UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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, 2019~~MARCH 31, 2020

Commission file number: 000-33063

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, California 93257

(Address of principal executive offices) (Zip Code)

(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 every Interactive Data File required to be submitted 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 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.


Large Accelerated Filer	☐	Accelerated Filer:	☒
Non-accelerated Filer:	☐	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 ~~November~~May 1, ~~2019,~~2020, the registrant had ~~15,292,685~~15,190,038 shares of common stock outstanding.

~~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~~

Table of Contents

FORM 10-Q

Table of Contents


					Page
Part I - Financial Information					1
	Item 1. Financial Statements (Unaudited)				1
		Consolidated Balance Sheets			1
		Consolidated Statements of Income			2
		Consolidated Statements of Comprehensive Income			3
		Consolidated Statements of Changes In Stockholder’s Equity			4
		Consolidated Statements of Cash Flows			65
		Notes to Consolidated Financial Statements (Unaudited)			76

	Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations				3531
		Forward-Looking Statements			3531
		Critical Accounting Policies			3531
		Overview of the Results of Operations and Financial Condition			3632
		Earnings Performance			3835
			Net Interest Income and Net Interest Margin		3835
			Provision for Loan and Lease Losses		4238
			Noninterest Income and Noninterest Expense		4339
			Provision for Income Taxes		4540
		Balance Sheet Analysis			4541
			Earning Assets		4541
				Investments	4541
				Loan and Lease Portfolio	4642
				Nonperforming Assets	4843
				Allowance for Loan and Lease Losses	4944
				Off-Balance Sheet Arrangements	5147
			Other Assets		5147
			Deposits and Interest-Bearing Liabilities		5248
				Deposits	5248
				Other Interest-Bearing Liabilities	5348
			Noninterest Bearing Liabilities		5449
		Liquidity and Market Risk Management			5449
		Capital Resources			5752

	Item 3. Qualitative & Quantitative Disclosures about Market Risk				5753

	Item 4. Controls and Procedures				5854

Part II - Other Information					5955
	Item 1. - Legal Proceedings				5955
	Item 1A. - Risk Factors				5955
	Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds				5956
	Item 3. - Defaults upon Senior Securities				5956
	Item 4. - Mine Safety Disclosures				5956
	Item 5. - Other Information				5956
	Item 6. - Exhibits				6057

Signatures					6158

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

SIERRA BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
ASSETS	(unaudited)		(audited)		(unaudited)		(audited)
Cash and due from banks	$	68,309	$	72,439	$	78,660	$	65,556
Interest-bearing deposits in banks		12,380		1,693		28,332		14,521
Total cash & cash equivalents		80,689		74,132		106,992		80,077
Securities available-for-sale		599,906		560,479		620,154		600,799
Loans and leases:
Gross loans and leases		1,797,660		1,731,928		1,798,025		1,762,565
Allowance for loan and lease losses		(11,200)		(9,750)		(11,453)		(9,923)
Deferred loan and lease costs, net		2,946		2,602		2,741		2,896
Net loans and leases		1,789,406		1,724,780		1,789,313		1,755,538
Foreclosed assets		762		1,082		766		800
Premises and equipment, net		27,988		29,500		28,425		27,435
Goodwill		27,357		27,357		27,357		27,357
Other intangible assets, net		5,650		6,455		5,112		5,381
Bank-owned life insurance		49,876		48,153		50,722		50,517
Other assets		54,326		50,564		41,628		45,915
Total assets	$	2,635,960	$	2,522,502	$	2,670,469	$	2,593,819

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	685,528	$	662,527	$	704,700	$	690,950
Interest bearing		1,510,679		1,453,813		1,474,691		1,477,424
Total deposits		2,196,207		2,116,340		2,179,391		2,168,374
Repurchase agreements		25,157		16,359		29,361		25,711
Short-term borrowings		42,200		56,100		74,100		20,000
Subordinated debentures, net		34,901		34,767		34,990		34,945
Other liabilities		34,142		25,912		33,168		35,504
Total liabilities		2,332,607		2,249,478		2,351,010		2,284,534

Commitments and contingent liabilities (Note 8)
Commitments and contingent liabilities (Note 7)

Shareholders' equity
Common stock, no par value; 24,000,000 shares authorized; 15,284,491 and 15,300,460 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		112,797		112,507
Common stock, no par value; 24,000,000 shares authorized; 15,190,038 and 15,284,538 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively						112,600		113,179
Additional paid-in capital		3,333		3,066		3,367		3,307
Retained earnings		181,332		164,117		189,882		186,867
Accumulated other comprehensive income (loss), net		5,891		(6,666)		13,610		5,932
Total shareholders' equity		303,353		273,024		319,459		309,285
Total liabilities and shareholder's equity	$	2,635,960	$	2,522,502	$	2,670,469	$	2,593,819

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND ~~NINE MONTHS ENDED SEPTEMBER 30,~~ 2019 ~~AND 2018~~

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


	Three months ended September 30,					Nine months ended September 30,			Three months ended March 31,
	2019		2018		2019		2018		2020		2019
Interest and dividend income
Loans and leases, including fees	$	24,118	$	22,824	$	71,877	$	64,332	$	22,112	$	23,748
Taxable securities		2,484		2,382		7,692		7,020		2,460		2,617
Tax-exempt securities		1,160		1,006		3,276		3,040		1,339		1,045
Federal funds sold and other		139		24		327		204		140		73
Total interest income		27,901		26,236		83,172		74,596		26,051		27,483
Interest expense
Deposits		2,983		1,923		9,031		4,835		1,834		2,955
Short-term borrowings		90		86		188		152		36		72
Subordinated debentures		453		451		1,406		1,273		394		483
Total interest expense		3,526		2,460		10,625		6,260		2,264		3,510
Net interest income		24,375		23,776		72,547		68,336		23,787		23,973
Provision for loan losses		1,350		2,450		2,050		2,950		1,800		300
Net interest income after provision for loan losses		23,025		21,326		70,497		65,386		21,987		23,673
Non-interest income
Service charges on deposits		3,292		3,208		9,386		9,181		3,183		2,943
Other income		2,577		2,515		8,245		7,104		2,923		2,963
Total non-interest income		5,869		5,723		17,631		16,285		6,106		5,906
Other operating expense
Salaries and employee benefits		8,784		8,814		27,021		26,994		10,172		9,243
Occupancy and equipment		2,485		2,685		7,296		7,484		2,327		2,361
Other		5,819		6,308		18,280		18,510		5,319		6,248
Total other operating expense		17,088		17,807		52,597		52,988		17,818		17,852
Income before taxes		11,806		9,242		35,531		28,683		10,275		11,727
Provision for income taxes		2,854		2,171		8,855		6,910		2,468		2,832
Net income	$	8,952	$	7,071	$	26,676	$	21,773	$	7,807	$	8,895

PER SHARE DATA
Book value	$	19.85	$	17.23	$	19.85	$	17.23	$	21.03	$	18.53
Cash dividends	$	0.19	$	0.16	$	0.55	$	0.48	$	0.20	$	0.18
Earnings per share basic	$	0.58	$	0.46	$	1.74	$	1.43	$	0.51	$	0.58
Earnings per share diluted	$	0.58	$	0.46	$	1.73	$	1.41	$	0.51	$	0.58
Average shares outstanding, basic		15,318,580		15,267,587		15,320,041		15,251,746		15,262,252		15,311,154
Average shares outstanding, diluted		15,434,788		15,444,406		15,449,340		15,428,465		15,340,017		15,447,747

Total shareholder equity (in thousands)	$	303,353	$	263,208	$	303,353	$	263,208	$	319,459	$	284,068
Shares outstanding		15,284,491		15,277,710		15,284,491		15,277,710		15,190,038		15,328,030
Dividends paid (in thousands)	$	2,914	$	2,442	$	8,427	$	7,320	$	3,059	$	2,754

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND ~~NINE MONTHS ENDED SEPTEMBER 30,~~ 2019 ~~AND 2018~~

(dollars in thousands, unaudited)

Three months ended September 30,

Nine months ended September 30,

2019

2018

2019

2018
Net income

$
8,952

$
7,071

$
26,676

$
21,773
Other comprehensive income, before tax:

Unrealized gains (losses) on securities:

Unrealized holding gain (loss) arising during period

2,363

(2,892)

17,855

(11,676)
Less: reclassification adjustment for gains included in net income (1)

—

(1)

(29)

(2)
Other comprehensive income (loss), before tax

2,363

(2,893)

17,826

(11,678)
Income tax expense related to items of other comprehensive income (loss), net of tax

(698)

854

(5,269)

3,453
Other comprehensive income (loss)

1,665

(2,039)

12,557

(8,225)

Comprehensive income

$
10,617

$
5,032

$
39,233

$
13,548


	Three months ended March 31,
	2020		2019
Net income	$	7,807	$	8,895
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gain arising during period		10,902		6,167
Less: reclassification adjustment for gains included in net income (1)		—		(6)
Other comprehensive income, before tax		10,902		6,161
Income tax expense related to items of other comprehensive income, net of tax		(3,224)		(1,821)
Other comprehensive income		7,678		4,340

Comprehensive income	$	15,485	$	13,235

(1)

Amounts are included in net gains on investment securities available-for-sale on the Consolidated Statements of Income in noninterest revenue. Income tax expense associated with the reclassification adjustment for the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was $0 thousand and $0$2 thousand respectively. ~~Income tax expense associated with the reclassification adjustment for the nine months ended September 30, 2019 and 2018 was $9 thousand and $1 thousand respectively.~~

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

Table of Contents

SIERRA BANCORP

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

FOR THE THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2020 AND 2019 ~~AND 2018~~

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

Accumulated

Additional

Other

Common Stock

Paid In

Retained

Comprehensive

Shareholders'


Shares

Amount

Capital

Earnings

(Loss) Income

Equity
Balance, June 30, 2018

15,258,100

$
111,739

$
2,994

$
154,021

$
(8,516)

$
260,238
Net income

7,071

7,071
Other comprehensive loss, net of tax

(2,039)

(2,039)
Exercise of stock options

19,610

340

(60)

280
Stock compensation costs

100

100
Stock issued-acquisition

—
Cash dividends - $0.16 per share

(2,442)

(2,442)
Balance, September 30, 2018

15,277,710

$
112,079

$
3,034

$
158,650

$
(10,555)

$
263,208

Balance, June 30, 2019

15,332,550

$
113,061

$
3,237

$
176,328

$
4,226

$
296,852
Net income

8,952

8,952
Other comprehensive income, net of tax

1,665

1,665
Exercise of stock options

6,520

76

(16)

60
Stock compensation costs

112

112
Stock repurchase

(54,579)

(340)

(1,034)

(1,374)
Stock issued-acquisition

—
Cash dividends - $0.19 per share

(2,914)

(2,914)
Balance, September 30, 2019

15,284,491

$
112,797

$
3,333

$
181,332

$
5,891

$
303,353


								Accumulated
				Additional				Other
	Common Stock			Paid In		Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, December 31, 2018	15,300,460	$	112,507	$	3,066	$	164,117	$	(6,666)	$	273,024
Net income							8,895				8,895
Other comprehensive income, net of tax									4,340		4,340
Exercise of stock options	27,570		494		(82)						412
Stock compensation costs					151						151
Cash dividends - $0.18 per share							(2,754)				(2,754)
Balance, March 31, 2019	15,328,030	$	113,001	$	3,135	$	170,258	$	(2,326)	$	284,068

Balance, December 31, 2019	15,285,118	$	113,179	$	3,307	$	186,867	$	5,932	$	309,285
Net income							7,807				7,807
Other comprehensive income, net of tax									7,678		7,678
Exercise of stock options	16,970		250		(69)						181
Stock compensation costs					129						129
Stock repurchase	(112,050)		(829)				(1,733)				(2,562)
Cash dividends - $0.20 per share							(3,059)				(3,059)
Balance, March 31, 2020	15,190,038	$	112,600	$	3,367	$	189,882	$	13,610	$	319,459

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF ~~CHANGES IN STOCKHOLDER’S EQUITY~~CASH FLOWS

FOR THE ~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2020 AND 2019 ~~AND 2018~~

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

Accumulated

Additional

Other

Common Stock

Paid In

Retained

Comprehensive

Shareholders'


Shares

Amount

Capital

Earnings

(Loss) Income

Equity
Balance, December 31, 2017

15,223,360

$
111,138

$
2,937

$
144,197

$
(2,330)

$
255,942
Net income

21,773

21,773
Other comprehensive loss, net of tax

(8,225)

(8,225)
Exercise of stock options

54,350

941

(171)

770
Stock compensation costs

274

274
Stock issued-acquisition

(6)

(6)
Cash dividends - $0.48 per share

(7,320)

(7,320)
Balance, September 30, 2018

15,277,710

$
112,079

$
3,034

$
158,650

$
(10,555)

$
263,208

Balance, December 31, 2018

15,300,460

$
112,507

$
3,066

$
164,117

$
(6,666)

$
273,024
Net income

26,676

26,676
Other comprehensive income, net of tax

12,557

12,557
Exercise of stock options

38,610

630

(112)

518
Stock compensation costs

379

379
Stock repurchase

(54,579)

(340)

(1,034)

(1,374)
Stock issued-acquisition

—
Cash dividends - $0.55 per share

(8,427)

(8,427)
Balance, September 30, 2019

15,284,491

$
112,797

$
3,333

$
181,332

$
5,891

$
303,353


		Three months ended March 31,
	2020		2019
Cash flows from operating activities:
Net income	$	7,807	$	8,895
Gain on sales of securities		—		(6)
Loss on disposal of fixed assets		—		12
Loss (gain) on sale on foreclosed assets		2		(16)
Writedowns on foreclosed assets		—		20
Share-based compensation expense		129		151
Provision for loan losses		1,800		300
Depreciation and amortization		771		754
Net amortization on securities premiums and discounts		1,050		1,030
Accretion of discounts for loans acquired and net deferred loan fees		(225)		(266)
Increase in cash surrender value of life insurance policies		(38)		(900)
Amortization of core deposit intangible		269		269
Decrease (increase) in interest receivable and other assets		1,467		(203)
(Decrease) increase in other liabilities		(2,336)		4,476
Deferred income tax (benefit) provision		(114)		2
Increase in equity securities		(447)		—
Net amortization of partnership investment		158		450
Net cash provided by operating activities		10,293		14,968

Cash flows from investing activities:
Maturities and calls of securities available for sale		2,430		1,150
Proceeds from sales of securities available for sale		—		15,504
Purchases of securities available for sale		(33,285)		(34,469)
Principal pay downs on securities available for sale		21,351		19,803
Net purchases of FHLB stock		—		—
Loan originations and payments, net		(35,350)		(19,618)
Purchases of premises and equipment		(1,716)		(87)
Proceeds from sale premises and equipment		—		10
Proceeds from sales of foreclosed assets		32		7,920
Purchase of bank-owned life insurance		(167)		(217)
Net cash used in investing activities		(46,705)		(10,004)

Cash flows from financing activities:
Increase in deposits		11,017		44,408
Increase (decrease) in borrowed funds		54,100		(56,100)
Increase in repurchase agreements		3,650		3,001
Cash dividends paid		(3,059)		(2,754)
Repurchases of common stock		(2,562)		—
Stock options exercised		181		412
Net cash provided by (used in) financing activities		63,327		(11,033)

Increase (decrease) in cash and due from banks		26,915		(6,069)

Cash and cash equivalents
Beginning of period		80,077		74,132
End of period	$	106,992	$	68,063

Supplemental disclosure of cash flow information:
Interest paid	$	2,359	$	3,409
Income taxes paid	$	—	$	—
Supplemental noncash disclosures:
Real estate acquired through foreclosure	$	—	$	26
Operating right-of-use asset pursuant to adoption on ASU 2016-02	$	—	$	9,712
Operating lease liability pursuant to adoption of ASU 2016-02	$	—	$	10,336

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

Table of Contents

SIERRA BANCORP

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018~~

~~(dollars in thousands, unaudited)~~

Nine months ended September 30,

2019

2018
Cash flows from operating activities:

Net income

$
26,676

$
21,773
Gain on sales of securities

(29)

(2)
Loss on disposal of fixed assets

28

13
Gain on sale on foreclosed assets

(107)

(733)
Writedowns on foreclosed assets

77

195
Share-based compensation expense

379

274
Provision for loan losses

2,050

2,950
Depreciation and amortization

2,240

2,365
Net amortization on securities premiums and discounts

3,248

4,269
Accretion of discounts for loans acquired and net deferred loan fees

(712)

(1,368)
Increase in cash surrender value of life insurance policies

(1,617)

(1,067)
Amortization of core deposit intangible

806

752
(Increase) decrease in interest receivable and other assets

(7,362)

251
Increase in other liabilities

(1,412)

(4,897)
Deferred income tax benefit

(163)

(956)
Increase in equity securities

(232)

—
Net amortization of partnership investment

1,648

1,242
Net cash provided by operating activities

25,518

25,061

Cash flows from investing activities:

Maturities and calls of securities available for sale

8,714

3,534
Proceeds from sales of securities available for sale

22,181

9,913
Purchases of securities available for sale

(122,579)

(90,879)
Principal pay downs on securities available for sale

66,864

71,002
Net purchases of FHLB stock

(833)

(301)
Loan originations and payments, net

(66,017)

(137,860)
Purchases of premises and equipment

(632)

(2,854)
Proceeds from sale premises and equipment

10

—
Proceeds from sales of foreclosed assets

7,955

3,987
Purchase of bank-owned life insurance

(366)

(384)
Liquidation of bank-owned life insurance

260

—
Net cash from bank acquisition

—

(6)
Net cash used in investing activities

(84,443)

(143,848)

Cash flows from financing activities:

Increase in deposits

79,867

117,667
Decrease in borrowed funds

(13,900)

(5,800)
Increase in repurchase agreements

8,798

8,372
Cash dividends paid

(8,427)

(7,320)
Repurchases of common stock

(1,374)

—
Stock options exercised

518

770
Net cash provided by financing activities

65,482

113,689

Increase (decrease) in cash and due from banks

6,557

(5,098)

Cash and cash equivalents

Beginning of period

74,132

70,137
End of period

$
80,689

$
65,039

Supplemental disclosure of cash flow information:

Interest paid

$
10,671

$
5,880
Income taxes paid

$
9,000

$
10,000
Supplemental noncash disclosures:

Real estate acquired through foreclosure

$
27

$
161
Operating right-of-use asset pursuant to adoption on ASU 2016-02

$
9,712

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

$
10,336

$
—

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

~~Table of Contents~~

~~SIERRA BANCORP~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2019~~March 31, 2020

(Unaudited)

Note 1 – The Business of Sierra Bancorp

Sierra Bancorp (the “Company”) is a California corporation headquartered in Porterville, California, and is a registered bank holding company under federal banking laws. The Company was formed to serve as the holding company for Bank of the Sierra (the “Bank”), and has been the Bank’s sole shareholder since August 2001. The Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. As of ~~September 30, 2019,~~March 31, 2020, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”). Pursuant to the Financial Accounting Standards Board (“FASB”) standard on the consolidation of variable interest entities, these trusts are not reflected on a consolidated basis in the Company’s financial statements. References herein to the “Company” include Sierra Bancorp and its consolidated subsidiary, the Bank, unless the context indicates otherwise.

Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a wide range of retail and commercial banking services via branch offices located throughout California’s South San Joaquin Valley, the Central Coast, Ventura County, 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 2017. As of the filing date of this report the Bank operates 40 full service branches and an online branch, and maintains ATMs at all but one of our branch locations as well as seven non-branch locations. Moreover, the Bank has specialized lending units which focus on agricultural borrowers, SBA loans, and mortgage warehouse lending. The Company had total assets of ~~$2.6~~$2.7 billion at ~~September 30, 2019,~~March 31, 2020, and for a number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley. The Bank’s deposit accounts, which totaled $2.2 billion at ~~September 30, 2019,~~March 31, 2020, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

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

Note 3 – Current Accounting Developments

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

~~Table of Contents~~

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

In September 2016 the FASB issued ASU 2016‑13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which eliminates the probable initial recognition threshold for credit losses in current U.S. GAAP, and instead requires an organization to record a current estimate of all expected credit losses over the contractual term for financial assets carried at amortized cost. This is commonly referred to as the current expected credit losses (“CECL”) methodology. Expected credit losses for financial assets held at the reporting date will be measured based on historical experience, current conditions, and reasonable and supportable forecasts. Another change from existing U.S. GAAP involves the treatment of purchased credit deteriorated assets, which are more broadly defined

Table of Contents

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

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

~~Table of Contents~~

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~~were effective for public business entities for fiscal years beginning after December 15, 2019. WeIn accordance with ASU 2017-04, the Company performed a qualitative analysis of goodwill during the first quarter of 2020, and determined that a quantitative analysis was not necessary at this time. Thus, we have not been required to record any goodwill impairment to date, and after a preliminary review do not expect that this guidance would require us to do so given current circumstances. Nevertheless, we will continue to evaluate ASU 2017‑04 to more definitely determine its potential impact on the Company’s consolidated financial position, results of operations and cash flows.

