~~0001130144us-gaap:AgriculturalSectorMemberbsrr:AgriculturalPortfolioSegmentMember2020-03-31~~0015284538153417232020-01-010001130144--12-312020Q3falsetruefalse

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 ~~JUNE~~SEPTEMBER 30, 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 ~~August~~November 1, 2020, the registrant had ~~15,192,838~~15,359,023 shares of common stock ~~outstanding.~~outstanding, including 148,885 shares of unvested restricted stock.

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~~Shareholders’ Equity			4
		Consolidated Statements of Cash Flows			6
		Notes to Consolidated Financial Statements (Unaudited)			7

	Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations				3536
		Forward-Looking Statements			3536
		Critical Accounting Policies			3536
		Overview of the Results of Operations and Financial Condition			3637
		Earnings Performance			4041
			Net Interest Income and Net Interest Margin		4041
			Provision for Loan and Lease Losses		4546
			Noninterest Income and Noninterest Expense		4647
			Provision for Income Taxes		4749
		Balance Sheet Analysis			4849
			Earning Assets		4849
				Investments	4849
				Loan and Lease Portfolio	4950
				Nonperforming Assets	5152
				Allowance for Loan and Lease Losses	5254
				Off-Balance Sheet Arrangements	5557
			Other Assets		5557
			Deposits and Interest-Bearing Liabilities		5557
				Deposits	5557
				Other Interest-Bearing Liabilities	5658
			Noninterest Bearing Liabilities		5759
		Liquidity and Market Risk Management			5759
		Capital Resources			6062

	Item 3. Qualitative & Quantitative Disclosures about Market Risk				6164

	Item 4. Controls and Procedures				6264

Part II - Other Information					6365
	Item 1. - Legal Proceedings				6365
	Item 1A. - Risk Factors				6365
	Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds				6466
	Item 3. - Defaults upon Senior Securities				6466
	Item 4. - Mine Safety Disclosures				6466
	Item 5. - Other Information				6466
	Item 6. - Exhibits				6567

Signatures					6668

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

SIERRA BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
ASSETS	(unaudited)		(audited)		(unaudited)		(audited)
Cash and due from banks	$	88,705	$	65,556	$	84,287	$	65,556
Interest-bearing deposits in banks		67,906		14,521		4,646		14,521
Total cash & cash equivalents		156,611		80,077		88,933		80,077
Securities available-for-sale		599,333		600,799		577,278		600,799
Loans and leases:
Gross loans and leases		2,212,097		1,762,565		2,380,300		1,762,565
Deferred loan and lease (fees) and costs, net						(3,078)		2,896
Allowance for loan and lease losses		(13,560)		(9,923)		(15,586)		(9,923)
Deferred loan and lease (fees) costs, net		(2,617)		2,896
Net loans and leases		2,195,920		1,755,538		2,361,636		1,755,538
Foreclosed assets		2,893		800		2,970		800
Premises and equipment, net		27,779		27,435		27,216		27,435
Goodwill		27,357		27,357		27,357		27,357
Other intangible assets, net		4,844		5,381		4,575		5,381
Bank-owned life insurance		51,347		50,517		52,110		50,517
Other assets		43,960		45,915		57,543		45,915
Total assets	$	3,110,044	$	2,593,819	$	3,199,618	$	2,593,819

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	949,662	$	690,950
Noninterest bearing					$	975,750	$	690,950
Interest bearing		1,557,092		1,477,424		1,615,963		1,477,424
Total deposits		2,506,754		2,168,374		2,591,713		2,168,374
Repurchase agreements		41,449		25,711		36,657		25,711
Short-term borrowings		163,000		20,000		158,000		20,000
Subordinated debentures, net		35,035		34,945		35,079		34,945
Other liabilities		36,373		35,504		41,922		35,504
Total liabilities		2,782,611		2,284,534		2,863,371		2,284,534

Commitments and contingent liabilities (Note 7)

Shareholders' equity
Common stock, 0 par value; 24,000,000 shares authorized; 15,192,838 and 15,284,538 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		112,645		113,179
Common stock, 0 par value; 24,000,000 shares authorized; 15,341,723 and 15,284,538 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively						112,645		113,179
Additional paid-in capital		3,462		3,307		3,644		3,307
Retained earnings		195,147		186,867		202,464		186,867
Accumulated other comprehensive income (loss), net		16,179		5,932		17,494		5,932
Total shareholders' equity		327,433		309,285		336,247		309,285
Total liabilities and shareholders’ equity	$	3,110,044	$	2,593,819	$	3,199,618	$	2,593,819

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF INCOME

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

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


	Three months ended June 30,					Six months ended June 30,			Three months ended September 30,					Nine months ended September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Interest and dividend income
Loans and leases, including fees	$	21,683	$	24,010	$	43,796	$	47,759	$	25,742	$	24,118	$	69,538	$	71,877
Taxable securities		2,250		2,591		4,710		5,207		1,832		2,484		6,542		7,692
Tax-exempt securities		1,440		1,072		2,778		2,117		1,467		1,160		4,246		3,276
Federal funds sold and other		12		115		153		188		2		139		155		327
Total interest income		25,385		27,788		51,437		55,271		29,043		27,901		80,481		83,172
Interest expense
Deposits		893		3,093		2,727		6,048		641		2,983		3,368		9,031
Short-term borrowings		39		26		75		97		70		90		145		188
Subordinated debentures		311		470		706		954		258		453		965		1,406
Total interest expense		1,243		3,589		3,508		7,099		969		3,526		4,478		10,625
Net interest income		24,142		24,199		47,929		48,172		28,074		24,375		76,003		72,547
Provision for loan and lease losses		2,200		400		4,000		700
Provision for loan losses										2,350		1,350		6,350		2,050
Net interest income after provision for loan losses		21,942		23,799		43,929		47,472		25,724		23,025		69,653		70,497
Non-interest income
Noninterest income
Service charges on deposits		2,618		3,151		5,802		6,094		2,950		3,292		8,752		9,386
Other income		4,282		2,704		7,205		5,668		4,155		2,577		11,360		8,245
Total non-interest income		6,900		5,855		13,007		11,762
Total noninterest income										7,105		5,869		20,112		17,631
Other operating expense
Salaries and employee benefits		9,266		8,994		19,438		18,237		9,698		8,784		29,136		27,021
Occupancy and equipment		2,504		2,450		4,832		4,811		2,559		2,485		7,390		7,296
Other		6,263		6,212		11,581		12,461		7,046		5,819		18,630		18,280
Total other operating expense		18,033		17,656		35,851		35,509		19,303		17,088		55,156		52,597
Income before taxes		10,809		11,998		21,085		23,725		13,526		11,806		34,609		35,531
Provision for income taxes		2,506		3,169		4,975		6,001		3,170		2,854		8,144		8,855
Net income	$	8,303	$	8,829	$	16,110	$	17,724	$	10,356	$	8,952	$	26,465	$	26,676

PER SHARE DATA
Book value	$	21.55	$	19.36	$	21.55	$	19.36	$	21.92	$	19.85	$	21.92	$	19.85
Cash dividends	$	0.20	$	0.18	$	0.40	$	0.36	$	0.20	$	0.19	$	0.60	$	0.55
Earnings per share basic	$	0.55	$	0.58	$	1.06	$	1.16	$	0.68	$	0.58	$	1.74	$	1.74
Earnings per share diluted	$	0.54	$	0.57	$	1.05	$	1.15	$	0.68	$	0.58	$	1.73	$	1.73
Average shares outstanding, basic		15,191,823		15,329,907		15,226,748		15,320,784		15,192,838		15,318,580		15,215,167		15,320,041
Average shares outstanding, diluted		15,237,655		15,458,320		15,288,009		15,453,212		15,387,309		15,434,788		15,422,647		15,449,340

Total shareholder equity (in thousands)	$	327,433	$	296,852	$	327,433	$	296,852
Total shareholders’ equity (in thousands)									$	336,247	$	303,353	$	336,247	$	303,353
Shares outstanding		15,192,838		15,332,550		15,192,838		15,332,550		15,341,723		15,284,491		15,341,723		15,284,491
Dividends paid (in thousands)	$	3,038	$	2,759	$	6,097	$	5,513	$	3,039	$	2,914	$	9,136	$	8,427

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(dollars in thousands, unaudited)

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019
Net income

$
8,303

$
8,829

$
16,110

$
17,724
Other comprehensive income, before tax:

Unrealized gains on securities:

Unrealized holding gain arising during period

4,037

9,324

14,939

15,491
Less: reclassification adjustment for (gains) losses included in net income ⁽¹⁾

(390)

(22)

(390)

(28)
Other comprehensive income, before tax

3,647

9,302

14,549

15,463
Income tax expense related to items of other comprehensive income, net of tax

(1,078)

(2,750)

(4,302)

(4,571)
Other comprehensive income

2,569

6,552

10,247

10,892
Comprehensive income

$
10,872

$
15,381

$
26,357

$
28,616


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net income	$	10,356	$	8,952	$	26,465	$	26,676
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gain arising during period		1,867		2,363		16,806		17,855
Less: reclassification adjustment for (gains) losses included in net income ⁽¹⁾		—		—		(390)		(29)
Other comprehensive income, before tax		1,867		2,363		16,416		17,826
Income tax expense related to items of other comprehensive income, net of tax		(552)		(698)		(4,854)		(5,269)
Other comprehensive income		1,315		1,665		11,562		12,557
Comprehensive income	$	11,671	$	10,617	$	38,027	$	39,233

(1)

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

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN ~~STOCKHOLDERS’~~SHAREHOLDERS’ EQUITY

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

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

Accumulated

Additional

Other

Common Stock

Paid In

Retained

Comprehensive

Shareholders'


Shares

Amount

Capital

Earnings

(Loss) Income

Equity
Balance, March 31, 2019

15,328,030

$
113,001

$
3,135

$
170,258

$
(2,326)

$
284,068
Net income

8,829

8,829
Other comprehensive income, net of tax

6,552

6,552
Exercise of stock options

4,520

60

(14)

46
Stock compensation costs

116

116
Cash dividends - $0.18 per share

(2,759)

(2,759)
Balance, June 30, 2019

15,332,550

$
113,061

$
3,237

$
176,328

$
4,226

$
296,852

Balance, March 31, 2020

15,190,038

$
112,600

$
3,367

$
189,882

$
13,610

$
319,459
Net income

8,303

8,303
Other comprehensive income, net of tax

2,569

2,569
Exercise of stock options

2,800

45

(11)

34
Stock compensation costs

106

106
Cash dividends - $0.20 per share

(3,038)

(3,038)
Balance, June 30, 2020

15,192,838

$
112,645

$
3,462

$
195,147

$
16,179

$
327,433

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

~~Table of Contents~~

~~SIERRA BANCORP~~

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

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

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

Accumulated

Additional

Other

Common Stock

Paid In

Retained

Comprehensive

Shareholders'


Shares

Amount

Capital

Earnings

(Loss) Income

Equity
Balance, December 31, 2018

15,300,460

$
112,507

$
3,066

$
164,117

$
(6,666)

$
273,024
Net income

17,724

17,724
Other comprehensive income, net of tax

10,892

10,892
Exercise of stock options

32,090

554

(96)

458
Stock compensation costs

267

267
Stock repurchase

—
Cash dividends - $0.36 per share

(5,513)

(5,513)
Balance, June 30, 2019

15,332,550

$
113,061

$
3,237

$
176,328

$
4,226

$
296,852

Balance, December 31, 2019

15,284,538

$
113,179

$
3,307

$
186,867

$
5,932

$
309,285
Net income

16,110

16,110
Other comprehensive income, net of tax

10,247

10,247
Exercise of stock options

20,350

295

(80)

215
Stock compensation costs

235

235
Stock repurchase

(112,050)

(829)

(1,733)

(2,562)
Cash dividends - $0.40 per share

(6,097)

(6,097)
Balance, June 30, 2020

15,192,838

$
112,645

$
3,462

$
195,147

$
16,179

$
327,433


								Accumulated
				Additional				Other
	Common Stock			Paid In		Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
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)
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

Balance, June 30, 2020	15,192,838	$	112,645	$	3,462	$	195,147	$	16,179	$	327,433
Net income							10,356				10,356
Other comprehensive income, net of tax									1,315		1,315
Exercise of stock options											—
Unvested restricted stock issued	148,885										—
Stock compensation costs					182						182
Cash dividends - $0.20 per share							(3,039)				(3,039)
Balance, September 30, 2020	15,341,723	$	112,645	$	3,644	$	202,464	$	17,494	$	336,247

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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


								Accumulated
				Additional				Other
	Common Stock			Paid In		Retained		Comprehensive		Shareholders'
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, December 31, 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 based compensation expense	—		—		379		—		—		379
Stock repurchase	(54,579)		(340)		—		(1,034)		—		(1,374)
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

Balance, December 31, 2019	15,284,538	$	113,179	$	3,307	$	186,867	$	5,932	$	309,285
Net income	—		—		—		26,465		—		26,465
Other comprehensive income, net of tax	—		—		—		—		11,562		11,562
Exercise of stock options	20,350		295		(80)		—		—		215
Stock based compensation expense	148,885		—		417		—		—		417
Stock repurchase	(112,050)		(829)		—		(1,732)		—		(2,561)
Cash dividends - $0.60 per share	—		—		—		(9,136)		—		(9,136)
Balance, September 30, 2020	15,341,723	$	112,645	$	3,644	$	202,464	$	17,494	$	336,247

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

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(dollars in thousands, unaudited)

Six months ended June 30,

2020

2019
Cash flows from operating activities:

Net income

$
16,110

$
17,724
Gain on sales of securities

(390)

(28)
Loss on disposal of fixed assets

—

28
Loss (gain) on sale on foreclosed assets

2

(37)
Writedowns on foreclosed assets

—

69
Stock compensation costs

235

267
Provision for loan and lease losses

4,000

700
Depreciation and amortization

1,540

1,496
Net amortization on securities premiums and discounts

2,227

2,107
Accretion of discounts for loans acquired and net deferred loan fees

(331)

(505)
Increase in cash surrender value of life insurance policies

(687)

(1,027)
Amortization of core deposit intangible

537

537
Increase in interest receivable and other assets

(2,241)

(1,213)
Increase (decrease) in other liabilities

869

(2,065)
Deferred income tax benefit

(230)

(27)
Increase in equity securities

(447)

(232)
Net amortization of partnership investment

571

900
Net cash provided by operating activities

21,765

18,694

Cash flows from investing activities:

Maturities and calls of securities available for sale

6,195

4,459
Proceeds from sales of securities available for sale

20,298

22,180
Purchases of securities available for sale

(59,578)

(72,330)
Principal pay downs on securities available for sale

47,263

42,288
Net purchases of FHLB stock

—

(833)
Loan originations and payments, net

(446,178)

(46,315)
Purchases of premises and equipment

(1,794)

(330)
Proceeds from sale premises and equipment

—

10
Proceeds from sales of foreclosed assets

32

7,955
Purchase of bank-owned life insurance

(182)

(292)
Liquidation of bank-owned life insurance

39

261
Net cash used in investing activities

(433,905)

(42,947)

Cash flows from financing activities:

Increase in deposits

338,380

62,758
Increase (decrease) in borrowed funds

143,000

(47,600)
Increase in repurchase agreements

15,738

7,808
Cash dividends paid

(6,097)

(5,513)
Repurchases of common stock

(2,562)

—
Stock options exercised

215

458
Net cash provided by financing activities

488,674

17,911

Increase (decrease) in cash and cash equivalents

76,534

(6,342)

Cash and cash equivalents

Beginning of period

80,077

74,132
End of period

$
156,611

$
67,790

Supplemental disclosure of cash flow information:

Interest paid

$
3,941

$
6,917
Income taxes paid

$
—

$
7,600
Supplemental noncash disclosures:

Real estate acquired through foreclosure

$
2,127

$
27
Operating right-of-use asset pursuant to adoption on ASU 2016-02

$
—

$
9,712
Operating lease liability pursuant to adoption of ASU 2016-02

$
—

$
10,336


		Nine months ended September 30,
	2020		2019
Cash flows from operating activities:
Net income	$	26,465	$	26,676
Gain on sales of securities		(390)		(29)
Loss on disposal of fixed assets		—		28
Gain on sale on foreclosed assets		(10)		(107)
Writedowns on foreclosed assets		332		77
Stock based compensation expense		417		379
Provision for loan losses		6,350		2,050
Depreciation and amortization		2,276		2,240
Net amortization on securities premiums and discounts		3,528		3,248
Accretion of discounts for loans acquired and net deferred loan fees		(502)		(712)
Increase in cash surrender value of life insurance policies		(1,997)		(1,617)
Amortization of core deposit intangible		806		806
Increase in interest receivable and other assets		(17,046)		(7,362)
Increase (decrease) in other liabilities		6,418		(1,412)
Deferred income tax benefit		(275)		(163)
Increase in value of restricted bank equity securities		(447)		(232)
Net amortization of partnership investment		1,287		1,648
Net cash provided by operating activities		27,212		25,518

