UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~FORM 10-Q~~

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2023

Commission file number: 000-33063

SIERRA BANCORP

~~Sierra Bancorp~~

(Exact name of Registrant as specified in its charter)


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

86 North Main Street, Porterville, California93257

(Address of principal executive offices) (Zip Code)

(559) 782-4900

~~(559) 782-4900~~

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

BSRR

The NASDAQ Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.~~(Check one)~~:


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

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 1, 2023, the registrant had 15,045,639 shares of common stock outstanding, including 201,007 shares of unvested restricted stock.

~~Common stock, no par value, 15,218,740 shares outstanding as of November 1, 2017~~

Table of Contents

PART I - ~~FINANCI~~ALFINANCIAL INFORMATION

Item 1 – Financial Statements

SIERRA BANCORP

CONSOLIDATED BALANCE SHEETS

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


	March 31, 2023		December 31, 2022
ASSETS	(unaudited)		(audited)
Cash and due from banks	$	81,694	$	72,803
Interest bearing deposits in banks		1,812		4,328
Total cash & cash equivalents		83,506		77,131
Investment securities
Available-for-sale, net of zero allowance for credit losses at March 31, 2023 and December 31, 2022		1,040,920		934,923

Held-to-maturity, (fair value of $325,607 at March 31, 2023 and $328,011 at December 31, 2022)		332,791		336,944
Allowance for credit losses on held-to-maturity securities		(63)		(63)
Net, investment securities held-to-maturity		332,728		336,881

Loans:
Gross loans		2,033,968		2,052,940
Deferred loan costs (fees), net		24		(123)
Allowance for credit losses on loans		(23,090)		(23,060)
Net loans		2,010,902		2,029,757
Premises and equipment, net		22,321		22,478
Goodwill		27,357		27,357
Other intangible assets, net		2,056		2,275
Bank-owned life insurance		52,308		52,169
Other assets		121,886		125,619
Total assets	$	3,693,984	$	3,608,590

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing	$	1,041,748	$	1,088,199
Interest bearing		1,907,240		1,757,965
Total deposits		2,948,988		2,846,164
Repurchase agreements		94,061		109,169
Other borrowings		216,800		219,000
Long-term debt		49,236		49,214
Subordinated debentures		35,526		35,481
Allowance for credit losses on unfunded loan commitments		850		840
Other liabilities		41,513		45,140
Total liabilities		3,386,974		3,305,008

Commitments and contingent liabilities (Note 7)

Shareholders' equity
Common stock, no par value; 24,000,000 shares authorized; 15,050,740 and 15,170,372 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		111,801		112,928
Additional paid-in capital		4,561		4,148
Retained earnings		246,723		243,082
Accumulated other comprehensive (loss) income, net		(56,075)		(56,576)
Total shareholders' equity		307,010		303,582
Total liabilities and shareholders' equity	$	3,693,984	$	3,608,590

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

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

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


	Three months ended March 31,
	2023		2022
Interest and dividend income
Loans, including fees	$	22,550	$	20,772
Taxable securities		11,986		3,490
Tax-exempt securities		2,813		1,726
Federal funds sold and other		70		93
Total interest income		37,419		26,081
Interest expense
Deposits		5,999		560
Short-term borrowings		2,158		82
Subordinated debentures		1,130		683
Total interest expense		9,287		1,325
Net interest income		28,132		24,756
Provision for credit losses		260		506
Net interest income after provision for credit losses		27,872		24,250
Noninterest income
Service charges and fees on deposit accounts		5,380		5,548
Net gains on sale of securities available-for-sale		45		1,032
Increase (decrease) in cash surrender value of life insurance		172		(645)
Other income		982		128
Total noninterest income		6,579		6,063
Noninterest expense
Salaries and employee benefits		12,816		11,805
Occupancy and equipment costs		2,330		2,294
Other		7,846		6,074
Total noninterest expense		22,992		20,173
Income before taxes		11,459		10,140
Provision for income taxes		2,708		2,733
Net income	$	8,751	$	7,407

PER SHARE DATA
Earnings per share basic	$	0.58	$	0.49
Earnings per share diluted	$	0.58	$	0.49

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

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(dollars in thousands, unaudited)


	Three months ended March 31,
	2023		2022
Net income	$	8,751	$	7,407
Other comprehensive gain (loss), before tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period		756		(39,962)
Less: reclassification adjustment for gains included in net income ⁽¹⁾		(45)		(1,032)
Other comprehensive gain (loss), before tax		711		(40,994)
Income tax expense (benefit) related to items of other comprehensive gain (loss), net of tax		(210)		12,119
Other comprehensive gain (loss), net of tax:		501		(28,875)
Comprehensive income (loss)	$	9,252	$	(21,468)

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. Income tax expense associated with the reclassification adjustment for the three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016 was $386~~2022 were $13 thousand and ~~$38~~$305 thousand, 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 MARCH 31, 2023 AND 2022

(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, 2021	15,270,010	$	113,007	$	3,910	$	234,410	$	11,167	$	362,494
Cumulative effect of change in accounting principle (Note 3)	—		$—		$—		($7,315)		$—		(7,315)
Net income	—		—		—		7,407		—		7,407
Other comprehensive loss, net of tax	—		—		—		—		(28,875)		(28,875)
Restricted stock surrendered due to employee tax liability	(1,196)		(9)		—		(23)		—		(32)
Restricted stock forfeited / cancelled	(220)		—		—		—		—		—
Stock based compensation - stock options	—		—		30		—		—		30
Stock based compensation - restricted stock	—		—		341		—		—		341
Stock repurchase	(182,562)		(1,325)		—		(3,526)		—		(4,851)
Cash dividends - $0.23 per share	—		—		—		(3,508)		—		(3,508)
Balance, March 31, 2022	15,086,032	$	111,673	$	4,281	$	227,445	$	(17,708)	$	325,691

Balance, December 31, 2022	15,170,372	$	112,928	$	4,148	$	243,082	$	(56,576)	$	303,582
Net income	—		—		—		8,751		—		8,751
Other comprehensive income, net of tax	—		—		—		—		501		501
Restricted stock granted	29,064		—		—		—		—		—
Restricted stock surrendered due to employee tax liability	(1,764)		(13)		—		(23)		—		(36)
Restricted stock forfeited / cancelled	(514)		—		—		—		—		—
Stock based compensation - stock options	—		—		20		—		—		20
Stock based compensation - restricted stock	—		—		393		—		—		393
Stock repurchase	(146,418)		(1,088)		—		(1,592)		—		(2,680)
Excise tax on stock repurchase	—		(26)		—		—		—		(26)
Cash dividends - $0.23 per share	—		—		—		(3,495)		—		(3,495)
Balance, March 31, 2023	15,050,740	$	111,801	$	4,561	$	246,723	$	(56,075)	$	307,010

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 CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(dollars in thousands, unaudited)


		Three months ended March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	8,751	$	7,407
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of securities		(45)		(1,032)
(Gain) loss on disposal of fixed assets		(14)		6
Gain on sale on foreclosed assets		—		(5)
Stock based compensation expense		413		371
Provision for credit losses on loans		250		600
Depreciation and amortization		604		636
Net amortization on securities premiums and discounts		743		1,177
Net (accretion) amortization of premiums/discounts for loans acquired		(124)		36
(Increase) decrease in cash surrender value of life insurance policies		(172)		645
Amortization of core deposit intangible		219		253
Decrease (increase) in interest receivable and other assets		3,185		(1,419)
Decrease in other liabilities		(3,617)		(537)
Deferred income tax (benefit) provision		(119)		811
Decrease in value of restricted bank equity securities		291		332
Excise tax on stock options purchased		(26)		—
Amortization of debt issuance costs		22		10
Net amortization of partnership investment		166		113
Net cash provided by operating activities		10,527		9,404
Cash flows from investing activities:
Maturities and calls of securities available for sale		21,864		2,373
Proceeds from sales of securities available for sale		14,349		26,408
Purchases of securities available for sale		(149,172)		(145,327)
Principal pay downs on securities available for sale		11,128		23,688
Loan originations and payments, net		(422)		3,914
Purchases of premises and equipment		(413)		(265)
Proceeds from sale of premises and equipment		25		—
Proceeds from sales of foreclosed assets		19,151		5
Purchase of bank-owned life insurance		(202)		(8)
Liquidation of bank-owned life insurance		—		11
Proceeds from BOLI death benefit		235		—
Net cash used in investing activities		(83,457)		(89,201)
Cash flows from financing activities:
Increase in deposits		102,824		83,371
Decrease in borrowed funds		(27,200)		—
Increase in Fed funds purchased		25,000		—
(Decrease) increase in customer repurchase agreements		(15,108)		823
Cash dividends paid		(3,495)		(3,508)
Repurchases of common stock		(2,716)		(4,883)
Net cash provided by financing activities		79,305		75,803

Increase (decrease) in cash and cash equivalents		6,375		(3,994)
Cash and cash equivalents
Beginning of period		77,131		257,528
End of period	$	83,506	$	253,534
Supplemental disclosure of cash flow information:
Interest paid	$	8,511	$	1,730
Supplemental schedule of noncash investing and financing activities:
Real estate acquired through foreclosure	$	15,406	$	—

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

Table of Contents

SIERRA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 30, 2017,~~March 31, 2023, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”). 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 bank with $1.5 million in capital. Our growth in the ensuing years has largely been organic in nature, but includes four 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 at 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 30, 2017,~~$3.7 billion at March 31, 2023, 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 30, 2017,~~March 31, 2023, 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, through May 5, 2023 and recognized them where appropriate. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter, or for the full year. Certain amounts reported for ~~2016~~2022 have been reclassified to be consistent with the reporting for ~~2017.~~2023, none of which impacted net income or shareholders’ equity. 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,~~2022, 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~~an estimate of ~~all~~ expected credit losses over the

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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~~securities through the other-than-temporary impairment approach. The Company implemented CECL on January 1, 2022, using the modified retrospective approach to estimate lifetime expected losses on financial assets measured at amortized cost in addition to certain off balance sheet credit exposures. The January 1, 2022, increase in the Company’s allowance for credit losses, of $9.5 million on loans and $0.9 million in off balance sheet credit exposures, net of the impact of deferred taxes, was reflected in a transition adjustment of $7.3 million to retained earnings. There was no cumulative effect adjustment related to our available-for-sale investment portfolio upon adoption and the Company had no securities designated as held-to-maturity as of January 1, 2022.

For available-for-sale debt securities in an unrealized loss position for which management has an intent to sell the security or considers it more likely-than-not that the security in question will be sold prior to a recovery of its amortized cost basis, the security will be written down to fair value through a direct charge to income. For the remainder of available sale debt securities in an unrealized loss position, which don’t meet the previously outlined criteria, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in ratings by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for ~~other-than-temporary impairment. ASU 2016-13 will also require~~credit loss (“ACL”) is established, with the ~~enhancement~~caveat that the maximum amount of ~~financial statement disclosures regarding estimates used~~the reserve on any individual security is the difference between the fair value and amortized cost balance of the security in ~~calculating credit losses. ASU 2016-13 does~~question. Any unrealized loss that has not ~~change~~been recorded through an ACL is recognized in other comprehensive income.

On April 1, 2022 the ~~existing write-off principle in U.S. GAAP or current nonaccrual practices, nor does it change accounting requirements for loans held~~Company transferred $162.1 million of Agency, Mortgaged-Backed and Municipal securities from available-for-sale to held-to maturity. On October 1, 2022, a similar transfer of $198.3 million securities from available for sale to held-to-maturity was completed. Because of the implicit and explicit guarantees of the Federal Government on the Agency and Mortgage-Backed securities there is no expectation of future losses on any of these securities. The Bank’s municipal bonds moved to the held-to-maturity designation all have credit ratings considered investment grade or ~~certain other financial assets~~equivalent. A discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and is updated on a quarterly basis. As of March 31, 2023, an allowance for credit losses of $0.06 million had been established on the Bank’s held-to-maturity portfolio which ~~are measured at~~remained unchanged from December 31, 2022.

In March 2023 the ~~lower~~FASB issued, ASU No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” ASU 2023-02 is intended to improve the accounting and disclosures for investments in tax credit structures. ASU 2023-02 allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of ~~amortized cost or fair value. As a public business entity that is an SEC filer,~~the program giving rise to the related income tax credits. Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures. ASU ~~2016-13 becomes~~2023-02 will be effective for the Company on January 1, ~~2020, although~~2024, though early ~~application~~adoption is permitted, for 2019. On the effective date, institutions will apply the new accounting standard as follows: for financial assets carried at amortized cost, a cumulative-effect adjustment will be recognized on the balance sheet for any change in the related allowance for loan and ~~lease losses generated by the~~its adoption ~~of the new standard; financial assets classified as purchased credit impaired assets prior~~is not expected to the effective date will be reclassified as purchased credit deteriorated assets as of the effective date, and will be grossed up for the related allowance for expected credit losses created as of the effective date; and, debt securities on which other-than-temporary impairment had been recognized prior to the effective date will transition to the new guidance prospectively with no change in their amortized cost basis. The Company commenced its transition efforts by establishing an implementation team, comprised of the Company’s executive officers and certain other members of our credit administration and finance departments and chaired by our Chief Credit Officer. Furthermore, after extensive discussion 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 indicates that the provisions of ASU 2016-13 will likely have a material impact on our consolidated financial statements, particularly 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 to as much as two times current levels if utilizing a discounted cash flow methodology with forecasting.

~~In January 2017 the FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~. Currently, Topic 805 specifies three elements of a business – inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. This led many transactions to be accounted for as business combinations rather than asset purchases under legacy GAAP. The primary goal of ASU 2017-01 is to narrow the definition of a business, and the guidance in this update provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This 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 impactsignificant effect on the Company’s ~~consolidated~~ financial ~~position, results of operations and cash flows.~~statements.

~~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 yield over the contractual life of the instrument, and any unamortized premium is recorded as a loss in earnings upon the debtor’s exercise of a call provision. Under ASU 2017-08, because the premium will be amortized to the earliest call date, entities will no longer recognize a loss in earnings if a debt security is called prior to the contractual maturity date. The amendments do not require an accounting change for securities held at a discount; discounts will continue to be amortized as an adjustment to yield over the contractual life of the debt instrument. ASU 2017-08 is effective for public business entities, including the Company, for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. To apply ASU 2017-08, entities must use a modified retrospective approach, with the cumulative-effect adjustment recognized to retained earnings at the beginning of the period of adoption. Entities are also required to provide disclosures about a change in accounting principle in 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) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; 3) the classification 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 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.

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~~134,449 shares that were granted under the 2007 Plan were still outstanding as of ~~September 30, 2017,~~March 31,

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2023 and remain unaffected by that plan’s expiration. The 2017 Plan provides for the issuance of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options to non-employee directors and consultants of the Company. The 2017 Plan also provides for the issuance of restricted stock awards to these same classes of eligible ~~participants, 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 March 31, 2023 was 356,420. Options to purchase 402,726 shares granted under the 2017 ~~Plan.~~Plan were outstanding as of March 31, 2023. 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~~$0.4 million was reflected in the Company’s income statement during the ~~third~~first quarter of ~~2017~~2023 and ~~$11,000~~$0.4 million was charged during the ~~third~~first quarter of ~~2016,~~2022, as expense related to stock ~~options. For~~options and restricted stock awards.