~~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 shortened 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 previous guidance, the premium on a callable debt security was generally amortized as an adjustment to yield over the contractual life of the instrument, with any unamortized premium recorded as a loss in earnings upon the debtor’s exercise of a call provision. Under ASU 2017‑08, because the premium is amortized to the earliest call date, entities no longer recognize a loss in earnings if a debt security is called prior to the contractual maturity date. The amendments did not require an accounting change for securities held at a discount; discounts continue to be amortized as an adjustment to yield over the contractual life of the debt instrument. ASU 2017‑08 became effective for public business entities, including the Company, for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. To apply ASU 2017‑08, entities were required to use a modified retrospective approach, with the cumulative-effect adjustment recognized to retained earnings at the beginning of the period of adoption. The Company adopted ASU 2017‑08 effective January 1, 2019 with no material impact on our financial statements or operations.

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

Table of Contents

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

In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326), which provides transition relief for entities adopting ASU 2016-13. ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value

~~Table of Contents~~

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

In March 2020, in an effort to conform with Section 4013 of the CARES Act, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on ~~our~~the Company’s financial ~~statements or operations.~~statements; however, this impact cannot be quantified at this time.

Note 4 – Share Based Compensation

On March 16, 2017 the Company’s Board of Directors approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective May 24, 2017, the date approved by the Company’s shareholders. The 2017 Plan replaced the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017. Options to purchase 327,610 shares that were granted under the 2007 Plan were still outstanding as of ~~September 30, 2019~~March 31, 2020 and remain unaffected by that plan’s expiration. The 2017 Plan provides for the issuance of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options to non-employee directors and consultants of the Company. The 2017 Plan also provides for the issuance of restricted stock awards to these same classes of eligible participants, although no restricted stock awards have ever been issued by the Company. The total number of shares of the Company’s authorized but unissued stock reserved for issuance pursuant to awards under the

Table of Contents

2017 Plan was initially 850,000 shares, and the number remaining available for grant as of ~~September 30, 2019~~March 31, 2020 was ~~669,800.~~547,000. The potential dilutive impact of unexercised stock options is discussed below in Note 5, Earnings per Share.

Pursuant to FASB’s standards on stock compensation, the value of each stock option is reflected in our income statement as employee compensation or directors’ expense by amortizing its grant date fair value over the vesting period of the option. The Company utilizes a Black-Scholes model to determine grant date fair values. A pre-tax charge of ~~$112,000~~$.1 million was reflected in the Company’s income statement during the ~~third~~first quarter of ~~2019~~2020 and ~~$100,000~~$.2 million was charged during the ~~third~~first quarter of ~~2018,~~2019, as expense related to stock options. ~~For the first nine months, the charges totaled $379,000 in 2019 and $274,000 in 2018.~~

Note 5 – Earnings per Share

The computation of earnings per share, as presented in the Consolidated Statements of Income, is based on the weighted average number of shares outstanding during each period. There were ~~15,318,580 weighted average shares outstanding during the third quarter of 2019 and 15,267,587 during the third quarter of 2018, while there were 15,320,041~~15,262,252 weighted average shares outstanding during the first ~~nine months~~quarter of ~~2019~~2020 and ~~15,251,746~~15,311,154 during the first ~~nine months~~quarter of ~~2018.~~

2019. Diluted earnings per share calculations include the effect of the potential issuance of common shares, which for the Company is limited to shares that would be issued on the exercise of “in-the-money” stock options. For the ~~third~~first quarter of ~~2019,~~2020, calculations under the treasury stock method resulted in the equivalent of ~~116,208~~77,765 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of ~~261,137~~304,763 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the ~~third~~first quarter of ~~2018~~2019 the equivalent of ~~176,819~~136,593 shares were added in calculating diluted earnings per share, while ~~105,800~~199,120 anti-dilutive stock options were not factored into the computation. Likewise, for the first nine months of 2019 the equivalent of 129,299 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 239,714 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 176,719 shares and non-inclusion of 105,800 anti-dilutive options in calculating diluted earnings per share for first nine months of 2018.

~~Table of Contents~~

Note 6 – Comprehensive Income

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

Note 7 – Financial Instruments with Off-Balance-Sheet Risk

The Company is a party to financial instruments with off‑balance‑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 credit risk (dollars in thousands):


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Commitments to extend credit	$	503,375	$	781,987	$	453,849	$	492,040
Standby letters of credit	$	9,143	$	8,966	$	9,067	$	8,619

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

Table of Contents

At ~~September 30, 2019,~~March 31, 2020, the Company was also utilizing a letter of credit in the amount of $105 million issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers. That letter of credit is backed by loans which are pledged to the FHLB by the Company.

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

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

Fair value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the

~~Table of Contents~~

use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:

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

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

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

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Fair value disclosures for deposits include demand deposits, which are by definition equal to the amount payable on demand at the reporting date. Fair value calculations for loans and leases reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality adjustments based on risk characteristics of various financial instruments, among other things. Since the estimates are subjective and involve uncertainties and matters of significant judgment they cannot be determined with precision, and changes in assumptions could significantly alter the fair values presented.

Table of Contents

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, 2019										March 31, 2020
			Fair Value Measurements										Fair Value Measurements
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets:
Cash and cash equivalents	$	80,689	$	80,689	$	—	$	—	$	80,689	$	106,992	$	106,992	$	—	$	—	$	106,992
Investment securities available for sale		599,906		—		599,906		—		599,906		620,154		—		620,154		—		620,154
Loans and leases, net held for investment		1,787,406		—		1,807,104		—		1,807,104		1,787,101		—		—		1,834,373		1,834,373
Collateral dependent impaired loans		2,000		—		2,000		—		2,000		2,212		—		2,212		—		2,212

Financial liabilities:
Deposits		2,196,207		685,528		1,510,840		—		2,196,368		2,179,391		704,700		1,474,482		—		2,179,182
Repurchase agreements		25,157		25,157		—		—		25,157		29,361		—		29,361		—		29,361
Short term borrowings		42,200		—		42,200		—		42,200		74,100		—		74,100		—		74,100
Subordinated debentures		34,901		—		31,024		—		31,024		34,990		—		29,911		—		29,911

~~Table of Contents~~


		December 31, 2018										December 31, 2019
			Fair Value Measurements										Fair Value Measurements
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets:
Cash and cash equivalents	$	74,132	$	74,132	$	—	$	—	$	74,132	$	80,077	$	80,076	$	—	$	—	$	80,076
Investment securities available for sale		560,479		—		560,479		—		560,479		600,799		—		600,799		—		600,799
Loans and leases, net held for investment		1,724,575		—		1,707,463		—		1,707,463		1,753,846		—		—		1,761,461		1,761,461
Collateral dependent impaired loans		205		—		205		—		205		1,692		—		1,692		—		1,692

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

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

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

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

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

Table of Contents

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.

~~Table of Contents~~

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, 2019, using										Fair Value Measurements at March 31, 2020, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Realized Gain/(Loss) (Level 3)		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	$	—	$	14,445	$	—	$	14,445	$	—	$	—	$	11,742	$	—	$	11,742	$	—
Mortgage-backed securities		—		411,803		—		411,803		—		—		405,246		—		405,246		—
State and political subdivisions		—		173,658		—		173,658		—		—		203,166		—		203,166		—
Total available-for-sale securities	$	—	$	599,906	$	—	$	599,906	$	—	$	—	$	620,154	$	—	$	620,154	$	—


	Fair Value Measurements at December 31, 2018, using										Fair Value Measurements at December 31, 2019, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Realized Gain/(Loss) (Level 3)		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Realized Gain/(Loss) (Level 3)
Securities:
U.S. government agencies	$	—	$	15,212	$	—	$	15,212	$	—	$	—	$	12,145	$	—	$	12,145	$	—
Mortgage-backed securities		—		404,733		—		404,733		—		—		400,389		—		400,389		—
State and political subdivisions		—		140,534		—		140,534		—		—		188,265		—		188,265		—
Total available-for-sale securities	$	—	$	560,479	$	—	$	560,479	$	—	$	—	$	600,799	$	—	$	600,799	$	—

1412

Table of Contents

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

Fair Value Measurements – Nonrecurring

(dollars in thousands, unaudited)


	Fair Value Measurements at September 30, 2019, using								Fair Value Measurements at March 31, 2020, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Impaired loans
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other construction/land		—		—		—		—		—		—		—		—
1-4 family - closed-end		—		—		—		—		—		—		—		—
Equity lines		—		—		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		91		—		91		—		86		—		86
Commercial real estate - non-owner occupied		—		1,909		—		1,909		—		2,126		—		2,126
Farmland		—		—		—		—		—		—		—		—
Total real estate		—		2,000		—		2,000		—		2,212		—		2,212
Agricultural		—		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—		—		—
Total impaired loans	$	—	$	2,000	$	—	$	2,000	$	—	$	2,212	$	—	$	2,212
Foreclosed assets	$	—	$	762	$	—	$	762	$	—	$	766	$	—	$	766
Total assets measured on a nonrecurring basis	$	—	$	2,762	$	—	$	2,762	$	—	$	2,978	$	—	$	2,978

Fair Value Measurements at December 31, 2018, using


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

Significant
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

Total
Impaired loans

Real estate:

1-4 family residential construction

$
—

$
—

$
—

$
—
Other construction/land

—

27

—

27
1-4 family - closed-end

—

—

—

—
Equity lines

—

12

—

12
Multi-family residential

—

—

—

—
Commercial real estate - owner occupied

—

—

—

—
Commercial real estate - non-owner occupied

—

—

—

—
Farmland

—

—

—

—
Total real estate

—

39

—

39
Agricultural

—

—

—

—
Commercial and industrial

—

119

—

119
Consumer loans

—

47

—

47
Total impaired loans

$
—

$
205

$
—

$
205
Foreclosed assets

$
—

$
1,082

$
—

$
1,082
Total assets measured on a nonrecurring basis

$
—

$
1,287

$
—

$
1,287

Table of Contents


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

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

~~Table of Contents~~

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

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

Note 9 – Investments

Investment Securities

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

Table of Contents

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

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)


	September 30, 2019								March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	14,408	$	168	$	(131)	$	14,445	$	11,587	$	204	$	(49)	$	11,742
Mortgage-backed securities		409,922		3,483		(1,602)		411,803		393,680		11,742		(176)		405,246
State and political subdivisions		167,213		6,488		(43)		173,658		195,565		7,623		(22)		203,166
Total securities	$	591,543	$	10,139	$	(1,776)	$	599,906	$	600,832	$	19,569	$	(247)	$	620,154


	December 31, 2018								December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	15,553	$	12	$	(353)	$	15,212	$	12,125	$	124	$	(104)	$	12,145
Mortgage-backed securities		414,208		398		(9,873)		404,733		398,353		3,354		(1,318)		400,389
State and political subdivisions		140,181		1,206		(853)		140,534		181,900		6,478		(113)		188,265
Total securities	$	569,942	$	1,616	$	(11,079)	$	560,479	$	592,378	$	9,956	$	(1,535)	$	600,799

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had ~~240~~34 securities and ~~552~~198 securities, respectively, with gross unrealized losses. Management has evaluated those securities as of the respective dates, and does not believe that any of the unrealized losses are other than temporary. Gross unrealized losses on our investment securities as of the indicated dates are disclosed in the table below, categorized by investment type and by the duration of time that loss positions on individual securities have continuously existed (over or under twelve months).

~~Table of Contents~~

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)


	September 30, 2019								March 31, 2020
	Less than twelve months				Twelve months or more				Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	(25)	$	3,801	$	(106)	$	3,766	$	(3)	$	1,199	$	(46)	$	2,587
Mortgage-backed securities		(274)		63,536		(1,328)		115,855		(94)		7,717		(82)		8,717
State and political subdivisions		(39)		7,317		(4)		605		(22)		5,791		—		—
Total	$	(338)	$	74,654	$	(1,438)	$	120,226	$	(119)	$	14,707	$	(128)	$	11,304


	December 31, 2018								December 31, 2019
	Less than twelve months				Twelve months or more				Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	(54)	$	2,815	$	(299)	$	10,764	$	(32)	$	3,240	$	(72)	$	2,689
Mortgage-backed securities		(717)		69,686		(9,156)		273,230		(494)		100,518		(824)		78,538
State and political subdivisions		(249)		33,864		(604)		22,213		(113)		19,762		—		—
Total	$	(1,020)	$	106,365	$	(10,059)	$	306,207	$	(639)	$	123,520	$	(896)	$	81,227

Table of Contents

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

Investment Portfolio - Realized Gains/(Losses)

(dollars in thousands, unaudited)


	Three months ended September 30,					Nine months ended September 30,			Three months ended March 31,
	2019		2018		2019		2018		2020		2019
Proceeds from sales, calls and maturities of securities available for sale	$	4,255	$	11,137	$	30,895	$	13,447	$	2,430	$	16,654
Gross gains on sales, calls and maturities of securities available for sale		—		20		128		21		—		94
Gross losses on sales, calls and maturities of securities available for sale		—		(19)		(99)		(19)		—		(88)
Net gains on sale of securities available for sale	$	—	$	1	$	29	$	2	$	$—	$	$6

The amortized cost and estimated fair value of investment securities available-for-sale at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are shown below, grouped by the remaining time to contractual maturity dates. The expected life of investment securities may not be consistent with contractual maturity dates, since the issuers of the securities might have the right to call or prepay obligations with or without penalties.

~~Table of Contents~~

Estimated Fair Value of Contractual Maturities

(dollars in thousands, unaudited)


	September 30, 2019				March 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	6,385	$	6,512	$	7,037	$	7,158
Maturing after one year through five years		180,367		180,842		15,424		15,631
Maturing after five years through ten years		67,959		69,211		35,850		36,927
Maturing after ten years		117,752		122,836		148,842		155,192
Securities not due at a single maturity date:
Mortgage-backed securities						194,774		199,613
Collateralized mortgage obligations						198,905		205,633
					$	600,832	$	620,154
Securities not due at a single maturity date:
U.S. government agencies collateralized by mortgage obligations		219,080		220,505
	$	591,543	$	599,906


	December 31, 2018				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	7,726	$	7,789	$	7,155	$	7,244
Maturing after one year through five years		199,840		195,519		17,008		17,171
Maturing after five years through ten years		47,802		47,661		33,805		34,881
Maturing after ten years		83,606		83,444		136,057		141,114
Securities not due at a single maturity date:
Mortgage-backed securities						189,554		190,488
Collateralized mortgage obligations						208,799		209,901
					$	592,378	$	600,799
Securities not due at a single maturity date:
U.S. government agencies collateralized by mortgage obligations		230,968		226,066
	$	569,942	$	560,479

At ~~September 30, 2019,~~March 31, 2020, the Company’s investment portfolio included ~~336~~349 “muni” bonds issued by ~~274~~280 different government municipalities and agencies located within 2931 different states, with an aggregate fair value of ~~$174~~$203 million. The largest exposure to any single municipality or agency was a combined ~~$2.2~~$3.9 million (fair value) in general obligation bonds issued by the ~~Lindsay (CA) Unified School District.~~Charter Township of Washington County (MI).

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

1816

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)


	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Amortized		Fair Market		Amortized		Fair Market		Amortized		Fair Market		Amortized		Fair Market
General obligation bonds	Cost		Value		Cost		Value		Cost		Value		Cost		Value
State of issuance
Texas	$	55,397	$	57,447	$	36,331	$	36,199	$	65,619	$	68,182	$	59,439	$	61,519
Washington										23,445		24,579		23,392		24,313
California		24,037		25,231		26,928		27,357		23,873		24,996		23,882		25,030
Washington		16,703		17,625		16,036		16,062
Illinois		7,908		8,234		6,827		6,838
Ohio		7,670		7,802		8,639		8,601
Other (22 and 22 states, respectively)		33,536		34,528		21,530		21,576
Other (24 states)										54,712		56,580		49,326		50,725
Total general obligation bonds		145,251		150,867		116,291		116,633		167,649		174,337		156,039		161,587

Revenue bonds
State of issuance
Texas		6,249		6,508		7,526		7,506		7,068		7,320		6,035		6,298
Utah		4,664		4,770		5,364		5,353
Indiana		3,141		3,293		2,641		2,654
Washington		1,741		1,864		1,751		1,780		2,787		2,927		1,737		1,856
Pennsylvania		1,697		1,738		—		—
Other (9 and 11 states, respectively)		4,470		4,618		6,608		6,608
California										364		379		365		380
Other (13 states)										17,697		18,203		17,724		18,144
Total revenue bonds		21,962		22,791		23,890		23,901		27,916		28,829		25,861		26,678
Total obligations of states and political subdivisions	$	167,213	$	173,658	$	140,181	$	140,534	$	195,565	$	203,166	$	181,900	$	188,265

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

Revenue Bonds by Type

(dollars in thousands, unaudited)


	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Amortized		Fair Market		Amortized		Fair Market		Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value		Cost		Value		Cost		Value
Revenue source:
Water	$	7,052	$	7,334	$	6,942	$	6,946	$	7,499	$	7,774	$	7,515	$	7,775
Sales Tax		3,954		4,123		2,932		2,901
College & University		3,007		3,134		2,583		2,604
Sewer										4,752		4,854		4,760		4,811
Lease		1,888		1,917		2,053		2,068		4,639		4,751		3,596		3,678
Sewer		1,190		1,225		1,392		1,398
Other (13 sources)		4,871		5,058		7,988		7,984
College & university										1,993		2,031		1,997		2,019
Sales tax										1,945		1,988		1,949		1,995
Electric & power										1,419		1,478		1,421		1,521
Other (8 and 7 sources, respectively)										5,669		5,953		4,623		4,879
Total revenue bonds	$	21,962	$	22,791	$	23,890	$	23,901	$	27,916	$	28,829	$	25,861	$	26,678

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

The Company has the ability to invest in limited partnerships which own housing projects that qualify for federal and/or California state tax credits, by mandating a specified percentage of low-income tenants for each project. The primary

~~Table of Contents~~

investment return comes from tax credits that flow through to 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 for tax purposes.

Table of Contents

The Company made investment commitments to nine different LIHTC fund limited partnerships from 2001 through 2017, all of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act. We utilize the cost method of accounting for our LIHTC fund investments, under which we initially record on our balance sheet an asset that represents the total cash expected to be invested over the life of the partnership. Any commitments or contingent commitments for future investment are reflected as a liability. The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on a straight-line basis as an offset to noninterest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of ~~September 30, 2019~~March 31, 2020 our total LIHTC investment book balance was ~~$4.6~~$3.9 million, which includes ~~$1.4~~$1.0 million in remaining commitments for additional capital contributions. There were ~~$404,000~~$.1 million in tax credits derived from our LIHTC investments that were recognized during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, and amortization expense of ~~$1.351~~$.2 million associated with those investments was netted against pre-tax 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.