Cash flows from investing activities:
Maturities and calls of securities available for sale		9,585		8,714
Proceeds from sales of securities available for sale		20,298		22,181
Purchases of securities available for sale		(71,065)		(122,579)
Principal pay downs on securities available for sale		77,980		66,864
Net purchases of FHLB stock		—		(833)
Loan originations and payments, net		(614,676)		(66,017)
Purchases of premises and equipment		(1,923)		(632)
Proceeds from sale premises and equipment		—		10
Proceeds from sales of foreclosed assets		238		7,955
Purchase of bank-owned life insurance		(196)		(366)
Liquidation of bank-owned life insurance		326		260
Proceeds from BOLI death benefit		274		—
Net cash used in investing activities		(579,159)		(84,443)

Cash flows from financing activities:
Increase in deposits		423,339		79,867
Increase (decrease) in borrowed funds		138,000		(13,900)
Increase in repurchase agreements		10,946		8,798
Cash dividends paid		(9,136)		(8,427)
Repurchases of common stock		(2,561)		(1,374)
Stock options exercised		215		518
Net cash provided by financing activities		560,803		65,482

Increase in cash and due from banks		8,856		6,557

Cash and cash equivalents
Beginning of period		80,077		74,132
End of period	$	88,933	$	80,689

Supplemental disclosure of cash flow information:
Interest paid	$	5,067	$	10,671
Income taxes paid	$	10,050	$	9,000
Supplemental noncash disclosures:
Real estate acquired through foreclosure	$	2,563	$	27
Operating right-of-use asset pursuant to adoption on ASU 2016-02	$	—	$	9,712
Operating lease liability pursuant to adoption of ASU 2016-02	$	—	$	10,336

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

Table of Contents

SIERRA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

Note 1 – The Business of Sierra Bancorp

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

Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a wide range of retail and commercial banking services via branch offices located throughout California’s South San Joaquin Valley, the Central Coast, Ventura County, the Sacramento area, and neighboring communities. The Bank was incorporated in September 1977, and opened for business in January 1978 as a 1-branch bank with $1.5 million in capital. Our growth in the ensuing years has largely been organic in nature, but includes 4 whole-bank acquisitions: Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in October 2017. As of the filing date of this report the Bank operates 40 full service branches and an online branch, and maintains ATMs at all but one of our branch locations as well as seven non-branch locations. Moreover, the Bank has specialized lending units which focus on agricultural borrowers, SBA loans, and mortgage warehouse lending. In addition, the bank opened a loan production office in Rocklin, CA in February 2020. The Company had total assets of $~~3.1~~3.2 billion at ~~June~~September 30, 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 $~~2.5~~2.6 billion at ~~June~~September 30, 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 2019 have been reclassified to be consistent with the reporting for 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, 2019, as filed with the Securities and Exchange Commission (the “SEC”).

Note 3 – Current Accounting Developments

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

Table of Contents

from existing U.S. GAAP involves the treatment of purchased credit deteriorated assets, which are more broadly defined than purchased credit impaired assets in current accounting standards. When such assets are purchased, institutions will estimate and record an allowance for credit losses that is added to the purchase price rather than being reported as a credit loss expense. Furthermore, ASU 2016-13 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 became effective for the Company on January 1, 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 adopted ASU 2016-13 on January 1, 2020, however, the Company elected under Section 4014 of the Coronavirus Aid, Relief and Economic Security (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. While the ultimate impact cannot be definitively determined at this time, we believe the provisions of ASU 2016-13 will have a material adverse impact on our consolidated financial statements, particularly the level of our allowance for credit losses and shareholders’ equity.

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 were effective for public business entities for fiscal years beginning after December 15, 2019. In accordance with ASU 2017-04, the Company performed a qualitative analysis of goodwill during the first ~~and second quarters~~nine months 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.

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

Table of Contents

reporting entity. The guidance also clarifies that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date. ASU 2018-13 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 adopted ASU 2018-13 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 option under ASC 825-10. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date, in order to maintain the same amortized cost basis before and after the effective date of this update. Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvements in cash flows expected to be collected should continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption should be recorded in earnings when received. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. For public business entities that are SEC filers, including the Company, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2019-05 effective January 1, 2020. There was no impact to the financial statements of the Company as we did not elect the fair value option on financial instruments upon adoption of ASU 2016-13.

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act, that passed on March 27, 2020, further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructuring (“TDR”) as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 10 for further information on non-TDR loan modifications. The Interagency Guidance and Section 4013 are expected to have a material impact on the Company’s financial 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 257,789 shares that were granted under the 2007 Plan were still outstanding as of ~~June~~September 30, 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.~~participants. The total number of shares of the Company’s authorized but unissued stock

Table of Contents

~~number of shares of the Company’s authorized but unissued stock~~ reserved for issuance pursuant to awards under the 2017 Plan was initially 850,000 shares, and the number remaining available for grant as of ~~June~~September 30, 2020 was ~~551,800~~.405,915. Options to purchase 290,000 shares granted under the 2017 Plan were outstanding as of September 30, 2020. 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 and restricted stock award 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.~~values, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Forfeitures are recognized as they occur for both types of awards. A pre-tax charge of $~~0.1~~0.2 million was reflected in the Company’s income statement during the ~~second~~third quarter of 2020 and $0.1 million was charged during the ~~second~~third quarter of 2019, as expense related to stock ~~options.~~options and restricted stock awards. For the first ~~half,~~nine months, the charges totaled ~~$0.2~~$0.4 million in 2020 and ~~$0.3~~$0.4 million in 2019.

Restricted Stock Grants

The Company’s Restricted Stock Awards are awards of time-vested, non-transferrable shares of common stock and are available to be granted to the Company’s employees and directors. The vesting period of Restricted Stock Awards is determined at the time the awards are issued, and different awards may have different vesting terms; provided, however, that no installment of any Restricted Stock Award shall become vested less than one year from the grant date. Restricted Stock Awards are valued utilizing the fair value of the Company’s stock at the grant date. During the third quarter of 2020 148,885 shares were granted to employees and directors of the Company. These awards are expensed on a straight-line basis over the vesting period. As of September 30, 2020, there was $2.6 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan. That cost is expected to be amortized over a weighted average period of 4.3 years.

The Company’s time-vested award activity for the nine months ended September 30, 2020 and 2019 is summarized below:


	Nine Months Ended September 30,
	2020			2019
			Weighted Averaged			Weighted Averaged
	Shares		Grant-Date Fair Value	Shares		Grant-Date Fair Value
Unnvested shares, January 1,	—	$	—	—	$	—
Granted	148,885		18.00	—		—
Vested	—		—	—		—
Forfeited	—		—	—		—
Unvested shares Septermber 30,	148,885		18.00	—		—

Stock Option Grants

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

Table of Contents

The Company’s stock option activity during the nine months ended September 30, 2020 and 2019 are summarized below (dollars in thousands, except per share data, unaudited):


	Nine Months Ended September 30,
	2020						2019
	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value⁽¹⁾		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value⁽¹⁾
Outstanding at January 1,	457,959	$	21.08		$	3,684	453,020	$	18.45		$	3,150
Granted	126,000	$	27.11		$	—	102,000	$	26.97		$	—
Exercised	(19,770)	$	10.87		$	267	(38,610)	$	13.41		$	498
Canceled	(16,400)	$	26.93		$	—	(8,600)	$	26.70		$	6
Outstanding at September 30,	547,789	$	22.66	6.47	$	612	507,810	$	20.40	6.15	$	3,376
Exercisable at September 30,	373,189	$	20.68	5.31	$	612	368,010	$	18.18	5.02	$	3,248

(1)

The aggregate intrinsic value of stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2020. This amount changes based on changes in the market value of the Company's stock.

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.~~period, excluding unvested restricted stock awards. There were ~~15,191,823~~15,192,838 weighted average shares outstanding during the ~~second~~third quarter of 2020 and ~~15,329,907~~15,318,580 during the ~~second~~third quarter of 2019, while there were ~~15,226,748~~15,215,167 weighted average shares outstanding during the first ~~six~~nine months of 2020 and ~~15,320,784~~15,320,041 during the first ~~six~~nine months of 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.~~options, and unvested restricted stock awards. For the ~~second~~third quarter of 2020, calculations under the treasury stock method resulted in the equivalent of ~~45,832~~45,586 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of ~~367,884~~362,407 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the ~~second~~third quarter of 2019 the equivalent of ~~128,413~~116,208 shares were added in calculating diluted earnings per share, while ~~258,202~~261,137 anti-dilutive stock options were not factored into the computation. Likewise, for the first ~~half~~nine months of 2020 the equivalent of ~~61,261~~58,595 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of ~~336,123~~344,814 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of ~~132,428~~129,299 shares and non-inclusion of ~~228,824~~239,714 anti-dilutive options in calculating diluted earnings per share for first ~~half~~nine months of 2019.

Note 6 – Comprehensive Income

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

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

The Company is a party to financial instruments with off-balance-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

Table of Contents

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):


	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Commitments to extend credit	$	449,045	$	492,040	$	541,355	$	492,040
Standby letters of credit	$	9,435	$	8,619	$	8,822	$	8,619

~~Table of Contents~~

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

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

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

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

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

●

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

●

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

●

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

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

1112

Table of Contents

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.

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

Fair Value of Financial Instruments

(dollars in thousands, unaudited)


		June 30, 2020										September 30, 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	$	156,611	$	156,611	$	—	$	—	$	156,611	$	88,933	$	88,933	$	0	$	0	$	88,933
Investment securities available for sale		599,333		—		599,333		—		599,333		577,278		0		577,278		0		577,278
Loans and leases, net held for investment		2,195,837		—		—		2,240,456		2,240,456		2,361,557		0		0		2,398,362		2,398,362
Collateral dependent impaired loans		83		—		83		—		83		79		0		79		0	��	79

Financial liabilities:
Deposits		2,506,754		949,662		1,557,228		—		2,506,890		2,591,713		975,750		1,616,025		0		2,591,775
Repurchase agreements		41,449		—		41,449		—		41,449		36,657		0		36,657		0		36,657
Short term borrowings		163,000		—		162,981		—		162,981		158,000		0		157,991		0		157,991
Subordinated debentures		35,035		—		24,507		—		24,507		35,079		0		24,222		0		24,222


		December 31, 2019										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	$	80,077	$	80,076	$	—	$	—	$	80,076	$	80,077	$	80,076	$	0	$	0	$	80,076
Investment securities available for sale		600,799		—		600,799		—		600,799		600,799		0		600,799		0		600,799
Loans and leases, net held for investment		1,753,846		—		—		1,761,461		1,761,461		1,753,846		0		0		1,761,461		1,761,461
Collateral dependent impaired loans		1,692		—		1,692		—		1,692		1,692		0		1,692		0		1,692

Financial liabilities:
Deposits		2,168,374		690,950		1,477,497		—		2,168,447		2,168,374		690,950		1,477,497		0		2,168,447
Repurchase agreements		25,711		—		25,711		—		25,711		25,711		0		25,711		0		25,711
Short term borrowings		20,000		—		2,000		—		2,000		20,000		0		2,000		0		2,000
Subordinated debentures		34,945		—		30,564		—		30,564		34,945		0		30,564		0		30,564

For financial asset categories that were carried on our balance sheet at fair value as of ~~June~~September 30, 2020 and December 31, 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

1213

Table of Contents

●

Foreclosed assets: Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower of cost or fair value. Fair value is the appraised value less expected disposition costs for OREO and some other assets such as mobile homes; fair values for any other foreclosed assets are represented by estimated sales proceeds as determined using reasonably available sources. Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals. Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution. If impairment is determined to exist, the book value of a foreclosed asset is immediately written down to its estimated impaired value through the income statement, thus the carrying amount is equal to the fair value and there is no valuation allowance.

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

Fair Value Measurements – Recurring

(dollars in thousands, unaudited)


	Fair Value Measurements at June 30, 2020, using										Fair Value Measurements at September 30, 2020, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Realized Gain/(Loss) (Level 3)		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	$	—	$	1,850	$	—	$	1,850	$	—	$	0	$	1,856	$	0	$	1,856	$	0
Mortgage-backed securities		—		375,485		—		375,485		—		0		347,207		0		347,207		0
State and political subdivisions		—		221,998		—		221,998		—		0		228,215		0		228,215		0
Total available-for-sale securities	$	—	$	599,333	$	—	$	599,333	$	—	$	0	$	577,278	$	0	$	577,278	$	0


	Fair Value Measurements at December 31, 2019, 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	$	—	$	12,145	$	—	$	12,145	$	—	$	0	$	12,145	$	0	$	12,145	$	0
Mortgage-backed securities		—		400,389		—		400,389		—		0		400,389		0		400,389		0
State and political subdivisions		—		188,265		—		188,265		—		0		188,265		0		188,265		0
Total available-for-sale securities	$	—	$	600,799	$	—	$	600,799	$	—	$	0	$	600,799	$	0	$	600,799	$	0

1314

Table of Contents

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

Fair Value Measurements – Nonrecurring

(dollars in thousands, unaudited)


	Fair Value Measurements at June 30, 2020, using								Fair Value Measurements at September 30, 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	$	—	$	—	$	—	$	—	$	0	$	0	$	0	$	0
Other construction/land		—		—		—		—		0		0		0		0
1-4 family - closed-end		—		—		—		—		0		0		0		0
Equity lines		—		—		—		—		0		0		0		0
Multi-family residential		—		—		—		—		0		0		0		0
Commercial real estate - owner occupied		—		83		—		83		0		79		0		79
Commercial real estate - non-owner occupied		—		—		—		—		0		0		0		0
Farmland		—		—		—		—		0		0		0		0
Total real estate		—		83		—		83		0		79		0		79
Agricultural		—		—		—		—		0		0		0		0
Commercial and industrial		—		—		—		—		0		0		0		0
Consumer loans		—		—		—		—		0		0		0		0
Total impaired loans	$	—	$	83	$	—	$	83	$	0	$	79	$	0	$	79
Foreclosed assets	$	—	$	2,893	$	—	$	2,893	$	0	$	2,970	$	0	$	2,970
Total assets measured on a nonrecurring basis	$	—	$	2,976	$	—	$	2,976	$	0	$	3,049	$	0	$	3,049


	Fair Value Measurements at December 31, 2019, 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		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	$	—	$	—	$	—	$	—	$	0		$	0	$	0	$	0
Other construction/land		—		—		—		—		0			0		0		0
1-4 family - closed-end		—		—		—		—		0			0		0		0
Equity lines		—		—		—		—		0			0		0		0
Multi-family residential		—		—		—		—		0			0		0		0
Commercial real estate - owner occupied		—		88		—		88		0			88		0		88
Commercial real estate - non-owner occupied		—		1,605		—		1,605		0			1,604		0		1,604
Farmland		—		—		—		—		0			0		0		0
Total real estate		—		1,693		—		1,693		0			1,692		0		1,692
Agricultural		—		—		—		—		0			0		0		0
Commercial and industrial		—		—		—		—		0			0		0		0
Consumer loans		—		—		—		—		0			0		0		0
Total impaired loans	$	—	$	1,693	$	—	$	1,693	$	0		$	1,692	$	0	$	1,692
Foreclosed assets	$	—	$	800	$	—	$	800	$	0		$	800	$	0	$	800
Total assets measured on a nonrecurring basis	$	—	$	2,493	$	—	$	2,493	$	0		$	2,492	$	0	$	2,492

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.

1415

Table of Contents

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

Note 9 – Investments

Investment Securities

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

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

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)


	June 30, 2020								September 30, 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	$	1,775	$	75	$	—	$	1,850	$	1,774	$	82	$	$—	$	1,856
Mortgage-backed securities		364,828		10,668		(11)		375,485		336,248		11,033		(74)		347,207
State and political subdivisions		209,760		12,239		(1)		221,998		214,419		13,796		—		228,215
Total securities	$	576,363	$	22,982	$	(12)	$	599,333	$	552,441	$	24,911	$	(74)	$	577,278


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

1516

Table of Contents

At ~~June~~September 30, 2020 and December 31, 2019, the Company had 72 securities and 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).

