SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(dollars in thousands, unaudited)


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Net income	$	9,204	$	11,708	$	16,611	$	22,786
Other comprehensive (loss) income, before tax:
Unrealized (loss) gains on securities:
Unrealized holding (loss) gain arising during period		(46,476)		1,489		(86,438)		(4,270)
Less: reclassification adjustment for gains included in net income ⁽¹⁾		—		—		(1,032)		—
Other comprehensive (loss) gain, before tax		(46,476)		1,489		(87,470)		(4,270)
Income tax benefit (income) related to items of other comprehensive (loss) income, net of tax		13,740		(441)		25,859		1,262
Other comprehensive (loss) income, before tax:		(32,736)		1,048		(61,611)		(3,008)
Comprehensive (loss) income	$	(23,532)	$	12,756	$	(45,000)	$	19,778

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Net income

$
5,742

$
3,929

$
15,496

$
12,050

Other comprehensive income, before tax:

Unrealized gains (losses) on securities:

Unrealized holding gain (loss) arising during period

(713
)

(674
)

5,065

3,813

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

(918
)

(90
)

(984
)

(212
)
Other comprehensive (loss) income, before tax

(1,631
)

(764
)

4,081

3,601

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

686

362

(1,716
)

(1,452
)
Other comprehensive income (loss) gain

(945
)

(402
)

2,365

2,149

Comprehensive income

$
4,797

$
3,527

$
17,861

$
14,199

⁽¹⁾

Amounts are included in net gains on investment securities available-for-sale on the Consolidated Statements of Income in ~~non-interest revenue.~~noninterest income. There was 0 income tax expense associated with the reclassification adjustment for either of the three months ended June 30, 2022 and 2021. Income tax expense associated with the reclassification adjustment for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016 was $386~~2021 were $305 thousand and ~~$38 thousand~~$0, respectively. ~~Income tax expense associated with the reclassification adjustment for the nine months ended September 30, 2017 and 2016 was $414 thousand and $89 thousand respectively.~~

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

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


								Accumulated
				Additional				Other
	Common Stock			Paid In		Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balance, March 31, 2021	15,410,763	$	113,453	$	3,961	$	216,218	$	14,349	$	347,981
Net income	—		—		—		11,708		—		11,708
Other comprehensive income, net of tax	—		—		—		—		1,048		1,048
Stock compensation costs	—		—		229		—		—		229
Cash dividends - $0.21 per share	—		—		—		(3,237)		—		(3,237)
Balance, June 30, 2021	15,410,763	$	113,453	$	4,190	$	224,689	$	15,397	$	357,729

Balance, March 31, 2022	15,086,032	$	111,673	$	4,281	$	227,445	$	(17,708)	$	325,691
Net income	—		—		—		9,204		—		9,204
Other comprehensive loss, net of tax	—		—		—		—		(32,736)		(32,736)
Stock options exercised, net of shares surrendered for cashless exercises	5,200		54		(1)		—		—		53
Restricted stock forfeited / cancelled	(440)		—		—		—		—		—
Stock based compensation - stock options	—		—		18		—		—		18
Stock based compensation - restricted stock	—		—		287		—		—		287
Cash dividends - $0.23 per share	—		—		—		(3,470)		—		(3,470)
Balance, June 30, 2022	15,090,792	$	111,727	$	4,585	$	233,179	$	(50,444)	$	299,047

Nine months ended September 30,

2017

2016

Cash flows from operating activities:

Net income

$
15,496

$
12,050

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

Gain on sales of securities

(984
)

(212
)
   Gain on sales of loans

(3
)

—

   Loss on disposal of fixed assets

66

—

   (Gain) loss on sale on foreclosed assets

(12
)

3

Writedowns on foreclosed assets

75

275

Share-based compensation expense

459

180

Provision for loan losses

300

—

Depreciation and amortization

2,177

1,880

Net amortization on securities premiums and discounts

5,083

5,208

Amortization/(accretion) of discounts for loans acquired and net deferred loan fees

276

(303
)
(Increase) decrease in cash surrender value of life insurance policies

(1,188
)

249

Amortization of core deposit intangible

320

101

Decrease in interest receivable and other assets

4,004

11,830

Increase in other liabilities

(12
)

(8,995
)
   Deferred income tax (benefit) provision

(336
)

1,998

Net cash provided by operating activities

25,721

24,264

Cash flows from investing activities:

Maturities of securities available for sale

1,165

1,195

Proceeds from sales/calls of securities available for sale

22,325

23,753

Purchases of securities available for sale

(151,711
)

(103,334
)
Principal pay downs on securities available for sale

75,086

72,463

Net purchases of FHLB stock

(235
)

(960
)
Net increase in loans receivable, net

(50,976
)

(31,086
)
Purchases of premises and equipment, net

(1,589
)

(4,016
)
Proceeds from sale premises and equipment

—

1,204

Proceeds from sales of foreclosed assets

99

982

Purchase of company owned life insurance

(376
)

(300
)
Net increase in partnership investment

(12,132
)

(8,338
)
Net cash from bank acquisition

—

15,502

Net cash used in investing activities

(118,344
)

(32,935
)

Cash flows from financing activities:

   Increase in deposits

84,108

40,165

   Decrease in borrowed funds

(54,500
)

(8,200
)
Increase in Fed funds purchased

1,600

2,500

   Increase (decrease) in repurchase agreements

585

(2,635
)
Cash dividends paid

(5,804
)

(4,851
)
Repurchases of common stock

—

(1,723
)
Stock options exercised

799

234

          Net cash provided by financing activities

26,788

25,490

(Decrease) increase in cash and due from banks

(65,835
)

16,819

Cash and cash equivalents

Beginning of period

120,442

48,623

End of period

$
54,607

$
65,442

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

Table of Contents~~Sierra Bancorp~~

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

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


								Accumulated
				Additional				Other
	Common Stock			Paid In		Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balance, December 31, 2020	15,388,423	$	113,384	$	3,736	$	208,371	$	18,405	$	343,896
Net income	—		—		—		22,786		—		22,786
Other comprehensive loss, net of tax	—		—		—		—		(3,008)		(3,008)
Exercise of stock options	4,160		69		(15)		—		—		54
Stock based compensation expense	18,180		—		469		—		—		469
Cash dividends - $0.42 per share	—		—		—		(6,468)		—		(6,468)
Balance, June 30, 2021	15,410,763	$	113,453	$	4,190	$	224,689	$	15,397	$	357,729

Balance, December 31, 2021	15,270,010	$	113,007	$	3,910	$	234,410	$	11,167	$	362,494
Cumulative change in accounting principle	—		—		—		(7,315)		—		(7,315)
Net income	—		—		—		16,611		—		16,611
Other comprehensive loss, net of tax	—		—		—		—		(61,611)		(61,611)
Stock options exercised, net of shares surrendered for cashless exercises	5,200		54		(1)		—		—		53
Restricted stock surrendered due to employee tax liability	(1,196)		(9)		—		(23)		—		(32)
Restricted stock forfeited / cancelled	(660)		—		—		—		—		—
Stock based compensation - stock options	—		—		48		—		—		48
Stock based compensation - restricted stock	—		—		628		—		—		628
Stock repurchase	(182,562)		(1,325)		—		(3,526)		—		(4,851)
Cash dividends - $0.46 per share	—		—		—		(6,978)		—		(6,978)
Balance, June 30, 2022	15,090,792	$	111,727	$	4,585	$	233,179	$	(50,444)	$	299,047

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, 2022 AND 2021

(dollars in thousands, unaudited)


		Six months ended June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	16,611	$	22,786
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of securities		(1,032)		—
Loss on disposal of fixed assets		6		4
Gain on sale on foreclosed assets		(5)		(116)
Writedowns on foreclosed assets		91		176
Stock based compensation expense		676		469
Provision (benefit) for credit losses on loans and leases		3,148		(1,850)
Provision for credit losses on held-to-maturity securities		18		—
Depreciation and amortization		1,284		1,924
Net amortization on securities premiums and discounts		2,271		2,386
Amortization (accretion) of premiums (discounts) for loans acquired		(73)		(253)
Decrease (increase) in cash surrender value of life insurance policies		1,228		(1,397)
Amortization of core deposit intangible		505		527
(Increase) decrease in interest receivable and other assets		(16,029)		602
Increase (decrease) in other liabilities		7,511		(1,310)
Deferred income tax benefit		(2,414)		(2,057)
Decrease (increase) in value of restricted bank equity securities		332		(857)
Net amortization of partnership investment		225		267
Net cash provided by operating activities		14,353		21,301
Cash flows from investing activities:
Maturities and calls of securities available for sale		4,123		4,000
Proceeds from sales of securities available for sale		26,408		—
Purchases of securities available for sale		(215,269)		(130,696)
Principal pay downs on securities available for sale		43,748		56,540
Net purchases of FHLB stock		(336)		(1,666)
Loan originations and payments, net		(37,703)		319,697
Purchases of premises and equipment		(566)		(283)
Proceeds from sales of foreclosed assets		5		229
Purchase of bank-owned life insurance		(14)		(28)
Liquidation of bank-owned life insurance		11		—
Proceeds from BOLI death benefit		859		—
Amortization of debt issuance costs		32		—
Net cash (used in) provided by investing activities		(178,702)		247,793
Cash flows from financing activities:
Increase in deposits		69,427		151,308
Decrease in borrowed funds		—		(142,900)
Increase in customer repurchase agreements		11,077		31,397
Cash dividends paid		(6,978)		(6,468)
Repurchases of common stock		(4,883)		—
Stock options exercised		53		54
Net cash provided by financing activities		68,696		33,391

(Decrease) increase in cash and cash equivalents		(95,653)		302,485

Cash and cash equivalents
Beginning of period		257,528		71,417
End of period	$	161,875	$	373,902

Supplemental disclosure of cash flow information:
Interest paid	$	3,459	$	1,800
Income taxes paid	$	6,005	$	3,803
Supplemental noncash disclosures:
Real estate acquired through foreclosure	$	—	$	93

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

Table of Contents

SIERRA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2017~~2022

(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 ~~September~~June 30, ~~2017,~~2022, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”). 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 ~~full~~wide range of retail and commercial banking services invia 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 of 2017, subsequent to the reporting date of this 10-Q. Certain branching activity also occurred after the reporting date, namely the consolidation of our Oxnard loan production office into the Ventura branch (a former Ojai Community Bank location), the acquisition of the Woodlake branch from Citizens Business Bank, and the closure of our Fresno Herndon branch. We plan to open a new branch on Palm Avenue in Fresno in 2018, in close proximity to the former Herndon Branch but with easier access and superior visibility. Additional branching activity that has taken place in 2017 includes the opening of a de novo branch in Pismo Beach, California in the third quarter, preceded by the opening of a de novo branch on California Avenue in Bakersfield and the relocation of our Paso Robles branch earlier in the year. Counting our latest acquisitions and branching activity, as2017. As of the filing date of this report the Bank operates ~~39 full service~~35 full-service branches and an online branch, and ~~we maintain~~maintains ATMs at all but one of our branch locations ~~and~~as well as seven non-branch locations. ~~Details on our most recent acquisitions are provided in Note 13 to the financial statements, Recent Developments. In addition to our stand-alone offices~~Moreover, the Bank has specialized lending units which ~~include a~~focus on agricultural borrowers, commercial real estate, ~~industries center, an~~and mortgage warehouse lending. In addition, in February 2020 the bank opened a loan production office which is currently located in Roseville, CA. To support organic growth in the agricultural ~~credit center, and an SBA~~ lending ~~unit. We were close to $2.1 billion~~sector the bank also opened a loan production office in Templeton, CA in April 2022. The Company had total assets as of ~~September~~$3.4 billion at June 30, ~~2017,~~2022, and for ~~the past several~~a number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley. ~~Total assets surpassed $2.3 billion subsequent to our recent acquisitions.~~ The Bank’s deposit accounts, which totaled ~~almost $1.8~~$2.9 billion at ~~September~~June 30, ~~2017,~~2022, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts. ~~Immediately after the acquisitions, total deposits exceeded $2.0 billion.~~

Note 2 – Basis of Presentation

The accompanying interim unaudited consolidated financial statements have been prepared in a condensed format ~~and therefore~~as allowed under U.S. generally accepted accounting principles (“GAAP”). Therefore these financial statements do not include all of the information and footnotes required ~~by U.S. generally accepted accounting principles (“GAAP”)~~ for complete, audited financial ~~statements.~~statements as presented in the Company’s Annual Report on Form 10-K. 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. 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 ~~2016~~2021 have been reclassified to be consistent with the reporting for ~~2017.~~2022. The interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2021, as filed with the Securities and Exchange Commission (the “SEC”).

Note 3 – Current Accounting Developments

~~In May 2014 the FASB issued Accounting Standards Update (“ASU”) 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~. This ASU is the result of a joint project initiated by the FASB and the International Accounting Standards Board (IASB) to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would: (1) remove

inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15, 2016. The Company plans to adopt ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach. Since the guidance does not apply to revenue associated with financial instruments such as loans and investments, which are accounted for under other provisions of GAAP, we do not expect it to impact interest income, our largest component of income. The Company is currently performing an overall assessment of revenue streams potentially affected by the ASU, including certain deposit related fees and interchange fees, to determine the impact this guidance will have on our consolidated financial statements.

~~In January 2016 the FASB issued ASU 2016-01,~~ ~~Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities~~. This guidance primarily affects the accounting for equity securities with readily determinable fair values, by requiring that the changes in fair value for such securities will be reflected in earnings rather than in other comprehensive income. The accounting for other financial instruments such as loans, debt securities, and financial liabilities is largely unchanged. ASU 2016-01 also changes the presentation and disclosure requirements for financial instruments, including a requirement that public business entities use exit pricing when estimating fair values for financial instruments measured at amortized cost for disclosure purposes. ASU 2016-01 is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Based on Management’s evaluation of the provisions of ASU 2016-01 and the fact that we had no equity positions with readily determinable market values remaining at September 30, 2017, we do not anticipate any impact on our consolidated financial statements upon adoption of ASU 2016-01.

~~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 and an administrative office building, which are considered operating leases and are not currently reflected in our financial statements. We expect that these lease agreements will be recognized on our consolidated statements of condition as right-of-use assets and corresponding lease liabilities subsequent to implementing ASU 2016-02, but we are still evaluating the extent to which this will impact our consolidated financial statements.

~~In March 2016 the FASB issued ASU 2016-09,~~ ~~Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~, as part of its simplification initiative. ASU 2016-09 became effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Accordingly, the Company adopted ASU 2016-09 effective January 1, 2017. Prior guidance dictated that as they relate to share-based payments, tax benefits in excess of compensation costs (“windfalls”) were to be recorded in equity, and tax deficiencies (“shortfalls”) were to be recorded in equity to the extent of previous windfalls and then to the income statement. ASU 2016-09 reduced some of the administrative complexities by eliminating the need to track a windfall “pool,” but as we have already experienced, it also increases the volatility of income tax expense. ASU 2016-09 also removed the requirement to delay recognition of a windfall tax benefit until such time as it reduces current taxes payable. Under the new guidance, the benefit is recorded when it arises, subject to normal valuation allowance considerations. This change was applied by us on a modified retrospective basis, as required, with a cumulative-effect adjustment to opening retained earnings. Furthermore, all tax-related cash flows resulting from share-based payments are now reported as operating activities on the statement of cash flows, a change from the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. However, cash paid by an employer when directly withholding shares for tax withholding purposes is classified as a financing activity. Under the new guidance, entities were permitted to make an accounting policy election for the impact of forfeitures on expense recognition for share-based payment awards. Forfeitures can be estimated in advance, as required previously, or recognized as they occur. Estimates are still required in certain

circumstances, such as at the time of modification of an award or issuance of a replacement award in a business combination. If elected, the change to recognize forfeitures when they occur would have been adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to opening retained earnings. We did not elect to recognize forfeitures as they occur, and continue to estimate potential forfeitures in advance.

In September 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which eliminates the probable initial recognition threshold for credit losses in current U.S. GAAP, and instead requires an organization to record a current estimate of all expected credit losses over

Table of Contents

the contractual term for financial assets carried at amortized ~~cost. This is commonly referred~~cost (generally loans and held-to-maturity investment securities) in addition to ascertain off balance-sheet credit exposure. Under the current expected credit losses (“CECL”) ~~methodology. Expected~~methodology expected credit losses for financial assets ~~held at~~are estimated over the ~~reporting date will be measured based on~~contractual life of the financial asset, adjusted for expected prepayments, considering historical experience, current conditions, and reasonable and supportable forecasts. ~~Another change from existing U.S. GAAP involves~~Additionally, under CECL 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 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~~is addressed through an allowance for credit losses ~~rather than~~which is a change from legacy GAAP which previously required the ~~current practice~~direct write-down of ~~writing down~~ securities ~~for~~through the other-than-temporary impairment. ASU 2016-13 will also require the enhancement of financial statement disclosures regarding estimates used in calculating credit losses. ASU 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 effective for theimpairment approach. The Companyimplemented CECL on January 1, ~~2020, although early application is permitted for 2019. On~~2022, using the ~~effective date, institutions will apply the new accounting standard as follows: for~~modified retrospective approach to estimate lifetime expected losses on financial assets ~~carried~~measured at amortized cost ~~a cumulative-effect adjustment will be recognized on the~~in addition to certain off balance sheet ~~for any change~~credit exposures. The January 1, 2022, increase in the ~~related~~Company’s allowance for ~~loan~~credit losses, of $9.5 million on loans and ~~lease losses generated by~~leases and $0.9 million in off balance sheet credit exposures, net of the impact of deferred taxes, was reflected in a transition adjustment of $7.3 million to retained earnings. There was 0 cumulative effect adjustment related to our available-for-sale investment portfolio upon adoption and the company had no securities designated as held-to-maturity as of January 1, 2022. Results for reporting periods beginning after December 31, 2021, are presented under CECL whereas prior comparative periods are presented under legacy GAAP.

The following table illustrates the impact of the adoption of CECL, and the ~~new standard; financial assets classified as purchased credit impaired assets prior~~transition away from the incurred loss method, on January 1, 2022. The impact to the ~~effective date will be reclassified~~Allowance for Credit losses (“ACL”) on the Loan Portfolio is broken out at the class level (dollars in thousands, unaudited):


Transition Impact on Allowance for Credit Losses
(dollars in thousands, unaudited)
	January 1, 2022
	Reserves Under Incurred Loss		Reserves Under CECL		Transition Impact Gross		Impact of Deferred Taxes		Impact to Retained Earnings
Real estate:
1-4 family residential construction	$	135	$	28	$	(107)	$	32	$	(75)
Other construction/land		228		254		26		(8)		18
1-4 family - closed-end		1,618		2,310		692		(205)		487
Equity lines		290		210		(80)		24		(56)
Multi-family residential		274		574		300		(89)		211
Commercial real estate - owner occupied		2,217		3,444		1,227		(363)		864
Commercial real estate - non-owner occupied		6,199		14,380		8,181		(2,418)		5,763
Farmland		737		340		(397)		117		(280)
Total real estate		11,698		21,540		9,842		(2,910)		6,932
Agricultural		465		382		(83)		25		(58)
Commercial and industrial		1,060		1,418		358		(106)		252
Mortgage warehouse lines		512		91		(421)		124		(297)
Consumer loans		521		279		(242)		72		(170)
Total allowance for credit losses - loans	$	14,256	$	23,710	$	9,454	$	(2,795)	$	6,659

Allowance for credit losses - unfunded loan commitments	$	203		1,134		931		(275)		656

The Company currently categorizes all of its loans and leases as ~~purchased credit deteriorated assets as of~~held-for-investment and following CECL implementation, reports loans and leases on 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 commenced its transition efforts by establishing an implementation team,~~Company’s amortized cost basis is comprised of the principal balance outstanding, net of remaining purchase discount or premium and any deferred fees or costs. Notably, the Company elected the practical expedient available under CECL to exclude accrued interest receivable from the amortized cost basis of all categorizations of loans and investment securities, and resultingly did not estimate reserves on accrued interest receivable balances, as any past due interest income is reversed on a timely basis. Accrued interest receivable continues to be included in other assets on the Company’s ~~executive officers~~balance sheet and ~~certain other members~~as of ~~our credit administration~~June 30, 2022, measured at $6.0 million, $0.8 million and ~~finance departments~~$5.4 million for available-for-sale securities, held-to-maturity securities and ~~chaired by our Chief Credit Officer. Furthermore, after extensive discussion~~

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loans, respectively. During 2022 0 accrued interest receivable on loans or available for sale investment securities was reversed against interest income.

Similar to practice under legacy GAAP, the Company generally continues to place loans and due diligence, we engaged an external vendor to assist in our calculation of potential required reserves utilizing the CECL methodology and help validate our current reserving methodology. A preliminary evaluation indicatesleases on nonaccrual status when management has determined that the ~~provisions~~full repayment of ~~ASU 2016-13 will likely have~~principal and collection of contractually agreed upon interest is unlikely or when the loan in question has become delinquent more than 90 days. The Company may decide that it is appropriate to continue to accrue interest on certain loans and leases more than 90 days delinquent if they are well-secured by collateral and collection is in process. When a ~~material impact~~loan is placed on ~~our consolidated financial statements, particularly~~nonaccrual status, any accrued but uncollected interest for the level of our allowance for credit losses and shareholders’ equity. While the potential extent of that impact has not yet been definitively determined, initial estimates indicate that our allowance for loan and lease ~~losses could increase~~is reversed out of interest income in the period in which the loan’s status changed. For loans and leases with an interest reserve, i.e., where loan and lease proceeds are advanced to the borrower to make interest payments, all interest recognized from the inception of the loan and lease is reversed when the loan and lease is placed on non-accrual. Once a loan and lease is on non-accrual status subsequent payments received from the customer are applied to principal, and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as ~~much as two times~~contractually required. Generally, loans and leases are not restored to accrual status until the obligation is brought current ~~levels if utilizing~~and has performed in accordance with the contractual terms for a ~~discounted cash flow methodology with forecasting.~~reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

~~In January 2017~~Similar to practice under legacy GAAP, the ~~FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying~~ACL on 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~~loan portfolio is a ~~business usually has outputs, outputs are~~valuation allowance deducted from the recorded balance in loans and leases. However, under CECL the ACL represents principal which is 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 transactionsexpected 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 screen 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. The amendments in this update should be applied prospectively on or after the effective date. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.

~~In January 2017 the FASB issued ASU 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 effective for public business entities for fiscal years beginning after December 15, 2019. 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.

~~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 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 yieldcollected over the contractual life of the ~~instrument,~~loans and ~~any unamortized premium~~leases, adjusted for expected prepayment, whereas under legacy GAAP the allowance represented only losses already incurred as of the balance sheet date. The ACL is ~~recorded~~increased by a provision for credit losses charged to expense, and by principal recovered on charged-off balances. It is reduced by principal charge-offs. The amount of the allowance is based on management’s evaluation of the collectability of the loan and lease portfolio, using information from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Adjustments are also made for changes in risk profile, credit concentrations, historical trends, and other economic conditions.

The ACL for loans and leases is separated between a collective reserve evaluation, for loans where similar risk characteristics exist and an individual reserve evaluation for loans without similar risk characteristics. The collective evaluation of loans is performed at the portfolio segment level, using call code as ~~a loss~~the primary segmentation key but also considering similarity in ~~earnings upon the debtor’s exercise of a call provision. Under ASU 2017-08, because the premium will be amortized~~quantitative reserve methodology. The Company’s ACL is categorized according to the ~~earliest call date, entities will~~following portfolio segments: 1-4 Family Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse, and Consumer. Management utilizes a discounted cash flow methodology to estimate the quantitative portion of collectively evaluated reserves for the 1-4 Family Real Estate, Commercial Real Estate, Commercial & Industrial and Mortgage Warehouse portfolio segments. Management utilizes a Remaining Life Quantitative Reserve Methodology for the Farmland & Agricultural Production, and Consumer portfolio segments. Within the portfolio segments utilizing the DCF quantitative reserve methodology, management has made the election to adjust the effective interest rate to consider the impact of expected prepayments.

Loans and leases where similar risk characteristics exist are evaluated for the ACL in the collective reserve evaluation. The Company’s policy is that loans designated as nonaccrual no longer ~~recognize a loss in earnings~~share risk characteristics similar to other loans and leases evaluated collectively and as such, all nonaccrual loans and leases are individually evaluated for reserves. As of June 30, 2022 the Bank’s nonaccrual loans and leases comprised the entire population of loans and leases individually evaluated. The Company’s policy is that nonaccrual loans also represent the subset of loans and leases where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if ~~a debt security~~the nonaccrual loan and lease should be categorized as collateral dependent. It is ~~called prior~~the Company’s policy that the only loans and leases where the credit quality has deteriorated to the ~~contractual maturity date.~~ point where foreclosure is probable are the Company’s nonaccrual loans and leases.

The ~~amendments do not require an accounting change for securities held at a discount; discounts will continue to be amortized~~implementation of CECL also impacted the Company’s ACL on unfunded loan commitments, as ~~an adjustment to yield~~this ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded

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commitment. The funding rate represents management’s estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while any related provision expense has been moved to provision for credit loss expense from its prior presentation in noninterest expense. Prior period expense has been reclassified for comparative purposes.

For available-for-sale debt 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. Early adoption is permitted, including adoptionsecurities in an ~~interim period. If~~unrealized loss position for which management has an ~~entity early adopts~~intent to sell the security or considers it more likely-than-not that the security in question will be sold prior to a recovery of its amortized cost basis, the security will be written down to fair value through a direct charge to income. For the remainder of available sale debt securities in an ~~interim period, any adjustments must be reflected as~~unrealized loss position, which don’t meet the previously outlined criteria, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in rating by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation indicates that a credit loss exists then a present value of the ~~beginning~~expected cash flows is calculated and compared to the amortized cost basis of the ~~fiscal year~~security in question and to the degree that ~~includes that interim period. To apply ASU 2017-08, entities must use a modified retrospective approach,~~the amortized cost basis exceeds the present value an allowance for credit loss (“ACL”) is established, with the ~~cumulative-effect adjustment recognized to retained earnings at~~caveat that the ~~beginning~~maximum amount of the ~~period of adoption. Entities are also required to provide disclosures about a change in accounting principle in~~reserve on any individual security is the period of adoption. The Company has evaluated the potential impact of this guidance, and does not expect the adoption of ASU 2017-08 to have a material impact on our financial statements or operations.

~~In May 2017 the FASB issued ASU 2017-09,~~ ~~Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting~~. This update was issued to provide clarity, reduce diversity in practice, and lower cost and complexity when applying the guidance in Topic 718. Under the updated guidance, an entity will be expected to account for the effects of an equity award modification unless all the following are met: 1)difference between the fair value and amortized cost balance of the ~~modified award~~security in question. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

On April 1, 2022 the ~~same as the fair value~~Company transferred $162.1 million of Agency, Mortgaged-Backed and Municipal securities from available-for-sale to held-to maturity. Because of the ~~original award immediately before the original award is modified; 2) the vesting conditions~~implicit and explicit guarantees of the ~~modified award are~~Federal Government on the ~~same as~~Agency and Mortgage-Backed securities there is no expectation of future losses on any of these securities. The Bank’s municipal bonds moved to the ~~vesting conditions~~held-to-maturity designation all have credit ratings considered investment grade or equivalent. A discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the ~~original award immediately before the original award is modified; 3) the classification~~held-to-maturity designation and a reserve of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 continue$0.02 million was calculated and charged to apply. ASU 2017-09 is effective for public business entities, including the Company, for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period for public business entities for reporting periods for which financial statements have not yet been issued. Since the Company has not modified equity awards in the past and does not expect to do so in the future, we do not anticipate any impact on our financial statements or operations from the adoption of ASU 2017-09.provision expense.

Note 4 ~~– Supplemental Disclosure of Cash Flow Information~~

During the nine months ended September 30, 2017 and 2016, cash paid for interest due on interest-bearing liabilities was $3.645 million and $2.362 million, respectively. There was $6.497 million in cash paid for income taxes during the nine months ended September 30, 2017, and $2.900 million for the nine months ended September 30, 2016. Assets totaling $648,000 and $847,000 were acquired in settlement of loans for the nine months ended September 30, 2017 and September 30, 2016, respectively. We received $99,000 in cash from the sale of foreclosed assets during the first nine months of 2017 relative to $837,000 during the first nine months of 2016, which represents sales proceeds less loans (if any) extended to finance such sales.

~~Note 5~~ – 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 ~~492,240~~172,489 shares that were granted under the 2007 Plan were still outstanding as of ~~September~~June 30, ~~2017,~~2022 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.~~participants. The total number of shares of the Company’s authorized but unissued stock reserved for issuance pursuant to

awards under the 2017 Plan iswas initially 850,000 ~~shares; no awards have yet been~~shares, and the number remaining available for grant as of June 30, 2022 was 418,912. Options to purchase 382,311 shares granted under the 2017 ~~Plan.~~Plan were outstanding as of June 30, 2022. The potential dilutive impact of unexercised stock options ~~outstanding~~ is discussed below in Note 6,5, Earnings per Share.

Pursuant to FASB’s standards on stock compensation, the value of each stock option ~~granted~~and restricted stock award is reflected in our income ~~statement~~statement as employee compensation or directors’ expense ~~by expensing its fair value as of the grant date in the case of immediately vested options, or~~ by amortizing its grant date fair value over the vesting period ~~for options with graded vesting.~~of the option or award. The Company ~~is utilizing the~~utilizes a Black-Scholes model to ~~value~~determine grant date fair values for options, while the market price of the Company’s common stock ~~options, and~~at the ~~“multiple option” approach~~date of grant is used ~~to allocate the resulting valuation to actual expense. Under the multiple option approach an employee’s options~~ for ~~each vesting period~~restricted stock awards. Forfeitures are ~~separately valued and amortized, which appears to be the preferred method~~reflected in compensation costs as they occur for ~~option grants with graded vesting.~~both types of awards. A pre-tax charge of ~~$18,000~~$0.3 million was reflected in the Company’s income statement during the ~~third~~second quarter of ~~2017~~2022 and ~~$11,000~~$0.2 million was charged during the ~~third~~second quarter of ~~2016,~~2021, as expense related to stock ~~options.~~options and restricted stock awards. For the first ~~three quarters,~~half, the charges totaled ~~$460,000~~$0.7 million in 2022 and $0.5 million in 2021.

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Restricted Stock Grants

The Company’s Restricted Stock Awards are awards of time-vested, non-transferrable shares of common stock and are available to be granted to the Company’s employees and directors. The vesting period of Restricted Stock Awards is determined at the time the awards are issued, and different awards may have different vesting terms; provided, however, that no installment of any Restricted Stock Award shall become vested less than one year from the grant date. Restricted Stock Awards are valued utilizing the fair value of the Company’s stock at the grant date. There were no shares granted to employees and directors of the Company during the first six months of 2022. These awards are expensed on a straight-line basis over the vesting period. As of June 30, 2022, there was $2.3 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan. That cost is expected to be amortized over a weighted average period of 2.8 years.

The Company’s time-vested award activity for the six months ended June 30, 2022 and ~~$180,000~~2021 is summarized below (unaudited):


	Six months ended June 30,
	2022			2021
	Shares		Weighted Average Grant-Date Fair Value	Shares		Weighted Average Grant-Date Fair Value
Unvested shares, January 1,	161,217	$	21.72	148,885	$	18.00
Granted	—		—	18,180		25.30
Vested	(17,194)		20.35	—		—
Forfeited	(660)		27.16	—		—
Unvested shares, June 30,	143,363	$	21.84	167,065	$	18.79

Stock Option Grants

The Company has issued equity instruments in ~~2016.~~the form of Incentive Stock Options and Nonqualified Stock Options to certain officers and directors and may continue to do so under the 2017 Plan. The exercise price of each stock option is determined at the time of the grant and may be no less than 100% of the fair market value of such stock at the time the option is granted.

The Company’s stock option activity during the six months ended June 30, 2022 and 2021 are summarized below (dollars in thousands, except per share data, unaudited):


	Six months ended June 30,
	2022						2021
	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value⁽¹⁾		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value⁽¹⁾
Outstanding at January 1,	415,870	$	24.15		$	1,338	495,489	$	23.67		$	1,340
Granted	—	$	—		$	—	—	$	—		$	—
Exercised	(200)	$	10.21		$	3	(4,160)	$	12.95		$	50
Forfeited/Expired	(3,681)	$	27.27		$	—	(21,719)	$	27.51		$	1
Outstanding at June 30,	411,989	$	24.13	5.41	$	733	469,610	$	23.59	6.20	$	1,500
Exercisable at June 30,	370,589	$	23.79	5.19	$	733	389,010	$	22.89	5.80	$	1,500

(1)

The aggregate intrinsic value of stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2022. This amount changes based on changes in the market value of the Company's stock.

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Note 65 – 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.~~period, excluding unvested restricted stock awards. There were ~~13,839,111~~14,931,701 weighted average shares outstanding during the ~~third~~second quarter of ~~2017,~~2022 and ~~13,790,107~~15,243,698 during the ~~third~~second quarter of ~~2016. There~~2021, while there were ~~13,824,173~~14,976,774 weighted average shares outstanding during the first ~~nine~~six months of ~~2017,~~2022 and ~~13,446,567~~15,242,451 during the first ~~nine~~six months of ~~2016.~~

2021.

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.~~options, and unvested restricted stock awards. For the ~~third~~first quarter of ~~2017,~~2022, calculations under the treasury stock method resulted in the equivalent of ~~174,876~~72,316 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of ~~120,700~~354,612 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the ~~third~~second quarter of ~~2016~~2021 the equivalent of ~~114,353~~132,127 shares were added in calculating diluted earnings per share, while ~~146,900~~335,481 anti-dilutive stock options were not factored into the computation. Likewise, for the first ~~nine months~~half of ~~2017~~2022 the equivalent of ~~186,721~~87,030 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of ~~120,700 stock~~303,543 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of ~~114,149~~123,515 shares and non-inclusion of ~~196,900~~345,748 anti-dilutive options in calculating diluted earnings per share for first ~~nine months~~half of ~~2016.~~2021.

Note 76 – Comprehensive Income (Loss)

As presented in the Consolidated Statements of Comprehensive Income (Loss), comprehensive income (loss) includes net income and other comprehensive ~~income.~~income (loss). The Company’s only source of other comprehensive income (loss) is unrealized gains and losses on available-for-sale investment securities. ~~Gains~~Investment gains or losses ~~on investment securities~~ that were realized and reflected in net income of the current period, which had previously been included in other comprehensive income (loss) as unrealized holding gains or losses in the period in which they arose, are considered to be reclassification adjustments that are excluded from other comprehensive income (loss) in the current period.

Note 87 – ~~Financial Instruments with Off-Balance-Sheet Risk~~Commitments and Contingent Liabilities

The Company is a party to financial instruments with ~~off‑balance‑sheet~~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 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):

	September 30, 2017		December 31, 2016

					June 30, 2022		December 31, 2021
Commitments to extend credit	$	639,177	$	463,923	$	670,756	$	554,028
Standby letters of credit	$	7,936	$	8,582	$	6,196	$	6,651

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 ~~generally unsecured and 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.