Note 10 – Credit Quality and Nonperforming Assets

Credit Quality Classifications

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

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

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

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

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

2018

Table of Contents

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

Credit Quality Classifications

(dollars in thousands, unaudited)


	September 30, 2019											March 31, 2020
	Pass			Special Mention		Substandard		Impaired		Total		Pass		Special Mention		Substandard		Impaired		Total
Real estate:
1-4 family residential construction	$	115,821		$	—	$	—	$	—	$	115,821	$	94,114	$	464	$	—	$	—	$	94,578
Other construction/land		92,008	��		704		—		405		93,117		87,861		2,219		—		522		90,602
1-4 family - closed end		204,871			1,618		424		3,814		210,727		182,832		3,523		169		3,110		189,634
Equity lines		44,352			1,971		89		4,795		51,207		42,010		2,084		61		4,381		48,536
Multi-family residential		51,945			—		—		357		52,302		57,891		—		—		347		58,238
Commercial real estate - owner occupied		310,413			5,751		4,324		2,050		322,538		293,360		3,936		3,109		2,529		302,934
Commercial real estate - non-owner occupied		412,689			1,390		526		2,819		417,424		471,003		747		568		2,608		474,926
Farmland		143,396			1,060		137		25		144,618		140,307		1,047		130		256		141,740
Total real estate		1,375,495			12,494		5,500		14,265		1,407,754		1,369,378		14,020		4,037		13,753		1,401,188

Agricultural		39,165			9,934		—		6		49,105		49,030		164		—		5		49,199
Commercial and industrial		101,108			13,162		657		810		115,737		97,081		12,994		510		1,405		111,990
Mortgage warehouse		216,913			—		—		—		216,913		228,608		—		—		—		228,608
Consumer loans		7,351			76		18		706		8,151		6,579		70		15		376		7,040
Total gross loans and leases	$	1,740,032		$	35,666	$	6,175	$	15,787	$	1,797,660	$	1,750,676	$	27,248	$	4,562	$	15,539	$	1,798,025


	December 31, 2018										December 31, 2019
	Pass		Special Mention		Substandard		Impaired		Total		Pass		Special Mention		Substandard		Impaired		Total
Real estate:
1-4 family residential construction	$	105,676	$	—	$	—	$	—	$	105,676	$	105,979	$	—	$	—	$	—	$	105,979
Other construction/land		108,304		231		—		488		109,023		90,761		98		—		554		91,413
1-4 family - closed end		230,022		1,861		1,310		3,632		236,825		194,572		2,425		164		3,020		200,181
Equity lines		49,346		2,194		64		4,716		56,320		43,111		1,995		72		4,421		49,599
Multi-family residential		54,504		—		—		373		54,877		54,104		—		—		353		54,457
Commercial real estate - owner occupied		292,886		4,192		3,021		1,225		301,324		334,460		4,005		3,384		2,034		343,883
Commercial real estate - non-owner occupied		429,835		2,730		4,354		1,425		438,344		409,289		1,164		11		2,105		412,569
Farmland		148,680		1,073		146		1,642		151,541		142,594		1,048		132		259		144,033
Total real estate		1,419,253		12,281		8,895		13,501		1,453,930		1,374,870		10,735		3,763		12,746		1,402,114

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

Past Due and Nonperforming Assets

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets. The Company’s foreclosed assets can include mobile homes and/or OREO, which consists of commercial and/or residential real estate properties acquired by foreclosure or similar means that the Company is offering or will offer for sale. Foreclosed assets totaled ~~$762,000~~$.8 million at ~~September 30, 2019,~~March 31, 2020, and ~~$1.082~~December 31, 2019. Gross nonperforming loans totaled $7.4 million at March 31, 2020 and $5.7 million at December 31, ~~2018. Gross nonperforming loans totaled $6.719 million at September 30, 2019 and $5.156 million at December 31, 2018.~~2019. Loans and leases are classified as nonperforming when reasonable doubt surfaces with regard to the ability of the Company to collect all principal and interest. At that point, we stop accruing interest on the loan or lease in question and reverse any previously-recognized

2119

Table of Contents

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

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

Loan Portfolio Aging

(dollars in thousands, unaudited)


	September 30, 2019														March 31, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due(1)		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans(2)		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	$	—	$	—	$	—	$	—	$	115,821	$	115,821	$	—	$	464	$	—	$	—	$	464	$	94,114	$	94,578	$	—
Other construction/land		621		—		—		621		92,496		93,117		37		—		—		—		—		90,602		90,602		10
1-4 family - closed end		24		—		1,359		1,383		209,344		210,727		1,445		2,349		14		783		3,146		186,488		189,634		866
Equity lines		343		70		22		435		50,772		51,207		457		122		—		141		263		48,273		48,536		535
Multi-family residential		—		—		—		—		52,302		52,302		—		—		—		—		—		58,238		58,238		—
Commercial real estate - owner occupied		—		—		982		982		321,556		322,538		1,449		196		—		837		1,033		301,901		302,934		1,941
Commercial real estate - non-owner occupied		198		2,819		—		3,017		414,407		417,424		2,819		633		—		2,127		2,760		472,166		474,926		2,608
Farmland		—		—		—		—		144,618		144,618		24		213		—		—		213		141,527		141,740		257
Total real estate		1,186		2,889		2,363		6,438		1,401,316		1,407,754		6,231		3,977		14		3,888		7,879		1,393,309		1,401,188		6,217

Agricultural		—		—		—		—		49,105		49,105		—		—		—		—		—		49,199		49,199		—
Commercial and industrial		60		60		52		172		115,565		115,737		405		617		358		195		1,170		110,820		111,990		1,116
Mortgage warehouse lines		—		—		—		—		216,913		216,913		—		—		—		—		—		228,608		228,608		—
Consumer		76		4		13		93		8,058		8,151		83		42		8		—		50		6,990		7,040		18
Total gross loans and leases	$	1,322	$	2,953	$	2,428	$	6,703	$	1,790,957	$	1,797,660	$	6,719	$	4,636	$	380	$	4,083	$	9,099	$	1,788,926	$	1,798,025	$	7,351

(1)

As of ~~September 30, 2019~~March 31, 2020 there were no loans over 90 days past due and still accruing.

(2)

Included in total financing receivables

2220

Table of Contents

Loan Portfolio Aging

(dollars in thousands, unaudited)


	December 31, 2018														December 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due(1)		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans(2)		30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due(1)		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans(2)
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	105,676	$	105,676	$	—	$	—	$	—	$	—	$	—	$	105,979	$	105,979	$	—
Other construction/land		210		—		27		237		108,786		109,023		82		16		—		—		16		91,397		91,413		31
1-4 family - closed end		319		—		775		1,094		235,731		236,825		799		485		380		659		1,524		198,657		200,181		741
Equity lines		1,471		—		57		1,528		54,792		56,320		408		177		10		78		265		49,334		49,599		480
Multi-family residential		—		—		—		—		54,877		54,877		—		—		—		—		—		54,457		54,457		—
Commercial real estate - owner occupied		183		—		102		285		301,039		301,324		605		1,552		—		88		1,640		342,243		343,883		1,440
Commercial real estate - non-owner occupied		49		—		—		49		438,295		438,344		49		500		—		1,605		2,105		410,464		412,569		2,105
Farmland		1,555		—		—		1,555		149,986		151,541		1,642		—		—		—		—		144,033		144,033		258
Total real estate		3,787		—		961		4,748		1,449,182		1,453,930		3,585		2,730		390		2,430		5,550		1,396,564		1,402,114		5,055

Agricultural		—		—		—		—		49,103		49,103		—		—		—		—		—		48,036		48,036		—
Commercial and industrial		1,567		83		886		2,536		125,684		128,220		1,425		160		215		—		375		115,157		115,532		651
Mortgage warehouse lines		—		—		—		—		91,813		91,813		—		—		—		—		—		189,103		189,103		—
Consumer		95		45		56		196		8,666		8,862		146		55		12		2		69		7,711		7,780		31
Total gross loans and leases	$	5,449	$	128	$	1,903	$	7,480	$	1,724,448	$	1,731,928	$	5,156	$	2,945	$	617	$	2,432	$	5,994	$	1,756,571	$	1,762,565	$	5,737

(1)

As of December 31, ~~2018~~2019 there were no loans over 90 days past due and still accruing.

(2)

Included in total financing receivables

Troubled Debt Restructurings

A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring (TDR) if the modification constitutes a ~~concession.~~concession, excluding loan modifications that are COVID-19 related and made in accordance with the interagency guidance and the CARES Act as described in Note 3, above. At ~~September 30, 2019,~~March 31, 2020, the Company had a total of ~~$9.9~~$9.482 million in TDRs, including ~~$880,000~~$1.0 million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance period or even at the time of loan modification. Regardless of the period of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain then the loan will be kept on non-accrual status. Moreover, a TDR is generally considered to be in default when it appears that the customer will not likely be able to repay all principal and interest pursuant to restructured terms.

2321

Table of Contents

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

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)


	Three months ended September 30, 2019										Three months ended March 31, 2020
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total		Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:
Other construction/land	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
1-4 family - closed-end		—		—		—		—		—		—		—		—		—		—		—
Equity lines		—		—		—		—		—		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—		—		—		—		—		86		86
Farmland		—		—		—		—		—		—		—		—		—		—		—
Total real estate loans		—		—		—		—		—		—		—		—		—		86		86
Agricultural		—		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		—		233		—		—		233		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—		—		—		—		—		—
Total	$	—	$	233	$	—	$	—	$	233	$	—	$	—	$	—	$	—	$	86	$	86


	Three months ended September 30, 2018										Three months ended March 31, 2019
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total		Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:
Other construction/land	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
1-4 family - closed-end		—		—		—		—		—		—		—		—		—		—		—
Equity lines		—		97		—		—		97		—		100		—		—		—		100
Multi-family residential		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—		—		—		—
Total real estate loans		—		97		—		—		97		—		100		—		—		—		100
Agricultural		—		7		—		—		7		—		—		—		—		—		—
Commercial and industrial		—		10		—		—		10		94		—		—		—		—		94
Consumer loans		—		—		10		—		10		—		9		—		—		—		9
Total	$	—	$	114	$	10	$	—	$	124	$	94	$	109	$	—	$	—	$	—		203

2422

Table of Contents

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

(dollars in thousands, unaudited)

Nine months ended September 30, 2019


Rate Modification

Term
Modification

Interest Only Modification

Rate & Term Modification

Total
Real estate:

Other construction/land

$
—

$
—

$
—

$
—

$
—
1-4 family - closed-end

—

—

—

—

—
Equity lines

—

344

—

—

344
Multi-family residential

—

—

—

—

—
Commercial real estate - owner occupied

—

—

—

—

—
Farmland

—

—

—

—

—
Total real estate loans

—

344

—

—

344
Agricultural

—

—

—

—

—
Commercial and industrial

94

255

—

52

401
Consumer loans

—

9

—

50

59
Total

$
94

$
608

$
—

$
102

$
804

Nine months ended September 30, 2018


Rate Modification

Term
Modification

Interest Only Modification

Rate & Term Modification

Total
Real estate:

Other construction/land

$
—

$
—

$
—

$
—

$
—
1-4 family - closed-end

—

—

—

—

—
Equity lines

—

460

504

—

964
Multi-family residential

—

—

—

—

—
Commercial real estate - owner occupied

—

—

—

—

—
Farmland

—

—

—

—

—
Total real estate loans

—

460

504

—

964
Agricultural

—

7

—

—

7
Commercial and industrial

—

73

25

225

323
Consumer loans

—

—

10

—

10
Total

$
—

$
540

$
539

$
225

$
1,304

~~Table of Contents~~

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

~~Troubled Debt Restructurings~~

~~(dollars in thousands, unaudited)~~


	Three months ended September 30, 2019									Three months ended March 31, 2020
		Pre- Modification		Post- Modification							Pre- Modification		Post- Modification
	Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve		Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real estate:
Other construction/land	0	$	—	$	—	$	—	$	—	0	$	—	$	—	$	—	$	—
1-4 family - closed-end	0		—		—		—		—	0		—		—		—		—
Equity lines	0		—		—		—		—	0		—		—		—		—
Multi-family residential	0		—		—		—		—	0		—		—		—		—
Commercial real estate - owner occupied	0		—		—		—		—	1		86		86		—		—
Farmland	0		—		—		—		—	0		—		—		—		—
Total real estate loans			—		—		—		—			86		86		—		—

Agricultural	0		—		—		—		—	0		—		—		—		—
Commercial and industrial	3		233		233		(40)		9	0		—		—		—		—
Consumer loans	0		—		—		—		—	0		—		—		—		—
Total		$	233	$	233	$	(40)	$	9		$	86	$	86	$	—	$	—

(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, 2018

Pre-
Modification

Post-
Modification


Number of
Loans

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment

Reserve
Difference⁽¹⁾

Reserve
Real estate:

Other construction/land

0

$
—

$
—

$
—

$
—
1-4 family - closed-end

0

—

—

—

—
Equity lines

1

97

97

—

3
Multi-family residential

0

—

—

—

—
Commercial real estate - owner occupied

0

—

—

—

—
Farmland

0

—

—

—

—
Total real estate loans

97

97

—

3

Agricultural

1

7

7

2

2
Commercial and industrial

1

10

10

—

1
Consumer loans

1

10

10

—

—
   Total

$
124

$
124

$
2

$
6

~~(1)~~

~~Table of Contents~~

~~Troubled Debt Restructurings~~

~~(dollars in thousands, unaudited)~~

Nine months ended September 30, 2019

Pre-
Modification

Post-
Modification


Number of
Loans

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment

Reserve
Difference⁽¹⁾

Reserve
Real estate:

Other construction/land

0

$
—

$
—

$
—

$
—
1-4 family - closed-end

0

—

—

—

—
Equity lines

2

344

344

—

1
Multi-family residential

0

—

—

—

—
Commercial real estate - owner occupied

0

—

—

—

—
Farmland

0

—

—

—

—
Total real estate loans

344

344

—

1

Agricultural

0

—

—

—

—
Commercial and industrial

7

401

401

(59)

10
Consumer loans

2

59

59

(47)

2
   Total

$
804

$
804

$
$(106)

$
13

~~(1)~~


	Nine months ended September 30, 2018									Three months ended March 31, 2019
		Pre- Modification		Post- Modification							Pre- Modification		Post- Modification
	Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve		Number of Loans	Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real estate:
Other construction/land	0	$	—	$	—	$	—	$	—	0	$	—	$	—	$	—	$	—
1-4 family - closed-end	0		—		—		—		—	0		—		—		—		—
Equity lines	7		964		964		4		21	1		100		100		—		—
Multi-family residential	0		—		—		—		—	0		—		—		—		—
Commercial real estate - owner occupied	0		—		—		—		—	0		—		—		—		—
Farmland	0		—		—		—		—	0		—		—		—		—
Total real estate loans			964		964		4		21			100		100		—		—

Agricultural	0		7		7		2		2	0		—		—		—		—
Commercial and industrial	3		323		323		—		26	2		94		94		(20)		1
Consumer loans	0		10		10		—		—	1		9		9		(2)		—
Total		$	1,304	$	1,304	$	6	$	49		$	203	$	203	$	$(22)	$	1

(1)

The ~~company~~Company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the nine-month periods ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

2723

Table of Contents

Purchased Credit Impaired Loans

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

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

Purchased Credit Impaired Loans:

(dollars in thousands, unaudited)


	September 30, 2019				March 31, 2020
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Real estate secured	$	91	$	—	$	86	$	86
Total purchased credit impaired loans	$	91	$	—	$	86	$	$86


	December 31, ~~2018~~2019
	Unpaid Principal Balance		Carrying Value
Real estate secured	$	~~103~~88	$	—
Total purchased credit impaired loans	$	~~103~~—	$	—

AnThere was no allowance for loan losses ~~totaling $91,000 was~~ allocated for PCI loans as of ~~September 30, 2019, as compared to $103,000 at~~March 31, 2020 and, December 31, ~~2018.~~2019. There was no discount accretion recorded on PCI loans during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

Note 11 – Allowance for Loan and Lease Losses

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

The following tables disclose the unpaid principal balance, recorded investment, average recorded investment, and interest income recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required such. Included in the valuation allowance for impaired loans shown in the tables below are specific reserves allocated to TDRs, totaling $.6 million at March 31, 2020 and December 31, 2019.

2824

Table of Contents

~~are specific reserves allocated to TDRs, totaling $1.063 million at September 30, 2019 and $1.048 million at December 31, 2018.~~

Impaired Loans

(dollars in thousands, unaudited)


	September 30, 2019										March 31, 2020
	Unpaid Principal Balance(1)		Recorded Investment(2)		Related Allowance		Average Recorded Investment		Interest Income Recognized(3)		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	$	505	$	387	$	86	$	402	$	23	$	641	$	522	$	154	$	527	$	12
1-4 family - closed-end		2,858		2,857		75		2,916		113		2,266		2,266		62		2,279		33
Equity lines		4,714		4,662		592		4,699		188		4,129		4,076		252		4,090		37
Multi-family residential		357		357		19		364		17		347		347		17		349		6
Commercial real estate- owner occupied		600		600		9		609		28		586		586		2		589		9
Commercial real estate- non-owner occupied		2,819		2,819		910		2,858		—		—		—		—		—		—
Farmland		—		—		—		—		—		237		237		3		237		—
Total real estate		11,853		11,682		1,691		11,848		369		8,206		8,034		490		8,071		97
Agricultural		5		6		1		6		—		5		5		—		5		—
Commercial and industrial		788		769		133		893		27		1,156		1,137		520		1,157		6
Consumer loans		745		706		234		720		40		414		376		98		385		8
Subtotal		13,391		13,163		2,059		13,467		436		9,781		9,552		1,108		9,618		111
With no related allowance recorded
Real estate:
Other construction/land		54		18		—		21		3		—		—		—		—		—
1-4 family - closed-end		995		957		—		968		—		844		844		—		845		—
Equity lines		158		133		—		138		—		305		305		—		307		1
Commercial real estate- owner occupied		1,570		1,450		—		1,473		—		2,062		1,942		—		1,950		—
Commercial real estate- non-owner occupied		—		—		—		—		—		3,798		2,608		—		2,440		—
Farmland		25		25		—		26		—		20		20		—		21		—
Total real estate		2,802		2,583		—		2,626		3		7,029		5,719		—		5,563		1
Agricultural		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		62		41		—		55		—		289		268		—		271		—
Consumer loans		15		—		—		—		1		—		—		—		—		—
Subtotal		2,879		2,624		—		2,681		4		7,318		5,987		—		5,834		1
Total	$	16,270	$	15,787	$	2,059	$	16,148	$	440	$	17,099	$	15,539	$	1,108	$	15,452	$	112

(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.

2925

Table of Contents

Impaired Loans

(dollars in thousands, unaudited)


	December 31, 2018										December 31, 2019
	Unpaid Principal Balance(1)		Recorded Investment(2)		Related Allowance		Average Recorded Investment		Interest Income Recognized(3)		Unpaid Principal Balance(1)		Recorded Investment(2)		Related Allowance		Average Recorded Investment		Interest Income Recognized(3)
With an allowance recorded
Real estate:
1-4 family residential construction											$	—	$	—	$	—	$	—	$	—
Other construction/land	$	593	$	438	$	44	$	458	$	40		656		537		157		563		32
1-4 family - closed-end		3,325		3,325		75		3,221		175		2,298		2,298		58		2,365		146
Equity lines		4,603		4,550		656		4,563		206		4,173		4,120		252		4,185		200
Multi-family residential		373		373		25		379		20		353		353		17		361		23
Commercial real estate- owner occupied		842		723		135		757		40		593		593		6		606		38
Commercial real estate- non-owner occupied		1,572		1,425		3		1,482		107		—		—		—		—		—
Farmland												237		237		3		256		—
Total real estate		11,308		10,834		938		10,860		588		8,310		8,138		493		8,336		439
Agricultural		6		6		1		3		—		5		5		1		6		—
Commercial and industrial		1,724		1,534		918		1,573		40		915		896		219		1,140		29
Consumer loans		813		764		151		807		61		464		425		114		469		35
Subtotal		13,851		13,138		2,008		13,243		689		9,694		9,464		827		9,951		503
With no related allowance recorded
Real estate:
1-4 family residential construction											$	—	$	—	$	—	$	—	$	—
Other construction/land		54		50		—		32		—		52		17		—		577		4
1-4 family - closed-end		357		307		—		584		3		755		722		—		726		—
Equity lines		224		166		—		222		—		326		301		—		310		5
Multi-family residential												—		—		—		—		—
Commercial real estate- owner occupied		502		502		—		181		—		1,560		1,440		—		1,477		—
Commercial real estate- non-owner occupied		—		—		—		2,004		—		3,295		2,105		—		3,267		—
Farmland		1,642		1,642		—		434		—		22		22		—		25		—
Total real estate		2,779		2,667		—		3,457		3		6,010		4,607		—		6,382		9
Agricultural		—		—		—		139		—		—		—		—		—		—
Commercial and industrial		238		211		—		—		—		102		81		—		162		—
Consumer loans		182		56		—		41		1		9		—		—		140		15
Subtotal		3,199		2,934		—		3,637		4		6,121		4,688		—		6,684		24
Total	$	17,050	$	16,072	$	2,008	$	16,880	$	693	$	15,815	$	14,152	$	827	$	16,635	$	527

(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~~.basis.

The specific loss allowance for an impaired loan generally represents the difference between the book value of the loan and either the fair value of underlying collateral less estimated disposition costs, or the loan’s net present value as determined by a discounted cash flow analysis. The discounted cash flow approach is typically used to measure

Table of Contents

impairment on loans for which it is anticipated that repayment will be provided from cash flows other than those generated solely by the disposition or operation of underlying collateral. However, historical loss rates may be used by the Company to determine a specific loss allowance if those rates indicate a higher potential reserve need than the discounted cash flow analysis. Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral value, net of the expected costs of disposition, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required. At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within 30 to 60 days if a recent appraisal is not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed staff appraisers

~~Table of Contents~~

may update older appraisals based on current market conditions and property value trends. Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required. The specific loss allowance is adjusted, as necessary, once a new appraisal is received. Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired, and current appraisals were available or in process for ~~97%~~55% of the Company’s impaired real estate loan balances at ~~September 30, 2019.~~March 31, 2020. Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off against the Company’s allowance for loan and lease losses, with the loan then carried at the fair value of the collateral, as appraised, less estimated costs of disposition if applicable. Once a charge-off or write-down is recorded, it will not be restored to the loan balance on the Company’s accounting books.

Our methodology also provides for the establishment of a “general” allowance for probable incurred losses inherent in loans and leases that are not impaired. Unimpaired loan balances are segregated by credit quality, and are then evaluated in pools with common characteristics. At the present time, pools are based on the same segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other measurable information, the credit classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on Management’s judgment and experience. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that Management believes is appropriate at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the condition of the agricultural industry and other key industries. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was ~~$9.141~~$10.3 million at ~~September 30, 2019.~~March 31, 2020.