Restricted Stock Grants

The Company’s Restricted Stock Awards are awards of either time-vested or performance-based shares. The Restricted Stock Awards are 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 or performance measures; 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. These awards are expensed on a straight-line basis over the vesting period and consider the probability of meeting the performance criteria. There were 29,064 shares granted to employees of the Company during the first three ~~quarters,~~months of 2023. As of March 31, 2023, there was $3.1 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the ~~charges totaled $460,000~~2017 plan. That cost is expected to be amortized over a weighted average period of 2.3 years.

The Company’s restricted stock award activity for the three months ended March 31, 2023 and 2022 is summarized below (unaudited):


	Three months ended March 31,
	2023			2022
	Shares		Weighted Average Grant-Date Fair Value	Shares		Weighted Average Grant-Date Fair Value
Unvested shares, January 1,	175,619	$	21.42	165,131	$	21.72
Granted	29,064		21.50	—		—
Vested	(3,162)		25.30	(3,162)		25.30
Forfeited	(514)		27.16	(220)		27.16
Unvested shares, March 31,	201,007	$	21.35	161,749	$	21.65

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Stock Option Grants

The Company has issued equity instruments in the form of Incentive Stock Options and Nonqualified Stock Options to certain officers and directors and may continue to do so under the 2017 Plan. The exercise price of each stock option is determined at the time of the grant and ~~$180,000~~may be no less than 100% of the fair market value of such stock at the time the option is granted.

The Company’s stock option activity during the nine months ended March 31, 2023 and 2022 are summarized below (dollars in ~~2016.~~thousands, except per share data, unaudited):


	Three months ended March 31,
	2023						2022
	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,	352,249	$	25.06		$	348	415,870	$	24.15		$	1,338
Exercised	—	$	—		$	—	—	$	—		$	91
Forfeited/Expired	(2,200)	$	27.67		$	—	(3,081)	$	27.30		$	—
Outstanding at March 31,	350,049	$	25.04	4.99	$	33	412,789	$	24.12	5.66	$	1,092
Exercisable at March 31,	325,649	$	24.89	4.85	$	33	370,789	$	23.78	5.43	$	1,092

(1)

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

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 weighted average shares outstanding during the third quarter of 2017, and 13,790,107 during the third quarter of 2016. There were 13,824,173~~14,971,842 weighted average shares outstanding during the first ~~nine months~~quarter of ~~2017,~~2023 and ~~13,446,567~~15,021,138 during the first ~~nine months~~quarter of ~~2016.~~

2022.

Diluted earnings per share calculations include the effect of the potential issuance of common shares, which for the Company is limited to shares that would be issued on the exercise of “in-the-money” stock ~~options.~~options, and unvested restricted stock awards. For the ~~third~~first quarter of ~~2017,~~2023, calculations under the treasury stock method resulted in the equivalent of ~~174,876~~30,524 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of ~~120,700~~327,141 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the ~~third~~first quarter of ~~2016~~2022 the equivalent of ~~114,353~~99,852 shares were added in calculating diluted earnings per share, while ~~146,900~~301,714 anti-dilutive stock options were not factored into the computation. Likewise, for the first nine months of 2017 the equivalent of 186,721 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 120,700 stock options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 114,149 shares and non-inclusion of 196,900 anti-dilutive options in calculating diluted earnings per share for first nine months of 2016.

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.

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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

					March 31, 2023		December 31, 2022
Commitments to extend credit	$	639,177	$	463,923	$	699,176	$	889,517
Standby letters of credit	$	7,936	$	8,582	$	6,052	$	6,037

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. Included in unused commitments are mortgage warehouse lines which are mostly in the form of repo lines and are unconditionally cancellable. Unused commitments on mortgage warehouse lines were $401.5 million at March 31, 2023 and $594.6 million at December 31, 2022.

At ~~September 30, 2017,~~March 31, 2023, the Company was also utilizing a letter of credit in the amount of ~~$86~~$127.9 million issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers. That letter of credit is backed by loans which are pledged to the FHLB by the Company.

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

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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 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.~~11

~~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


		March 31, 2023
			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	$	83,506	$	83,506	$	—	$	—	$	83,506
Investment securities available-for-sale		1,040,920		—		988,921		51,999		1,040,920
Investment securities held-to-maturity		332,728		—		325,607		—		325,607
Loans, net held for investment		2,010,807		—		—		1,896,715		1,896,715
Individually evaluated collateral dependent loans		95		—		95		—		95

Financial liabilities:
Deposits		2,948,988		1,041,748		1,906,751		—		2,948,499
Repurchase agreements		94,061		—		94,061		—		94,061
Other borrowings		216,800		—		216,480		—		216,480
Long-term borrowings		49,236		—		41,038		—		41,038
Subordinated debentures		35,526		—		32,757		—		32,757

Notional Amount

Off-balance-sheet financial instruments:

Commitments to extend credit

$
463,923

Standby letters of credit

8,582


		December 31, 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	$	77,131	$	77,131	$	—	$	—	$	77,131
Investment securities available for sale		934,923		—		877,488		57,435		934,923
Investment securities held-to-maturity		336,881		—		328,011		—		328,011
Loans, net held for investment		2,011,616		—		—		1,909,822		1,909,822
Individually evaluated collateral dependent loans		18,141		—		18,141		—		18,141

Financial liabilities:
Deposits		2,846,164		1,088,199		1,756,443		—		2,844,642
Repurchase agreements		109,169		—		109,169		—		109,169
Other borrowings		219,000		—		219,000		—		219,000
Long-term borrowings		49,214		—		42,775		—		42,775
Subordinated debentures		35,481		—		37,171		—		37,171

For financial asset categories that were ~~actually reported~~carried on our balance sheet at fair value as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, 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 foreclosure is probable or repayment is expected through the sale or operation of collateral and borrower is experiencing financial difficulty.

●

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 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

~~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

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 March 31, 2023, 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	$	—	$	105,327	$	—	$	105,327	$	—
Mortgage-backed securities		—		115,652		—		115,652		—
State and political subdivisions		—		206,963		—		206,963		—
Corporate bonds		—		—		51,999		51,999		—
Collateralized loan obligations		—		560,979		—		560,979		—
Total available-for-sale securities	$	—	$	988,921	$	51,999	$	1,040,920	$	—


	Fair Value Measurements at December 31, 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	$	—	$	50,599	$	—	$	50,599	$	—
Mortgage-backed securities		—		122,532		—		122,532		—
State and political subdivisions		—		205,980		—		205,980		—
Corporate bonds		—		—		57,435		57,435		—
Collateralized loan obligations		—		498,377		—		498,377		—
Total available-for-sale securities	$	—	$	877,488	$	57,435	$	934,923	$	—


Fair Value Measurements - Level 3 Recurring
(dollars in thousands, unaudited)
	Collateralized Loan Obligations				Corporate Bonds
	2023		2022		2023		2022
Balance of recurring Level 3 assets at January 1,	$	—	$	195,707	$	57,435	$	27,530
Total gains or losses for the period:
Included in other comprehensive income		—		—		(5,436)		—
Purchases		—		—		—		13,354
Transfers out of Level 3		—		(195,707)		—		—
Balance of recurring Level 3 assets at March 31,	$	—	$	—	$	51,999	$	40,884

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.

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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 March 31, 2023, using
									Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Individually evaluated collateral dependent loans
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other construction/land		—		—		—		—		—		—		—		—
1-4 family - closed-end		—		—		—		—		—		—		—		—
Equity lines		—		—		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		281		—		281		—		—		—		—
Commercial real estate - non-owner occupied		—		67		—		67		—		—		—		—
Farmland		—		—		—		—		—		—		—		—
Total real estate		—		348		—		348		—		—		—		—
Agriculture		—		—		—		—
Agricultural										—		—		—		—
Commercial and industrial		—		—		—		—		—		95		—		95
Consumer loans		—		58		—		58		—		—		—		—
Total impaired loans		—	$	406		—		406
Total collateral dependent loans									$	—	$	95	$	—	$	95
Foreclosed assets	$	—	$	2,225	$	—	$	2,225	$	—	$	—	$	—	$	—
Total assets measured on a nonrecurring basis	$	—	$	2,631	$	—	$	2,631	$	—	$	95	$	—	$	95


	Fair Value Measurements at December 31, 2022, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Individually evaluated collateral dependent loans
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—
Other construction/land		—		—		—		—
1-4 family - closed-end		—		—		—		—
Equity lines		—		—		—		—
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—
Commercial real estate - non-owner occupied		—		—		—		—
Farmland		—		15,391		—		15,391
Total real estate		—		15,391		—		15,391
Agricultural		—		2,750		—		—
Commercial and industrial		—		—		—		2,750
Consumer loans		—		—		—		—
Total collateral dependent loans	$	—	$	18,141	$	—	$	18,141
Foreclosed assets	$	—	$	—	$	—	$	—
Total assets measured on a nonrecurring basis	$	—	$	18,141	$	—	$	18,141

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)

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

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

Amortized Cost And Estimated Fair Value

~~At September 30, 2017~~(dollars in thousands, unaudited)


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
Available-for-sale
U.S. government agencies	$	105,600	$	66	$	(339)	$	—	$	105,327
Mortgage-backed securities		122,977		—		(7,325)		—		115,652
State and political subdivisions		222,609		785		(16,431)		—		206,963
Corporate bonds		65,190		—		(13,191)		—		51,999
Collateralized loan obligations		574,041		62		(13,124)		—		560,979
Total available-for-sale securities	$	1,090,417	$	913	$	(50,410)	$	—	$	1,040,920

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value		Allowance for Credit Losses
Held-to-maturity
U.S. government agencies	$	5,795	$	—	$	(602)	$	5,193	$	—
Mortgage-backed securities		153,667		—		(10,168)		143,499		—
State and political subdivisions		173,329		3,586		—		176,915		(63)
Total held-to-maturity securities	$	332,791	$	3,586	$	(10,770)	$	325,607	$	(63)

Table of Contents


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
Available-for-sale
U.S. government agencies	$	50,625	$	49	$	(75)	$	—	$	50,599
Mortgage-backed securities		129,948		—		(7,416)		—		122,532
State and political subdivisions		223,810		607		(18,437)		—		205,980
Corporate bonds		65,164		10		(7,739)		—		57,435
Collateralized loan obligations		515,032		60		(16,715)		—		498,377
Total available-for-sale securities	$	984,579	$	726	$	(50,382)	$	—	$	934,923

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value		Allowance for Credit Losses
Held-to-maturity
U.S. government agencies	$	6,047	$	—	$	(621)	$	5,426	$	—
Mortgage-backed securities		157,473		—		(9,915)		147,558		—
State and political subdivisions		173,424		1,603		—		175,027		(63)
Total held-to-maturity securities	$	336,944	$	1,603	$	(10,536)	$	328,011	$	(63)

The Company reassessed classification of certain investments and effective April 1, 2022 the Company transferred $162.1 million of Agency, Mortgaged-Backed and Municipal securities from the available-for-sale designation to the held-to-maturity designation. On October 1, 2022, a similar transfer of $198.3 million securities from available for sale to held-to-maturity was completed. The securities were transferred at their fair value as of the transfer date, with the related unrealized gain or loss as of the date of transfer included in the amortized cost basis of the transferred security and subject to amortization or accretion over each security’s remaining life. An unrealized loss of $30.1 million, on securities transferred from the available-for-sale to held-to-maturity categorization, remains as of March 31, 2023 and is included in accumulated other comprehensive income, net of tax. The remaining unrealized loss on the securities transferred from available-for-sale to held-to-maturity, will be accreted over the remaining term of the securities, with the amortized-cost basis of these securities and accumulated comprehensive income each increasing over time. A discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and is updated on a quarterly basis. As of March 31, 2023, an allowance for credit losses of $0.06 million had been established on the Bank’s held-to-maturity portfolio which remained unchanged from December 31, 2022. All of the Company’s held-to-maturity municipal bonds were AAA, AA, or A rated and have been determined to be investment grade as of March 31, 2023 and December 31, ~~2016,~~2022.

Table of Contents

The following table summarizes available-for-sale debt securities that were in an unrealized loss position for which an ACL has not been recorded, based on the ~~Company had 329~~length of time the individual securities ~~and 431~~have been in an unrealized loss position, including the number of available-for-sale debt securities ~~respectively, with gross~~in an unrealized ~~losses. Management has evaluated those securities~~loss position, as of the ~~respective~~ dates ~~and does not believe that any of the unrealized losses are other than temporary. Gross unrealized losses on our investment securities as of the~~ indicated ~~dates are disclosed~~below.

Investment Portfolio - Unrealized Losses

(dollars 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).~~thousands, unaudited)


		March 31, 2023
		Less than twelve months				Twelve months or more				Total
	Number of Securities	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Available-for-sale
U.S. government agencies	19	$	(297)	$	68,303	$	(42)	$	958	$	(339)	$	69,261
Mortgage-backed securities	338		(1,310)		29,985		(6,015)		85,644		(7,325)		115,629
State and political subdivisions	236		(2,747)		73,118		(13,684)		77,094		(16,431)		150,212
Corporate bonds	52		(3,074)		21,667		(10,117)		30,332		(13,191)		51,999
Collateralized loan obligations	65		(1,258)		148,195		(11,866)		384,889		(13,124)		533,084
Total available-for-sale	710	$	(8,686)	$	341,268	$	(41,724)	$	578,917	$	(50,410)	$	920,185


		December 31, 2022
		Less than twelve months				Twelve months or more				Total
	Number of Securities	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Available-for-sale
U.S. government agencies	8	$	(75)	$	27,550	$	—	$	—	$	(75)	$	27,550
Mortgage-backed securities	340		(7,108)		119,260		(308)		3,227		(7,416)		122,487
State and political subdivisions	252		(15,732)		147,635		(2,705)		9,807		(18,437)		157,442
Corporate bonds	52		(7,644)		54,636		(95)		405		(7,739)		55,041
Collateralized loan obligations	60		(10,152)		309,102		(6,563)		169,743		(16,715)		478,845
Total available-for-sale	712	$	(40,711)	$	658,183	$	(9,671)	$	183,182	$	(50,382)	$	841,365

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

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 March 31,
	2023		2022
Proceeds from sales, calls and maturities of securities available for sale	$	36,213	$	28,781
Gross gains on sales, calls and maturities of securities available for sale		45		1,032
Net gains on sale of securities available for sale	$	45	$	1,032

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

Table of Contents

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022 are shown below, grouped by the remaining time to contractual maturity dates. The expected life of investment securities may not be consistent with contractual maturity dates since the issuers of the securities might have the right to call or prepay obligations with or without penalties.

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


	March 31, 2023
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	24,690	$	24,749	$	668	$	666
Maturing after one year through five years		50,222		49,963		2,052		2,018
Maturing after five years through ten years		131,381		117,486		18,754		17,313
Maturing after ten years		187,107		172,090		157,650		162,111
Securities not due at a single maturity date:
Mortgage-backed securities		122,977		115,652		153,667		143,499
Collateralized loan obligations		574,040		560,980		—		—
	$	1,090,417	$	1,040,920	$	332,791	$	325,607


	December 31, 2022
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	12,141	$	12,184	$	672	$	666
Maturing after one year through five years		21,013		20,831		2,059		2,032
Maturing after five years through ten years		119,649		111,513		19,048		17,431
Maturing after ten years		186,796		169,486		157,692		160,324
Securities not due at a single maturity date:
Mortgage-backed securities		129,948		122,532		157,473		147,558
Collateralized loan obligations		515,032		498,377		—		—
	$	984,579	$	934,923	$	336,944	$	328,011

At ~~September 30, 2017,~~March 31, 2023, the Company’s investment portfolio included ~~330 “muni”~~499 municipal bonds issued by 409 different government municipalities and agencies located within 3237 different states, with an aggregate fair value of ~~$142~~$383.9 million. The largest exposure to any single municipality or agency was a combined ~~$2.588~~$5.2 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 51 subordinated debentures issued by bank holding companies totaling $52.0 million (fair value).