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At ~~September~~June 30, ~~2017,~~2022, the Company was also utilizing a letter of credit in the amount of ~~$86~~$128.6 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.

The Company is subject to loss contingencies, including claims and legal actions arising in the ordinary course of business, which are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.

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

Note 98 – 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 ~~all~~public business entities to disclose in their financial statement footnotes the estimated fair values of financial ~~instruments for which it is practicable to estimate such.~~instruments. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities ~~which~~that are classified as available for sale and any equity securities ~~that~~which have readily determinable fair values be measured and reported at fair value in our statement of financial position. Certain ~~impaired~~individually identified 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~~the Company has 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.

~~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. The estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to those instruments. In addition, the tax ramifications related to realized gains and losses could have a significant effect on fair value estimates but have not been considered in determining those estimates. Because no active market exists for a significant portion of our financial instruments, fairFair value disclosures for deposits include demand deposits, which are, by definition, equal to the 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 ~~judgments regarding current economic conditions,~~ risk characteristics of various financial instruments, ~~and~~among other ~~factors. The~~things. Since the estimates are subjective and involve uncertainties and matters of significant judgment ~~and therefore~~they cannot be determined with ~~precision. Changes~~precision, and changes in assumptions could significantly alter the fair values presented. ~~The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at September 30, 2017 and December 31, 2016:~~

~~Cash and cash equivalents and fed funds sold: The carrying amount is estimated to be fair value.~~13

~~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 when quoted prices for specific securities are not readily available.

~~Other investments~~: Certain investments for which no secondary market exists are carried at cost and the carrying amount for those investments typically approximates their estimated fair value, unless an impairment analysis indicates the need for adjustments.Table of Contents

•

~~Loans and leases~~: For variable-rate loans and leases that re-price frequently with no significant changes in credit risk or interest rate spreads relative to current market pricing, fair values are based on carrying values. Fair values for other loans and leases are estimated by discounting projected cash flows at interest rates being offered at each reporting date for loans and leases with similar terms, to borrowers of comparable creditworthiness. The carrying amount of accrued interest receivable approximates its fair value.

~~Loans held for sale~~: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.

~~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.

~~Cash surrender value of life insurance policies: Fair values are based on net cash surrender values at each reporting date.~~

~~Deposits~~: Fair values for non-maturity deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

~~Short-term borrowings~~: Current carrying amounts are used as an approximation of fair values for federal funds purchased, overnight advances from the Federal Home Loan Bank (“FHLB”), borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days of the reporting dates. Fair values of other short-term borrowings are estimated by discounting projected cash flows at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

~~Long-term borrowings: Fair values are estimated using projected cash flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.~~

~~Subordinated debentures: Fair values are determined based on the current market value for like instruments of a similar maturity and structure.~~

~~Commitments to extend credit and letters of credit~~: If funded, the carrying amounts for currently unused commitments would provide an equivalent measure of fair values for the newly created financial assets at the funding date. However, because of the high degree of uncertainty with regard to whether or not those commitments will ultimately be funded, fair values for loan commitments and letters of credit in their current undisbursed state cannot reasonably be estimated, and only notional values are disclosed in the table below.

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

Fair Value of Financial Instruments

(dollars in thousands, unaudited)

September 30, 2017

Estimated Fair Value

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

$
54,607

$
54,610

$
—

$
—

$
54,610

Investment securities available for sale

583,200

—

583,200

—

583,200

Loans and leases, net held for investment

1,305,507

—

1,317,560

—

1,317,560

Collateral dependent impaired loans

39

—

39

—

39

Cash surrender value of life insurance policies

45,270

—

45,270

—

45,270

Other investments

8,741

—

8,741

—

8,741

Accrued interest receivable

6,676

—

6,676

—

6,676

Financial liabilities:

Deposits:

Noninterest-bearing

$
571,509

$
571,509

$
—

$
—

$
571,509

Interest-bearing

1,208,070

—

1,207,808

—

1,207,808

Fed funds purchased and repurchase agreements

10,279

—

10,279

—

10,279

Short-term borrowings

10,500

—

10,500

—

10,500

Subordinated debentures

34,544

—

24,095

—

24,095

Accrued interest payable

175

—

175

—

175

Notional Amount

Off-balance-sheet financial instruments:

Commitments to extend credit

$
639,177

Standby letters of credit

7,936

Fair Value of Financial Instruments

(dollars in thousands, unaudited)

December 31, 2016

Estimated Fair Value

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

$
120,442

$
120,442

$
—

$
—

$
120,442

Investment securities available for sale

530,083

1,546

528,537

—

530,083

Loans and leases, net held for investment

1,255,348

—

1,266,447

—

1,266,447

Collateral dependent impaired loans

406

—

406

—

406

Cash surrender value of life insurance policies

43,706

—

43,706

—

43,706

Other investments

8,506

—

8,506

—

8,506

Accrued interest receivable

6,354

—

6,354

—

6,354

Financial liabilities:

Deposits:

Noninterest-bearing

$
524,552

$
524,552

$
—

$
—

$
524,552

Interest-bearing

1,170,919

—

1,171,188

—

1,171,188

Fed funds purchased and repurchase agreements

8,094

—

8,094

—

8,094

Short-term borrowings

65,000

—

65,000

—

65,000

Subordinated debentures

34,410

—

22,633

—

22,633

Accrued interest payable

188

—

188

—

188


		June 30, 2022
			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

Financial assets:
Cash and cash equivalents	$	161,875	$	161,875	$	0	$	0	$	161,875
Investment securities available-for-sale		864,178		0		817,639		46,539		864,178
Investment securities held-to-maturity		161,399		0		147,147		0		147,147
Loans and leases, net held for investment		1,980,317		0		0		1,960,923		1,960,923
Collateral dependent loans		18,462		0		18,462		0		18,462

Financial liabilities:
Deposits		2,850,999		1,120,413		1,727,383		0		2,847,796
Repurchase agreements		118,014		0		118,014		0		118,014
Long-term debt		49,173		0		44,890		0		44,890
Subordinated debentures		35,392		0		33,683		0		33,683

Notional Amount

Off-balance-sheet financial instruments:

Commitments to extend credit

$
463,923

Standby letters of credit

8,582


		December 31, 2021
			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

Financial assets:
Cash and cash equivalents	$	257,528	$	257,528	$	0	$	0	$	257,528
Investment securities available for sale		973,314		0		750,077		223,237		973,314
Loans and leases, net held for investment		1,973,207		0		0		1,960,966		1,960,966
Collateral dependent loans		398		0		221		177		398

Financial liabilities:
Deposits		2,781,572		1,084,544		1,696,124		0		2,780,668
Repurchase agreements		106,937		0		106,937		0		106,937
Short term borrowings		49,141		0		49,118		0		49,118
Subordinated debentures		35,302		0		33,281		0		33,281

For financial asset categories that were ~~actually reported~~carried on our balance sheet at fair value as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, 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.

●

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

●

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 disposition

~~Foreclosed assets: Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower~~Table 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 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.Contents

costs for OREO; fair values for any other foreclosed assets are represented by estimated sales proceeds as determined using reasonably available sources. Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals. Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic reevaluation of expected cash flows and the timing of 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 September 30, 2017, 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:

US Government agencies

$
—

$
24,422

$
—

$
24,422

$
—

Mortgage-backed securities

—

417,038

—

417,038

—

State and political subdivisions

—

141,740

—

141,740

—

Equity securities

—

—

—

—

—

Total available-for-sale securities

$
—

$
583,200

$
—

$
583,200

$
—

Fair Value Measurements at December 31, 2016, 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:

US Government agencies

$
—

$
26,468

$
—

$
26,468

$
—

Mortgage-backed securities

—

387,876

—

387,876

—

State and political subdivisions

—

114,193

—

114,193

—

Equity securities

1,546

—

—

1,546

—

Total available-for-sale securities

$
1,546

$
528,537

$
—

$
530,083

$
—

Fair Value Measurements – Recurring

14(dollars in thousands, unaudited)


	Fair Value Measurements at June 30, 2022, 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	$	0	$	981	$	0	$	981	$	—
Mortgage-backed securities		0		181,446		0		181,446		—
State and political subdivisions		0		254,888		0		254,888		—
Corporate bonds		0		—		46,539		46,539		—
Collateralized loan obligations		0		380,324		0		380,324		—
Total available-for-sale securities	$	0	$	817,639	$	46,539	$	864,178	$	—


	Fair Value Measurements at December 31, 2021, 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	$	0	$	1,574	$	0	$	1,574	$	—
Mortgage-backed securities		0		306,727		0		306,727		—
State and political subdivisions		0		304,268		0		304,268		—
Corporate bonds		0		999		27,530		28,529		—
Collateralized loan obligations		0		136,509		195,707		332,216		—
Total available-for-sale securities	$	0	$	750,077	$	223,237	$	973,314	$	—


Fair Value Measurements - Level 3 Recurring
(dollars in thousands, unaudited)
	Collateralized Loan Obligations				Corporate Bonds
	2022		2021		2022		2021
Balance of recurring Level 3 assets at January 1,	$	195,707	$	—	$	27,530	$	—
Purchases		—		—		19,009		—
Transfers out of Level 3		(195,707)		—		—		—
Balance of recurring Level 3 assets at June 30,	$	—	$	—	$	46,539	$	—

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

Table of Contents

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

Fair Value Measurements – Nonrecurring

Fair Value Measurements - Nonrecurring

(dollars in thousands, unaudited)

Fair Value Measurements at September 30, 2017, 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

—

12

—

12

Equity lines

—

14

—

14

Multi-family residential

—

—

—

—

Commercial real estate - owner occupied

—

—

—

—

Commercial real estate - non-owner occupied

—

—

—

—

Farmland

—

—

—

—

Total real estate

—

26

—

26

Agriculture

—

—

—

—

Commercial and industrial

—

—

—

—

Consumer loans

—

13

—

13

Total impaired loans

—

39

—

39

Foreclosed assets

$
—

$
2,674

$
—

$
2,674

Total assets measured on a nonrecurring basis

$
—

$
2,713

$
—

$
2,713

(dollars in thousands, unaudited)

	Fair Value Measurements at December 31, 2016, 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:

									Fair Value Measurements at June 30, 2022, using
									Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Collateral dependent loans
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	0	$	0	$	0	$	0
Other construction/land		—		—		—		—		0		0		0		0
1-4 family - closed-end		—		—		—		—		0		0		0		0
Equity lines		—		—		—		—		0		0		0		0
Multi-family residential		—		—		—		—		0		0		0		0
Commercial real estate - owner occupied		—		281		—		281		0		51		0		51
Commercial real estate - non-owner occupied		—		67		—		67		0		0		0		0
Farmland		—		—		—		—		0		18,411		0		18,411
Total real estate		—		348		—		348		0		18,462		0		18,462
Agriculture		—		—		—		—
Agricultural										0		0		0		0
Commercial and industrial		—		—		—		—		0		0		0		0
Consumer loans		—		58		—		58		0		0		0		0
Total impaired loans		—	$	406		—		406
Total collateral dependent loans									$	0	$	18,462	$	0	$	18,462
Foreclosed assets	$	—	$	2,225	$	—	$	2,225	$	0	$	2	$	0	$	2
Total assets measured on a nonrecurring basis	$	—	$	2,631	$	—	$	2,631	$	0	$	18,464	$	0	$	18,464


	Fair Value Measurements at December 31, 2021, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Collateral dependent loans
Real estate:
1-4 family residential construction	$	0	$	0	$	0	$	0
Other construction/land		0		0		0		0
1-4 family - closed-end		0		0		0		0
Equity lines		0		161		0		161
Multi-family residential		0		0		0		0
Commercial real estate - owner occupied		0		60		0		60
Commercial real estate - non-owner occupied		0		0		0		0
Farmland		0		0		0		0
Total real estate		0		221		0		221
Agricultural		0		0		0		0
Commercial and industrial		0		0		177		177
Consumer loans		0		0		0		0
Total collateral dependent loans	$	0	$	221	$	177	$	398
Foreclosed assets	$	0	$	93	$	0	$	93
Total assets measured on a nonrecurring basis	$	0	$	314	$	177	$	491

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~~collateral dependent loan balances and specific loss reserves associated with those balances is included in Note ~~11 below, and in Management’s Discussion and Analysis~~10 below.

Table of ~~Financial Condition and Results of Operation 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~~individually identified loans.

Note 109 – 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. Held-to-maturity securities are carried on the Company’s financial statements at their amortized cost, net of the allowance for credit losses.

The amortized cost, ~~and~~ estimated fair value, and allowance for credit losses of available-for-sale and held-to-maturity investment securities ~~available-for-sale~~ are as follows:

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)


	June 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
Available-for-sale
U.S. government agencies	$	1,000	$	—	$	(19)	$	—	$	981
Mortgage-backed securities		190,417		18		(8,989)		—		181,446
State and political subdivisions		286,650		198		(31,960)		—		254,888
Corporate bonds		49,708		10		(3,179)		—		46,539
Collateralized loan obligations		396,763		—		(16,439)		—		380,324
Total available-for-sale securities	$	924,538	$	226	$	(60,586)	$	—	$	864,178

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value		Allowance for Credit Losses
Held-to-maturity
U.S. government agencies	$	6,762	$	—	$	(346)	$	6,416	$	—
Mortgage-backed securities		103,888		—		(8,006)		95,882		—
State and political subdivisions		50,767		25		(5,943)		44,849		(18)
Total held-to-maturity securities	$	161,417	$	25	$	(14,295)	$	147,147	$	(18)


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
Available-for-sale
U.S. government agencies	$	1,546	$	28	$	—	$	—	$	1,574
Mortgage-backed securities		303,912		4,772		(1,957)		—		306,727
State and political subdivisions		290,729		13,807		(268)		—		304,268
Corporate bonds		28,436		94		(1)		—		28,529
Collateralized loan obligations		332,836		68		(688)		—		332,216
Total securities	$	957,459	$	18,769	$	(2,914)	$	—	$	973,314

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)

September 30, 2017

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated Fair
Value

US Government agencies
$
24,574

$
112

$
(264
)

$
24,422

Mortgage-backed securities

418,961

1,416

(3,339
)

417,038

State and political subdivisions

138,621

3,401

(282
)

141,740

Equity securities

—

—

—

—

Total securities
$
582,156

$
4,929

$
(3,885
)

$
583,200

Table of Contents

December 31, 2016

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated Fair
Value

US Government agencies
$
26,926

$
48

$
(506
)

$
26,468

Mortgage-backed securities

391,555

1,492

(5,171
)

387,876

State and political subdivisions

114,140

1,519

(1,466
)

114,193

Equity securities

500

1,046

—

1,546

Total securities
$
533,121

$
4,105

$
(7,143
)

$
530,083

The Company reassessed classification of certain investments and effective April 1, 2022 the Company transferred $162.1 million of Agency, Mortgaged-Backed and Municipal securities from available-for-sale to held-to-maturity securities. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss of $11.5 million included in other comprehensive income remained in other comprehensive income, to be amortized out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. Subsequent to transfer, a discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and a allowance for credit losses of $0.02 million was calculated and charged to provision for credit loss expense. The Company did not have any securities classified as held-to-maturity as of December 31, 2021.

The Company did not record an ACL on the AFS portfolio at June 30, 2022 or upon the implementation of CECL on January 1, 2022. As of both dates the Company considers the unrealized loss across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value in any case. The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both January 1, 2022 and June 30, 2022 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold. The following bullets outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of January 1, 2022 and June 30, 2022 was attributable to credit deterioration and a risk of loss, requiring a allowance for credit losses.

●

US Government Agencies are supported by the full faith and credit-worthiness of the U.S. Federal Government and the management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or June 30, 2022.

●

Mortgage-backed securities issued by government sponsored entities (“GSEs”) carry an implicit guarantee by the U.S. Federal Government, as the GSEs can draw funds from the U.S. Federal Government up to a limit, with an implied ability to draw funds beyond the limit. Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or June 30, 2022.

●

Management routinely monitors third party credit grades of the municipal issuers in the Company’s state and political subdivisions portfolio and as of both January 1, 2022 and June 30, 2022 noted that all municipal securities in an unrealized loss position were either investment grade rated or guaranteed. On a quarterly basis management receives financial information from a third-party service related to underlying issuer’s financial stability. In addition, management performs annual reviews of the underlying municipal issuers financial statements in order to evaluate stability and repayment capacity and has noted no concerns with any of the bonds in the Company’s State and Local portfolio. As of both January 1, 2022 and June 30, 2022 management concluded that no allowance for credit losses was warranted on any of the Company’s municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.

●

The Company has invested in corporate debt issuances of other financial institutions. Various financial metrics of each of the issuing financial institutions are reviewed by management quarterly, these metrics include credit quality, reserve adequacy, capital, profitability and capital. Following review of the financial metrics available for each of the underlying institutions as of January 1, 2022 and June 30, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution. These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews.

●

The Company has invested exclusively in AA and AAA tranches of various collateralized debt obligations, which are securitizations of commercial loans. Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews. Management monitors the credit rating of these investments on a quarterly basis in addition to various performance metrics available through a third-party informational service. Following review of financial metrics as of both January 1, 2022 and June 30, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest

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rate spreads, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

At ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, the Company had ~~329~~961 securities and ~~431~~98 securities, respectively, with gross unrealized losses. ~~Management has evaluated those~~Since the declines in market values were primarily attributable to changes in interest rates and volatility in the financial markets and not a result of an expected credit loss, 0 allowance for credit losses on available-for-sale securities was recorded as of ~~the respective dates, and does not believe that any of the unrealized losses are other than temporary.~~June 30, 2022. 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).

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)


	June 30, 2022
	Less than twelve months				Twelve months or more				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Available-for-sale
U.S. government agencies	$	(19)	$	981	$	—	$	—	$	(19)	$	981
Mortgage-backed securities		(8,941)		176,718		(48)		853		(8,989)		177,571
State and political subdivisions		(31,960)		221,848		—		—		(31,960)		221,848
Corporate bonds		(3,179)		43,562		—		—		(3,179)		43,562
Collateralized loan obligations		(16,439)		380,324		—		—		(16,439)		380,324
Total available-for-sale	$	(60,538)	$	823,433	$	(48)	$	853	$	(60,586)	$	824,286

	June 30, 2022
	Less than twelve months				Twelve months or more				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Held-to-maturity
U.S. government agencies	$	(346)	$	6,416	$	—	$	—	$	(346)	$	6,416
Mortgage-backed securities		(8,006)		95,882		—		—		(8,006)		95,882
State and political subdivisions		(5,943)		41,148		—		—		(5,943)		41,148
Total held-to-maturity	$	(14,295)	$	143,446	$	—	$	—	$	(14,295)	$	143,446


	December 31, 2021
	Less than twelve months				Twelve months or more				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Available-for-sale
U.S. government agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		(1,797)		107,026		(160)		2,808		(1,957)		109,834
State and political subdivisions		(268)		30,170		—		—		(268)		30,170
Corporate bonds		(1)		499		—		—		(1)		499
Collateralized loan obligations		(688)		175,581		—		—		(688)		175,581
Total available-for-sale	$	(2,754)	$	313,276	$	(160)	$	2,808	$	(2,914)	$	316,084

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)

September 30, 2017

Less than twelve months

Twelve months or more

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

US Government agencies

$
(136
)

$
12,379

$
(128
)

$
4,512

Mortgage-backed securities

(1,906
)

231,968

(1,433
)

79,052

State and political subdivisions

(120
)

13,042

(162
)

7,018

Total

$
(2,162
)

$
257,389

$
(1,723
)

$
90,582

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December 31, 2016

Less than twelve months

Twelve months or more

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

US Government agencies

$
(500
)

$
21,056

$
(6
)

$
711

Mortgage-backed securities

(4,303
)

271,276

(868
)

43,570

State and political subdivisions

(1,466
)

49,195

—

—

Total

$
(6,269
)

$
341,527

$
(874
)

$
44,281

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 September 30,

Nine months ended September 30,

2017

2016

2017

2016

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

$
5,865

$
19,723

$
23,490

$
24,948

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

$
918

$
90

$
1,024

$
250

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

—

—

(40
)

(38
)
Net gains on sale of securities available for sale

$
918

$
90

$
984

$
212

Investment Portfolio - Realized Gains/(Losses)

17(dollars in thousands, unaudited)


	Three months ended June 30,					Six months ended June 30,
	2022		2021		2022		2021
Proceeds from sales, calls and maturities of securities available for sale	$	1,750	$	2,295	$	30,531	$	4,000
Gross gains on sales, calls and maturities of securities available for sale		—		0		1,032		—
Gross losses on sales, calls and maturities of securities available for sale		—		0		—		—
Net gains on sale of securities available for sale	$	—	$	0	$	1,032	$	—

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016~~2021 are shown below, grouped by the remaining time to contractual maturity dates. The expected life of investment securities may not be consistent with contractual maturity dates since the issuers of the securities might have the right to call or prepay obligations with or without penalties.

Estimated Fair Value of Contractual Maturities

Estimated Fair Value of Contractual Maturities

(dollars in thousands, unaudited)

September 30, 2017

Amortized Cost

Fair Value

Maturing within one year

$
7,657

$
7,736

Maturing after one year through five years

252,046

252,582

Maturing after five years through ten years

44,786

45,702

Maturing after ten years

75,744

76,935

Securities not due at a single maturity date:

US Government agencies collateralized by mortgage
obligations

201,923

200,245

Other securities

-

-

$
582,156

$
583,200

(dollars in thousands, unaudited)

December 31, 2016

Amortized Cost

Fair Value

Maturing within one year

$
8,488

$
8,573

Maturing after one year through five years

260,387

259,535

Maturing after five years through ten years

50,823

50,687

Maturing after ten years

47,132

46,190

Securities not due at a single maturity date:

US Government agencies collateralized by mortgage
obligations

165,791

163,552

Other securities

500

1,546

$
533,121

$
530,083


	June 30, 2022
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	3,008	$	3,014	$	1,225	$	1,227
Maturing after one year through five years		8,376		8,267		1,880		1,850
Maturing after five years through ten years		71,878		68,281		17,096		15,925
Maturing after ten years		251,829		220,579		37,327		32,263
Securities not due at a single maturity date:
Mortgage-backed securities		192,684		183,713		103,889		95,882
Collateralized loan obligations		396,763		380,324		—		—
	$	924,538	$	864,178	$	161,417	$	147,147


	December 31, 2021
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	3,513	$	3,547	$	—	$	—
Maturing after one year through five years		26,422		26,718		—		—
Maturing after five years through ten years		36,840		38,314		—		—
Maturing after ten years		253,936		265,792		—		—
Securities not due at a single maturity date:						—		—
Mortgage-backed securities		303,912		306,727		—		—
Collateralized loan obligations		332,836		332,216		—		—
	$	957,459	$	973,314	$	—	$	—

At ~~September~~June 30, ~~2017,~~2022, the Company’s investment portfolio included ~~330~~442 “muni” bonds issued by 368 different government municipalities and agencies located within 3234 different states, with an aggregate fair value of ~~$142~~$299.7 million. The largest exposure to any single municipality or agency was a combined ~~$2.588~~$5.7 million (fair value) in general obligation bonds issued by the ~~Lindsay (CA) Unified School District.~~City of New York (NY). In addition, the Company owned 40 subordinated debentures issued by bank holding companies totaling $46.5 million (fair value).

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At December 31, 2021, the Company’s investment portfolio included 403 “muni” bonds issued by 335 different government municipalities and agencies located within 33 states, with an aggregate fair value of $304.3 million. The largest exposure to any single municipality or agency was $4.0 million (fair value) in 3 bonds issued by the Charter Township of Washington. In addition, the company owned 23 subordinated debentures issued by bank holding companies totaling $28.5 million (fair value).

The Company’s investments in bonds issued by corporations, states, municipalities and political subdivisions are evaluated in accordance with ~~Supervision and Regulation~~Financial Institution Letter ~~12-15~~48-2012, issued by the ~~Board~~FDIC, “Revised Standards of ~~Governors of the Federal Reserve System, “Investing in~~Creditworthiness for Investment 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~~similarly rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the ~~third party~~third-party credit rating agencies.

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

Revenue and General Obligation Bonds by Location

(dollars in thousands, unaudited)

September 30, 2017

December 31, 2016

Amortized

Fair Market

Amortized

Fair Market

General obligation bonds

Cost

Value

Cost

Value

State of issuance

Texas

$
32,352

$
32,826

$
20,170

$
19,875

California

26,677

27,638

25,457

25,799

Washington

13,108

13,392

5,928

5,970

Ohio

9,355

9,464

9,412

9,324

Illinois

8,388

8,565

9,873

9,871

Other (21 states)

24,236

24,831

22,637

22,698

Total General Obligation Bonds

114,116

116,716

93,477

93,537

Revenue bonds

State of issuance

Texas

7,105

7,248

5,727

5,702

California

1,029

1,046

1,283

1,298

Washington

2,108

2,177

1,302

1,299

Ohio

—

—

261

261

Illinois

284

290

287

284

Other (12 states)

13,979

14,263

11,803

11,812

Total Revenue Bonds

24,505

25,024

20,663

20,656

Total Obligations of States and Political Subdivisions

$
138,621

$
141,740

$
114,140

$
114,193

(dollars in thousands, unaudited)


	June 30, 2022				December 31, 2021
	Amortized		Fair Market		Amortized		Fair Market
General obligation bonds	Cost		Value		Cost		Value
State of issuance
Texas	$	114,615	$	100,728	$	85,045	$	89,225
California		64,337		56,481		64,092		67,066
Washington		20,724		19,476		23,858		24,812
Other (27 & 26 states, respectively)		91,855		82,271		75,037		78,579
Total general obligation bonds		291,531		258,956		248,032		259,682

Revenue bonds
State of issuance
Texas		5,739		5,118		7,038		7,377
California		3,997		3,616		4,334		4,602
Washington		4,103		3,502		1,349		1,392
Other (17 & 15 states, respectively)		32,047		28,545		29,976		31,215
Total revenue bonds		45,886		40,781		42,697		44,586
Total obligations of states and political subdivisions	$	337,417	$	299,737	$	290,729	$	304,268

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

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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)

September 30, 2017

December 31, 2016

Amortized

Fair Market

Amortized

Fair Market

Revenue bonds

Cost

Value

Cost

Value

Revenue source:

Water

$
7,236

$
7,362

$
4,788

$
4,722

Sales Tax

2,963

3,005

2,981

2,927

College & University

2,619

2,710

3,401

3,472

Lease

2,320

2,387

3,119

3,123

Local Housing

1,535

1,552

168

167

Other (13 sources)

7,832

8,008

6,206

6,245

Total Revenue Bonds

$
24,505

$
25,024

$
20,663

$
20,656

Revenue Bonds by Type

(dollars in thousands, unaudited)


	June 30, 2022				December 31, 2021
	Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value
Revenue source:
Water	$	17,120	$	15,112	$	15,534	$	16,220
Sewer		6,107		5,356		3,932		4,165
Lease		4,665		4,341		6,556		6,718
Sales tax revenue		3,559		3,067		—		—
Intergovernmental agreement		2,838		2,680		—		—
Other (9 and 9 sources, respectively)		11,597		10,225		16,675		17,483
Total revenue bonds	$	45,886	$	40,781	$	42,697	$	44,586

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, supplementing any returns that might be derived from an increase in property values.~~investors. Because rent levels are lower than standard market rents and the projects are generally highly leveraged, each project also typically generates tax-deductible operating losses that are allocated to the limited ~~partners.~~partners for tax purposes.

The Company ~~invested~~currently has investments in ~~nine~~three different LIHTC fund limited partnerships ~~from 2001 through 2017,~~made in 2014, 2015, and 2022, 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 ~~non-interest~~noninterest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of ~~September~~June 30, ~~2017~~2022, our total LIHTC investment book balance was ~~$8.9~~$7.7 million, which includes ~~$3.5~~$5.1 million in remaining commitments for additional capital contributions. There were ~~$533,000~~$0.3 million in tax credits derived from our LIHTC investments that were recognized during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, and amortization expense of ~~$837,000~~$0.2 million associated with those investments was netted against pre-tax ~~non-interest~~noninterest income for the same time period. Our LIHTC investments are evaluated annually for potential impairment, and we have concluded that the carrying value of the investments is stated fairly and is not impaired.

As of December 31, 2021, our total LIHTC investment book balance was $2.9 million, which includes $0.1 million in remaining commitments for additional capital contributions. There were $0.5 million in tax credits derived from our LIHTC investments that were recognized during the year ended December 31, 2022, and amortization expense of $0.5 million associated with those investments was netted against pre-tax noninterest income for the same time period.

Note 1110 – Loans and Leases and Allowance for Credit ~~Quality~~Losses

We adopted the new current expected credit loss accounting guidance, CECL, and ~~Nonperforming Assets~~

~~Credit Quality Classifications~~

~~The Company monitors the~~all related amendments as of January 1, 2022. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current guidance and have not been included below as of ~~loans~~June 30, 2022. Under CECL, disclosures are required on ~~a continuous~~the amortized cost basis, ~~using~~whereas legacy GAAP required presentation on the ~~regulatory~~recorded investment basis, with the primary difference being net deferred fees 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:costs. Unless specifically noted otherwise,

~~Pass: Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller homogeneous loans that are not assessed on an individual basis.~~22

~~Special mention: Loans which have potential issues that deserve~~Table of Contents

June 30, 2022 disclosures are prepared on the ~~close attention of Management. If left uncorrected, those potential weaknesses could eventually diminish the prospects for full repayment of principal~~amortized cost basis and ~~interest~~December 31, 2021 disclosures present information according to the ~~contractual terms~~recorded investment basis.

The following table presents loans by class as of June 30, 2022 and December 31, 2021. Accrued interest receivable on loans of $5.4 million and $6.8 million at June 30, 2022 and December 31, 2021 respectively is not included in the loans included in the table below but is included in other assets on the Company’s balance sheet. The June 30, 2022, balance in 1-4 family closed end loans reflects year-to-date 2022 loan purchase of $173.1 million. The majority of the ~~loan agreement,~~disclosures in this footnote are prepared at the class level which is equivalent to the call report classification or ~~could result~~call code classification. The final table in ~~deterioration~~this section separates a roll forward of the ~~Company’s credit position~~Allowance for Credit Losses at ~~some future date.~~the portfolio segment level.

~~Substandard: Loans that have at least one clear~~Table of Contents


Loan And Lease Distribution
(dollars in thousands, unaudited)
	June 30, 2022		December 31, 2021
Real estate:
1-4 family residential construction	$	5,542	$	21,369
Other construction/land		20,816		25,299
1-4 family - closed-end		429,109		289,457
Equity lines		25,260		26,588
Multi-family residential		66,367		53,458
Commercial real estate - owner occupied		312,060		334,446
Commercial real estate - non-owner occupied		898,158		882,888
Farmland		101,675		106,706
Total real estate		1,858,987		1,740,211
Agricultural		28,660		33,990
Commercial and industrial		72,617		109,791
Mortgage warehouse lines		58,134		101,184
Consumer loans		4,264		4,550
Subtotal		2,022,662		1,989,726
Less net deferred loan fees and costs		(1,081)		(1,865)
Loans and leases, amortized cost basis		2,021,581		1,987,861
Allowance for credit losses		(22,802)		(14,256)
Net loans and leases	$	1,998,779	$	1,973,605

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and ~~well-defined weakness that could jeopardize the ultimate recoverability~~without individually evaluated reserves as 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 a deteriorated financial condition.June 30, 2022:


Nonaccrual Loans and Leases
(dollars in thousands, unaudited)
	June 30, 2022
	Nonaccrual Loans
	With no allowance for credit loss		With an allowance for credit loss		Total		Loans Past Due 90+ Accruing
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	632
Other construction/land		—		—		—		—
1-4 family - closed-end		745		—		745		—
Equity lines		62		—		62		—
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		379		—		379		—
Commercial real estate - non-owner occupied		—		—		—		—
Farmland		19,301		—		19,301		—
Total real estate		20,487		—		20,487		632
Agricultural		8,414		30		8,444		—
Commercial and industrial		584		230		814		7
Mortgage warehouse lines		—		—		—		—
Consumer loans		—		—		—		—
Total	$	29,485	$	260	$	29,745	$	639

~~Impaired: A~~Table of Contents

The following table presents the impaired loans as of December 31, 2021, according to loan ~~is considered impaired when, based on current information~~class, with and ~~events, it is probable that the Company will be unable to collect all amounts due~~without an individually evaluated reserve according to the ~~contractual terms of the loan agreement.~~recorded investment basis. Impaired loans ~~include all nonperforming~~as of December 31, 2021 included both nonaccrual loans and ~~restructured troubled debt (“TDRs”).~~performing TDRs. A ~~TDR may be nonperforming or performing, depending on its accrual status and the demonstrated ability~~separate breakout of ~~the borrower to comply with restructured terms (see “Troubled Debt Restructurings” section below for additional information on TDRs).~~

~~Credit quality classifications for the Company’s loan balances were as follows,~~nonaccrual loans by class as of ~~the dates indicated:~~

~~Credit Quality Classifications~~

(dollars in thousands, unaudited)

September 30, 2017

Pass

Special
Mention

Substandard

Impaired

Total

Real Estate:

1-4 family residential construction

$
53,035

$
—

$
—

$
—

$
53,035

Other construction/land

46,317

281

—

562

47,160

1-4 family - closed end

148,652

626

794

4,862

154,934

Equity lines

33,411

3,555

538

4,618

42,122

Multi-family residential

31,020

—

—

394

31,414

Commercial real estate - owner occupied

253,912

4,343

2,766

1,844

262,865

Commercial real estate - non-owner occupied

275,251

4,464

3,154

1,668

284,537

Farmland

143,742

996

515

297

145,550

Total real estate

985,340

14,265

7,767

14,245

1,021,617

Agricultural

48,663

652

—

—

49,315

Commercial and industrial

98,822

10,539

679

1,325

111,365

Mortgage warehouse

119,031

—

—

—

119,031

Consumer loans

8,609

320

68

1,300

10,297

Total gross loans and leases

$
1,260,465

$
25,776

$
8,514

$
16,870

$
1,311,625

December 31, 2016

Pass

Special
Mention

Substandard

Impaired

Total

Real Estate:

1-4 family residential construction

$
32,417

$
—

$
—

$
—

$
32,417

Other construction/land

38,699

888

—

1,063

40,650

1-4 family - closed end

129,726

624

403

6,390

137,143

Equity lines

35,159

3,165

698

4,421

43,443

Multi-family residential

31,058

—

—

573

31,631

Commercial real estate - owner occupied

243,366

4,991

2,892

2,286

253,535

Commercial real estate - non-owner occupied

233,584

5,597

3,220

1,797

244,198

Farmland

132,613

1,020

808

39

134,480

Total real estate

876,622

16,285

8,021

16,569

917,497

Agricultural

45,249

891

—

89

46,229

Commercial and industrial

107,404

13,186

732

2,273

123,595

Mortgage warehouse

163,045

—

—

—

163,045

Consumer loans

10,303

191

9

1,662

12,165

Total gross loans and leases

$
1,202,623

$
30,553

$
8,762

$
20,593

$
1,262,531

~~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 $2.674 million at September 30, 2017, which includes one single-family residential property with a carrying value of $51,000 and two relatively low-value mobile homes, and $2.225 million at December 31, ~~2016, which includes two relatively low-value mobile homes but no single-family residential properties.~~2021 is included in the past due loans table as of December 31, 2021, later in this footnote.

