			$	48,172	4.25%			$	44,560	4.22%


	For the three months ended June 30,						For the six months ended June 30,
NONINTEREST INCOME:	2019		% of Total	2018		% of Total	2019		% of Total	2018		% of Total
Service charges on deposit accounts	$	3,151	53.81%	$	3,027	55.76%	$	6,094	51.81%	$	5,974	56.56%
Other service charges and fees		2,514	42.94%		2,225	40.98%		4,777	40.61%		4,375	41.43%
Net gains on sale of securities available-for-sale		22	0.38%		—	—		28	0.24%		—	—
Bank-owned life insurance		127	2.17%		423	7.79%		1,027	8.73%		626	5.93%
Other		41	0.70%		(246)	-4.53%		(164)	-1.39%		(412)	-3.92%
Total noninterest income	$	5,855	100.00%	$	5,429	100.00%	$	11,762	100.00%	$	10,563	100.00%
As a % of average interest-earning assets (1)			1.01%			1.00%			1.03%			0.99%

OTHER OPERATING EXPENSE:
Salaries and employee benefits	$	8,994	50.93%	$	8,997	52.02%	$	18,237	51.36%	$	18,180	51.68%
Occupancy costs
Furniture & equipment		692	3.92%		608	3.52%		1,215	3.42%		1,234	3.51%
Premises		1,758	9.96%		1,843	10.66%		3,596	10.13%		3,565	10.13%
Advertising and marketing costs		560	3.17%		689	3.98%		1,252	3.53%		1,310	3.72%
Data processing costs		1,255	7.11%		1,284	7.42%		2,507	7.06%		2,555	7.26%
Deposit services costs		2,124	12.03%		1,355	7.84%		3,893	10.96%		2,593	7.37%
Loan services costs
Loan processing		205	1.16%		245	1.42%		376	1.06%		566	1.61%
Foreclosed assets		41	0.23%		(574)	-3.32%		61	0.17%		(346)	-0.98%
Other operating costs
Telephone & data communications		317	1.80%		432	2.50%		624	1.76%		759	2.16%
Postage & mail		81	0.46%		235	1.36%		276	0.78%		511	1.45%
Other		459	2.60%		442	2.56%		803	2.26%		769	2.19%
Professional services costs
Legal & accounting		524	2.97%		533	3.08%		935	2.63%		965	2.74%
Acquisition costs		(1)	-0.01%		151	0.87%		22	0.06%		437	1.24%
Other professional service		437	2.48%		653	3.78%		1,374	3.87%		1,232	3.50%
Stationery & supply costs		101	0.57%		344	1.98%		156	0.44%		665	1.89%
Sundry & tellers		109	0.62%		57	0.33%		182	0.51%		186	0.53%
Total noninterest expense	$	17,656	100.00%	$	17,294	100.00%	$	35,509	100.00%	$	35,181	100.00%
As a % of average interest-earning assets (1)			3.03%			3.18%			3.10%			3.29%
Efficiency ratio (2)		58.17%			60.44%			58.46%			63.01%


	June 30, 2019		December 31, 2018		June 30, 2018
NON-ACCRUAL LOANS:
Real estate:
Other construction/land	$	43	$	82	$	66
1-4 family - closed-end		1,454		799		804
Equity lines		467		408		430
Commercial real estate - owner occupied		1,472		605		257
Commercial real estate - non-owner occupied		—		49		85
Farmland		25		1,642		32
TOTAL REAL ESTATE		3,461		3,585		1,674
Agriculture		—		—		—
Commercial and industrial		569		1,425		1,333
Consumer loans		90		146		86
TOTAL NONPERFORMING LOANS		4,120		5,156		3,093

Foreclosed assets		770		1,082		2,112
Total nonperforming assets	$	4,890	$	6,238	$	5,205
Performing TDRs (1)	$	9,246	$	10,920	$	11,981
Nonperforming loans as a % of total gross loans and leases		0.23%		0.30%		0.19%
Nonperforming assets as a % of total gross loans and leases and foreclosed assets		0.27%		0.36%		0.32%