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)

										��
	June 30, 2020								September 30, 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	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		(3)		4,692		(8)		1,733		(74)		3,011		—		403
State and political subdivisions		(1)		1,052		—		—		—		—		—		—
Total	$	(4)	$	5,744	$	(8)	$	1,733	$	(74)	$	3,011	$	—	$	403


	December 31, 2019
	Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	(32)	$	3,240	$	(72)	$	2,689
Mortgage-backed securities		(494)		100,518		(824)		78,538
State and political subdivisions		(113)		19,762		—		—
Total	$	(639)	$	123,520	$	(896)	$	81,227

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

Investment Portfolio - Realized Gains/(Losses)

(dollars in thousands, unaudited)


	Three months ended June 30,					Six months ended June 30,			Three months ended September 30,					Nine months ended September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Proceeds from sales, calls and maturities of securities available for sale	$	24,063	$	9,985	$	26,493	$	26,639	$	3,390	$	4,225	$	29,883	$	30,895
Gross gains on sales, calls and maturities of securities available for sale		433		33		433		127		—		0		433		128
Gross losses on sales, calls and maturities of securities available for sale		(43)		(11)		(43)		(99)		—		0		(43)		(99)
Net gains on sale of securities available for sale	$	390	$	$22	$	390	$	28	$	—	$	0	$	390	$	29

1617

Table of Contents

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

Estimated Fair Value of Contractual Maturities

(dollars in thousands, unaudited)


	June 30, 2020				September 30, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	4,362	$	4,388	$	3,768	$	3,806
Maturing after one year through five years		7,834		8,104		8,643		8,918
Maturing after five years through ten years		29,485		30,823		28,337		29,781
Maturing after ten years		169,854		180,533		175,445		187,565
Securities not due at a single maturity date:
Mortgage-backed securities		181,945		186,880		170,820		176,426
Collateralized mortgage obligations		182,883		188,605		165,428		170,782
	$	576,363	$	599,333	$	552,441	$	577,278


	December 31, 2019
	Amortized Cost		Fair Value
Maturing within one year	$	7,155	$	7,244
Maturing after one year through five years		17,008		17,171
Maturing after five years through ten years		33,805		34,881
Maturing after ten years		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

At ~~June~~September 30, 2020, the Company’s investment portfolio included ~~356~~352 “muni” bonds issued by 298 different government municipalities and agencies located within 29 different states, with an aggregate fair value of ~~$222~~$228.2 million. The largest exposure to any single municipality or agency was a combined $4.0 million (fair value) in general obligation bonds issued by the 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.

1718

Table of Contents

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

Revenue and General Obligation Bonds by Location

(dollars in thousands, unaudited)


	June 30, 2020				December 31, 2019				September 30, 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	$	76,494	$	81,128	$	59,439	$	61,519	$	77,976	$	83,305	$	59,439	$	61,519
California		27,447		29,067		23,882		25,030		30,423		32,198		23,882		25,030
Washington		23,330		25,023		23,392		24,313		23,285		25,193		23,392		24,313
Other (21 & 24 states, respectively)		53,652		56,532		49,326		50,725		52,887		56,036		49,326		50,725
Total general obligation bonds		180,923		191,750		156,039		161,587		184,571		196,732		156,039		161,587

Revenue bonds
State of issuance
Texas		7,053		7,452		6,035		6,298		7,038		7,496		6,035		6,298
Washington		2,256		2,377		1,737		1,856		2,252		2,381		1,737		1,856
California		364		382		365		380		363		381		365		380
Other (15 & 13 states, respectively)		19,164		20,037		17,724		18,144		20,195		21,225		17,724		18,144
Total revenue bonds		28,837		30,248		25,861		26,678		29,848		31,483		25,861		26,678
Total obligations of states and political subdivisions	$	209,760	$	221,998	$	181,900	$	188,265	$	214,419	$	228,215	$	181,900	$	188,265

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

Revenue Bonds by Type

(dollars in thousands, unaudited)


	June 30, 2020				December 31, 2019				September 30, 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	$	10,363	$	10,949	$	7,515	$	7,775	$	10,017	$	10,536	$	7,515	$	7,775
Sewer		5,219		5,408		4,760		4,811		4,739		4,973		4,760		4,811
Lease										4,630		4,890		3,596		3,678
Sales tax		3,572		3,743		1,949		1,995		2,089		2,179		1,949		1,995
Lease		2,773		2,864		3,596		3,678
Charter school aid		1,565		1,689		1,232		1,290
College and university										1,987		2,054		1,232		1,290
Other (8 and 8 sources, respectively)		5,345		5,595		6,809		7,129		6,386		6,851		6,809		7,129
Total revenue bonds	$	28,837	$	30,248	$	25,861	$	26,678	$	29,848	$	31,483	$	25,861	$	26,678

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

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

1819

Table of Contents

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

As of ~~June~~September 30, 2020, our total LIHTC investment book balance was ~~$3.8~~$3.6 million, which includes $0.2 million in remaining commitments for additional capital contributions. There were $~~0.3~~0.4 million in tax credits derived from our LIHTC investments that were recognized during the ~~six~~nine months ended ~~June~~September 30, 2020, and amortization expense of ~~$0.3~~$0.5 million associated with those investments was netted against pre-tax noninterest income for the same time period. The Company also recognized a $~~0.7~~0.8 million gain during the same period for the sale of a single fund property that was at the end of its tax credit life. Our LIHTC investments are evaluated annually for potential impairment, and we have concluded that the carrying value of the investments is stated fairly and is not impaired.

Note 10 – Credit Quality and Nonperforming Assets

Credit Quality Classifications

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

●

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

●

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

●

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

●

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

1920

Table of Contents

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

Credit Quality Classifications

(dollars in thousands, unaudited)


	June 30, 2020										September 30, 2020
	Pass		Special Mention		Substandard		Impaired		Total		Pass		Special Mention		Substandard		Impaired		Total
Real estate:
1-4 family residential construction	$	89,225	$	—	$	—	$	—	$	89,225	$	75,532	$	0	$	0	$	0	$	75,532
Other construction/land		87,747		2,227		—		571		90,545		66,032		17,210		0		555		83,797
1-4 family - closed end		172,085		1,635		146		4,205		178,071		156,738		2,055		414		2,815		162,022
Equity lines		38,147		1,955		60		4,156		44,318		31,615		2,076		59		4,870		38,620
Multi-family residential		55,577		—		—		344		55,921		61,401		0		0		339		61,740
Commercial real estate - owner occupied		304,684		3,444		3,068		2,667		313,863		309,697		12,753		2,877		3,505		328,832
Commercial real estate - non-owner occupied		689,589		511		565		627		691,292		923,469		14,298		7,005		602		945,374
Farmland		132,584		1,040		128		702		134,454		110,555		13,771		3,174		464		127,964
Total real estate		1,569,638		10,812		3,967		13,272		1,597,689		1,735,039		62,163		13,529		13,150		1,823,881

Agricultural		48,356		159		—		2		48,516		43,529		409		1,594		250		45,782
Commercial and industrial		208,434		11,213		471		1,383		221,502		203,120		11,816		1,049		1,239		217,224
Mortgage warehouse		338,124		—		—		—		338,124		287,516		0		0		0		287,516
Consumer loans		5,834		54		34		344		6,266		5,546		85		11		255		5,897
Total gross loans and leases	$	2,170,386	$	22,238	$	4,472	$	15,001	$	2,212,097	$	2,274,750	$	74,473	$	16,183	$	14,894	$	2,380,300


	December 31, 2019										December 31, 2019
	Pass		Special Mention		Substandard		Impaired		Total		Pass		Special Mention		Substandard		Impaired		Total
Real estate:
1-4 family residential construction	$	105,979	$	—	$	—	$	—	$	105,979	$	105,979	$	0	$	0	$	0	$	105,979
Other construction/land		90,761		98		—		554		91,413		90,761		98		0		554		91,413
1-4 family - closed end		194,572		2,425		164		3,020		200,181		194,572		2,425		164		3,020		200,181
Equity lines		43,111		1,995		72		4,421		49,599		43,111		1,995		72		4,421		49,599
Multi-family residential		54,104		—		—		353		54,457		54,104		0		0		353		54,457
Commercial real estate - owner occupied		334,460		4,005		3,384		2,034		343,883		334,460		4,005		3,384		2,034		343,883
Commercial real estate - non-owner occupied		409,289		1,164		11		2,105		412,569		409,289		1,164		11		2,105		412,569
Farmland		142,594		1,048		132		259		144,033		142,594		1,048		132		259		144,033
Total real estate		1,374,870		10,735		3,763		12,746		1,402,114		1,374,870		10,735		3,763		12,746		1,402,114

Agricultural		47,814		217		—		5		48,036		47,814		217		0		5		48,036
Commercial and industrial		100,584		13,415		556		977		115,532		100,584		13,415		556		977		115,532
Mortgage warehouse		189,103		—		—		—		189,103		189,103		0		0		0		189,103
Consumer loans		7,245		85		25		425		7,780		7,245		85		25		425		7,780
Total gross loans and leases	$	1,719,616	$	24,452	$	4,344	$	14,153	$	1,762,565	$	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 $~~2.9~~3.0 million at ~~June~~September 30, 2020, and $0.8 million at December 31, 2019. Gross nonperforming loans totaled $~~5.8~~7.2 million at ~~June~~September 30, 2020 and $5.7 million at December 31, 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

2021

Table of Contents

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

~~Not included in past due and nonperforming assets are loan modifications executed under Section 4013~~ As of ~~the CARES Act. There~~September 30, 2020, there were ~~313~~314 customers, for a total of ~~$386.2~~$424.0 million, with payment deferrals either under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement. NaN of these ~~loan modifications.~~loans totaling $2.1 million were downgraded to nonaccrual and are included in nonperforming assets. Approximately $~~4.9~~9.0 million in accrued interest has been recognized but not collected on ~~these loans.~~loans with payment deferments at September 30, 2020.

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

Loan Portfolio Aging

(dollars in thousands, unaudited)


	June 30, 2020														September 30, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due⁽¹⁾		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans⁽²⁾		30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due⁽¹⁾		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans⁽²⁾
Real estate:
1-4 family residential construction	$	—	$	—	$	—	$	—	$	89,225	$	89,225	$	—	$	0	$	0	$	0	$	0	$	75,532	$	75,532	$	0
Other construction/land		—		—		—		—		90,545		90,545		4		0		0		0		0		83,797		83,797		0
1-4 family - closed end		11		684		409		1,104		176,967		178,071		843		0		0		150		150		161,872		162,022		975
Equity lines		84		1,120		349		1,553		42,765		44,318		626		0		0		337		337		38,283		38,620		1,537
Multi-family residential		—		—		—		—		55,921		55,921		—		241		0		0		241		61,499		61,740		0
Commercial real estate - owner occupied		—		—		989		989		312,874		313,863		1,909		0		0		0		0		328,832		328,832		2,364
Commercial real estate - non-owner occupied		—		—		628		628		690,664		691,292		627		2,736		0		152		2,888		942,486		945,374		602
Farmland		128		—		684		812		133,642		134,454		702		0		0		447		447		127,517		127,964		464
Total real estate		223		1,804		3,059		5,086		1,592,603		1,597,689		4,711		2,977		0		1,086		4,063		1,819,818		1,823,881		5,942

Agricultural		—		—		—		—		48,516		48,516		—		150		250		0		400		45,382		45,782		250
Commercial and industrial		337		16		772		1,125		220,377		221,502		1,086		4,035		0		382		4,417		212,807		217,224		988
Mortgage warehouse lines		—		—		—		—		338,124		338,124		—		0		0		0		0		287,516		287,516		0
Consumer		4		32		—		36		6,230		6,266		11		9		30		0		39		5,858		5,897		6
Total gross loans and leases	$	564	$	1,852	$	3,831	$	6,247	$	2,205,850	$	2,212,097	$	5,808	$	7,171	$	280	$	1,468	$	8,919	$	2,371,381	$	2,380,300	$	7,186

(1)	As of ~~June~~September 30, 2020, there were 0 loans over 90 days past due and still accruing.

(2)	Included in total financing receivables

2122

Table of Contents

Loan Portfolio Aging

(dollars in thousands, unaudited)


	December 31, 2019														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	$	—	$	—	$	—	$	—	$	105,979	$	105,979	$	—	$	0	$	0	$	0	$	0	$	105,979	$	105,979	$	0
Other construction/land		16		—		—		16		91,397		91,413		31		16		0		0		16		91,397		91,413		31
1-4 family - closed end		485		380		659		1,524		198,657		200,181		741		485		380		659		1,524		198,657		200,181		741
Equity lines		177		10		78		265		49,334		49,599		480		177		10		78		265		49,334		49,599		480
Multi-family residential		—		—		—		—		54,457		54,457		—		0		0		0		0		54,457		54,457		0
Commercial real estate - owner occupied		1,552		—		88		1,640		342,243		343,883		1,440		1,552		0		88		1,640		342,243		343,883		1,440
Commercial real estate - non-owner occupied		500		—		1,605		2,105		410,464		412,569		2,105		500		0		1,605		2,105		410,464		412,569		2,105
Farmland		—		—		—		—		144,033		144,033		258		0		0		0		0		144,033		144,033		258
Total real estate		2,730		390		2,430		5,550		1,396,564		1,402,114		5,055		2,730		390		2,430		5,550		1,396,564		1,402,114		5,055

Agricultural		—		—		—		—		48,036		48,036		—		0		0		0		0		48,036		48,036		0
Commercial and industrial		160		215		—		375		115,157		115,532		651		160		215		0		375		115,157		115,532		651
Mortgage warehouse lines		—		—		—		—		189,103		189,103		—		0		0		0		0		189,103		189,103		0
Consumer		55		12		2		69		7,711		7,780		31		55		12		2		69		7,711		7,780		31
Total gross loans and leases	$	2,945	$	617	$	2,432	$	5,994	$	1,756,571	$	1,762,565	$	5,737	$	2,945	$	617	$	2,432	$	5,994	$	1,756,571	$	1,762,565	$	5,737

(1)	As of December 31, 2019, there were 0 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, excluding loan modifications that are COVID-19 related and made in accordance with the interagency guidance and the CARES Act as described in Note 3, above. At ~~June~~September 30, 2020, the Company had a total of $108.6 million in TDRs, including ~~$0.8~~$0.9 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.~~

2223

Table of Contents

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

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)


	Three months ended June 30, 2020												Three months ended September 30, 2020
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total		Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:
Other construction/land	$	—	$	85	$	—	$	—	$	—	$	85	$	0	$	0	$	0	$	0	$	—	$	—
1-4 family - closed-end		—		1,325		—		—		—		1,325		0		0		0		0		—		—
Equity lines		—		—		—		—		—		—		0		0		0		0		—		—
Multi-family residential		—		—		—		—		—		—		0		0		0		0		—		—
Commercial real estate - owner occupied		—		178		—		—		—		178		0		569		0		0		—		569
Farmland		—		—		—		—		—		—		0		0		0		0		—		—
Total real estate loans		—		1,588		—		—		—		1,588		0		569		0		0		—		569
Agricultural		—		—		—		—		—		—		0		0		0		0		—		—
Commercial and industrial		—		28		—		—		—		28		0		17		0		0		—		17
Consumer loans		—		—		—		—		—		—		0		0		0		0		—		—
Total	$	—	$	1,616	$	—	$	—	$	—	$	1,616	$	0	$	586	$	0	$	0	$	—	$	586


	Three months ended June 30, 2019												Three months ended September 30, 2019
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total		Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:
Other construction/land	$	—	$	—	$	—	$	—	$	—	$	—	$	0	$	0	$	0	$	0	$	—	$	0
1-4 family - closed-end		—		—		—		—		—		—		0		0		0		0		—		0
Equity lines		—		244		—		—		—		244		0		0		0		0		—		0
Multi-family residential		—		—		—		—		—		—		0		0		0		0		—		0
Commercial real estate - owner occupied		—		—		—		—		—		—		0		0		0		0		—		0
Farmland		—		—		—		—		—		—		0		0		0		0		—		0
Total real estate loans		—		244		—		—		—		244		0		0		0		0		—		0
Agricultural		—		—		—		—		—		—		0		0		0		0		—		0
Commercial and industrial		—		22		—		52		—		74		0		233		0		0		—		233
Consumer loans		—		—		—		50		—		50		0		0		0		0		—		0
Total	$	—	$	266	$	—	$	102	$	—	$	368	$	0	$	233	$	0	$	0	$	—	$	233

2324

Table of Contents

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)


		Six months ended June 30, 2020												Nine months ended September 30, 2020
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total		Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest Modification		Total
Real estate:											$												$
Other construction/land	$	—	$	85	$	—	$	—	$	—		85	$	—	$	85	$	—	$	—	$	—		85
1-4 family - closed-end		—		1,325		—		—		—		1,325		—		1,325		—		—		—		1,325
Equity lines		—		—		—		—		—		—		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		178		—		—		338		516		—		747		—		—		338		1,085
Farmland		—		—		—		—		—		—		—		—		—		—		—		—
Total real estate loans		—		1,588		—		—		338		1,926		—		2,157		—		—		338		2,495
Agricultural		—		—		—		—				—		—		—		—		—				—
Commercial and industrial		—		28		—		—		—		28		—		45		—		—		—		45
Consumer loans		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	—	$	1,616	$	—	$	—	$	338	$	1,954	$	—	$	2,202	$	—	$	—	$	338	$	2,540


		Six months ended June 30, 2019												Nine months ended September 30, 2019
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Term & Interest 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		—		344		—		—		—		344		—		344		—		—		—		344
Multi-family residential		—		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—		—		—		—		—
Total real estate loans		—		344		—		—		—		344		—		344		—		—		—		344
Agricultural		—		—		—		—				—		—		—		—		—				—
Commercial and industrial		94		22		—		52		—		168		94		255		—		52		—		401
Consumer loans		—		9		—		50		—		59		—		9		—		50		—		59
Total	$	94	$	375	$	—	$	102	$	—	$	571	$	94	$	608	$	—	$	102	$	—	$	804

2425

Table of Contents

Troubled Debt Restructurings

(dollars in thousands, unaudited)


	Three months ended June 30, 2020									Three months ended September 30, 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	1	$	86	$	85	$	40	$	41	0	$	0	$	0	$	0	$	0
1-4 family - closed-end	1		1,325		1,325		10		17	0		0		0		0		0
Equity lines	0		—		—		—		—	0		0		0		0		0
Multi-family residential	0		—		—		—		—	0		0		0		0		0
Commercial real estate - owner occupied	1		178		178		8		9	1		569		569		0		5
Farmland	0		—		—		—		—	0		0		0		0		0
Total real estate loans			1,589		1,588		58		67			569		569		0		5

Agricultural	0		—		—		—		—	0		0		0		0		0
Commercial and industrial	1		28		28		1		2	1		17		17		0		1
Consumer loans	0		—		—		—		—	0		0		0		0		0
Total		$	1,617	$	1,616	$	59	$	69		$	586	$	586	$	0	$	6

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


	Three months ended June 30, 2019									Three months ended September 30, 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	$	0	$	0	$	0	$	0
1-4 family - closed-end	0		—		—		—		—	0		0		0		0		0
Equity lines	1		244		244		—		1	0		0		0		0		0
Multi-family residential	0		—		—		—		—	0		0		0		0		0
Commercial real estate - owner occupied	0		—		—		—		—	0		0		0		0		0
Farmland	0		—		—		—		—	0		0		0		0		0
Total real estate loans			244		244		—		1			0		0		0		0

Agricultural	0		—		—		—		—	0		0		0		0		0
Commercial and industrial	2		74		74		—		45	3		233		233		(40)		9
Consumer loans	1		50		50		(45)		2	0		0		0		0		0
Total		$	368	$	368	$	$(45)	$	48		$	233	$	233	$	$(40)	$	9

(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.