~~Nonperforming loans and leases result when reasonable doubt surfaces with regard to the ability of the~~


	December 31, 2021
	Unpaid Principal		Recorded				Average Recorded		Interest Income
	Balance⁽¹⁾		Investment⁽²⁾		Related Allowance		Investment		Recognized⁽³⁾
With an Allowance Recorded
Real estate:
Other construction/land	$	341	$	341	$	64	$	352	$	55
1-4 family - closed-end		1,048		1,048		37		1,096		104
Equity lines		2,005		1,993		182		2,056		138
Commercial real estate - owner occupied		1,249		1,248		19		1,278		144
Commercial real estate - non-owner occupied		367		367		126		393		32
Total real estate		5,010		4,997		428		5,175		473
Agricultural		244		244		244		246		—
Commercial and industrial		757		757		127		873		41
Consumer loans		164		164		19		180		28
		6,175		6,162		818		6,474		542
With no Related Allowance Recorded
Real estate:
1-4 family - closed-end		788		788		—		869		—
Equity lines		648		648		—		690		6
Commercial real estate - owner occupied		1,353		1,234		—		1,282		—
Total real estate		2,789		2,670		—		2,841		6
Agricultural		134		134		—		186		—
Commercial and industrial		466		466		—		550		—
		3,389		3,270		—		3,577		6
Total	$	9,564	$	9,432	$	818	$	10,051	$	548

(1)	Contractual principal balance due from customer.

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

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

The Company ~~to collect all principal and interest. At that point, we stop accruing~~recognized $0 in interest on nonaccrual loans during the ~~loan or lease in question~~second quarter 2022 and ~~reverse any previously-recognized~~would have recognized an additional $0.6 million on nonaccrual loans had those loans not been designated as nonaccrual.

~~interest~~25

Table of Contents

Troubled Debt Restructurings ~~by Type of Loan Modification~~

(dollars in thousands, unaudited)

Nine months ended September 30, 2017

Term
Modification

Interest Only Modification

Rate & Term Modification

Total

Real Estate:

Other construction/land

$
—

$
—

$
—

$
—

1-4 family - closed-end

—

—

340

340

Equity lines

643

—

96

739

Multi-family residential

—

—

—

—

Commercial real estate - owner occupied

529

—

—

529

Farmland

—

—

—

—

Total real estate loans

1,172

—

436

1,608

Commercial and industrial

15

—

—

15

Consumer loans

7

—

—

7

$
1,194

$
—

$
436

$
1,630

Nine months ended September 30, 2016

Term
Modification

Interest Only Modification

Rate & Term Modification

Total

Real Estate:

Other construction/land

$
17

$
—

$
—

$
17

1-4 family - closed-end

—

547

437

984

Equity lines

1,415

—

97

1,512

Multi-family residential

—

—

132

132

Commercial real estate - owner occupied

—

—

266

266

Farmland

—

—

258

258

Total real estate loans

1,432

547

1,190

3,169

Commercial and industrial

—

—

—

—

Consumer loans

25

—

60

85

$
1,457

$
547

$
1,250

$
3,254

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

~~Troubled Debt Restructurings~~


	Three months ended June 30, 2021
		Pre- Modification		Post- Modification
	Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real estate:
Other construction/land	0	$	0	$	0	$	0	$	0
1-4 family - closed-end	0		0		0		0		0
Equity lines	0		0		0		0		0
Multi-family residential	0		0		0		0		0
Commercial real estate - owner occupied	1		137		136		(1)		0
Farmland	0		0		0		0		0
Total real estate loans			137		136		(1)		0

Agricultural	0		0		0		0		0
Commercial and industrial	0		0		0		0		0
Consumer loans	0		0		0		0		0
Total		$	137	$	136	$	($1)	$	0

(dollars in thousands, unaudited)

Three months ended September 30, 2017

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

3

250

250

—

8

Equity lines

2

136

136

3

2

Multi-family residential

0

—

—

—

—

Commercial real estate - owner occupied

1

529

529

—

6

Farmland

0

—

—

—

—

Total real estate loans

915

915

3

16

Commercial and industrial

0

—

—

—

—

Consumer loans

1

7

7

—

2

$
922

$
922

$
3

$
18

⁽¹⁾	This represents the change in the ~~ALLL~~ACL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.


	Six months ended June 30, 2021
		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		83		83		—		1
Multi-family residential	0		—		—		—		—
Commercial real estate - owner occupied	1		137		136		(1)		—
Farmland	0		—		—		—		—
Total real estate loans			220		219		(1)		1

Agricultural	1		118		118		116		—
Commercial and industrial	1		185		185		(1)		48
Consumer loans	1		41		41		—		—
Total		$	564	$	563	$	114	$	49

Three months ended September 30, 2016

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

3

178

178

41

80

Equity lines

3

232

232

15

17

Multi-family residential

0

—

—

—

—

Commercial real estate - owner occupied

0

—

—

—

—

Farmland

1

258

258

(26
)

-

Total real estate loans

668

668

30

97

Commercial and industrial

0

—

—

—

—

Consumer loans

1

4

5

—

—

$
672

$
673

$
30

$
97

⁽¹⁾	This represents the change in the ~~ALLL~~ACL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.

~~Troubled Debt Restructurings~~

(dollars in thousands, unaudited)

Nine months ended September 30, 2017

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

6

340

340

32

12

Equity lines

7

739

739

85

25

Multi-family residential

0

—

—

—

—

Commercial real estate - owner occupied

1

529

529

—

6

Farmland

0

—

—

—

—

Total real estate loans

1,608

1,608

117

43

Commercial and industrial

1

15

15

—

—

Consumer loans

1

7

7

—

2

$
1,630

$
1,630

$
117

$
45

⁽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.

Nine months ended September 30, 2016

Pre-
Modification

Post-
Modification

Number of
Loans

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment

Reserve
Difference⁽¹⁾

Reserve

Real Estate:

Other construction/land

1

$
17

$
17

$
—

$
2

1-4 family - closed-end

8

984

984

116

107

Equity lines

13

1,512

1,512

(27
)

46

Multi-family residential

1

132

132

—

6

Commercial real estate - owner occupied

1

266

266

—

4

Farmland

1

258

258

(26
)

—

Total real estate loans

3,169

3,169

63

165

Commercial and industrial

0

—

—

—

—

Consumer loans

4

84

85

(7
)

6

$
3,253

$
3,254

$
56

$
171

~~(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.

The ~~company~~Company had no0 finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the ~~three-~~three or ~~nine-month~~six-month periods ~~ended September~~ending June 30, ~~2017~~2022 and ~~2016, respectively.~~

~~Purchased Credit Impaired Loans~~2021.

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

Table of Contents

Pass – Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention – Loans classified as special mention have the potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may ~~acquire~~result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are those loans with clear and well-defined weaknesses such as a highly leveraged position, unfavorable financial operating results and/or trends, or uncertain repayment sources or poor financial condition, which ~~show evidence~~may jeopardize ultimate recoverability of the debt.

Table of Contents

The following tables present the amortized cost of loans and leases by credit ~~deterioration since origination. These~~quality classification in addition to loan and lease vintage as of June 30, 2022:


Loan and Lease Credit Quality by Vintage
(dollars in thousands, unaudited)
	Term Loans and Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Total Loans
1-4 family construction
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	4,910	$	4,910
Special Mention		—		—		—		—		—		—		632		632
Substandard		—		—		—		—		—		—		—		—
Subtotal		—		—		—		—		—		—		5,542		5,542
Other construction/land
Pass		—	$	3,591	$	4,343	$	777	$	1,054	$	1,116	$	9,802		20,683
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		74		—		—		—		—		74
Subtotal		—		3,591		4,417		777		1,054		1,116		9,802		20,757
1-4 family - closed-end
Pass		110,397	$	243,625	$	8,058	$	2,094	$	11,042	$	50,354	$	—		425,570
Special Mention		264		—		—		—		1,022		2,095		—		3,381
Substandard		—		—		—		—		32		1,152		—		1,184
Subtotal		110,661		243,625		8,058		2,094		12,096		53,601		—		430,135
Equity lines
Pass		2,355	$	171	$	551	$	361	$	79	$	—	$	20,691		24,208
Special Mention		—		—		20		—		—		—		790		810
Substandard		—		118		—		—		—		—		439		557
Subtotal		2,355		289		571		361		79		—		21,920		25,575
Multi-family residential
Pass		19,320	$	522	$	9,504	$	668	$	13,159	$	12,757	$	4,720		60,650
Special Mention		—		—		2,240		—		—		3,401		—		5,641
Substandard		—		—		—		—		—		—		—		—
Subtotal		19,320		522		11,744		668		13,159		16,158		4,720		66,291
Commercial real estate - OO
Pass		9,855	$	26,311	$	63,756	$	38,080	$	39,071	$	118,601	$	7,346		303,020
Special Mention		—		—		—		2,403		—		2,107		—		4,510
Substandard		326		—		—		—		80		3,393		760		4,559
Subtotal		10,181		26,311		63,756		40,483		39,151		124,101		8,106		312,089
Commercial real estate - NOO
Pass		51,922	$	19,710	$	451,234	$	26,810	$	56,883	$	165,217	$	62,955		834,731
Special Mention		—		—	$	33,613		—		7,266		3,121		12,671		56,671
Substandard		—		—	$	—		—		852		3,098		—		3,950
Subtotal		51,922		19,710		484,847		26,810		65,001		171,436		75,626		895,352
Farmland
Pass		—	$	1,377	$	5,008	$	1,978	$	8,202	$	25,700	$	27,588		69,853
Special Mention		—		—		—		—		7,116		4,385		1,004		12,505
Substandard		—		—		—		—		4,722		14,133		548		19,403
Subtotal		—		1,377		5,008		1,978		20,040		44,218		29,140		101,761
Agricultural
Pass		549	$	1,684	$	475	$	30	$	1,092	$	6,882	$	9,329		20,041
Special Mention		—		—		—		—		—		—		272		272
Substandard		—		7,847		—		—		—		—		597		8,444
Subtotal		549		9,531		475		30		1,092		6,882		10,198		28,757
Commercial and industrial
Pass		1,272	$	11,449	$	8,021	$	6,977	$	5,682	$	10,004	$	19,576		62,981
Special Mention		—		312		3,186		50		—		1,553		3,772		8,873
Substandard		—		—		44		143		93		643		49		972
Subtotal		1,272		11,761		11,251		7,170		5,775		12,200		23,397		72,826
Mortgage warehouse lines
Pass		—	$	—	$	—	$	—	$	—	$	—	$	58,134		58,134
Subtotal		—		—		—		—		—		—		58,134		58,134
Consumer loans
Pass		953	$	275	$	173	$	299	$	19	$	429	$	2,163		4,311
Special Mention		—		—		40	$	—		—		—		7		47
Substandard		2		—		—	$	—		—		2		—		4
Subtotal		955		275		213		299		19		431		2,170		4,362
Total	$	197,215	$	316,992	$	590,340	$	80,670	$	157,466	$	430,143	$	248,755	$	2,021,581

Table of Contents

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


	Pass		Special Mention		Substandard		Impaired		Total
Real estate:
1-4 family residential construction	$	19,669	$	1,700	$	—	$	—	$	21,369
Other construction/land		24,958		—		—		341		25,299
1-4 family - closed-end		282,717		4,703		201		1,836		289,457
Equity lines		23,277		615		55		2,641		26,588
Multi-family residential		49,986		3,472		—		—		53,458
Commercial real estate owner occupied		321,996		6,108		3,860		2,482		334,446
Commercial real estate non-owner occupied		841,728		26,364		14,429		367		882,888
Farmland		92,479		10,266		3,961		—		106,706
Total real estate		1,656,810		53,228		22,506		7,667		1,740,211
Agricultural		32,513		—		1,099		378		33,990
Commercial and industrial		98,367		9,989		212		1,223		109,791
Mortgage warehouse lines		101,184		—		—		—		101,184
Consumer loans		4,349		31		6		164		4,550
Total gross loans and leases	$	1,893,223	$	63,248	$	23,823	$	9,432	$	1,989,726

CECL replaces the legacy accounting for loans designated as purchased credit impaired (“PCI”) with loans designated as purchased credit deteriorated (“PCD”). PCD loans are ~~recorded at the amount paid, since there is no carryover~~loans acquired or purchased, which as 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 the loan(s) 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 acquisitions of Santa Clara Valley Bank in the fourth quarter of 2014 and Coast Bancorp in the third quarter of 2016 included certain loans which have shown~~had evidence of more than insignificant 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~~origination. Due to the immaterial balance ~~of those PCI loans was as follows, as of~~in the ~~dates indicated:~~

~~Purchased Credit Impaired Loans:~~

(dollars in thousands, unaudited)

September 30, 2017

Unpaid Principal Balance

Carrying Value

Real estate secured

$
254

$
37

Commercial and industrial

8

-

Total purchased credit impaired loans

$
262

$
37

December 31, 2016

Unpaid Principal Balance

Carrying Value

Real estate secured

$
712

$
47

Commercial and industrial

23

—

Total purchased credit impaired loans

$
735

$
47

~~An allowance for loan losses totaling $130,000 was allocated for~~Company’s PCI loans as of ~~September 30, 2017, as compared to $58,000 at~~ December 31, ~~2016. We also recorded approximately $6,000~~2021 management elected not to transition these loans into the PCD designation. As of June 30, 2022 the Company had 0 loans categorized as PCD.

As noted in ~~discount accretion~~footnote 3, on ~~PCI loans during~~January 1, 2022 the ~~nine months ended September 30, 2017.~~

~~Note 12 – Allowance for Loan~~Company implemented CECL 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 ofincreased our ACL, previously the allowance for loan and lease losses, with a $9.5 million cumulative adjustment. The Company’s ACL is calculated quarterly, with any difference in the calculated ACL and ~~adjusting it~~the recorded ACL trued-up through an entry 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~~provision for credit losses. Management calculates the quantitative portion of ~~the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation plan. A specific loss allowance is created~~collectively evaluated reserves for ~~each impaired~~all 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,categories, with the ~~associated allowance disclosed for those that required such. Included in the valuation allowance for impaired~~exception of Farmland, Agricultural Production and Consumer loans, ~~shown in the tables below are specific reserves allocated to TDRs, totaling $886,000 at September 30, 2017 and $1.048 million at December 31, 2016.~~

Impaired Loans

(dollars in thousands, unaudited)

September 30, 2017

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

$
688

$
533

$
31

$
772

$
33

1-4 family - closed-end

6,108

4,160

88

6,933

314

Equity lines

4,404

4,318

327

4,550

113

Multi-family residential

394

394

30

412

17

Commercial real estate- owner occupied

519

400

136

524

30

Commercial real estate- non-owner occupied

1,815

1,668

34

1,907

95

Total real estate

13,928

11,473

646

15,098

602

Agriculture

—

—

—

—

—

Commercial and industrial

739

707

170

1,826

74

Consumer loans

1,280

1,270

230

1,461

75

15,947

13,450

1,046

18,385

751

With no related allowance recorded

Real Estate:

Other construction/land

29

29

—

34

—

1-4 family - closed-end

760

702

—

828

2

Equity lines

329

300

—

333

—

Commercial real estate- owner occupied

1,445

1,444

—

1,808

8

Commercial real estate- non-owner occupied

10

—

—

28

—

Farmland

297

297

—

328

—

Total real estate

2,870

2,772

—

3,359

10

Agriculture

132

—

—

397

—

Commercial and industrial

619

618

—

854

—

Consumer loans

155

30

—

238

—

3,776

3,420

—

4,848

10

Total

$
19,723

$
16,870

$
1,046

$
23,233

$
761

⁽¹⁾	~~Contractual principal balance due from customer.~~

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

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

Impaired Loans

(dollars in thousands, unaudited)

December 31, 2016

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

$
854

$
699

$
20

$
624

$
14

1-4 family - closed-end

7,730

5,783

163

8,008

462

Equity lines

3,991

3,906

214

4,110

49

Multi-family residential

573

573

7

588

50

Commercial real estate- owner occupied

1,287

1,287

49

1,641

14

Commercial real estate- non-owner occupied

1,877

1,730

35

1,969

131

Total real estate

16,312

13,978

488

16,940

720

Agriculture

24

24

24

24

—

Commercial and industrial

2,211

2,211

608

2,652

99

Consumer loans

1,633

1,633

287

1,847

94

20,180

17,846

1,407

21,463

913

With no related allowance recorded

Real Estate:

Other construction/land

364

364

—

374

27

1-4 family - closed-end

666

607

—

685

3

Equity lines

544

515

—

550

—

Commercial real estate- owner occupied

999

999

—

1,773

98

Commercial real estate- non-owner occupied

77

67

—

85

—

Farmland

39

39

—

50

—

Total real estate

2,689

2,591

—

3,517

128

Agriculture

65

65

65

Commercial and industrial

62

62

—

277

—

Consumer loans

148

29

—

238

—

2,964

2,747

—

4,097

128

Total

$
23,144

$
20,593

$
1,407

$
25,560

$
1,041

⁽¹⁾	~~Contractual principal balance due from customer.~~

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

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

The 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 byusing a discounted cash flow ~~analysis.~~ (“DCF”) methodology. For purposes of calculating the quantitative portion of collectively evaluated reserves on Farmland, Agricultural Production, and Consumer categories a Remaining Life methodology is utilized. For purposes of estimating the Company’s ACL, Management generally evaluates collectively evaluated loans by Federal Call code in order to group loans with similar risk characteristics together, however management has grouped loans in selected call codes together in determining portfolio segments, due to similar risk characteristics and reserve methodologies used for certain call code classifications.

The ~~discounted~~DCF quantitative reserve methodology incorporates the consideration of probability of default (“PD”) and loss given default (“LGD”) estimates to estimate periodic losses. The PD estimates are derived through the application of reasonable and supportable economic forecasts to call code specific regression models, derived from the consideration of historical bank-specific and peer loss-rate data. The loss rate data has been regressed against benchmark economic indicators, for which reasonable and supportable forecasts exist, in the development of the call-code specific regression models. Regression models are generally refreshed on an annual basis, in order to pull in more recent loss rate data. Reasonable and supportable forecasts of the selected economic metric are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected monthly loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The Company utilizes a four-quarter forecast period, after which the expected default rates revert to the historical average for each call code, over a four-quarter reversion period, on a straight-line basis. The prepayment assumptions applied to expected cash flow ~~approach~~over the contractual life of the loans are estimated based on historical, bank-specific experience, peer data and current conditions and circumstances including the level of interest rates. The prepayment assumptions may be updated by

Table of Contents

Management in the event that changing conditions impact Management’s estimate or additional historical data gathered has resulted in the need for a reevaluation. LGD utilized in the DCF is ~~typically used~~derived from the application of the Frye-Jacobs theory which relates LGD to ~~measure impairment~~PD based on historical peer data, as calculated by a third-party. Economic forecasts are considered over a four-quarter forecast period, with reversion to mean occurring on a straight-line basis over four quarters. The call code regression models utilized upon implementation of CECL on January 1, 2022, and as of June 30, 2022, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate. Management selected the National Unemployment Rate as the driver of quantitative portion of collectively reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling, the availability of forecasts including the quarterly FOMC forecast, and given the widespread familiarity of stakeholders with this economic metric.

The quantitative reserves for Farmland, Agricultural Production and Consumer 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,~~are calculated using a Remaining Life methodology where average historical bank specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans in calculation of the quantitative portion of collectively evaluated loans in these classes. The estimated remaining life is calculated using historical bank-specific loan attrition data. For the Farmland, Agricultural Production and Consumer classes of loans, reasonable and supportable forecasts of the National Unemployment rate, real GDP and the housing price index are considered through estimation of qualitative reserves.

Management recognizes that there are additional factors impacting risk of loss in the loan portfolio beyond what is captured in the quantitative portion of reserves on collectively evaluated loans. As current and expected conditions, may vary compared with conditions over the historical lookback period, which is utilized in the calculation of quantitative reserves, management considers whether additional or reduced reserve levels on collectively evaluated loans may be ~~used~~warranted given the consideration of a variety of qualitative factors. Several of the following qualitative factors (“Q-factors”) considered by management reflect the legacy regulatory guidance on Q-factors, whereas several others represent factors unique to the Company or unique to the current time period.

●

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

●

Changes in international, regional and local economic and business conditions, and developments that affect the collectability of the portfolio, as reflected in forecasts of the Housing Price Index, Real GDP and the National Unemployment Rate (Farmland & Agricultural Production and Consumer segments only)

●

Changes in the nature and volume of the loan portfolio

●

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

●

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

●

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

●

Changes in the value of underlying collateral for loans not identified as collateral dependent

●

Changes in loan categorization concentrations

●

Other external factors, which include, the influence of peer data on estimated quantitative reserves, residual COVID-19 related risk, expected impact of current and expected inflationary environment, reliance on the National Unemployment rate as opposed to the California unemployment rate in the calculation of quantitative reserves, the expected impact of current and expected geo-political conditions

The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of numeric frameworks and management judgement, to determine ~~a specific loss allowance if they indicate a higher potential reserve need than the discounted cash flow analysis. Any change~~risk categorizations 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~~each of the ~~underlying collateral, impairment~~Q-factors presented above. The amount of qualitative reserves is ~~measured using~~also contingent upon the ~~fair value~~historical peer, life-of-loan-equivalent, loss rate ranges and the relative weighting of Q-factors according to management’s judgement.

Although collectively evaluated reserves are generally calculated separately at the ~~collateral. If~~call code or loan class level, management has grouped loan classes with similar risk characteristics into the ~~collateral value, net~~following portfolio segments: 1-4 Family Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse and Consumer loans. Loans secured by 1-4 family residences have a different profile from loans secured by Commercial Real Estate. Generally, the borrowers for 1-4 Family loans are consumers whereas borrowers for

Table of ~~the expected costs~~Contents

Commercial Real Estate are often businesses. The COVID-19 pandemic illustrated how these different categories of disposition where applicable, 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 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~~were subject to different risks, which was exacerbated by the widespread work-from-home model adopted by many companies during and since the pandemic. Farmland and Agricultural Production loans are included in a single segment as these loans are often times to the same borrowers, facing the same risks relating to commodity prices, water supply and drought conditions in addition to other environmental concerns. Commercial & Industrial loans are separated into a unique segment given the uniqueness of these loans, which are often revolving and secured by other business assets as opposed to real estate. Mortgage warehouse loans are also unique in the Company’s ~~licensed staff appraisers may update older appraisals based on current market conditions~~portfolio and ~~property value trends. Until~~warrant separate presentation as an ~~updated appraisal is received,~~individual portfolio segment, given the specific nature of these constantly revolving lines to mortgage originators and also attributable to a very limited loss history, even after consideration of peer data. Finally, the Company ~~uses the existing appraisal to determine the amount~~splits out Consumer loans as a separate segment as a result of the ~~specific~~small balance, homogeneous terms that characterize these loans.

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-dependentManagement individually evaluates loans that ~~remain impaired. Current appraisals were available or in process for all~~do not share risk characteristics with other loans when estimating reserves. As of June 30, 2022, the ~~Company’s impaired real estate loan balances at September 30, 2017. Furthermore, the Company analyzes collateral-dependent~~only loans ~~on at least a quarterly basis,~~that Management considered to ~~determine if any portion of the recorded investment in such~~have different risk characteristics from other 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 onsharing the same ~~segmentation of loan types presented~~Federal Call Report code were loans designated nonaccrual.

The following table presents the activity 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~~credit 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,~~by portfolio segment for the quarter ended June 30, 2022:


Allowance for Credit Losses and Recorded Investment in Financing Receivables
(dollars in thousands, unaudited)
	1-4 Family Real Estate		Commercial Real Estate		Farmland & Agricultural Production		Commercial & Industrial		Mortgage Warehouse		Consumer		Total
Allowance for credit losses:
Balance, March 31, 2022	$	3,329	$	17,043	$	606	$	1,231	$	51	$	270	$	22,530
Charge-offs		—		(1,911)		(213)		(86)		—		(313)		(2,523)
Recoveries		12		—		—		62		—		173		247
Provision for credit losses		252		2,187		(17)		(74)		(10)		210		2,548
Ending allowance balance:	$	3,593	$	17,319	$	376	$	1,133	$	41	$	340	$	22,802

The $0.3 million increase 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 ofCompany’s loan portfolio ~~growth, and changes~~ACL in ~~legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was $7.738~~the second quarter 2022 from $22.5 million at ~~September~~March 31, 2022 to $22.8 million at June 30, ~~2017.~~2022, is primarily a reflection of growth in loan balances recognized in the second quarter 2022.

~~There were no material changes to~~The following table presents the ~~methodology used to determine our allowance for loan and lease losses during the three months ended September 30, 2017, although~~activity in recognition of relatively low loan loss rates in recent periods upward adjustments have been made to certain qualitative factor multipliers. As we add new products and expand our geographic coverage, and as the economic environment changes, we expect to enhance our methodology to keep pace with the size and complexity of the 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 Company’s external auditors, the FDIC, and the California DBO review the allowance for credit losses by portfolio segment for the six months ended June 30, 2022:


Allowance for Credit Losses and Recorded Investment in Financing Receivables
(dollars in thousands, unaudited)
	1-4 Family Real Estate		Commercial Real Estate		Farmland & Agricultural Production		Commercial & Industrial		Mortgage Warehouse		Consumer		Total
Allowance for credit losses:
Balance, December 31, 2021	$	1,909	$	9,052	$	1,202	$	1,060	$	512	$	521	$	14,256
Impact of adopting ASC 326		611		9,628		(480)		358		(421)		(242)		9,454
Charge-offs		—		(1,911)		(2,171)		(160)		—		(612)		(4,854)
Recoveries		99		260		—		82		—		357		798
Provision for credit losses		974		290		1,825		(207)		(50)		316		3,148
Ending allowance balance:	$	3,593	$	17,319	$	376	$	1,133	$	41	$	340	$	22,802

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The $0.9 million decline in the Company’s loan portfolio ACL between the $23.7 million ACL recognized upon implementation of CECL on January 1, 2022 and ~~lease losses~~the $22.8 million as ~~an integral part~~ of June 30, 2022, reflects a narrowing of the gap between the California unemployment rate and the National Unemployment rate during the first six months of 2022, compared with December 31, 2021. The $2.2 million in charge-offs recognized in the Farmland and Agricultural Production portfolio segment is primarily the result of a reduction in the expected valuation of collateral on a single loan relationship, recorded in the first quarter 2022. The $1.9 million charge-off in Commercial Real Estate was recognized during the second quarter, when Management became aware of a borrower’s reduced ability to service their ~~audit and examination processes. Management believes that~~loan primarily as a result of increased vacancy rates related to the ~~current methodology is appropriate given our size and level of complexity.~~remote work which has increased following the pandemic.

The ~~tables that follow detail~~following table presents the activity in the allowance for loan ~~and lease~~ losses by portfolio segment for the ~~periods noted:~~three and six months ended June 30, 2021:


		Three months ended June 30, 2021
		Real Estate		Agricultural Products		Commercial and Industrial ⁽¹⁾		Consumer		Unallocated		Total

Allowance for credit losses:
Beginning balance	$	12,806	$	672	$	4,205	$	593	$	43	$	18,319
Charge-offs		(11)		(50)		(25)		(169)		—		(255)
Recoveries		195		—		82		180		—		457
(Benefit) provision		(915)		(98)		(1,190)		86		17		(2,100)
Ending balance	$	12,075	$	524	$	3,072	$	690	$	60	$	16,421

	Six months ended June 30, 2021
	Real Estate		Agricultural Products		Commercial and Industrial ⁽¹⁾		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance	$	11,766	$	482	$	4,721	$	720	$	49	$	17,738
Charge-offs		(245)		(50)		(77)		(331)		—		(703)
Recoveries		648		—		192		396		—		1,236
(Benefit) provision		(94)		92		(1,764)		(95)		11		(1,850)
Ending balance	$	12,075	$	524	$	3,072	$	690	$	60	$	16,421
Reserves:
Specific	$	641	$	246	$	381	$	16	$	—	$	1,284
General		11,434		278		2,691		674		60		15,137
Ending balance	$	12,075	$	524	$	3,072	$	690	$	60	$	16,421
Loans evaluated for impairment:
Individually	$	15,677	$	517	$	1,649	$	207	$	—	$	18,050
Collectively		1,780,290		42,435		299,334		4,687		—		2,126,746
Ending balance	$	1,795,967	$	42,952	$	300,983	$	4,894	$	—	$	2,144,796

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

Three months ended September 30, 2017

Real Estate

Agricultural
Products

Commercial and
Industrial

Consumer

Unallocated

Total

Allowance for credit losses:

Beginning Balance

$
4,104

$
243

$
3,452

$
1,149

$
282

$
9,230

Charge-offs

(1
)

(132
)

(192
)

(561
)

—

(886
)
Recoveries

69

—

87

284

—

440

Provision

369

108

(568
)

315

(224
)

—

Ending Balance

$
4,541

$
219

$
2,779

$
1,187

$
58

$
8,784

Nine months ended September 30, 2017

Real Estate

Agricultural
Products

Commercial and
Industrial

Consumer

Unallocated

Total

Allowance for credit losses:

Beginning Balance

$
3,548

$
209

$
4,279

$
1,208

$
457

$
9,701

Charge-offs

(146
)

(154
)

(576
)

(1,606
)

—

(2,482
)
Recoveries

214

5

282

764

—

1,265

Provision

925

159

(1,206
)

821

(399
)

300

Ending Balance

$
4,541

$
219

$
2,779

$
1,187

$
58

$
8,784

Reserves:

Specific

$
646

$
—

$
170

$
230

$
—

$
1,046

General

3,895

219

2,609

957

58

7,738

Ending Balance

$
4,541

$
219

$
2,779

$
1,187

$
58

$
8,784

Loans evaluated for impairment:

Individually

$
14,245

$
—

$
1,325

$
1,300

$
—

$
16,870

Collectively

1,007,372

49,315

229,071

8,997

1,294,755

Ending Balance

$
1,021,617

$
49,315

$
230,396

$
10,297

$
—

$
1,311,625

Year ended December 31, 2016

Real Estate

Agricultural
Products

Commercial and
Industrial

Consumer

Unallocated

Total

Allowance for credit losses:

Beginning Balance

$
4,783

$
722

$
2,533

$
1,263

$
1,122

$
10,423

Charge-offs

(962
)

—

(344
)

(1,905
)

—

(3,211
)
Recoveries

983

14

477

1,015

—

2,489

Provision

(1,256
)

(527
)

1,613

835

(665
)

—

Ending Balance

$
3,548

$
209

$
4,279

$
1,208

$
457

$
9,701

Reserves:

Specific

$
488

$
24

$
608

$
287

$
—

$
1,407

General

3,060

185

3,671

921

457

8,294

Ending Balance

$
3,548

$
209

$
4,279

$
1,208

$
457

$
9,701

Loans evaluated for impairment:

Individually

$
16,569

$
89

$
2,273

$
1,662

$
—

$
20,593

Collectively

900,928

46,140

284,367

10,503

—

1,241,938

Ending Balance

$
917,497

$
46,229

$
286,640

$
12,165

$
—

$
1,262,531

Note 11 – Long-Term Debt

Long-Term Debt

(dollars in thousands, unaudited)


	June 30, 2022				December 31, 2021
			Unamortized				Unamortized
			Debt Issuance				Debt Issuance
	Principal		Costs		Principal		Costs
Fixed - floating rate subordinated debentures, due 2031 ⁽¹⁾	$	50,000	$	(827)	$	50,000	$	(859)
Total long-term debt	$	50,000	$	(827)	$	50,000	$	(859)

(1)	3.25% fixed rate for five years, then floating rate beginning October 1, 2026 at 253.5 basis points over 3-month term SOFR adjusted quarterly.

Table of Contents

Note 1312 – ~~Recent Developments~~Revenue Recognition

~~On April 24, 2017,~~The Company utilizes the guidance found in ASU 2014-09, Revenue from Contracts with Customers (ASC 606), when accounting for certain noninterest income. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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 ~~announced the signing~~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 a definitive agreement to acquire OCB Bancorp (“Ojai”), the holding company for Ojai Community Bank, and the transaction was completed on October 1, 2017. Immediately following the acquisition, Ojai Community Bank was merged with and into BankGAAP.

All of the ~~Sierra. Ojai Community Bank had its head office~~Company’s revenue from contracts within the scope of ASC 606 is recognized as noninterest income, except for gains on the sale of OREO which is classified as noninterest expense. The following table presents the Company’s sources of noninterest income for the three and six-month periods ended June 30, 2022 and 2021. Items outside the scope of ASC 606 are noted as such (dollars in ~~Ojai,~~thousands, unaudited).


	For the three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Noninterest income
Service charges on deposits
Returned item and overdraft fees	$	1,372	$	1,148	$	2,700	$	2,254
Other service charges on deposits		1,832		1,577		3,545		3,237
Debit card interchange income		2,161		2,235		4,218		4,128
Loss on limited partnerships⁽¹⁾		(113)		(114)		(225)		(247)
Dividends on equity investments⁽¹⁾		183		164		429		357
Unrealized gains recognized on equity investments⁽¹⁾		—		—		(332)		857
Net gains on sale of securities⁽¹⁾		—		—		1,032		—
Other⁽¹⁾		5,004		1,602		5,135		2,856
Total noninterest income	$	10,439	$	6,612	$	16,502	$	13,442

Noninterest expense
Salaries and employee benefits ⁽¹⁾	$	11,745	$	10,425	$	23,550	$	21,576
Occupancy expense ⁽¹⁾		2,406		2,626		4,699		5,112
(Gain) loss on sale of OREO		—		(101)		(5)		(116)
Other ⁽¹⁾		7,962		7,285		14,042		13,934
Total noninterest expense	$	22,113	$	20,235	$	42,286	$	40,506
Percentage of noninterest income not within scope of ASC 606.		48.61%		24.98%		36.60%		28.44%

(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 ~~branch offices in Ventura, Santa Paula, and Santa Barbara, conducting business~~performance obligations are satisfied as services are rendered, thus there is little or no judgment involved in the ~~respective communities as Ventura Community Bank, Santa Paula Community Bank, and Santa Barbara Community Bank. Those locations are now being operated as our branch offices~~timing of revenue recognition under the Bank of the Sierra name, but it should be noted that we plan to consolidate Ojai’s former Santa Paula office into our Santa Paula branch in early 2018. The aggregate consideration tendered by the Company in its acquisition of OCB Bancorp consisted of 1.376 million shares of Sierra Bancorp common stock, approximately $1.2 million in cash in lieu of shares for certain convertible debt and unexercised stock options, and a nominal amount of cash for fractional shares. One-time acquisition costs are expected to add $2.5 million to $3.0 million to the Company’s pre-tax non-interest expense, primarily in 2017. At the merger date the Ojai acquisition contributed approximately $220 million to the Company’s outstanding loan balances, over $5 million to investment securities, and $231 million to total deposits. In accordance with GAAP, assets and liabilities will be reflected on the Company’s books at their estimated fair values and there was no carryover of the allowance for loan losses that had previously been recorded by Ojai. The Company will also record a deferred income tax asset, goodwill, and a core deposit intangible (“CDI”) in conjunction with the acquisition, although those amounts have not yet been definitively determined. Goodwill represents the excess of consideration transferred over the fair values of the identifiable net assets acquired; it is not amortized but could be written down if deemed to be impaired at some point. The CDI is essentially the premium paid for core deposits over the fair value of those deposits, and it will be amortized on a straight line basis over eight years commencing at the date of acquisition. Goodwill and core deposit intangibles are not deductible for income tax purposes.