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, 2019,~~March 31, 2020, although as outlined in Note 3 to the consolidated financial statements we will substantially update our methodology upon the ~~adoption~~implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards UpdateASU 2016‑13 ~~on January 1,~~and related amendments, Financial Instruments – Credit Losses (Topic 326)when the earlier of the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Moreover, we will continue to enhance our methodology as needed in order to comply with regulatory and accounting requirements, keep pace with the size and complexity of our loan and lease portfolio, and respond to pressures created by external forces. We engage outside firms on a regular basis to assess our methodology and perform independent credit reviews of our loan and lease portfolio. In addition, the FDIC and the California DBO review the allowance for loan and lease losses as an integral part of their audit and examination processes. Management believes ~~that~~deferring the implementation of “CECL” and continuing with the current incurred loss methodology is appropriate given ~~our size~~the impact of the economic uncertainty surrounding COVID-19 and ~~level~~related governmental and regulatory actions taken in response thereto, such as the stimulus provisions of ~~complexity.~~the CARES Act.

3127

Table of Contents

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)


		Three months ended September 30, 2019											Three months ended March 31, 2020
		Real Estate		Agricultural Products		Commercial and Industrial (1)		Consumer		Unallocated		Total	Real Estate		Agricultural Products		Commercial and Industrial (1)		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance	$	5,969	$	201	$	2,569	$	1,132	$	12	$	9,883	$	5,635	$	193	$	2,685	$	1,278	$	132	$	9,923
Charge-offs		—		—		(57)		(640)		—		(697)		—		—		(25)		(617)		—		(642)
Recoveries		187		—		172		305		—		664		72		—		28		272		—		372
Provision		568		(10)		177		629		(14)		1,350		1,608		42		66		204		(120)		1,800
Ending balance	$	6,724	$	191	$	2,861	$	1,426	$	(2)	$	11,200	$	7,315	$	235	$	2,754	$	1,137	$	12	$	11,453

	Nine months ended September 30, 2019
	Real Estate		Agricultural Products		Commercial and Industrial (1)		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance	$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750
Charge-offs		—		—		(891)		(1,753)		—		(2,644)
Recoveries		516		—		646		882		—		2,044
Provision		377		(65)		712		1,058		(32)		2,050
Ending balance	$	6,724	$	191	$	2,861	$	1,426	$	(2)	$	11,200

Reserves:
Specific	$	1,691	$	1	$	133	$	234	$	—	$	2,059	$	490	$	—	$	520	$	98	$	—	$	1,108
General		5,033		190		2,728		1,192		(2)		9,141		6,825		235		2,234		1,039		12		10,345
Ending balance	$	6,724	$	191	$	2,861	$	1,426	$	(2)	$	11,200	$	7,315	$	235	$	2,754	$	1,137	$	12	$	11,453

Loans evaluated for impairment:
Individually	$	14,265	$	6	$	810	$	706	$	—	$	15,787	$	13,753	$	5	$	1,405	$	376	$	—	$	15,539
Collectively		1,393,489		49,099		331,840		7,445		—		1,781,873		1,387,435		49,194		339,193		6,664		—		1,782,486
Ending balance	$	1,407,754	$	49,105	$	332,650	$	8,151	$	—	$	1,797,660	$	1,401,188	$	49,199	$	340,598	$	7,040	$	—	$	1,798,025

		Year ended December 31, 2018												Year ended December 31, 2019
	Real Estate		Agricultural Products		Commercial and Industrial (1)		Consumer		Unallocated		Total		Real Estate		Agricultural Products		Commercial and Industrial (1)		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance	$	4,786	$	208	$	2,772	$	1,231	$	46	$	9,043	$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750
Charge-offs		(2,474)		—		(608)		(2,226)		—		(5,308)		(1,190)		—		(1,274)		(2,409)		—		(4,873)
Recoveries		374		23		148		1,120		—		1,665		647		—		690		1,159		—		2,496
Provision		3,145		25		82		1,114		(16)		4,350		347		(63)		875		1,289		102		2,550
Ending balance	$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750	$	5,635	$	193	$	2,685	$	1,278	$	132	$	9,923

Reserves:
Specific	$	937	$	2	$	918	$	151	$	—	$	2,008	$	493	$	1	$	219	$	114	$	—	$	827
General		4,894		254		1,476		1,088		30		7,742		5,142		192		2,466		1,164		132		9,096
Ending balance	$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750	$	5,635	$	193	$	2,685	$	1,278	$	132	$	9,923

Loans evaluated for impairment:
Individually	$	13,501	$	6	$	1,744	$	821	$	—	$	16,072	$	12,746	$	5	$	977	$	425	$	—	$	14,153
Collectively		1,440,429		49,097		218,289		8,041		—		1,715,856		1,389,368		48,031		303,658		7,355		—		1,748,412
Ending balance	$	1,453,930	$	49,103	$	220,033	$	8,862	$	—	$	1,731,928	$	1,402,114	$	48,036	$	304,635	$	7,780	$	—	$	1,762,565

														Three months ended March 31, 2019
													Real Estate		Agricultural Products		Commercial and Industrial (1)		Consumer		Unallocated		Total
Allowance for credit losses:
Beginning balance													$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750
Charge-offs														—		—		(579)		(551)		—		(1,130)
Recoveries														175		—		41		302		—		518
Provision														88		(37)		58		139		52		300
Ending balance													$	6,094	$	219	$	1,914	$	1,129	$	82	$	9,438
Reserves:
Specific													$	915	$	1	$	333	$	180	$	—	$	1,429
General														5,179		218		1,581		949		82		8,009
Ending balance													$	6,094	$	219	$	1,914	$	1,129	$	82	$	9,438
Loans evaluated for impairment:
Individually													$	13,348	$	6	$	1,099	$	789	$	—	$	15,242
Collectively														1,460,502		52,080		215,698		7,467		—		1,735,747
Ending balance													$	1,473,850	$	52,086	$	216,797	$	8,256	$	—	$	1,750,989

(1)

Includes mortgage warehouse lines.

Table of Contents

Note 12 – Operating Leases

We lease space under non-cancelable operating leases for 21 branch locations, three off-site ATM locations, one administrative building, one loan production office and a warehouse. Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs). Payments for taxes and insurance as well as non-lease components are not included in the accounting of the lease component, but are

~~Table of Contents~~

separately accounted for in occupancy expense. The Company recognized lease expense of ~~$557 thousand~~$.6 million and ~~$1.652~~$.5 million for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2020 and 2019, ~~respectively. Lease expense for the three and nine month periods ended September 30, 2018, prior to the adoption of ASU 2016‑02, was $567 thousand and $1.745 million,~~ respectively. Most leases include one or more renewal options available to exercise. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. As most of our leases do not provide an implicit rate, we used our incremental borrowing rate in determining the present value of the lease payments.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

At ~~September 30, 2019,~~March 31, 2020, the Company’s right-of-use assets and operating lease liabilities were ~~$8.677~~$7.9 million and ~~$9.281~~$8.5 million, respectively. The weighted average remaining lease term for the lease liabilities was ~~5.0~~7.1 years, and the weighted average discount rate of remaining payments was 5.5 percent. There were no lease liabilities from new right-of-use assets obtained during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. Cash paid on operating leases was ~~$1.055~~$.4 million for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

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


	Maturities of
	Lease Liabilities		March 31, 2020
2019 (1)	$	550
2020		2,227
2020 (1)			$	1,677
2021		2,013		2,020
2022		1,567		1,571
2023		1,119		1,113
2024				749
Thereafter		3,939		3,196
Total		11,415		10,326
Less: present value discount		(2,134)		(1,856)
Lease liability (2)	$	9,281	$	8,470

(1)

Contractual maturities for the ~~three~~nine months remaining in ~~2019.~~2020.

(2)

Lease liability is included in other liabilities.

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


	December 31, 2018		December 31, 2019
2019	$	2,193
2020		2,227	$	2,235
2021		2,013		2,023
2022		1,567		1,574
2023		1,119		1,113
2024				749
Thereafter		3,939		3,196
Total	$	13,058
Total undiscounted lease payments				10,890

Table of Contents

Note 13 – Revenue Recognition.

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

~~Table of Contents~~

enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company’s revenue streams that are within the scope of and accounted for under Topic 606 include service charges on deposit accounts, debit card interchange fees, and fees levied for other services the Company provides its customers. The guidance does not apply to revenue associated with financial instruments such as loans and investments, and other noninterest income such as loan servicing fees and earnings on bank-owned life insurance, which are accounted for on an accrual basis under other provisions of GAAP. In total, approximately ~~19%~~21% of the Company’s noninterest revenue was outside of the scope of the ASC 606 for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

All of the company’s revenue from contracts within the scope of ASC 606 is recognized as noninterest income. The following table presents the Company’s sources of noninterest income for the ~~three- and nine-month~~three-month periods ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Items outside the scope of ASC 606 are noted as such (dollars in thousands, unaudited).


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
	2019		2018		2019		2018		2020		2019
Non-interest income
Service charges on deposits
Returned item and overdraft fees	$	1,766	$	1,676	$	4,990	$	4,818	$	1,663	$	1,567
Other service charges on deposits		1,526		1,532		4,396		4,363		1,520		1,376
Debit card interchange income		1,698		1,478		4,897		4,363		1,632		1,512
Loss on limited partnerships(1)		(728)		(431)		(1,628)		(1,242)		(158)		(450)
Dividends on equity investments(1)		188		227		594		621		194		231
Unrealized gains recognized on equity investments(1)		—		—		232		—		447		—
Net gains on sale of securities(1)		—		1		29		2		—		6
Other(1)		1,419		1,240		4,121		3,360		808		1,664
Total non-interest income	$	5,869	$	5,723	$	17,631	$	16,285	$	6,106	$	5,906

Non-interest expense
Salaries and employee benefits (1)									$	10,172	$	9,243
Occupancy expense (1)										2,327		2,361
Gain on sale of OREO										2		3
Other (1)										5,317		6,245
Total non-interest expense									$	17,818	$	17,852

(1)

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

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

3430

Table of Contents

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

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

CRITICAL ACCOUNTING POLICIES

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

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

3531

Table of Contents

OVERVIEW OF THE RESULTS OF OPERATIONS

AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

~~Third~~First Quarter ~~2019~~2020 compared to ~~Third~~First Quarter ~~2018~~2019

~~Net~~First Quarter 2020 net income ~~for the quarter ended September 30, 2019~~ was ~~$8.952 million, an increase of $1.881~~$7.8 million, or ~~27%, relative~~$0.51 per diluted share, compared to ~~net income of $7.071~~$8.9 million, ~~for~~or $0.58 per diluted share in the ~~quarter ended September 30, 2018. Basic and diluted earnings per share for the third~~first quarter of ~~2019 were both $0.58, compared to $0.46 basic and diluted earnings per share for the third quarter of 2018.~~2019. The Company’s annualized return on average equity was ~~11.78%~~9.97% and annualized return on average assets was ~~1.36%~~1.05% for the quarter ended ~~September 30, 2019,~~March 31, 2020, compared to ~~10.66%~~12.99% and ~~1.15%~~1.44%, respectively, for the same quarter ~~ended September 30, 2018.~~in 2019. The primary ~~drivers~~driver behind these unfavorable variances is the ~~variance in third quarter net income are as follows:~~provision for loan and leases losses.

Net interest income increased by $599,000, or 3%, due to the positive impact of growth in average interest-earning assets totaling $158 million, or 7%, partially offset by a drop of 18 basis points in our net interest margin for the comparative quarters. Organic growth in the average balances of mortgage warehouse loans, real estate loans and investments contributed to the increase in average earning assets. However, our net interest margin was negatively impacted by the following factors: A shift in our earning asset mix into lower-yielding loans and investments; aggressive pricing instituted on mortgage warehouse lines to encourage increased line utilization; higher rates paid on time deposits and brokered deposits; and, a shift in the mix of our interest-bearing liabilities toward higher-cost funding sources.

~~The Company’s provision for loan losses was $1.350~~

The Company’s provision for loan and lease losses was $1.8 million in ~~the third quarter of 2019 relative to $2.450 million in the third quarter of 2018.~~ ~~The 2019 provision~~ includes close to $900,000 set aside for a $2.8 million loan that was placed on non-accrual status shortly before the end of the third quarter, while the 2018 provision includes the establishment of a $1.9 million reserve for a $10 million loan participation that was placed on non-accrual status during the third quarter of 2018.

Total noninterest income reflects an increase of $146,000, or 3%, despite a $278,000 valuation reduction recorded on a limited partnership investment in the third quarter of 2019. The comparative results include higher deposit service charges and an increase in debit card interchange income, augmented by a favorable swing of $150,000, or 34%, in income generated by bank-owned life insurance (BOLI).

Total noninterest expense declined by $719,000, or 4%. Compensation costs were roughly the same, but occupancy expense fell by $200,000, or 7%, due primarily to a drop in furniture and equipment costs. Other favorable expense variances for the quarter include the offset of the Company’s FDIC assessment for the third quarter of 2019, resulting from the application of small-bank assessment credits provided by the FDIC,~~and various other expense reductions in a number of categories.~~

~~The Company’s provision for income taxes was 24.2% of pre-tax income in the third quarter of 2019 relative to 23.5% in the third quarter of 2018.~~

~~First Nine Months of 2019 compared to First Nine Months of 2018~~

~~Net income for~~ the first ~~nine months~~quarter of ~~2019 was $26.676 million, an increase of $4.903 million, or 23%,~~2020 relative to ~~net income~~$0.3 million in the same quarter of ~~$21.773~~2019. The $1.5 million increase in provision for loan and lease losses is due mostly to the ~~first nine months of 2018. Basic~~estimated impact that COVID-19 will have on the economy and ~~diluted earnings per share~~our loan customers. Management adjusted its qualitative risk factors under the incurred loss model for ~~the first nine months of 2019 were $1.74~~worsening economic conditions, changes in credit policy that provide payment deferrals to customers, expected changes in collateral values due to reduced cash flows, and ~~$1.73, respectively, compared~~external factors such as government shelter-in-place orders. The uncertainty regarding our customers’ ability to $1.43 and $1.41 basic and diluted earnings per share, respectively, for the first nine months of 2018. The Company’s annualized return on average equity was 12.33% and annualized return on average assets was 1.40% for the nine months ended September 30, 2019, compared to a return on equity of 11.23% and return on assets of 1.22% for the nine months ended September 30, 2018. The primary drivers behind the variance in year-to-date net income are as follows:repay loans could be adversely impacted by COVID-19 given these factors.

Net interest income was up by $4.211 million, or 6%, due to an increase of $156 million, or 7%, in average interest-earning assets that was partially offset by a four basis point decline in our net interest margin.

~~Table of Contents~~

The Company recorded a $2.050 million provision for loan losses in the first nine months of 2019, relative to a $2.950 million provision in 2018. The largest impact on the year-to-date provisions came from the third quarter events noted above.

Total noninterest income increased by $1.346 million, or 8%. The year-to-date variance reflects nonrecurring gains recorded in the second quarter of 2019, including $232,000 from the write up of certain restricted stock pursuant to a periodic assessment of its market value, and $100,000 from the wrap-up of a low-income housing tax credit fund investment. The variance also includes increases in deposit service charges and debit card interchange income, and an increase of $551,000, or 52%, in BOLI income. As with the quarterly comparison, increases within noninterest income were partially offset by the valuation adjustment recorded on a limited partnership investment in the third quarter of 2019.

Total noninterest expense was reduced by $391,000, or 1%. Similar to the quarterly comparison, compensation costs did not change materially and occupancy expense declined by $188,000, or 3%. Other noninterest expense went down by $230,000, or 1%, including the quarterly reductions noted above as well as the favorable impact of lower nonrecurring acquisition costs. Partially offsetting favorable year-to-date variances, however, were a $335,000 increase in net OREO expense and a $148,000 increase in directors’ deferred compensation expense (related to the increase in BOLI income).

~~The Company’s provision for income taxes was 24.9% of pre-tax income for the first nine months of 2019 relative to 24.1% for the same period in 2018.~~

FINANCIAL CONDITION SUMMARY

~~September 30, 2019~~March 31, 2020 relative to December 31, ~~2018~~2019

The Company’s assets totaled ~~$2.636~~$2.7 billion at ~~September 30, 2019~~March 31, 2020 relative to ~~$2.523~~$2.6 billion at December 31, 2018. Total liabilities were $2.333 billion at September 30, 2019 compared to $2.249 billion at the end of 2018, and shareholders’ equity totaled $303 million at September 30, 2019 compared to $273 million at December 31, 2018.2019. The following provides a summary of key balance sheet changes during the first ~~nine~~three months of ~~2019:~~2020:

The Company’s balance of cash and ~~cash equivalents~~due from banks was up by $7$13.1 million, or 9%20%, due ~~an $11 million increase~~to maintaining additional cash in ~~interest-bearing balances~~our branches in late March 2020 as a result of lack of assurance from our armored delivery service that ~~was partially offset by a drop in~~ cash ~~items in process of collection and lower vault cash balances.~~could be reliably delivered as requested due to COVID-19.

~~Gross loans increased by $66~~Securities available-for-sale were $620.2 million ~~or 4%, due to~~at March 31, 2020, an increase of ~~$125~~$19.4 million, or 3%, during the quarter due to purchases of securities in March 2020 primarily to take advantage of temporary lower market pricing in the bond market, principally in the municipal securities market.

Net loans and leases increased $33.8 million, or 2%, during the first quarter of 2020 to $1.8 billion at March 31, 2020, due mostly to a $39.5 million increase in Mortgage Warehouse Lines during the quarter.

Nonperforming assets increased $1.6 million, to $8.1 million during the first quarter of 2020. This increase was due to $2.0 million in ~~outstanding balances on mortgage warehouse~~new nonaccrual loans ~~that was partially offset by net runoff~~and paydowns of $0.4 million. The new nonaccrual loans were not a result of COVID-19, as they downgrades occurred mostly in ~~other~~the early part of the quarter. The new nonaccrual loans consisted primarily of a few smaller real-estate loans and one commercial loan ~~categories.~~for $0.5 million.

Total ~~nonperforming assets, comprised of non-accrual loans~~Deposits increased slightly by $11.0 million, or 1%, during the first quarter 2020. Total time deposits declined by $34.3 million, while lower-cost transaction and ~~foreclosed assets,~~savings accounts increased by ~~$1.2 million, or 20%, due~~$45.4 million. Noninterest bearing deposits as a percent of total deposits was 32.3% at March 31, 2020, as compared to the aforementioned $2.8 million commercial real estate loan which was placed on nonaccrual status in the third quarter, partially offset by reductions resulting from net loan charge-offs and our continued efforts to sell OREO and resolve nonperforming loan balances. The Company’s ratio of nonperforming assets to total loans plus foreclosed assets increased to 0.42% at September 30, 2019 from 0.36%31.9% at December 31, ~~2018.~~2019.

~~The “other assets” line item~~Short-term borrowings increased by $4$54.1 million ~~or 7%,~~to $74.1 million at March 31, 2020. This increase was due to additional Federal Home Loan Bank (FHLB) overnight borrowings to fund increases in our assets during the current $9 million balance of an operating lease asset booked in 2019 pursuant to our adoption of FASB ASU 2016‑02, partially offset by our first quarter 2019 collection of a receivable established at the end of 2018 for expected proceeds from the sale of a large foreclosed property.quarter.

~~Deposit balances reflect growth~~Total shareholders’ equity of ~~$80 million, or 4%, during the first nine months of 2019. Core non-maturity deposits increased by $37 million, or 2%, while customer time deposits increased by $43 million, or 9%.~~

~~Junior subordinated debentures increased slightly from accretion of the discount on trust-preferred securities, but other non-deposit borrowings were reduced by $5 million, or 7%.~~

~~Other liabilities increased by $8 million, or 32%, due in large part to a liability for future operating lease payments that was set up in conjunction with the operating lease asset noted above.~~

~~Table of Contents~~

~~Total capital of $303~~$319.5 million at ~~September 30, 2019~~March 31, 2020 reflects an increase of ~~$30~~$10.2 million, or ~~11%~~3%, relative to year-end ~~2018~~2019 due to capital from the addition of net income, a ~~$13~~$7.7 million favorable swing in accumulated other comprehensive income/loss, and stock options exercised, net of ~~$8.4~~$3.1 million in dividends paid. There were share repurchases totaling ~~54,579~~112,050 shares at a weighted average cost of ~~$25.16~~$22.86 per share executed by the Company during the ~~third~~first quarter of ~~2019.~~2020.

Table of Contents

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

Overview

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

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

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

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

Starting on March 9, 2020, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Conference of State Bank Supervisors began issuing various Interagency Guidance Statements to encourage financial institutions to meet the financial needs of customers affected by the Coronavirus.

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

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

Effective March 20, 2020, the state of California ordered the closure of all non-essential workplaces, restricting non-essential travel, and ordering a state-wide shelter-in-place order. This was followed by extensions of these orders in April and many local municipalities in which the Company operates issued orders mandating additional requirements to protect their citizens.