2526

Table of Contents

Troubled Debt Restructurings

(dollars in thousands, unaudited)


	Six months ended June 30, 2020									Nine months ended September 30, 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	1	$	86	$	85	$	40	$	41	1	$	86	$	85	$	40	$	41
1-4 family - closed-end	1		1,325		1,325		10		17	1		1,325		1,325		10		—
Equity lines	0		`		—		—		—	0		`		—		—		—
Multi-family residential	0		—		—		—		—	0		—		—		—		—
Commercial real estate - owner occupied	2		516		516		8		9	3		1,085		1,085		8		6
Farmland	0		—		—		—		—	0		—		—		—		—
Total real estate loans			1,927		1,926		58		67			2,496		2,495		58		47

Agricultural	0		—		—		—		—	0		—		—		—		—
Commercial and industrial	1		28		28		1		2	2		45		45		2		2
Consumer loans	0		—		—		—		—	0		—		—		—		—
Total		$	1,955	$	1,954	$	59	$	69		$	2,541	$	2,540	$	60	$	49

(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.


	Six months ended June 30, 2019									Nine months ended September 30, 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	2		344		344		—		1	2		344		344		—		1
Multi-family residential	0		—		—		—		—	0		—		—		—		—
Commercial real estate - owner occupied	0		—		—		—		—	0		—		—		—		—
Farmland	0		—		—		—		—	0		—		—		—		—
Total real estate loans			344		344		—		1			344		344		—		1

Agricultural	0		—		—		—		—	0		—		—		—		—
Commercial and industrial	4		168		168		(20)		46	7		401		401		(59)		10
Consumer loans	2		59		59		(47)		3	2		59		59		(47)		2
Total		$	571	$	571	$	$(67)	$	50		$	804	$	804	$	(106)	$	13

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

The Company had 0 finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the ~~six-month~~nine-month periods ended ~~June~~September 30, 2020 and 2019.

2627

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)


	June 30, 2020				September 30, 2020
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Real estate secured	$	83	$	83	$	79	$	79
Total purchased credit impaired loans	$	83	$	$83	$	79	$	79


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

There was 0 allowance for loan losses allocated for PCI loans as of ~~June~~September 30, 2020, however, an allowance totaling $0.1 million was allocated for PCI loans as of December 31, 2019. There was 0 discount accretion recorded on PCI loans during the ~~six~~nine months ended ~~June~~September 30, 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~~ ~~$0.7 million at June 30, 2020 and $0.6 million at December 31, 2019.~~

2728

Table of Contents

are specific reserves allocated to TDRs, totaling $0.7 million at September 30, 2020 and $0.6 million at December 31, 2019.

Impaired Loans

(dollars in thousands, unaudited)


	June 30, 2020										September 30, 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	$	690		571		173		586		21	$	555	$	555	$	170	$	571	$	32
1-4 family - closed-end		3,379		3,379		71		3,406		58		1,855		1,855		50		1,896		77
Equity lines		3,909		3,856		317		3,971		69		3,571		3,518		307		3,628		94
Multi-family residential		344		344		18		347		12		339		339		17		345		18
Commercial real estate- owner occupied		757		757		11		763		18		1,319		1,319		8		1,333		27
Commercial real estate- non-owner occupied		—		—		—		—		—		0		0		0		0		0
Farmland		237		237		3		237		—		0		0		0		0		0
Total real estate		9,316		9,144		593		9,310		178		7,639		7,586		552		7,773		248
Agricultural		2		2		—		4		—		250		250		250		250		0
Commercial and industrial		1,282		1,262		671		1,297		9		888		869		344		936		10
Consumer loans		382		344		95		361		15		294		255		88		280		17
Subtotal		10,982		10,752		1,359		10,972		202		9,071		8,960		1,234		9,239		275
With no related allowance recorded
Real estate:
Other construction/land		—		—		—		—		1		117		0		—		6		0
1-4 family - closed-end		826		826		—		845		—		984		960		—		968		0
Equity lines		300		300		—		304		2		1,377		1,352		—		1,371		3
Commercial real estate- owner occupied		2,029		1,910		—		1,937		—		2,306		2,186		—		2,261		0
Commercial real estate- non-owner occupied		627		627		—		634		—		602		602		—		626		0
Farmland		465		465		—		467		—		464		464		—		466		0
Total real estate		4,247		4,128		—		4,187		3		5,850		5,564		—		5,698		3
Agricultural		—		—		—		—		—		0		0		—		0		0
Commercial and industrial		142		121		—		206		—		391		370		—		371		0
Consumer loans		9		—		—		1		—		7		0		—		0		0
Subtotal		4,398		4,249		—		4,394		3		6,248		5,934		—		6,069		3
Total	$	15,380	$	15,001	$	1,359	$	15,366	$	205	$	15,319	$	14,894	$	1,234	$	15,308	$	278

(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.

2829

Table of Contents

Impaired Loans

(dollars in thousands, unaudited)


	December 31, 2019										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:
Other construction/land	$	656	$	537	$	157	$	563	$	32	$	656	$	537	$	157	$	563	$	32
1-4 family - closed-end		2,298		2,298		58		2,365		146		2,298		2,298		58		2,365		146
Equity lines		4,173		4,120		252		4,185		200		4,173		4,120		252		4,185		200
Multi-family residential		353		353		17		361		23		353		353		17		361		23
Commercial real estate- owner occupied		593		593		6		606		38		593		593		6		606		38
Commercial real estate- non-owner occupied		—		—		—		—		—		0		0		0		0		0
Farmland		237		237		3		256		—		237		237		3		256		0
Total real estate		8,310		8,138		493		8,336		439		8,310		8,138		493		8,336		439
Agricultural		5		5		1		6		—		5		5		1		6		0
Commercial and industrial		915		896		219		1,140		29		915		896		219		1,140		29
Consumer loans		464		425		114		469		35		464		425		114		469		35
Subtotal		9,694		9,464		827		9,951		503		9,694		9,464		827		9,951		503
With no related allowance recorded
Real estate:
Other construction/land												52		17		—		577		4
1-4 family - closed-end	$	755	$	722	$	—	$	726	$	—		755		722		—		726		0
Equity lines		326		301		—		310		5		326		301		—		310		5
Multi-family residential		—		—		—		—		—		0		0		—		0		0
Commercial real estate- owner occupied		1,560		1,440		—		1,477		—		1,560		1,440		—		1,477		0
Commercial real estate- non-owner occupied		3,295		2,105		—		3,267		—		3,295		2,105		—		3,267		0
Farmland		22		22		—		25		—		22		22		—		25		0
Total real estate		6,010		4,607		—		6,382		9		6,010		4,607		—		6,382		9
Agricultural		—		—		—		—		—		0		0		—		0		0
Commercial and industrial		102		81		—		162		—		102		81		—		162		0
Consumer loans		9		—		—		140		15		9		0		—		140		15
Subtotal		6,121		4,688		—		6,684		24		6,121		4,688		—		6,684		24
Total	$	15,815	$	14,152	$	827	$	16,635	$	527	$	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.

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

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral value, net of the expected costs of disposition, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required. At the

Table of Contents

time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within

~~Table of Contents~~

30 to 60 days if a recent appraisal is not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed staff appraisers 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 ~~59%~~55% of the Company’s impaired real estate loan balances at ~~June~~September 30, 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 $~~12.2~~14.4 million at ~~June~~September 30, 2020.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended ~~June~~September 30, 2020, although as outlined in Note 3 to the consolidated financial statements we will substantially update our methodology upon the implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-13 and 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 Department of Business Oversight (DBO) review the allowance for loan and lease losses as an integral part of their audit and examination processes. Management believes deferring the implementation of “CECL” and continuing with the current incurred loss methodology is appropriate given the impact of the economic uncertainty surrounding COVID-19 and related governmental and regulatory actions taken in response thereto, such as the stimulus provisions of the CARES Act.

3031

Table of Contents

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)


		Three months ended June 30, 2020												Three months ended September 30, 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	$	7,315	$	235	$	2,754	$	1,137	$	12	$	11,453	$	8,850	$	232	$	3,615	$	849	$	14	$	13,560
Charge-offs		—		—		(67)		(286)		—		(353)		—		—		(327)		(234)		—		(561)
Recoveries		3		—		20		237		—		260		4		—		35		198		—		237
Provision		1,532		(3)		908		(239)		2		2,200		1,906		244		159		34		7		2,350
Ending balance	$	8,850	$	232	$	3,615	$	849	$	14	$	13,560	$	10,760	$	476	$	3,482	$	847	$	21	$	15,586

	Six months ended June 30, 2020												Nine months ended September 30, 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	$	5,635	$	193	$	2,685	$	1,278	$	132	$	9,923	$	5,635	$	193	$	2,685	$	1,278	$	132	$	9,923
Charge-offs		—		—		(92)		(903)		—		(995)		—		—		(419)		(1,137)		—		(1,556)
Recoveries		74		—		48		510		—		632		78		—		83		708		—		869
Provision		3,141		39		974		(36)		(118)		4,000		5,047		283		1,133		(2)		(111)		6,350
Ending balance	$	8,850	$	232	$	3,615	$	849	$	14	$	13,560	$	10,760	$	476	$	3,482	$	847	$	21	$	15,586
Reserves:
Specific	$	593	$	—	$	671	$	95	$	—	$	1,359	$	552	$	250	$	344	$	88	$	—	$	1,234
General		8,257		232		2,944		754		14		12,201		10,208		226		3,138		759		21		14,352
Ending balance	$	8,850	$	232	$	3,615	$	849	$	14	$	13,560	$	10,760	$	476	$	3,482	$	847	$	21	$	15,586
Loans evaluated for impairment:
Individually	$	13,272	$	2	$	1,383	$	344	$	—	$	15,001	$	13,150	$	250	$	1,239	$	255	$	—	$	14,894
Collectively		1,584,417		48,514		558,243		5,922		—		2,197,096		1,810,731		45,532		503,501		5,642		—		2,365,406
Ending balance	$	1,597,689	$	48,516	$	559,626	$	6,266	$	—	$	2,212,097	$	1,823,881	$	45,782	$	504,740	$	5,897	$	—	$	2,380,300

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

(1)	Includes mortgage warehouse lines.

3132

Table of Contents

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)


		Three months ended June 30, 2019												Three months ended September 30, 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	$	6,094	$	219	$	1,914	$	1,129	$	82	$	9,438	$	5,969	$	201	$	2,569	$	1,132	$	12	$	9,883
Charge-offs		—		—		(254)		(562)		—		(816)		—		—		(57)		(640)		—		(697)
Recoveries		153		—		431		277		—		861		187		—		172		305		—		664
Provision		(278)		(18)		478		288		(70)		400		568		(10)		177		629		(14)		1,350
Ending balance	$	5,969	$	201	$	2,569	$	1,132	$	12	$	9,883	$	6,724	$	191	$	2,861	$	1,426	$	(2)	$	11,200

		Six months ended June 30, 2019												Nine months ended September 30, 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	$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750	$	5,831	$	256	$	2,394	$	1,239	$	30	$	9,750
Charge-offs		—		—		(832)		(1,114)		—		(1,946)		—		—		(891)		(1,753)		—		(2,644)
Recoveries		329		—		472		578		—		1,379		516		—		646		882		—		2,044
Provision		(191)		(55)		535		429		(18)		700		377		(65)		712		1,058		(32)		2,050
Ending balance	$	5,969	$	201	$	2,569	$	1,132	$	12	$	9,883	$	6,724	$	191	$	2,861	$	1,426	$	(2)	$	11,200
Reserves:
Specific	$	881	$	1	$	303	$	137	$	—	$	1,322	$	1,691	$	1	$	133	$	234	$	—	$	2,059
General		5,088		200		2,266		995		12		8,561		5,033		190		2,728		1,192		(2)		9,141
Ending balance	$	5,969	$	201	$	2,569	$	1,132	$	12	$	9,883	$	6,724	$	191	$	2,861	$	1,426	$	(2)	$	11,200
Loans evaluated for impairment:
Individually	$	11,751	$	6	$	837	$	772	$	—	$	13,366	$	14,265	$	6	$	810	$	706	$	—	$	15,787
Collectively		1,426,425		51,503		279,091		7,514		—		1,764,533		1,393,489		49,099		331,840		7,445		—		1,781,873
Ending balance	$	1,438,176	$	51,509	$	279,928	$	8,286	$	—	$	1,777,899	$	1,407,754	$	49,105	$	332,650	$	8,151	$	—	$	1,797,660

(1)	Includes mortgage warehouse lines.

Note 12 – Operating Leases

We lease space under non-cancelable operating leases for 21 branch locations, 3 off-site ATM locations, 1 administrative building, one loan production office and a warehouse. Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs). Payments for taxes and insurance as well as non-lease components are not included in the accounting of the lease component, but are separately accounted for in occupancy expense. The Company recognized lease expense of $~~1.1~~1.7 million for both ~~six-month~~nine-month periods ended ~~June~~September 30, 2020 and 2019. Most leases include one or more renewal options available to exercise. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. As most of our leases do not provide an implicit rate, we used our incremental borrowing rate in determining the present value of the lease payments.

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

At ~~June~~September 30, 2020, the Company’s right-of-use assets and operating lease liabilities were ~~$7.5~~$7.0 million and ~~$8.0~~$7.5 million, respectively. The weighted average remaining lease term for the lease liabilities was 7.0 years, and the weighted average discount rate of remaining payments was 5.5 percent. There were 0 lease liabilities from new right-of-use assets obtained during the nine months ended September 30, 2020. Cash paid on operating leases was $1.4 million for the nine months ended September 30, 2020.

3233

Table of Contents

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

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



	June 30, 2020		September 30, 2020
2020 ⁽¹⁾	$	1,120	$	560
2021		2,020		1,983
2022		1,571		1,571
2023		1,113		1,113
2024		749		749
Thereafter		3,196		3,196
Total		9,769		9,172
Less: present value discount		(1,744)		(1,635)
Lease liability ⁽²⁾	$	8,025	$	7,537

(1)	Contractual maturities for the ~~six~~three months remaining in 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, 2019 presented in accordance with ASC Topic 840, “Leases”:


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

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 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 ~~37.1%~~32.8% and ~~29.6%~~30.7% of the Company’s noninterest revenue was outside of the scope of the ASC 606 for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2020, respectively.