On July 5, 2017, Bank of the Sierra, the banking subsidiary of Sierra Bancorp, entered into an agreement with Citizens Business Bank, the banking subsidiary of CVB Financial Corp., to acquire the Citizens branch located in Woodlake, California. The transaction closed on November 3, 2017, and the Woodlake branch is now being operated as a full-service branch of Bank of the Sierra. Woodlake branch deposits totaled approximately $26 million at the acquisition date, consisting largely of non-maturity deposits. Bank of the Sierra already had a number of deposits in the Woodlake zip codecontracts that are ~~domiciled at nearby branches, and this branch purchase is intended to enhance~~within the ~~level~~scope of ~~service for those customers as well as provide additional core deposits for the Bank. The acquisition also included the purchase~~ASC 606.

Table of ~~the Woodlake branch building, the real property on which the building is located, and certain other equipment and fixed assets at their aggregate fair value of $500,000.~~Contents

The Company acquired Coast Bancorp (“Coast”), the holding company for Coast National Bank, on July 8, 2016, and immediately following the acquisition, Coast National Bank was merged with and into Bank of the Sierra. Coast National Bank was a community bank with branch offices in San Luis Obispo, Paso Robles, and Arroyo Grande, and a loan production office in Atascadero, California. Shortly after transaction closing, the Atascadero location was converted into a full-service branch office. At the acquisition date, the fair value of Coast’s loans totaled $94 million and deposits totaled $129 million. The acquisition also involved $7 million in trust preferred securities, which were booked by the Company at their initial fair value of $3.4 million. This acquisition had, and will continue to have, a material impact on comparative 2017 and 2016 average balances and associated income and expense. Furthermore, one-time acquisition costs added over $2.4 million to the Company’s pre-tax non-interest expense in 2016.

PART I - FINANCIAL INFORMATION

ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form ~~10-Q~~10-Q includes forward-looking statements that involve inherent risks and uncertainties. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933 (“1933 Act”), as amended and Section 21E of the Securities Exchange Act of 1934 (“1934 Act”), as amended. Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements in order to encourage companies to provide prospective information about their financial performance as long as important factors that could cause actual results to differ significantly from projected results are identified with meaningful cautionary statements. Words such as “expects”, “anticipates”, “believes”, “projects”, “intends”, and “estimates” or variations of such words and similar expressions, as well as future or conditional verbs preceded by “will”, “would”, “should”, “could” or “may” are intended to identify forward-looking statements. These forward-looking statements are based on certain underlying assumptions and are not guarantees of future performance, as they could be impacted by ~~a number of~~several potential risks and developments that cannot be predicted with any degree of certainty.

These statements are based on management’s current expectations regarding economic, legislative, regulatory and other environmental issues that may affect our earnings in future periods. 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,~~ to:

●

the risk of unfavorable economic conditions in the Company’s market areas;

●

risks associated with fluctuations in interest rates;

●

risks associated with the current national emergency with respect to COVID-19 and its variants, including the impact that national, state, and local responses, including limitations on business and personal activity as well as any stimulus or relief efforts have on customers’ continued ability to repay loans;

●

risks associated with inflation (including efforts by the Board of Governors of the Federal Reserve to control the same);

●

liquidity risks, including the ability to effectively manage the additional liquidity from the significant increase in deposits during the COVID-19 pandemic including managing the potential loss of a portion of such deposits;

●

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 diversify and grow its loan portfolio;

●

the Company’s ability to attract and retain skilled employees;

●

the Company’s ability to successfully deploy new technology;

●

the Company’s ability to receive regulatory approval for acquisitions or branch expansion while having a less than satisfactory rating under the Community Reinvestment Act;

Table of unfavorable economic conditions in the Company’s market areas; risks associated with fluctuations in interest rates; 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. Contents

●

the outcome of any existing or future legal action for which the Company or Bank is a defendant;

●

the success of acquisitions or branch expansions, closures or consolidations; and

●

risks associated with the multitude of or changes to current and prospective laws and regulations, and related interpretations, 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~~detailed in the Company’s Form 10-K for the fiscal year ended December 31, ~~2016.~~2021 and in Item 1A, herein. We do not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.

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 12 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 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.

●

the establishment of the allowance for credit losses, as explained in detail in Note 10 to the consolidated financial statements and in the “Provision for Credit Losses” and “Allowance for Credit Losses” sections of this discussion and analysis;

●

the valuation of individually evaluated loans and foreclosed assets, as discussed in Notes 8 and 10 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~~regarding those areas.

OVERVIEW OF THE RESULTS OF OPERATIONS

AND FINANCIAL CONDITION

~~results of operations Summary~~RESULTS OF OPERATIONS SUMMARY

~~Third~~Second Quarter ~~2017~~2022 compared to ~~Third~~Second Quarter ~~2016~~2021

~~Net~~Second quarter 2022 net income ~~for the quarter ended September 30, 2017~~ was ~~$5.742 million, representing an increase of $1.813~~$9.2 million, or ~~46%, relative to net income of $3.929 million for the quarter ended September 30, 2016. Basic and~~$0.61 per diluted ~~earnings per~~ share, ~~for the third quarter of~~

~~2017 were both $0.41,~~ compared to ~~$0.28 basic and~~$11.7 million, or $0.76 per diluted ~~earnings per~~ share ~~for~~in the ~~third~~second quarter of ~~2016.~~2021. The Company’s annualized return on average equity was ~~10.45%~~11.68% and annualized return on average assets was ~~1.10%~~1.07% for the quarter ended ~~September~~June 30, ~~2017,~~2022, compared to ~~7.50%~~13.29% and ~~0.81%~~1.42%, respectively, for the same quarter ~~ended September 30, 2016.~~in 2021. The primary drivers behind the variance in ~~third~~second quarter net income are as follows:

●

Net interest income decreased $0.6 million, or 2%, due primarily to a $0.4 million increase in interest expense from the issuance of subordinated debt during the third quarter of 2021 and higher cost of funds on interest-bearing liabilities due to the recent increases in the prime interest rate.

Net interest income was up by $1.528 million, or 9%, due to growth in average interest-earning assets totaling $142 million, or 8%, as well as improvement of four basis points in our net interest margin.38

Total non-interest income increased by $919,000, or 18%, due to a $918,000 gain realized on the sale of certain investment securities in the third quarter of 2017. An increase in deposit service charges was largely offset by a net drop in other non-interest income.

~~Total non-interest expense fell by $676,000, or 4%, due to lower nonrecurring acquisition costs, which totaled $424,000 in the third quarter~~Table of 2017 relative to $1.695 million in the third quarter of 2016. This favorable variance was partially offset by other large variances within non-interest expense, including an increase of $612,000, or 9%, in personnel costs. Fluctuations in operating costs are discussed in greater detail in the “Non-Interest Income and Non-Interest Expense” section of this Management Discussion and Analysis.Contents

While pre-tax income increased by 54%, net income reflects a lower percentage increase due to a higher income tax accrual rate. The Company’s provision for income taxes increased to 35% of pre-tax income in the third quarter of 2017 from 32% in the third quarter of 2016, due primarily to higher taxable income and a declining level of tax credits.

●

The provision for credit losses on loans and leases was $2.5 million under the new current expected credit losses (“CECL”) methodology, as compared to a $2.1 million benefit under the incurred loss model in the same quarter of 2021, for a net increase of $4.6 million. This is driven primarily from the replacement of allowance due to $4.1 million in net loan charge offs during the second quarter of 2022.

●

Noninterest income increased $3.8 million, primarily due to a $3.2 million gain on sale of other assets, $0.4 million in life insurance proceeds, a $0.2 million recovery on an acquired loan, and a $1.0 million recovery of prior year legal expenses, partially offset by a $1.4 million negative variance in Corporate Owned Life Insurance with income linked to the Company’s nonqualified deferred compensation plan.

●

Total noninterest expense increased $1.9 million, or 9%, in the second quarter of 2022 as compared to the second quarter of 2021. Higher salaries and benefits costs accounted for $1.3 million of the increase as we added new lending teams, and $0.8 million of the increase was due to higher other expenses, mostly for the accrual of restitution payments to customers charged nonsufficient fund fees for representments in the past five years and $0.3 million in postage and mailing costs associated with new disclosure agreements which detail updated service charges on returned items and overdraft fees.

First ~~Nine Months of 2017~~Half 2022 compared to First ~~Nine Months of 2016~~Half 2021

Net income for the first ~~nine months~~half of ~~2017~~2022 was ~~$15.496 million, representing an increase of $3.446~~$16.6 million, or ~~29%, relative~~$1.10 per diluted share, compared to ~~net income of $12.050~~$22.8 million, ~~for the first nine months of 2016. Basic and~~or $1.48 per diluted ~~earnings per~~ share for the ~~first nine months of 2017 were $1.12 and $1.11, respectively, compared to $0.90 basic earnings per share and $0.89 diluted earnings per share for the first nine months of 2016.~~same period in 2021. The Company’s annualized return on average equity was ~~9.70%~~10.10% and annualized return on average assets was ~~1.02%~~0.98% for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, compared to a return on equity of ~~8.08%~~13.11% and return on assets of ~~0.89%~~1.41% for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. The primary drivers behind the variance in year-to-date net income are as follows:

●

The provision for credit losses on loans and leases was $3.1 million, an increase of $5.0 million, due to a change from the incurred loss method to the current expected credit loss method, coupled with higher charge-offs in 2022 on two loan relationships.

●

Net interest income decreased by $4.4 million, or 8%, due mostly to the change in mix of interest earning assets with average loan balances increasing and investments increasing. In addition, the cost of interest-bearing liabilities was higher due to increases in index rates on certain floating rate liabilities.

●

Noninterest income increased $3.1 million, or 23%, for the same reasons as noted above in the quarterly comparison, combined with a $1.0 million gain on the sale of investment securities, and a $2.6 million negative variance in BOLI income tied to our nonqualified deferred compensation plan.

●

Noninterest expense increased $1.8 million, or 4% for the same reasons as outlined in the quarterly comparison above.

~~Net interest income increased $5.742 million, or 12%, due to the positive impact of a $202 million increase in average interest-earning assets resulting in part from the Coast acquisition in 2016.~~

~~The year-to-date comparison was impacted by a $300,000 loan loss provision that was recorded in the second quarter of 2017, the first such provision since the third quarter of 2014.~~

Total non-interest income was up $2.549 million, or 18%, due to an increase of $772,000 in investment gains, a $728,000 increase in service charges on deposits, a $447,000 increase in bank-owned life insurance (BOLI) income, and a $602,000 increase in other non-interest income.

Total non-interest expense increased by $2.923 million, or 7%, due in large part to ongoing operating expenses associated with the Coast acquisition and recent branch openings; other significant variances are detailed below in the “Non-Interest Income and Non-Interest Expense” section of this Management Discussion and Analysis.

~~Financial Condition Summary~~

~~September~~FINANCIAL CONDITION SUMMARY

June 30, ~~2017~~2022 relative to December 31, ~~2016~~2021

The Company’s assets totaled ~~$2.078~~$3.4 billion at ~~September~~June 30, ~~2017, relative to $2.033 billion at~~2022 unchanged from December 31, 2016. Total liabilities were $1.859 billion at September 30, 2017 compared to $1.827 billion at the end of 2016, and shareholders’ equity totaled $219 million at September 30, 2017 compared to $206 million at December 31, 2016.2021. The following provides a summary of key balance sheet changes during the first ~~nine~~six months of ~~2017:~~2022:

●

The Company’s balance of cash and cash equivalents declined by $95.7 million, or 37% from December 31, 2021. The overall increase in cash balances was due primarily to increases in investment securities and loans and leases during the first half 2022.

●

Investment securities were $1.0 billion at June 30, 2022, an increase of $52.3 million, or 5% from December 31, 2021. The Company purchased $158.2 million in various government agency sponsored mortgage-backed securities, agency securities, municipal securities, corporate bonds and collateralized mortgage obligations. On April 1, 2022, the Company transferred $162.1 million of “available-for-sale” investment securities to “held-to-maturity”. The securities were transferred at fair market value on the date of transfer. The transfer was initiated to partially insulate other comprehensive income and equity from changes in interest rates. This transfer had no

~~Cash balances were down $66~~Table of Contents

impact on net income, and future price changes on these securities due to changes in interest rates will not affect capital.

●

Gross loans increased $32.9 million due predominantly to the purchase of high quality jumbo single family mortgage loan pool purchases. This increase was offset by reductions in almost all loan categories as loan maturities and payoffs exceeded the increases in loan production for the first six months of 2022.

●

Deposits increased by $69.4 million, or 2%. The growth in deposits came primarily from noninterest-bearing or low-cost transaction and savings accounts, while higher-cost time deposits increased $5.9 million.

Total shareholders’ equity of $299.0 million at June 30, 2022 reflects a decrease of $63.4 million, or ~~55%~~18%, ~~including a $27 million reduction in non-earning balances.~~

~~Investment securities were up $53 million, or 10%,due in part~~relative to ~~the longer-term investment of cash balances.~~

Gross loans increased by $49 million, or 4%, due to strong organic growth in real estate loans and agricultural production loans. Loan growth would have been greater if not for the payoff of sizeable agricultural and commercial loans, and a drop of $44 million in mortgage warehouse loans.

•

Total nonperforming assets, namely non-accrual loans and foreclosed assets, were reduced by almost $2 million, or 21%. The Company’s ratio of nonperforming assets to total loans plus foreclosed assets was 0.52% at September 30, 2017, compared to 0.68% at December 31, 2016 and 0.72% at September 30, 2016.

Despite a quarterly decline resulting from the runoff of seasonal deposits, deposits were still up $84 million, or 5%, for the first nine months of 2017, ending the period at $1.780 billion due largely to growth in core non-maturity deposits.

Junior subordinated debentures increased slightly from accretion of the discount on trust-preferred securities gained in the Coast acquisition, but other borrowings were reduced by $52 million, or 72%, as facilitated by deposit growth.

~~Total capital reflects an increase of $13 million, or 6%,~~year-end 2021, due to the addition of $16.6 million in net income, offset by a $61.6 million unfavorable swing in accumulated other comprehensive income/loss due principally to changes in investment securities’ fair value, a one-time adjustment from the ~~impact~~implementation of CECL on January 1, 2022 for $7.3 million, $4.9 million in share repurchases and net of $7.0 million in dividends paid. The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

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 ~~$2 million absolute increase in accumulated~~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 many actions impacting the Company. These actions included, among other ~~comprehensive income, net~~things, the Federal Open Market Committee (FOMC) reducing the federal funds rate; California issuing a state-wide shelter-in-place order and various other orders at the state and local levels restricting business operations, closing schools, and thereafter prescribing requirements for reopening; and various pieces of ~~dividends paid. Our consolidated total risk-based capital ratio was 17.26% at September 30, 2017 as compared~~federal legislation were passed to ~~17.25% at year-end 2016, and our regulatory capital ratios remain very strong relative~~attempt to ~~peer banks.~~address the impact of COVID-19 on the economy.

Impact of COVID-19 on the Company’s Operations

●

Starting in April 2020, the Company took 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. The Company had no loans remaining on deferral, which were modified under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, as amended.

●

The uncertainty of national and local economic conditions had an impact on our provision for credit losses in early 2022 and on our provision for loan and lease losses in 2021. The Company implemented the Current Expected Credit Loss ("CECL") accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022, after having elected under Section 4014 of the CARES Act and the Consolidated Appropriations Act, 2021 to defer earlier implementation.

●

The Company expects that net interest income may continue to be adversely impacted given pressure on the net interest margin as a result of the current interest rate environment. Although the FOMC has raised the fed funds rate three times in the first half of 2022; 25 basis points on March 16, 2022, 50 basis points on May 4, 2022 and 75 basis points on June 16, 2022, the overall rate environment is still relatively low. The FOMC has indicated potential future increases to the overnight fed funds rate but uncertainty as to when and at what rate this may occur still remains. These lower rates have impacted our net interest margin. Our net interest margin for the six months ended June 30, 2022, was 3.31%, compared to a net interest margin of 3.76% for the same period in 2021. Additional liquidity from significant deposit growth in 2021 and the first six months of 2022, coupled with lower loan balances has negatively impacted our net interest margin. This additional liquidity was mostly deployed in overnight funding resulting in $170.4 million in average overnight cash during the first half of 2022. This overnight funding earned an average rate of 43 basis points, for the first six months ending June

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30, 2022. In addition, the Company had $1.0 billion in investment securities at average tax effective yield 207 basis points lower than that of current loan yields.

●

The COVID-19 pandemic has not adversely affected our capital or financial resources as of June 30, 2022. During the first half of 2022, total shareholders’ equity decreased by $63.4 million, or 18%, to $299.0 million. The Company earned $16.6 million in net income in the first six months of 2022, but had a $61.6 million decrease in accumulated other comprehensive income as a result of decreases in the value of our investment portfolio due to an uptick in interest rates. If interest rates continue to rise, this component of equity would be expected to further decline. The Company also paid dividends of $7.0 million and repurchased shares of stock for $4.9 million during the first half of 2022. On July 21, 2022, the Company declared a twenty-three cent per share dividend to be paid on August 15, 2022. 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.

●

The Company continues to serve its customers. Several of our branch locations were closed during the height of the pandemic, but have since re-opened. Five branch locations were permanently closed in June 2021. This decision to close these branches was made as a result of a change in customer behaviors brought about by the COVID-19 pandemic along with an efficiency review. All of the five closed locations were located outside of Tulare County, the Bank’s primary market area. Many of our customers have found an added convenience and ease of transacting business through online and mobile banking services which precipitated our decision to close locations where in-person transaction volumes no longer warranted a traditional brick-and-mortar branch. Overall deposits at these five closed branches increased during the period of time from announcement to closure and consolidation into a nearby branch.

●

As a financial institution providing essential services, the Company expects continued demand for loans and deposits. In addition, strong mortgage warehouse utilization that resulted from the low rate refinance environment of 2020 and 2021 is not expected to return in 2022 and hence our loans outstanding in this sector remain at lower levels. Further, it is expected that SBA PPP loans will continue to be forgiven, with the remainder expected to be forgiven in 2022.

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 ~~non-interest~~noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as ~~bank-owned life insurance.~~BOLI and investment gains. The majority of the Company’s ~~non-interest~~noninterest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.

~~Net interest income~~

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income ~~increased by $1.528~~decreased $0.6 million to $26.6 million, for the second quarter of 2022 over the second quarter of 2021 and decreased $4.4 million, or ~~9%,~~8% to $51.3 million for the ~~third quarter~~first six months of ~~2017~~2022 relative to the ~~third~~same period in 2021.

For the second quarter of ~~2016 and by $5.742~~2022 as compared to the same quarter in 2021, average loan balances decreased $173.0 million, or ~~12%~~8%, primarily due to decreases in commercial loans of $86.0 million, or 52%, a $13.5 million, or 31% decrease in agricultural production loans, and a $92.5 million, or 65%, decrease in the utilization of mortgage warehouse lines. These decreases were partially offset by an $18.8 million, or 1% increase in real estate loans. The yield on the loan and lease portfolio was 26 basis points lower in the second quarter of 2022 as compared to the same period in 2021. Average investment balances also increased $290.6 million with a 79 basis point increase in yield, mostly due to a $388.9 million increase in average collateralized loan obligation balances which have variable rates, which helped

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alleviate some of the negative pressure on our net interest margin. Adding to the pressure on our net interest margin, was a 13 basis points unfavorable increase in the cost of interest-bearing liabilities in the second quarter of 2022 as compared to the second quarter of 2021.

For the first half of 2022 as compared to the same period in 2021, average loan balances decreased $293.5 million or 13%. All categories of loans decreased with the primary decrease in commercial loans for $90.3 million and a $136.8 million decline in mortgage warehouse line utilization. There was a 24 basis points decrease in loan yield for the first ~~nine months~~half of ~~2017~~2022 as compared to the ~~first nine months of 2016.~~ same period in 2021. Average investment balances increased $451.0 million yielding 28 basis points higher for the same period, which helped offset the negative loan yield variances. Adding to the unfavorable decrease in yield was an 11 basis point decrease in the yield on interest bearing liabilities, driven by the recent increases in the prime interest rate.

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~~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 is also impacted by the reversal of interest for loans placed on non-accrual status during the reporting period, and the recovery of interest on loans that had been on non-accrual and were paid off, sold or returned to accrual status.

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.~~periods.

Average Balances and Rates

(dollars in thousands, except per share data)

For the three months ended

For the three months ended

Ended September 30, 2017

Ended September 30, 2016

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

$
18,743

$
63

1.32
%

$
11,221

$
29

1.01
%
Taxable

446,395

2,224

1.95
%

419,218

1,879

1.75
%
Non-taxable

142,544

1,002

4.23
%

112,600

765

4.09
%
Total investments

607,682

3,289

2.47
%

543,039

2,673

2.22
%

Loans and Leases:⁽³⁾

Real estate

999,692

12,772

5.07
%

860,753

10,931

5.05
%
Agricultural

51,063

651

5.06
%

52,979

576

4.33
%
Commercial

113,166

1,483

5.20
%

126,190

1,685

5.31
%
Consumer

11,046

328

11.78
%

13,456

395

11.68
%
Mortgage warehouse lines

109,547

1,258

4.56
%

155,487

1,501

3.84
%
Other

3,392

51

5.97
%

2,035

33

6.45
%
Total loans and leases

1,287,906

16,543

5.10
%

1,210,900

15,121

4.97
%
Total interest earning assets⁽⁴⁾

1,895,588

19,832

4.26
%

1,753,939

17,794

4.13
%
Other earning assets

8,741

8,268

Non-earning assets

163,525

156,657

Total assets

$
2,067,854

$
1,918,864

Liabilities and shareholders' equity

Interest bearing deposits:

Demand deposits

$
136,304

$
106

0.31
%

$
136,467

$
105

0.31
%
NOW

376,067

106

0.11
%

338,086

95

0.11
%
Savings accounts

238,824

65

0.11
%

211,900

59

0.11
%
Money market

120,086

24

0.08
%

117,854

24

0.08
%
CDAR's

—

—

—

477

—

—

Certificates of deposit, under $100,000

70,884

78

0.44
%

76,609

61

0.32
%
Certificates of deposit, $100,000 or more

272,680

653

0.95
%

249,132

231

0.37
%
Brokered deposits

—

—

—

—

—

—

Total interest bearing deposits

1,214,845

1,032

0.34
%

1,130,525

575

0.20
%
Borrowed Funds:

Federal funds purchased

174

1

2.28
%

898

1

0.44
%
Repurchase agreements

8,247

8

0.38
%

7,704

8

0.41
%
Short term borrowings

1,441

5

1.38
%

36,293

42

0.46
%
TRUPS

34,519

351

4.03
%

37,319

261

2.78
%
Total borrowed funds

44,381

365

3.26
%

82,214

312

1.51
%
Total interest bearing liabilities

1,259,226

1,397

0.44
%

1,212,739

887

0.29
%
Demand deposits - non-interest bearing

560,057

481,996

Other liabilities

30,487

15,678

Shareholders' equity

218,084

208,451

Total liabilities and shareholders' equity

$
2,067,854

$
1,918,864

Interest income/interest earning assets

4.26
%

4.13
%
Interest expense/interest earning assets

0.29
%

0.20
%
Net interest income and margin⁽⁵⁾

$
18,435

3.97
%

$
16,907

3.93
%

Table of Contents

Average Balances and Rates

(dollars in thousands, unaudited)


	For the three months ended					For the three months ended
	June 30, 2022					June 30, 2021
Assets	Average Balance ⁽¹⁾		Income/ Expense		Average Rate/Yield ⁽²⁾	Average Balance ⁽¹⁾		Income/ Expense		Average Rate/Yield ⁽²⁾
Investments:
Interest-earning due from banks	$	146,287	$	270	0.74%	$	308,453	$	85	0.11%
Taxable		752,693		4,477	2.39%		340,690		1,573	1.85%
Non-taxable		284,198		1,854	3.31%		243,461		1,517	3.16%
Total investments		1,183,178		6,601	2.40%		892,604		3,175	1.61%

Loans and leases:⁽³⁾
Real estate		1,844,367		19,659	4.28%		1,825,600		21,015	4.62%
Agricultural		30,466		232	3.05%		43,959		408	3.72%
Commercial		80,533		980	4.88%		166,554		2,124	5.12%
Consumer		4,264		207	19.47%		4,978		193	15.55%
Mortgage warehouse lines		49,884		493	3.96%		142,348		1,151	3.24%
Other		2,354		34	5.79%		1,460		26	7.14%
Total loans and leases		2,011,868		21,605	4.31%		2,184,899		24,917	4.57%
Total interest earning assets⁽⁴⁾		3,195,046		28,206	3.60%		3,077,503		28,092	3.71%
Other earning assets		15,628					15,438
Non-earning assets		239,803					209,218
Total assets	$	3,450,477				$	3,302,159


Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	221,322	$	120	0.22%	$	161,871	$	91	0.23%
NOW		542,915		82	0.06%		601,339		116	0.08%
Savings accounts		480,654		70	0.06%		424,512		59	0.06%
Money market		155,574		23	0.06%		139,336		30	0.09%
Time Deposits		295,850		441	0.60%		337,270		262	0.31%
Brokered deposits		60,000		48	0.32%		92,418		61	0.26%
Total interest bearing deposits		1,756,315		784	0.18%		1,756,746		619	0.14%
Borrowed funds:
Federal funds purchased		168		—	—		168		—	0.00%
Repurchase agreements		112,417		77	0.27%		57,885		39	0.27%
Short term borrowings		1		—	—		3,133		—	0.00%
Long-term debt		49,160		430	3.51%				—	—
Subordinated debentures		35,365		330	3.74%		35,185		245	2.79%
Total borrowed funds		197,111		837	1.70%		96,371		284	1.18%
Total interest bearing liabilities		1,953,426		1,621	0.33%		1,853,117		903	0.20%
Demand deposits - noninterest bearing		1,132,601					1,052,494
Other liabilities		48,458					43,095
Shareholders' equity		315,992					353,453
Total liabilities and shareholders' equity	$	3,450,477				$	3,302,159
Interest income/interest earning assets					3.60%					3.71%
Interest expense/interest earning assets					0.20%					0.12%
Net interest income and margin⁽⁵⁾			$	26,585	3.40%			$	27,189	3.60%

⁽¹⁾	Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

⁽²⁾	Yields and net interest margin have been computed on a tax equivalent basis utilizing a ~~35%~~21% effective tax rate.

⁽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 ~~$(22) thousand~~$0.4 million and ~~$156 thousand~~$1.0 million for the quarters ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~

2021, respectively.

⁽⁴⁾	Non-accrual loans have been included in total loans for purposes of computing total earning assets.

⁽⁵⁾	Net interest margin represents net interest income as a percentage of average ~~interest-earning~~interest earning assets.

Average Balances and Rates

(dollars in thousands, except per share data)

For the nine months ended

For the nine months ended

September 30, 2017

September 30, 2016

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

$
42,983

$
317

0.97
%

$
11,996

$
61

0.67
%
Taxable

436,818

6,385

1.93
%

416,177

6,114

1.93
%
Non-taxable

130,285

2,739

4.27
%

106,396

2,225

4.23
%
Total investments

610,086

9,441

2.36
%

534,569

8,400

2.36
%

Loans and Leases:⁽³⁾

Real estate

965,980

36,586

5.06
%

803,958

30,287

5.03
%
Agricultural

49,851

1,826

4.90
%

48,678

1,598

4.39
%
Commercial

116,628

4,558

5.23
%

114,040

4,189

4.91
%
Consumer

11,569

982

11.35
%

14,140

1,218

11.51
%
Mortgage warehouse lines

98,994

3,253

4.39
%

136,899

3,972

3.88
%
Other

3,228

144

5.96
%

2,004

96

6.40
%
Total loans and leases

1,246,250

47,349

5.08
%

1,119,719

41,360

4.93
%
Total interest earning assets⁽⁴⁾

1,856,336

56,790

4.20
%

1,654,288

49,760

4.11
%
Other earning assets

8,646

7,890

Non-earning assets

158,502

142,825

Total assets

$
2,023,484

$
1,805,003

Liabilities and shareholders' equity

Interest bearing deposits:

Demand deposits

$
142,840

$
328

0.31
%

$
136,708

$
309

0.30
%
NOW

373,022

311

0.11
%

320,151

261

0.11
%
Savings accounts

229,774

186

0.11
%

203,639

168

0.11
%
Money market

119,541

69

0.08
%

105,065

56

0.07
%
CDAR's

42

-

0.00
%

4,858

3

0.08
%
Certificates of deposit, under $100,000

72,761

204

0.37
%

75,039

175

0.31
%
Certificates of deposit, $100,000 or more

269,775

1,490

0.74
%

230,436

601

0.35
%
Brokered deposits

—

—

0.00
%

-

-

0.00
%
Total interest bearing deposits

1,207,755

2,588

0.29
%

1,075,896

1,573

0.20
%
Borrowed Funds:

Federal funds purchased

61

1

2.19
%

766

4

0.70
%
Repurchase agreements

8,878

26

0.39
%

8,872

26

0.39
%
Short term borrowings

1,029

7

0.91
%

23,239

77

0.44
%
Long term borrowings

—

—

—

409

—

—

TRUPS

34,474

1,009

3.91
%

33,074

663

2.68
%
Total borrowed funds

44,442

1,043

3.14
%

66,360

770

1.55
%
Total interest bearing liabilities

1,252,197

3,631

0.39
%

1,142,256

2,343

0.27
%
Demand deposits - non-interest bearing

529,997

448,502

Other liabilities

27,763

15,001

Shareholders' equity

213,527

199,244

Total liabilities and shareholders' equity

$
2,023,484

$
1,805,003

Interest income/interest earning assets

4.20
%

4.11
%
Interest expense/interest earning assets

0.27
%

0.18
%
Net interest income and margin⁽⁵⁾

$
53,159

3.93
%

$
47,417

3.93
%

Table of Contents


Average Balances and Rates
(Dollars in Thousands, Unaudited)
	For the six months ended						For the six months ended
	June 30, 2022						June 30, 2021
Assets	Average Balance ⁽¹⁾		Income/ Expense		Average Rate/Yield ⁽²⁾	Average Balance ⁽¹⁾		Income/ Expense		Average Rate/Yield ⁽²⁾
Investments:
Interest-earning due from banks	$	170,432	$	363	0.43%	$	193,120	$	104	0.11%
Taxable		756,061		7,966	2.12%		329,029		3,150	1.93%
Non-taxable		281,882		3,581	3.24%		235,204		2,967	3.21%
Total investments		1,208,375		11,910	2.15%		757,353		6,221	1.87%

Loans and leases:⁽³⁾
Real estate		1,799,132		37,984	4.26%		1,852,330		42,407	4.62%
Agricultural		32,216		534	3.34%		45,050		827	3.70%
Commercial		88,784		2,378	5.40%		179,036		4,575	5.15%
Consumer		4,355		413	19.12%		5,199		389	15.09%
Mortgage warehouse lines		55,538		1,003	3.64%		192,329		3,078	3.23%
Other		1,922		65	6.82%		1,523		53	7.02%
Total loans and leases		1,981,947		42,377	4.31%		2,275,467		51,329	4.55%
Total interest earning assets⁽⁴⁾		3,190,322		54,287	3.49%		3,032,820		57,550	3.88%
Other earning assets		15,654					14,363
Non-earning assets		225,345					205,187
Total assets	$	3,431,321				$	3,252,370
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	212,193	$	226	0.21%	$	146,403	$	164	0.23%
NOW		544,589		164	0.06%		585,344		217	0.07%
Savings accounts		474,213		137	0.06%		407,894		112	0.06%
Money market		153,469		46	0.06%		137,887		60	0.09%
Time Deposits		294,773		675	0.46%		374,636		551	0.30%
Brokered deposits		60,000		96	0.32%		96,188		123	0.26%
Total interest bearing deposits		1,739,237		1,344	0.16%		1,748,352		1,227	0.14%
Borrowed funds:
Federal funds purchased		169		1	1.19%		2,980		1	0.07%
Repurchase agreements		108,762		158	0.29%		52,024		83	0.32%
Short term borrowings		1		—	0.00%		7,308		2	0.06%
Long-term debt		49,152		857	3.52%		—		—	—
Subordinated debentures		35,342		585	3.34%		35,164		493	2.83%
Total borrowed funds		193,426		1,601	1.67%		97,476		579	1.20%
Total interest bearing liabilities		1,932,663		2,945	0.31%		1,845,828		1,806	0.20%
Demand deposits - noninterest bearing		1,113,262					1,015,023
Other liabilities		53,712					41,156
Shareholders' equity		331,684					350,363
Total liabilities and shareholders' equity	$	3,431,321				$	3,252,370
Interest income/interest earning assets					3.49%					3.88%
Interest expense/interest earning assets					0.18%					0.12%
Net interest income and margin⁽⁵⁾			$	51,342	3.31%			$	55,744	3.76%

⁽¹⁾	Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

⁽²⁾	Yields and net interest margin have been computed on a tax equivalent basis utilizing a ~~35%~~21% effective tax rate.

⁽³⁾

Loans are gross of the allowance for possible loan losses. ~~Net loan~~Loan fees have been included in the calculation of interest income. Net loan fees and loan ~~acquistion~~acquisition FMV amortization were ~~$57 thousand~~$0.8 million and ~~$(7) thousand~~$2.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~

2021, respectively.

⁽⁴⁾	Non-accrual loans have been included in total loans for purposes of computing total earning assets.

⁽⁵⁾	Net interest margin represents net interest income as a percentage of average interest-earning assets.