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

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

Table of Contents

Impact of COVID-19 on the Company’s Operations

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

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

The COVID-19 pandemic has not adversely affected our capital or financial resources at this time. During the first quarter of 2020, total shareholders’ equity increased by $10.2 million, or 3%, to $319.5 million. The largest component of this was a $7.7 million increase in accumulated other comprehensive income as a result of increases in the value of our investment portfolio due to lower interest rates. If interest rates rise, this component of equity would be expected to decline. In addition, the Company earned $7.8 million in net income in the first quarter of 2020 and paid a twenty cent per share dividend of $3.1 million. The Company also declared a twenty cent per share dividend to be paid on May 13, 2020. Although presently not expected, if the Company were to incur significant credit losses as a result of COVID-19’s impact on our customers’ ability to repay loans, capital could be adversely impacted. With respect to liquidity, the Company maintains strong primary and secondary liquidity sources as further described under “Liquidity and Market Risk Management” below.

While we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet, this could change in future periods. Certain valuation assumptions and judgments continue to change to account for pandemic-related circumstances such as widening credit spreads. However, we do not anticipate any significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. As of March 31, 2020, our goodwill was not impaired. The Company performed a qualitative assessment of its goodwill during the first quarter of 2020 and concluded that it was not more likely than not that a goodwill impairment exists. The Company will continue to monitor its goodwill recorded on the balance sheet for potential impairment. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At March 31, 2020, we had goodwill of $27.4 million which represented 9% of total equity at March 31, 2020.

As an essential service under California’s stay-at-home orders, the Company continues to serve its customers. Each of our branches with a drive-up or walk-up facility continues to remain open. We also continue to accept

Table of Contents

appointments. Out of our 40 branch locations, nine of them do not have a drive-up or walk-up facility and are currently closed except by appointment. Most of our back-office and corporate employees are working remotely and it has not adversely affected our operations. In addition, none of our internal controls have changed or are expected to change as a result of the remote work arrangements. The Company is prepared to continue operating in this manner until it is safe to begin bringing those working remotely back to our corporate offices and branches.

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

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

The Company’s primary footprint is in the Central San Joaquin Valley of California. As a result, restrictions on non-essential travel are not expected to adversely affect our ability to service our loan and deposit customers. The Company also loosened its vacation and sick-time policy to accommodate our employees who were affected by COVID-19. The Company has not had any temporary or permanent reductions in staff as a result of COVID-19.

EARNINGS PERFORMANCE

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as bank-owned life insurance. The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a broad range of banking services to our customers.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income ~~increased by $599,000, or 3%, for the third quarter of 2019 relative to the third quarter of 2018, and by $4.211~~was $23.8 million ~~or 6%,~~ for the first ~~nine months~~quarter of ~~2019 in comparison~~2020, a decrease of $0.2 million, or 1%, as compared to the first ~~nine months~~quarter of ~~2018.~~ 2019. The slight decrease in net interest income for the first quarter of 2020 as compared to the same period in 2019 is due to lower net interest margin, partially offset by an increase in average earning assets. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. ~~Net interest income can also be impacted by nonrecurring items, as discussed in greater detail below.~~

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

3835

Table of Contents

Average Balances and Rates

(dollars in thousands, unaudited)


	For the three months ended					For the three months ended					For the three months ended					For the three months ended
	September 30, 2019					September 30, 2018					March 31, 2020					March 31, 2019
Assets	Average Balance (1)		Income/ Expense		Average Rate/Yield (2)	Average Balance (1)		Income/ Expense		Average Rate/Yield (2)	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	$	23,447	$	139	2.35%	$	4,009	$	24	2.38%	$	37,124	$	140	1.52%	$	11,469	$	73	2.58%
Taxable		426,523		2,484	2.31%		421,715		2,382	2.24%		408,591		2,460	2.42%		418,901		2,617	2.53%
Non-taxable		169,109		1,160	3.44%		140,315		1,006	3.60%		195,690		1,339	3.48%		142,329		1,045	3.77%
Total investments		619,079		3,783	2.62%		566,039		3,412	2.58%		641,405		3,939	2.69%		572,699		3,735	2.84%

Loans and leases:(3)
Real estate		1,425,093		19,858	5.53%		1,387,049		18,904	5.41%		1,394,911		18,722	5.40%		1,464,275		20,100	5.57%
Agricultural		50,394		753	5.93%		52,761		782	5.88%		48,532		583	4.83%		50,550		780	6.26%
Commercial		117,414		1,461	4.94%		123,467		1,544	4.96%		107,696		1,097	4.10%		122,597		1,577	5.22%
Consumer		8,467		354	16.59%		9,576		327	13.55%		7,583		368	19.52%		8,718		315	14.65%
Mortgage warehouse lines		169,786		1,646	3.85%		93,372		1,227	5.21%		144,621		1,264	3.52%		63,120		927	5.96%
Other		2,458		46	7.42%		2,635		40	6.02%		5,242		78	5.98%		3,107		49	6.40%
Total loans and leases		1,773,612		24,118	5.39%		1,668,860		22,824	5.43%		1,708,585		22,112	5.21%		1,712,367		23,748	5.62%
Total interest earning assets (4)		2,392,691		27,901	4.68%		2,234,899		26,236	4.70%		2,349,990		26,051	4.52%		2,285,066		27,483	4.93%
Other earning assets		12,743					10,496					12,841					11,678
Non-earning assets		199,447					202,532					196,906					209,613
Total assets	$	2,604,881				$	2,447,927				$	2,559,737				$	2,506,357
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	115,971	$	87	0.30%	$	122,543	$	94	0.30%	$	88,731	$	62	0.28%	$	99,252	$	72	0.29%
NOW		446,974		133	0.12%		432,197		120	0.11%		456,586		122	0.11%		437,209		126	0.12%
Savings accounts		290,221		79	0.11%		303,468		81	0.11%		297,721		73	0.10%		287,773		75	0.11%
Money market		120,196		53	0.17%		144,975		30	0.08%		117,249		43	0.15%		128,686		41	0.13%
Certificates of deposit, under $100,000		89,711		276	1.22%		80,889		159	0.78%		80,852		134	0.67%		90,346		278	1.25%
Certificates of deposit, $100,000 or more		409,861		2,091	2.02%		309,507		1,340	1.72%		379,699		1,233	1.31%		381,950		2,038	2.16%
Brokered deposits		44,946		264	2.33%		20,217		99	1.94%		40,824		167	1.65%		50,000		325	2.64%
Total interest bearing deposits		1,517,880		2,983	0.78%		1,413,796		1,923	0.54%		1,461,662		1,834	0.50%		1,475,216		2,955	0.81%
Borrowed funds:
Federal funds purchased		79		—	—		24		—	—		4		—	—		1,122		—	—
Repurchase agreements		25,104		26	0.41%		16,044		16	0.40%		27,482		27	0.40%		17,278		17	0.40%
Short term borrowings		11,909		64	2.13%		13,246		70	2.10%		5,946		9	0.61%		8,121		55	2.75%
TRUPS		34,876		453	5.15%		34,696		451	5.16%		34,962		394	4.53%		34,784		483	5.63%
Total borrowed funds		71,968		543	2.99%		64,010		537	3.33%		68,394		430	2.53%		61,305		555	3.67%
Total interest bearing liabilities		1,589,848		3,526	0.88%		1,477,806		2,460	0.66%		1,530,056		2,264	0.60%		1,536,521		3,510	0.93%
Demand deposits - non-interest bearing		668,139					678,154					678,592					652,910
Other liabilities		45,488					28,853					36,220					39,150
Shareholders' equity		301,406					263,114					314,869					277,776
Total liabilities and shareholders' equity	$	2,604,881				$	2,447,927				$	2,559,737				$	2,506,357
Interest income/interest earning assets					4.68%					4.70%					4.52%					4.93%
Interest expense/interest earning assets					0.59%					0.43%					0.39%					0.63%
Net interest income and margin(5)			$	24,375	4.09%			$	23,776	4.27%			$	23,787	4.13%			$	23,973	4.30%

(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 21% effective tax rate.

(3)

Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were ~~$(137)~~$(140) thousand and ~~$280~~$9 thousand for the quarters ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively.~~

~~(4)~~

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

~~(5)~~

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

~~Table of Contents~~

Average Balances and Rates

(dollars in thousands, unaudited)

For the nine months ended

For the nine months ended

September 30, 2019

September 30, 2018
Assets

Average
Balance (1)

Income/
Expense

Average
Rate/Yield (2)

Average
Balance (1)

Income/
Expense

Average
Rate/Yield (2)
Investments:

Federal funds sold/due from time

$
17,948

$
327

2.44%

$
15,758

$
204

1.73%
Taxable

423,668

7,692

2.43%

423,736

7,020

2.21%
Non-taxable

153,763

3,276

3.61%

141,032

3,040

3.65%
Total investments

595,379

11,295

2.73%

580,526

10,264

2.55%

Loans and leases:(3)

Real estate

1,449,603

60,057

5.54%

1,322,784

53,347

5.39%
Agricultural

50,742

2,326

6.13%

52,262

2,193

5.61%
Commercial

120,011

4,575

5.10%

125,021

4,413

4.72%
Consumer

8,615

961

14.91%

9,940

917

12.33%
Mortgage warehouse lines

110,776

3,812

4.60%

88,821

3,331

5.01%
Other

2,995

146

6.52%

2,715

131

6.45%
Total loans and leases

1,742,742

71,877

5.51%

1,601,543

64,332

5.37%
Total interest earning assets (4)

2,338,121

83,172

4.81%

2,182,069

74,596

4.62%
Other earning assets

12,312

10,377

Non-earning assets

204,480

203,129

Total assets

$
2,554,913

$
2,395,575

Liabilities and shareholders' equity

Interest bearing deposits:

Demand deposits

$
111,808

$
248

0.30%

$
126,327

$
291

0.31%
NOW

440,443

393

0.12%

421,422

353

0.11%
Savings accounts

289,263

230

0.11%

299,607

237

0.11%
Money market

124,090

136

0.15%

154,241

108

0.09%
Certificates of deposit, under $100,000

90,103

843

1.25%

81,333

403

0.66%
Certificates of deposit, $100,000 or more

397,115

6,308

2.12%

301,019

3,344

1.49%
Brokered deposits

47,594

873

2.45%

6,813

99

1.94%
Total interest bearing deposits

1,500,416

9,031

0.80%

1,390,762

4,835

0.46%
Borrowed funds:

Federal funds purchased

398

1

0.34%

14

—

—
Repurchase agreements

21,389

64

0.40%

13,882

42

0.40%
Short term borrowings

6,972

123

2.36%

7,437

110

1.98%
TRUPS

34,830

1,406

5.40%

34,650

1,273

4.91%
Total borrowed funds

63,589

1,594

3.35%

55,983

1,425

3.40%
Total interest bearing liabilities

1,564,005

10,625

0.91%

1,446,745

6,260

0.58%
Demand deposits - non-interest bearing

658,784

659,515

Other liabilities

42,752

30,180

Shareholders' equity

289,372

259,135

Total liabilities and shareholders' equity

$
2,554,913

$
2,395,575

Interest income/interest earning assets

4.81%

4.62%
Interest expense/interest earning assets

0.61%

0.38%
Net interest income and margin(5)

$
72,547

4.20%

$
68,336

4.24%

~~(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 21% effective tax rate.~~

~~(3)~~

Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were $(314) thousand and $743 thousand for the six months ended June 30, 2019 and 2018, respectively.

(4)

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

(5)

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

4036

Table of Contents

The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest-earning 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 September 30,						Nine months ended September 30,						Three months ended March 31,
	2019 over 2018						2019 over 2018						2020 over 2019
	Increase (decrease) due to						Increase (decrease) due to						Increase (decrease) due to
Assets:	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Investments:
Federal funds sold/due from time	$	116	$	(1)	$	115	$	28	$	95	$	123	$	163	$	(96)	$	67
Taxable		27		75		102		(1)		673		672		(64)		(93)		(157)
Non-taxable		206		(52)		154		274		(38)		236		392		(98)		294
Total investments		349		22		371		301		730		1,031		491		(287)		204
Loans and leases:
Real estate		518		436		954		5,115		1,595		6,710		(952)		(426)		(1,378)
Agricultural		(35)		6		(29)		(64)		197		133		(31)		(166)		(197)
Commercial		(76)		(7)		(83)		(177)		339		162		(192)		(288)		(480)
Consumer		(38)		65		27		(122)		166		44		(41)		94		53
Mortgage warehouse		1,004		(585)		419		823		(342)		481		1,197		(860)		337
Other		(3)		9		6		14		1		15		34		(5)		29
Total loans and leases		1,370		(76)		1,294		5,589		1,956		7,545		15		(1,651)		(1,636)
Total interest earning assets	$	1,719	$	(54)	$	1,665	$	5,890	$	2,686	$	8,576	$	506	$	(1,938)	$	(1,432)
Liabilities
Interest bearing deposits:
Demand deposits	$	(5)		(2)	$	(7)	$	(33)	$	(10)	$	(43)	$	(8)		(2)	$	(10)
NOW		4		9		13		16		24		40		6		(10)		(4)
Savings accounts		(4)		2		(2)		(8)		1		(7)		3		(5)		(2)
Money market		(5)		28		23		(21)		49		28		(4)		6		2
Certificates of deposit, under $100,000		17		100		117		43		397		440		(29)		(115)		(144)
Certificates of deposit, $100,000 or more		434		317		751		1,068		1,896		2,964		(12)		(793)		(805)
Brokered deposits		121		44		165		593		181		774		(60)		(98)		(158)
Total interest bearing deposits		562		498		1,060		1,658		2,538		4,196		(104)		(1,017)		(1,121)
Borrowed funds:
Repurchase agreements		9		1		10		23		(1)		22		10		—		10
Short term borrowings		(7)		1		(6)		(7)		20		13		(15)		(31)		(46)
TRUPS		2		—		2		7		127		134		2		(91)		(89)
Total borrowed funds		4		2		6		23		146		169		(3)		(122)		(125)
Total interest bearing liabilities		566		500		1,066		1,681		2,684		4,365		(107)		(1,139)		(1,246)
Net interest income	$	1,153	$	(554)	$	599	$	4,209	$	2	$	4,211	$	613	$	(799)	$	(186)

The volume variance calculated for the ~~third~~first quarter of 2020 relative to the first quarter of 2019 ~~relative to the third quarter of 2018~~ was a favorable ~~$1.153~~$0.6 million due to ~~an increase of $158 million, or 7%, in the~~higher average ~~balance~~balances of interest-earning assets, resulting from organic growth in mortgage warehouse ~~loans, real estate loans, and investments.~~loans. During 2019, the Company changed its pricing strategy with respect to mortgage warehouse lines in order to encourage increased utilization. This strategy caused line utilization to increase as demonstrated by the $1.2 million favorable volume variance. There was an unfavorable rate variance of ~~$554,000~~$0.8 million for the comparative quarters, since the weighted average yield on interest-earning assets fell by ~~two~~41 basis points while the weighted average cost of interest-bearing liabilities ~~increased~~decreased by 2233 basis points. The rate variance was negatively impacted by the following factors: A shift in our earning asset mix into lower-yielding loans and investments; aggressive pricing instituted on mortgage ~~warehouse lines to encourage increased line utilization; higher rates paid on time deposits and brokered deposits; and, a shift in the mix of our interest-bearing liabilities toward higher-~~

4137

Table of Contents

~~cost funding sources. The comparative results can also be impacted~~warehouse lines to encourage increased line utilization; partially offset by ~~nonrecurring interest items such as interest recoveries on non-accrual loans, interest reversals for loans placed on non-accrual status, accelerated fee recognition~~lower costs of time-deposits and ~~prepayment penalties for premature loan payoffs, and late fees. Nonrecurring items added $34,000 to interest income in~~other interest-bearing liabilities.

As mentioned above, the ~~third quarter~~FOMC lowered rates by a total of ~~2019 relative to $33,000 in the third quarter of 2018, so the impact on the quarterly variance was negligible.~~

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 4.09% in the third quarter of 2019, down 18150 basis points ~~relative~~in March 2020 in two separate emergency actions. These actions are expected to ~~the third quarter of 2018. In addition to the items noted in the previous paragraph, a drop in discount accretion~~have an unfavorable impact on ~~loans from whole-bank acquisitions also contributed to the unfavorable variance. Discount accretion added only three basis points to~~ our net interest margin and net interest income in future quarters. At March 31, 2020, approximately 19% of our total portfolio, or $337 million, consists of variable rate loans. Of these variable rate loans, approximately $119 million have floors that limited the overall reduction in rates in the ~~third~~first quarter. At March 31, 2020, our outstanding fixed rate loans represented 30% of our loan portfolio. The remaining 51% of our loan portfolio at March 31, 2020 consists of adjustable rate loans. However, the majority of these loans (approximately $650 million) will not adjust for at least another 3 years. Approximately $53 million of these adjustable rate loans adjusted in April 2020 and $46 million will reprice in smaller amounts monthly over the remainder of 2020. Another $18 million of these adjustable rate loans will reprice in the first quarter of ~~2019~~2021.

In the later part of the first quarter 2020, overall cash balances were increased as a precaution to reduce uncertainty of our cash delivery providers being able to serve us during the stay-at-home order. It is expected that these balances will return to more normalized levels later in 2020. Overall average investment securities increased by $68.7 million at March 31, 2020 as compared to ~~eight basis points in the third quarter~~March 31, 2019. The largest increase was to average non-taxable securities of ~~2018.~~$53.4 million. The overall investment portfolio had a tax-equivalent yield of 2.81% at March 31, 2020, with an average life of 4.3 years.

~~Net interest income~~Interest expense was $2.3 million in the first ~~nine months~~quarter of ~~2019 relative~~2020, a decline of $1.2 million, or 35%, compared to the first ~~nine months~~quarter of ~~2018 reflects~~2019. The significant decline in interest expense is attributable to a favorable ~~variance of $4.209~~shift in deposit mix as average total time deposits declined by $20.9 million attributable to volume changes, while the rate variance was essentially neutral. The volume variance for the comparative year-to-date periods was due primarily to an increase of $156 million, or 7%, in ~~average interest-earning assets. The Company’s net interest margin for~~ the first ~~nine months~~quarter of ~~2019 was 4.20%,~~2020 as compared to ~~4.24%~~the same quarter in ~~the first nine months of 2018. Nonrecurring interest income totaled $306,000 for the first nine months of~~ 2019 and ~~$261,000 and for~~ the ~~first nine months~~average cost of ~~2018, and discount accretion on loans from whole-bank acquisitions enhanced our net interest margin~~interest-bearing deposits declined by ~~only four~~31 basis points, ~~in the first nine months of 2019 as compared~~or 38%, to ~~eight~~50 basis ~~points in the first nine months 2018.~~points.

PROVISION FOR LOAN AND LEASE LOSSES

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loan and lease losses, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for loan and lease losses. The Company recorded a loan loss provision of ~~$1.350~~$1.8 million in the ~~third~~first quarter of ~~2019 relative~~2020 compared to ~~$2.450~~$0.3 million in the ~~third~~first quarter of ~~2018,~~2019. As discussed above, the significant increase in the provision for loan and ~~a year-to-date loan loss provision totaling $2.050 million in 2019 as compared~~lease losses is due to ~~$2.950 million in 2018. The 2019 provision was deemed necessary subsequent to Management’s determination~~management’s estimate of the ~~appropriate level~~impact of increased economic uncertainty with respect to COVID-19 on our customers’ ability to repay loans. Management adjusted its qualitative risk factors under our incurred loss model based on information presently available for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows, and external factors such as government actions. In particular, the uncertainty regarding our customers’ ability to repay loans could be adversely impacted by COVID-19 given higher unemployment rates, requests for payment deferrals, temporary business shut-downs, and reduced consumer and business spending.

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

Table of Contents

million. The impact of COVID-19 on the Company’s allowance for loan ~~balances,~~ and ~~reserves required for specifically identified impaired loan balances, including close~~leases losses under the CECL methodology in the first quarter 2020 will remain unknown until more information is available with respect to ~~$900,000 set aside for a $2.8 million loan that was placed on non-accrual status shortly before~~ the ~~end~~impact of the ~~third quarter. The reserves for that particular loan include approximately $500,000 for past-due property taxes that~~economic uncertainty of the ~~Company will be required~~impact of COVID-19, net of actions taken to pay should it ultimately foreclose on the office building securing the loan. Our 2018 provision included the establishment of a $1.9 million reserve for a $10 million loan participation that was placed on non-accrual status during the third quarter of 2018. mitigate such impact.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance. The Company recorded net charge-offs of ~~$33,000~~$0.3 million in the ~~third~~first quarter of ~~2019,~~2020 as compared to ~~$2.123~~net charge-offs of $0.5 million in the ~~third~~first quarter of ~~2018. For the first nine months, net charge-offs were $600,000 in 2019 and $2.530 million in 2018.~~2019.