	For the three months		For the three months		For the six months		For the six months		For the year
	ended June 30,		ended June 30,		ended June 30,		ended June 30,		ended December 31,
Balances:	2019		2018		2019		2018		2018
Average gross loans and leases outstanding during period (1)	$	1,741,573	$	1,605,334	$	1,727,051	$	1,567,327	$	1,625,732
Gross loans and leases outstanding at end of period	$	1,777,899	$	1,624,344	$	1,777,899	$	1,624,344	$	1,731,928

Allowance for Loan and Lease Losses:
Balance at beginning of period	$	9,438	$	8,991	$	9,750	$	9,043	$	9,043
Provision charged to expense		400		300		700		500		4,350
Charge-offs
Real estate
1-4 family residential construction		—		—		—		—		—
Other construction/land		—		—		—		—		4
1-4 family - closed-end		—		—		—		5		5
Equity lines		—		104		—		125		125
Multi-family residential		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		—		—
Commercial real estate- non-owner occupied		—		—		—		—		2,341
Farmland		—		—		—		—		—
TOTAL REAL ESTATE		—		104		—		130		2,475
Agricultural		—		—		—		—		—
Commercial and industrial		254		68		832		101		608
Consumer loans		562		523		1,114		1,088		2,225
Total	$	816	$	695	$	1,946	$	1,319	$	5,308
Recoveries
Real estate
1-4 family residential construction		—		—		—		—		—
Other construction/land		—		—		—		—		—
1-4 family - closed-end		4		3		9		5		10
Equity lines		2		19		23		82		134
Multi-family residential		—		—		—		—		—
Commercial real estate- owner occupied		—		230		—		229		230
Commercial real estate- non-owner occupied		147		—		297		—		—
Farmland		—		—		—		—		—
TOTAL REAL ESTATE		153		252		329		316		374
Agricultural		—		—		—		—		22
Commercial and industrial		431		17		472		45		148
Consumer loans		277		271		578		551		1,121
Total	$	861	$	540	$	1,379	$	912	$	1,665
Net loan charge offs (recoveries)	$	(45)	$	155	$	567	$	407	$	3,643
Balance at end of period	$	9,883	$	9,136	$	9,883	$	9,136	$	9,750

RATIOS
Net charge-offs to average loans and leases (annualized)		-0.01%		0.04%		0.07%		0.05%		0.22%
Allowance for loan losses to gross loans and leases at end of period		0.56%		0.56%		0.56%		0.56%		0.56%
Allowance for loan losses to nonperforming loans		239.88%		295.38%		239.88%		295.38%		189.10%
Net loan charge-offs to allowance for loan losses at end of period		-0.46%		1.70%		5.74%		4.45%		37.36%
Net loan charge-offs to provision for loan losses		-11.25%		51.67%		81.00%		81.40%		83.75%


	Immediate Change in Rate

	-300 bp	-200 bp	-100 bp	+100 bp	+200 bp	+300 bp	+400 bp
Change in Net Int. Inc. (in $000’s)	-$15,810	-$8,442	-$3,729	+$1,202	+$1,847	+$2,481	+$2,573
% Change	-16.39%	-8.75%	-3.86%	+1.25%	+1.91%	+2.57%	+2.67%


	June 30,		December 31,		Minimum Requirement
	2019		2018		to be Well Capitalized
Sierra Bancorp
Common Equity Tier 1 Capital to Risk-Weighted Assets	12.95	%	12.61	%	6.50	%
Tier 1 Capital to Risk-weighted Assets	14.68	%	14.38	%	8.00	%
Total Capital to Risk-weighted Assets	15.19	%	14.89	%	10.00	%
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")	11.73	%	11.49	%	5.00	%

Bank of the Sierra
Common Equity Tier 1 Capital to Risk-Weighted Assets	14.57	%	14.25	%	6.50	%
Tier 1 Capital to Risk-weighted Assets	14.57	%	14.25	%	8.00	%
Total Capital to Risk-weighted Assets	15.08	%	14.77	%	10.00	%
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")	11.64	%	11.39	%	5.00	%