3944

Table of Contents

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~~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,
	2022 over 2021								2022 over 2021
	Increase (decrease) due to								Increase (decrease) due to
Assets:	Volume		Rate		Mix		Net		Volume		Rate		Mix		Net
Investments:
Federal funds sold/due from time	$	(45)	$	485	$	(255)	$	185	$	(12)	$	307	$	(36)	$	259
Taxable		1,902		453		548		2,904		4,088		317		411		4,816
Non-taxable		63		72		202		337		589		23		2		614
Total investments ⁽¹⁾		1,920		1,010		495		3,426		4,665		647		377		5,689
Loans and leases:
Real estate		216		(1,556)		(16)		(1,356)		(1,218)		(3,300)		95		(4,423)
Agricultural		(125)		(73)		22		(176)		(236)		(80)		23		(293)
Commercial		(1,097)		(97)		50		(1,144)		(2,306)		220		(111)		(2,197)
Consumer		(28)		49		(7)		14		(63)		104		(17)		24
Mortgage warehouse		(748)		256		(166)		(658)		(2,189)		395		(281)		(2,075)
Other		16		(5)		(3)		8		14		(2)		—		12
Total loans and leases ⁽¹⁾		(1,766)		(1,426)		(120)		(3,312)		(5,998)		(2,663)		(291)		(8,952)
Total interest earning assets ⁽¹⁾	$	154	$	(416)	$	375	$	114	$	(1,333)	$	(2,016)	$	86	$	(3,263)
Liabilities
Interest bearing deposits:
Demand deposits	$	33		(3)		(1)	$	29	$	74	$	(8)		(4)	$	62
NOW		(11)		(25)		2		(34)		(15)		(41)		3		(53)
Savings accounts		8		3		—		11		18		6		1		25
Money market		3		(9)		(1)		(7)		7		(19)		(2)		(14)
Time Deposits		(32)		241		(30)		179		(117)		306		(65)		124
Brokered deposits		(21)		13		(5)		(13)		(46)		31		(12)		(27)
Total interest bearing deposits ⁽¹⁾		(20)		220		(35)		165		(79)		275		(79)		117
Borrowed funds:
Federal funds purchased		—		—		—		—		(1)		17		(16)		—
Repurchase agreements		36		1		1		38		91		(8)		(8)		75
Short term borrowings		—		—		—		—		(2)		(2)		2		(2)
Long-term debt		—		—		430		430		—		—		857		857
Subordinated debt		1		84		—		85		2		90		—		92
Total borrowed funds ⁽¹⁾		37		85		431		553		90		97		835		1,022
Total interest bearing liabilities ⁽¹⁾		17		305		396		718		11		372		756		1,139
Net interest income ⁽¹⁾	$	137	$	(721)	$	(21)	$	(604)	$	(1,344)	$	(2,388)	$	(670)	$	(4,402)

Volume & Rate Variances
Three months ended September 30,

Nine months ended September 30,

(dollars in thousands, unaudited)
2017 over 2016

2017 over 2016

Increase (decrease) due to

Increase (decrease) due to

Assets:
Volume

Rate

Net

Volume

Rate

Net

Investments:

Federal funds sold/due from time
$
19

$
15

$
34

$
158

$
98

$
256

Taxable

122

223

345

303

(32
)

271

Non-taxable⁽¹⁾

203

34

237

500

14

514

Total investments

344

272

616

961

80

1,041

Loans and Leases:

Real estate

1,764

77

1,841

6,104

195

6,299

Agricultural

(21
)

96

75

39

189

228

Commercial

(174
)

(28
)

(202
)

95

274

369

Consumer

(71
)

4

(67
)

(221
)

(15
)

(236
)
Mortgage warehouse

(443
)

200

(243
)

(1,100
)

381

(719
)
Other

22

(4
)

18

59

(11
)

48

Total loans and leases

1,077

345

1,422

4,976

1,013

5,989

Total interest earning assets
$
1,421

$
617

$
2,038

$
5,937

$
1,093

$
7,030

Liabilities

Interest Bearing Deposits:

Demand deposits
$
-

$
1

$
1

$
14

$
5

$
19

NOW

11

—

11

43

7

50

Savings accounts

7

(1
)

6

22

(4
)

18

Money market

—

—

—

8

5

13

CDAR's

—

—

—

(3
)

—

(3
)
Certificates of Deposit, under
$100,000

(5
)

22

17

(5
)

34

29

Certificates of Deposit, $100,000 or
more

22

400

422

103

786

889

Total interest bearing deposits

35

422

457

182

833

1,015

Borrowed Funds:

Federal funds purchased

(1
)

1

-

(4
)

1

(3
)
Repurchase agreements

1

(1
)

—

—

—

-

Short term borrowings

(40
)

3

(37
)

(74
)

4

(70
)
TRUPS

(20
)

110

90

28

318

346

Total borrowed funds

(60
)

113

53

(50
)

323

273

Total interest bearing liabilities

(25
)

535

510

132

1,156

1,288

Net interest income
$
1,446

$
82

$
1,528

$
5,805

$
(63
)

$
5,742

⁽¹⁾	~~Yields~~Subtotals are a sum of the categories above and are not recalculated on ~~tax exempt income have not been computed on a tax equivalent basis.~~ the portfolio totals.

The volume variance calculated for the ~~third~~second quarter of ~~2017~~2022 relative to the ~~third~~second quarter of ~~2016~~2021 was a favorable ~~$1.446 million, due to~~$0.1 million; although average balances of interest earning assets were flat, we had an increase in investment securities, offset by a decrease in almost all categories of ~~$142 million, or 8%, in the average balance of interest-earning assets resulting from organic growth in loans and investments.~~loans. There was ~~also a favorable~~an unfavorable rate variance of ~~$82,000~~$0.7 million for the ~~third quarter comparison. Our~~comparative quarters since the weighted average yield on ~~interest-earning~~interest earning assets ~~was up~~decreased by 1311 basis points ~~while~~and the weighted average cost of interest-bearing ~~liabilities~~liabilities increased by 1513 basis ~~points, but there~~points. There was also an unfavorable mix

Table of Contents

variance of $0.02 million primarily from the issuance of variable rate subordinated debentures issued in September of 2021. The $0.7 million negative rate variance was impacted by the following factors: relatively high average balances of cash and due from banks earning on average 74 bps, new loans and investments having lower yields overall, including low-yielding purchased 1-4 SFD mortgage loans. Increased costs on interest bearing liabilities also had a ~~net benefit to~~negative impact on the ~~Company because the yield increase on earning assets was applied to a much higher balance than the~~variance primarily from two Federal Reserve fed funds rate change for interest-bearing liabilities. Investment yields have started to increase due to the recent rising rate environment, and also in response to limited investment portfolio restructuring which took placeincreases in the second quarter of ~~2017. Loan yields have risen due to the impact~~2022 for a total of higher short-term interest rates on our variable-rate loans and discount accretion on loans from the Coast acquisition. The comparative results were also impacted by non-recurring interest items, which can include things such as interest recoveries on non-accrual loans, interest reversals for loans placed on non-accrual status, accelerated fee recognition for loan prepayments, and late fees. We had net interest reversals of $54,000 in the third quarter of 2017 relative to net interest recoveries of $117,000 in the third quarter of 2016, for an unfavorable swing of $171,000. Our weighted average cost of interest-bearing liabilities increased primarily because of higher rates paid on adjustable-rate trust-preferred securities (“TRUPS”), short-term borrowings and large time deposits.

The Company’s net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was affected by the same factors discussed above relative to rate and volume variances. Our net interest margin was 3.97% in the third quarter of 2017, up four125 basis points, ~~relative to~~and the ~~third quarter~~issuance of 2016 primarily as the result of higher loan and investment yields. However, the fact that average investment balances have grown faster than higher-yielding loans has somewhat restrained net interest margin expansion in recent periods.

Net interest income in the first nine months of 2017 relative to the first nine months of 2016 reflects a favorable variance of $5.805 million attributable to volume changes, and an unfavorable rate variance of $63,000.subordinated debt mentioned above. The volume variance for the year-to-date period was due primarily to an increase of $202 million, or 12%, in average interest-earning assets, including the impact of the Coast acquisition. The negative rate variance for the first nine months is the result of a 12 basis point increase in our average cost of interest-bearing liabilities, relative to an increase of only nine basis points in our average yield on earning assets. Nonrecurring interest items had a slight unfavorable impact on the year-to-date results, with net interest recoveries of $164,000 for the first nine months of 2017 relative to net interest recoveries of $181,000 for the first nine months of 2016. There was no net change in the Company’s net interest margin for the ~~nine month comparison.~~second quarter of 2022 was 3.40%, as compared to 3.60% for the second quarter of 2021.

The volume variance calculated for the first six months of 2022 relative to the first six months of 2021 reflects an unfavorable variance of $1.3 million, an unfavorable rate variance of $2.4 million, and an unfavorable mix variance of $0.7 million. There was a decline in loan balances, partially offset by an increase in investment securities. Interest bearing liabilities were relatively flat with an 11 basis point increase in cost, primarily from three Federal Reserve fed funds interest rate increases totaling 150 basis points and the issuance of variable rate subordinated debentures issued in September 2021. The Company’s net interest margin for the first half of 2022 was 3.31%, as compared to 3.76% in the first half of 2021.

At June 30, 2022, approximately 8% of our total portfolio, or $122.7 million, consists of variable rate loans. Of these variable rate loans, approximately $34.0 million have floors. At June 30, 2022, our outstanding fixed rate loans represented 26% of our loan portfolio. The remaining 66% of our loan portfolio at June 30, 2022 consists of adjustable-rate loans; 74% of these loans (approximately $930.9 million) will not begin adjusting for at least another 3 years, but up to 10 years. These loans are typically adjustable every five years after the initial adjustment. Approximately $54.3 million of these adjustable-rate loans have the ability to reprice next quarter, which will have a positive impact on earnings.

Cash balances for the quarter and year-to-date comparisons have decreased and having less of a negative impact on our net interest margin since cash balances earn considerably lower yields than other earning assets. Average cash and due from banks was $146.3 million, a decrease of $162.2 million, or 53% for the second quarter of 2022, and was $22.7 million lower, or 12% for the first half of 2022 as compared to the same period in 2021.

Overall average investment securities increased by $452.7 million for the second quarter of June 30, 2022 as compared to June 30, 2021, and increased by $473.7 million for the first half of 2022. For the quarter ending June 30, 2022 over the same period for 2021, average non-taxable securities increased $40.7 million and taxable securities increased $412.0 million. For the first half of 2022 over the same period in 2021, average non-taxable securities increased $46.7 million and taxable securities increased $427.0 million. The overall investment portfolio had a tax-equivalent yield of 2.65% at June 30, 2022, with an average life of 7.55 years.

Interest expense was $1.6 million for the second quarter of 2022, an increase of $0.7 million, or 80%, compared to the second quarter of 2021, and increased $1.1 million or 63% for the first six-months of 2022 as compared to the same period in 2021. The increase in interest expense for the quarter is primarily attributable to the increase in the cost of time deposits tied to prime interest rate increases, while the year-to-date comparison included the increase in the cost of time deposits as well as the issuance of subordinated debentures in September of 2021 at a variable rate. The average cost of interest-bearing deposits increased by 4 basis points to 18 basis points for the second quarter of 2022 compared to the second quarter of 2021, and by 2 basis points to 16 basis points for the first six-months of 2022 as compared to the same period in 2021. The average cost of borrowed funds increased 52 basis points for the second quarter of 2022 as compared to the same period in 2021 and by 47 basis points for the first six-months of 2022 as compared to the first six-months of 2021. Non-interest bearing demand deposits increased $80.1 million or 8% for the second quarter of 2022 as compared to the second quarter of 2021, and increased by $98.2 million or 10% for the first half of 2022 as compared to the first half of 2021.

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~~Provision~~

PROVISION FOR CREDIT LOSSES ON LOANS AND LEASES

The Company implemented the Current Expected Credit Loss ("CECL") accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022. Upon implementation the Company recorded a $10.4 million increase in the allowance for ~~loan and LEASE~~credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for ~~loan~~credit losses on loans and ~~lease losses,~~leases, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for ~~loan~~credit losses on loans and ~~lease losses. There was no~~leases. The Company recorded an expense related to a credit loss provision for ~~loan losses in the third quarters~~loans and leases of ~~2017 or 2016, but the year-to-date comparison was impacted by a $300,000 loan loss provision that was recorded~~$2.5 million in the second quarter of ~~2017,~~2022 relative to a provision for loan and lease losses benefit of $2.1 million in the second quarter of 2021, and a year-to-date credit loss provision for loans and leases of $3.1 million in 2022 as compared to a $1.9 million loan and lease loss provision benefit in 2021. The higher provision for credit losses in the second quarter of 2022 over the same quarter in 2021, was primarily due to the impact of the change in reserve methodology from the incurred loss method to the current expected credit loss method combined with $2.3 million in net charge-offs in the second quarter of 2022 from a single office building loan relationship that was sold at a discount due to an increased risk of default that would have likely led to a prolonged collection period. For the first ~~such provision since the third quarter~~six months of ~~2014. The provision helped replenish reserves subsequent~~2022 compared to the ~~unanticipated~~same period in 2021 the $5.0 million increase in provision for credit losses on loans and leases is due to the change in reserve methodology along with the impact of $4.1 million in net charge offs for the first six months of 2022. The first half of 2022 was not only impacted by the loan relationship as mentioned above in the quarterly discussion but also by a charge-off ~~of a $224,000 overdraft~~ on a ~~business account, and also provided limited reserves for growth~~single dairy loan relationship that defaulted in ~~performing loan balances.~~ March 2022.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance. The Company recorded ~~$446,000 in net loan balances charged off in the third quarter of 2017 relative to $162,000 in the third quarter of 2016, and~~ net charge-offs ~~were $1.217~~of $2.3 million ~~in the first nine months of 2017 relative to $543,000 in the first nine months of 2016.~~

~~With the loan loss provision that was recorded~~ in the second quarter of ~~2017, we have been able~~2022 as compared to ~~maintain our~~net recoveries of $0.2 million for the comparative period of 2021. For the first six months of 2022, net charge-offs were $4.1 million as compared to $0.5 million in net recoveries for the same period of 2021.

The allowance for ~~loan~~credit losses on loans and ~~lease losses~~leases is at a level that, in Management’s judgment, is adequate to absorb probable ~~loan~~credit losses on loans related to ~~specifically-identified impaired~~individually identified loans as well as probable incurred credit losses in the remaining loan portfolio. The need for reserve replenishment via a loan loss provision has been minimized in recent periods for the following reasons: all of our acquired loans were booked at their fair values on the acquisition date, and thus did not initially require a loan loss allowance; with the exception of the overdraft noted in the previous paragraph, charge-offs have primarily been recorded against pre-established reserves which alleviated what otherwise might have been a need for reserve replenishment; organic growth in our performing loan portfolio has been concentrated in loan types with low historical loss rates, and loss rates for most loan types have been declining, thus having a positive impact on general reserves 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, ~~and~~ determining loan ~~amounts~~balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 1210 to the consolidated financial statements,

and below, under “Allowance for ~~Loan and Lease~~Credit Losses.” The process utilized to establish an appropriate credit allowance for ~~loan~~losses on loans and ~~lease losses~~leases can result in a high degree of variability in the Company’s ~~loan~~credit loss provision, and consequently in our net earnings.

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~~NON-INTEREST~~

NONINTEREST INCOME ~~and NON-INTEREST expense~~AND NONINTEREST EXPENSE

The following table provides details on the Company’s ~~non-interest~~noninterest income and ~~non-interest~~noninterest expense for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2022 and ~~2016:~~2021:

Noninterest Income/Expense

(dollars in thousands, unaudited)


	For the three months ended June 30,				For the six months ended June 30,
Noninterest income:	2022		2021		2022		2021
Service charges on deposit accounts	$	3,204	$	2,725	$	6,245	$	5,491
Other service charges and fees		2,893		3,050		5,680		5,611
Net gains on sale of securities available-for-sale		—		—		1,032		—
Bank-owned life insurance		(582)		814		(1,228)		1,397
Other		4,924		23		4,773		943
Total noninterest income	$	10,439	$	6,612	$	16,502	$	13,442
As a % of average interest earning assets⁽¹⁾		1.31%		0.86%		1.04%		0.89%

Noninterest expense:
Salaries and employee benefits	$	11,745	$	10,425	$	23,550	$	21,576
Occupancy costs
Furniture & equipment		511		453		964		905
Premises		1,895		2,173		3,735		4,207
Advertising and marketing costs		449		292		855		612
Data processing costs		1,525		1,513		3,010		2,939
Deposit services costs		2,417		2,282		4,662		4,350
Loan services costs
Loan processing		186		65		297		234
Foreclosed assets		92		(10)		87		98
Other operating costs
Telephone & data communications		377		668		821		1,048
Postage & mail		223		109		279		193
Other		1,447		337		1,868		799
Professional services costs
Legal & accounting		673		682		1,219		1,125
Acquisition costs		—		—		—		—
Other professional service		259		1,004		402		1,899
Stationery & supply costs		116		73		201		151
Sundry & tellers		198		169		336		370
Total noninterest expense	$	22,113	$	20,235	$	42,286	$	40,506
As a % of average interest earning assets⁽¹⁾		2.78%		2.64%		2.67%		2.68%
Efficiency ratio ⁽²⁾⁽³⁾		59.19%		58.79%		62.70%		57.58%

Non Interest Income/Expense

(dollars in thousands, unaudited)

For the three months ended September 30,

For the nine months ended September 30,

NON-INTEREST INCOME:

2017

% of Total

2016

% of Total

2017

% of Total

2016

% of Total

Service charges on deposit accounts

$
2,916

49.34
%

$
2,686

53.82
%

$
8,263

50.36
%

$
7,535

54.37
%
Other service charges, commissions &
   fees

1,975

33.42
%

1,893

37.93
%

6,249

38.09
%

5,484

39.57
%
Gains on securities

918

15.53
%

90

1.80
%

984

6.00
%

212

1.53
%
Bank owned life insurance

377

6.38
%

302

6.05
%

1,188

7.24
%

741

5.35
%
Other

(276
)

-4.67
%

20

0.40
%

(276
)

-1.69
%

(113
)

-0.82
%
Total non-interest income

$
5,910

100.00
%

$
4,991

100.00
%

$
16,408

100.00
%

$
13,859

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

1.24
%

1.13
%

1.18
%

1.12
%

OTHER OPERATING EXPENSE:

Salaries and employee benefits

$
7,478

48.42
%

$
6,866

42.59
%

$
22,617

48.91
%

$
20,355

46.99
%
Occupancy costs

Furniture & equipment

641

4.15
%

651

4.04
%

1,888

4.08
%

1,814

4.19
%
Premises

1,727

11.18
%

1,412

8.76
%

5,035

10.89
%

3,866

8.93
%
Advertising and marketing costs

552

3.57
%

576

3.57
%

1,675

3.62
%

1,761

4.07
%
Data processing costs

1,040

6.73
%

933

5.79
%

3,049

6.59
%

2,560

5.91
%
Deposit services costs

1,029

6.66
%

1,063

6.59
%

3,140

6.79
%

2,785

6.43
%
Loan services costs

Loan processing

195

1.26
%

148

0.92
%

634

1.37
%

506

1.17
%
Foreclosed assets

43

0.28
%

84

0.52
%

207

0.45
%

535

1.24
%
Other operating costs

Telephone & data communications

406

2.63
%

392

2.43
%

1,278

2.76
%

1,141

2.63
%
Postage & mail

284

1.84
%

284

1.76
%

762

1.65
%

737

1.70
%
Other

273

1.77
%

252

1.57
%

809

1.76
%

638

1.47
%
Professional services costs

Legal & accounting

448

2.90
%

463

2.87
%

1,381

2.99
%

1,312

3.03
%
Acquisition Costs

424

2.75
%

1,695

10.51
%

585

1.27
%

2,037

4.70
%
Other professional service

440

2.85
%

596

3.70
%

1,766

3.82
%

1,464

3.38
%
Stationery & supply costs

329

2.13
%

416

2.58
%

962

2.08
%

1,066

2.46
%
Sundry & tellers

136

0.88
%

290

1.80
%

450

0.97
%

738

1.70
%
Total non-interest expense

$
15,445

100.00
%

$
16,121

100.00
%

$
46,238

100.00
%

$
43,315

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

3.23
%

3.66
%

3.32
%

3.51
%
Efficiency Ratio ⁽²⁾

63.90
%

72.02
%

65.40
%

69.13
%

⁽¹⁾	Annualized

⁽²⁾	Tax ~~Equivalent~~ equivalent

(3)	The efficiency ratio is a non-GAAP measure and is a calculation of 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.

Table of Contents

Noninterest Income:

Total ~~non-interest~~noninterest income increased by ~~$919,000,~~$3.8 million, or ~~18%~~58%, for the ~~third~~ quarter ~~of 2017 over~~ended June 30, 2022 as compared to the ~~third~~same quarter ~~of 2016,~~in 2021 and increased $3.1 million, or 23% for the comparable year-to-date periods.

Service charges on customer deposit account income increased by ~~$2.549~~$0.5 million, or 18%, ~~for the first nine months of 2017 relative~~ to ~~the first nine months of 2016. As discussed below, relatively large investment gains realized in the third quarter of 2017 had a significant impact on the comparative results, and the year-to-date~~

~~comparison also includes a $141,000 prepayment charge on a large dairy loan that paid off~~$3.2 million in the second quarter of ~~2017. Total non-interest income was an annualized 1.24% of average interest-earning assets in the third quarter of 2017 relative~~2022 as compared to ~~1.13% in the third quarter of 2016, and was 1.18% of average earning assets for the first nine months of 2017 relative to 1.12% for the first nine months of 2016.~~

Service charge income on deposits increased by $230,000, or 9%, for the third quarter comparison and $728,000, or 10%, for the first nine months due primarily to fees earned from accounts added over the past year, including from the Coast acquisition. The increase also includes higher revenue-generating activity on certain commercial accounts, and additional fees on higher-risk commercial accounts. Other service charges, commissions, and fees increased by $82,000, or 4%, for the third quarter and $765,000, or 14%, for the first nine months. This category includes the aforementioned $141,000 prepayment penalty recorded in the second quarter of ~~2017, as well as~~2021. This service charge income was $0.8 million higher, ~~levels of debit card interchange fees and an increase in fees related to commercial customer activities.~~

The Company sold its remaining equity position in other community banks during the third quarter of 2017, for a net gain of $918,000. Gains realized on the sale of investment securities thus totaled $918,000 in the third quarter of 2017 relative to $90,000 in the third quarter of 2016, and $984,000 for the first nine months of 2017 relative to $212,000 for the first nine months of 2016, resulting in material increases for the comparative periods.

BOLI income is derived from two types of policies owned by the Company: “separate account” life insurance policies associated with deferred compensation plans, and “general account” life insurance. BOLI income increased by $75,000, or 25%, in the third quarter of 2017 over the third quarter of 2016, and by $447,000, or 60%, for the first nine months due in part to higher income on separate account BOLI. The Company had $6.2 million invested in separate account BOLI at September 30, 2017, 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). Gains on separate account BOLI totaled $144,000 in the third quarter of 2017 relative to $109,000 in the third quarter of 2016, for an increase of $35,000, and $465,00014% in the first ~~nine~~six months of 2017 relative to $121,000 in the first nine months of 2016, for an increase of $344,000. 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. At September 30, 2017, the Company’s books also reflect a net cash surrender value of $39.1 million for general account BOLI. General account BOLI generates income that is used to help 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. While rate reductions and an increase in the cost of insurance for certain policies created downward pressure on general account BOLI income over the past few years, the average income crediting rate increased in 2017 due to the termination of a high-cost policy in late 2016. Income on general account BOLI thus shows increases of $40,000 for the third quarter, and $103,000 for the first nine months of 2017.

~~The “Other” category under non-interest income reflects unfavorable swings of $296,000 for the third quarter and $163,000 for the first nine months of 2017, relative~~2022, as compared to the same ~~periods~~period in 2016. This line item 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 dividends on our equity investment2021. These increases in the ~~Federal Home Loan Bank),~~quarterly and ~~other miscellaneous~~year-to-date comparisons are primarily a result of increased analysis fees and overdraft income. ~~Amortization expense associated with our investments in low-income housing tax credit funds~~Overdraft fees and ~~other limited partnership investments is netted against this category, and third quarter 2017 adjustments~~returned check charges increased $0.2 million to true-up those investments contributed $201,000 to the unfavorable category variance for the third quarter and $157,000 for the first nine months. The unfavorable variance in “Other” non-interest income was exacerbated by a non-recurring charge of $68,000 in the third quarter of 2017 to write off obsolete equipment, and by lower dividends on restricted stock as the FHLB dividend payout ratio has been declining in 2017 relative to historically high ratios in prior years.

Total non-interest expense was down by $676,000, or 4%, for the third quarter of 2017 relative to the third quarter of 2016, but reflects an increase of $2.923 million, or 7%, for the comparative nine-month periods. As detailed below there were several significant fluctuations within non-interest expense, including some items of a non-recurring nature. Acquisition costs, in particular, had a material impact on the comparative results, declining by $1.271$1.4 million for the ~~third quarter and $1.452 million for the first nine months. Total non-interest expense fell to an annualized 3.23% of average interest-earning assets in the third~~second quarter of ~~2017 from 3.66% in the third quarter of 2016,~~2022, and increased $0.4 million to 3.32% for the first nine months of 2017 relative to 3.51% for the first nine months of 2016. The reduction in the ratio for the third quarter is logical given the drop in total non-interest expense, but the year-to-date ratio is also down primarily as the result of a sizeable increase in average earning assets.

~~The largest component of non-interest expense, salaries and benefits, increased by $612,000, or 9%, for the third quarter and $2.262~~$2.7 million ~~or 11%, for the first nine months, with the disproportionate increase for the year-to-date period due primarily to the fact that personnel expense~~ for the first six months of 2016 did not include expenses for former Coast employees retained subsequent to the Coast acquisition in July of 2016. Both the third quarter and year-to-date comparisons reflect staffing costs for our Sanger branch which opened in May of 2016, our newest Bakersfield branch that commenced operations in March of 2017, and our Pismo Beach office that opened for business in September of 2017. The increase also includes salary adjustments in the normal course of business, a relatively large increase in group health insurance costs, and, for the year-to-date comparison, higher stock option expense stemming from options granted in February of 2017. The comparative periods were also impacted by fluctuations in salaries directly related to successful loan originations, which are deferred and amortized as loan costs and thus reduce current period compensation expense. Those deferrals declined by $63,000 for the third quarter, but were up by $572,000 for the comparative year-to-date periods.2022.

~~Occupancy expense increased by $305,000, or 15%,~~Effective in the third quarter of ~~2017 over~~2022, the ~~third~~Company made several changes to its NSF fees (i.e. returned item) and overdraft fees for customers. In particular, NSF fees will no longer be charged, and overdraft fees will be limited to 4 per day and no continuous overdraft fee will be charged. In addition, the amount of overdraft privilege (i.e. the amount to which the Company will pay overdrafts for customers) was increased by $250. Although the exact impact of these changes is unknown, the combination of eliminating NSF fees and increasing overdraft privilege is not expected to have a material impact on overall overdraft income.

Other service charges and fees decreased $0.2 million or 5% for the second quarter of ~~2016,~~2022 as compared to the same period in 2021, and ~~by $1.243~~increased $0.1 million or 22%, for the comparative year-to-date periods, due to ongoing occupancy costs associated with the former Coast National Bank branches and our newer de-novo branches, certain non-recurring start-up costs associated with the new branches, and higher rent and depreciation expense in other locations. Despite an increase in marketing efforts targeting our expanded geography, marketing costs were down $24,000, or 4%, for the third quarter and also fell by $86,000, or 5%, for the first ~~nine months~~half of ~~2017 due largely~~2022 as compared to the timing of payments. Data processing costs increased by $107,000, or 11%, for the third quarter and $489,000, or 19%, for the first nine months of 2017, primarily from ongoing expenses related to the Coast acquisition and our new branches but also due to costs associated with an online lending platform that was implemented at the beginning of 2017. Deposit services costs fell by $34,000, or 3%,same periods in 2021. The unfavorable variance for the quarterly comparison ~~but increased by $355,000, or 13%~~is mostly due to lower miscellaneous loan fees while the increase for the ~~first nine months. The year-to-date increase~~year to date comparison is ~~due largely to higher ATM costs, and amortization expense on the core deposit intangible created via the Coast acquisition.~~

Loan processing costs increased by $47,000, or 32% for the third quarter and $128,000, or 25%, for the first nine months of 2017, with the year-to-date increase resulting largely from certain non-recurring costs incurred in the first quarter of 2017. Net expenses associated with foreclosed assets dropped by $41,000, or 49%, in the third quarter of 2017 relative to the third quarter of 2016, and by $328,000, or 61%, for the first nine months of 2017, primarily due to a reduced level of OREO write-downs and operating costs.

Telecommunications expense increased by $14,000, or 4%, in the third quarter of 2017 relative to the third quarter of 2016 and $137,000, or 12%, for the first nine months of 2017. Negotiated rate reductions in effect for much of the third quarter of 2017 helped minimize cost increases in the telecommunications area for the quarterly comparison, but the year-to-date increase includes the impact of the Coast acquisition and branch expansion, and well as certain circuit enhancements. Postage costs were the same for the quarterly comparison, but increased by $25,000, or 3%, for the year-to-date comparison, primarily from increased mailings associated with growth in our customer base. The “Other” category under other operating costs increased by $21,000, or 8%, for the third quarter and $171,000, or 27%, for the first nine monthsmainly due to an increase in ~~corporate travel expenses.~~debit card interchange fees from higher usage.

~~Under professional services costs, legal and accounting expenses fell slightly~~There were no gains of the sales of securities for the ~~third~~second quarter of 2022 or 2021, but ~~increased by $69,000, or 5%,~~there was a $1.0 million gain on the sale of securities for the ~~comparative~~first half of 2022 with no sales in the comparable year-to-date ~~periods~~period of 2021. The sale in the first half of 2022 was a strategic effort to rebalance the portfolio by selling longer duration and higher price volatility securities as a hedge against rising interest rates, due to likely persistent inflationary pressures in the near-intermediate term environment.

BOLI income decreased by $1.4 million for the second quarter of 2022 as compared to the second quarter of 2021. At June 30, 2022, there was $42.9 million in traditional BOLI policies and $9.3 million in separate account corporate owned life insurance policies associated with the deferred compensation plans. Investments in the separate account variable life insurance policies are invested in a ~~negotiated settlement~~similar proportionate mix of asset classes that ~~added $85,000~~our deferred compensation participants have elected, with the exception of participant elections in a fixed income account. Such election by plan participants in the fixed income account is ignored which creates greater volatility of the corporate owned life insurance asset value as compared to ~~legal~~the related liability balance for deferred compensation. More specifically, the specific account life insurance policies are designed to hold similar assets to the deemed investments in the director and employee deferred compensation plans. Directors and officers are allowed to make a deemed investment in a fixed income account designed to mirror the crediting rate on one of the life insurance policies. However, the amount of deferred compensation elected to attributed to the fixed income account significantly exceeds the amount of life insurance invested in a similar fixed income account. As the life insurance funding does not closely match the deferred compensation deemed investments, fluctuations occur in earnings of the life insurance plan as compared to the related expense of the deferred compensation plan. If earnings on the life insurance plan are negative, it creates a scenario where the negative income is not tax deductible and has an unfavorable impact on the Company’s tax rate. This occurred in 2022 as the lower quarterly values in the life insurance policies were only partially offset by lower deferred compensation expense reflected primarily in director fees expense. For the first half of 2022 as compared to the same period in 2021 life insurance income was $2.6 million lower and the related deferred compensation was $1.8 million lower.

In the “other” category of noninterest income the Company reflected a $4.9 million increase in the second quarter of ~~2017. Acquisition costs, which include nonrecurring acquisition~~2022 as compared to the second quarter of 2021, and a $3.8 million increase in the first half of 2022 as compared to the same period in 2021. The quarterly and year-to-date comparison includes non-recurring gains resulting from the sale of Visa B stock of $2.6 million and a small business investment company fund investment of $0.6 million, as well as $0.4

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million in life insurance proceeds, a $1.0 million recovery of prior year legal expenses, ~~for~~and a $0.2 million gain from a recovery on an acquired loan.

Noninterest Expense:

Total noninterest expense increased by $1.9 million, or 9%, in the ~~Ojai acquisition~~second quarter of 2022 relative to the second quarter of 2021, and by $1.8 million, or 4%, in ~~2017~~the first six months of 2022 as compared to the first six months of 2021.

The tax-equivalent efficiency ratio was 59.19% in the second quarter of 2022 as compared to 58.79% in the same quarter of 2021, and ~~the Coast acquisition in 2016, were reduced by $1.271 million for the third quarter and $1.452 million~~was 62.70% for the first ~~nine months, since the bulk~~half of ~~the Coast acquisition costs were recorded in the third quarter of 2016. We expect that the majority of non-recurring costs related~~2022 as compared to the Ojai acquisition will be recorded in the fourth quarter of 2017. The cost of other professional services fell by $156,000, or 26% for the third quarter, but reflects an increase of $302,000, or 21%,57.58% for the first ~~nine months~~half of 2017 primarily for the following reasons: FDIC assessment costs were down $194,000 for the third quarter and $438,000 for the first nine months; directors’ deferred compensation expense rose by $275,000 for the first nine months in conjunction with the aforementioned increase in separate account BOLI income; equity incentive compensation costs for stock options issued to our directors was $177,000 higher for the year-to-date comparison, due to three additional directors as well as a higher stock option grant date fair value for stock options issued in February 2017; and, director retirement plan expense accruals were also higher for the year-to-date comparison due to a non-recurring expense reversal of $173,000 in director retirement plan accruals in the third quarter of 2016, subsequent to the death of a former director.

Stationery and supply costs were reduced by $87,000, or 21%, for the third quarter and $104,000, or 10%, for the first nine months of 2017 due to prior-year costs associated with the issuance of new debit cards incorporating EMV technology. Sundry and teller losses were also reduced by $154,000, or 53%, for the third quarter and $288,000, or 39% for the first nine months of 2017 due to reduced debit card losses, with the year-to-date reduction also reflective of lower operations-related losses within our branch system.2021. The ~~drop in debit card losses is the result of new technology implemented in the latter part of 2016, although no assurance can be provided that those losses will remain at reduced levels.~~

The Company’s tax-equivalent overhead efficiency ratio declined to 63.90% in the third quarter of 2017 from 72.02% in the third quarter of 2016, and to 65.40% for the first nine months of 2017 from 69.13% in the first nine months of 2016. The overhead efficiency ratio represents total ~~non-interest~~noninterest expense divided by the sum of fully tax-equivalent net interest and ~~non-interest income, with~~noninterest income; the provision for ~~loan~~credit losses on loans and leases and investment gains/losses are excluded from the equation.