At December 31, 2022, the Company’s investment portfolio included 501 municipal bonds issued by 406 different government municipalities and agencies located within 37 states, with an aggregate fair value of $381.0 million. The largest exposure to any single municipality or agency was a combined $5.1 million (fair value) in general obligation bonds issued by the City of New York (NY). In addition, the company owned 51 subordinated debentures issued by bank holding companies totaling $57.4 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.

Table of Contents

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

Revenue and General Obligation Bonds by Location

(dollars in thousands, unaudited)


	March 31, 2023				December 31, 2022
	Amortized		Fair Market		Amortized		Fair Market
General obligation bonds	Cost		Value		Cost		Value
State of issuance
Texas	$	152,779	$	147,874	$	153,209	$	146,667
California		65,368		61,651		65,758		60,701
Washington		21,597		21,498		21,635		21,312
Other (29 & 26 states, respectively)		101,954		100,596		102,336		100,480
Total general obligation bonds		341,698		331,619		342,938		329,160

Revenue bonds
State of issuance
Texas		9,209		8,852		9,216		8,840
California		3,790		3,728		3,788		3,673
Washington		4,073		3,523		4,083		3,490
Other (20 & 15 states, respectively)		37,168		36,156		37,209		35,844
Total revenue bonds		54,240		52,259		54,296		51,847
Total obligations of states and political subdivisions	$	395,938	$	383,878	$	397,234	$	381,007

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

Table of Contents

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

Revenue Bonds by Type

(dollars in thousands, unaudited)

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)


	March 31, 2023				December 31, 2022
	Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value
Revenue source:
Water	$	21,220	$	20,098	$	21,246	$	19,977
Lease		7,027		7,284		7,035		7,250
Sewer		6,554		6,469		6,560		6,405
Sales tax revenue		4,117		3,969		4,123		3,934
Local or GTD housing		3,038		2,971		3,040		2,951
Other (9 and 10 sources, respectively)		12,284		11,468		12,292		11,330
Total revenue bonds	$	54,240	$	52,259	$	54,296	$	51,847

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~~four different LIHTC fund limited partnerships ~~from 2001 through 2017,~~made in 2014, 2015, and two in 2022, all of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act. 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 30, 2017~~March 31, 2023, our total LIHTC investment book balance was ~~$8.9~~$9.9 million, which includes ~~$3.5~~$7.4 million in remaining commitments for additional capital contributions. There were ~~$533,000~~$0.1 million in tax credits derived from our LIHTC investments that were recognized during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 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, 2022, our total LIHTC investment book balance was $10.1 million, which includes $7.4 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 Allowance for Credit ~~Quality~~Losses

We adopted the new current expected credit loss accounting guidance, CECL, and ~~Nonperforming Assets~~all related amendments as of January 1, 2022.

Table of Contents

The following table presents loans by class as of March 31, 2023 and December 31, 2022. Accrued interest receivable on loans of $5.2 million and $6.4 million at March 31, 2023 and December 31, 2022 respectively is not included in the loans included in the table below but is included in other assets on the Company’s balance sheet. The December 31, 2022 balance in 1-4 family closed end loans reflects year-to-date 2022 loan purchases of $173.1 million. The majority of the disclosures in this footnote are prepared at the class level which is equivalent to the call report or call code classification. The final table in this section separates a roll forward of the Allowance for Credit Losses at the portfolio segment level.

~~Credit Quality Classifications~~


Loan Distribution
(dollars in thousands, unaudited)
	March 31, 2023		December 31, 2022
Real estate:
Other construction/land	$	15,653	$	18,412
1-4 family - closed-end		414,232		416,116
Equity lines		18,953		21,330
Multi-family residential		92,220		91,691
Commercial real estate - owner occupied		313,863		323,873
Commercial real estate - non-owner occupied		912,544		893,846
Farmland		92,906		113,394
Total real estate		1,860,371		1,878,662
Agricultural		26,392		27,936
Commercial and industrial		74,726		76,779
Mortgage warehouse lines		68,472		65,439
Consumer loans		4,007		4,124
Subtotal		2,033,968		2,052,940
Net deferred loan fees and costs		24		(123)
Loans, amortized cost basis		2,033,992		2,052,817
Allowance for credit losses		(23,090)		(23,060)
Net Loans	$	2,010,902	$	2,029,757

Table of Contents

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


Nonaccrual Loans
(dollars in thousands, unaudited)
	March 31, 2023
	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	$	—	$	—	$	—	$	—
Other construction/land		—		—		—		—
1-4 family - closed-end		485		—		485		—
Equity lines		93		—		93		—
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—
Commercial real estate - non-owner occupied		—		—		—		—
Farmland		78		—		78		—
Total real estate		656		—		656		—
Agricultural		71		—		71		—
Commercial and industrial		75		134		209		88
Mortgage warehouse lines		—		—		—		—
Consumer loans		1		1		2		—
Total	$	803	$	135	$	938	$	88


	December 31, 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	$	—	$	—	$	—	$	—
Other construction/land		—		—		—		—
1-4 family - closed-end		629		—		629		—
Equity lines		59		—		59		—
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—
Commercial real estate - non-owner occupied		—		—		—		—
Farmland		15,812		—		15,812		—
Total real estate		16,500		—		16,500		—
Agricultural		2,826		29		2,855		—
Commercial and industrial		83		134		217		940
Mortgage warehouse lines		—		—		—		—
Consumer loans		—		7		7		—
Total	$	19,409	$	170	$	19,579	$	940

Table of Contents

The Company did not recognize any interest on nonaccrual loans during 2022 and would have recognized an additional $0.04 million in interest income on nonaccrual loans had those loans not been designated as nonaccrual.

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


Collateral Dependent Loans
(dollars in thousands, unaudited)
	March 31, 2023				December 31, 2022
	Amortized Cost		Individual Reserves		Amortized Cost		Individual Reserves
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—
Other construction/land		—		—		—		—
1-4 family - closed-end		485		—		629		—
Equity lines		93		—		59		—
Multi-family residential		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—
Commercial real estate - non-owner occupied		—		—		—		—
Farmland		78		—		15,812		—
Total real estate		656		—		16,500		—
Agricultural		71		—		2,826		—
Commercial and industrial		210		39		217		39
Mortgage warehouse lines		—		—		—		—
Consumer loans		—		—		—		—
Total Loans	$	937	$	39	$	19,543	$	39

During the first quarter of 2023 the amortized cost balance of collateral-dependent loans declined by 18.6 million due to the foreclosure and subsequent sale of Farmland and other Agricultural collateral related to a single borrower, as well as declines resulting from upgrades and payoffs. The weighted average loan-to-value ratio of collateral dependent loans was 17% at March 31, 2023. There were no collateral dependent loans in the process of foreclosure as of March 31, 2023.

Table of Contents

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


Past Due Loans
(dollars in thousands, unaudited)
	March 31, 2023
	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:
Other construction/land	$	—	$	—	$	—	$	—	$	15,596	$	15,596
1-4 family - closed-end		1,158		—		31		1,189		413,998		415,187
Equity lines		1		88		35		124		19,139		19,263
Multi-family residential		—		—		—		—		92,040		92,040
Commercial real estate - owner occupied		—		—		—		—		313,860		313,860
Commercial real estate - non-owner occupied		—		—		—		—		909,884		909,884
Farmland		—		—		—		—		93,141		93,141
Total real estate		1,159		88		66		1,313		1,857,658		1,858,971
Agricultural		—		—		—		—		26,672		26,672
Commercial and industrial		322		—		222		544		75,218		75,762
Mortgage warehouse lines		—		—		—		—		68,472		68,472
Consumer loans		30		—		—		30		4,085		4,115
Total Loans	$	1,511	$	88	$	288	$	1,887	$	2,032,105	$	2,033,992


	December 31, 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:
Other construction/land	$	—	$	—	$	—	$	—	$	18,358	$	18,358
1-4 family - closed-end		1,259		87		179		1,525		415,568		417,093
Equity lines		35		—		—		35		21,603		21,638
Multi-family residential		—		—		—		—		91,485		91,485
Commercial real estate - owner occupied		—		—		—		—		323,895		323,895
Commercial real estate - non-owner occupied		—		—		—		—		891,195		891,195
Farmland		522		97		15,393		16,012		97,582		113,594
Total real estate		1,816		184		15,572		17,572		1,859,686		1,877,258
Agricultural		—		—		2,778		2,778		25,416		28,194
Commercial and industrial		19		134		940		1,093		76,601		77,694
Mortgage warehouse lines		—		—		—		—		65,439		65,439
Consumer loans		15		—		—		15		4,217		4,232
Total Loans	$	1,850	$	318	$	19,290	$	21,458	$	2,031,359	$	2,052,817

Loan Modifications

The Company may agree to different types of concessions when modifying a loan. There were no modifications to borrowers experiencing financial difficulty, including principal forgiveness, rate reductions, payment deferral, or term extension, during the three months ended March 31, 2023.

For the three months ended March 31, 2022, there were no new TDRs and no modifications of existing TDRs.

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

Table of Contents

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

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

Substandard: – Loans ~~that have at least one~~classified as substandard are those loans with clear and well-defined ~~weakness that could jeopardize the ultimate recoverability of all principal and interest,~~weaknesses such as ~~a borrower displaying~~ a highly leveraged position, unfavorable financial operating results and/or trends, or uncertain repayment sources or ~~a deteriorated~~poor financial ~~condition.~~

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

(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

(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

⁽¹⁾	~~As of September 30, 2017 there were no loans over 90 days past due and still accruing.~~

⁽²⁾	~~Included in total financing receivables~~

December 31, 2016

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

$
—

$
—

$
—

$
—

$
32,417

$
32,417

$
—

Other construction/land

—

—

—

—

40,650

40,650

558

1-4 family - closed end

99

23

575

697

136,446

137,143

963

Equity lines

397

—

320

717

42,726

43,443

1,926

Multi-family residential

—

—

—

—

31,631

31,631

—

Commercial real estate -
   owner occupied

338

—

28

366

253,169

253,535

1,572

Commercial real estate -
   non-owner occupied

—

—

—

—

244,198

244,198

67

Farmland

—

—

—

—

134,480

134,480

39

Total real estate

834

23

923

1,780

915,717

917,497

5,125

Agricultural

—

—

89

89

46,140

46,229

89

Commercial and industrial

168

3

292

463

123,132

123,595

692

Mortgage warehouse lines

—

—

—

—

163,045

163,045

—

Consumer

94

9

52

155

12,010

12,165

459

Total gross loans and leases

$
1,096

$
35

$
1,356

$
2,487

$
1,260,044

$
1,262,531

$
6,365

⁽¹⁾	~~As of December 31, 2016 there were no loans over 90 days past due and still accruing.~~

⁽²⁾	~~Included in total financing receivables~~

(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

(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

Table of Contents

Loan Credit Quality by Vintage

(dollars in ~~the loan both before and after modification and balances that were modified during the period:~~thousands, unaudited)


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost		Total Loans
Other construction/land
Pass	$	—	$	—	$	—	$	3,792	$	712	$	1,892	$	9,132	$	15,528
Substandard		—		—		—		68		—		—		—		68
Subtotal		—		—		—		3,860		712		1,892		9,132		15,596
1-4 family - closed-end
Pass		—		109,728		237,151		7,761		2,038		55,919		—		412,597
Special mention		—		—		—		—		—		1,603		—		1,603
Substandard		—		—		—		—		—		987		—		987
Subtotal		—		109,728		237,151		7,761		2,038		58,509		—		415,187
Equity lines
Pass		—		46		332		400		322		363		16,856		18,319
Special mention		—		—		—		20		—		—		454		474
Substandard		—		—		114		—		—		—		356		470
Subtotal		—		46		446		420		322		363		17,666		19,263
Multi-family residential
Pass		1,892		23,696		511		11,348		655		23,368		27,341		88,811
Special mention		—		—		—		—		—		3,229		—		3,229
Subtotal		1,892		23,696		511		11,348		655		26,597		27,341		92,040
Commercial real estate - OO
Pass		3,275		38,637		24,015		63,603		36,273		138,028		5,839		309,670
Special mention		—		279		—		203		341		1,329		—		2,152
Substandard		—		—		—		—		—		1,571		467		2,038
Subtotal		3,275		38,916		24,015		63,806		36,614		140,928		6,306		313,860
Commercial real estate - NOO
Pass		31,278		84,417		19,416		375,899		24,797		207,388		69,399		812,594
Special mention		—		—		—		68,559		—		4,165		—		72,724
Substandard		—		—		—		14,653		—		9,913		—		24,566
Subtotal		31,278		84,417		19,416		459,111		24,797		221,466		69,399		909,884
Farmland
Pass		—		27,996		1,350		3,993		1,746		32,519		15,428		83,032
Special mention		—		—		—		—		—		3,023		—		3,023
Substandard		—		—		—		—		—		7,086		—		7,086
Subtotal		—		27,996		1,350		3,993		1,746		42,628		15,428		93,141
Agricultural
Pass		3,475		7,509		425		438		18		2,667		11,619		26,151
Special mention		—		—		—		—		—		—		450		450
Substandard		—		—		71		—		—		—		—		71
Subtotal		3,475		7,509		496		438		18		2,667		12,069		26,672
Commercial and industrial
Pass		2,089		4,302		3,893		7,024		5,857		10,590		33,439		67,194
Special mention		—		184		119		3,006		41		1,097		3,772		8,219
Substandard		—		—		—		—		72		208		69		349
Subtotal		2,089		4,486		4,012		10,030		5,970		11,895		37,280		75,762
Mortgage warehouse lines
Pass		—		—		—		—		—		—		68,472		68,472
Subtotal		—		—		—		—		—		—		68,472		68,472
Consumer loans
Pass		885		397		181		133		101		303		2,049		4,049
Special mention		—		—		—		19		12		17		14		62
Substandard		2		—		—		—		—		—		2		4
Subtotal		887		397		181		152		113		320		2,065		4,115
Total	$	42,896	$	297,191	$	287,578	$	560,919	$	72,985	$	507,265	$	265,158	$	2,033,992

Gross charge-offs	$	437	$	13	$	250	$	—	$	—	$	1,280

~~Troubled Debt Restructurings~~

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

Three months ended 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 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.

Table of Contents~~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 had no finance receivables modified as TDRs within~~CECL replaces the ~~previous twelve months that defaulted or were charged off during the three- or nine-month periods ended September 30, 2017 and 2016, respectively.~~

~~Purchased Credit Impaired Loans~~

~~The Company may acquire~~legacy accounting for loans ~~which show evidence of credit deterioration since origination. These~~designated as purchased credit impaired (“PCI”) with loans designated as purchased credit deteriorated (“PCD”). PCD loans are ~~recorded at~~loans acquired or purchased, which as of acquisition, had evidence of more than insignificant credit deterioration since origination. Due to the ~~amount paid, since there is no carryover of~~immaterial balance in the ~~seller’s allowance for loan losses. Potential losses on~~Company’s PCI loans ~~subsequent~~as of December 31, 2021 management elected not to ~~acquisition are recognized by an increase~~transition these loans into the PCD designation. As of March 31, 2023 the Company had no loans categorized as PCD.