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

3334

Table of Contents

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


	For the three months ended June 30,				For the six months ended June 30,				For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Non-interest income
Noninterest income
Service charges on deposits
Returned item and overdraft fees	$	962	$	1,657	$	2,626	$	3,223	$	1,160	$	1,766	$	3,785	$	4,990
Other service charges on deposits		1,656		1,494		3,176		2,871		1,790		1,526		4,967		4,396
Debit card interchange income		1,723		1,687		3,355		3,200		1,828		1,698		5,183		4,897
Loss on limited partnerships⁽¹⁾		(158)		(450)		(315)		(900)		(716)		(728)		(1,031)		(1,628)
Dividends on equity investments⁽¹⁾		139		175		333		406		190		188		524		594
Unrealized gains recognized on equity investments⁽¹⁾		—		232		447		232		—		—		447		232
Net gains on sale of securities⁽¹⁾		390		22		390		28		—		—		390		29
Other⁽¹⁾		2,188		1,038		2,995		2,702		2,853		1,419		5,847		4,121
Total non-interest income	$	6,900	$	5,855	$	13,007	$	11,762
Total noninterest income									$	7,105	$	5,869	$	20,112	$	17,631

Non-interest expense
Noninterest expense
Salaries and employee benefits ⁽¹⁾	$	9,266	$	8,994	$	19,438	$	18,237	$	9,698	$	8,784	$	29,136	$	27,021
Occupancy expense ⁽¹⁾		2,504		2,450		4,832		4,811		2,559		2,485		7,390		7,296
Gain on sale of OREO		—		(21)		2		(37)		(12)		(70)		(10)		(107)
Other ⁽¹⁾		6,263		6,233		11,579		12,498		7,058		5,889		18,640		18,387
Total non-interest expense	$	18,033	$	17,656	$	35,851	$	35,509
Total noninterest expense									$	19,303	$	17,088	$	55,156	$	52,597

(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.

3435

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 shelter-at-home orders and limitations on business and personal activity as well as any stimulus or relief efforts, have on customers’ ability to repay ~~loans;~~loans or to resume normal payments following the end of COVID-19 related deferrals granted by the Bank; the Company’s implementation of CECL; 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 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, 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

Table of Contents

are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations with regard to those areas.

~~Table of Contents~~

OVERVIEW OF THE RESULTS OF OPERATIONS

AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

~~Second~~Third Quarter 2020 compared to ~~Second~~Third Quarter 2019

~~Second Quarter~~Third quarter 2020 net income was ~~$8.3~~$10.4 million, or ~~$0.54~~$0.68 per diluted share, compared to ~~$8.8~~$9.0 million, or ~~$0.57~~$0.58 per diluted share in the ~~second~~third quarter of 2019. The Company’s annualized return on average equity was ~~10.30%~~12.34% and annualized return on average assets was ~~1.19%~~1.34% for the quarter ended ~~June~~September 30, 2020, compared to ~~12.27%~~11.78% and ~~1.39%~~1.36%, respectively, for the same quarter in 2019. The primary drivers behind the variance in ~~second~~third quarter net income are as follows:

●

The ~~Company’s~~$3.7 million increase in net interest income is due to a $1.1 million increase in interest income due mostly to higher loan volumes partially offset by lower rates and lower interest expense, as well as a $2.6 million decrease in interest expense due to an increase in noninterest bearing deposits and lower rates on the remaining deposits. The provision for loan ~~and~~& lease losses was ~~$2.2~~$1.0 million higher due to the increase in core loan volume and relative uncertainty in the second quarter of 2020 relative to $0.4 million in the same quarter of 2019. The $1.8 million increase in provision for loan and lease losses is due mostly to the estimated impact that COVID-19 will have on the economy and our loan customers. Management adjusted its qualitative risk factors under our current incurred loss model for economic conditions, changes in the mix of the portfolio due to loans subject to a payment deferral, potential changes in collateral values due to reduced cash flows, and external factors such as government actions. In particular, the uncertainty regarding our customers' ability to repay loans could be adversely impacted by COVID-19 given higher unemployment rates, requests for payment deferrals, temporary business shut-downs, and reduced consumer and business spending.economy.

●

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

●

The ~~$1.0~~$1.2 million favorable increase in noninterest income is due to a ~~$0.7~~$0.8 million gain from the ~~termination~~disposal of a low-income housing tax credit fund investment, and a ~~$0.5~~$0.7 million increase in bank-owned life insurance (BOLI) ~~income, and a $0.4 million gain from the sale of debt securities.~~income. These increases were partially offset by a ~~$0.5~~$0.3 million decline in customer service charges.

●

Noninterest expense increased by ~~$0.4~~$2.2 million, ~~or 2%,~~ due mostly to ~~higher~~a $1.1 million increase in salaries, a $0.4 million increase in foreclosed asset expenses, and a $0.5 million increase in director’s deferred ~~compensation expense.~~compensation.

~~First Half~~Nine months ended 2020 compared to ~~First Half~~nine months ended 2019

Net income for the first ~~half~~nine months of 2020 was ~~$16.1~~$26.5 million, or ~~$1.05~~$1.73 per diluted share, compared to ~~$17.7~~$26.7 million, or ~~$1.15~~$1.73 per diluted share for the first ~~half~~nine months of 2019. The Company’s annualized return on average equity was ~~10.14%~~10.90% and annualized return on average assets was ~~1.21%~~1.26% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to a return on equity of ~~12.62%~~12.33% and return on assets of ~~1.41%~~1.40% for the ~~six~~nine months ended ~~June~~September 30, 2019. The primary drivers behind the variance in year-to-date net income are as follows:

●

Net interest income was up $3.5 million or 5% due to the increase in volume of interest earning assets and the favorable impact of a 54 basis point decrease in yield on interest bearing liabilities.

●

The Company’s provision for loan and lease losses was ~~$4.0~~$6.4 million in the first ~~half~~nine months of 2020 relative to ~~$0.7~~$2.1 million for the first ~~half~~nine months of ~~2019, for~~2019. Organic loan growth specifically non-owner occupied commercial real estate combined with the uncertainties surrounding the economy due to the COVID-19 pandemic, necessitated the $4.3 million increase in the comparative periods,.

●

Noninterest income increased by $2.5 million, or 14%, due mostly to a $0.4 million increase in BOLI income, a $1.4 million gain from the wrap up of low-income housing tax credit fund investments, a decrease of $0.6 million in low-income housing tax credit fund expenses, an increase of $0.2 million in the valuation gain of restricted equity investments owned by the Company and a $0.4 million gain on the sale of debt securities from the restructuring of the portfolio in the second quarter.

●

Noninterest expense increased by $2.6 million or 5% due mostly to the same reasons outlined above in the quarterly comparison.

●

~~Net interest income was down by $0.2 million or 1% due to the negative impact of a 28 basis point decrease in net interest margin.~~

●

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

●

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

Table of Contents

FINANCIAL CONDITION SUMMARY

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

The Company’s assets totaled ~~$3.1~~$3.2 billion at ~~June~~September 30, 2020 relative to $2.6 billion at December 31, 2019. The following provides a summary of key balance sheet changes during the first ~~six~~nine months of 2020:

~~Table of Contents~~

●

The Company’s balance of cash and ~~due from banks~~cash equivalents was up by ~~$76.5~~$8.9 million, or ~~96%~~11% from December 31, 2019, ~~due~~ to ~~borrowing additional cash on June 30, 2020, for expected~~support fluctuations in month end mortgage warehouse line utilization.

●

Securities available-for-sale were ~~$599.3~~$577.3 million at ~~June~~September 30, 2020, a decrease of ~~$1.5~~$23.5 million, or ~~less than 1%~~4% from December 31, 2019. WeThe Company sold approximately $20.3 million in certain debt securities during the first half of 2020 as an effort to restructure the portfolio, selling smaller-balance or variable rate SBA and FNMA bonds, as well as certain municipal securities with potential higher credit risk. ~~These~~Those sales ~~and normal principal paydowns~~ were mostly offset by bond ~~purchases and increases~~purchases. During the third quarter of 2020 however, regular principal paydowns were generally not replaced to offset organic growth in ~~unrealized fair value of~~ the ~~bond~~commercial real estate loan portfolio.

●

~~Net loans and leases increased $440.4~~Year-to-date 2020 loan growth of $611.8 million, or ~~25%~~35%, ~~during the first half of 2020 to $2.2 billion at June 30, 2020, due to~~was highlighted by a ~~$205.2~~$435.7 million increase in non-agricultural real estate loans, ~~$149.0~~as well as a $98.4 million increase in mortgage warehouse ~~line utilization,~~lines, and ~~a $106.0~~$123.6 million ~~increase in commercial and industrial loans due mostly to new SBA~~of Paycheck Protection Program (PPP) loans.

●

~~Nonperforming~~ Foreclosed assets increased $2.2 million, to ~~$8.7~~$3.0 million during the first ~~half~~nine months of 2020. This increase was mostly due to $2.1 million in ~~new foreclosed assets, from~~ one commercial real estate credit. The single loan which moved to ~~other real estate owned~~foreclosed assets during the first ~~six~~nine months of 2020, has a pending sale ~~contract.~~contract, expected to close in the fourth quarter of 2020.

●

~~Total deposits reflected growth of $338.4~~Deposits increased by $423.3 million, or ~~16%,~~20% during ~~the first half~~ 2020. ~~Non-maturity~~The growth in deposits ~~increased by $409.1 million~~came primarily from noninterest bearing or ~~25%,~~low-cost transaction and savings accounts, while ~~customer~~higher-cost time deposits declined by $30.8 million or 7%. Wholesale brokered deposits decreased by $40.0 million to $10.0 million. Noninterest bearing deposits as a percent of total deposits was 37.9% at June 30, 2020, as compared to 31.9% at December 31, 2019.decreased.

●

Short-term borrowings increased by ~~$143.0~~$138.0 million to ~~$163.0~~$158.0 million at ~~June~~September 30, 2020. This increase was due to additional Federal Home Loan Bank (FHLB) overnight borrowings to partially fund ~~expected increases in our~~loan growth including PPP loans and increased utilization of mortgage warehouse ~~line utilization~~lines at ~~June~~September 30, 2020. ~~$10.0~~Ten million of these FHLB advances were “interest-free”, given to all member banks as part of the FHLB’s “Zero Interest Recovery Advance” program to provide immediate relief to property owners, businesses, and other customers struggling with the financial impacts of the pandemic.

●

Total shareholders’ equity of ~~$327.4~~$336.2 million at ~~June~~September 30, 2020 reflects an increase of ~~$18.1~~$27.0 million, or 6%9%, relative to year-end 2019 due to capital from the addition of net income, a ~~$10.2~~$11.6 million favorable swing in accumulated other comprehensive income/loss, stock options exercised, net of ~~$6.1~~$9.1 million in dividends paid and $2.6 million in stock repurchases prior to March 15, 2020.

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

Overview

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

●

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

●

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

Table of Contents

●

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

~~Table of Contents~~

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

●

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

●

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

●

Effective March 20, 2020, the state of California ordered the closure of all non-essential workplaces, restricting non-essential travel, and ordering a state-wide shelter-in-place order. This was followed by extensions of these orders in April and many local municipalities in which the Company operates issued orders mandating additional requirements to protect their citizens. Although many counties in California began phased reopening plans, due to recent increases in cases effective July 13, 2020, the Governor ordered that dine-in restaurants, wineries and tasting rooms, movie theaters, family entertainment centers, zoos and museums, and cardrooms immediately close all indoor operations. ~~Further limitations apply~~Effective August 31, 2020, a new simplified, four-tier guideline was implemented for counties to ~~counties that have been on County Monitoring List~~reopen. Counties must remain in a tier for ~~3 consecutive days.~~at least three weeks before moving to the next tier.

●

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. Further interagency guidance for financial institutions was issued in June, August, and September 2020.

●

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

Impact of COVID-19 on the Company’s Operations

●

The Company has ~~not yet experienced any~~had an $8.4 million increase in classified assets, ~~or nonperforming assets~~including $2.1 million in non-accrual loans as a result of ~~COVID-19.~~COVID-19 due to loans modified under the Interagency Guidance that are either not expected to make all principal and interest payments in a timely manner, or will need further modifications or assistance. Further, we have not experienced any charge-offs as a result of COVID-19. ~~However,~~Starting in April 2020, the Company ~~has taken~~took actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program (PPP) loans. For further information on the principal and interest deferrals, please see the “Nonperforming Assets” section below. However, the ~~change in~~uncertainty of national and local economic conditions had a material impact on our

Table of Contents

provision for loan and lease losses. The Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Although this deferral will still require CECL to be implemented as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. The most significant unknown factor is how long economic activity will be impacted by COVID-19, and in turn how deeply that will impact the markets in which we operate. Therefore, more time iswas needed to assess the impact of this economic uncertainty and related actions taken such as the stimulus provisions of the CARES Act on the Company’s allowance for loan and lease losses under the CECL methodology. It is anticipated that if economic conditions do not improve, in future quarters of 2020, the provision for loan and lease losses could be at the same or higher level as that booked in the first half of 2020.

~~Table of Contents~~

●

In addition to the expected increase in provision for loan losses, the Company expects that net interest income ~~will~~could be ~~reduced due to a lower~~adversely impacted over time given pressure on net interest margin as a result of the FOMC’s emergency rate cuts in March 2020. For example, our net interest margin for the ~~six~~nine months ended ~~June~~September 30, 2020, was 3.97%, compared to a net interest margin of ~~4.25%~~4.20% for the same period in 2019. New loans booked in 2020 ~~will be~~have been at lower rates and although deposit costs ~~will~~have also ~~decline,~~declined, deposit costs were already low or at their floors prior to these interest rate cuts. Further, ~~it is expected that~~ the stay-at-home order and record unemployment resulting from the COVID-19 pandemic ~~will reduce~~has reduced consumer spending which ~~will reduce~~has reduced our fee income, primarily from debit and credit card interchange fees. It’s also expected that the Company will offer concessions or certain fee waivers to consumers adversely affected by COVID-19. These actions will likely result in lower deposit service charge income in future periods as compared to 2019.overdraft activity.

●

The COVID-19 pandemic has not adversely affected our capital or financial ~~resources.~~resources as of September 30, 2020. During the first ~~half~~nine months of 2020, total shareholders’ equity increased by ~~$18.1~~$27.0 million, or 6%9%, to ~~$327.4~~$336.2 million. ~~The largest~~A large component of this was ~~a $10.2~~an $11.6 million increase in accumulated other comprehensive income as a result of increases in the value of our investment portfolio due to lower interest rates. If interest rates rise, this component of equity would be expected to decline. In addition, the Company earned ~~$16.1~~$26.5 million in net income in the first ~~half~~nine months of 2020 and paid dividends of ~~$6.1~~$9.1 million. The Company also declared a twenty cent per share dividend to be paid on ~~August 13,~~November 12, 2020. Although presently not expected, if the Company were to incur significant credit losses as a result of COVID-19’s impact on our customers’ ability to repay loans, capital could be adversely impacted. With respect to liquidity, the Company maintains strong primary and secondary liquidity sources as further described under “Liquidity and Market Risk Management” below.

●

While we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet, this could change in future periods. Certain valuation assumptions and judgments continue to change to account for pandemic-related circumstances such as widening credit spreads. However, we do not anticipate any significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. As of ~~June~~September 30, 2020, our goodwill was not impaired. The Company performed a qualitative assessment of its goodwill ~~during the first and second quarters of~~at September 30, 2020 and concluded that it was not more likely than not that a goodwill impairment exists. The Company will continue to monitor its goodwill recorded on the balance sheet for potential impairment. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. At ~~June~~September 30, 2020, we had goodwill of $27.4 million which represented 8% of total equity.

●

The Company continues to serve its customers. Out of our 40 branch locations, ~~five~~four are open with limited lobby hours, while 128 branches have limited lobby hours and a drive-up or walk-up facility. 1923 branches are open for drive-up or walk-up only and ~~four~~five branches are currently closed except by appointment. ~~56%~~Approximately 75% of our back-office and corporate employees are working remotely and it has not adversely affected our operations. In addition, none of our internal controls have changed or are expected to change as a result of the remote work arrangements other than the use of remote approvals. The Company is prepared to continue operating in this manner until it is safe to begin bringing those working remotely back to our corporate offices and branches.

●

To date, the Company did not experience any challenges in implementing its business continuity plans. The Company’s Risk Management team began preparing in late January and early February with ordering of supplies such as hand sanitizer, masks and cleaning supplies, as well as laptops for those who did not have one.

Table of Contents

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.