Salaries and Benefits were $1.3 million, or 13%, higher in the second quarter of 2022 as compared to the second quarter of 2021 and $2.0 million, or 9% higher for the first six months of 2022 compared to the same period in 2021. The reason for this increase is primarily due to increased salary expense due to the strategic hiring of lending and management staff for both the quarterly and year-to-date comparisons. Overall full-time equivalent employees were 504 at June 30, 2022 as compared to 486 at June 30, 2021.

Occupancy expenses were $0.2 million lower for the second quarter of 2022 as compared to the same quarter in 2021 and $0.4 million lower for the first half of 2022 as compared to the first half of 2021. The primary reason for this decrease was from a decrease in premises depreciation due to the sale of a branch building which was closed in the third quarter of 2021.

Other noninterest expense increased $0.8 million, or 11% for the second quarter 2022 as compared to the second quarter in 2021, and increased $0.2 million, or 2% for the first half of 2022 as compared to the same period in 2021. The variance for the second quarter of 2022 compared to the same period in 2021 was driven by a $0.7 million accrual for restitution payments to customers charged nonsufficient fund fees in the past five years for representments. This accrual was established after the FDIC published a change in its position in how such representments are characterized for regulatory purposes. The Company also incurred higher costs of $0.3 million associated with postage and mailing of new account agreements to customers as well as higher professional fees associated with this matter. Beginning in the third quarter of 2022, the Company will no longer charge customers for returned item fees, commonly referred to as nonsufficient fund fees. In addition, the Company increased overdraft privilege for both commercial and consumer customers, but will limit the number of daily overdraft fees to four per day (previously five per day) and will no longer charge a fee for continuous overdrafts (previously a $35 charge after the 10^th consecutive day an account is in an overdraft position). These changes to our nonsufficient fund fees, overdraft fees and overdraft privilege program are not expected to have a material impact on deposit fee income. In addition, there was a $0.4 million increase in recruitment costs associated with new lending teams and management staff. For the quarterly and year-to-date comparisons decreases in deferred compensation expense for directors, which is linked to the changes in life insurance income partially offset the increases.

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, and California state employment tax credits.~~

funds. The ~~Company’s~~Company's provision for income taxes was ~~35%~~26.3% of pre-tax income in the ~~third~~second quarter of ~~2017 as compared~~2022 relative to ~~32%~~25.3% in the ~~third~~second quarter of ~~2016,~~2021, and ~~was 33%~~26.6% of pre-tax income for the first ~~nine months~~half of ~~2017 and 2016.~~2022 relative to 25.4% for the same period in 2021. The ~~higher~~increase in effective tax ~~accrual~~ rate for both the ~~third~~quarterly and year-to-date comparisons is due to the volatility in the Corporate Owned Life Insurance asset value associated with our non-qualified deferred compensation plans. In the

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second quarter and first half of ~~2017 is primarily~~2022, the result of higher taxable income and a declining level of employment tax credits. Our year-to-date tax accrual rate would also have been higher if not for our adoption of FASB’s Accounting Standards Update 2016-09 effective January 1, 2017, and the subsequent change in accounting methodologyinvestments associated with the ~~disqualifying disposition of Company shares issued pursuant~~non-qualified deferred compensation plans declined in value, resulting in a non-deductible expense as compared to an increase in value generating non-taxable income for the exercise of incentive stock options. Prior to January 1, 2017, the favorable tax impact of disqualifying dispositions was recorded directly to equity, whereas it is now reflected in the income statement as an adjustment to our income tax provision. Disqualifying dispositions had a marginal effect on our tax accrual rate during the thirdsecond quarter, ~~but they occurred at a higher rate during the~~and first half of ~~2017 and thus had a more material impact on our year-to-date tax accrual.~~2021.

~~balance sheet analysis~~

BALANCE SHEET ANALYSIS

EARNING ASSETS

The Company’s ~~interest-earning~~interest earning assets are comprised of loans and investments, including overnight investments and ~~loans, and the~~surplus balances held in interest earning accounts in our Federal Reserve Bank account. 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

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~~interest earning balances in our Federal Reserve Bank ~~(“FRB”)~~ account, and overnight fed funds sold. ~~Surplus FRB balances and fed funds sold to correspondent banks represent the temporary investment of excess liquidity.~~ 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~~interest earning option for the placement of surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. ~~Aggregate investments~~

The investment portfolio is reflected on the balance sheet as investment securities and totaled ~~$585 million,~~$1.03 billion, or ~~28%~~30% of total assets at ~~September~~June 30, ~~2017, compared to $571~~2022, and $973.3 million, or ~~28%~~29% of total assets at December 31, ~~2016.~~

~~We had no fed funds sold~~2021. The increase was primarily due to purchases of $215.3 million to deploy cash into interest earning assets and to provide Balance Sheet diversification. In addition, within the Cash and Due from Banks account on the balance sheet was $79.8 million of surplus interest earning balances in our Federal Reserve Bank account at ~~the end of the reporting periods, and interest-bearing balances at other banks declined~~June 30, 2022, as compared to ~~$2 million at September 30, 2017 from $41~~$193.2 million at December 31, ~~2016 as~~2021. Surplus balances in our Federal Reserve Bank account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity was repositioned into longer-term investment securities. The Company’s investment portfolio had a book balance of $583 million at September 30, 2017, reflecting an increase of $53 million, or 10%, for the first nine months of 2017. liquidity.

The Company carries “available for sale” investments at their fair market ~~values.~~values and “held to maturity” investments at amortized cost. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all ~~marketable~~marketable. The expected average duration was 3.2 years at June 30, 2022, and ~~are classified as~~at year-end 2021.

In the second quarter of 2022 the Company transferred $162.1 million of “available for sale” investments to ~~allow maximum flexibility with regard~~“held to ~~interest rate risk and liquidity management. The expected average life for bonds in our investment portfolio was 4.0 years and their average effective duration was 2.9 years~~maturity”. Those securities were transferred at ~~September 30, 2017, with~~fair market value on the duration up slightly from 2.6 years at year-end 2016 due to a modest portfolio restructuring took place primarily in June of 2017. That restructuring involved the sale of certain underperforming bonds and the addition of longer-term municipal bonds, which improved yields in addition to increasing the effective durationdate of the ~~portfolio.~~transfer. The transfer was initiated to reduce the effect of potential future rate increases on the available-for-sale portfolio, mark-to-market, other comprehensive income and equity. See Note 9, Investment Securities for additional information.

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The following table sets forth the carrying amount for available-for-sale securities, at fair value, and held-to-maturity securities, at amortized cost, ~~and fair market value~~net of the allowance for credit losses of the Company’s investment portfolio by investment type as of the dates noted:

Investment Portfolio

(dollars in thousands, unaudited)

September 30, 2017

December 31, 2016

Amortized

Fair Market

Amortized

Fair Market

Cost

Value

Cost

Value

Available for Sale

US Government agencies

$
24,574

$
24,422

$
26,926

$
26,468

Mortgage-backed securities

418,961

417,038

391,555

387,876

State and political subdivisions

138,621

141,740

114,140

114,193

Equity securities

—

—

500

1,546

Total securities

$
582,156

$
583,200

$
533,121

$
530,083

Investment Portfolio

The net unrealized gain on our investment portfolio, or the difference between the fair market value and amortized cost, was $1 million at September 30, 2017, an absolute difference of about $4 million relative to the net unrealized loss of $3 million at December 31, 2016. The improvement is due primarily to lower long-term interest rates. The balance of US Government agency securities(dollars in our portfolio declined by $2 million, or 8%, during the first nine months of 2017 due primarily to bond maturities. Mortgage-backed securities increased by $29 million, or 8%, due to bond purchases and higher market valuations, net of prepayments in the portfolio. Municipal bond balances were also up by $28 million, or 24%, due to bond purchases and increases in market valuations. Municipal bonds purchased in recent periods have strong underlying ratings, and all municipal bonds in our portfolio undergo a detailed quarterly review for potential impairment. The balance of equity securities fell to zero at September 30, 2017, due to the sale of our last remaining equity position in other community banks during the third quarter.thousands, unaudited)


	June 30, 2022			December 31, 2021
	Carrying Amount		Percent	Carrying Amount		Percent
Available for sale
U.S. government agencies	$	981	0%	$	1,574	0%
Mortgage-backed securities		181,446	18%		306,727	32%
State and political subdivisions		254,888	25%		304,268	31%
Corporate bonds		46,539	5%		28,529	3%
Collateralized loan obligations		380,324	37%		332,216	34%
Total available for sale		864,178	84%		973,314	100%
Held to maturity
U.S. government agencies		6,762	1%		—	—
Mortgage-backed securities		103,888	10%		—	—
State and political subdivisions		50,749	5%		—	—
Total held to maturity		161,399	16%		—	—
Total securities	$	1,025,577	100%	$	973,314	100%

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank ~~borrowings,~~and the Federal Reserve Bank, customer repurchase agreements, ~~public deposits~~ and other purposes as required or permitted by law totaled ~~$188~~$169.2 million at ~~September~~June 30, ~~2017~~2022 and ~~$194~~$167.2 million at December 31, ~~2016,~~2021, leaving ~~$395~~$842.1 million in unpledged debt securities at ~~September~~June 30, ~~2017~~2022 and ~~$336~~$806.1 million at December 31, ~~2016.~~2021. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled ~~$33~~$38.2 million at ~~September~~June 30, ~~2017~~2022 and ~~$51~~$47.0 million at December 31, ~~2016.~~ 2021.

~~Loan~~

LOAN AND ~~LEAS~~~~E Portfolio~~LEASE PORTFOLIO

Despite a drop of $44 million in balances outstanding on mortgage warehouse lines, total loans and leases, gross of the associated allowance for losses and deferred fees and origination costs, reflect a net increase of $49 million, or 4%, to $1.312 billion at September 30, 2017 from $1.263 billion at December 31, 2016. 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.

Loan and Lease Distribution

(dollars in thousands, unaudited)

September 30, 2017

December 31, 2016

Real Estate:

1-4 family residential construction

$
53,035

$
32,417

Other construction/land

47,160

40,650

1-4 family - closed-end

154,934

137,143

Equity lines

42,122

43,443

Multi-family residential

31,414

31,631

Commercial real estate - owner occupied

262,865

253,535

Commercial real estate - non-owner occupied

284,537

244,198

Farmland

145,550

134,480

Total real estate

1,021,617

917,497

Agricultural

49,315

46,229

Commercial and industrial

111,365

123,595

Mortgage warehouse lines

119,031

163,045

Consumer loans

10,297

12,165

Total loans and leases

$
1,311,625

$
1,262,531

Percentage of Total Loans and Leases

Real Estate:

1-4 family residential construction

4.04
%

2.57
%
Other construction/land

3.60
%

3.22
%
1-4 family - closed-end

11.81
%

10.86
%
Equity lines

3.21
%

3.44
%
Multi-family residential

2.40
%

2.51
%
Commercial real estate - owner occupied

20.03
%

20.08
%
Commercial real estate - non-owner occupied

21.69
%

19.34
%
Farmland

11.10
%

10.65
%
Total real estate

77.88
%

72.67
%
Agricultural

3.76
%

3.66
%
Commercial and industrial

8.49
%

9.79
%
Mortgage warehouse lines

9.08
%

12.92
%
Consumer loans

0.79
%

0.96
%
Total loans and leases

100.00
%

100.00
%

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Loan and Lease Distribution

~~For~~(dollars in thousands, unaudited)


	June 30, 2022			December 31, 2021
	Amount		Percent	Amount		Percent
Real estate:
1-4 family residential construction	$	5,542	0.28%	$	21,369	1.08%
Other construction/land		20,758	1.04%		25,299	1.28%
1-4 family - closed-end		430,135	21.52%		289,457	14.65%
Equity lines		25,574	1.28%		26,588	1.35%
Multi-family residential		66,291	3.32%		53,458	2.71%
Commercial real estate - owner occupied		312,089	15.61%		334,446	16.93%
Commercial real estate - non-owner occupied		895,353	44.79%		882,888	44.69%
Farmland		101,761	5.09%		106,706	5.40%
Total real estate		1,857,503	92.93%		1,740,211	88.09%
Agricultural		28,757	1.44%		33,990	1.72%
Commercial and industrial		72,825	3.64%		109,791	5.56%
Mortgage warehouse lines		58,134	2.91%		101,184	5.12%
Consumer loans		4,362	0.22%		4,550	0.23%
Total loans and leases		2,021,581	101.14%		1,989,726	100.72%
Allowance for credit losses on loans		(22,802)	(1.14)%		(14,256)	(0.72)%
Total loans and leases, net	$	1,998,779	100.00%	$	1,975,470	100.00%

Gross loans and leases at $2.0 billion, increased $32.9 million during the first ~~nine months~~half of ~~2017, total~~2022 with an overall 2% change. The increase in gross loan balances as compared to December 31, 2021 was primarily a result of an increase in 1-4 family residential real estate loans, ~~increased by $104~~mostly from the purchase of $173.1 million ~~or 11%, due~~in high quality jumbo mortgage loans designed as a bridge to ~~strong~~organic growth, and a $12.8 million organic increase in multi-family residential loans. Organic loan production for the first half of 2022 was $142.1 million, a 61% increase, as compared to $88.3 million for the comparative period in 2021, as the new lending teams hired earlier in the year have been gaining traction in our market. Counterbalancing these positive variances were loan paydowns, charge-offs and maturities resulting in net declines in many categories even with higher loan production. In particular, there was a $20.4 million net decrease in construction loans, ~~secured by~~a $9.9 million net decline in commercial real estate ~~farmland~~loans, a $37.0 million net reduction in commercial and ~~residential properties. Agricultural production~~industrial loans, ~~were also up by $3~~a $43.0 million ~~or 7%. Net growth~~unfavorable change in mortgage warehouse line utilization, and a $10.2 million net decline in agricultural ~~loans, including loans secured by farmland, was negatively impacted by the prepayment of~~loans. Further, SBA PPP loan forgiveness resulted in a ~~large dairy~~$23.6 million decline in loan balances, included in the ~~second quarter subsequent~~commercial and industrial variance noted above.

The following table presents a roll forward of the Company’s gross loan balances for each of the periods noted:


LOAN ROLLFORWARD
(Dollars in Thousands, Unaudited)
	For the three months ended:						For the six months ended:
		June 30, 2022		March 31, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Gross loans beginning balance	$	1,983,331	$	1,989,726	$	2,288,468	$	1,989,726	$	2,463,111
New credit extended		119,553		22,543		21,698		142,096		88,294
Loan purchases		46,364		126,718		—		173,082		—
Changes in line of credit utilization		(17,837)		(19,553)		(17,071)		(37,390)		(39,657)
Change in mortgage warehouse		956		(44,005)		(37,588)		(43,049)		(157,327)
Pay-downs, maturities, charge-offs and amortization ⁽¹⁾		(109,705)		(92,098)		(110,711)		(201,803)		(209,625)
Gross loans ending balance		2,022,662		1,983,331		2,144,796		2,022,662		2,144,796
Deferred costs and (fees), net		(1,081)		(1,200)		(3,835)		(1,081)		(3,835)
Loans, net of deferred costs and (fees)	$	2,021,581	$	1,982,131	$	2,140,961	$	2,021,581	$	2,140,961

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The Company’s regulatory commercial real estate concentration ratio decreased to ~~the borrower’s sale~~238% at June 30, 2022 as compared to 248% at December 31, 2021.

Unused commitments, excluding mortgage warehouse and overdraft lines, were $199.4 million at June 30, 2022, compared to $242.3 million at December 31, 2021. Total line utilization, excluding mortgage warehouse and consumer overdraft lines, was 61.2% at June 30, 2022 and 61.0% at December 31, 2021. Mortgage warehouse utilization declined significantly to 12% at June 30, 2022, as compared to 28% at December 31, 2021. It should be noted that approximately $278.0 million of ~~land adjacent to~~ the ~~business. As noted, outstanding balances on~~ mortgage warehouse lines were ~~down $44 million, or 27%, due~~moved to ~~a drop in utilization on those~~repurchase agreement lines that provide stronger credit protection to ~~31% at September 30, 2017 from 48% at December 31, 2016. Commercial loan and lease balances reflect a net decline of $12 million, or 10%,~~the Company, as ~~the addition of new commercial lending relationships was~~well as more than offset by payoffs in the portfolio. One large commercial relationship, in particular, had a detrimental impact when the borrower sold the business in the third quarter of 2017 and paid off $14 million in loans. Consumerfavorable regulatory capital treatment as these repurchase lines are not considered off-balance sheet commitments.

As expected, PPP loans ~~also declined by $2 million, or 15%. We~~ continue to ~~actively seek quality loan participations~~decline as borrowers receive forgiveness on these loans. There were 107 loans for $8.2 million outstanding at June 30, 2022, compared to ~~supplement organic~~

growth, but the Company’s loan participations purchased, which are included in the balances shown in the table above, declined during the first nine months of 2017, to $37 million at September 30, 2017 from $41438 loans for $31.8 million at December 31, ~~2016.~~2021.

Management remains focused on loan growth, which combined with stronger economic activity in some of our markets has led to record levels for our pipeline of loans in process of approval in recent periods. However, we are still experiencing a relatively high level of prepayments and mortgage warehouse lending is subject to significant fluctuations, thus no assurance can be provided with regard to future net growth in aggregate loan balances.

NONPERFORMING ASSETS

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, ~~and~~in addition to foreclosed assets ~~including mobile homes and OREO.~~ which is primarily OREO, but can include other foreclosed assets.

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, unless the modification was granted under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement. 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, 2022		December 31, 2021		June 30, 2021
NON-ACCRUAL LOANS:
Real estate:
Other construction/land	$	—	$	—	$	—
1-4 family - closed-end		745		1,023		1,473
Equity lines		62		892		2,138
Commercial real estate - owner occupied		379		1,234		1,278
Commercial real estate - non-owner occupied		—		—		—
Farmland		19,301		—		427
TOTAL REAL ESTATE		20,487		3,149		5,316
Agriculture		8,444		378		517
Commercial and industrial		814		973		1,423
Consumer loans		—		22		20
TOTAL NONPERFORMING LOANS		29,745		4,522		7,276

Foreclosed assets		2		93		774
Total nonperforming assets	$	29,747	$	4,615	$	8,050
Performing TDRs⁽¹⁾	$	4,714	$	4,910	$	10,774
Nonperforming loans as a % of total gross loans and leases		1.47%		0.23%		0.34%
Nonperforming assets as a % of total gross loans and leases and foreclosed assets		1.47%		0.23%		0.38%

Nonperforming Assets and Performing Troubled Debt Restructurings

(dollars in thousands, unaudited)

September 30, 2017

December 31, 2016

September 30, 2016

NON-ACCRUAL LOANS:

Real Estate:

Other construction/land

$
83

$
558

$
590

1-4 family - closed-end

886

963

975

Equity lines

893

1,926

1,898

Commercial real estate - owner occupied

1,148

1,572

1,485

Commercial real estate - non-owner occupied

—

67

69

Farmland

297

39

295

TOTAL REAL ESTATE

3,307

5,125

5,312

Agriculture

—

89

89

Commercial and industrial

734

692

438

Consumer loans

77

459

446

TOTAL NONPERFORMING LOANS

4,118

6,365

6,285

Foreclosed assets

2,674

2,225

2,782

Total nonperforming assets

$
6,792

$
8,590

$
9,067

Performing TDRs⁽¹⁾

$
12,707

$
14,182

$
14,478

Nonperforming loans as a % of total gross loans and
leases

0.31
%

0.50
%

0.50
%

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

0.52
%

0.68
%

0.72
%

⁽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 ~~$1.8~~$25.1 million, ~~or 21%,~~to $29.7 million during the first ~~nine months~~half of ~~2017. Nonperforming~~2022, primarily as a result of a downgrade in the first quarter of 2022, consisting of one relationship in the dairy industry comprising four separate loans. These loans ~~declined~~were written down by ~~$2.2~~$1.96 million or 35%, while foreclosed assets increased by $449,000, or 20%. Non-accruing loan balances secured by real estate totaled $3.3 million at September 30, 2017, comprising 80% of total nonperforming loans and ~~reflecting a decline of $1.8 million, or 35%, since December 31, 2016 due primarily to principal pay-downs and balances returned to accrual status.~~no further allowance for credit losses was deemed necessary on these loans. The ~~balance~~Company's ratio of nonperforming loans to gross loans increased to 1.47% at ~~September~~June 30, ~~2017 includes $2.5 million in TDRs~~2022 from 0.23% at December 31, 2021. All of the Company's nonperforming 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 classified as such.~~ the underlying collateral, net of expected disposition costs.

As shown in the table, we also had ~~$12.7~~$4.7 million in loans classified as performing TDRs ~~for~~on which we were still accruing interest as of ~~September~~June 30, ~~2017,~~2022, a ~~reduction~~decrease of ~~$1.5~~$0.2 million, or ~~10%~~4%, relative to December 31, ~~2016.~~2021.

As noted above, foreclosed assets increased by $449,000, or 20%, during the first nine months of 2017 due to gross additions totaling $648,000, partially offset by the sale of certain small properties and $75,000 in write-downs on OREO. The balance of foreclosedForeclosed assets had a carrying value of ~~$2.7~~$0.002 million at ~~September~~June 30, ~~2017,~~2022 and ~~was~~$0.1 million December 31, 2021 comprised of ~~14 properties~~one property classified as ~~OREO~~OREO. The property was written down to fair value less disposition costs in the second quarter of 2022 and ~~two mobile homes. At~~subsequently sold in the ~~end~~third quarter of ~~2016 foreclosed assets totaled just over $2.2 million, consisting of 11 properties classified as OREO and two mobile homes.~~2022. 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 0.52% of gross loans and leases plus foreclosed assets at September 30, 2017, down from 0.68% at December 31, 2016 and 0.72% at September 30, 2016.~~ 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 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 had $5.3 million in loans past due 30-59 days at June 30, 2022. This is an increase of $3.1 million over the balance at December 31, 2021. All of these past due loans are under management supervision and every effort is being taken to assist the borrowers and manage credit risk in this regard.

~~Allowance for loan and lease Losses~~

ALLOWANCE FOR CREDIT LOSSES – LOANS AND LEASES RECEIVABLE

The allowance for ~~loan~~credit losses on loans and ~~lease losses,~~leases, a contra-asset, is established through ~~a provision~~periodic provisions for ~~loan~~credit losses on loans and ~~lease losses.~~leases. It is maintained at a level that is considered adequate to ~~absorb probable~~measure expected losses on ~~specifically~~individually identified ~~impaired~~ loans, as well as ~~probable incurred~~expected 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.

~~The Company’s~~After deferring implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) under section 4014 of the CARES Act, the Company implemented CECL on January 1, 2022. Upon implementation the Company recorded a $10.4 million increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.

The Company's allowance for credit losses on loans and leases was $22.8 million at June 30, 2022, as compared to $14.3 million at December 31, 2021, and $16.4 million at June 30, 2021. The $8.5 million increase in the allowance for credit losses on loans and leases during the first half of 2022 is due to a $9.5 million one-time adjustment from the implementation of CECL on January 1, 2022, a $3.1 million provision for credit losses on loans and leases, and net loan ~~and lease losses~~charge-offs of $4.1 million.

The allowance was ~~$8.8 million, or 0.67%~~1.13% of gross loans at ~~September~~June 30, ~~2017, relative to $9.7 million, or 0.77%~~2022, 0.72% of gross loans at December 31, ~~2016. The decline resulted from~~2021, and 0.77% of total loans at June 30, 2021. Management's detailed analysis indicates that the ~~charge-off of certain impaired loan balances against previously-established reserves, partially offset by reserves provided~~Company's allowance for credit losses ~~inherent in incremental loan balances~~on loans and ~~unanticipated charge-offs. Moreover, our need~~leases should be sufficient to cover credit losses for ~~loss reserves has been favorably impacted in recent periods by loan growth in portfolio segments with relatively low historical loss rates, by continued credit quality improvement in~~ the performing loan portfolio in general as loans booked or renewed during or since the great recession have been underwritten using tighter credit criteria, and by acquired loans that were booked at their fair values and thus initially did not necessarily require loss reserves. The ratiolife of the ~~allowance to nonperforming~~ loans ~~was 213.31% at September~~and leases outstanding as of June 30, ~~2017,~~2022, but no assurance can be given that the Company will not experience substantial future losses relative to ~~152.41% at December 31, 2016~~the size of the loan and ~~157.20% at September 30, 2016.~~ lease loss allowance.

A separate allowance of ~~$344,000~~$0.9 million for potential credit losses inherent in unused commitments is included in other liabilities at ~~September~~June 30, ~~2017.~~2022, as compared to $0.2 million at December 31, 2021. As mentioned previously a $0.9 million

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one-time adjustment was recorded to the reserve for unfunded commitments on January 1, 2022 upon the implementation of CECL.

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The following table ~~that follows~~ summarizes ~~the~~ activity in the credit allowance for ~~loan~~losses on loans and ~~lease losses~~leases for the noted periods:

Allowance for Credit Losses on Loans and Leases

(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:	2022		2021		2022		2021		2021
Average gross loans and leases outstanding during period ⁽¹⁾	$	2,011,868	$	2,184,899	$	1,981,947	$	2,275,467	$	2,169,582
Gross loans and leases outstanding at end of period	$	2,022,662	$	2,144,796	$	2,022,662	$	2,144,796	$	1,989,726

Allowance for credit losses on loans and leases:
Balance at beginning of period	$	22,530	$	18,319	$	14,256	$	17,738	$	17,738
Adoption of ASC 326		—		—		9,454		—		—
Provision charged to expense		2,548		(2,100)		3,148		(1,850)		(3,650)
Charge-offs
Real estate
1-4 family residential construction		—		—		—		—		—
Other construction/land		—		—		—		—		—
1-4 family - closed-end		—		—		—		—		—
Equity lines		—		11		—		12		12
Multi-family residential		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		233		233
Commercial real estate- non-owner occupied		1,911		—		1,911		—		—
Farmland		—		—		1,958		—		—
Total real estate		1,911		11		3,869		245		245
Agricultural		212		50		212		50		50
Commercial and industrial		86		25		159		77		159
Consumer loans		314		169		612		331		946
Total	$	2,523	$	255	$	4,852	$	703	$	1,400
Recoveries
Real estate
1-4 family residential construction		—		—		—		—		—
Other construction/land		—		110		259		328		328
1-4 family - closed-end		1		3		86		5		(67)
Equity lines		12		—		12		—		25
Multi-family residential		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		233		233
Commercial real estate- non-owner occupied		—		82		—		82		82
Farmland		—		—		—		—		—
Total real estate		13		195		357		648		601
Agricultural		—		—		—		—		—
Commercial and industrial		62		82		82		192		223
Consumer loans		172		180		357		396		744
Total	$	247	$	457	$	796	$	1,236	$	1,568
Net loan charge offs (recoveries)	$	2,276	$	(202)	$	4,056	$	(533)	$	(168)
Balance at end of period	$	22,802	$	16,421	$	22,802	$	16,421	$	14,256

RATIOS
Net charge-offs (recoveries) to average loans and leases (annualized)		0.45%		(0.04)%		0.41%		(0.05)%		(0.01)%
Allowance for credit losses on loans and leases to gross loans and leases at end of period		1.13%		0.77%		1.13%		0.77%		0.72%
Allowance for credit losses on loans and leases to nonperforming loans		76.66%		225.69%		76.66%		225.69%		315.26%
Net loan charge-offs (recoveries) to allowance for credit losses on loans and leases at end of period		9.98%		(1.23)%		17.79%		(3.25)%		(1.18)%
Net loan charge-offs (recoveries) to provision for credit losses on loans and leases		89.32%		9.62%		128.84%		28.81%		4.60%

Allowance for Loan and Lease Losses

For the three
months

For the three
months

For the nine
months

For the nine
months

For the year

(dollars in thousands, unaudited)

ended September 30,

ended September 30,

ended September 30,

ended September 30,

ended December 31,

Balances:

2017

2016

2017

2016

2016

Average gross loans and leases outstanding during period ⁽¹⁾

$
1,287,906

$
1,210,900

$
1,246,250

$
1,119,719

$
1,153,240

Gross loans and leases outstanding at end of period

$
1,311,625

$
1,256,330

$
1,311,625

$
1,256,330

$
1,262,531

Allowance for Loan and Lease Losses:

Balance at beginning of period

$
9,230

$
10,042

$
9,701

$
10,423

$
10,423

Provision charged to expense

—

—

300

—

—

Charge-offs

Real Estate

1-4 family residential construction

—

—

—

—

—

Other construction/land

—

—

—

6

144

1-4 family - closed-end

—

—

7

97

97

Equity lines

1

—

52

94

94

Multi-family residential

—

—

—

50

50

Commercial real estate- owner occupied

—

—

87

23

108

Commercial real estate- non-owner occupied

—

—

—

10

469

Farmland

—

—

—

—

—

TOTAL REAL ESTATE

1

—

146

280

962

      Agricultural

132

—

154

—

      Commercial & industrial loans

192

23

576

197

344

      Consumer loans

561

458

1,606

1,443

1,905

Total

$
886

$
481

$
2,482

$
1,920

$
3,211

Recoveries

Real Estate

1-4 family residential construction

—

—

—

—

—

Other construction/land

—

—

5

329

467

1-4 family - closed-end

3

6

8

10

15

Equity lines

3

2

8

9

17

Multi-family residential

—

—

—

—

—

Commercial real estate- owner occupied

51

—

89

34

35

Commercial real estate- non-owner
   occupied

12

—

104

23

449

Farmland

—

—

—

—

—

TOTAL REAL ESTATE

69

8

214

405

983

      Agricultural

-

3

5

7

14

Commercial and industrial

87

97

282

257

477

Consumer loans

284

211

764

708

1,015

Total

$
440

$
319

$
1,265

$
1,377

$
2,489

Net loan charge offs (recoveries)

$
446

$
162

$
1,217

$
543

$
722

Balance at end of period

$
8,784

$
9,880

$
8,784

$
9,880

$
9,701

RATIOS

Net Charge-offs to Average Loans and Leases (annualized)

0.14
%

0.05
%

0.13
%

0.06
%

0.06
%
Allowance for Loan Losses to Gross Loans and Leases at
   End of Period

0.67
%

0.79
%

0.67
%

0.79
%

0.77
%
Allowance for Loan Losses to Nonperforming Loans

213.31
%

157.20
%

213.31
%

157.20
%

152.41
%
Net Loan Charge-offs to Allowance for Loan Losses at End
   of Period

5.08
%

1.64
%

13.85
%

5.50
%

7.44
%
Net Loan Charge-offs to Provision for Loan Losses

—

—

406
%

—

—

⁽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 did not record a provision for loan and lease losses during 2016, but a $300,000 provision was required in the second quarter of 2017 to cover net loan growth and to replenish reserves subsequent to unanticipated charge-offs. Net loans charged off against the allowance totaled $1.217 million in the first nine months of 2017, including a $224,000

overdraft on a business account that did not previously have specifically allocated reserves, compared to $543,000 in the first nine months of 2016. Any shortfall in the allowance identified pursuant to our analysis of remaining probable losses is covered by quarter-end. OurThe Company’s credit allowance for ~~probable~~ losses on ~~specifically identified impaired~~ loans ~~was reduced by $316,000, or 23%, during the nine months ended September~~and leases at June 30, 2017, due to the charge-off of losses against the allowance. The allowance for probable losses inherent in non-impaired loans was reduced by $601,000, or 7%, during the first nine months of 2017, primarily from the impact of improved credit quality, net of reserves provided to accommodate loan growth. 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 September 30, 2017~~2022 represents Management’s best estimate of ~~probable~~expected 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.

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. ~~Unused commitments to extend credit totaled $639 million at September 30, 2017 and $464 million at December 31, 2016, although it~~It is ~~not likely~~unlikely that all ~~of those~~unused commitments will ultimately be drawn down. Unused commitments ~~represented~~to extend credit, which included standby letters of credit, totaled $513 million at June 30, 2022 and $561 million at December 31, 2021, representing approximately ~~49%~~25% of gross loans outstanding at ~~September~~June 30, ~~2017~~2022 and ~~37%~~28% at December 31, ~~2016,~~2021. The decrease in unused commitments is due in large part to the decrease in loan balances with ~~the increase due primarily to lower utilization on mortgage warehouse lines and an increase in commercial construction loan~~unfunded commitments. The Company also had undrawn letters of credit issued to customers totaling $8$3.6 million at ~~September~~June 30, ~~2017~~2022 and ~~$9 million at~~ December 31, ~~2016.~~2021. The effect on the Company’s

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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 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 ~~an $86~~a $125 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain local agency deposits ~~and to facilitate certain credit arrangements with the Company’s customers.~~which totaled $77.5 million at June 30, 2022. That letter of credit is backed by loans that are pledged to the FHLB by the Company. For more information ~~regarding~~on the Company’s off-balance sheet arrangements, see Note 87 to the consolidated financial statements located elsewhere herein.

OTHER ASSETS

~~The~~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 ~~level~~amount of cash ~~maintained on hand~~held at our branches, and our reserve requirement among other things, and it is subject to significant ~~fluctuation~~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, ~~the Company will~~we could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity ~~in higher-yielding, longer-term bonds.~~into investments or loans, subject to the bank’s risk tolerances. The Company’s balance of ~~non-interest earning~~non-earning cash and due from banks was ~~$52~~$82.1 million at ~~September~~June 30, ~~2017 and $79~~2022 relative to $63.1 million at December 31, 2016, with the drop due primarily to a lower level of cash items in process of collection. The average balance for the first nine months of 2017 was $50 million, relative to an average balance of $45 million for the first nine months of 2016. The increase in the average balance in 2017 is largely a function of cash maintained on-premises for customer transactions at the former Coast branches, and our newer de novo branches.2021.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”

Net premises and equipment ~~was down $520,000, or 2%,~~decreased by $0.6 million during the first ~~nine months~~half of ~~2017, as the~~2022, to $22.9 million. This decline was primarily a result of ~~depreciation.~~ normal depreciation, net of new purchases.

Goodwill was $8$27.4 million at ~~September~~June 30, ~~2017,~~2022, unchanged ~~for the first nine months. Other intangible assets were down $320,000, or 11%,~~ during the first ~~nine months, due to amortization on core deposit intangibles. The Company’s goodwill~~half of 2022. Goodwill is tested for impairment annually, unless events and ~~other intangible assets are evaluated annually for potential~~circumstances exist which indicate that an impairment test should be performed. A Goodwill impairment test was last performed during the fourth quarter 2021 and ~~pursuant to that analysis Management has concluded~~determined that no impairment ~~exists as~~existed. There have been no triggering events in the first six months of ~~September 30, 2017.~~2022 that would require the Company ~~owned~~to perform a Goodwill impairment test, however the Company will continue to monitor its Goodwill for potential impairment.