As noted in footnote 3, on January 1, 2022 the Company implemented CECL and increased our ACL, previously the allowance for loan ~~losses. PCI loans are accounted for individually or are aggregated into pools of loans based on common risk characteristics.~~losses, with a $9.5 million cumulative adjustment. 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 flowsCompany’s ACL 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 atcalculated quarterly, with 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~~difference in the ~~fourth quarter of 2014~~calculated ACL and ~~Coast Bancorp in~~ the third quarter of 2016 included certain loans which have shown evidence of credit deterioration since origination, and for which it was probable at acquisition that all contractually required payments would not be collected. The carrying amount and unpaid principal balance of those PCI loans was as follows, as ofrecorded ACL trued-up through an entry to 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 PCI loans as of September 30, 2017, as compared to $58,000 at December 31, 2016. We also recorded approximately $6,000 in discount accretion on PCI loans during the nine months ended September 30, 2017.

~~Note 12 – Allowance for Loan and Lease Losses~~

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

The following tables disclose the unpaid principal balance, recorded investment, average recorded investment, and interest income recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not,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 the consideration of current and expected conditions and circumstances including the level of interest rates. The prepayment assumptions may be updated by 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 March 31, 2023, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate. Management selected the National Unemployment Rate as the driver of quantitative portion of collectively reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling, the availability of forecasts including the quarterly FOMC forecast, and given the widespread familiarity of stakeholders with this economic metric.

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-

Table of Contents

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 Commercial Real Estate are often businesses. The COVID-19 pandemic illustrated how these different categories of the expected costs 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 March 31, 2023, 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~~Federal Call Report code were loans designated nonaccrual.

Table of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other measurable information, the credit classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on Management’s judgment and experience. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that Management believes is appropriate at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the condition of the agricultural industry and other key industries. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. Contents

The ~~total general reserve established for probable incurred losses on unimpaired loans was $7.738 million at September 30, 2017.~~

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended September 30, 2017, although 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 loan and lease losses as an integral part of their audit and examination processes. Management believes that the current methodology is appropriate given our size and level of complexity.

~~The~~following tables ~~that follow detail~~present the activity in the allowance for ~~loan and lease~~credit losses by portfolio segment for the ~~periods noted:~~quarters ended March 31, 2023 and 2022:

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


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, 2022	$	3,251	$	17,732	$	458	$	1,233	$	72	$	314	$	23,060
Charge-offs		—		—		(1,277)		(308)		—		(395)		(1,980)
Recoveries		205		—		1,282		23		—		250		1,760
Provision for credit losses		(213)		67		38		258		10		90		250
Ending allowance balance:	$	3,243	$	17,799	$	501	$	1,206	$	82	$	259	$	23,090

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


	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		—		—		(1,958)		(74)		—		(299)		(2,331)
Recoveries		87		260		—		20		—		184		551
Provision for credit losses		722		(1,897)		1,842		(133)		(40)		106		600
Ending allowance balance:	$	3,329	$	17,043	$	606	$	1,231	$	51	$	270	$	22,530

~~Note 13 – Recent Developments~~

On April 24, 2017, the Company announced the signing 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 Bank of the Sierra. Ojai Community Bank had its head office in Ojai, and branch offices in Ventura, Santa Paula, and Santa Barbara, conducting businessThere were no significant changes in the ~~respective communities as Ventura Community Bank, Santa Paula Community Bank,~~Company’s loan portfolio ACL in the first quarter of 2023.

Note 11 – Goodwill

The following table discloses changes in the carrying value of goodwill for the three months ended March 31, 2023 and ~~Santa Barbara Community Bank. Those locations are now being operated as our branch offices under the~~2022 (dollars in thousands, unaudited):

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. 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 “Bank”) is the only subsidiary of the Company that meets the materiality criteria necessary to be deemed an operating segment, and because the Company exists primarily for the purpose of holding the stock of the Bank we have determined that only one unified operating segment or reporting unit (the consolidated Company) exists. The fair value of the consolidated Company is its market capitalization, as determined by quoted prices in ~~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~~active markets, plus a sales control premium, as determined by analyzing recent mergers 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~~acquisitions. If 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 willmarket capitalization plus a control premium exceeds recorded shareholders’ equity (the book value), it can be ~~reflected on the Company’s books at their estimated fair values and there~~reasonably presumed that no impairment exists. Therefore, it was ~~no carryover of the allowance for loan losses~~determined 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,~~the reporting unit exceeded its carrying value, resulting in no impairment at March 31, 2023.

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Note 12 – Borrowings and Other Arrangements

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


	March 31, 2023			December 31, 2022
			Weighted			Weighted
			Average			Average
	Balance		Rate	Balance		Rate
Overnight Fed funds purchased ⁽¹⁾	$	150,000	4.88%	$	125,000	4.08%
Overnight FHLB advance ⁽²⁾		26,800	4.84%		94,000	3.44%
Long-term FHLB advance ⁽²⁾		40,000	3.88%		—	—
Total other borrowings	$	216,800	4.84%	$	219,000	3.67%

The Company has established secured and unsecured lines of credit under which it ~~will be amortized~~may borrow funds from time to time on a ~~straight~~term or overnight basis from the FHLB, FRB, and other correspondent banks.

Federal Funds Purchased ⁽¹⁾ – The Company had unsecured available lines of credit with correspondent banks for short-term borrowings totaling $309.0 million at March 31, 2022 and $237.0 million at December 31, 2022. In general, interest rates on these lines approximate the federal funds target rate.

Federal Home Loan Bank Borrowings ⁽²⁾ – At March 31, 2023 and December 31, 2022, the Company had available lines of credit with the FHLB totaling $762.7 million and $718.8 million, respectively, based on eligible collateral of certain loans and investment securities.

Federal Reserve Line of Credit – The Company has an available line ~~basis over eight years commencing~~of credit with the Federal Reserve Bank of San Francisco secured by certain loans. At March 31, 2023 and December 31, 2022 the Company had borrowing capacity under this line totaling $40.3 million and $42.3 million, respectively. We had no outstanding borrowings on this line of credit as of March 31, 2023 and December 31, 2022.

Repurchase Agreements – Repurchase agreements represent “sweep accounts”, where commercial deposit balances above a specified threshold are transferred at the ~~date~~close of ~~acquisition. Goodwill and core deposit intangibles are not deductible for income tax purposes.~~each business day into non-deposit accounts secured by investment securities. Repurchase agreements totaled $94.1 million at March 31, 2023 relative to a balance of $109.2 million at December 31, 2022.

~~On July 5, 2017, Bank~~Long-Term Debt – The Company has long-term debt in the form of fixed to floating rate subordinated debentures with a fixed rate of 3.25% until September 30, 2026, then floating rate at 253.5 basis points over 3-month term SOFR until maturity on October 1, 2031. The balance of the Company’s long-term debt, net of unamortized issuance costs, at both March 31, 2023 and December 31, 2022 was $49.2 million.

Subordinated Debentures - Sierra Statutory Trust II (“Trust II”), Sierra Capital Trust III (“Trust III”), and Coast Bancorp Statutory Trust II (“Trust IV”), (collectively, 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 code that are domiciled at nearby branches, and this branch purchase is intended to enhance the level of service for those customers as well as provide additional core deposits“Trusts”) exist solely for the ~~Bank. The acquisition also included the purchase~~purpose 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.~~

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 inissuing trust preferred securities ~~which were booked~~fully and unconditionally guaranteed by the Company. For financial reporting purposes, the Trusts are not consolidated, and the Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) held by the Trusts and issued and guaranteed by the Company ~~at their initial fair value~~are reflected in the Company’s consolidated balance sheet in accordance with provisions of ~~$3.4~~ASC Topic 810. At March 31, 2023 and December 31, 2022 the Company’s trust preferred securities totaled $35.5 million. ~~This acquisition had,~~

Note 13 – Revenue Recognition

The Company utilizes the guidance found in ASU 2014-09, Revenue from Contracts with Customers (ASC 606), when accounting for certain noninterest income. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which

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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 ~~will continue~~uncertainty of revenue and cash flows arising from contracts with customers. The Company’s revenue streams that are within the scope of and accounted for under Topic 606 include service charges on deposit accounts, debit card interchange fees, and fees levied for other services the Company provides its customers. The guidance does not apply to ~~have, a material impact~~revenue associated with financial instruments such as loans and investments, and other noninterest income such as loan servicing fees and earnings on ~~comparative 2017 and 2016 average balances and associated~~bank-owned life insurance, which are accounted for on an accrual basis under other provisions of GAAP.

All of the Company’s revenue from contracts within the scope of ASC 606 is recognized when incurred as noninterest income and gains on the sale of OREO which is classified as noninterest expense. ~~Furthermore, one-time acquisition costs added over $2.4 million to~~These gains were immaterial for both of the three months ended March 31, 2023 and 2022. The following table presents the Company’s ~~pre-tax non-interest expense~~sources of noninterest income for the three month periods ended March 31, 2023 and 2022. Items outside the scope of ASC 606 are noted as such (dollars in ~~2016.~~thousands, unaudited).


	For the three months ended March 31,				For the year ended December 31,
	2023		2022		2022
Noninterest income
Service charges on deposits
Returned item and overdraft fees	$	1,258	$	1,328	$	5,227
Other service charges on deposits		2,093		2,164		9,340
Debit card interchange income		2,029		2,056		8,533
Gain (loss) on limited partnerships⁽¹⁾		(166)		(113)		253
Dividends on equity investments⁽¹⁾		276		246		843
Unrealized (losses) gains recognized on equity investments⁽¹⁾		(291)		(332)		(332)
Net gains on sale of securities⁽¹⁾		45		1,032		1,487
Other⁽¹⁾		1,335		(318)		5,419
Total noninterest income	$	6,579	$	6,063	$	30,770
Percentage of noninterest income not within scope of ASC 606.		18.22%		8.49%		24.93%

(1)	Not within scope of ASC 606. Revenue streams are not related to contracts with customers and are accounted for under other provisions of GAAP.

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

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PART I - FINANCIAL INFORMATION

ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form ~~10-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:

●

risks associated with fluctuations in interest rates, including the impact on other comprehensive income (loss), the ability for customers to repay on floating or adjustable rates loans, and the impact on costs of funding and interest income on earning assets;

●

risks associated with inflation (including efforts by the Federal Open Market Committee of the Federal Reserve Bank to control the same);

●

the risk of unfavorable economic conditions in the Company’s market areas, or the impact on the Company’s market areas of national or international economic conditions;

●

liquidity risks, including the ability to effectively manage the potential loss of deposits, the ability to maintain funding lines of credit; and the loss of value of unencumbered investment securities;

●

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 impact of adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks;

●

operational risks including the ability to detect and prevent errors and fraud;

●

the Company’s ability to diversify and grow its loan portfolio;

●

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

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 Company’s ability to successfully deploy new technology and manage cyber security risks;

●

the Company’s ability to maintain a satisfactory rating under the Community Reinvestment Act;

●

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

●

the effects of severe weather events, pandemics, other public health crises, acts of war or terrorism, and other external events;

●

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.~~2022 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.

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OVERVIEW OF THE RESULTS OF OPERATIONS

AND FINANCIAL CONDITION

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

~~Third~~First Quarter ~~2017~~2023 compared to ~~Third~~First Quarter ~~2016~~2022

~~Net~~First quarter 2023 net income ~~for the quarter ended September 30, 2017~~ was ~~$5.742 million, representing an increase of $1.813~~$8.8 million, or ~~46%, relative to net income of $3.929 million for the quarter ended September 30, 2016. Basic and~~$0.58 per diluted ~~earnings per~~ share, ~~for the third quarter of~~

~~2017 were both $0.41,~~ compared to ~~$0.28 basic and~~$7.4 million, or $0.49 per diluted ~~earnings per~~ share ~~for~~in the ~~third~~first quarter of ~~2016.~~2022. The Company’s annualized return on average equity was ~~10.45%~~11.53% and annualized return on average assets was ~~1.10%~~0.97% for the quarter ended ~~September 30, 2017,~~March 31, 2023, compared to ~~7.50%~~8.64% and ~~0.81%~~0.88%, respectively, for the same quarter ~~ended September 30, 2016.~~in 2022. The primary drivers behind the variance in ~~third~~first quarter net income are as follows:

●

Net interest income increased $3.4 million or 14%. This was due mostly to an $11.3 million increase in interest income partially offset by an $8.0 million increase in interest expense. There was an increase in investment securities which contributed $9.6 million to the favorable interest income variance. This increase in investments primarily consisted of floating rate collateralized loan obligations (CLOs), which contributed to $6.9 million or 61.0% of the interest income favorable variance, partially offset by an unfavorable increase in interest expense due to a shift of deposit balances into higher cost time certificates and an increase in borrowed funds.

●

Noninterest income increased $0.5 million or 9% primarily due to $0.3 million gain on life insurance proceeds, $0.3 million in other foreclosed assets income, combined with favorable BOLI fluctuations associated with deferred compensation plans for $0.8 million. The provision for credit losses at $0.3 million declined by $0.2 million, or 49% as a result of lower net loan charge-offs recognized in the first quarter of 2023.

●

Total noninterest expense increased $2.8 million, or 14%, in the first quarter of 2023 as compared to the first quarter of 2022. Salaries and benefits costs increased $1.0 million as we added new lending teams, and other noninterest expense increased $1.8 million mostly due to a $0.8 million increase in foreclosed asset expense, and a $0.5 million in directors deferred compensation expense, linked to favorable changes in BOLI income described above.

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.

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 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.

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.

~~First Nine Months of 2017 compared to First Nine Months of 2016~~FINANCIAL CONDITION SUMMARY

Net income for the first nine months of 2017 was $15.496 million, representing an increase of $3.446 million, or 29%, relative to net income of $12.050 million for the first nine months of 2016. Basic and 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. The Company’s annualized return on average equity was 9.70% and annualized return on average assets was 1.02% for the nine months ended September 30, 2017, compared to a return on equity of 8.08% and return on assets of 0.89% for the nine months ended September 30, 2016. The primary drivers behind the variance in year-to-date net income are as follows:

~~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 30, 2017~~March 31, 2023 relative to December 31, ~~2016~~2022

The Company’s assets totaled ~~$2.078~~$3.7 billion at ~~September 30, 2017, relative to $2.033 billion at~~March 31, 2023, an increase of $85.4 million, or 2% 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, 2016.2022. The following provides a summary of key balance sheet changes during the first ~~nine~~three months of ~~2017:~~2023:

~~Cash balances were down $66 million, or 55%, including a $27 million reduction in non-earning balances.~~

~~Investment securities were up $53 million, or 10%,due in part 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~~●

Investment securities increased by ~~almost $2~~$101.8 million, or ~~21%~~8%, to $1.4 billion primarily due to strategic purchases of U.S. government agency securities and CLOs.

●

Gross loan balances declined by $19.0 million, due mostly to the foreclosure of $18.1 million of loans related to one dairy relationship in January 2023. Further commercial real estate secured loans increased $8.7 million, and mortgage warehouse lines increased by $3.0 million.

●

Deposits increased by $102.8 million, or 4%. The ~~Company’s ratio of nonperforming assets~~growth in deposits came primarily from customer time and brokered deposits.

●

Other short-term borrowings declined $42.2 million to ~~total loans plus foreclosed assets was 0.52%~~$176.8 million at ~~September 30, 2017, compared to 0.68%~~March 31, 2023 from $219.0 million at December 31, ~~2016~~2022 and ~~0.72%~~consisted of overnight borrowings from correspondent banks and the FHLB. Customer repurchase agreements, which are considered short-term as well, declined from $109.2 million at ~~September 30, 2016.~~

December 31, 2022 to $94.1 million at March 31, 2023.