~~With the loan loss provision recorded thus far in 2019, we have been able to maintain our~~The allowance for loan and lease losses is at a level that, in Management’s judgment, is adequate to absorb probable loan losses related to specifically-identified impaired loans as well as probable incurred losses in the remaining loan portfolio. With the exception of the establishment of a reserve for the large loan that was placed on nonaccrual status in the third quarter of 2019, it should be noted that our need for reserves in recent periods has benefitted from overall credit quality improvement. It has also been favorably impacted by acquired loans, which were booked at their fair values on the acquisition dates and thus did not initially require a loan loss allowance, as well as a relatively low level of loss reserves allocated to mortgage warehouse loans resulting from the fact that we have not experienced any losses in that portfolio segment.

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

~~Table of Contents~~

NONINTEREST INCOME AND NONINTEREST EXPENSE

The following table provides details on the Company’s noninterest income and noninterest expense for the ~~three- and nine-month~~three-month periods ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:

Noninterest Income/Expense

(dollars in thousands, unaudited)


	For the three months ended September 30,						For the nine months ended September 30,						For the three months ended March 31,
NON-INTEREST INCOME:	2019		% of Total	2018		% of Total	2019		% of Total	2018		% of Total	2020		% of Total	2019		% of Total
Service charges on deposit accounts	$	3,292	56.09%	$	3,208	56.05%	$	9,386	53.24%	$	9,181	56.37%	$	3,183	52.13%	$	2,943	49.83%
Other service charges and fees		2,524	43.01%		2,274	39.73%		7,300	41.40%		6,649	40.83%		2,404	39.37%		2,262	38.30%
Net gains on sale of securities available-for-sale		—	—		1	0.02%		29	0.16%		2	0.01%		—	—		6	0.10%
Bank-owned life insurance		590	10.05%		440	7.69%		1,617	9.17%		1,066	6.55%		38	0.62%		900	15.24%
Other		(537)	-9.15%		(200)	-3.49%		(701)	-3.97%		(613)	-3.76%		481	7.88%		(205)	-3.47%
Total non-interest income	$	5,869	100.00%	$	5,723	100.00%	$	17,631	100.00%	$	16,285	100.00%	$	6,106	100.00%	$	5,906	100.00%
As a % of average interest-earning assets (1)			0.97%			1.02%			1.01%			1.00%			1.05%			1.05%

OTHER OPERATING EXPENSE:
Salaries and employee benefits	$	8,784	51.41%	$	8,814	49.50%	$	27,021	51.37%	$	26,994	50.94%	$	10,172	57.08%	$	9,243	51.78%
Occupancy costs
Furniture & equipment		472	2.76%		772	4.34%		1,687	3.21%		2,006	3.79%		465	2.61%		524	2.94%
Premises		2,013	11.78%		1,913	10.74%		5,609	10.66%		5,478	10.34%		1,862	10.44%		1,837	10.29%
Advertising and marketing costs		614	3.59%		671	3.77%		1,866	3.55%		1,981	3.74%		601	3.37%		692	3.88%
Data processing costs		1,092	6.39%		1,234	6.93%		3,450	6.56%		3,789	7.15%		1,142	6.41%		1,251	7.01%
Deposit services costs		2,072	12.14%		1,556	8.74%		5,964	11.34%		4,148	7.83%		1,797	10.09%		1,769	9.91%
Loan services costs
Loan processing		122	0.71%		286	1.61%		498	0.95%		852	1.61%		171	0.96%		171	0.96%
Foreclosed assets		(56)	-0.33%		16	0.09%		5	0.01%		(330)	-0.62%		6	0.03%		20	0.11%
Other operating costs
Telephone & data communications		473	2.77%		362	2.03%		1,097	2.09%		1,121	2.12%		368	2.07%		307	1.72%
Postage & mail		88	0.51%		195	1.10%		364	0.69%		706	1.33%		68	0.38%		195	1.09%
Other		221	1.29%		332	1.85%		1,173	2.23%		1,101	2.07%		386	2.17%		344	1.91%
Professional services costs
Legal & accounting		542	3.17%		483	2.71%		1,477	2.81%		1,448	2.73%		328	1.84%		411	2.30%
Acquisition costs		—	—		12	0.07%		22	0.04%		449	0.85%		—	—		23	0.13%
Other professional service		545	3.19%		720	4.04%		1,920	3.65%		1,952	3.68%		247	1.39%		937	5.25%
Stationery & supply costs		82	0.48%		331	1.86%		238	0.45%		996	1.88%		115	0.65%		55	0.31%
Sundry & tellers		24	0.14%		110	0.62%		206	0.39%		297	0.56%		90	0.51%		73	0.41%
Total non-interest expense	$	17,088	100.00%	$	17,807	100.00%	$	52,597	100.00%	$	52,988	100.00%	$	17,818	100.00%	$	17,852	100.00%
As a % of average interest-earning assets (1)			2.83%			3.16%			3.01%			3.25%			3.05%			3.17%
Efficiency ratio ~~(2)~~(3)		55.64%			59.59%			57.51%			61.82%			58.88%			58.74%

(1)

Annualized

Table of Contents

(2)

Tax equivalent

(3)

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

Total noninterest income reflects ~~increases~~an increase of ~~$146,000,~~$0.2 million, or 3%, for the quarterly comparison and $1.346 million, or 8% for the year-to-date period. Those variances were negatively impacted by a $278,000 valuation reduction recorded on a limited partnership investment in a small business investment corporation in the third quarter of 2019, but the year-to-date increase was favorably impacted by other nonrecurring items recorded in the second quarter of 2019, including $232,000 from the write up of certain restricted stock pursuant to a periodic assessment of its market value and $100,000 from the wrap-up of a low-income housing tax credit fund investment. Total noninterest income was an annualized 0.97% of average interest-earning assets in the third quarter of 2019 relative to 1.02% in the third quarter of 2018, and 1.01% for the first nine months of 2019 relative to 1.00% for the first nine months of 2018.

In reviewing the major components of noninterest income, service charges on deposit accounts increased by $84,000, or 3%, in the third quarter of 2019 relative to the third quarter of 2018 and by $205,000, or 2%, for the comparative year-to-date periods due to a higher number of deposit accounts and an increased level of account activity. Other service charges and fees increased by $250,000, or 11%, for the third quarter comparison and $651,000, or 10%, for the year-to-

~~Table of Contents~~

~~date period due in large part to a higher level of debit card interchange fees. There were minimal net gains on investment securities in 2019 and 2018.~~

~~BOLI income was up by $150,000, or 34%, in the third quarter of 2019 and $551,000, or 52%, for the first nine months of 2019 in comparison~~ended March 31, 2020 as compared to the same ~~periods~~quarter in ~~2018. BOLI income is derived from two types of policies owned by the Company, namely “separate account” and “general account”~~2019. The largest variances were in bank-owned life insurance (BOLI) and the change in BOLI income in 2019 relative to 2018 is due almost entirely to fluctuations in separate account BOLI income. The Company had $7.6 million invested in separate account BOLI at September 30, 2019, which produces income that helps offset expense accruals for deferred compensation accounts the Company maintains on behalf of certain directors and senior officers. Those accounts have returns pegged to participant-directed investment allocations that can include equity, bond, or real estate indices, and are thus subject to gains or losses which often contribute to significant fluctuations in income (and associated expense accruals). The Company recorded a gain of $345,000 on separate account BOLI in the third quarter of 2019 relative to a gain of $198,000 in the third quarter of 2018, for an increase of $147,000. For the first nine months, net gains on separate account BOLI totaled $889,000 in 2019 as compared $334,000 in 2018, for an increase of $555,000. As noted, gains and losses on separate account BOLI are related to expense accruals or reversals associated with participant gains and losses on deferred compensation balances, thus their net impact on taxable income tends to be minimal. The Company’s books also reflect a net cash surrender value of $42.3 million for general account BOLI at September 30, 2019. While not directly related, general account BOLI generates income that helps offset expenses associated with executive salary continuation plans, director retirement plans and other employee benefits. Interest credit rates on general account BOLI do not change frequently, so the income has typically been fairly consistent at roughly $240,000 per quarter in recent periods.

The “Other” category under noninterest income often reflects negative amounts because it includes amortization expense associated with our investments in low-income housing tax credit funds and other limited partnership investments, which is netted against other noninterest income. This line item also includes gains and losses on the disposition of assets other than OREO, rent on bank-owned property other than OREO, dividends on restricted stock (including our equity investment in the Federal Home Loan Bank), and other miscellaneous income. Due in large part to the $278,000 valuation adjustment noted above, other noninterestBOLI income ~~has unfavorable variances of $337,000 for the third quarter and $88,000 for the first nine months. The year-to-date variance was favorably impacted~~decreased by previously-noted nonrecurring items recognized in the second quarter of 2019, namely the $232,000 write up of certain restricted stock and the $100,000 gain from the conclusion of a low-income housing tax credit fund investment.

~~Total noninterest expense fell by $719,000, or 4%, in the third quarter of 2019 relative to the third quarter of 2018, and by $391,000, or 1%, in the first nine months of 2019~~$0.9 million as compared to the first ~~nine months~~quarter of ~~2018. The variances~~2019 due mostly to unfavorable fluctuations in underlying values of assets in the specific account BOLI policies that are designed to have similar assets to those in the deferred compensation plans. Thus, these lower values in BOLI policies are offset by lower deferred compensation expense reflected primarily in director fees expense. At March 31, 2020, there was $42.8 million in BOLI policies associated with the deferred compensation plans and $8.0 million in separate account BOLI policies. Mostly offsetting this unfavorable change in BOLI income was a $0.7 million increase in other noninterest ~~expense include the offset of the Company’s FDIC assessment~~income due to two items. First, there was a $0.5 million increase in the ~~third~~valuation of restricted stock held by the Company recorded under FASB ASU 2016-01. This stock is related to an equity investment in Pacific Coast Bankers’ Bank and is adjusted when financial information becomes available, generally in the late first quarter of 2019, fluctuations in net OREO expense that were largely driven by nonrecurring OREO gains which helped offset expenses in the third quarter of 2019 and the first half of 2018, and lower nonrecurring acquisition costs in 2019. Noninterest expense has been trending lower in recent periods, dropping to 2.83% of average earning assets in the third quarter of 2019 from 3.16% for the third quarter of 2018, and to 3.01% of average earning assets for the first nine months of 2019 relative to 3.25% for the first nine months of 2018.

The largest component of operating expense, salaries and employee benefits, did not change materially in 2019 compared to 2018, as selective staff reductions offset increases stemming from a drop in our deferral of loan origination salaries pursuant to lower loan origination activity, and salary adjustments in the normal course of business. Salaries directly related to successful loan originations that were deferred from current expense totaled $822,000 in the third quarter of 2019 and $1.097 million in the third quarter of 2018, and $2.638 millioneach year. This stock was revalued in the first ~~nine months~~quarter of 2020, but was not revalued in 2019 ~~relative to $3.130 million in~~until the first nine months of 2018, representing reductions of $275,000 and $492,000, respectively. The Company had 519 full-time equivalent employees at September 30, 2019 relative to 558 at September 30, 2018.

Occupancy costs declined by $200,000, or 7%, for the third quarter and $188,000, or 3%, for the year-to-date comparison, with the reductions centered in furniture and equipment expense including depreciation as well as maintenance and repair costs. Other expense categories were well-controlled for the most part and were favorably affected by efficiency gains in some areas. A notable exception was Deposit Services Costs, which were unfavorably

~~Table of Contents~~

~~impacted by a mid-first quarter 2019 reclassification of deposit customer statement costs from supplies expense and postage expense to Deposit Services Costs.~~second quarter. In addition, noninterest income includes a valuation adjustment related to ~~the reclassification, there~~investments in low-income housing credit investments. This valuation adjustment was ~~an overall increase~~a reduction of income of $0.2 million in statement costs due to a higher number of accounts and supplemental mailings. The increase in deposit costs also includes higher ATM costs stemming from 2019 expenditures for upgrades and repairs. Loan processing costs are down due in large part to lower loan origination volume. Foreclosed asset costs declined by $72,000 for the quarterly comparison due to gains recorded on the sale of OREO in the third quarter of 2019, but they reflect an increase of $335,000 for the first nine months due to a sizeable nonrecurring OREO gain that helped offset expenses in the second quarter of 2018. Telecommunications expense was up by $111,000 for the quarterly comparison while the “Other” category in other operating costs went down by the same amount, due primarily to the reclassification of certain expenses in the third quarter of 2019. As discussed above, the year-to-date variance in overhead expense also includes the positive impact of a $427,000 drop nonrecurring acquisition costs. Other Professional Service expense was down for the quarter due primarily to the offset of the Company’s FDIC assessment in the third quarter of 2019, resulting from the application of small-bank assessment credits provided by the FDIC. It is expected that the Company’s remaining assessment credit will entirely offset its quarterly FDIC assessments in the fourth quarter of 2019 and the first quarter of 2020 as ~~well. The favorable year-to-date variance~~compared to a $0.5 million reduction in the ~~Other Professional Service~~first quarter of 2019.

Both “service charges on deposit accounts” and “other service charges and fees” increased in the first quarter 2020 as compared to the first quarter 2019. The Company expects that service charges on deposit accounts could decline in future quarters based on reduced customer activity and increased waivers due to COVID-19.

Total noninterest expense ~~category was lower than~~remained relatively flat at $17.8 million for the ~~quarterly comparison~~first quarter of 2020 as compared to $17.9 million for the first quarter of 2019. The $0.9 million increase in salaries and employee benefit expense for the first quarter of 2020 as compared to the same quarter in 2019, was offset by a decrease in other professional services ($0.7 million decrease) and smaller decreases in postage & mail, and advertising. The increase in salaries and employee benefits during the comparative period is due mostly to higher base salaries of $0.6 million due to annual merit increases for employees and a change in the ~~offsetting~~mix of the employee base due to more lending officers and senior officers in risk and operations, as well as a $0.2 million impact of ~~higher directors~~salaries deferred as a loan cost and a $0.1 million increase in payroll taxes. There have not been any permanent or temporary reductions in employees as a result of COVID-19.

The decrease in other professional services is due mostly to directors’ deferred compensation ~~accruals, which are~~being included in this category. As described above under noninterest income, BOLI income related to ~~changes~~deferred compensation declined during the first quarter of 2020 as compared to the same period in 2019. Mostly offsetting this decline in noninterest income was a decline in noninterest expense related to deferred compensation related to this BOLI income.

The Company’s tax-equivalent ~~overhead~~ efficiency ratio was ~~55.64%~~58.88% in the ~~third~~first quarter 2020 as compared to 58.74% in the same quarter of ~~2019 relative to 59.59% in the third quarter of 2018, and was 57.51% for the first nine months of 2019 in comparison to 61.82% for the same period in 2018.~~2019. The ~~overhead~~ efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income; the provision for loan losses and investment gains/losses are excluded from the equation. ~~Our overhead~~Given the expected decline in net interest income due to the lower rate environment in 2020, it is expected that the efficiency ratio ~~improved~~will increase in ~~2019 due to higher levels of net interest and noninterest income, combined with reductions in noninterest expense.~~2020.

PROVISION FOR INCOME TAXES

The Company sets aside a provision for income taxes on a monthly basis. The amount of that provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits. Permanent differences include but are not limited to tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax deductions. Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds. The Company’s provision for income taxes was ~~24.2%~~24.0% of pre-tax income in the ~~third~~first quarter of ~~2019 relative to 23.5% in the third quarter of 2018, and 24.9% of pre-tax income for the first nine months of 2019~~2020 relative to 24.1% in the first quarter of 2019. The slight decrease for ~~the same period in 2018. The increase for 2019~~2020 is due primarily to ~~higher pretax income and a declining level of tax credits,~~an increase in municipal bond interest in 2020, partially offset by ~~the impact of higher levels of~~lower tax-exempt BOLI ~~income and municipal bond~~ income.

Table of Contents

BALANCE SHEET ANALYSIS

EARNING ASSETS

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

INVESTMENTS

The Company’s investments may at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. The Company’s investments can serve several purposes, including the following: 1) they can provide liquidity 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 structural characteristics that can be changed more readily than loan or deposit

~~Table of Contents~~

portfolios, as might be required for interest rate risk management purposes; 4) they are another interest-earning option for the placement of surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. Surplus balances in our Federal Reserve Bank (“FRB”) account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity. Aggregate investments totaled ~~$612~~$648.5 million, or ~~23%~~24% of total assets at ~~September 30, 2019~~March 31, 2020, and ~~$562~~$615.3 million, or ~~22%~~24% of total assets at December 31, ~~2018.~~2019.

We had no fed funds sold at the end of the reporting periods, while interest-bearing balances held primarily in our FRB account totaled $12 million at September 30, 2019 and $2 million at December 31, 2018. The Company’s investment securities portfolio had a book balance of $600 million at September 30, 2019, reflecting a net increase of $39 million, or 7%, for the first nine months of 2019 as excess liquidity was invested in longer-term bonds. The Company carries investments at their fair market values. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. The expected average life for bonds in our investment portfolio was ~~4.0~~4.3 years and their average effective duration was ~~2.8~~3.0 years at ~~September 30, 2019,~~March 31, 2020, down from an expected average life of ~~4.1~~4.4 years and an average effective duration of ~~3.3~~3.2 years at year-end ~~2018.~~2019.

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

Investment Portfolio

(dollars in thousands, unaudited)


	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Amortized		Fair Market		Amortized		Fair Market		Amortized		Fair Market		Amortized		Fair Market
	Cost		Value		Cost		Value		Cost		Value		Cost		Value
Available for Sale
U.S. government agencies	$	14,408	$	14,445	$	15,553	$	15,212	$	11,587	$	11,742	$	12,125	$	12,145
Mortgage-backed securities		409,922		411,803		414,208		404,733		393,680		405,246		398,353		400,389
State and political subdivisions		167,213		173,658		140,181		140,534		195,565		203,166		181,900		188,265
Total securities	$	591,543	$	599,906	$	569,942	$	560,479	$	600,832	$	620,154	$	592,378	$	600,799

The net unrealized gain on our investment portfolio, or the amount by which aggregate fair market values exceeded amortized cost, was $8$19.3 million at ~~September 30, 2019,~~March 31, 2020, an absolute difference of ~~over $17~~$10.9 million relative to the net unrealized ~~loss~~gain of $9$8.4 million at December 31, ~~2018.~~2019. The change was caused by ~~the favorable impact of~~ declining long-term market interest rates on fixed-rate bond values. The balance of U.S. Government agency securities in our portfolio fell slightly during the first nine months of 2019 due to maturities. Mortgage-backed securities increased by $7 million, or 2%, since bond purchases and positive changes in fair market values exceeded the impact of prepayments and bond sales. Municipal bond balances ~~increased by $33 million, or 24%,~~comprise 33% of our total securities portfolio at March 31, 2020, as ~~bond purchases and higher market valuations offset the impact of bond sales, maturities and redemptions.~~compared to 31% at December 31, 2019. Municipal bonds purchased ~~in recent periods~~ have strong underlying ratings, and we review all municipal bonds in our portfolio every quarter for potential impairment.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, repurchase agreements, and other purposes as required or permitted by law totaled ~~$233~~$240.8 million at ~~September 30, 2019~~March 31, 2020 and ~~$217~~$234.8 million at December 31, ~~2018,~~2019, leaving ~~$367~~$379.4 million in unpledged

Table of Contents

debt securities at ~~September 30, 2019~~March 31, 2020 and ~~$343~~$366.0 million at December 31, ~~2018.~~2019. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled ~~$71~~$72.9 million at ~~September 30, 2019~~March 31, 2020 and $9$71.0 million at December 31, ~~2018.~~2019.

LOAN AND LEASE PORTFOLIO

Gross loans and leases reflect a net increase of ~~$66~~$35.5 million, or 4%2%, growing to ~~$1.798~~$1.80 billion at ~~September 30, 2019~~March 31, 2020 from ~~$1.732~~$1.76 billion at December 31, ~~2018~~2019 due to an increase in outstanding balances on mortgage warehouse ~~lines that was partially offset by runoff in real estate loans and commercial loans.~~ lines.