Bank-owned life insurance, with a balance of ~~$45~~$52.2 million at ~~September~~June 30, ~~2017,~~2022, is discussed in detail above in the ~~“Non-Interest~~“Noninterest Income and ~~Non-Interest~~Noninterest Expense” section.

The aggregate balance of “Other assets” was $47.6 million at September 30, 2017, up by $6.9 million, or 17%, for the first nine months of 2017. The increase is due to a $4.9 million increase in suspense resources, representing loan transactions in process of

settlement, as well as the net addition of $2.1 million to our investment in low-income housing tax credit funds and a $2.0 million increase in our capital commitment to a small business investment corporation. Those increases were offset in part by a $2.1 million reduction in our net deferred tax asset. At September 30, 2017, the balance of other assets included as its largest components an $8.9 million investment in low-income housing tax credit funds, an $8.7 million investment in restricted stock, a net deferred tax asset of $7.5 million, accrued interest receivable totaling $6.7 million, a $6.4 million balance in suspense resources, and a $3.2 million investment in a small business investment corporation. Restricted stock is comprised primarily of Federal Home Loan Bank of San Francisco stock held in conjunction with our FHLB borrowings, and is not 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 represent another key balance sheet category impacting the Company’s net interest ~~margin~~income and ~~other~~ 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 ~~deposits~~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 nine-month periods ended September 30, 2017 and 2016~~ is included in the Average Balances and Rates ~~table~~tables appearing above, in the section titled “Net 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, ~~by type~~ is presented as of the dates indicated in the following table.

Deposit Distribution

(dollars in thousands, unaudited)

September 30, 2017

December 31, 2016

Interest bearing demand deposits

$
115,024

$
132,586

Non-interest bearing demand deposits

571,509

524,552

NOW

381,623

366,238

Savings

245,093

215,693

Money market

122,772

119,417

CDAR's

-

251

Time, under $250,000

150,361

152,561

Time, $250,000 or more

193,197

184,173

Total deposits

$
1,779,579

$
1,695,471

Percentage of Total Deposits

Interest bearing demand deposits

6.46
%

7.82
%
Non-interest bearing demand deposits

32.12
%

30.94
%
NOW

21.44
%

21.60
%
Savings

13.77
%

12.72
%
Money market

6.90
%

7.04
%
CDAR's

-

0.01
%
Time, under $250,000

8.45
%

9.01
%
Time, $250,000 or more

10.86
%

10.86
%
Total

100.00
%

100.00
%

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Deposit Distribution

~~While total deposit~~(dollars in thousands, unaudited)


	June 30, 2022		December 31, 2021
Noninterest bearing demand deposits	$	1,120,413	$	1,084,544
Interest bearing demand deposits		203,032		129,783
NOW		533,002		614,770
Savings		482,140		450,785
Money market		152,596		147,793
Time		299,816		293,897
Brokered deposits		60,000		60,000
Total deposits	$	2,850,999	$	2,781,572

Percentage of Total Deposits
Noninterest bearing demand deposits		39.30%		38.99%
Interest bearing demand deposits		7.12%		4.67%
NOW		18.70%		22.10%
Savings		16.91%		16.21%
Money market		5.35%		5.31%
Time		10.52%		10.57%
Brokered deposits		2.10%		2.16%
Total		100.00%		100.00%

Deposit balances ~~fell~~reflect net growth of $69.4 million, or 2%, during the ~~third quarter~~first half of ~~2017 due~~2022. Time deposits were $299.8 million at June 30, 2022 as compared to ~~the runoff of seasonal~~$293.9 million at December 31, 2021. Brokered deposits ~~they still reflect net organic~~were unchanged at $60.0 million at June 30, 2022 from December 31, 2021. Non-maturity deposit growth of ~~$84~~$63.5 million ~~or 5%,~~ for the first ~~nine months~~half of ~~2017 due~~2022 was primarily ~~to an increase~~the result of ~~$78 million, or 6%,~~increases in ~~core non-maturity deposits. Non-interest bearing demand deposit~~ balances ~~grew by $47 million, or 9%, for~~of existing customers as the ~~first nine months~~total number of 2017, NOW accounts increased by $15 million, or 4%, savings deposits rose by $29 million, or 14%, and money market demand deposits were up by $3 million, or 3%. However, part of the growth in those deposit account types came from a shift out of interest-bearing demand deposits, which were down $18 million, or 13%, for the first nine months of 2017. Total time deposits were up by $7 million, or 2%, as growth in larger time deposits more than offset a slight decline in deposits under $250,000. customers was relatively unchanged.

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 no assurance can be provided with regard~~noninterest-bearing deposits to ~~future core deposit increases.~~total deposits was 39.3% at June 30, 2022 as compared to 39.0% at December 31, 2021.

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 ~~agreement~~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 reduced~~increased by ~~$52~~$11.2 million, ~~or 49%, in~~during the first ~~nine months~~half of ~~2017,~~2022 primarily due to ~~a drop in FHLB borrowings facilitated by the~~an increase in deposits. There were $11 million in overnight borrowings from the FHLB at September 30, 2017, down from $65 million at December 31, 2016, and we had $2 million in overnight funds purchased from other correspondent banks at September 30, 2017 but none at December 31, 2016. There were no advances from the FRB on our books at September 30, 2017 or December 31, 2016.customer repurchase agreements. Repurchase agreements totaled $9$118.0 million at ~~September~~June 30, ~~2017, constituting a slight increase~~2022 relative to ~~their~~a balance of $106.9 million at year-end ~~2016.~~2021. Repurchase agreements represent “sweep accounts”, where certain customers have elected to have their commercial deposit balances above a specified threshold ~~are~~ transferred at the close of each business day into non-deposit ~~accounts secured~~investments accounts. The balance in the investment account is used to have the customer purchase securities or a perfected interest in specifically identified pledged securities from the bank, which are then repurchased by ~~investment securities.~~ the bank from the customer the next business day.

The Company had Long term debt totaling $49.2 million and $49.1 million at June 30, 2022 and December 31, 2021, respectively, in the form of 3.25% fixed – floating subordinated debt with a ten-year maturity and junior subordinated debentures totaling ~~$34.5~~$35.4 million at ~~September~~June 30, ~~2017~~2022 and ~~$34.4~~$35.3 million at December 31, ~~2016,~~2021, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities. ~~The small increase resulted from the amortization~~

Table of ~~discount on junior subordinated debentures acquired with Coast Bancorp in 2016.~~Contents

OTHER ~~NON-INTEREST~~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. ~~Other~~The Company’s balance of other liabilities ~~were virtually unchanged during~~was $43.1 million at June 30, 2022 as compared to $35.4 million at December 31, 2021, an increase of $7.8 million or 22%. The increase was primarily driven by the ~~first nine months of 2017. There were sizeable increases~~Company’s investment commitment in ~~accruals for capital commitments to low-income~~a $2.0 million low income housing tax credit ~~funds~~fund and $5.0 million investment commitment in a ~~small business investment corporation, but those were largely offset by lower balances in clearing accounts.~~FinTech Fund.

LIQUIDITY AND MARKET RISK MANAGEMENT

~~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, ~~the Company~~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~~

At June 30, 2022 and December 31, 2021, the Company had the following sources of primary and secondary liquidity (dollars in thousands):


Primary and secondary liquidity sources		June 30, 2022		December 31, 2021
Cash and cash equivalents	$	161,875	$	257,528
Unpledged investment securities		839,833		806,132
Excess pledged securities		38,245		47,024
FHLB borrowing availability		830,615		787,519
Unsecured lines of credit		305,000		305,000
Funds available through fed discount window		32,762		50,608
Totals	$	2,208,330	$	2,253,811

In addition to the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market.

Cash and cash equivalents during the first half of 2022, declined $95.7 million due to increases in investment securities and loans and leases. Utilization of remaining excess liquidity is expected to come from a combination of new organic loan originations, and new investment purchases, mostly in the form of collateralization loan obligations. In addition, it is possible that a portion of the deposits built-up during the COVID-19 pandemic could be withdrawn by customers. When looking to reduce these low-yielding cash balances with earning assets, management considers interest rate risk, including duration and extension risk; credit ~~from correspondent banks~~risk; and the ~~FHLB totaled $398 million at September 30, 2017. An additional $105 million in credit is available from the FHLB if the Company were to pledge sufficient collateral and maintain the required amount~~liquidity risk of ~~FHLB stock.~~ such alternative assets.

The Company ~~is also eligible to borrow approximately $74 million~~performs regular stress tests on its liquidity and at the Federal Reserve Discount Window, if necessary, based on pledged assets at September 30, 2017. Furthermore, funds can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cashthis 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 September 30, 2017, unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $429 million of the Company’s investment balances, compared to $386 million at December 31, 2016. 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 ~~$86~~$125 million at ~~September~~June 30, ~~2017.~~2022 and December 31, 2021. Other sources of liquidity include 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 liquid

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assets, along with ~~the~~ 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 primary liquidity ratio and net loans to ~~assets~~deposits were 36.56% and ~~available investments to assets ratios were 63% and 21%~~70.11%, respectively, at ~~September~~June 30, ~~2017,~~2022, as compared to internal policy guidelines of “greater than 15%” and “less than ~~78%” and “greater than 3%~~95%.” ~~Other liquidity ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to total assets (including ratios~~Ratios and sub-limits for the various components comprising wholesale ~~funding),~~funding, which were all well within policy guidelines at ~~September~~June 30, ~~2017. Favorable trends in core deposits~~2022, are also periodically reviewed by Management and ~~relatively high levels of liquid investments have had~~the Board. The Company has been able to maintain a ~~positive impact on our~~robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current ~~robust~~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 and subordinated debt, shareholder dividends, and ~~stock~~share 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, 2022, the holding company maintained a cash balance of $7.5 million. Management anticipates that the ~~Bank will have~~holding company has sufficient ~~earnings to provide dividends to the holding company~~liquidity to meet its funding requirements for the foreseeable future. Both 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 for the year ended December 31, ~~2016~~2021 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.

The Company reclassified $162.1 million of securities that have the highest level of volatility to changes in interest rates from available-for-sale to held-to-maturity to mitigate the impact on tangible capital.

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).

WeIn addition to a stable rate scenario, which presumes that there are no changes in interest rates, we typically use at least eight ~~standard~~other interest rate scenarios in conducting our rolling ~~12-month~~12-month net interest income simulations: ~~“stable,”~~ upward shocks of 100, 200, 300, and 400 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 considering economic conditions and expectations at the time. The downward shock scenarios of 200 300 and 400 basis points were temporarily suspended in the second quarter of 2020 after concurrence by the Company’s Board of Directors, due to the fact that in these down scenarios, projected interest rates would be near or below zero. At the June 2022 Finance & Sustainability Committee Meeting, Management reinstituted the down 200 scenario, due to the Federal Open Market Committee increasing rates by 150 basis points during the quarter. Pursuant to policy guidelines, we ~~typically~~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 ~~September 30, 2017 the~~Contents

The Company had the following estimated net interest income sensitivity ~~profile,~~profiles over one-year, 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)
-$18,793
-$12,659
-$5,603
+$938
+$1,340
+$1,788
+$1,839
% Change
-24.53%
-16.53%
-7.31%
+1.22%
+1.75%
+2.33%
+2.40%


	June 30, 2022				June 30, 2021
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		9.5%	$	11,559		11.3%	$	11,645
+300		7.5%	$	9,053		9.1%	$	9,384
+200		5.6%	$	6,778		6.9%	$	7,072
+100		3.3%	$	3,939		4.1%	$	4,226
Base
-100		(6.9)%	$	(8,316)		(8.1)%	$	(8,306)
-200		(15.9)%	$	(19,279)		N/A		N/A

~~Our current simulations indicate~~For the periods ending June 30, 2022 and June 30, 2021, management believes that the Company ~~has an asset-sensitive profile, meaning that~~was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining in the down shocks. The Company’s asset sensitivity based on its interest rate risk model at June 30, 2022 as compared to June 30, 2021, is similar. In the up 400 basis point shock scenario, expected net interest income over the next twelve months increases ~~with a parallel shift up~~$11.6 million, or 10%, to $132.7 million at June 30, 2022 compared to an 11% increase or $11.6 million for the same period in 2021.

The Company reclassified $162.1 million of securities that have the ~~yield curve but a drop~~highest level of volatility to changes in interest rates from available-for-sale to held-to-maturity to mitigate the impact on tangible capital.

Over the next twelve months, $161.9 million in surplus cash is projected to decline due to expected core loan growth as our pipelines begin to increase, and a redeployment of excess cash into variable rate investment vehicles such as collateralized loan obligations. Further, a portion of the significant increase in deposits during the COVID-19 pandemic could ~~have~~be withdrawn by customers. These expected changes in earnings assets, including overnight cash, are not modeled in the immediate rate shock model described above. Although the cost of interest-bearing liabilities will also increase in a ~~negative impact. This profile is consistent with~~rate shock, the ~~Company’s relatively large balance~~deposit betas utilized in the interest rate model mitigate the magnitude of ~~less rate-sensitive non-maturity deposits and large volume of variable-rate loans, which contribute to higher net interest income in rising~~a deposit rate ~~scenarios and compression~~increase.

The change in net interest income ~~in declining rate~~is similar for the up 100, 200, 300, and 400 basis point scenarios.

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 ~~$938,000,~~$3.9 million, or ~~1.22%~~3%, relative to a stable interest rate scenario, with the favorable variance ~~continuing to expand slightly~~increasing marginally as interest rates rise higher.

If ~~interest rates were to decline by~~there was an immediate downward adjustment of 100 basis points ~~however,~~in interest rates, net interest income would ~~likely~~drop $8.3 million or a negative variance of 7%. The change in net interest income in the down 200 basis point scenario is a decrease of $19.3 million or 16%. The reason for the drop in net interest income in the down 200 basis points scenario over the 100 basis point scenario is that many of the deposit products reach their floors and cannot be ~~around $5.603 million~~repriced lower ~~than~~while, non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a ~~stable interest~~falling rate ~~scenario, for a negative~~

~~variance of 7.31%.~~environment. The unfavorable variance increases when rates drop 200 or 300 basis points, 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 in net interest income in the “down 200 basis points” interest rate scenario exceeds our internal policy guidelines, ~~in declining interest rate scenarios~~ and we will continue to monitor our interest rate risk profile and ~~take corrective action as~~implement remedial changes if deemed appropriate. The percentage drop in net interest income exceeding internal policy guidelines will most likely continue until interest rates return to historically higher levels.

If there was an immediate downward adjustment of 100 basis points in interest rates, net interest income would drop $8.3 million or a negative variance of 8%. The reason for the drop in net interest income is, most deposit products are at their floors of 0.10% and cannot be re-priced lower, while non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment. Due to the historically low current rate environment, we view any material interest rate reductions as unlikely in the near term. However, the potential percentage drop in net interest income in the “down 100 basis points” interest rate scenario exceeds our internal policy guidelines and we will continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate.

In addition to the net interest income simulations shown above, we run stress scenarios for the unconsolidated Bank ~~modeling~~where we model the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the ~~Company~~Bank in the most recent economic cycle, and ~~potential~~ unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas). ~~Projected~~When a static balance sheet and a stable interest rate environment are assumed, projected annual net interest income is ~~roughly $2~~$8.0 million lower than in the stable rate scenario if no balance sheet growth is assumed, but the rate-driven variances predicted for net interest income in a static growth environment are similar to the changes noted above for our standard projections. When a greater level of non-maturity deposit runoff is assumed or unfavorable deposit rate changes are factored into the model, projected net interest income in declining and flat rate scenarios does not change materially relative to standard rate projections but net interest income drops and the slope reverses in rising rate scenarios.simulation.

The modeled 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

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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 ~~projected~~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 ~~characteristics of~~tables below for the periods ending June 30, 2022 and 2021, respectively, as the Company’s balance sheet ~~evolve~~evolves and interest rate and yield curve assumptions are updated.

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 increased in the past twelve months primarily driven by an increase in deposits and an increase in deposit values. The ~~table~~tables below ~~shows~~show estimated changes in the Company’s EVE as ~~of September 30, 2017,~~modeled under different interest rate scenarios relative to athe base ~~case of current interest rates:~~case:


	June 30, 2022				June 30, 2021
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		13.4%	$	95,479		35.6%	$	202,631
+300		10.9%	$	77,821		31.8%	$	181,010
+200		8.2%	$	58,626		25.9%	$	147,560
+100		3.6%	$	25,282		15.7%	$	89,293
Base
-100		(18.9)%	$	(134,337)		(21.3)%	$	(120,991)
-200		(38.6)%	$	(274,465)		N/A		N/A

Immediate Change in Rate

-300 bp
-200 bp
-100 bp
+100 bp
+200 bp
+300 bp
+400 bp
Change in EVE (in $000’s)
-$75,290
-$94,028
-$68,448
+$34,099
+$52,699
+$62,062
+$63,632
% Change
-18.38%
-22.96%
-16.71%
+8.33%
+12.87%
+15.15%
+15.54%

The table shows that our EVE ~~will generally~~is modeled to deteriorate in declining rate scenarios but should benefit from a ~~parallel~~parallel shift upward in the yield curve. ~~While still negative relative to~~The rate of increase in EVE accelerates the ~~base case we see a favorable swing~~higher interest rates rise. This increase in ~~EVE~~sensitivity is caused by the increase in gross deposits, namely, an increase in noninterest bearing deposits which become more valuable as interest rates drop more than 200 basis points, and the change in EVE begins to level off as interest rates rise by more than 300 basis points. This is due to the relative durations of our fixed-rate assets and liabilities, combined with the optionality inherent in our balance sheet.rise. We also run stress scenarios for the unconsolidated Bank’s EVE to simulate the possibility of ~~higher~~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 ~~higher~~rising interest rate scenarios.

55The potential percentage drop in EVE in the “down 100 and 200 basis points” interest rate scenario exceeds our internal policy guidelines, and we will continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate. The percentage drop in EVE exceeding internal policy guidelines will most likely continue until interest rates and deposit rates return to historically higher levels.

CAPITAL R~~ESOURCES~~RESOURCES

The Company had total shareholders’ equity of ~~$219.1~~$299.0 million at ~~September~~June 30, ~~2017,~~2022, comprised of ~~$73.7~~$111.7 million in common stock, ~~$2.9~~$4.6 million in additional paid-in capital, ~~$141.9~~$233.2 million in retained earnings, and accumulated other

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comprehensive ~~income~~loss of ~~$605,000.~~$50.4 million. At the end of ~~2016,~~2021, total shareholders’ equity was ~~$205.9~~$362.5 million. The ~~increase of $13.2 million, or 6%,~~decrease in ~~shareholders’~~ equity during the first ~~nine months~~half of ~~2017~~2022 is due to net income of $16.6 million, offset by a $7.0 million dividend paid to shareholders, $4.9 million in share repurchases, a $61.6 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities' fair value and a $7.3 million decrease in retained earnings due to the cumulative effect of a change in accounting principal from the ~~addition~~implementation of ~~income, the impact of~~CECL, topic 326. The remaining difference is related to stock options exercised and ~~a $2~~restricted stock compensation recognized during the quarter.

The Company’s strong liquidity position enabled the transfer of $162.1 million ~~absolute increase in accumulated other~~of “available-for-sale” investment securities to “held-to-maturity” classification effective April 1, 2022. The transfer was initiated to reduce the effect of future rate increases on the available-for-sale portfolio, mark-to-market adjustments, comprehensive income ~~net of dividends paid.~~and equity.

The Company approved a new share repurchase program (the 2021 Share Repurchase Plan) on October 21, 2021 and authorized one million shares to be repurchased under this plan. The previous 2003 Share Repurchase Plan was cancelled and the 268,301 shares remaining in that plan were incorporated into the 2021 Share Repurchase Plan. There were ~~no share repurchases executed by the Company during~~182,562 shares repurchased in the first ~~three quarters~~half of ~~2017.~~2022, with 630,000 shares remaining to be repurchased under the 2021 Share Repurchase Plan.

The Company uses a variety of measures to evaluate its capital adequacy, including ~~risk-based capital and~~the leverage ~~ratios that are~~ratio 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.

Regulatory Capital Ratios

September 30,

December 31,

Minimum Requirement

2017

2016

to be Well Capitalized

Sierra Bancorp

Common Equity Tier 1 Capital to Risk-Weighted Assets

14.28%

14.09%

6.50%

Tier 1 Capital to Risk-weighted Assets

16.64%

16.53%

8.00%

Total Capital to Risk-weighted Assets

17.26%

17.25%

10.00%

Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

11.84%

11.92%

5.00%

Bank of the Sierra

Common Equity Tier 1 Capital to Risk-Weighted Assets

15.86%

16.26%

6.50%

Tier 1 Capital to Risk-weighted Assets

15.86%

16.26%

8.00%

Total Capital to Risk-weighted Assets

16.48%

16.97%

10.00%

Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

11.24%

11.73%

5.00%

~~With~~Regulatory Capital Ratios


					Minimum		Minimum
					Requirement		Required
	June 30,		December 31,		to be		Community Bank
	2022		2021		Well Capitalized ⁽¹⁾		Leverage Ratio ⁽²⁾
Bank of the Sierra
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") ⁽³⁾	11.72	%	11.31	%	5.00	%	9.00	%
Sierra Bancorp
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") ⁽³⁾	10.45	%	10.43	%	5.00	%	N/A

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

(2)

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.

(3)	The Company has elected to phase in the impact of implementing CECL on regulatory capital over a three-year period.

The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital adequacy for qualifying community banking organizations. A qualifying community banking organization that opts into the ~~exception of Sierra Bancorp’s~~community bank leverage ratio ~~which declined slightly, our consolidated risk-based~~framework and maintains a leverage ratio greater than 9 percent will be considered to have met the minimum capital ~~ratios experienced marginal increases~~requirements, the capital ratio requirements for the ~~first nine months~~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 ~~2017 since risk-based capital grew at a higher rate~~greater than ~~risk-adjusted assets. However, initial projections indicate that~~9 percent may opt into the ~~impact of the Ojai acquisition could reduce our~~community bank leverage ratio framework if has average consolidated total ~~risk-based capital~~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 ~~by close~~ to ~~150 basis points, with other regulatory capital ratios declining by lesser amounts. Bank~~8% until the earlier of December 31, 2020, or the ~~Sierra’s standalone ratios already reflect material reductions~~national emergency is declared over. Beginning in 2021 the CBLR was increased to 8.5% for the ~~year-to-date period, due~~calendar year with the CBLR increasing to 9% on January 1,

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2022. The federal bank regulatory agencies adopted an interim final rule to implement this change from the payment of an $11 million cash dividend to the holding company in August to ensure that Sierra Bancorp had enough cash on hand for the Ojai acquisition. Even with potential reductions our capital ratios should be very strong relative to the median for peer financial institutions, and are expected to remain well above the threshold forCARES Act. At September 30, 2021, the Company and the Bank met the criteria outlined in the final rule and the interim final rule and elected to ~~be classified as “well capitalized,” the highest rating of the categories defined~~measure capital adequacy under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.CBLR framework.

PART I – FINANCIAL INFORMATION

ITEM 3

~~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.”

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) and 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 ~~third quarter~~first six months of ~~2017~~2022 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 - ~~OTHE~~ROTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The Company ~~is involved~~and the Bank are defendants, from time to time, in ~~various~~ legal proceedings in various points of the ~~normal~~legal process arising from transactions conducted in the ordinary course of business. In the opinion of Management, ~~any~~in consultation with legal counsel, it is not probable that current legal actions will result in an unfavorable outcome that has a material adverse effect on the Company’s consolidated financial condition, results of operations, comprehensive income, or cash flows. In the event that such legal action results in an unfavorable outcome, the resulting liability ~~resulting from such proceedings would not~~could have a material adverse effect on the Company’s consolidated financial ~~condition or~~position, results of ~~operation.~~operations, comprehensive income, or cash flows.

ITEM 1A: RISK FACTORS

There were no material changes from the risk factors disclosed in the Company’s Form 10-K for the fiscal year ended December 31, ~~2016.~~2021.

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

~~(c)~~

~~Stock Repurchases~~

In ~~September of 2016~~October 2021 the Board approved the 2021 Share Repurchase Plan by authorizing 1,000,000 shares of common stock for repurchase. In conjunction with this action, the Board terminated the current Share Repurchase Plan which authorized 500,000 shares of common stock for ~~repurchase, subsequent to the completion of previous stock buyback plans. The authorization of~~repurchase. There are 630,000 shares remaining for repurchase ~~does not provide assurance that a specific quantity of shares will be repurchased, and~~under the program may be suspended at any time at Management’s discretion. The Company did not repurchase any shares in the third quarter of 2017, and there were 478,954 authorized shares remaining available for repurchase at September 30, 2017. As of the date of this report, Management has no immediate plans to resume stock repurchase activity.current Share Repurchase Plan.

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

On August 3, 2022, the Company entered into its standard form of indemnification agreement for directors and senior officers with its two new directors, Ermina Karim and Michele Gil (the “Indemnitees”). The form indemnification agreement provides that the Indemnitees are entitled to indemnification from the Company for expenses, judgments, fines, penalties or amounts paid in settlement incurred in a proceeding against the Indemnitee by reason of their service as an officer or director of the Company, but only if the Indemnitee acted in good faith and in a manner reasonably believed to be in the best interests of the Company, and with respect to any criminal proceeding they had no reasonable cause to believe their conduct was unlawful; that the obligation for indemnification continues so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that Indemnitee served in any capacity referred to in the Indemnification Agreement; and that Indemnification is limited in certain situations as when required by law. Indemnitees are entitled as well to any broader indemnification protections provided by law or subsequently adopted through amended bylaws.

The foregoing summary of the terms of the Indemnification Agreements is qualified in its entirety by reference to the complete text of the Indemnification Agreement, and the form of such Indemnification Agreements is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 29, 2021 and incorporated herein by reference.

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~~Item~~

ITEM 6: E~~xhibits~~EXHIBITS

Exhibit #		Description

3.1	~~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 (1) ~~(4)~~
3.2		Amended and Restated By-laws of ~~the Company~~Sierra Bancorp ~~(5)~~(2)
~~10.1~~ 4.1		~~Salary Continuation Agreement for Kenneth R. Taylor~~Description of Securities ~~(6)~~(3)
~~10.2~~4.2		~~Salary Continuation Agreement~~3.25% Fixed to Floating Subordinated Debt issued September 24, 2021 ~~and~~ ~~Split Dollar Agreement for James F. Gardunio~~ ~~(7)~~(4)
10.3		Director Retirement and Split ~~Dollar Agreement~~dollar Agreements Effective October 1, 2002, for ~~Kenneth R. Taylor~~ ~~(8)~~Albert Berra, Morris Tharp, and Gordon Woods (5)*
10.4		~~Director Retirement Agreement and Split dollar Agreement for Robert Fields~~ ~~(8)~~
~~10.5~~		~~Director Retirement Agreement and Split dollar Agreement for Gordon Woods~~ ~~(8)~~
~~10.6~~		~~Director Retirement Agreement and Split dollar Agreement for Morris Tharp~~ ~~(8)~~
~~10.7~~		~~Director Retirement Agreement and Split dollar Agreement for Albert Berra~~ ~~(8)~~
~~10.8~~		401 Plus Non-Qualified Deferred Compensation Plan (5) ~~(8)~~*
~~10.9~~ 10.5		Indenture dated as of March 17, 2004 between U.S. Bank N.A., as Trustee, and Sierra Bancorp, as Issuer (6) ~~(9)~~
~~10.10~~ 10.6		Amended and Restated Declaration of Trust of Sierra Statutory Trust II, dated as of March 17, 2004 ~~(9)~~ (6)
~~10.11~~ 10.7		Indenture dated as of June 15, 2006 between Wilmington Trust Co., as Trustee, and Sierra Bancorp, as Issuer ~~(10)~~ (7)
~~10.12~~ 10.8		Amended and Restated Declaration of Trust of Sierra Capital Trust III, dated as of June 15, 2006 (7) ~~(10)~~
~~10.13~~ 10.9		2007 Stock Incentive Plan (8) ~~(11)~~
~~10.14~~ 10.10		Sample Retirement Agreement Entered into with Each Non-Employee Director Effective January 1, 2007 ~~(12)~~ (9)*
~~10.15~~ 10.11		Salary Continuation Agreement for Kevin J. McPhaill (9) ~~(12)~~*
~~10.16~~ 10.14		~~First Amendment to the Salary Continuation Agreement for Kenneth R. Taylor~~ ~~(12)~~
~~10.17~~		~~Second Amendment to the Salary Continuation Agreement for Kenneth R. Taylor~~ ~~(13)~~
~~10.18~~		First Amendment to the Salary Continuation Agreement for Kevin J. McPhaill ~~(14)~~ (10)*
~~10.19~~ 10.15		Indenture dated as of September 20, 2007 between Wilmington Trust Co., as Trustee, and Coast Bancorp, as Issuer (11) ~~(15)~~
~~10.20~~ 10.16		Amended and Restated Declaration of Trust of Coast Bancorp Statutory Trust II, dated as of September 20, 2007 (11) ~~(15)~~
~~10.21~~ 10.17		First Supplemental Indenture dated as of July 8, 2016, between Wilmington Trust Co. as Trustee, Sierra Bancorp as the “Successor Company”, and Coast Bancorp (11) ~~(15)~~
~~10.22~~ 10.18		2017 Stock Incentive Plan (12) ~~(16)~~*
11 10.19		~~Statement~~Employment agreements dated as of ~~Computation of Per Share Earnings~~December 27, 2018 for Kevin McPhaill ~~(17)~~, CEO and Michael Olague, Chief Banking Officer (13)*
~~31.1~~ 10.21		Employment agreement dated as of November 15, 2019 for Christopher Treece, Chief Financial Officer (14)*
10.22		Employment agreement dated as of January 17, 2020 for Jennifer Johnson, Chief Administrative Officer (15)*
10.23		Employment agreement dated as of December 14, 2020 for Hugh Boyle, Chief Credit Officer (16)*
10.24		Form Indemnification Agreement dated as of January 28, 2021 for Directors and Executive Officers (17)*
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		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

~~(1)~~

~~Filed as an Exhibit to~~Cover Page Interactive Data File - The cover page interactive data file does not appear in the ~~Form 8-K filed with~~Interactive Data File because its XBRL tags are embedded within the ~~SEC on July 18, 2014 and incorporated herein by reference.~~Inline XBRL document.

(1)

~~(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 filed with the SEC on August 7, 2009 and incorporated herein by reference.

(2)

~~(5)~~

Filed as an Exhibit to the Form 8-K filed with the SEC on ~~February 21, 2007~~May 25, 2022 and incorporated herein by reference.

(3)

~~(6)~~

Filed as an Exhibit ~~10.5~~ to the Form ~~10-Q~~10-K filed with the SEC on ~~May 15, 2003~~March 12, 2020 and incorporated herein by reference.

(4)

~~(7)~~

Filed as an Exhibit to the Form 8-K filed with the SEC on ~~August 11, 2005~~September 24, 2021 and incorporated herein by reference.

(5)

~~(8)~~

Filed as Exhibits ~~10.10, 10.17~~10.18 through 10.20, and 10.22 to the Form 10-K filed with the SEC on March 15, 2006 and incorporated herein by reference.

(6)

~~(9)~~

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

(7)

~~(10)~~

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

(8)

~~(11)~~

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

(9)

~~(12)~~

Filed as Exhibits 10.1 through ~~10.3~~10.2 to the Form 8-K filed with the SEC on January 8, 2007 and incorporated herein by reference.

(10)

~~(13)~~

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

~~(14)~~

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

(11)

~~(15)~~

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

(12)

~~(16)~~

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

(13)

~~(17)~~

~~Computation of earnings per share is~~Filed as Exhibits 99.1 and 99.4 to the Form 8-K filed with the SEC on December 28, 2018 and incorporated by ~~reference~~reference.

(14)	Filed as Exhibit 99.1 to ~~Note 6 of~~ the ~~Financial Statements included herein.~~ Form 8-K filed with the SEC on November 11, 2019 and incorporated by reference.

(15)	Filed as Exhibit 99.1 to the Form 8-K filed with the SEC on January 21, 2020 and incorporated by reference.

(16)	Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on December 09, 2020 and incorporated herein by reference.

(17)	Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on January 29, 2021 and incorporated herein by reference.

*Indicates management contract or compensatory plan or arrangement.