●

Long-term debt at March 31, 2023 consisted of $40.0 million of long-term FHLB advances and $49.2 million of subordinated debt. This was an increase of $40.0 million from December 31, 2022 due to the $40.0 million in long-term FHLB advances, taken out as a partial hedge on longer term adjustable rate loans.

●

Total capital of $307.0 million at March 31, 2023 reflects an increase of $3.4 million, or 1%, relative to year-end 2022. The Company’s leverage ratio was 10.13% at March 31, 2023 as compared to 10.30% at December 31, 2022. The increase in equity during the first three months of 2023 was due to the addition of $8.8 million in net income, a $0.5 million favorable swing in accumulated other comprehensive income/loss, due principally to changes in investment securities’ fair value, net of $2.7 million in share repurchases, and $3.5 million in

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.34

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~~Table of $13 million, or 6%, due to the addition of income, the impact of stock options exercised, and a $2 million absolute increase in accumulated other comprehensive income, net of dividends paid. Our consolidated total risk-based capital ratio was 17.26% at September 30, 2017 as compared to 17.25% at year-end 2016, and our regulatory capital ratios remain very strong relative to peer banks.Contents

dividends paid. The remaining difference is related to stock options exercised and restricted stock granted during the first three months.

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~~was $28.1 million, ~~or 9%,~~ for the ~~third~~first quarter of ~~2017~~2023, a $3.4 million increase, or 14% over the first quarter of 2022.

For the first quarter of 2023 as compared to the same quarter in 2022, the $3.4 million increase in net interest income came from a $186.9 million increase in average earning asset balances, which consisted of increases of $104.8 million in average investment balances and $82.1 million in average loan balances. In addition, there was a favorable rate variance on average earning assets of 121 basis points. Offsetting these favorable interest income variances, average deposit balances increased $128.6 million, with all of the increase in higher cost time deposits. Average borrowed funds increased $175.2 million, primarily for the purchase of floating rate collateralized loan obligations. Deposit costs increased 118 basis points in the first quarter of 2023 as compared to the same quarter in 2022, along with a 201 basis point increase in the cost of borrowed funds.

Interest expense was $9.3 million for the first quarter of 2023, an increase of $8.0 million, relative to the ~~third~~first quarter of ~~2016~~2022. The significant increase in interest expense is attributable to an unfavorable shift in deposit mix and the impact of interest rate increases, as the average balance of higher cost time deposits, including variable rate time deposits and borrowed funds increased by ~~$5.742~~$270.1 million ~~or 12%, for~~and $175.2 million respectively in the first ~~nine months~~quarter of ~~2017~~2023 as compared to the first ~~nine months~~quarter of ~~2016.~~ 2022.

The Company had $1.3 billion in adjustable and variable rate loans and $561.0 million in floating rate collateralized loan obligations, as compared to $464.7 million in floating rate CDs and $35.5 million in floating rate trust preferred securities at March 31, 2023. $227.5 million of the Company’s adjustable and variable rate loans have the ability to reprice in the next twelve months.

The Company continues to offer floating rate CDs which are indexed to prime. These floating rate CDs increased $135.4 million or 41%, to $464.7 million at March 31, 2023, as compared to $329.3 million at December 31, 2022. Due to the increases in the prime rate during 2022 and 2023, interest expense on floating rate CDs has increased $4.1 million for the first quarter of 2023 over the first quarter of 2022. These CD’s require a minimum balance and pay a rate that is 325 – 400 basis points below the Wall Street Journal Prime rate, with a 20 basis point minimum 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
	March 31, 2023					March 31, 2022
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	$	5,312	$	70	5.34%	$	194,846	$	93	0.19%
Taxable		972,051		11,986	5.00%		744,599		3,490	1.90%
Non-taxable		361,328		2,813	4.00%		294,409		1,726	3.01%
Total investments		1,338,691		14,869	4.73%		1,233,854		5,309	1.90%

Loans:⁽³⁾
Real estate		1,869,112		19,899	4.32%		1,753,394		18,326	4.24%
Agricultural		28,028		433	6.27%		33,986		302	3.60%
Commercial		70,887		993	5.68%		97,127		1,398	5.84%
Consumer		4,137		87	8.53%		4,448		206	18.78%
Mortgage warehouse lines		59,122		1,118	7.67%		61,255		510	3.38%
Other		2,464		20	3.29%		1,485		30	8.19%
Total loans		2,033,750		22,550	4.50%		1,951,695		20,772	4.32%
Total interest earning assets⁽⁴⁾		3,372,441		37,419	4.59%		3,185,549		26,081	3.38%
Other earning assets		15,714					15,679
Non-earning assets		272,496					210,724
Total assets	$	3,660,651				$	3,411,952


Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	150,139	$	129	0.35%	$	202,962	$	106	0.21%
NOW		483,645		71	0.06%		546,280		82	0.06%
Savings accounts		457,593		65	0.06%		467,700		67	0.06%
Money market		135,434		25	0.07%		151,339		23	0.06%
Time deposits		461,214		4,505	3.96%		293,684		234	0.32%
Brokered deposits		162,560		1,204	3.00%		60,000		48	0.32%
Total interest bearing deposits		1,850,585		5,999	1.31%		1,721,965		560	0.13%
Borrowed funds:
Repurchase agreements		103,426		81	0.32%		105,067		82	0.32%
Other borrowings		176,725		2,111	4.84%		171		—	—
Long-term debt		49,222		429	3.53%		49,143		428	3.53%
Subordinated debentures		35,499		667	7.62%		35,320		255	2.93%
Total borrowed funds		364,872		3,288	3.65%		189,701		765	1.64%
Total interest bearing liabilities		2,215,457		9,287	1.70%		1,911,666		1,325	0.28%
Demand deposits - noninterest bearing		1,070,775					1,093,709
Other liabilities		66,632					59,026
Shareholders' equity		307,787					347,551
Total liabilities and shareholders' equity	$	3,660,651				$	3,411,952
Interest income/interest earning assets					4.59%					3.38%
Interest expense/interest earning assets					1.12%					0.17%
Net interest income and margin⁽⁵⁾			$	28,132	3.47%			$	24,756	3.21%

⁽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 federal tax rate.

⁽³⁾

Loans are gross of the allowance for ~~possible loan~~expected credit losses. Loan fees have been included in the calculation of interest income. Net loan (costs) fees and loan acquisition FMV amortization were ~~$(22) thousand~~$(0.1) million and ~~$156 thousand~~$0.4 million for the quarters ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~

2022, 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
%

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

⁽²⁾

Table of Contents

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

⁽³⁾	Loans are gross of the allowance for possible loan losses. Net loan fees have been included in the calculation of interest income. Net loan fees and loan acquistion FMV amortization were $57 thousand and $(7) thousand for the nine months ended September 30, 2017 and 2016.

⁽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.~~

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 March 31,
	2023 over 2022
	Increase (decrease) due to
Assets:	Volume		Rate		Mix		Net
Investments:
Federal funds sold/due from time	$	(90)	$	2,474	$	(2,407)	$	(23)
Taxable		1,067		5,690		1,739		8,496
Non-taxable		97		566		424		1,087
Total investments ⁽¹⁾		1,074		8,730		(244)		9,560
Loans:
Real estate		1,209		341		23		1,573
Agricultural		(53)		223		(39)		131
Commercial		(378)		(37)		10		(405)
Consumer		(14)		(113)		8		(119)
Mortgage warehouse		(18)		649		(23)		608
Other		20		(18)		(12)		(10)
Total loans ⁽¹⁾		766		1,045		(33)		1,778
Total interest earning assets ⁽¹⁾	$	1,840	$	9,775	$	(277)	$	11,338
Liabilities
Interest bearing deposits:
Demand deposits	$	(28)		69		(18)	$	23
NOW		(9)		(2)		—		(11)
Savings accounts		(1)		(1)		—		(2)
Money market		(2)		5		(1)		2
Time deposits		133		2,635		1,503		4,271
Brokered deposits		82		396		678		1,156
Total interest bearing deposits ⁽¹⁾		175		3,102		2,162		5,439
Borrowed funds:
Repurchase agreements		(1)		—		—		(1)
Other Borrowings		—		2		2,109		2,111
Long-term debt		1		—		—		1
Subordinated debt		1		409		2		412
Total borrowed funds ⁽¹⁾		1		411		2,111		2,523
Total interest bearing liabilities ⁽¹⁾		176		3,513		4,273		7,962
Net interest income ⁽¹⁾	$	1,664	$	6,262	$	(4,550)	$	3,376

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~~first quarter of ~~2017~~2023 relative to the ~~third~~first quarter of ~~2016~~2022 was a favorable ~~$1.446~~$1.6 million; this is primarily from a favorable volume variance of $1.8 million ~~due to an increase of $142 million, or 8%,~~ in interest earning assets, as the average balance of ~~interest-earning~~interest earning assets ~~resulting~~increased $186.9 million from ~~organic growth in loans and investments.~~the comparative quarters. There was ~~also~~ a favorable rate variance of ~~$82,000 for~~$6.3 million from the ~~third quarter comparison. Our~~comparative quarters since the weighted average yield on interest-earning assets was up by 13 basis points while the weighted average cost of interest-bearing liabilities increased by 15 basis points, but there was a net benefit to the Company because the yield increase oninterest earning assets ~~was applied to a much higher balance~~more than offset the ~~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 place~~ in the ~~second quarter~~average yield unfavorable variance on interest bearing liabilities. There was an unfavorable mix variance of ~~2017. Loan yields have risen due to the impact of higher short-term interest rates on our variable-rate loans and discount accretion on loans~~$4.5 million primarily from the ~~Coast acquisition.~~shift in customer deposit transaction accounts into higher

Table of Contents

cost variable rate time certificates combined with a higher level of borrowed funds. 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 four basis points relative to the third quarter 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. 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~~first quarter of 2023 was 3.47%, as compared to 3.21% for the first quarter of 2022.

At March 31, 2023, approximately 4% of our total portfolio, or $89.5 million, consists of variable rate loans. At March 31, 2023, our outstanding fixed rate loans represented 36% of our loan portfolio. The remaining 60% of our loan portfolio at March 31, 2023 consists of adjustable-rate loans; 68% of these loans (approximately $829.9 million) will not have the ability to reprice for at least another 3 years. These loans are typically adjustable every five years after the initial adjustment. Approximately $68.1 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 quarterly comparisons have decreased and have a positive impact on our net interest margin since cash balances earn considerably lower yields than other earning assets. Average cash and due from banks was $83.1 million, a decrease of $188.5 million for the first three months of 2023 as compared to the same period last year.

Overall average investment securities increased by $294.4 million for the first quarter of March 31, 2023 as compared to March 31, 2022. For the quarter ending March 31, 2023 over the same period for 2022, average non-taxable securities increased $66.9 million and taxable securities increased $227.5 million. The overall investment portfolio had a tax-equivalent yield of 4.65% at March 31, 2023, with an average life of 6.41 years.

Interest expense was $9.3 million in the first quarter of 2023, an increase of $8.0 million compared to the first quarter of 2022. The increase is attributable to a shift from being a net seller of Federal Funds at March 31, 2022, to a net purchaser of funds at March 31, 2023 coupled with a 380 to 450 basis point increase to the rate on the Prime Index Certificate of Deposit accounts offered by the bank. The rate on the Prime Index account is tied to a spread to the Wall Street Journal Prime Rate and varies from Prime minus 400 basis points to Prime minus 325 basis points. The average cost of interest-bearing deposits increased by 118 basis points to 131 basis points for the first quarter of 2023 compared to the first quarter of 2022. This increase is almost entirely due to the prime-based certificate of deposit account that adjusts with each change in the Wall Street Journal Prime rate. As described above, this certificate of deposit product pays between 325 and 400 basis points below the Wall Street Journal Prime rate. The Wall Street Journal Prime rate has increased by 450 basis points for the twelve month ~~comparison.~~period between March 31, 2023 and March 31, 2022. The average cost of borrowed funds increased 201 basis points for the first quarter of 2023 as compared to the same period in 2022. Non-interest-bearing demand deposits decreased $22.9 million or 2% for the first quarter of 2023 as compared to the first quarter of 2022.

~~Provision for loan and LEASE losses~~

PROVISION FOR CREDIT LOSSES ON LOANS

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for ~~loan and lease~~credit losses on loans, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for ~~loan and lease losses. There was no~~credit losses on loans. The Company recorded an expense related to a credit loss provision for ~~loan losses~~loans of $0.3 million in the ~~third quarters~~first quarter of ~~2017 or 2016, but the year-to-date comparison was impacted by~~2023 relative to a ~~$300,000 loan loss~~ provision ~~that was recorded~~for credit losses on loans of $0.6 million in the ~~second~~first quarter of ~~2017,~~2022. The Company's $0.3 million decrease in the provision for credit losses on loans in the first ~~such provision since the third~~ quarter of ~~2014. The provision helped replenish reserves subsequent~~2023 as compared to the ~~unanticipated charge-off~~first quarter of ~~a $224,000 overdraft on a business account, and also provided limited reserves for growth~~2022 was primarily due to the impact of reduced net loan charge-offs in ~~performing loan balances.~~ the first quarter of 2023.

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~~charge-offs of ~~2017 relative to $162,000 in the third quarter of 2016, and net charge-offs were $1.217~~$0.2 million in the first ~~nine months~~quarter of ~~2017 relative~~2023 as compared to ~~$543,000 in~~$1.8 million for the first ~~nine months of 2016.~~

~~With the loan loss provision that was recorded in the second~~ quarter of ~~2017, we have been able to maintain our~~2022.

The allowance for ~~loan and lease~~credit losses on loans 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

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financial statements,

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

~~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 periods ended ~~September 30, 2017~~March 31, 2023 and ~~2016:~~2022:

Noninterest Income/Expense

(dollars in thousands, unaudited)


	For the three months ended March 31,
Noninterest income:	2023		2022
Service charges and fees on deposit accounts	$	5,380	$	5,548
Net gains on sale of securities available-for-sale		45		1,032
Bank-owned life insurance		172		(645)
Other		982		128
Total noninterest income	$	6,579	$	6,063
As a % of average interest earning assets⁽¹⁾		0.79%		0.77%

Noninterest expense:
Salaries and employee benefits	$	12,816	$	11,805
Occupancy and equipment costs		2,330		2,294
Advertising and marketing costs		513		406
Data processing costs		1,528		1,485
Deposit services costs		2,023		2,245
Loan services costs
Loan processing		127		111
Foreclosed assets		758		(5)
Other operating costs		989		919
Professional services costs
Legal & accounting services		646		546
Director's costs		275		(195)
Other professional service		515		338
Stationery & supply costs		141		85
Sundry & tellers		331		139
Total noninterest expense	$	22,992	$	20,173
As a % of average interest earning assets⁽¹⁾		2.76%		2.57%

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~~

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Noninterest Income:

Total ~~non-interest~~noninterest income increased ~~by $919,000, or 18%, for the third quarter of 2017 over the third quarter of 2016, and 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 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 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~~ended March 31, 2023 as compared to the ~~first nine months due primarily to fees earned from accounts added over~~same quarter in 2022. A favorable swing in the ~~past year, including from the Coast acquisition. The increase also includes higher revenue-generating activity~~income on ~~certain commercial accounts, and additional fees on higher-risk commercial accounts. Other~~BOLI offset by lower service charges ~~commissions,~~on deposits 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 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~~lower gains on the sale of investment securities ~~thus totaled $918,000~~accounts for most of the positive variance.