A distribution of the Company’s loans showing

~~Table of Contents~~

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

Loan and Lease Distribution

(dollars in thousands, unaudited)


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Real estate:
1-4 family residential construction	$	115,821	$	105,676	$	94,578	$	105,979
Other construction/land		93,117		109,023		90,602		91,413
1-4 family - closed-end		210,727		236,825		189,634		200,181
Equity lines		51,207		56,320		48,536		49,599
Multi-family residential		52,302		54,877		58,238		54,457
Commercial real estate - owner occupied		322,538		301,324		302,934		343,883
Commercial real estate - non-owner occupied		417,424		438,344		474,926		412,569
Farmland		144,618		151,541		141,740		144,033
Total real estate		1,407,754		1,453,930		1,401,188		1,402,114
Agricultural		49,105		49,103		49,199		48,036
Commercial and industrial		115,737		128,220		111,990		115,532
Mortgage warehouse lines		216,913		91,813		228,608		189,103
Consumer loans		8,151		8,862		7,040		7,780
Total loans and leases	$	1,797,660	$	1,731,928	$	1,798,025	$	1,762,565
Percentage of Total Loans and Leases
Real estate:
1-4 family residential construction		6.44%		6.10%		5.26%		6.01%
Other construction/land		5.18%		6.29%		5.04%		5.19%
1-4 family - closed-end		11.72%		13.67%		10.55%		11.36%
Equity lines		2.85%		3.25%		2.70%		2.81%
Multi-family residential		2.91%		3.17%		3.24%		3.09%
Commercial real estate - owner occupied		17.94%		17.40%		16.85%		19.51%
Commercial real estate - non-owner occupied		23.22%		25.32%		26.41%		23.42%
Farmland		8.05%		8.75%		7.88%		8.17%
Total real estate		78.31%		83.95%		77.93%		79.55%
Agricultural		2.73%		2.84%		2.74%		2.73%
Commercial and industrial		6.44%		7.40%		6.23%		6.55%
Mortgage warehouse lines		12.07%		5.30%		12.71%		10.73%
Consumer loans		0.45%		0.51%		0.39%		0.44%
Total loans and leases		100.00%		100.00%		100.00%		100.00%

For the first nine months of 2019, total real estate loans declined by $46 million, or 3%, with the drop centered in closed-end residential real estate loans, construction loans, and loans secured by farmland. Residential real estate loans have been declining since the Company made the deliberate decision to discontinue such lending at the end of 2018, thus maturing balances and prepayments are no longer being replaced. Total commercial real estate loan balances ~~are essentially the same at September 30, 2019 as they were at December 31, 2018, although there was a $21~~increased in 2020 by $21.4 million ~~shift into loans secured by owner-occupied properties from loans secured by~~due mostly to an increase in non-owner occupied properties. Heightened competitive forces and lower loan demand have had an adverse impact on our ability to grow commercial real estate loan balances in recent periods. Agricultural production loans are also unchanged for the first nine months of 2019, while commercial and industrial loan and lease balances reflect a net decline of $12 million, or 10%, again due to competitive pressures and weak demand. The Company’s only loan category to experience significant growth during the first nine months of 2019 was mortgage warehouse lines, as utilization on those lines expanded to 64% at September 30, 2019 from 23% at December 31, 2018. The increase in utilization is the result of market factors favorably impacting homeIn

4742

Table of Contents

the first quarter of 2020, the Company hired lending teams to focus primarily on commercial real estate loans in our northern and southern markets.

The $39.5 million, or 21%, increase in warehouse lines in the first quarter 2020 was due to seasonal loan demand during the later part of the first quarter. Average warehouse line balances were down during the first quarter 2020 as compared to the fourth quarter 2019 due to the seasonality of home buying that slows down in the late fourth quarter to early first quarter of each year. The Company had a significant increase in warehouse line utilization toward the end of the first quarter 2020. The increase in utilization is also a result of lower rates in March 2020 impacting home refinancing ~~and purchase activity,~~activity. Mortgage warehouse utilization was 66.6% at March 31, 2020, as ~~well~~compared to 58.7% at December 31, 2019. Future utilization of the mortgage warehouse lines could be impacted if the economic impacts of the COVID-19 pandemic reduce the demand for mortgages.

The Company has elected to participate in the Small Business Administration’s Paycheck Protection Program (PPP) as ~~heightened business development efforts and internal pricing adjustments enacted~~authorized by the CARES Act and began accepting and funding loans under this program in April 2020. As of April 30, 2020, the Company ~~mid-second quarter 2019.~~

~~Management remains focused on quality loan growth, but as noted, this year there appear~~obtained approval from the Small Business Administration to ~~be fewer lending opportunities which meet our credit and yield criteria and competition~~fund PPP loans for those loans has intensified. While we have recently implemented process improvements and pricing adjustments to help stimulate loan growth in areas other than mortgage warehouse lending, we are still experiencing occasional surges in prepayments as well as significant fluctuations in mortgage warehouse balances, thus no assurance can be provided with regard to future net growth in aggregate loan balances.approximately 800 customers totaling $94.2 million.

NONPERFORMING ASSETS

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

Nonperforming assets and performing troubled debt restructurings

(dollars in thousands, unaudited)


	September 30, 2019		December 31, 2018		September 30, 2018		March 31, 2020		December 31, 2019		March 31, 2019
NON-ACCRUAL LOANS:
Real estate:
Other construction/land	$	37	$	82	$	60	$	10	$	31	$	75
1-4 family - closed-end		1,445		799		781		866		741		822
Equity lines		457		408		504		535		480		488
Commercial real estate - owner occupied		1,449		605		106		1,941		1,440		594
Commercial real estate - non-owner occupied		2,819		49		8,083		2,608		2,105		—
Farmland		24		1,642		30		257		258		1,642
TOTAL REAL ESTATE		6,231		3,585		9,564		6,217		5,055		3,621
Agriculture		—		—		—		—		—		—
Commercial and industrial		405		1,425		1,255		1,116		651		811
Consumer loans		83		146		141		18		31		136
TOTAL NONPERFORMING LOANS		6,719		5,156		10,960		7,351		5,737		4,568

Foreclosed assets		762		1,082		2,212		766		800		806
Total nonperforming assets	$	7,481	$	6,238	$	13,172	$	8,117	$	6,537	$	5,374
Performing TDRs (1)	$	9,067	$	10,920	$	11,290	$	8,188	$	8,415	$	10,674
Nonperforming loans as a % of total gross loans and leases		0.37%		0.30%		0.65%		0.41%		0.33%		0.26%
Nonperforming assets as a % of total gross loans and leases and foreclosed assets		0.42%		0.36%		0.78%		0.45%		0.37%		0.31%

(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.

Table of Contents

Total nonperforming assets increased by over $1$1.6 million, or ~~20%~~24%, during the first ~~nine months~~quarter of ~~2019, due~~2020. The increase resulted from $2.0 million in new nonaccrual loans and paydowns of $0.4 million. The increases consisted of a few smaller real-estate loans totaling $1.5 million being downgraded to ~~the aforementioned $2.8 million commercial real estate loan that was placed on~~ nonaccrual status in the ~~third~~early part of the first quarter ~~partially offset by reductions resulting from net charge-offs and our continued focus on credit quality improvement. The $7~~of 2020, as well as a single commercial loan for $0.5 million ~~balance~~moving to nonaccrual status in early March 2020. None of these increases were due to COVID-19. As a result of these increases, the Company’s ratio of nonperforming assets to loans increased to 0.41% at ~~September 30, 2019 includes certain TDRs~~March 31, 2020, from 0.33% at December 31, 2019. All of the Company’s impaired assets are periodically reviewed, and ~~other loans that were paying as agreed, but which met~~are either well-reserved based on current loss expectations, or are carried at the ~~technical definition~~fair value of ~~nonperforming loans and were thus classified as such.~~ the underlying collateral net of expected disposition costs.

As shown in the table, we also had $9$8.2 million in loans classified as performing TDRs on which we were still accruing interest as of ~~September 30, 2019,~~March 31, 2020, a reduction of $2$0.2 million, or ~~17%~~3%, relative to December 31, ~~2018.~~

~~Table of Contents~~

2019.

Foreclosed assets had a carrying value of ~~$762,000~~$0.8 million at ~~September 30,~~March 31, 2020, comprised of 8 properties classified as OREO and two mobile homes relative to year-end 2019 ~~comprised~~when foreclosed assets consisted of 10 properties classified as OREO and ~~one~~two mobile ~~home. This represents a reduction of $320,000, or 30%, relative to year-end 2018 when foreclosed assets totaled $1.082 million, consisting of 11~~homes. Two very-low value properties ~~classified as OREO. The balance reduction came from write-downs on OREO and the sale of a few small properties~~were sold during the first ~~nine months of 2019.~~quarter 2020. All foreclosed assets are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

~~Total nonperforming assets were 0.42% of gross loans and leases plus foreclosed assets at September 30, 2019, up from 0.36% at December 31, 2018 but lower than the 0.65% ratio at September 30, 2018.~~ An action plan is in place for each of our non-accruing loans and foreclosed assets and they are all being actively managed. Collection efforts are continuously pursued for all nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company is providing deferrals to certain customers and taking advantage of Section 4013 of the CARES Act, which provides that such deferrals do not result in treatment of such loan as a TDR. These deferrals typically provide deferrals of both principal and interest for 180 days. Interest continues to accrue during the deferral period. At the end of the deferral period, for term loans, payments will be applied to accrued interest first and after the accrued interest is paid in full, the loan will be re-amortized with the maturity extended. For lines of credit, the borrower must repay the accrued interest at the end of the deferral period or take out a second credit facility to repay the accrued interest. As of April 15, 2020, we have had 104 commercial customers for a total of $149.1 million who have either executed a loan modification under Section 4013 of the CARES Act or we have approved a modification that is expected to be executed in April 2020. Approximately $50.8 million of these modifications were in the hospitality industry representing 15 different customers, while $5.8 million of these modifications were in the restaurant industry representing 51 different customers. The remaining modifications were a mix of commercial customers who were current at the time the deferral was requested. While these modified loans are not classified as nonperforming or classified assets, we will continue to monitor these loans during the deferral period. If economic conditions worsen and these customers are not able to resume payments after the deferral period, it likely could result in higher classified and/or nonperforming assets, reversals of interest income, and/or higher charge-offs.

ALLOWANCE FOR LOAN AND LEASE LOSSES

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

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

The Company’s allowance for loan and lease losses was ~~$11.2~~$11.5 million at ~~September 30, 2019,~~March 31, 2020, an increase of $1.5 million, or 15%, relative to December 31, ~~2018~~2019 resulting from a ~~$2.1~~$1.8 million loan loss provision recorded during the ~~nine-month period,~~first quarter of 2020, less ~~$600,000~~$0.3 million in net charge-offs during the same period. As discussed above, the $1.8 million provision for

Table of Contents

loan ~~balances charged-off against~~and lease losses is primarily a result of the ~~allowance. Because~~impact of COVID-19 on our qualitative factors. With respect to exposures related to the ~~percentage increase~~COVID-19 pandemic, the Company had fewer than 70 relationships in the hospitality industry totaling $216.0 million at March 31, 2020. In addition to loans in the hospitality sector, we have approximately $13 million of loans in the energy industry, $86.2 million of loans in retail (which includes $21 million in restaurant loans), and $7 million in consumer loans. In general, we will lend up to a maximum LTV of 75% for owner occupied real estate and up to 65% on investor commercial real estate, which would include hospitality loans.

The allowance ~~was greater than the percentage increase in~~for loan and lease losses over total loans increased to 0.64% of total loans at March 31, 2020, as compared to 0.56% at December 31, 2019. The ratio of the allowance for loan and lease losses increased to 0.62% of total loans at September 30, 2019 from 0.56% at December 31, 2018 and September 30, 2018. Despite the establishment of a reserve for the large loan that was placed on nonaccrual status in the third quarter of 2019, the ratio of the Company’s allowance to total loans has been at relatively low levels in recent periods as facilitated by the following circumstances: some charge-offs have been recorded against pre-established reserves, alleviating the need for reserve replenishment; acquisition loans were booked at their fair values, and thus did not initially require a loan loss allowance; favorable trends in loan loss rates have had a positive impact on general reserves established for performing loans; and, new loans booked during and since the great recession have been underwritten using tighter credit standards than was the case for many legacy loans. The ratio of the allowance to nonperforming loans was ~~166.69%~~155.80% at ~~September 30, 2019,~~March 31, 2020, relative to ~~189.10%~~172.96% at December 31, ~~2018 and 86.34% at September 30, 2018.~~2019. A separate allowance of ~~$314,000~~$0.3 million for potential losses inherent in unused commitments is included in other liabilities at ~~September 30, 2019.~~March 31, 2020.

4945

Table of Contents

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

Allowance for Loan and Lease Losses

(dollars in thousands, unaudited)


	For the three months ended		For the three months ended		For the nine months ended		For the nine months ended		For the year ended		For the three months ended		For the three months ended		For the year ended
	September 30,		September 30,		September 30,		September 30,		December 31,		March 31,		March 31,		December 31,
Balances:	2019		2018		2019		2018		2018		2020		2019		2019
Average gross loans and leases outstanding during period (1)	$	1,773,612	$	1,668,860	$	1,742,742	$	1,601,543	$	1,625,732	$	1,708,585	$	1,712,367	$	1,753,748
Gross loans and leases outstanding at end of period	$	1,797,660	$	1,694,509	$	1,797,660	$	1,694,509	$	1,731,928	$	1,798,025	$	1,750,989	$	1,762,565

Allowance for Loan and Lease Losses:
Allowance for loan and lease losses:
Balance at beginning of period	$	9,883	$	9,136	$	9,750	$	9,043	$	9,043	$	9,923	$	9,750	$	9,750
Provision charged to expense		1,350		2,450		2,050		2,950		4,350		1,800		300		2,550
Charge-offs
Real estate
1-4 family residential construction		—		—		—		—		—		—		—		—
Other construction/land		—		—		—		—		4		—		—		—
1-4 family - closed-end		—		—		—		5		5		—		—		—
Equity lines		—		—		—		125		125		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		—		—		—		—		—
Commercial real estate- non-owner occupied		—		1,948		—		1,948		2,341		—		—		1,190
Farmland		—		—		—		—		—		—		—		—
TOTAL REAL ESTATE		—		1,948		—		2,078		2,475
Total real estate												—		—		1,190
Agricultural		—		—		—		—		—		—		—		—
Commercial and industrial		57		43		891		144		608		25		579		1,274
Consumer loans		640		538		1,753		1,627		2,225		617		551		2,409
Total	$	697	$	2,529	$	2,644	$	3,849	$	5,308	$	642	$	1,130	$	4,873
Recoveries
Real estate
1-4 family residential construction		—		—		—		—		—		—		—		—
Other construction/land		1		—		1		—		—		34		—		2
1-4 family - closed-end		134		2		143		7		10		4		4		148
Equity lines		2		51		25		132		134		34		21		150
Multi-family residential		—		—		—		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		230		230		—		—		—
Commercial real estate- non-owner occupied		50		—		347		—		—		—		149		347
Farmland		—		—		—		—		—		—		—		—
TOTAL REAL ESTATE		187		53		516		369		374
Total real estate												72		174		647
Agricultural		—		22		—		22		22		—		—		—
Commercial and industrial		172		43		646		88		148		28		42		690
Consumer loans		305		288		882		840		1,121		272		302		1,159
Total	$	664	$	406	$	2,044	$	1,319	$	1,665	$	372	$	518	$	2,496
Net loan charge offs	$	33	$	2,123	$	600	$	2,530	$	3,643	$	270	$	612	$	2,377
Balance at end of period	$	11,200	$	9,463	$	11,200	$	9,463	$	9,750	$	11,453	$	9,438	$	9,923

RATIOS
Net charge-offs to average loans and leases (annualized)		0.01%		0.50%		0.05%		0.21%		0.22%		0.06%		0.14%		0.14%
Allowance for loan losses to gross loans and leases at end of period		0.62%		0.56%		0.62%		0.56%		0.56%		0.64%		0.54%		0.56%
Allowance for loan losses to nonperforming loans		166.69%		86.34%		166.69%		86.34%		189.10%		155.80%		206.61%		172.96%
Net loan charge-offs to allowance for loan losses at end of period		0.29%		22.43%		5.36%		26.74%		37.36%		2.36%		6.48%		23.95%
Net loan charge-offs to provision for loan losses		2.44%		86.65%		29.27%		85.76%		83.75%		15.00%		204.00%		93.22%

(1)

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

As reflected in the table above, the Company recorded a loan loss provision of $1.350 million in the third quarter of 2019 compared to $2.450 million in the third quarter of 2018, and a loan loss provision of $2.050 million for the first nine months of 2019 relative to $2.950 million for the first nine months of 2018. Net loan balances charged-off against the allowance totaled $33,000 in the third quarter of 2019 and $2.123 million in the third quarter of 2018. Net charge-offs were $600,000 for the first nine months of 2019 relative to $2.530 million during the first nine months of 2018.

5046

Table of Contents

Any shortfall in the allowance identified pursuant to our analysis of remaining probable losses is covered by quarter-end. The “Provision for Loan and Lease Losses” section above includes additional details on our provision and its relationship to actual charge-offs.

The Company’s allowance for loan and lease losses at ~~September 30, 2019~~March 31, 2020 represents Management’s best estimate of probable losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance. Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

OFF-BALANCE SHEET ARRANGEMENTS

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. It is unlikely that all unused commitments will ultimately be drawn down. Unused commitments to extend credit totaled ~~$503~~$453.8 million at ~~September 30, 2019~~March 31, 2020 and ~~$782~~$492.0 million at December 31, ~~2018,~~2019, representing approximately ~~28%~~25% of gross loans outstanding at ~~September 30, 2019~~March 31, 2020 and ~~45%~~28% at December 31, ~~2018.~~2019. The drop in unused commitments is due in large part to the increase in outstanding balances on mortgage warehouse ~~lines, but commercial and residential construction loan commitments have also declined.~~lines. The Company also had undrawn letters of credit issued to customers totaling $9$9.1 million at ~~September 30, 2019~~March 31, 2020 and $8.6 million at December 31, ~~2018.~~2019. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of 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 a $105 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers. That letter of credit is backed by loans that are pledged to the FHLB by the Company. For more information on the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements located elsewhere herein.

OTHER ASSETS

Interest-earning cash balances were discussed above in the “Investments” section, but the Company also maintains a certain level of cash on hand in the normal course of business as well as non-earning deposits at other financial institutions. Our balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the amount of cash held at our branches, and our reserve requirement among other things, and it is subject to significant fluctuations in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to, and borrowings from, correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, we could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity into longer-term, higher-yielding bonds. The Company’s balance of non-earning cash and due from banks was ~~$68~~$78.7 million at ~~September 30, 2019~~March 31, 2020 relative to ~~$72~~$65.6 million at December 31, ~~2018, with the decrease~~2019. The increase is primarily due ~~primarily~~ to ~~a lower amount~~maintaining higher amounts of cash ~~items in process~~on hand due to lack of ~~collection~~certainty from our armored cash delivery vendor during the COVID-19 pandemic due to potential staffing issues and a reduction in vault cash. The average balance of non-earning cash and due from banks, which is a better measure for ascertaining trends, was $61 million for the first nine months of 2019, unchanged from the average balance for the year in 2018.governmental stay-at-home orders.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.” Net premises and equipment ~~declined~~increased by ~~$1.512~~$1.0 million ~~or 5%,~~ during the first ~~nine months of 2019 as the result of depreciation recorded on fixed assets.~~quarter 2020, due primarily to investments in our ATM network. Goodwill was $27 million at ~~September 30, 2019,~~March 31, 2020, unchanged ~~for~~during the first ~~nine months~~quarter 2020. As mentioned above, the Company performed a qualitative assessment of ~~2019, but other intangible assets were down $805,000, or 12%, due~~goodwill impairment during the first quarter 2020 and determined that a quantitative analysis was not required at this time. The Company will continue to ~~amortization expense recorded on core deposit intangibles. The Company’s goodwill and other intangible assets are evaluated annually~~monitor its Goodwill for potential impairment ~~and pursuant to that analysis Management has concluded that no impairment exists as of September 30, 2019.~~given the COVID-19 pandemic. Bank-owned life insurance,

~~Table of Contents~~

with a balance of ~~$50~~$50.7 million at ~~September 30, 2019,~~March 31, 2020, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

~~The aggregate balance~~

Table of “Other assets” was $54.3 million at September 30, 2019, compared to $50.6 million at December 31, 2018, an increase of $3.8 million, or 7%. There were significant changes within other assets during the first nine months of 2019 including the following: an $8.7 million increase resulting from operating lease assets booked at the beginning of 2019, pursuant to our adoption of FASB’s ASU 2016‑02; a reduction of $7.6 million resulting from our first quarter 2019 collection of a receivable established at the end of 2018 for expected proceeds from the sale of a large foreclosed property; a $5.1 million reduction in our deferred tax asset; an $8 million increase resulting from a short-term receivable booked shortly before the end of the third quarter; and, a $1.0 million increase in restricted stock. At September 30, 2019, the balance of other assets included as its largest components a $12.7 million investment in restricted stock, an operating lease right-of-use asset totaling $8.7 million, accrued interest receivable totaling $8.6 million, a short-term receivable totaling $8.1 million, a $4.6 million investment in low-income housing tax credit funds, a net deferred tax asset of $3.5 million, and a $2.8 million investment in a small business investment corporation. Restricted stock is comprised of Federal Home Loan Bank of San Francisco stock held in conjunction with our FHLB borrowings and an equity investment in a correspondent bank, neither of which is deemed to be marketable or liquid. Our net deferred tax asset is evaluated as of every reporting date pursuant to FASB guidance, and we have determined that no impairment exists.Contents

DEPOSITS AND INTEREST BEARING LIABILITIES

DEPOSITS

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

~~Table of Contents~~

Deposit Distribution

(dollars in thousands, unaudited)


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Non-interest bearing demand deposits	$	685,528	$	662,527	$	704,700	$	690,950
Interest bearing demand deposits		102,390		101,243		119,882		91,212
NOW		442,710		434,483		456,132		458,600
Savings		287,774		283,953		304,894		294,317
Money market		124,553		123,807		113,766		118,933
Time, under $250,000		228,189		212,901		207,510		211,916
Time, $250,000 or more		275,063		247,426		242,507		252,446
Brokered deposits		50,000		50,000		30,000		50,000
Total deposits	$	2,196,207	$	2,116,340	$	2,179,391	$	2,168,374

Percentage of Total Deposits
Non-interest bearing demand deposits		31.22%		31.31%		32.33%		31.86%
Interest bearing demand deposits		4.66%		4.78%		5.50%		4.21%
NOW		20.16%		20.53%		20.93%		21.15%
Savings		13.10%		13.42%		13.99%		13.57%
Money market		5.67%		5.85%		5.22%		5.48%
Time, under $250,000		10.39%		10.06%		9.52%		9.77%
Time, $250,000 or more		12.52%		11.69%		11.13%		11.64%
Brokered deposits		2.28%		2.36%		1.38%		2.31%
Total		100.00%		100.00%		100.00%		100.00%

Deposit balances reflect net growth of ~~$80~~$11.0 million, or 4%1%, during the first ~~nine months~~quarter of 2020. Time deposits were $480.0 million at March 31, 2020 as compared to $514.4 million at December 31, 2019. The $34.4 million decline in time-deposits was a result of a $20 million reduction in brokered deposits and a $14.4 million in other time-deposits. The Company chose not to renew brokered deposits given the pricing that existed toward the end of the first quarter 2020. Non-maturity deposits were up ~~$37~~$45.4 million, or 2%3%, ~~while customer time deposits increased by $43 million, or 9%, and wholesale brokered deposits were unchanged.~~during the first quarter 2020. All of our non-maturity deposit growth was organic in nature. As evidenced by the disproportionate percentage growth in time deposits versus non-maturity deposits, we have experienced a slight shift in our deposit mix in recent periods as some customers have moved their money into higher-rate accounts. This has had an unfavorable impact on our net interest margin. That said, our highest-rate deposit product is currently a variable-rate time deposit account that has balances totaling $269 million at September 30, 2019, and rates paid on those deposits will decline if our prime lending rate continues to go down.