5967

Table of Contents

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:

~~November 8, 2017~~
August 4, 2022		/s/ Kevin J. McPhaill
Date		SIERRA BANCORP
		Kevin J. McPhaill
		President & Chief Executive Officer
		(Principal Executive Officer)

~~November 8, 2017~~August 4, 2022		/s/ ~~Kenneth R. Taylor~~Christopher G. Treece
Date		SIERRA BANCORP
		~~Kenneth R. Taylor~~Christopher G. Treece
		Chief Financial Officer
		~~(Principal Financial and~~
August 4, 2022		/s/ Cindy L. Dabney
Date		SIERRA BANCORP
		Cindy L. Dabney
		Principal Accounting ~~Officer)~~Officer


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


Large Accelerated Filer	☐	Accelerated Filer:	☒
~~Non‑accelerated~~Non-accelerated Filer:	☐ ~~(Do not check if a smaller reporting company)~~	Smaller Reporting Company:	☐
Emerging Growth Company:	☐

			Other Interest Bearing Liabilities	59
						~~Page~~
									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 (Loss)				3
						Consolidated Statements of Changes In Shareholders’ Equity			4
	Consolidated Statements of Cash Flows				46
						Notes to Consolidated Financial Statements (Unaudited)				57

					Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations					3537
						Forward-Looking Statements				3537
						Critical Accounting Policies				3538
						Overview of the Results of Operations and Financial Condition				3538
						Earnings Performance				3741
							Net Interest Income and Net Interest Margin			3741
							Provision for ~~Loan~~Credit Losses on Loans and ~~Lease Losses~~Leases			4147
							~~Non-Interest~~Noninterest Income and ~~Non-Interest~~Noninterest Expense			4248
							Provision for Income Taxes			4550
						Balance Sheet Analysis				4551
							Earning Assets			4551
								Investments		4551
								Loan and Lease Portfolio		4752
								Nonperforming Assets		4854
								Allowance for ~~Loan~~Credit Losses on Loans and ~~Lease Losses~~Leases		4955
								Off-Balance Sheet Arrangements		5157
							Other Assets			5158
							Deposits and ~~Interest-Bearing Liabilities~~		52
			~~Deposits~~	52
			~~Other Interest-Bearing Liabilities~~	53
		~~Non-Interest~~Interest Bearing Liabilities			5358
								Deposits	58
		Noninterest Bearing Liabilities		60
	Liquidity and Market Risk Management				5360
						Capital Resources				5663

					Item 3. Qualitative & Quantitative Disclosures about Market Risk					5765

					Item 4. Controls and Procedures					5765

				Part II - Other Information						5866
					Item 1. - Legal Proceedings					5866
					Item 1A. - Risk Factors					5866
					Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds					5866
					Item 3. - Defaults upon Senior Securities					5866
					Item 4. - ~~(Removed and Reserved)~~Mine Safety Disclosures					5866
					Item 5. - Other Information					5866
					Item 6. - Exhibits					5967

				Signatures						6068

	September 30, 2017			December 31, 2016
ASSETS	(unaudited)			(audited)
Cash and due from banks	$	52,358		$	79,087
Interest-bearing deposits in banks		2,249			41,355
Total cash & cash equivalents		54,607			120,442
Securities available-for-sale		583,200			530,083
Loans and leases:
Gross loans and leases		1,311,625			1,262,531
Allowance for loan and lease losses		(8,784	)		(9,701	)
Deferred loan and lease costs, net		2,705			2,924
Net loans and leases		1,305,546			1,255,754
Foreclosed assets		2,674			2,225
Premises and equipment, net		28,373			28,893
Goodwill		8,268			8,268
Other intangible assets, net		2,483			2,803
Company owned life insurance		45,270			43,706
Other assets		47,572			40,699
Total assets	$	2,077,993		$	2,032,873

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	571,509		$	524,552
Interest bearing		1,208,070			1,170,919
Total deposits		1,779,579			1,695,471
Repurchase agreements		8,679			8,094
Federal funds purchased		1,600			—
Short-term borrowings		10,500			65,000
Subordinated debentures, net		34,544			34,410
Other liabilities		24,008			24,020
Total Liabilities		1,858,910			1,826,995

Commitments and contingent liabilities (Note 8)

Shareholders' equity
Common stock, no par value; 24,000,000 shares authorized; 13,840,429 and 13,776,589 shares issued
and outstanding at September 30, 2017 and
December 31, 2016, respectively		73,668			72,626
Additional paid-in capital		2,940			2,832
Retained earnings		141,870			132,180
Accumulated other comprehensive income (loss), net		605			(1,760	)
Total shareholders' equity		219,083			205,878
Total liabilities and shareholder's equity	$	2,077,993		$	2,032,873

	Three months ended September 30,				Nine months ended September 30,
Interest and dividend income	2017		2016		2017		2016
Loans and leases, including fees	$	16,543	$	15,121	$	47,349	$	41,360
Taxable securities		2,224		1,879		6,385		6,114
Tax-exempt securities		1,002		765		2,739		2,225
Federal funds sold and other		63		29		317		61
Total interest income		19,832		17,794		56,790		49,760
Interest expense
Deposits		1,032		575		2,588		1,573
Short-term borrowings		14		51		34		107
Subordinated debentures		351		261		1,009		663
Total interest expense		1,397		887		3,631		2,343
Net interest income		18,435		16,907		53,159		47,417
Provision for loan losses		—		—		300		—
Net interest income after provision for loan losses		18,435		16,907		52,859		47,417
Non-interest income
Service charges on deposits		2,916		2,686		8,263		7,535
Net gains on sale of securities available-for-sale		918		90		984		212
Other income		2,076		2,215		7,161		6,112
Total non-interest income		5,910		4,991		16,408		13,859
Other operating expense
Salaries and employee benefits		7,478		6,866		22,617		20,355
Occupancy and equipment		2,368		2,063		6,923		5,680
Other		5,599		7,192		16,698		17,280
Total other operating expense		15,445		16,121		46,238		43,315
Income before taxes		8,900		5,777		23,029		17,961
Provision for income taxes		3,158		1,848		7,533		5,911
Net income	$	5,742	$	3,929	$	15,496	$	12,050

PER SHARE DATA
Book value	$	15.83	$	15.12	$	15.83	$	15.12
Cash dividends	$	0.14	$	0.12	$	0.42	$	0.36
Earnings per share basic	$	0.41	$	0.28	$	1.12	$	0.90
Earnings per share diluted	$	0.41	$	0.28	$	1.11	$	0.89
Average shares outstanding, basic		13,839,111		13,790,107		13,824,173		13,446,567
Average shares outstanding, diluted		14,013,987		13,904,460		14,010,894		13,560,716

Total shareholder equity (in thousands)	$	219,083	$	208,528	$	219,083	$	208,528
Shares outstanding		13,840,429		13,789,501		13,840,429		13,789,501
Dividends Paid (in thousands)	$	1,937	$	1,666	$	5,805	$	4,851

Fair Value of Financial Instruments
(dollars in thousands, unaudited)	September 30, 2017
			Estimated Fair Value
	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	$	54,607	$	54,610	$	—	$	—	$	54,610
Investment securities available for sale		583,200		—		583,200		—		583,200
Loans and leases, net held for investment		1,305,507		—		1,317,560		—		1,317,560
Collateral dependent impaired loans		39		—		39		—		39
Cash surrender value of life insurance policies		45,270		—		45,270		—		45,270
Other investments		8,741		—		8,741		—		8,741
Accrued interest receivable		6,676		—		6,676		—		6,676

Financial liabilities:
Deposits:
Noninterest-bearing	$	571,509	$	571,509	$	—	$	—	$	571,509
Interest-bearing		1,208,070		—		1,207,808		—		1,207,808
Fed funds purchased and repurchase agreements		10,279		—		10,279		—		10,279
Short-term borrowings		10,500		—		10,500		—		10,500
Subordinated debentures		34,544		—		24,095		—		24,095
Accrued interest payable		175		—		175		—		175

	Notional Amount
Off-balance-sheet financial instruments:
Commitments to extend credit	$	639,177
Standby letters of credit		7,936

Fair Value Measurements - Recurring
(dollars in thousands, unaudited)
	Fair Value Measurements at September 30, 2017, 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:
US Government agencies	$	—	$	24,422	$	—	$	24,422	$	—
Mortgage-backed securities		—		417,038		—		417,038		—
State and political subdivisions		—		141,740		—		141,740		—
Equity securities		—		—		—		—		—

Total available-for-sale securities	$	—	$	583,200	$	—	$	583,200	$	—

Fair Value Measurements - Nonrecurring
(dollars in thousands, unaudited)
	Fair Value Measurements at September 30, 2017, 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		—		12		—		12
Equity lines		—		14		—		14
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—
Commercial real estate - non-owner occupied		—		—		—		—
Farmland		—		—		—		—
Total real estate		—		26		—		26
Agriculture		—		—		—		—
Commercial and industrial		—		—		—		—
Consumer loans		—		13		—		13
Total impaired loans		—		39		—		39
Foreclosed assets	$	—	$	2,674	$	—	$	2,674
Total assets measured on a nonrecurring basis	$	—	$	2,713	$	—	$	2,713

Amortized Cost And Estimated Fair Value
(dollars in thousands, unaudited)

	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
US Government agencies	$	24,574	$	112	$	(264	)	$	24,422
Mortgage-backed securities		418,961		1,416		(3,339	)		417,038
State and political subdivisions		138,621		3,401		(282	)		141,740
Equity securities		—		—		—			—
Total securities	$	582,156	$	4,929	$	(3,885	)	$	583,200

	December 31, 2016
	Less than twelve months					Twelve months or more
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
US Government agencies	$	(500	)	$	21,056	$	(6	)	$	711
Mortgage-backed securities		(4,303	)		271,276		(868	)		43,570
State and political subdivisions		(1,466	)		49,195		—			—
Total	$	(6,269	)	$	341,527	$	(874	)	$	44,281

	December 31, 2016
	Amortized Cost		Fair Value
Maturing within one year	$	8,488	$	8,573
Maturing after one year through five years		260,387		259,535
Maturing after five years through ten years		50,823		50,687
Maturing after ten years		47,132		46,190

Securities not due at a single maturity date:
US Government agencies collateralized by mortgage obligations		165,791		163,552
Other securities		500		1,546
	$	533,121	$	530,083

Revenue Bonds by Type
(dollars in thousands, unaudited)	September 30, 2017				December 31, 2016
	Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value
Revenue source:
Water	$	7,236	$	7,362	$	4,788	$	4,722
Sales Tax		2,963		3,005		2,981		2,927
College & University		2,619		2,710		3,401		3,472
Lease		2,320		2,387		3,119		3,123
Local Housing		1,535		1,552		168		167
Other (13 sources)		7,832		8,008		6,206		6,245
Total Revenue Bonds	$	24,505	$	25,024	$	20,663	$	20,656

	December 31, 2016
	Pass		Special Mention		Substandard		Impaired		Total
Real Estate:
1-4 family residential construction	$	32,417	$	—	$	—	$	—	$	32,417
Other construction/land		38,699		888		—		1,063		40,650
1-4 family - closed end		129,726		624		403		6,390		137,143
Equity lines		35,159		3,165		698		4,421		43,443
Multi-family residential		31,058		—		—		573		31,631
Commercial real estate - owner occupied		243,366		4,991		2,892		2,286		253,535
Commercial real estate - non-owner occupied		233,584		5,597		3,220		1,797		244,198
Farmland		132,613		1,020		808		39		134,480
Total real estate		876,622		16,285		8,021		16,569		917,497

Agricultural		45,249		891		—		89		46,229
Commercial and industrial		107,404		13,186		732		2,273		123,595
Mortgage warehouse		163,045		—		—		—		163,045
Consumer loans		10,303		191		9		1,662		12,165
Total gross loans and leases	$	1,202,623	$	30,553	$	8,762	$	20,593	$	1,262,531


Collateral Dependent Loans
(dollars in thousands, unaudited)
	June 30, 2022
	Amortized Cost		Individual Reserves
Real estate:
1-4 family residential construction	$	—	$	—
Other construction/land		—		—
1-4 family - closed-end		41		—
Equity lines		—		—
Multi-family residential		—		—
Commercial real estate - owner occupied		204		—
Commercial real estate - non-owner occupied		—		—
Farmland		19,300		—
Total real estate		19,545		—
Agricultural		8,414		—
Commercial and industrial		478		—
Mortgage warehouse lines		—		—
Consumer loans		—		—
Total loans and leases	$	28,437	$	—


Past Due Loans and Leases
(dollars in thousands, unaudited)
	June 30, 2022
	30-59 Days Past Due		60-89 Days Past Due		Loans Past Due 90+ Days		Total Past Due		Loans not Past Due		Total Loans
Real estate:
1-4 family residential construction	$	—	$	—	$	632	$	632	$	4,910	$	5,542
Other construction/land		—		—		—		—		20,757		20,757
1-4 family - closed-end		32		—		8		40		430,095		430,135
Equity lines		—		—		—		—		25,575		25,575
Multi-family residential		—		—		—		—		66,291		66,291
Commercial real estate - owner occupied		—		124		—		124		311,965		312,089
Commercial real estate - non-owner occupied		—		—		—		—		895,352		895,352
Farmland		5,129		13,932		342		19,403		82,358		101,761
Total real estate		5,161		14,056		982		20,199		1,837,303		1,857,502
Agricultural		—		7,760		597		8,357		20,400		28,757
Commercial and industrial		174		—		263		437		72,389		72,826
Mortgage warehouse lines		—		—		—		—		58,134		58,134
Consumer loans		7		2		—		9		4,353		4,362
Total loans and leases	$	5,342	$	21,818	$	1,842	$	29,002	$	1,992,579	$	2,021,581


December 31, 2021	30-59 Days		60-89 Days		90 Days Or More Past						Total Financing		Non-Accrual
	Past Due		Past Due		Due⁽²⁾		Total Past Due		Current		Receivables		Loans⁽¹⁾
Real Estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	21,369	$	21,369	$	—
Other construction/land		—		—		—		—		25,299		25,299		—
1-4 family - closed-end		1,532		132		—		1,664		287,793		289,457		1,023
Equity lines		30		—		—		30		26,558		26,588		892
Multi-family residential		—		—		—		—		53,458		53,458		—
Commercial real estate owner occupied		124		—		698		822		333,624		334,446		1,234
Commercial real estate non-owner occupied		—		—		—		—		882,888		882,888		—
Farmland		—		—		—		—		106,706		106,706		—
Total real estate loans		1,686		132		698		2,516		1,737,695		1,740,211		3,149

Agricultural		—		—		284		284		33,706		33,990		378
Commercial and industrial		473		—		283		756		109,035		109,791		973
Mortgage warehouse lines		—		—		—		—		101,184		101,184		—
Consumer loans		6		3		—		9		4,541		4,550		22
Total gross loans and leases	$	2,165	$	135	$	1,265	$	3,565	$	1,986,161	$	1,989,726	$	4,522

(dollars in thousands, unaudited)	September 30, 2017
	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	$	—	$	—	$	—	$	—	$	53,035	$	53,035	$	—
Other construction/land		—		—		—		—		47,160		47,160		83
1-4 family - closed end		298		90		540		928		154,006		154,934		886
Equity lines		334		—		203		537		41,585		42,122		893
Multi-family residential		—		—		—		—		31,414		31,414		—
Commercial real estate - owner occupied		191		—		114		305		262,560		262,865		1,148
Commercial real estate - non-owner occupied		—		—		—		—		284,537		284,537		—
Farmland		—		—		—		—		145,550		145,550		297
Total real estate		823		90		857		1,770		1,019,847		1,021,617		3,307

Agricultural		—		—		—		—		49,315		49,315		—
Commercial and industrial		463		—		519		982		110,383		111,365		734
Mortgage warehouse lines		—		—		—		—		119,031		119,031		—
Consumer		206		15		—		221		10,076		10,297		77
Total gross loans and leases	$	1,492	$	105	$	1,376	$	2,973	$	1,308,652	$	1,311,625	$	4,118

(dollars in thousands, unaudited)	Three months ended September 30, 2017
	Term Modification		Interest Only Modification		Rate & Term Modification		Total
Real Estate:
Other construction/land	$	—	$	—	$	—	$	—
1-4 family - closed-end		—		—		250		250
Equity lines		40		—		96		136
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		529		—		—		529
Farmland		—		—		—		—
Total real estate loans		569		—		346		915
Commercial and industrial		—		—		—		—
Consumer loans		7		—		—		7
	$	576	$	—	$	346	$	922

	Three months ended September 30, 2016
	Term Modification		Interest Only Modification		Rate & Term Modification		Total
Real Estate:
Other construction/land	$	—	$	—	$	—	$	—
1-4 family - closed-end		—		—		178		178
Equity lines		135		—		97		232
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—
Farmland		—		—		258		258
Total real estate loans		135		—		533		668
Commercial and industrial		—		—		—		—
Consumer loans		5		—		—		5
	$	140	$	—	$	533	$	673


	Three months ended June 30, 2021
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:
Other construction/land	$	0	$	0	$	0	$	0	$	—	$	0
1-4 family - closed-end		0		0		0		0		—		0
Equity lines		0		0		0		0		—		0
Multi-family residential		0		0		0		0		—		0
Commercial real estate - owner occupied		0		136		0		0		—		136
Farmland		0		0		0		0		—		0
Total real estate loans		0		136		0		0		—		136
Agricultural		0		0		0		0		—		0
Commercial and industrial		0		0		0		0		—		0
Consumer loans		0		0		0		0		—		0
Total	$	0	$	136	$	0	$	0	$	—	$	136

(dollars in thousands, unaudited)	Nine months ended September 30, 2017
	Term Modification		Interest Only Modification		Rate & Term Modification		Total
Real Estate:
Other construction/land	$	—	$	—	$	—	$	—
1-4 family - closed-end		—		—		340		340
Equity lines		643		—		96		739
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		529		—		—		529
Farmland		—		—		—		—
Total real estate loans		1,172		—		436		1,608
Commercial and industrial		15		—		—		15
Consumer loans		7		—		—		7
	$	1,194	$	—	$	436	$	1,630

	Nine months ended September 30, 2016
	Term Modification		Interest Only Modification		Rate & Term Modification		Total
Real Estate:
Other construction/land	$	17	$	—	$	—	$	17
1-4 family - closed-end		—		547		437		984
Equity lines		1,415		—		97		1,512
Multi-family residential		—		—		132		132
Commercial real estate - owner occupied		—		—		266		266
Farmland		—		—		258		258
Total real estate loans		1,432		547		1,190		3,169
Commercial and industrial		—		—		—		—
Consumer loans		25		—		60		85
	$	1,457	$	547	$	1,250	$	3,254

(dollars in thousands, unaudited)	Three months ended September 30, 2017

		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	3		250		250		—		8
Equity lines	2		136		136		3		2
Multi-family residential	0		—		—		—		—
Commercial real estate - owner occupied	1		529		529		—		6
Farmland	0		—		—		—		—
Total real estate loans			915		915		3		16

Commercial and industrial	0		—		—		—		—
Consumer loans	1		7		7		—		2
		$	922	$	922	$	3	$	18

(dollars in thousands, unaudited)	September 30, 2017
	Unpaid Principal Balance		Carrying Value
Real estate secured	$	254	$	37
Commercial and industrial		8		-
Total purchased credit impaired loans	$	262	$	37

	Year ended December 31, 2016
	Real Estate			Agricultural Products			Commercial and Industrial			Consumer			Unallocated			Total
Allowance for credit losses:
Beginning Balance	$	4,783		$	722		$	2,533		$	1,263		$	1,122		$	10,423
Charge-offs		(962	)		—			(344	)		(1,905	)		—			(3,211	)
Recoveries		983			14			477			1,015			—			2,489
Provision		(1,256	)		(527	)		1,613			835			(665	)		—
Ending Balance	$	3,548		$	209		$	4,279		$	1,208		$	457		$	9,701

Reserves:
Specific	$	488		$	24		$	608		$	287		$	—		$	1,407
General		3,060			185			3,671			921			457			8,294
Ending Balance	$	3,548		$	209		$	4,279		$	1,208		$	457		$	9,701

Loans evaluated for impairment:
Individually	$	16,569		$	89		$	2,273		$	1,662		$	—		$	20,593
Collectively		900,928			46,140			284,367			10,503			—			1,241,938
Ending Balance	$	917,497		$	46,229		$	286,640		$	12,165		$	—		$	1,262,531

Average Balances and Rates
(dollars in thousands, except per share data)
	For the three months ended							For the three months ended
	Ended September 30, 2017							Ended September 30, 2016
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	$	18,743	$	63		1.32	%	$	11,221	$	29		1.01	%
Taxable		446,395		2,224		1.95	%		419,218		1,879		1.75	%
Non-taxable		142,544		1,002		4.23	%		112,600		765		4.09	%
Total investments		607,682		3,289		2.47	%		543,039		2,673		2.22	%

Loans and Leases:⁽³⁾
Real estate		999,692		12,772		5.07	%		860,753		10,931		5.05	%
Agricultural		51,063		651		5.06	%		52,979		576		4.33	%
Commercial		113,166		1,483		5.20	%		126,190		1,685		5.31	%
Consumer		11,046		328		11.78	%		13,456		395		11.68	%
Mortgage warehouse lines		109,547		1,258		4.56	%		155,487		1,501		3.84	%
Other		3,392		51		5.97	%		2,035		33		6.45	%
Total loans and leases		1,287,906		16,543		5.10	%		1,210,900		15,121		4.97	%
Total interest earning assets⁽⁴⁾		1,895,588		19,832		4.26	%		1,753,939		17,794		4.13	%
Other earning assets		8,741							8,268
Non-earning assets		163,525							156,657
Total assets	$	2,067,854						$	1,918,864

Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	136,304	$	106		0.31	%	$	136,467	$	105		0.31	%
NOW		376,067		106		0.11	%		338,086		95		0.11	%
Savings accounts		238,824		65		0.11	%		211,900		59		0.11	%
Money market		120,086		24		0.08	%		117,854		24		0.08	%
CDAR's		—		—		—			477		—		—
Certificates of deposit, under $100,000		70,884		78		0.44	%		76,609		61		0.32	%
Certificates of deposit, $100,000 or more		272,680		653		0.95	%		249,132		231		0.37	%
Brokered deposits		—		—		—			—		—		—
Total interest bearing deposits		1,214,845		1,032		0.34	%		1,130,525		575		0.20	%
Borrowed Funds:
Federal funds purchased		174		1		2.28	%		898		1		0.44	%
Repurchase agreements		8,247		8		0.38	%		7,704		8		0.41	%
Short term borrowings		1,441		5		1.38	%		36,293		42		0.46	%
TRUPS		34,519		351		4.03	%		37,319		261		2.78	%
Total borrowed funds		44,381		365		3.26	%		82,214		312		1.51	%
Total interest bearing liabilities		1,259,226		1,397		0.44	%		1,212,739		887		0.29	%
Demand deposits - non-interest bearing		560,057							481,996
Other liabilities		30,487							15,678
Shareholders' equity		218,084							208,451
Total liabilities and shareholders' equity	$	2,067,854						$	1,918,864

Interest income/interest earning assets						4.26	%						4.13	%
Interest expense/interest earning assets						0.29	%						0.20	%
Net interest income and margin⁽⁵⁾			$	18,435		3.97	%			$	16,907		3.93	%

Average Balances and Rates
(dollars in thousands, except per share data)
	For the nine months ended							For the nine months ended
	September 30, 2017							September 30, 2016

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	$	42,983	$	317		0.97	%	$	11,996	$	61		0.67	%
Taxable		436,818		6,385		1.93	%		416,177		6,114		1.93	%
Non-taxable		130,285		2,739		4.27	%		106,396		2,225		4.23	%
Total investments		610,086		9,441		2.36	%		534,569		8,400		2.36	%

Loans and Leases:⁽³⁾
Real estate		965,980		36,586		5.06	%		803,958		30,287		5.03	%
Agricultural		49,851		1,826		4.90	%		48,678		1,598		4.39	%
Commercial		116,628		4,558		5.23	%		114,040		4,189		4.91	%
Consumer		11,569		982		11.35	%		14,140		1,218		11.51	%
Mortgage warehouse lines		98,994		3,253		4.39	%		136,899		3,972		3.88	%
Other		3,228		144		5.96	%		2,004		96		6.40	%
Total loans and leases		1,246,250		47,349		5.08	%		1,119,719		41,360		4.93	%
Total interest earning assets⁽⁴⁾		1,856,336		56,790		4.20	%		1,654,288		49,760		4.11	%
Other earning assets		8,646							7,890
Non-earning assets		158,502							142,825
Total assets	$	2,023,484						$	1,805,003

Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	142,840	$	328		0.31	%	$	136,708	$	309		0.30	%
NOW		373,022		311		0.11	%		320,151		261		0.11	%
Savings accounts		229,774		186		0.11	%		203,639		168		0.11	%
Money market		119,541		69		0.08	%		105,065		56		0.07	%
CDAR's		42		-		0.00	%		4,858		3		0.08	%
Certificates of deposit, under $100,000		72,761		204		0.37	%		75,039		175		0.31	%
Certificates of deposit, $100,000 or more		269,775		1,490		0.74	%		230,436		601		0.35	%
Brokered deposits		—		—		0.00	%		-		-		0.00	%
Total interest bearing deposits		1,207,755		2,588		0.29	%		1,075,896		1,573		0.20	%
Borrowed Funds:
Federal funds purchased		61		1		2.19	%		766		4		0.70	%
Repurchase agreements		8,878		26		0.39	%		8,872		26		0.39	%
Short term borrowings		1,029		7		0.91	%		23,239		77		0.44	%
Long term borrowings		—		—		—			409		—		—
TRUPS		34,474		1,009		3.91	%		33,074		663		2.68	%
Total borrowed funds		44,442		1,043		3.14	%		66,360		770		1.55	%
Total interest bearing liabilities		1,252,197		3,631		0.39	%		1,142,256		2,343		0.27	%
Demand deposits - non-interest bearing		529,997							448,502
Other liabilities		27,763							15,001
Shareholders' equity		213,527							199,244
Total liabilities and shareholders' equity	$	2,023,484						$	1,805,003

Interest income/interest earning assets						4.20	%						4.11	%
Interest expense/interest earning assets						0.27	%						0.18	%
Net interest income and margin⁽⁵⁾			$	53,159		3.93	%			$	47,417		3.93	%

Volume & Rate Variances	Three months ended September 30,									Nine months ended September 30,
(dollars in thousands, unaudited)	2017 over 2016									2017 over 2016
	Increase (decrease) due to									Increase (decrease) due to
Assets:	Volume			Rate			Net			Volume			Rate			Net
Investments:
Federal funds sold/due from time	$	19		$	15		$	34		$	158		$	98		$	256
Taxable		122			223			345			303			(32	)		271
Non-taxable⁽¹⁾		203			34			237			500			14			514
Total investments		344			272			616			961			80			1,041
Loans and Leases:
Real estate		1,764			77			1,841			6,104			195			6,299
Agricultural		(21	)		96			75			39			189			228
Commercial		(174	)		(28	)		(202	)		95			274			369
Consumer		(71	)		4			(67	)		(221	)		(15	)		(236	)
Mortgage warehouse		(443	)		200			(243	)		(1,100	)		381			(719	)
Other		22			(4	)		18			59			(11	)		48
Total loans and leases		1,077			345			1,422			4,976			1,013			5,989
Total interest earning assets	$	1,421		$	617		$	2,038		$	5,937		$	1,093		$	7,030
Liabilities
Interest Bearing Deposits:
Demand deposits	$	-		$	1		$	1		$	14		$	5		$	19
NOW		11			—			11			43			7			50
Savings accounts		7			(1	)		6			22			(4	)		18
Money market		—			—			—			8			5			13
CDAR's		—			—			—			(3	)		—			(3	)
Certificates of Deposit, under $100,000		(5	)		22			17			(5	)		34			29
Certificates of Deposit, $100,000 or more		22			400			422			103			786			889
Total interest bearing deposits		35			422			457			182			833			1,015
Borrowed Funds:
Federal funds purchased		(1	)		1			-			(4	)		1			(3	)
Repurchase agreements		1			(1	)		—			—			—			-
Short term borrowings		(40	)		3			(37	)		(74	)		4			(70	)
TRUPS		(20	)		110			90			28			318			346
Total borrowed funds		(60	)		113			53			(50	)		323			273
Total interest bearing liabilities		(25	)		535			510			132			1,156			1,288
Net interest income	$	1,446		$	82		$	1,528		$	5,805		$	(63	)	$	5,742

Non Interest Income/Expense
(dollars in thousands, unaudited)
	For the three months ended September 30,												For the nine months ended September 30,
NON-INTEREST INCOME:	2017			% of Total			2016			% of Total			2017			% of Total			2016			% of Total
Service charges on deposit accounts	$	2,916			49.34	%	$	2,686			53.82	%	$	8,263			50.36	%	$	7,535			54.37	%
Other service charges, commissions & fees		1,975			33.42	%		1,893			37.93	%		6,249			38.09	%		5,484			39.57	%
Gains on securities		918			15.53	%		90			1.80	%		984			6.00	%		212			1.53	%
Bank owned life insurance		377			6.38	%		302			6.05	%		1,188			7.24	%		741			5.35	%
Other		(276	)		-4.67	%		20			0.40	%		(276	)		-1.69	%		(113	)		-0.82	%
Total non-interest income	$	5,910			100.00	%	$	4,991			100.00	%	$	16,408			100.00	%	$	13,859			100.00	%
As a % of average interest- earning assets⁽¹⁾					1.24	%					1.13	%					1.18	%					1.12	%

OTHER OPERATING EXPENSE:
Salaries and employee benefits	$	7,478			48.42	%	$	6,866			42.59	%	$	22,617			48.91	%	$	20,355			46.99	%
Occupancy costs
Furniture & equipment		641			4.15	%		651			4.04	%		1,888			4.08	%		1,814			4.19	%
Premises		1,727			11.18	%		1,412			8.76	%		5,035			10.89	%		3,866			8.93	%
Advertising and marketing costs		552			3.57	%		576			3.57	%		1,675			3.62	%		1,761			4.07	%
Data processing costs		1,040			6.73	%		933			5.79	%		3,049			6.59	%		2,560			5.91	%
Deposit services costs		1,029			6.66	%		1,063			6.59	%		3,140			6.79	%		2,785			6.43	%
Loan services costs
Loan processing		195			1.26	%		148			0.92	%		634			1.37	%		506			1.17	%
Foreclosed assets		43			0.28	%		84			0.52	%		207			0.45	%		535			1.24	%
Other operating costs
Telephone & data communications		406			2.63	%		392			2.43	%		1,278			2.76	%		1,141			2.63	%
Postage & mail		284			1.84	%		284			1.76	%		762			1.65	%		737			1.70	%
Other		273			1.77	%		252			1.57	%		809			1.76	%		638			1.47	%
Professional services costs
Legal & accounting		448			2.90	%		463			2.87	%		1,381			2.99	%		1,312			3.03	%
Acquisition Costs		424			2.75	%		1,695			10.51	%		585			1.27	%		2,037			4.70	%
Other professional service		440			2.85	%		596			3.70	%		1,766			3.82	%		1,464			3.38	%
Stationery & supply costs		329			2.13	%		416			2.58	%		962			2.08	%		1,066			2.46	%
Sundry & tellers		136			0.88	%		290			1.80	%		450			0.97	%		738			1.70	%
Total non-interest expense	$	15,445			100.00	%	$	16,121			100.00	%	$	46,238			100.00	%	$	43,315			100.00	%
As a % of average interest- earning assets⁽¹⁾					3.23	%					3.66	%					3.32	%					3.51	%
Efficiency Ratio ⁽²⁾		63.90	%					72.02	%					65.40	%					69.13	%

Investment Portfolio
(dollars in thousands, unaudited)	September 30, 2017				December 31, 2016
	Amortized		Fair Market		Amortized		Fair Market
	Cost		Value		Cost		Value
Available for Sale
US Government agencies	$	24,574	$	24,422	$	26,926	$	26,468
Mortgage-backed securities		418,961		417,038		391,555		387,876
State and political subdivisions		138,621		141,740		114,140		114,193
Equity securities		—		—		500		1,546
Total securities	$	582,156	$	583,200	$	533,121	$	530,083

Loan and Lease Distribution
(dollars in thousands, unaudited)	September 30, 2017			December 31, 2016
Real Estate:
1-4 family residential construction	$	53,035		$	32,417
Other construction/land		47,160			40,650
1-4 family - closed-end		154,934			137,143
Equity lines		42,122			43,443
Multi-family residential		31,414			31,631
Commercial real estate - owner occupied		262,865			253,535
Commercial real estate - non-owner occupied		284,537			244,198
Farmland		145,550			134,480
Total real estate		1,021,617			917,497
Agricultural		49,315			46,229
Commercial and industrial		111,365			123,595
Mortgage warehouse lines		119,031			163,045
Consumer loans		10,297			12,165
Total loans and leases	$	1,311,625		$	1,262,531
Percentage of Total Loans and Leases
Real Estate:
1-4 family residential construction		4.04	%		2.57	%
Other construction/land		3.60	%		3.22	%
1-4 family - closed-end		11.81	%		10.86	%
Equity lines		3.21	%		3.44	%
Multi-family residential		2.40	%		2.51	%
Commercial real estate - owner occupied		20.03	%		20.08	%
Commercial real estate - non-owner occupied		21.69	%		19.34	%
Farmland		11.10	%		10.65	%
Total real estate		77.88	%		72.67	%
Agricultural		3.76	%		3.66	%
Commercial and industrial		8.49	%		9.79	%
Mortgage warehouse lines		9.08	%		12.92	%
Consumer loans		0.79	%		0.96	%
Total loans and leases		100.00	%		100.00	%

Allowance for Loan and Lease Losses	For the three months			For the three months			For the nine months			For the nine months			For the year
(dollars in thousands, unaudited)	ended September 30,			ended September 30,			ended September 30,			ended September 30,			ended December 31,
Balances:	2017			2016			2017			2016			2016
Average gross loans and leases outstanding during period ⁽¹⁾	$	1,287,906		$	1,210,900		$	1,246,250		$	1,119,719		$	1,153,240
Gross loans and leases outstanding at end of period	$	1,311,625		$	1,256,330		$	1,311,625		$	1,256,330		$	1,262,531

Allowance for Loan and Lease Losses:
Balance at beginning of period	$	9,230		$	10,042		$	9,701		$	10,423		$	10,423
Provision charged to expense		—			—			300			—			—
Charge-offs
Real Estate
1-4 family residential construction		—			—			—			—			—
Other construction/land		—			—			—			6			144
1-4 family - closed-end		—			—			7			97			97
Equity lines		1			—			52			94			94
Multi-family residential		—			—			—			50			50
Commercial real estate- owner occupied		—			—			87			23			108
Commercial real estate- non-owner occupied		—			—			—			10			469
Farmland		—			—			—			—			—
TOTAL REAL ESTATE		1			—			146			280			962
Agricultural		132			—			154						—
Commercial & industrial loans		192			23			576			197			344
Consumer loans		561			458			1,606			1,443			1,905
Total	$	886		$	481		$	2,482		$	1,920		$	3,211
Recoveries
Real Estate
1-4 family residential construction		—			—			—			—			—
Other construction/land		—			—			5			329			467
1-4 family - closed-end		3			6			8			10			15
Equity lines		3			2			8			9			17
Multi-family residential		—			—			—			—			—
Commercial real estate- owner occupied		51			—			89			34			35
Commercial real estate- non-owner occupied		12			—			104			23			449
Farmland		—			—			—			—			—
TOTAL REAL ESTATE		69			8			214			405			983
Agricultural		-			3			5			7			14
Commercial and industrial		87			97			282			257			477
Consumer loans		284			211			764			708			1,015
Total	$	440		$	319		$	1,265		$	1,377		$	2,489
Net loan charge offs (recoveries)	$	446		$	162		$	1,217		$	543		$	722
Balance at end of period	$	8,784		$	9,880		$	8,784		$	9,880		$	9,701

RATIOS
Net Charge-offs to Average Loans and Leases (annualized)		0.14	%		0.05	%		0.13	%		0.06	%		0.06	%
Allowance for Loan Losses to Gross Loans and Leases at End of Period		0.67	%		0.79	%		0.67	%		0.79	%		0.77	%
Allowance for Loan Losses to Nonperforming Loans		213.31	%		157.20	%		213.31	%		157.20	%		152.41	%
Net Loan Charge-offs to Allowance for Loan Losses at End of Period		5.08	%		1.64	%		13.85	%		5.50	%		7.44	%
Net Loan Charge-offs to Provision for Loan Losses	—			—				406	%	—			—

Deposit Distribution
(dollars in thousands, unaudited)
	September 30, 2017			December 31, 2016
Interest bearing demand deposits	$	115,024		$	132,586
Non-interest bearing demand deposits		571,509			524,552
NOW		381,623			366,238
Savings		245,093			215,693
Money market		122,772			119,417
CDAR's		-			251
Time, under $250,000		150,361			152,561
Time, $250,000 or more		193,197			184,173
Total deposits	$	1,779,579		$	1,695,471

Percentage of Total Deposits
Interest bearing demand deposits		6.46	%		7.82	%
Non-interest bearing demand deposits		32.12	%		30.94	%
NOW		21.44	%		21.60	%
Savings		13.77	%		12.72	%
Money market		6.90	%		7.04	%
CDAR's		-			0.01	%
Time, under $250,000		8.45	%		9.01	%
Time, $250,000 or more		10.86	%		10.86	%
Total		100.00	%		100.00	%