Other service charges and fees on deposit accounts decreased $0.2 million or 3% for the first quarter of 2023 as compared to the same period in 2022. Effective in the third quarter of ~~2017 relative~~2022, the Company made several changes to ~~$90,000 in~~its NSF fees (i.e. returned item) and overdraft fees for customers. In particular, NSF fees are no longer charged, and overdraft fees are limited to 4 per day and no continuous overdraft fee will be charged. In addition, the ~~third quarter~~amount of ~~2016, and $984,000~~overdraft privilege (i.e. the amount to which the Company will pay overdrafts for customers) was increased by $250.

There were de minimis gains of the sales of securities 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~~2023, but there was a $1.0 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 $465,000 in the first nine 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 to the same periods in 2016. This line item includes gains and lossesgain on the ~~disposition~~sale of assets other than OREO, rent on bank-owned property other than OREO, dividends on restricted stock (including dividends on our equity investment in the Federal Home Loan Bank), and other miscellaneous income. Amortization expense associated with our investments in low-income housing tax credit funds and other limited partnership investments is netted against this category, and third quarter 2017 adjustments 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 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 quarter of 2017 from 3.66% in the third quarter of 2016, and 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 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.

Occupancy expense increased by $305,000, or 15%, in the third quarter of 2017 over the third quarter of 2016, and by $1.243 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 of 2017 due largely 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%, for the quarterly comparison, but increased by $355,000, or 13% for the first nine months. The year-to-date increase 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 incurredsecurities in the first quarter of ~~2017. Net expenses associated with foreclosed assets dropped by $41,000, or 49%,~~2022. The sale in the ~~third~~first quarter of ~~2017 relative~~2022 was a strategic effort to rebalance the ~~third quarter of 2016,~~portfolio by selling longer duration and ~~by $328,000, or 61%, for the first nine months of 2017, primarily~~higher price volatility securities as a hedge against rising interest rates, due to ~~a reduced level of OREO write-downs and operating costs.~~likely persistent inflationary pressures in the near-intermediate term environment.

~~Telecommunications expense~~BOLI income 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 months due to an increase in corporate travel expenses.

Under professional services costs, legal and accounting expenses fell slightly for the third quarter, but increased by $69,000, or 5%, for the comparative year-to-date periods due to a negotiated settlement that added $85,000 to legal expense in the second quarter of 2017. Acquisition costs, which include nonrecurring acquisition expenses for the Ojai acquisition in 2017 and the Coast acquisition in 2016, were reduced by $1.271 million for the third quarter and $1.452$0.8 million for the first ~~nine months, since~~quarter of 2023 as compared to the ~~bulk~~first quarter of ~~the Coast acquisition costs were recorded~~2022. The variance is due mostly to fluctuations in underlying values of assets in the ~~third quarter of 2016. We expect~~separate account BOLI policies that ~~the majority of non-recurring costs related~~are designed to ~~the Ojai acquisition will be recorded~~have similar assets to those in the ~~fourth quarter of 2017. The cost of other professional services fell~~deferred compensation plans. Thus, the lower quarterly values in BOLI policies are offset by $156,000, or 26% for the third quarter, but reflects an increase of $302,000, or 21%, for the first nine months 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’lower deferred compensation expense ~~rose by $275,000 for the first nine months~~reflected primarily in ~~conjunction with the aforementioned increase~~director fees expense. At March 31, 2023, there was $43.2 million in traditional BOLI policies and $9.1 million in separate account BOLI ~~income; equity incentive~~policies associated with the deferred compensation ~~costs for stock options issued~~plans.

In the “other” category of noninterest income the Company there was a $0.9 million increase in the first quarter of 2023 as compared to ~~our directors was $177,000 higher~~the first quarter of 2022. The primary reason for the ~~year-to-date comparison,~~favorable variance was the receipt of $0.3 million in life insurance proceeds, $0.3 million in income on foreclosed assets and a $0.3 million increase in variable rate SBA loan fund income.

Noninterest Expense:

Total noninterest expense increased by $2.8 million, or 14%, in the first quarter of 2023 relative to the first quarter of 2022.

Salaries and Benefits were $1.0 million, or 9%, higher in the first quarter of 2023 as compared to the first quarter of 2022. The reason for this increase is primarily due to ~~three additional directors as well as a higher stock option grant date fair value~~several factors, including merit increases for ~~stock options issued in February 2017; and, director retirement plan expense accruals were also higher for the year-to-date comparison~~employees due to ~~a non-recurring expense reversal of $173,000 in director retirement plan accruals in~~annual performance evaluations during the ~~third~~first quarter of ~~2016, subsequent~~2023, and the strategic hiring of lending and management staff to ~~the death of a former director.~~support expected loan growth. There were 500 full-time equivalent employees at March 31, 2023 as compared to 484 at March 31, 2022.

~~Stationery and supply costs~~Occupancy expenses were ~~reduced by $87,000, or 21%, for the third quarter and $104,000, or 10%,~~flat for the first ~~nine months~~quarter of ~~2017 due~~2023 as compared 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,~~same quarter in 2022.

Other noninterest expense increased $1.8 million, or ~~53%, for the third quarter and $288,000, or 39%~~29% for the first ~~nine months of 2017 due~~quarter 2023 as compared to ~~reduced debit card losses, with~~ the ~~year-to-date reduction also reflective of lower operations-related losses within our branch system.~~first quarter in 2022. 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%~~variances for the first ~~nine months~~quarter of ~~2017 from 69.13%~~2023 compared to the same period in 2022 was primarily driven by a $0.8 million increase in foreclosed asset expenses related to a foreclosed Dairy relationship that was sold during the ~~first nine months of 2016. The overhead efficiency ratio represents total non-interest~~quarter and an increase in directors deferred compensation expense ~~divided by~~for $0.5 million which is linked to the ~~sum of fully tax-equivalent net interest and non-interest income, with the provision for loan losses and investment gains/losses excluded from the equation.~~fluctuation in BOLI income.

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

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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%~~23.6% of pre-tax income in the ~~third~~first quarter of ~~2017~~2023 relative to 27.0% in the first quarter of 2022. The decrease in effective tax rate is due to the volatility in the Corporate Owned Life Insurance asset value associated with our non-qualified deferred compensation plans. In the first quarter of 2023, the investments associated with the non-qualified deferred compensation plans increased in value, resulting in a non-taxable income as compared to ~~32%~~a decrease in ~~the third quarter of 2016, and was 33% of pre-tax income~~value generating non-tax deductible expense for the first ~~nine months of 2017 and 2016. The higher tax accrual rate for the third~~ quarter of 2017 is primarily 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 methodology associated with the disqualifying disposition of Company shares issued pursuant to 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 third quarter, but they occurred at a higher rate during the first half of 2017 and thus had a more material impact on our year-to-date tax accrual.2022.

~~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,~~$1.4 billion, or ~~28%~~37% of total assets at ~~September 30, 2017, compared to $571 million,~~March 31, 2023, and $1.3 billion, or ~~28%~~35% of total assets at December 31, ~~2016.~~2022. The increase was primarily due to purchases of U.S. government agency securities and AAA and AA tranches of collateralized loan obligations.

We had no fed funds sold at the end of the reporting periods, and interest-bearing balances at other banks declined to $2 million at September 30, 2017 from $41 million at December 31, 2016 as 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. The Company carries “available for sale” investments at their fair market ~~values.~~values and “held to maturity” investments at amortized cost net of allowance for credit losses. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all ~~marketable~~marketable. The expected effective duration was 1.6 years for available-for-sale investments and ~~are classified~~6.3 years for held-to-maturity investments at March 31, 2023, as compared to 1.8 years for available-for-sale investments and 6.4 years for held-to-maturity investments at December 31, 2022.

In the second and fourth quarters of 2022 the Company transferred $162.1 million and $198.3 million, respectively 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.

4541

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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)


	March 31, 2023			December 31, 2022
	Carrying Amount		Percent	Carrying Amount		Percent
Available for sale
U.S. government agencies	$	105,327	7.67%	$	50,599	3.98%
Mortgage-backed securities		115,652	8.42%		122,532	9.63%
State and political subdivisions		206,963	15.07%		205,980	16.20%
Corporate bonds		51,999	3.79%		57,435	4.52%
Collateralized loan obligations		560,979	40.83%		498,377	39.19%
Total available for sale		1,040,920	75.78%		934,923	73.51%
Held to maturity
U.S. government agencies		5,795	0.42%		6,047	0.48%
Mortgage-backed securities		153,667	11.19%		157,473	12.38%
State and political subdivisions		173,266	12.61%		173,361	13.63%
Total held to maturity		332,728	24.22%		336,881	26.49%
Total securities	$	1,373,648	100.00%	$	1,271,804	100.00%

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~~$186.3 million at ~~September 30, 2017~~March 31, 2023 and ~~$194~~$183.5 million at December 31, ~~2016,~~2022, leaving ~~$395 million~~$1.2 billion in unpledged debt securities at ~~September 30, 2017~~March 31, 2023 and ~~$336 million~~$1.1 billion at December 31, ~~2016.~~2022. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled ~~$33~~$58.3 million at ~~September 30, 2017~~March 31, 2023 and ~~$51~~$43.1 million at December 31, ~~2016.~~ 2022.

ALLOWANCE FOR CREDIT LOSSES – AFS INVESTMENT SECURITIES

The allowance for credit losses on AFS investment securities, a contra-asset, is established through periodic provisions for credit losses on AFS investment securities. It is maintained at a level that is considered adequate to measure expected losses across the classes of major investment security types related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value. 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 March 31, 2023 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 March 31, 2023 was attributable to credit deterioration and a risk of loss, requiring an 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 March 31, 2023.

●

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 March 31, 2023.

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●

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 March 31, 2023 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 in order to monitor the 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 March 31, 2023 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, profitability and capital. Following review of the financial metrics available for each of the underlying institutions as of January 1, 2022 and March 31, 2023 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 ongoing quarterly reviews.

●

The Company has invested exclusively in AA and AAA tranches of various collateralized loan 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 ongoing quarterly 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 March 31, 2023 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rate spreads, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

~~Loan AND LEASE Portfolio~~

LOAN 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~~after 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 Distribution

(dollars in thousands, unaudited)


	March 31, 2023			December 31, 2022
	Amount		Percent	Amount		Percent
Real estate:
Other construction/land		15,596	0.78%		18,357	0.90%
1-4 family - closed-end		415,187	20.64%		417,092	20.55%
Equity lines		19,262	0.96%		21,638	1.07%
Multi-family residential		92,040	4.58%		91,485	4.51%
Commercial real estate - owner occupied		313,861	15.61%		323,895	15.96%
Commercial real estate - non-owner occupied		909,884	45.24%		891,197	43.91%
Farmland		93,141	4.63%		113,594	5.60%
Total real estate		1,858,971	92.44%		1,877,258	92.49%
Agricultural		26,672	1.33%		28,193	1.39%
Commercial and industrial		75,763	3.77%		77,695	3.83%
Mortgage warehouse lines		68,472	3.41%		65,439	3.22%
Consumer loans		4,114	0.20%		4,232	0.21%
Total loans		2,033,992	101.15%		2,052,817	101.14%
Allowance for credit losses on loans		(23,090)	(1.15)%		(23,060)	(1.14)%
Total loans, net	$	2,010,902	100.00%	$	2,029,757	100.00%

Net loans at $2.0 billion, decreased $18.9 million during the first three months of 2023 with an overall 1% change. The net change did have offsetting components with the larger fluctuations being a $3.0 million increase in mortgage warehouse line utilization, and an $18.7 million increase in non-owner occupied commercial real estate. Unfavorable larger loan variances include a $20.5 million decrease in farmland, and a $10.0 million decrease in owner-occupied commercial real estate.

As indicated in the loan roll forward below, new credit extended for the first quarter of 2023 increased $30.1 million over the same period in 2022 but decreased $14.6 million for the linked quarter comparisons. For the first ~~nine~~three months ended 2023 we had $48.8 million in loan paydowns and maturities, along with a $3.0 million increase in mortgage warehouse line utilization and a $25.8 million decrease in line of ~~2017,~~credit utilization.


LOAN ROLLFORWARD
(Dollars in Thousands, Unaudited)
	For the three months ended:
		March 31, 2023		December 31, 2022		March 31, 2022
Gross loans beginning balance	$	2,052,940	$	2,020,364	$	1,989,726
New credit extended		52,609		67,170		22,543
Loan purchases		—		—		126,718
Changes in line of credit utilization		(25,790)		(3,361)		(19,335)
Change in mortgage warehouse		3,033		18,885		(44,005)
Pay-downs, maturities, charge-offs and amortization ⁽¹⁾		(48,824)		(50,118)		(92,316)
Gross loans ending balance		2,033,968		2,052,940		1,983,331

Over the past two years, the Company has strategically focused on reducing concentrations in commercial real estate, especially amongst areas management deemed to be higher risk such as construction, office real estate, and hospitality. At March 31, 2021, the total regulatory CRE ratio of total CRE over Tier 1 Capital plus allowance was 359%. At March 31, 2023, this ratio had declined to 249% which positions us well for growth. Further, the overall level of construction and land development lending had declined from 25% of regulatory capital plus allowance for credit losses at March 31, 2021, to 4% of regulatory capital plus allowance for credit losses at March 31, 2023. Further, overall committed office

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real estate is 8.4% of total commitments at March 31, 2023. The office real estate loans ~~increased by $104 million, or 11%, due to strong growth in loans secured by~~are adjustable rates with most rate adjustments occurring beyond two years. During the next twenty four months, we have 39 office commercial real estate ~~farmland~~loans totaling $15.4 million that have scheduled interest rate resets. The Bank’s practice is to make commercial real estate loans with an “at origination” loan-to-value of 65% or lower using conservative underwriting standards. Over the past two years, noting the affect the pandemic had on the office building sector, new production of commercial real estate loans in this segment have been discouraged, resulting in reduced loan originations.

Regarding line utilization, unused commitments, excluding mortgage warehouse and ~~residential properties. Agricultural production loans~~overdraft lines, were ~~also up by $3~~$223.6 million ~~or 7%. Net growth in agricultural loans, including loans secured by farmland,~~at March 31, 2023, compared to $219.7 million at December 31, 2022. Total utilization excluding mortgage warehouse and overdraft lines was ~~negatively impacted by~~57% at March 31, 2023, compared to 59% at December 31, 2022. Mortgage warehouse utilization was 15% at March 31, 2023, compared to 10% at December 31, 2022.

It should be noted that the ~~prepayment~~majority of ~~a large dairy loan in~~ the ~~second quarter subsequent to the borrower’s sale 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 eleven loans for $0.8 million outstanding at March 31, 2023, 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 $41fourteen loans for $1.8 million at December 31, ~~2016.~~2022.

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. If the Company grants a concession to a borrower~~which is primarily OREO, but can include other foreclosed assets.