~~Table of Contents~~

●

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

EARNINGS PERFORMANCE

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such 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 ~~was relatively unchanged at $24.1~~increased $3.7 million to $28.1 million, for the ~~second~~third quarter of 2020 ~~as compared to~~over the ~~second~~third quarter of 2019, and ~~decreased by $0.2~~increased $3.5 million ~~or 1%~~ to ~~$47.9~~$76.0 million for the first ~~six~~nine months of 2020 ~~in comparison to the first six months of 2019. The slight decrease in net interest income for the first six months of 2020 as compared~~relative to the same period in ~~2019 is due~~2019. For the third quarter of 2020, growth in average interest-earning assets totaled $452.8 million, or 19%, as compared to athe third quarter of 2019. Although the yield on these balances was 56 basis points lower ~~net~~for the same period, the decrease in our cost of interest-bearing liabilities for the same period was 66 basis points resulting in an overall decline in margin of 11 basis points. Net interest ~~margin, partially offset by an~~income for the comparative year-to-date periods increased $3.5 million as the increase in ~~average~~volume of interest earning ~~assets.~~ assets and favorable change in our deposit mix more than made up for the decrease in margin.

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.

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.

4041

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
	June 30, 2020					June 30, 2019					September 30, 2020						September 30, 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	$	53,209	$	12	0.09%	$	18,795	$	115	2.45%	$	6,942	$	2	0.11%		$	23,447	$	139	2.35%
Taxable		403,517		2,250	2.24%		425,498		2,591	2.44%		366,046		1,832	1.99%			426,523		2,484	2.31%
Non-taxable		216,746		1,440	3.38%		149,555		1,072	3.64%		227,283		1,467	3.25%			169,109		1,160	3.44%
Total investments		673,472		3,702	2.44%		593,848		3,778	2.74%		600,271		3,301	2.45%			619,079		3,783	2.62%

Loans and leases:⁽³⁾
Real estate		1,477,380		18,355	5.00%		1,459,871		20,098	5.52%		1,700,241		20,467	4.79%			1,425,093		19,858	5.53%
Agricultural		47,806		452	3.80%		51,285		793	6.20%		47,733		435	3.63%			50,394		753	5.93%
Commercial		170,876		1,080	2.54%		120,081		1,537	5.13%		226,511		2,485	4.36%			117,414		1,461	4.94%
Consumer		6,667		225	13.57%		8,661		292	13.52%		6,226		236	15.08%			8,467		354	16.59%
Mortgage warehouse lines		206,669		1,532	2.98%		98,249		1,239	5.06%		262,593		2,087	3.16%			169,786		1,646	3.85%
Other		2,811		39	5.58%		3,426		51	5.97%		1,868		32	6.82%			2,458		46	7.42%
Total loans and leases		1,912,209		21,683	4.56%		1,741,573		24,010	5.53%		2,245,172		25,742	4.56%			1,773,612		24,118	5.39%
Total interest earning assets⁽⁴⁾		2,585,681		25,385	4.01%		2,335,421		27,788	4.82%		2,845,443		29,043	4.12%			2,392,691		27,901	4.68%
Other earning assets		13,190					12,505					13,190						12,743
Non-earning assets		207,623					204,491					215,819						199,447
Total assets	$	2,806,494				$	2,552,417				$	3,074,452					$	2,604,881
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits	$	134,159	$	71	0.21%	$	120,018	$	88	0.29%	$	140,634	$	75	0.21%		$	115,971	$	87	0.30%
NOW		481,679		83	0.07%		437,040		134	0.12%		516,915		89	0.07%			446,974		133	0.12%
Savings accounts		327,833		46	0.06%		289,767		77	0.11%		354,331		51	0.06%			290,221		79	0.11%
Money market		125,594		31	0.10%		123,482		43	0.14%		126,567		28	0.09%			120,196		53	0.17%
Certificates of deposit, under $100,000		77,888		71	0.37%		90,258		289	1.28%		76,000		65	0.34%			89,711		276	1.22%
Certificates of deposit, $100,000 or more		364,874		554	0.61%		399,228		2,178	2.19%		352,171		318	0.36%			409,861		2,091	2.02%
Brokered deposits		19,890		37	0.75%		47,890		284	2.38%		29,696		15	0.20%			44,946		264	2.33%
Total interest bearing deposits		1,531,917		893	0.23%		1,507,683		3,093	0.82%		1,596,314		641	0.16%			1,517,880		2,983	0.78%
Borrowed funds:
Federal funds purchased		3		—	—		3		—	—		1,516		1	0.26%			79		—	—
Repurchase agreements		34,217		34	0.40%		21,698		21	0.39%		39,268		40	0.41%			25,104		26	0.41%
Short term borrowings		11,716		5	0.17%		845		5	2.37%		66,812		29	0.17%			11,909		64	2.13%
TRUPS		35,009		311	3.57%		34,830		470	5.41%		35,052		258	2.93%			34,876		453	5.15%
Total borrowed funds		80,945		350	1.74%		57,376		496	3.47%		142,648		328	0.91%			71,968		543	2.99%
Total interest bearing liabilities		1,612,862		1,243	0.31%		1,565,059		3,589	0.92%		1,738,962		969	0.22%			1,589,848		3,526	0.88%
Demand deposits - non-interest bearing		830,333					655,136
Demand deposits - noninterest bearing												958,233						668,139
Other liabilities		39,155					43,550					43,521						45,488
Shareholders' equity		324,144					288,672					333,736						301,406
Total liabilities and shareholders' equity	$	2,806,494				$	2,552,417				$	3,074,452					$	2,604,881
Interest income/interest earning assets					4.01%					4.82%					4.12%						4.68%
Interest expense/interest earning assets					0.20%					0.61%					0.14%						0.59%
Net interest income and margin⁽⁵⁾			$	24,142	3.81%			$	24,199	4.21%			$	28,074	3.98%				$	24,375	4.09%

(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 ~~$(237)~~$1,302 thousand and ~~$(186)~~$(137) thousand for the quarters ended ~~June~~September 30, 2020 and 2019, 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.

4142

Table of Contents

Average Balances and Rates
Average Balances and Rates
(dollars in thousands, unaudited)	(dollars in thousands, unaudited)											(dollars in thousands, unaudited)
		For the six months ended						For the six months ended					For the nine months ended						For the nine months ended
		June 30, 2020						June 30, 2019					September 30, 2020						September 30, 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		$	45,166	$	153	0.68%	$	15,152	$	188	2.50%		$	32,332	$	155	0.64%	$	17,948	$	327	2.44%
Taxable			406,054		4,710	2.33%		422,217		5,207	2.49%			392,617		6,542	2.22%		423,668		7,692	2.43%
Non-taxable			206,218		2,778	3.42%		145,962		2,117	3.70%			213,294		4,246	3.36%		153,763		3,276	3.61%
Total investments			657,438		7,641	2.56%		583,331		7,512	2.79%			638,243		10,943	2.52%		595,379		11,295	2.73%

Loans and leases:⁽³⁾
Real estate			1,436,145		37,079	5.19%		1,462,061		40,198	5.54%			1,524,821		57,544	5.04%		1,449,603		60,057	5.54%
Agricultural			48,169		1,035	4.32%		50,919		1,573	6.23%			48,022		1,470	4.09%		50,742		2,326	6.13%
Commercial			139,287		2,176	3.14%		121,332		3,116	5.18%			168,574		4,661	3.69%		120,011		4,575	5.10%
Consumer			7,124		593	16.74%		8,689		606	14.06%			6,822		831	16.27%		8,615		961	14.91%
Mortgage warehouse lines			175,645		2,797	3.20%		80,782		2,166	5.41%			204,839		4,884	3.18%		110,776		3,812	4.60%
Other			4,027		116	5.79%		3,268		100	6.17%			3,302		148	5.99%		2,995		146	6.52%
Total loans and leases			1,810,397		43,796	4.86%		1,727,051		47,759	5.58%			1,956,380		69,538	4.75%		1,742,742		71,877	5.51%
Total interest earning assets⁽⁴⁾			2,467,835		51,437	4.25%		2,310,382		55,271	4.87%			2,594,623		80,481	4.20%		2,338,121		83,172	4.81%
Other earning assets			13,015					12,094						13,074					12,312
Non-earning assets			202,265					207,038						206,816					204,480
Total assets		$	2,683,115				$	2,529,514					$	2,814,513				$	2,554,913
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits		$	111,445	$	134	0.24%	$	109,692	$	160	0.29%		$	121,246	$	209	0.23%	$	111,808	$	248	0.30%
NOW			469,133		205	0.09%		437,124		260	0.12%			485,176		295	0.08%		440,443		393	0.12%
Savings accounts			312,777		119	0.08%		288,776		151	0.11%			326,730		170	0.07%		289,263		230	0.11%
Money market			121,421		74	0.12%		126,070		84	0.13%			123,149		101	0.11%		124,090		136	0.15%
Certificates of deposit, under $100,000			79,370		205	0.52%		90,301		567	1.27%			78,239		270	0.46%		90,103		843	1.25%
Certificates of deposit, $100,000 or more			372,286		1,786	0.96%		390,637		4,216	2.18%			365,532		2,104	0.77%		397,115		6,308	2.12%
Brokered deposits			30,357		204	1.35%		48,939		610	2.51%			30,135		219	0.97%		47,594		873	2.45%
Total interest bearing deposits			1,496,789		2,727	0.37%		1,491,539		6,048	0.82%			1,530,207		3,368	0.29%		1,500,416		9,031	0.80%
Borrowed funds:
Federal funds purchased			3		—	—		560		—	—			511		1	0		398		1	0
Repurchase agreements			30,850		61	0.40%		19,500		39	0.40%			33,676		101	0.40%		21,389		64	0.40%
Short term borrowings			8,831		14	0.32%		4,463		58	2.62%			28,299		43	0.20%		6,972		123	2.36%
TRUPS			34,986		706	4.06%		34,806		954	5.53%			35,008		965	3.68%		34,830		1,406	5.40%
Total borrowed funds			74,670		781	2.10%		59,329		1,051	3.57%			97,494		1,110	1.52%		63,589		1,594	3.35%
Total interest bearing liabilities			1,571,459		3,508	0.45%		1,550,868		7,099	0.92%			1,627,701		4,478	0.37%		1,564,005		10,625	0.91%
Demand deposits - non-interest bearing			754,463					654,029
Demand deposits - noninterest bearing														822,882					658,784
Other liabilities			37,687					41,363						39,646					42,752
Shareholders' equity			319,506					283,254						324,284					289,372
Total liabilities and shareholders' equity		$	2,683,115				$	2,529,514					$	2,814,513				$	2,554,913
Interest income/interest earning assets						4.25%					4.87%						4.20%					4.81%
Interest expense/interest earning assets						0.28%					0.62%						0.23%					0.61%
Net interest income and margin⁽⁵⁾				$	47,929	3.97%			$	48,172	4.25%				$	76,003	3.97%			$	72,547	4.20%

(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 ~~$(377)~~$942 thousand and ~~$(177)~~$(314) thousand for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, 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.

4243

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 June 30,						Six months ended June 30,						Three months ended September 30,						Nine months ended September 30,
	2020 over 2019						2020 over 2019						2020 over 2019						2020 over 2019
	Increase (decrease) due to						Increase (decrease) due to						Increase (decrease) due to						Increase (decrease) due to
Assets:	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Investments:
Federal funds sold/due from time	$	211	$	(314)	$	(103)	$	372	$	(407)	$	(35)	$	(98)	$	(39)	$	(137)	$	262	$	(434)	$	(172)
Taxable		(134)		(207)		(341)		(199)		(298)		(497)		(352)		(300)		(652)		(564)		(586)		(1,150)
Non-taxable		482		(114)		368		874		(213)		661		399		(92)		307		1,268		(298)		970
Total investments		559		(635)		(76)		1,047		(918)		129		(51)		(431)		(482)		966		(1,318)		(352)
Loans and leases:
Real estate		241		(1,984)		(1,743)		(713)		(2,406)		(3,119)		3,834		(3,225)		609		3,116		(5,629)		(2,513)
Agricultural		(54)		(287)		(341)		(85)		(453)		(538)		(40)		(278)		(318)		(125)		(731)		(856)
Commercial		650		(1,107)		(457)		461		(1,401)		(940)		1,358		(334)		1,024		1,851		(1,765)		86
Consumer		(67)		—		(67)		(109)		96		(13)		(94)		(24)		(118)		(200)		70		(130)
Mortgage warehouse		1,367		(1,074)		293		2,544		(1,913)		631		900		(459)		441		3,237		(2,165)		1,072
Other		(9)		(3)		(12)		23		(7)		16		(11)		(3)		(14)		15		(13)		2
Total loans and leases		2,128		(4,455)		(2,327)		2,121		(6,084)		(3,963)		5,947		(4,323)		1,624		7,894		(10,233)		(2,339)
Total interest earning assets	$	2,687	$	(5,090)	$	(2,403)	$	3,168	$	(7,002)	$	(3,834)	$	5,896	$	(4,754)	$	1,142	$	8,860	$	(11,551)	$	(2,691)
Liabilities
Interest bearing deposits:
Demand deposits	$	10		(27)	$	(17)	$	3	$	(29)	$	(26)	$	19		(31)	$	(12)	$	21	$	(60)	$	(39)
NOW		14		(65)		(51)		19		(74)		(55)		21		(65)		(44)		40		(138)		(98)
Savings accounts		10		(41)		(31)		13		(45)		(32)		17		(45)		(28)		30		(90)		(60)
Money market		1		(13)		(12)		(3)		(7)		(10)		3		(28)		(25)		(1)		(34)		(35)
Certificates of deposit, under $100,000		(40)		(178)		(218)		(69)		(293)		(362)		(42)		(169)		(211)		(111)		(462)		(573)
Certificates of deposit, $100,000 or more		(187)		(1,437)		(1,624)		(198)		(2,232)		(2,430)		(294)		(1,479)		(1,773)		(502)		(3,702)		(4,204)
Brokered deposits		(166)		(81)		(247)		(232)		(174)		(406)		(90)		(159)		(249)		(320)		(334)		(654)
Total interest bearing deposits		(358)		(1,842)		(2,200)		(467)		(2,854)		(3,321)		(366)		(1,976)		(2,342)		(843)		(4,820)		(5,663)
Borrowed funds:
Repurchase agreements		12		1		13		23		(1)		22		15		(1)		14		37		—		37
Short term borrowings		53		(53)		—		44		(88)		(44)		295		(330)		(35)		376		(456)		(80)
TRUPS		2		(161)		(159)		5		(253)		(248)		2		(197)		(195)		7		(448)		(441)
Total borrowed funds		67		(213)		(146)		72		(342)		(270)		312		(527)		(215)		420		(904)		(484)
Total interest bearing liabilities		(291)		(2,055)		(2,346)		(395)		(3,196)		(3,591)		(54)		(2,503)		(2,557)		(423)		(5,724)		(6,147)
Net interest income	$	2,978	$	(3,035)	$	(57)	$	3,563	$	(3,806)	$	(243)	$	5,950	$	(2,251)	$	3,699	$	9,283	$	(5,827)	$	3,456

The volume variance calculated for the ~~second~~third quarter of 2020 relative to the ~~second~~third quarter of 2019 was a favorable ~~$3.0~~$6.0 million due to higher average balances of interest-earning assets, resulting from organic growth in commercial real estate loans, growth in commercial loans due to our participation in the SBA PPP program and higher utilization of mortgage warehouse lines. Given the low rate environment, loan demand for our mortgage warehouse lines have increased, as demonstrated by the ~~$1.4~~$0.9 million favorable volume variance. There was an unfavorable rate variance of ~~$3.0~~$2.3 million for the comparative quarters, since the weighted average yield on interest-earning assets fell by 8156 basis points ~~while~~and the weighted average cost of interest-bearing liabilities decreased by 6166 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; increased

4344

Table of Contents

~~investments; increased~~ line utilization of mortgage warehouse lines, ~~$116.2~~$123.62 million in low-yielding SBA PPP loans; partially offset by lower costs of time-deposits and other interest-bearing liabilities. The average fees on the SBA PPP loans was approximately 4.0%. These fees, net of loan costs, are being accreted over the stated life of the loan (generally two years), net of loan costs. Our customers with an SBA PPP loan are generally eligible to apply for loan forgiveness after ~~26 weeks.~~24 weeks, however there is pending legislation regarding the forgiveness process that could impact loans of less than $150,000. After the 24-week covered period, PPP borrowers have ten months to apply for forgiveness. During this period, payments are not due on the loan. If a loan is forgiven, upon repayment of principal and interest by the SBA, any unaccreted fee income, net of unamortized costs, would be recognized as interest income at such time.

The volume variance calculated for the first ~~six~~nine months of 2020 relative to the first ~~six~~nine months of 2019 reflects a favorable variance of ~~$3.6~~$9.3 million and an unfavorable rate variance of ~~$3.8~~$5.8 million. As with the discussion of the volume and rate variances for the quarter, the same is true for the ~~half.~~first nine months. The growth in interest earning assets was ~~more than~~ offset by the 6261 basis point decrease in yield while interest bearing liabilities increased ~~$20.6~~$63.7 million with a 4754 basis point drop in cost. ~~Since the overall~~The decrease in ~~yield~~rate on interest bearing liabilities more than offset the net volume/rate decrease in interest earning assets ~~is applied to~~and resulted in a ~~larger base than the decline in cost of interest- bearing liabilities it results in an unfavorable $0.2~~favorable $3.5 million net volume/rate difference. The Company’s net interest margin for the first ~~half~~nine months of 2020 was 3.97%, as compared to ~~4.25%~~4.20% in the first ~~half~~nine months of 2019.