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. In particular, the Company’s ratio of noninterest-bearing deposits to total deposits was 32.3% at March 31, 2020 as compared to 31.9% at December 31, 2019. Our promotions targeting transaction accounts are still favorably impacting growth in the number of accounts and it is expected that balances in these accounts will grow over time consistent with our past experience, although given the current highly competitive market for deposits no assurance can be provided with regard to future increases in core deposit balances.

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and

Table of Contents

fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

Total non-deposit interest-bearing liabilities ~~were down $5~~increased by $57.8 million, or 5%72%, ~~for~~during the first ~~nine~~three months of ~~2019,~~2020 due to ~~a drop~~an increase in borrowings from the FHLB that was partially offset by an increase in customer repurchase agreements. The Company had $42 million in borrowings from the FHLB at September 30, 2019 relative to $56 million at December 31, 2018, and there were no overnight federal funds purchased from other correspondent banks or advances from the FRB on our books at September 30, 2019 or December 31, 2018.FHLB. Repurchase agreements totaled ~~$25~~$29.4 million at ~~September 30, 2019~~March 31, 2020 relative to a balance of ~~$16~~$25.7 million at year-end ~~2018, for an increase of $9 million.~~2019. Repurchase agreements represent “sweep accounts”, where commercial deposit balances above a specified threshold are transferred at the close

~~Table of Contents~~

of each business day into non-deposit accounts secured by investment securities. The Company had junior subordinated debentures totaling ~~$34.9~~$35.0 million at ~~September 30, 2019~~both March 31, 2020 and ~~$34.8 million at~~ December 31, ~~2018,~~2019, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities. ~~The small increase resulted from the amortization of discount on junior subordinated debentures that were part of our acquisition of Coast Bancorp in 2016.~~

OTHER NONINTEREST BEARING LIABILITIES

Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts. The Company’s balance of other liabilities ~~increased by $8~~was $33.2 million ~~or 32%, during the first nine months of 2019 due in large part~~at March 31, 2020 as compared to ~~the liability established as an offset to the operating lease right-of-use asset noted above.~~$35.5 million at December 31, 2019.

LIQUIDITY AND MARKET RISK MANAGEMENT

LIQUIDITY

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

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

At March 31, 2020 and ~~the FHLB totaled $500 million at September 30, 2019. An additional $77 million in credit is available from the FHLB if~~December 31, 2019, the Company ~~were~~had the following sources of primary and secondary liquidity ($ in thousands):


Primary and secondary liquidity sources		March 31, 2020		December 31, 2019
Cash and due from banks	$	106,992	$	80,076
Unpledged investment securities		379,410		366,012
Excess pledged securities		72,912		70,955
FHLB borrowing availability		347,348		443,200
Unsecured lines of credit		80,000		80,000
Funds available through Fed discount window		69,518		59,198
Totals	$	1,056,180	$	1,099,441

In addition to ~~pledge sufficient collateral~~the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market. After March 31, 2020, the Company applied for and ~~maintain the required amount of FHLB stock. The Company was also eligible to borrow approximately $66 million at~~received approval from the Federal Reserve Discount Window based on pledged assets at September 30, 2019. Furthermore, funds can be obtained by drawing down excess cash that might be available in the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition,Bank for a Paycheck Protection Program Lending Facility (PPPLF). The PPPLF provides the Company ~~can raise immediate cash~~with the ability to pledge any PPP loan to the Federal Reserve Bank and obtain funding at 35 basis points. Further, any loans pledged to the PPPLF will be excluded from the regulatory leverage capital ratio. The Company performs regular stress tests on its liquidity and at this time, believes that we have sufficient primary and secondary liquidity sources for ~~temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As~~operations.

Table of September 30, 2019, unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $437 million of the Company’s investment balances, as compared to $352 million at December 31, 2018. Other sources of potential liquidity include but are not necessarily limited to any outstanding fed funds sold and vault cash. Contents

The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $105 million at ~~September 30, 2019~~March 31, 2020 and ~~$95 million at~~ December 31, ~~2018.~~2019. Other sources of liquidity included the brokered deposit market, deposit listing services, and the ability to offer local time-deposit campaigns. Management is of the opinion that available investments and other potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity ~~needs.~~needs and that its liquidity has not been adversely impacted by COVID-19.

The Company’s net loans to assets and available investments to assets ratios were ~~68%~~67.4% and ~~17%~~18.0%, respectively, at ~~September 30, 2019,~~March 31, 2020, as compared to internal policy guidelines of “less than 78%” and “greater than 3%.” Other liquidity ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to total assets, including ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at ~~September 30, 2019.~~March 31, 2020. The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current strong levels.

~~Table of Contents~~

The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, shareholder dividends, and stock repurchases. Its primary source of funds is dividends from the Bank, since the holding company does not conduct regular banking operations. Management anticipates that the Bank will have sufficient earnings to provide dividends to the holding company 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, ~~2018~~2019 which was filed with the SEC.

INTEREST RATE RISK MANAGEMENT

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

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

In addition to a stable rate scenario, which presumes that there are no changes in interest rates, we typically use at least six other interest rate scenarios in conducting our rolling 12‑month net interest income simulations: upward shocks of 100, 200, and 300 basis points, and downward shocks of 100, 200, and 300 basis points. Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations in light of economic conditions and expectations at the time. We currently utilize an additional upward rate shock scenario of 400 basis points. Pursuant to policy guidelines, we generally attempt to limit the projected decline in

Table of Contents

net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock.

As of ~~September 30, 2019~~March 31, 2020 the Company had the following estimated net interest income sensitivity profile, 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

-300 bp

-200 bp

-100 bp

+100 bp

+200 bp

+300 bp

+400 bp

Change in Net Int. Inc. (in $000’s)

-$17,267

-$10,403

-$4,331

+$1,047

+$1,679

+$2,278

+$2,430

-$20,160

-$13,897

-$7,233

+$2,404

+$3,591

+$4,603

+$4,952

% Change

-18.15%

-10.93%

-4.55%

+1.10%

+1.76%

+2.39%

+2.55%

-20.5%

-14.2%

-7.4%

+2.4%

+3.7%

+4.7%

+5.0%

Our current simulations indicate that the Company’s net interest income will increase slightly over the next 12 months in a rising rate environment, but a continued drop in interest rates could have a substantial negative impact. However, given the 150 basis point decrease in the target federal funds rate in March 2020 and the drop in the 5-year and 10-year Treasury yields in the first quarter 2020, it is unlikely to see dramatic rate decreases unless rates go negative. We have seen a drop in projected net interest income across all scenarios and an exacerbated negative impact in declining rate scenarios in recent periods, resulting from the impact of interest rate reductions and balance sheet changes including an increase in loans with variable rate characteristics (mortgage warehouse loans), the runoff of loans which had rates fixed for periods in excess of a year, and a shift in our deposit mix toward time deposits. If there were an immediate and sustained upward adjustment of 100 basis points in interest rates, all else being equal, net interest income over the next 12 months is projected to improve by ~~$1.047~~$2.4 million, or ~~1.10%~~2.40%, relative to a stable interest rate scenario, with the favorable variance increasing marginally as interest rates rise higher. If interest rates were to decline by 100 basis points, however, net interest income would likely be ~~around $4.331~~$7.2 million lower than in a stable interest rate scenario, for a negative variance of ~~4.55%~~7.4%. The unfavorable variance increases when rates drop ~~200 or 300 basis points~~are due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts for example), and will

~~Table of Contents~~

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 declines in net interest income in the “down 300 basis points” and “down 200 basis points” interest rate scenarios exceed our internal policy ~~guidelines and we will continue to monitor our interest rate risk profile and implement remedial changes as deemed appropriate and feasible.~~guidelines.

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

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

Table of Contents

and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates. Our EVE had been increasing due to asset growth and rising discount rates, which result in a larger benefit assessed to non-maturity deposits, but that trend reversed in the second quarter of 2019 as loan growth slowed and interest rates started to fall. The table below shows estimated changes in the Company’s EVE as of ~~September 30, 2019,~~March 31, 2020, under different interest rate scenarios relative to a base case of current interest rates:

Immediate Change in Rate

-300 bp

-200 bp

-100 bp

+100 bp

+200 bp

+300 bp

+400 bp

-300 bp

-200 bp

-100 bp

+100 bp

+200 bp

+300 bp

+400 bp

Change in EVE (in $000’s)

-$135,007

-$155,875

-$92,357

+$48,999

+$81,256

+$98,620

+$109,170

$89,447

-$10,069

-$52,569

+$63,135

+$108,427

+$136,480

+$152,966

% Change

-23.25%

-26.84%

-15.90%

+8.44%

+13.99%

+16.98%

+18.80%

17.8%

-2.0%

-10.4%

+12.5%

+21.5%

+27.1%

+30.4%

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

~~Table of Contents~~

CAPITAL RESOURCES

The Company had total shareholders’ equity of ~~$303.4~~$319.5 million at ~~September 30, 2019,~~March 31, 2020, comprised of ~~$112.8~~$112.6 million in common stock, ~~$3.3~~$3.4 million in additional paid-in capital, ~~$181.3~~$189.9 million in retained earnings, and accumulated other comprehensive income of ~~$5.9~~$13.6 million. At the end of ~~2018,~~2019, total shareholders’ equity was ~~$273.0~~$309.3 million. The increase ~~for~~during the first ~~nine months of 2019~~quarter 2020 is due to the addition of capital from net income and stock options exercised as well as a ~~$12.6~~$7.7 million favorable swing in accumulated other comprehensive income, ~~(moving from a $6.7 million loss to $5.9 million income),~~ net of the impact of cash dividends paid and share repurchases. There were repurchases totaling ~~54,579~~112,050 shares at a weighted average cost of ~~$25.16~~$22.86 per share executed by the Company during the ~~third~~first quarter of ~~2019,~~2020. The Company has 268,301 shares authorized to repurchase under the current repurchase program. The Company suspended its stock repurchase program on March 16, 2020 and ~~none in the first two quarters of the year.~~continues to evaluate when we will restart repurchasing shares.

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

Table of Contents

Regulatory Capital Ratios

September 30,

December 31,

Minimum Requirement


2019

2018

to be Well Capitalized

Sierra Bancorp

Common Equity Tier 1 Capital to Risk-Weighted Assets

13.07
%
12.61
%
6.50
%
Tier 1 Capital to Risk-weighted Assets

14.79
%
14.38
%
8.00
%
Total Capital to Risk-weighted Assets

15.35
%
14.89
%
10.00
%
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

11.72
%
11.49
%
5.00
%

Bank of the Sierra

Common Equity Tier 1 Capital to Risk-Weighted Assets

14.36
%
14.25
%
6.50
%
Tier 1 Capital to Risk-weighted Assets

14.36
%
14.25
%
8.00
%
Total Capital to Risk-weighted Assets

14.93
%
14.77
%
10.00
%
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

11.38
%
11.39
%
5.00
%


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


Bank of the Sierra
Common Equity Tier 1 Capital to Risk-Weighted Assets (1)	N/A		14.75	%	6.50	%	N/A
Tier 1 Capital to Risk-weighted Assets (1)	N/A		14.75	%	8.00	%	N/A
Total Capital to Risk-weighted Assets (1)	N/A		15.25	%	10.00	%	N/A
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")	12.06	%	11.73	%	5.00	%	8.00	%

(1)

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

(2)

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

(3)

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

(4)

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

~~Our risk-based~~The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital ~~ratios increased during~~adequacy for qualifying community banking organizations. A qualifying community banking organization that opts into the ~~first nine months~~community bank leverage ratio framework and maintains a leverage ratio greater than 9 percent will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject. A qualifying community banking organization with a leverage ratio of ~~2019, as growth in risk-based capital outpaced growth in risk-adjusted~~greater than 9 percent may opt into the community bank leverage ratio framework if has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5 percent or less of total consolidated assets. ~~Our capital ratios are strong relative~~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 ~~median for peer financial institutions, and remain well above~~community bank leverage framework starting with the ~~threshold for~~quarter ended March 31, 2020. The CARES Act reduced the required community bank leverage ratio to 8% until the earlier of December 31, 2020, or the national emergency is declared over. The federal bank regulatory agencies adopted an interim final rule to implement this change from the CARES Act. The Company and the Bank ~~to be classified as “well capitalized,”~~meet the ~~highest rating of~~criteria outlined in the ~~categories defined under the Bank Holding Company Act~~final rule and the ~~Federal Deposit Insurance Corporation Improvement Act of 1991. We do not foresee any circumstances that would cause~~interim final rule and have adopted the ~~Company or~~community bank leverage ratio framework in the ~~Bank to be less than well capitalized, although no assurance can be given that this will not occur.~~first quarter 2020.

PART I – FINANCIAL INFORMATION

Item 3

QUALITATIVE & QUANTITATIVE DISCLOSURES

ABOUT MARKET RISK

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

5753

Table of Contents

PART I – FINANCIAL INFORMATION

Item 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Controls

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

5854

Table of Contents

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

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

ITEM 1A: RISK FACTORS

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

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

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

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

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

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

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

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

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

Table of Contents

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

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

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

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

In September 2016 the Board authorized 500,000 shares of common stock for repurchase, subsequent to the completion of previous stock buyback plans. The authorization of shares for repurchase does not provide assurance that a specific quantity of shares will be repurchased, and the program can be suspended at any time at Management’s discretion. After a lengthy deferral of repurchase activity, the Company resumed share repurchases in mid-August 2019. The following table provides information concerning the Company’s stock repurchase transactions during the ~~third~~first quarter of ~~2019:~~2020:

0

July
August
September
Total shares purchased
0
30,447
24,132
Average per share price
N/A
$25.14
$25.18
Number of shares purchased as part of
publicly announced plan or program
0
30,447
24,132
Maximum number of shares remaining
for purchase under a plan or program
478,954
448,507
424,375


Stock Repurchases
	January 31, 2020		February 29, 2020		March 31, 2020
Total shares repurchased	—		35,489		76,561
Average per share price	N/A	$	26.74	$	21.06
Number of shares purchased as part of a publicly announced plan or program	—		35,489		76,561
Maximum number of shares remaining for purchase under a plan or program	380,351		344,862		268,301

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

5956

Table of Contents

ITEM 6: EXHIBITS


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

(1)

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

~~(2)~~

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

~~(3)~~

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

~~(4)~~

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

~~(5)~~(2)

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

(3)

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

~~(6)~~(4)

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

~~(7)~~(5)

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

~~(8)~~(6)

Filed as Exhibits 10.10, 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.

~~(9)~~(7)

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.

~~(10)~~(8)

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.

~~(11)~~(9)

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

~~(12)~~(10)

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

~~(13)~~(11)

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

~~(14)~~(12)

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

~~(15)~~(13)

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.

~~(16)~~(14)

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

~~(17)~~(15)

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

~~(18)~~(16)

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

~~(19)~~

~~Computation of earnings per share is incorporated by reference to Note 5 to the Financial Statements included herein.~~

6057

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

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

6158


Average Balances and Rates
(dollars in thousands, unaudited)
	For the nine months ended						For the nine months ended
	September 30, 2019						September 30, 2018
Assets	Average Balance (1)		Income/ Expense		Average Rate/Yield (2)	Average Balance (1)		Income/ Expense		Average Rate/Yield (2)
Investments:
Federal funds sold/due from time	$	17,948	$	327	2.44%	$	15,758	$	204	1.73%
Taxable		423,668		7,692	2.43%		423,736		7,020	2.21%
Non-taxable		153,763		3,276	3.61%		141,032		3,040	3.65%
Total investments		595,379		11,295	2.73%		580,526		10,264	2.55%

Loans and leases:(3)
Real estate		1,449,603		60,057	5.54%		1,322,784		53,347	5.39%
Agricultural		50,742		2,326	6.13%		52,262		2,193	5.61%
Commercial		120,011		4,575	5.10%		125,021		4,413	4.72%
Consumer		8,615		961	14.91%		9,940		917	12.33%
Mortgage warehouse lines		110,776		3,812	4.60%		88,821		3,331	5.01%
Other		2,995		146	6.52%		2,715		131	6.45%
Total loans and leases		1,742,742		71,877	5.51%		1,601,543		64,332	5.37%
Total interest earning assets (4)		2,338,121		83,172	4.81%		2,182,069		74,596	4.62%
Other earning assets		12,312					10,377
Non-earning assets		204,480					203,129
Total assets	$	2,554,913				$	2,395,575
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	111,808	$	248	0.30%	$	126,327	$	291	0.31%
NOW		440,443		393	0.12%		421,422		353	0.11%
Savings accounts		289,263		230	0.11%		299,607		237	0.11%
Money market		124,090		136	0.15%		154,241		108	0.09%
Certificates of deposit, under $100,000		90,103		843	1.25%		81,333		403	0.66%
Certificates of deposit, $100,000 or more		397,115		6,308	2.12%		301,019		3,344	1.49%
Brokered deposits		47,594		873	2.45%		6,813		99	1.94%
Total interest bearing deposits		1,500,416		9,031	0.80%		1,390,762		4,835	0.46%
Borrowed funds:
Federal funds purchased		398		1	0.34%		14		—	—
Repurchase agreements		21,389		64	0.40%		13,882		42	0.40%
Short term borrowings		6,972		123	2.36%		7,437		110	1.98%
TRUPS		34,830		1,406	5.40%		34,650		1,273	4.91%
Total borrowed funds		63,589		1,594	3.35%		55,983		1,425	3.40%
Total interest bearing liabilities		1,564,005		10,625	0.91%		1,446,745		6,260	0.58%
Demand deposits - non-interest bearing		658,784					659,515
Other liabilities		42,752					30,180
Shareholders' equity		289,372					259,135
Total liabilities and shareholders' equity	$	2,554,913				$	2,395,575
Interest income/interest earning assets					4.81%					4.62%
Interest expense/interest earning assets					0.61%					0.38%
Net interest income and margin(5)			$	72,547	4.20%			$	68,336	4.24%


	September 30,		December 31,		Minimum Requirement
	2019		2018		to be Well Capitalized
Sierra Bancorp
Common Equity Tier 1 Capital to Risk-Weighted Assets	13.07	%	12.61	%	6.50	%
Tier 1 Capital to Risk-weighted Assets	14.79	%	14.38	%	8.00	%
Total Capital to Risk-weighted Assets	15.35	%	14.89	%	10.00	%
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")	11.72	%	11.49	%	5.00	%

Bank of the Sierra
Common Equity Tier 1 Capital to Risk-Weighted Assets	14.36	%	14.25	%	6.50	%
Tier 1 Capital to Risk-weighted Assets	14.36	%	14.25	%	8.00	%
Total Capital to Risk-weighted Assets	14.93	%	14.77	%	10.00	%
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")	11.38	%	11.39	%	5.00	%

0
	July	August	September
Total shares purchased	0	30,447	24,132
Average per share price	N/A	$25.14	$25.18
Number of shares purchased as part of publicly announced plan or program	0	30,447	24,132
Maximum number of shares remaining for purchase under a plan or program	478,954	448,507	424,375