Nonperforming assets

(dollars in financial difficulty, the loan falls into the category of a troubled debt restructuring (“TDR”). TDRs may be classified as either nonperforming or performing loans depending on their underlying characteristics and circumstances. The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:thousands, unaudited)


	March 31, 2023		December 31, 2022		March 31, 2022
NON-ACCRUAL LOANS:
Real estate:
1-4 family - closed-end	$	485	$	629	$	1,713
Equity lines		93		59		845
Commercial real estate - owner occupied		—		—		399
Farmland		77		15,812		18,449
TOTAL REAL ESTATE		655		16,500		21,406
Agriculture		71		2,855		8,110
Commercial and industrial		210		217		912
Consumer loans		2		7		18
TOTAL NONPERFORMING LOANS		938		19,579		30,446

Foreclosed assets		—		—		93
Total nonperforming assets	$	938	$	19,579	$	30,539
Nonperforming loans as a % of total gross loans		0.05%		0.95%		1.54%
Nonperforming assets as a % of total gross loans and foreclosed assets		0.05%		0.95%		1.54%

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.~~

Total nonperforming assets, ~~were reduced~~comprised of non-accrual loans and foreclosed assets, decreased by ~~$1.8~~$18.6 million, or ~~21%,~~95% during the first ~~nine months~~quarter of ~~2017. Nonperforming~~2023. The significant decrease resulted from a decrease in non-accrual loans, ~~declined~~primarily as a result of one relationship in the dairy industry consisting of four separate loans that were foreclosed on and subsequently sold in the first quarter of 2023. These loans were written down by ~~$2.2~~$8.7 million ~~or 35%, while~~during 2022 and no further allowance for credit losses was deemed necessary on these loans. The Company's ratio of nonperforming assets to loans plus foreclosed assets ~~increased by $449,000, or 20%. Non-accruing loan balances secured by real estate totaled $3.3 million~~decreased to 0.05% at ~~September 30, 2017, comprising 80% of total nonperforming loans and reflecting a decline of $1.8 million, or 35%, since~~March 31, 2023, from 0.95% at December 31, ~~2016~~2022 due primarily to ~~principal pay-downs~~the resolution of the loan relationship previously mentioned. All of the Company's nonperforming assets are individually

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evaluated for credit loss quarterly and ~~balances returned to accrual status. The balance of nonperforming~~management believes the established allowance for credit loss on such loans are appropriate.

There were no foreclosed assets at ~~September 30, 2017 includes $2.5 million in TDRs~~March 31, 2023 and other loans that were paying as agreed, but which met the technical definition of nonperforming loans and were classified as such. As shown in the table, we also had $12.7 million in loans classified as performing TDRs for which we were still accruing interest as of September 30, 2017, a reduction of $1.5 million, or 10%, relative to December 31, ~~2016.~~

~~As noted above,~~2022., however when the Company does own 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 foreclosed assets had a carrying value of $2.7 million at September 30, 2017, and was comprised of 14 properties classified as OREO and two mobile homes. At the end of 2016 foreclosed assets totaled just over $2.2 million, consisting of 11 properties classified as OREO and two mobile homes. All foreclosed assetsthey 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 $1.5 million in loans past due 30-59 days at March 31, 2023. This is a decrease of $0.3 million over the balance at December 31, 2022. 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 RECEIVABLE

The allowance for ~~loan and lease~~credit losses on loans, a contra-asset, is established through ~~a provision~~periodic provisions for ~~loan and lease losses.~~credit losses on loans. 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.

Due to the uncertainty of national and local economic conditions, the Company deferred 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’s~~Company implemented CECL on January 1, 2022, and recorded a $10.4 million increase in the allowance for ~~loan~~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 was $23.1 million at both March 31, 2023, and ~~lease losses~~December 31, 2022, and $22.5 million at March 31, 2022. The allowance was ~~$8.8 million, or 0.67%~~1.14% of ~~gross~~total loans at ~~September 30, 2017, relative to $9.7 million, or 0.77%~~March 31, 2023, 1.12% of ~~gross~~total loans at December 31, ~~2016. The decline resulted from~~2022, and 1.14% of total loans at March 31, 2022. Management's detailed analysis indicates that the ~~charge-off of certain impaired~~Company's allowance for credit losses on loan ~~balances against previously-established reserves, partially offset by reserves provided~~should be sufficient to cover credit losses for losses inherent in incremental loan balances and unanticipated charge-offs. Moreover, our need 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 30, 2017,~~outstanding as of March 31, 2023, but no assurance can be given that the Company will not experience substantial future losses relative to ~~152.41% at December 31, 2016 and 157.20% at September 30, 2016.~~the size of the credit loss allowance for loans. A separate allowance of ~~$344,000~~$0.9 million for potential credit losses inherent in unused commitments is included in other liabilities at ~~September 30, 2017.~~March 31, 2023, unchanged from December 31, 2022. As mentioned previously a $0.9 million 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 and lease~~ losses on loans for the noted periods:

Allowance for Credit Losses on Loans

(dollars in thousands, unaudited)


	For the three months ended		For the three months ended		For the year ended
	March 31,		March 31,		December 31,
Balances:	2023		2022		2022
Average gross loans outstanding during period (1)	$	2,033,750	$	1,951,695	$	2,006,283
Gross Loans outstanding at end of period	$	2,033,968	$	1,983,331	$	2,052,940

Allowance for credit losses on loans:
Balance at beginning of period	$	23,060	$	14,256	$	14,256
Adoption of ASC 326		—		9,454		9,454
Provision charged to expense		250		600		10,898
Charge-offs
Real estate
1-4 family residential construction		—		—		—
Other construction/land		—		—		—
1-4 family - closed-end		—		—		—
Equity lines		—		—		—
Multi-family residential		—		—		—
Commercial real estate- owner occupied		—		—		—
Commercial real estate- non-owner occupied		—		—		1,911
Farmland		1,248		1,958		4,418
Total real estate		1,248		1,958		6,329
Agricultural		29		—		4,787
Commercial and industrial		308		74		322
Consumer loans		395		299		1,396
Total	$	1,980	$	2,331	$	12,834
Recoveries
Real estate
1-4 family residential construction		—		—		—
Other construction/land		—		260		260
1-4 family - closed-end		205		87		87
Equity lines		—		—		12
Multi-family residential		—		—		—
Commercial real estate- owner occupied		—		—		—
Commercial real estate- non-owner occupied		—		—		—
Farmland		257		—		—
Total real estate		462		347		359
Agricultural		1,025		—		—
Commercial and industrial		23		20		163
Consumer loans		250		184		764
Total	$	1,760	$	551	$	1,286
Net loan charge offs (recoveries)	$	220	$	1,780	$	11,548
Balance at end of period	$	23,090	$	22,530	$	23,060

RATIOS
Net charge-offs (recoveries) to average Loans (annualized)		0.04%		0.37%		0.58%
Allowance for credit losses on Loans to gross Loans at end of period		1.14%		1.14%		1.12%
Net loan charge-offs (recoveries) to allowance for credit losses on Loans at end of period		0.95%		7.90%		50.08%
Net loan charge-offs (recoveries) to provision for credit losses on Loans		88.00%		296.67%		105.96%

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 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~~March 31, 2023 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.

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OFF-BALANCE SHEET ARRANGEMENTS

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. ~~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 $705.2 million at March 31, 2023 and $895.6 million at December 31, 2022, representing approximately ~~49%~~35% of gross loans outstanding at ~~September 30, 2017~~March 31, 2023 and ~~37%~~44% at December 31, ~~2016, with~~2022. Included in unused commitments are mortgage warehouse lines which are mostly in the ~~increase due primarily to lower utilization~~form of repo lines and are unconditionally cancellable. Unused commitments on mortgage warehouse lines were $401.5 million at March 31, 2023 and $594.6 million at December 31, 2022. The increase in unused commitments on mortgage warehouse lines is due in large part to the decrease in funded commitments due to the impact of recent interest rate increases. Unused commitments exclusive of mortgage warehouse lines have increased $2.7 million or 1% for the first three months of 2023 and are due to an increase in ~~commercial construction loan commitments.~~new lines of credit. The Company also had undrawn letters of credit issued to customers totaling $8$6.1 million at ~~September 30, 2017~~March 31, 2023 and $9$6.0 million at December 31, ~~2016.~~2022. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of ~~the~~ commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q 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 $73.0 million at March 31, 2023. 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~~$81.7 million at ~~September 30, 2017 and $79~~March 31, 2023 relative to $72.8 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.2022.

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

Net premises and equipment ~~was down $520,000, or 2%,~~decreased by $0.2 million during the first ~~nine~~three months of ~~2017, as the~~2023, to $22.3 million. This decline was primarily a result of ~~depreciation.~~ normal depreciation, the disposal of obsolete equipment, net of new purchases.

Goodwill was $8$27.4 million at ~~September 30, 2017,~~March 31, 2023, unchanged ~~for the first nine months. Other intangible assets were down $320,000, or 11%,~~ during the first ~~nine~~three months ~~due~~of 2023. Goodwill is tested for impairment annually, unless events and circumstances exist which indicate that an impairment test should be performed. A Goodwill impairment test was last performed during the fourth quarter 2022 and determined that no impairment existed. During the first three months of 2023, overall bank stock prices declined significantly after the liquidity events that led to ~~amortization on core deposit intangibles. The~~the voluntary liquidation of one California bank, the failure of a $200 billion California Bank (second largest bank failure in history) and the failure of a $100 billion bank in New York. Given the recent events management felt it prudent to perform a current valuation in light of the recent slide in the Company’s ~~goodwill and other intangible assets are evaluated annually for potential impairment, and pursuant~~stock price relative to ~~that analysis Management has~~the entire banking sector. After performing such valuation, management concluded that no impairment ~~exists as~~ of ~~September 30, 2017.~~the Company ~~owned~~existed at March 31, 2023. Management will continue to evaluate whether or not a triggering event occurs, or circumstances

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change that would more likely than not reduce the fair value of the Company below its carrying amount before the next annual test.

Bank-owned life insurance, with a balance of ~~$45~~$52.3 million at ~~September 30, 2017,~~March 31, 2023, 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~~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
%

Deposit Distribution

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


	March 31, 2023			December 31, 2022
	Amount		Percent	Amount		Percent
Noninterest bearing demand deposits	$	1,041,748	35.32%	$	1,088,199	38.23%
Interest bearing demand deposits		153,231	5.20%		150,875	5.30%
NOW		484,318	16.42%		490,707	17.24%
Savings		441,758	14.98%		456,980	16.06%
Money market		123,162	4.18%		139,795	4.91%
Time		519,771	17.63%		399,608	14.04%
Brokered deposits		185,000	6.27%		120,000	4.22%
Total deposits	$	2,948,988	100.00%	$	2,846,164	100.00%

Deposit balances ~~fell~~grew by $102.8 million, or 4%, during the ~~third~~first quarter of ~~2017 due~~2023 to ~~the runoff of seasonal~~$2.9 billion at March 31, 2023. Core non-maturity deposits ~~they still reflect net organic growth of $84~~decreased $82.3 million, or 5%4%, for the first ~~nine~~three months of ~~2017 due primarily~~2023, while customer time deposits increased by $120.2 million. Brokered deposits increased $65.0 million during the quarter; to ~~an increase~~take advantage of ~~$78~~preferential pricing over other forms of borrowed funds. Overall noninterest-bearing deposits as a percent of total deposits decreased to 35.3% at March 31, 2023, compared to 38.2% at December 31, 2022, and from 38.6% at March 31, 2022. From March 10, 2023 to March 31, 2023, overall deposits decreased by less than 0.04%.

Overall uninsured deposits are estimated to be approximately $858.4 million, or ~~6%, in core non-maturity deposits. Non-interest bearing demand~~30% of total deposit balances, ~~grew~~excluding public agency deposits that are subject to collateralization through a letter of credit issued by ~~$47 million, or 9%, for~~ the ~~first nine months of 2017, NOW accounts increased by $15 million, or 4%, savings~~FHLB. In addition, uninsured 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~~bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep account or a reciprocal time deposit ~~account types came from a shift out~~through the Certificate of ~~interest-bearing demand deposits,~~Deposit Account Registry System (CDARS). IntraFi allows for up to $150 million of combined pass-through FDIC insurance 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~~would more than ~~offset~~cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance. The Bank maintains a ~~slight decline in~~diversified deposit base with no significant customer concentrations and does not bank any cryptocurrency companies. At March 31, 2023, the Company had approximately 122,000 accounts and the 25 largest deposit balance customers had balances of less than 9% of overall deposits ~~under $250,000.~~ .

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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 35.3% at March 31, 2023 as compared to 38.2% at December 31, 2022.

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, subordinated notes 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~~decreased by ~~$52~~$17.2 million, ~~or 49%, in~~during the first ~~nine~~three months of ~~2017,~~2023. primarily due to a ~~drop~~decrease in customer repurchase agreements and overnight borrowings.

Customer repurchase agreements declined from $109.2 million at December 31, 2022 to $94.1 million at March 31, 2023. Customer repurchase agreements provide collateral for customers that sweep excess deposit balances each day into a separate repurchase agreement account where the Company effectively sells certain government bonds to customers daily and then repurchase the same bonds on the next business day. Although these accounts are not deposits and are not FDIC insured, they provide customers with larger account balances the ability to have their account secured with collateral.

Other borrowings declined $2.2 million to $216.8 million at March 31, 2022 from $219.0 million at December 31, 2022 and consist of overnight borrowings from correspondent banks and FHLB ~~borrowings facilitated by the increase in deposits. There were $11 million in overnight~~advances. Overall borrowings from the FHLB and correspondent banks remained relatively unchanged during the first quarter of 2023.

Long-term debt at ~~September 30, 2017, down~~March 31, 2023 consisted of $49.2 million of subordinated debt. This remained unchanged from ~~$65 million at~~ December 31, ~~2016,~~2022. Subordinated debentures related to $35.5 million of trust preferred securities at both March 31, 2023 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. Repurchase agreements totaled $9 million at September 30, 2017, constituting a slight increase relative to their balance at year-end 2016. Repurchase agreements represent “sweep accounts”, where commercial deposit balances above a specified threshold are transferred at the close of each business day into non-deposit accounts secured by investment securities. The Company had junior subordinated debentures totaling $34.5 million at September 30, 2017 and $34.4 million December 31, 2016, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities. The small increase resulted from the amortization of discount on junior subordinated debentures acquired with Coast Bancorp in 2016.2022.

OTHER ~~NON-INTEREST BEARING~~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 the first nine months~~was $41.5 million at March 31, 2023 as compared to $45.1 million at December 31, 2022, a decrease of ~~2017. There were sizeable increases~~$3.6 million or 8%. The decrease was primarily driven a reduced in ~~accruals for capital commitments to low-income housing tax credit funds and a small business investment corporation, but those were largely offset by lower balances in clearing accounts.~~accrued expenses.

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,

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draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources. Availability on lines of credit from correspondent banks and the FHLB totaled $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 of FHLB stock.

The Company ~~is also eligible~~continues to ~~borrow approximately $74 million at the Federal Reserve Discount Window, if necessary, based on pledged~~have substantial liquidity though unencumbered 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.and available borrowings. In addition, the Company can raise immediate cash 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~~loan-to-deposit ratio declined from 72% at December 31, ~~2016. Other~~2022 to 69% at March 31, 2023. At March 31, 2023, and December 31, 2022, the Company had the following sources of ~~potential~~primary and secondary liquidity (dollars in thousands):


Primary and secondary liquidity sources		March 31, 2023		December 31, 2022
Cash and cash equivalents	$	83,506	$	77,131
Unpledged investment securities		1,197,816		1,097,164
Excess pledged securities		58,334		43,096
FHLB borrowing availability		762,698		718,842
Unsecured lines of credit		309,000		237,000
Funds available through fed discount window		40,327		42,278
Totals	$	2,451,681	$	2,215,511

The Company did not participate in the new Federal Reserve Bank Term Funding Program. Unpledged investment securities include ~~but are not necessarily~~$561.0 million of CLOs. As CLOs have a rate that resets every 90 days to current rates, the volatility of pricing of these securities is limited and the Company could sell such securities for liquidity at a significantly lower loss than selling lower rate fixed term securities such as US government bonds or municipal bonds. During the first quarter of 2023, the Bank sold a few CLOs at a modest gain and expects to ~~any outstanding fed funds sold~~continue to utilize the CLO portfolio for both interest rate risk management and ~~vault cash.~~ liquidity purposes.