The FOMC lowered rates by a total of 150 basis points in March 2020 in two separate emergency actions. These actions have had an unfavorable impact on our net interest margin for the quarter and year to date periods as compared to the same period in 2019, and will most likely have the same unfavorable impact on net interest ~~income~~margin through the end of 2020. At ~~June~~September 30, 2020, approximately ~~15%~~12% of our total portfolio, or ~~$317.4~~$273.7 million, consists of variable rate loans. Of these variable rate loans, approximately ~~$102.4~~$93.9 million have floors that limited the overall reduction in rates in the first ~~half.~~nine months. At ~~June~~September 30, 2020, our outstanding fixed rate loans represented ~~33%~~28% of our loan portfolio. The remaining ~~52%~~60% of our loan portfolio at ~~June~~September 30, 2020 consists of adjustable rate loans. However, the majority of these loans (approximately ~~$857.5 million)~~$1.1 billion) will not adjust for at least another 3 years. Approximately ~~$64.9~~$68.8 million of these adjustable rate loans will reprice in the next ~~quarter with $22.4 repricing in smaller amounts monthly over the fourth quarter of 2020.~~quarter.

In addition, as described below under Nonperforming Assets, as of ~~June~~September 30, 2020, the Company has modified approximately ~~$386.2million~~$405.9 million of loans under either Section 4013 of the CARES ~~Act.~~Act or the April 7, 2020 Interagency statement that offered some practical expedients for loan modifications. These modifications generally provide for a six-month deferral of both interest and principal. As of ~~June~~September 30, 2020, there is approximately ~~$4.9~~$9.0 million of accrued but uncollected interest related to such modifications. If a portion of this interest is uncollectible, it could be partially or fully written off and could impact interest income recognition in future quarters.

Cash balances were increased on ~~June~~September 30, 2020 in anticipation of mortgage warehouse line utilization. For ~~both~~ the quarterly comparisons, average volumes were lower than the same period in 2019 mitigating the unfavorable net volume and rate variance however, for the year to date comparisons ~~volumes were~~the average volume was higher ~~than the same periods in 2019~~ contributing to the ~~overall~~ unfavorable net volume ~~and~~ rate variance since cash balances earned considerably lower yields than other earning assets. It is expected that these balances will return to more normalized levels ~~later in 2020.~~ towards the end 2020 when the normal seasonal volatility reduces the utilization on mortgage warehouse lines.

Overall average investment securities ~~increased~~decreased by ~~$45.2~~$2.3 million for the quarter ending ~~June~~September 30, 2020 as compared to ~~June~~September 30, 2019 and by ~~$44.1~~$28.5 million for the first ~~six~~nine months of 2020, as compared to the same period in 2019. ~~Non-taxable~~Average non-taxable securities increased for both the quarterly and first ~~six-month~~nine month periods by ~~$67.2~~$58.2 million and ~~$60.3~~$59.5 million respectively. The overall investment portfolio had a tax-equivalent yield of ~~2.80%~~2.74% at ~~June~~September 30, 2020, with an average life of 4.2 years.

Interest expense was ~~$1.2~~$1.0 million in the ~~second~~third quarter of 2020, a decline of ~~$2.3~~$2.6 million, or ~~65%~~73%, compared to the ~~second~~third quarter of 2019 and was ~~$3.5~~$4.5 million in the first ~~six-months~~nine months of 2020, a decline of ~~$3.6~~$6.1 million or ~~51%~~58%, compared to the first ~~six-months~~nine months of 2019. The significant decline in interest expense for both the quarter and the ~~half~~first nine months is attributable to a favorable shift in deposit mix as average total time deposits declined by ~~$74.7~~$86.7 million in the ~~second~~third quarter of 2020 as compared to the same quarter in 2019 and by ~~$47.9~~$60.9 million for the first ~~half~~nine months of 2020 as compared to the same period in 2019. The average cost of interest-bearing deposits declined by 5962 basis points, or ~~72%~~79%,

Table of Contents

to 2316 basis points for the ~~second~~third quarter of 2020 compared to the ~~second~~third quarter of 2019, and by 4551 basis points, or ~~55%~~64% to 29 basis points for the first ~~six-months~~nine months of 2020 as compared to the same period in 2019.

~~Table of Contents~~

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 ~~$2.2~~$2.4 million in the ~~second~~third quarter of 2020 compared to ~~$0.4~~$1.4 million in the ~~second~~third quarter of 2019, and a year-to-date loan loss provision totaling ~~$4.0~~$6.4 million in 2020 as compared to ~~$0.7~~$2.1 million for the comparable period in 2019. As discussed above, the significant increase in the provision for loan and lease losses is primarily due to organic loan growth in non-owner occupied real estate loans and management’s estimate of the impact of increased economic uncertainty with respect to COVID-19 on our customers’ ability to repay loans. There was no increase in the provision for loan and lease losses due to the additional ~~$116.2~~$123.6 million in SBA PPP loans as those loans are guaranteed under a new ~~7(a)~~ loan program titled the “Paycheck Protection Program” and carry a ~~100 percent~~full guarantee by the ~~SBA.~~SBA, subject to the financial institution meetings its Bank Secrecy Act obligations and other diligence requirements in making such 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. In addition, COVID-19 case rates appear to be increasing throughout the United States, which may trigger a tightening of government restrictions. 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~~PPP 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 under the CECL methodology. ItThe current estimate 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 Company’s Form 10-K for the fiscal year ended December 31, 2019, for approximately $12 million. The impact of COVID-19 on the Company’s allowance for loan and leases losses under the CECL methodology in the ~~second~~third quarter and first ~~half~~nine months of 2020 will remain unknown until more information is available with respect to the impact of the economic uncertainty of the impact of COVID-19, net of actions taken to mitigate such impact.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance. The Company recorded net charge-offs of ~~$0.1~~$0.3 million in the ~~second~~third quarter of 2020 as compared to net ~~recoveries~~charge-offs of less than $0.1 million in the ~~second~~third quarter of 2019. For the first ~~six~~nine months, net charge-offs were ~~$0.4~~$0.7 million in 2020 and $0.6 million in 2019.

The allowance for loan and lease losses is at a level that, in Management’s judgment, is adequate to absorb probable loan losses related to specifically-identified impaired loans as well as probable incurred losses in the remaining loan portfolio.

The Company’s 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

Table of Contents

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-~~three and ~~six~~nine month periods ended ~~June~~September 30, 2020 and 2019:

Noninterest Income/Expense

(dollars in thousands, unaudited)


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
NON-INTEREST INCOME:	2020		% of Total	2019		% of Total	2020		% of Total	2019		% of Total
NONINTEREST INCOME:													2020		% of Total	2019		% of Total	2020		% of Total	2019		% of Total
Service charges on deposit accounts	$	2,618	37.94%	$	3,151	53.81%	$	5,802	44.61%	$	6,094	51.81%	$	2,950	41.52%	$	3,292	56.09%	$	8,752	43.52%	$	9,386	53.24%
Other service charges and fees		2,503	36.28%		2,514	42.94%		4,907	37.73%		4,777	40.61%		2,511	35.34%		2,524	43.01%		7,418	36.88%		7,300	41.40%
Net gains on sale of securities available-for-sale		390	5.65%		22	0.38%		390	3.00%		28	0.24%		—	—		—	—		390	1.94%		29	0.16%
Bank-owned life insurance		649	9.41%		127	2.17%		687	5.28%		1,027	8.73%		1,310	18.44%		590	10.05%		1,997	9.93%		1,617	9.17%
Other		740	10.72%		41	0.70%		1,221	9.38%		(164)	-1.39%		334	4.70%		(537)	-9.15%		1,555	7.73%		(701)	-3.97%
Total non-interest income	$	6,900	100.00%	$	5,855	100.00%	$	13,007	100.00%	$	11,762	100.00%
Total noninterest income													$	7,105	100.00%	$	5,869	100.00%	$	20,112	100.00%	$	17,631	100.00%
As a % of average interest-earning assets⁽¹⁾			1.07%			1.01%			1.07%			1.03%			0.99%			0.97%			1.04%			1.01%

OTHER OPERATING EXPENSE:
Salaries and employee benefits	$	9,266	51.39%	$	8,994	50.93%	$	19,438	54.22%	$	18,237	51.36%	$	9,698	50.23%	$	8,784	51.41%	$	29,136	52.81%	$	27,021	51.37%
Occupancy costs
Furniture & equipment		619	3.43%		692	3.92%		1,084	3.02%		1,215	3.42%		498	2.58%		472	2.76%		1,581	2.87%		1,687	3.21%
Premises		1,885	10.45%		1,758	9.96%		3,748	10.45%		3,596	10.13%		2,061	10.68%		2,013	11.78%		5,809	10.53%		5,609	10.66%
Advertising and marketing costs		425	2.36%		560	3.17%		1,026	2.86%		1,252	3.53%		324	1.68%		614	3.59%		1,350	2.45%		1,866	3.55%
Data processing costs		1,045	5.79%		1,255	7.11%		2,187	6.10%		2,507	7.06%		1,177	6.10%		1,092	6.39%		3,365	6.10%		3,450	6.56%
Deposit services costs		2,229	12.36%		2,124	12.03%		4,025	11.23%		3,893	10.96%		2,236	11.58%		2,072	12.13%		6,261	11.35%		5,964	11.34%
Loan services costs
Loan processing		191	1.06%		205	1.16%		362	1.01%		376	1.06%		289	1.50%		122	0.71%		652	1.18%		498	0.95%
Foreclosed assets		62	0.34%		41	0.23%		68	0.19%		61	0.17%		355	1.84%		(56)	-0.33%		423	0.77%		5	0.01%
Other operating costs
Telephone & data communications		467	2.59%		317	1.80%		835	2.33%		624	1.76%		485	2.51%		473	2.77%		1,319	2.39%		1,097	2.09%
Postage & mail		106	0.59%		81	0.46%		174	0.49%		276	0.78%		90	0.47%		88	0.51%		264	0.48%		364	0.69%
Other		365	2.02%		459	2.60%		751	2.09%		803	2.26%		338	1.75%		221	1.29%		1,090	1.98%		1,173	2.23%
Professional services costs
Legal & accounting		357	1.98%		524	2.97%		685	1.91%		935	2.63%		317	1.64%		542	3.17%		1,002	1.82%		1,477	2.81%
Acquisition costs		—	—		(1)	-0.01%		—	—		22	0.06%		—	—		—	0.00%		—	—		22	0.04%
Other professional service		701	3.89%		437	2.48%		947	2.64%		1,374	3.87%		1,223	6.34%		545	3.19%		2,171	3.94%		1,920	3.65%
Stationery & supply costs		131	0.73%		101	0.57%		246	0.69%		156	0.44%		95	0.49%		82	0.48%		341	0.62%		238	0.45%
Sundry & tellers		184	1.02%		109	0.62%		275	0.77%		182	0.51%		117	0.61%		24	0.14%		392	0.71%		206	0.39%
Total non-interest expense	$	18,033	100.00%	$	17,656	100.00%	$	35,851	100.00%	$	35,509	100.00%
Total noninterest expense													$	19,303	100.00%	$	17,088	100.00%	$	55,156	100.00%	$	52,597	100.00%
As a % of average interest-earning assets⁽¹⁾			2.80%			3.03%			2.94%			3.10%			2.70%			2.83%			2.85%			3.01%
Efficiency ratio ⁽²⁾⁽³⁾		57.78%			58.17%			58.33%			58.46%			53.74%			55.64%			56.64%			57.51%

(1)	Annualized

(2)	Tax equivalent

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

Total noninterest income reflects increases of ~~$1.0~~$1.2 million, or ~~18%~~21%, for the quarterly comparison and ~~$1.2~~$2.5 million, or ~~11%~~14% for the year-to-date comparison. BOLI income increased by ~~$0.5~~$0.7 million as compared to the ~~second~~third quarter of 2019 ~~but decreased $0.3~~and increased $0.4 million for the first ~~half~~nine months of 2020 as compared to the same period in 2019. These variances are due mostly to fluctuations in underlying values of assets in the specific account BOLI policies that are designed to have similar assets to those in the deferred compensation plans. Thus, the higher quarterly and year to date values in BOLI policies are offset by higher deferred compensation expense reflected primarily in director fees expense ~~and vice versa~~ for the first ~~six~~nine months of 2020 compared to 2019. At ~~June~~September 30, 2020, there was $43.0 million in BOLI policies associated with the deferred compensation plans and ~~$8.3~~$9.1 million in separate account BOLI policies. Complementing

Table of Contents

the change in BOLI income for the quarterly and year to date comparison was a ~~$0.7~~$0.8 and $1.4 million increase respectively, in other noninterest income due to the wrap up of a low- income housing tax credit ~~fund along with~~fund. We also had a $0.4 million gain in the year to date comparison on the sale of debt securities.

~~Table of Contents~~

There was a ~~$0.5~~$0.3 million decrease in service charges on deposit accounts mostly from lower returned items and overdraft fees for the quarterly comparison and ~~$0.3~~$0.6 million decrease for the year to date comparison. The Company expects that service charges on deposit accounts could continue to decline ~~in future quarters~~for the remainder of the year based on reduced customer ~~activity and increased waivers due to COVID-19.~~activity.

Additionally in the “other” category of noninterest income the Company reflected a $0.2 million ~~decrease~~increase in the ~~second quarter~~year to date comparison from the valuation of restricted stock held by the Company as required under FASB ASU ~~2016-01, but an increase of $0.2 million for the year to date comparison.~~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 each year. ~~This stock was revalued in the first quarter of 2020, but was not revalued in 2019 until the second quarter. In addition,~~Further, noninterest income includes a valuation adjustment related to investments in low-income housing credit investments. This valuation adjustment was a reduction of income of ~~$0.2~~$0.7 million in the ~~second quarter~~third quarters of 2020 ~~as compared to a $0.5 million reduction in the second quarter of~~and 2019, and ~~$0.3~~$1.0 million in the first ~~half~~nine months of 2020 compared to ~~$0.9~~$1.6 million in 2019.

Total noninterest expense increased by ~~$0.4~~$2.2 million, or 2%13%, in the ~~second~~third quarter of 2020 relative to the ~~second~~third quarter of 2019, and by ~~$0.3~~$2.6 million, or 1%5%, in the first ~~six~~nine months of 2020 as compared to the first ~~six~~nine months of 2019. Noninterest expense dropped to ~~2.8%~~2.7% of average earning assets in the ~~second~~third quarter of 2020 from ~~3.03%~~2.83% for the ~~second~~third quarter of 2019 and was ~~2.94%~~2.85% of average earning assets for the first ~~six~~nine months of 2020 relative to ~~3.10%~~3.01% for the first ~~six~~nine months of 2019.

Salaries and Benefits were ~~$0.3~~$0.9 million, or 3%10%, higher in the ~~second~~third quarter of 2020 as compared to the ~~second~~third quarter of 2019 and ~~$1.2~~$2.1 million higher for the first ~~six~~nine months of 2020 compared to the same period in 2019. The reason for this increase is due to several factors, including merit increases for employees due to annual performance evaluations for ~~2020.~~2019. These increases were ~~mitigated~~augmented for the quarterly comparison by the impact of deferred salaries related to loan origination costs, which were ~~$0.8~~$0.1 million ~~higher in the second quarter of 2020 relative to the second quarter of 2019, and $0.5~~lower however, they were $0.4 million higher for the first ~~six~~nine months of 2020 as compared to the same period in ~~2019.~~2019 offsetting some of the increase. There have not been any permanent or temporary reductions in employees as a result of COVID-19.

Occupancy expenses were roughly the same for the respective comparative periods. Further, other noninterest expense categories as a whole was ~~relatively unchanged~~$1.2 million higher for the ~~second~~third quarter 2020 as compared to the ~~second~~third quarter in 2019 but was ~~$0.9~~$0.4 million ~~lower~~higher for the first ~~half~~nine months of 2020 as compared to the same period in 2019.

The variance for ~~year-to-date~~the third quarter of 2020 compared to the same period in 2019 was primarily driven by a ~~$0.7~~$0.6 million ~~or 30%, decline~~increase in loan servicing expense, due mostly to write-downs of other real estate owned assets; a $0.5 million increase in professional services; partially offset by a $0.3 million decrease in advertising costs. The $0.5 million change in professional services ~~expenses. Those professional services variances include~~includes a $0.2 million ~~decrease~~increase in FDIC assessments due to the Small Bank Assessment credits applied against FDIC deposit insurance costs in the comparative quarter for 2019, a ~~$0.2~~$0.5 million ~~decrease~~increase in deferred compensation expense for directors, which is linked to the changes in BOLI income, and a $0.2 million reduction in consulting costs. The Company continues to actively consider a variety of operational efficiency opportunities. For the first nine months of 2020, the $0.4 million increase in other noninterest expense was driven by a $0.6 million increase in loan services costs (mostly in foreclosed assets), a $0.3 million increase in deposit services costs, a $0.2 million increase in sundry losses, partially offset by a $0.5 million decrease in advertising costs and a $0.2 million decrease in professional services expense.