The Company performs regular stress tests on its liquidity and at this time, believes that we have sufficient primary and secondary liquidity sources for 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 30, 2017.~~March 31, 2023 and December 31, 2022. 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 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.

The Company’s primary liquidity ratio and net loans to ~~assets~~deposits were 32.4% and ~~available investments to assets ratios were 63% and 21%~~69.0%, respectively, at ~~September 30, 2017,~~March 31, 2023, 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 30, 2017. Favorable trends in core deposits~~March 31, 2023, 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 March 31, 2023, the holding company maintained a cash balance of $27.8 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~~2022 which was filed with the SEC.

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INTEREST RATE RISK MANAGEMENT

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

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

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 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. 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 bpbasis point shock, 15% for a 300 bpbasis point shock, and 20% for a 400 bpbasis point shock. ~~As of September 30, 2017 the~~

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%


	March 31, 2023				March 31, 2022
Immediate change in Interest Rates (basis points)	% Change in Net Interest Income		$ Change in Net Interest Income		% Change in Net Interest Income		$ Change in Net Interest Income
+400		(5.5)%	$	(6,530)		13.3%	$	14,321
+300		(3.8)%	$	(4,554)		10.9%	$	11,684
+200		(2.1)%	$	(2,562)		8.1%	$	8,712
+100		(0.6)%	$	(764)		4.3%	$	4,624
Base
-100		(2.6)%	$	(3,150)		(9.2)%	$	(9,892)
-200		(6.3)%	$	(7,478)		N/A		N/A
-300		(7.1)%	$	(8,450)		N/A		N/A
-400		(9.4)%	$	(11,223)		N/A		N/A

~~Our current simulations indicate~~For the periods ending March 31, 2023 and March 31, 2022, management believes that the Company was liability sensitive, with net income decreasing in a rising and declining rate scenarios.

The shift from being asset sensitive at March 31, 2022 to slightly liability sensitive at March 31, 2023, is primarily due to the change in assumption regarding low cost deposits. At March 31, 2023, it was assumed that over twelve months, a small portion of low-cost deposits would shift into higher cost deposits thus making the company slightly liability sensitive. Further, the Company has ~~an asset-sensitive profile, meaning that~~more variable rate liabilities at March 31, 2023 including overnight borrowings both in Fed Funds purchased and overnight FHLB borrowings and in customer time deposits tied to the prime interest rate. In addition, based on the magnitude of rate changes, interest rates on new loans did not increase at the rates modeled in 2022 and therefore, the beta on loan yields was lowered in modeling interest rate risk in 2023. Any change in interest rate in the model would expect to decrease net interest ~~income increases with a parallel shift up~~income. At March 31, 2023, the Company had $176.8

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million in overnight borrowings as compared to none at March 31, 2022. At March 31, 2022, the ~~yield curve but a drop~~Company had $186.4 million in ~~interest rates could have a negative impact. This profile is consistent~~overnight cash held with the ~~Company’s relatively large balance of less rate-sensitive non-maturity deposits and large volume of variable-rate loans, which contribute~~Federal Reserve bank as compared to ~~higher net interest income in rising rate scenarios and compression~~$0.7 million at March 31, 2023.

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~~decline by ~~$938,000,~~$6.5 million, or ~~1.22%~~6%, 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 be around $5.603~~drop $3.2 million ~~lower than in~~or a ~~stable interest rate scenario, for a~~ negative

variance of ~~7.31%~~3%. 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 dropchange in net interest income ~~exceeds~~in the down 200 basis point scenario is a decrease of $7.5 million or 6%. As a significant portion of the Company’s deposits remain in noninterest bearing accounts or low-cost deposit accounts, in a down rate scenario, these rates would not change or only change slightly. All interest rate shock scenarios are within 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.

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~~$2.9 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 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 March 31, 2023 and 2022, 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.

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Our EVE decreased in the past twelve months primarily from an increase in decay rates on certain non-maturity deposit accounts which significantly lowered the 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:


	March 31, 2023				March 31, 2022
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		5.5%	$	31,949		25.8%	$	171,796
+300		5.4%	$	31,524		22.8%	$	151,682
+200		4.8%	$	28,118		18.4%	$	122,257
+100		3.0%	$	17,588		11.0%	$	72,882
Base
-100		(3.8)%	$	(22,403)		(20.2)%	$	(134,598)
-200		(19.0)%	$	(111,121)		N/A		N/A
-300		(21.2)%	$	(124,001)		N/A		N/A
-400		(10.4)%	$	(60,974)		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 change in EVE in all rate shock interest rate scenarios is within our internal policy guidelines. We continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate.

CAPITAL R~~ESOURCES~~RESOURCES

The Company had total shareholders’ equity of ~~$219.1~~$307.0 million at ~~September 30, 2017,~~March 31, 2023, comprised of ~~$73.7~~$111.8 million in common stock, ~~$2.9~~$4.6 million in additional paid-in capital, ~~$141.9~~$246.7 million in retained earnings, and accumulated other comprehensive ~~income~~loss of ~~$605,000.~~$56.1 million. At the end of ~~2016,~~2022, total shareholders’ equity was ~~$205.9~~$303.6 million. The increase ~~of $13.2 million, or 6%,~~ in ~~shareholders’~~ equity during the first ~~nine~~three months of ~~2017~~2022 is ~~from the addition~~due to net income of ~~income, the impact of~~$8.8 million, offset by a $3.5 million dividend paid to shareholders, $2.7 million in share repurchases, and a $0.5 million favorable swing in other comprehensive income/(loss) due principally to changes in investment securities' fair value. The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

The Company approved a ~~$2 million absolute increase~~new share repurchase program on October 20, 2022 (the 2023 Share Repurchase Plan) that was effective upon the expiration of the prior 2021 Share Repurchase Plan on October 31, 2022. The 2022 Share Repurchase Plan authorizes 630,000 shares to be repurchased and expires on October 31, 2023. Under the 2023 Share Repurchase Program, there were 146,418 shares repurchased in ~~accumulated other comprehensive income, net of dividends paid. There were no share repurchases executed by the Company during~~ the first three ~~quarters~~months of ~~2017.~~2023.

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~~

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Regulatory Capital Ratios


					Minimum		Minimum
					Requirement		Required
	March 31,		December 31,		to be		Community Bank
	2023		2022		Well Capitalized ⁽¹⁾		Leverage Ratio ⁽²⁾
Bank of the Sierra
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") ⁽³⁾	10.74	%	10.99	%	9.00	%	9.00	%
Sierra Bancorp
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") ⁽³⁾	10.13	%	10.30	%	9.00	%	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, 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~~

QUANTITATIVE & 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

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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 three months of ~~2017~~2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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/(loss), or cash flows.

ITEM 1A: RISK FACTORS

~~There were no material changes~~For a discussion of our risk factors, see Part I, Item 1A. “Risk Factors” of the 2022 Form 10-K. The risks and uncertainties that we face are not limited to those set forth in the 2022 Form 10-K.

Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer and investor confidence in the banking system. The recent high-profile bank failures involving Silicon Valley Bank and Signature Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional and community banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of regional and community banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. Additionally, these recent events have, and could continue to, adversely impact the market price and volatility of the Company’s common stock independent from the ~~risk factors disclosed~~Company’s actual underlying financial performance.

Rising interest rates have decreased the value of the Company’s held-to-maturity and available for sale securities portfolio, and certain fixed-rate loans and the Company would realize losses if it were required to sell such securities or loans to meet liquidity needs. As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly, as well as the value of certain fixed-rate loans. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses. Unaccreted unrealized losses that existed at the time securities were transferred to held-to maturity and unrealized losses on available-for-sale securities reflected in the Company’s ~~Form 10-K for~~accumulated other comprehensive income/(loss). Changes to unrealized losses after securities were transferred to held-to-maturity and unrealized losses on loans are not reflected in accumulated other comprehensive income/(loss). While the ~~fiscal year ended December 31, 2016.~~Company does not currently intend to sell these securities or loans, if the Company were required

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to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability.

Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations. The Company also anticipates increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community.

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

~~(c)~~

In ~~September of 2016~~October 2022, the Board ~~authorized 500,000~~approved the 2022 Share Repurchase Plan by authorizing 630,000 shares of common stock for repurchase ~~subsequent to the completion of previous stock buyback plans. The authorization of shares for repurchase does not provide assurance that a specific quantity of shares will be repurchased,~~ and the program 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.expires on October 31, 2023.


Stock Repurchases
Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid per Share	Total Number of Shares Purchased as Part of a Publicly Announced Plan	Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plan at the End of the Period
January 1, 2023 - January 31, 2023	—		—	—	630,000
February 1, 2023 - February 31, 2023	—		—	—	630,000
March 1, 2023 - March 31, 2023	146,418	$	18.30	146,418	483,582
Total	146,418			146,418

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

Table of Contents~~Item 5: Other Information~~

~~Not applicable~~

~~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		Description of Securities (3)
4.2		3.25% Fixed to Floating Subordinated Debt issued September 24, 2021 (4)
10.1		Salary Continuation Agreement for ~~Kenneth R. Taylor~~James C. Holly ~~(6)~~(5)*
10.2		~~Salary Continuation Agreement~~ ~~and~~ Split Dollar Agreement and Amendment thereto for James ~~F. Gardunio~~C. Holly ~~(7)~~(6)*
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 (6)*
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 (6) ~~(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 (7) ~~(9)~~
~~10.10~~ 10.6		Amended and Restated Declaration of Trust of Sierra Statutory Trust II, dated as of March 17, 2004 ~~(9)~~ (7)
~~10.11~~ 10.7		Indenture dated as of June 15, 2006 between Wilmington Trust Co., as Trustee, and Sierra Bancorp, as Issuer ~~(10)~~ (8)
~~10.12~~ 10.8		Amended and Restated Declaration of Trust of Sierra Capital Trust III, dated as of June 15, 2006 (8) ~~(10)~~
~~10.13~~ 10.9		2007 Stock Incentive Plan (9) ~~(11)~~
~~10.14~~ 10.10		Sample Retirement Agreement Entered into with Each Non-Employee Director Effective January 1, 2007 ~~(12)~~ (10)*
~~10.15~~ 10.11		Salary Continuation Agreement for Kevin J. McPhaill (10) ~~(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)~~ (11)*
~~10.19~~ 10.15		Indenture dated as of September 20, 2007 between Wilmington Trust Co., as Trustee, and Coast Bancorp, as Issuer (12) ~~(15)~~
~~10.20~~ 10.16		Amended and Restated Declaration of Trust of Coast Bancorp Statutory Trust II, dated as of September 20, 2007 (12) ~~(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 (12) ~~(15)~~
~~10.22~~ 10.18		2017 Stock Incentive Plan (13) ~~(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 (14)*
~~31.1~~ 10.21		Employment agreement dated as of November 15, 2019 for Christopher Treece, Chief Financial Officer (15)*
10.22		Employment agreement dated as of January 17, 2020 for Jennifer Johnson, Chief Administrative Officer (16)*
10.23		Employment agreement dated as of December 14, 2020 for Hugh Boyle, Chief Credit Officer (17)*
10.24		Form Indemnification Agreement dated as of January 28, 2021 for Directors and Executive Officers (18)*
10.25		Split Dollar Master Agreement and Election Form Effective October 1, 2002, for Kevin McPhaill (19)*
10.26		Split Dollar Agreement for Albert Berra*
10.27		10b5-1 Plan for Susan Abundis
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 to the Form 10-K filed with the SEC on March 12, 2020 and incorporated herein by reference.

(4)	Filed as an Exhibit to the Form 8-K filed with the SEC on September 24, 2021 and incorporated herein by reference.

(5)	Filed as Exhibit ~~10.5~~10.7 to the Form 10-Q filed with the SEC on May 15, 2003 and incorporated herein by reference.

(6)

~~(7)~~

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

~~(8)~~

Filed as Exhibits ~~10.10, 10.17~~10.12, 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.

(7)

~~(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.

(8)

~~(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.

(9)

~~(11)~~

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

(10)

~~(12)~~

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

(11)

~~(13)~~

~~Filed as Exhibit 10.23 to the Form 10-K 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.

(12)

~~(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.

(13)

~~(16)~~

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

(14)

~~(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.

(15)	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.

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

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

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

(19)	Filed as Exhibit 10.25 to the form 10-Q filed with the SEC on November 3, 2022 and incorporated herein by reference.

*Indicates management contract or compensatory plan or arrangement.

5958

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~~
May 5, 2023		/s/ Kevin J. McPhaill
Date		SIERRA BANCORP
		Kevin J. McPhaill
		President & Chief Executive Officer
		(Principal Executive Officer)

~~November 8, 2017~~May 5, 2023		/s/ ~~Kenneth R. Taylor~~Christopher G. Treece
Date		SIERRA BANCORP
		~~Kenneth R. Taylor~~Christopher G. Treece
		Chief Financial Officer
		~~(Principal Financial and~~
May 5, 2023		/s/ Cindy L. Dabney
Date		SIERRA BANCORP
		Cindy L. Dabney
		Principal Accounting ~~Officer)~~Officer

	Earnings Performance			35
						~~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				45
						Notes to Consolidated Financial Statements (Unaudited)				56

					Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations					3532
						Forward-Looking Statements				3532
						Critical Accounting Policies				3533
						Overview of the Results of Operations and Financial Condition				34
							~~Earnings Performance~~		37
		Net Interest Income and Net Interest Margin			3735
							Provision for ~~Loan and Lease~~Credit Losses on Loans			4138
							~~Non-Interest~~Noninterest Income and ~~Non-Interest~~Noninterest Expense			4239
							Provision for Income Taxes			4540
						Balance Sheet Analysis				41
		Earning Assets		41
			Investments	41
			Loan Portfolio	43
			Nonperforming Assets	45
								~~Earning Assets~~	45
			~~Investments~~	45
			~~Loan and Lease Portfolio~~	47
			~~Nonperforming Assets~~	48
			Allowance for ~~Loan and Lease~~Credit Losses on Loans		4946
								Off-Balance Sheet Arrangements		5148
							Other Assets			5148
							Deposits and ~~Interest-Bearing Liabilities~~		52
			~~Deposits~~	52
			~~Other Interest-Bearing Liabilities~~	53
		~~Non-Interest~~Interest Bearing Liabilities			5349
								Deposits	49
			Other Interest Bearing Liabilities	50
		Noninterest Bearing Liabilities		50
	Liquidity and Market Risk Management				5350
						Capital Resources				5654

					Item 3. ~~Qualitative~~Quantitative & ~~Quantitative~~Qualitative Disclosures about Market Risk					5755

					Item 4. Controls and Procedures					5755

				Part II - Other Information						5856
					Item 1. - Legal Proceedings					5856
					Item 1A. - Risk Factors					5856
					Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds					5857
					Item 3. - Defaults upon Senior Securities					5857
					Item 4. - ~~(Removed and Reserved)~~Mine Safety Disclosures					5857
					Item 5. - Other Information					5857
					Item 6. - Exhibits					5958

				Signatures						6059

	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

(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

(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	%

	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%

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%

Three Months Ended March 31,

Net carrying value at beginning of period