The Company’s tax-equivalent efficiency ratio was ~~57.78%~~53.74% in the ~~second~~third quarter 2020 as compared to ~~58.17%~~55.64% in the same quarter of 2019, and ~~58.33%~~56.64% for the first ~~six~~nine months of 2020 and ~~58.46%~~57.51% for the comparative period in 2019. The efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income; the provision for loan losses and investment gains/losses are excluded from the equation. Given the expected decline in net interest income due to the lower rate environment in 2020, it is expected that the efficiency ratio could increase in the remaining months of 2020.

Table of Contents

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 ~~23.2%~~23.4% of pre-tax income in the ~~second~~third quarter of 2020 relative to ~~26.4%~~24.2% in the ~~second~~third quarter of 2019, and ~~23.6%~~23.5% of pre-tax income for the first ~~half~~nine months of 2020 relative to ~~25.3%~~24.9% for the same

~~Table of Contents~~

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

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 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 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 account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity. Aggregate investments totaled ~~$667.2~~$581.9 million, or ~~21%~~18% of total assets at ~~June~~September 30, 2020, and $615.3 million, or 24% of total assets at December 31, 2019.

The Company carries investments at their fair market values. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. The expected average life for bonds in our investment portfolio was 4.2 years and their average effective duration was ~~2.9~~2.5 years at ~~June~~September 30, 2020, down from an expected average life of 4.4 years and an average effective duration of 3.2 years at year-end 2019.

Table of Contents

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

Investment Portfolio

(dollars in thousands, unaudited)


	June 30, 2020				December 31, 2019				September 30, 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	$	1,775	$	1,850	$	12,125	$	12,145	$	1,774	$	1,856	$	12,125	$	12,145
Mortgage-backed securities		364,828		375,485		398,353		400,389		336,248		347,207		398,353		400,389
State and political subdivisions		209,760		221,998		181,900		188,265		214,419		228,215		181,900		188,265
Total securities	$	576,363	$	599,333	$	592,378	$	600,799	$	552,441	$	577,278	$	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 ~~$23.0~~$24.8 million at ~~June~~September 30, 2020, a ~~$14.6~~$16.4 million increase relative to the net unrealized gain of $8.4 million at December 31, 2019. The change was caused by declining long-term market interest rates on fixed-rate bond

~~Table of Contents~~

values. Municipal bond balances comprise ~~37%~~40% of our total securities portfolio at ~~June~~September 30, 2020, as compared to 31% at December 31, 2019. Municipal bonds purchased 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 ~~$242.4~~$238.2 million at ~~June~~September 30, 2020 and $234.8 million at December 31, 2019, leaving ~~$356.9~~$339.1 million in unpledged debt securities at ~~June~~September 30, 2020 and $366.0 million at December 31, 2019. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled ~~$60.5~~$61.7 million at ~~June~~September 30, 2020 and $71.0 million at December 31, 2019.

LOAN AND LEASE PORTFOLIO

Gross loans and leases reflect a net increase of ~~$449.5~~$617.7 million, or ~~26%~~35%, growing to ~~$2.212~~$2.380 billion at ~~June~~September 30, 2020 from $1.763 billion at December 31, 2019 due to organic growth in non-owner occupied commercial real estate loans, an increase in commercial and industrial loans from our participation in the SBA PPP program and an increase in outstanding balances on mortgage warehouse lines.

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

4950

Table of Contents

Loan and Lease Distribution

(dollars in thousands, unaudited)


	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Real estate:
1-4 family residential construction	$	89,225	$	105,979	$	75,532	$	105,979
Other construction/land		90,545		91,413		83,797		91,413
1-4 family - closed-end		178,071		200,181		162,022		200,181
Equity lines		44,318		49,599		38,620		49,599
Multi-family residential		55,921		54,457		61,740		54,457
Commercial real estate - owner occupied		313,863		343,883		328,832		343,883
Commercial real estate - non-owner occupied		691,292		412,569		945,374		412,569
Farmland		134,454		144,033		127,964		144,033
Total real estate		1,597,689		1,402,114		1,823,881		1,402,114
Agricultural		48,516		48,036		45,782		48,036
Commercial and industrial		221,502		115,532		217,224		115,532
Mortgage warehouse lines		338,124		189,103		287,516		189,103
Consumer loans		6,266		7,780		5,897		7,780
Total loans and leases	$	2,212,097	$	1,762,565	$	2,380,300	$	1,762,565
Percentage of Total Loans and Leases
Real estate:
1-4 family residential construction		4.03%		6.01%		3.17%		6.01%
Other construction/land		4.09%		5.19%		3.52%		5.19%
1-4 family - closed-end		8.05%		11.36%		6.81%		11.36%
Equity lines		2.00%		2.81%		1.62%		2.81%
Multi-family residential		2.53%		3.09%		2.59%		3.09%
Commercial real estate - owner occupied		14.19%		19.51%		13.81%		19.51%
Commercial real estate - non-owner occupied		31.26%		23.42%		39.72%		23.41%
Farmland		6.08%		8.17%		5.38%		8.17%
Total real estate		72.23%		79.55%		76.62%		79.55%
Agricultural		2.19%		2.73%		1.92%		2.73%
Commercial and industrial		10.01%		6.55%		9.13%		6.55%
Mortgage warehouse lines		15.29%		10.73%		12.08%		10.73%
Consumer loans		0.28%		0.44%		0.25%		0.44%
Total loans and leases		100.00%		100.00%		100.00%		100.00%

For the first ~~six~~nine months of 2020, gross loans were up by ~~$449.5~~$617.7 million, or ~~26%~~35%, including increases of ~~$149.0~~$98.4 million in mortgage warehouse lines, ~~$205.2~~$437.8 million increase in non-agricultural real estate loans, and a ~~$106.0~~$101.7 million increase in commercial and industrial loans. Mortgage warehouse loan balances increased due to market factors favorably impacting line utilization due to both mortgage originations and refinancing activity. Mortgage warehouse utilization was ~~79.2%~~61.4% at ~~June~~September 30, 2020, as 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.

Non-agricultural real estate loan balances increased due to deliberate and concentrated efforts of our Northern and Southern market loan production teams. The growth in these markets was mostly due to commercial real estate and was the primary driver of our ~~$278.7~~$532.8 million increase in non-owner occupied commercial real estate loans.

Residential real estate loans have been declining since the Company made the deliberate decision to discontinue such lending at the end of 2018, thus maturing balances and prepayments are no longer being replaced.

Total commercial real estate loan balances increased in 2020 by $248.7 million due to an increase in non-owner occupied properties. In the first quarter of 2020, the Company hired lending teams to focus primarily on commercial real estate loans in our northern and southern markets. At ~~June~~September 30, 2020 the Bank’s regulatory credit concentration of commercial real estate loans (CRE), as defined in the Interagency Guidance dated, December 12, 2006, was ~~304%~~364%.

~~Table of Contents~~

Management employs heightened risk management practices with respect to CRE lending, including board and management oversight, strategic planning, development and

Table of Contents

underwriting standards, risk assessment and monitoring through market analysis, and stress testing. At ~~June~~September 30, 2020 we have concluded that we have an acceptable and well-managed concentration in CRE lending under the foregoing ~~standards.~~standards, however, given the current level of CRE we are actively monitoring this segment of the loan portfolio.

The ~~91.8%~~88.0% increase in Commercial and Industrial loans from $115.5 million at December 31, 2019 to ~~$221.5~~$217.2 million was primarily driven by the Company’s participation in the Small Business Administration’s PPP as authorized by the CARES Act. The Company began accepting and funding loans under this program in April 2020. As of ~~June~~September 30, 2020, the Company obtained approval from the Small Business Administration and has funded PPP loans for approximately ~~1,242~~1,334 customers totaling ~~$116.2~~$123.6 million.

The recent growth in loans, in particular, non-owner occupied commercial real estate loans was accomplished without relaxing any of the Company’s credit standards that had been tightened after the great recession. Instead, the growth came by diversifying geography with new loan teams announced in the first quarter 2020 in our Northern and Southern California markets. Those loan teams have maintained these enhanced underwriting standards through the pandemic and have not compromised credit quality when sourcing new loans. However, no assurance can be given as to how these loans will perform over their lifetime.

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 ~~TDR.~~TDR, unless the modification was granted under section 4016 of the CARES Act or the April 7, 2020 Interagency Statement. TDRs may be classified as either nonperforming or performing loans depending on their underlying characteristics and circumstances. The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:

Nonperforming assets and performing troubled debt restructurings

(dollars in thousands, unaudited)


	June 30, 2020		December 31, 2019		June 30, 2019		September 30, 2020		December 31, 2019		September 30, 2019
NON-ACCRUAL LOANS:
Real estate:
Other construction/land	$	4	$	31	$	43	$	—	$	31	$	37
1-4 family - closed-end		843		741		1,454		975		741		1,445
Equity lines		626		480		467		1,537		480		457
Commercial real estate - owner occupied		1,909		1,440		1,472		2,364		1,440		1,449
Commercial real estate - non-owner occupied		627		2,105		—		602		2,105		2,819
Farmland		702		258		25		464		258		24
TOTAL REAL ESTATE		4,711		5,055		3,461		5,942		5,055		6,231
Agriculture		—		—		—		250		—		—
Commercial and industrial		1,086		651		569		988		651		405
Consumer loans		11		31		90		6		31		83
TOTAL NONPERFORMING LOANS		5,808		5,737		4,120		7,186		5,737		6,719

Foreclosed assets		2,893		800		770		2,970		800		762
Total nonperforming assets	$	8,701	$	6,537	$	4,890	$	10,156	$	6,537	$	7,481
Performing TDRs⁽¹⁾	$	9,192	$	8,415	$	9,246	$	7,708	$	8,415	$	9,067
Nonperforming loans as a % of total gross loans and leases		0.26%		0.33%		0.23%		0.30%		0.33%		0.37%
Nonperforming assets as a % of total gross loans and leases and foreclosed assets		0.39%		0.37%		0.27%		0.43%		0.37%		0.42%

(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.

5152

Table of Contents

Total nonperforming assets increased by ~~$2.2~~$3.6 million, or ~~33.1%~~55%, during the first ~~six~~nine months of 2020. The increase resulted from ~~$2.1~~$2.2 million in new foreclosed assets due to the impact of one commercial real estate credit that went into ~~foreclosure.~~foreclosure and the downgrade of certain loans deferred due to COVID-19 for which repayment has become uncertain. The commercial property that went into other real estate owned ~~has a pending contract.~~is under contract and is expected to close escrow in the fourth quarter of 2020. None of these increases were due to COVID-19. As a result of the increase in the gross loan portfolio, the Company’s ratio of nonperforming assets to loans decreased to ~~0.26%~~0.30% at ~~June~~September 30, 2020, from 0.33% at December 31, 2019. All of the Company’s impaired assets are periodically reviewed, and are either well-reserved based on current loss expectations, or are carried at the fair value of the underlying collateral net of expected disposition costs.

As shown in the table, we also had ~~$9.2~~$7.7 million in loans classified as performing TDRs on which we were still accruing interest as of ~~June~~September 30, 2020, ~~an increase~~a decrease of ~~$0.8~~$0.7 million, or 9%8%, relative to December 31, 2019.

Foreclosed assets had a carrying value of ~~$2.9~~$3.0 million at ~~June~~September 30, 2020, comprised of 9 properties classified as OREO and ~~two mobile homes~~miscellaneous Ag equipment relative to year-end 2019 when foreclosed assets consisted of 10 properties classified as OREO and two mobile homes. ~~Two very-low value properties were sold during~~One property representing 63% of the ~~first six months~~OREO balance at September 30, 2020 is under contract and is expected to close escrow in the fourth quarter of 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.

An action plan is in place for each of our non-accruing loans and foreclosed assets and they are all being actively managed. Collection efforts are continuously pursued for all nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company had $7.2 million in loans past due 30-59 days at September 30, 2020. This is an increase of $4.2 million over the balance at December 31, 2019. All of these past due loans are under management supervision and every effort is being taken to assist the borrowers in this regard. 90% of the 30-59 day past due balance, totaling $6.5 million returned to current status shortly after September 30, 2020.

The Company is providing deferrals to certain customers and taking advantage of either Section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, which provides that such deferrals do not result in treatment of such loan as a TDR. These deferrals typically provide deferrals of both principal and interest for 180 days. Interest continues to accrue during the deferral period. At the end of the deferral period, for term loans, payments will be applied to accrued interest first and after the accrued interest is paid in full, the loan will be re-amortized with the maturity extended. For lines of credit, the borrower must repay the accrued interest at the end of the deferral period or take out a second credit facility to repay the accrued interest. As of ~~June~~September 30, 2020, ~~313~~314 customers, for a total of ~~$386.2~~$424.0 million, had executed a loan modification under Section 4013 of the CARES Act. Approximately 97% of these loan deferrals were for commercial customers with ~~38%~~39% or ~~$145.0~~$163.8 million of these modifications, in the hospitality industry. In addition, there were ~~$98.7~~$99.0 million, or ~~26%~~23%, that are lessors of real estate, both commercial and residential; ~~$45.5~~$52.3 million, or 12%, in the dairy industry; and ~~$28.7~~$29.5 million, or 7%, related to convenience stores, and ~~$2.7~~$7.0 million, or ~~0.7%~~2%, in the healthcare industry. Of the commercial deferrals, there were ~~$10.1~~$9.4 million that were unsecured. Consumer deferrals totaled ~~$11.2~~$12.8 million, of which ~~$7.5~~$12.6 million were mortgage related. ~~While~~At September 30, 2020, $15.3 million of these ~~modified~~ loans ~~are not classified as nonperforming or~~were considered classified assets ~~at June 30, 2020, we will~~including $2.1 million on non-accrual and $49.0 million considered special mention. We continue to monitor these loans during the deferral period and if circumstances change, we may downgrade the loan to a criticized ~~asset~~asset. An additional modification, if necessary, could also result in the loan being treated as a TDR or ~~consider it a troubled debt restructuring.~~classified asset. If a portion of the customers are not able to resume payments after the deferral period, it likely could result in higher classified and/or nonperforming assets, reversals of interest income, and/or higher charge-offs.

Table of Contents

The following table summarizes the loans deferred as September 30, 2020:


As of 9-30-20				Are payments expected to resume upon expiration of deferment?
(dollars in thousands)	Deferment Loans	Deferment Balance	Deferment Loans as % of Total Loans in Category	Yes		No/Further Review Required
CRE non-owner occupied
Office	15	$ 25,563	8.44%	$ 15,152	59.27%	$ 10,411	40.73%
Retail	24	46,378	15.10%	45,521	98.15%	857	1.85%
Industrial	7	6,149	7.85%	6,149	100.00%	-	0.00%
Hotel	27	115,828	67.29%	109,553	94.58%	6,275	5.42%
Special purpose	9	7,640	11.53%	7,640	100.00%	-	0.00%
CRE owner occupied	72	71,332	21.69%	69,467	97.39%	1,865	2.61%
Commercial - secured by SFR 1-4 unit	15	11,338	19.60%	10,593	93.43%	745	6.57%
Multi-family residential	4	6,337	7.73%	6,337	100.00%	-	0.00%
Commercial construction				-
Hotel	5	40,045	93.23%	40,045	100.00%	-	0.00%
Lots/land and other	8	13,723	11.75%	13,723	100.00%	-	0.00%
Ag farm mortgage and ag production	24	57,480	33.08%	57,480	100.00%	-	0.00%
Consumer SFR 1-4 unit mortgage and consumer other	46	12,800	8.64%	7,271	56.80%	5,529	43.20%
Commercial and industrial	58	9,427	4.34%	8,918	94.60%	509	5.40%

Total Loan Deferments ⁽¹⁾	314	$ 424,040		$ 397,849	93.82%	$ 26,191	6.18%

(1)

Loans with temporary modification agreements remain on deferral status internally until management completes its evaluation of the customer’s potential need for an additional modification. As of October 31, 2020, the Company had approximately $73.9 million in loans remaining on deferral status, including $18.9 million that have matured but still require further evaluation.

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 ~~$13.6~~$15.6 million at ~~June~~September 30, 2020, an increase of ~~$3.6~~$5.7 million, or ~~36.7%~~57%, relative to December 31, 2019 resulting from a ~~$4.0~~$6.4 million loan loss provision recorded during the first ~~six~~

~~Table of Contents~~

nine months of 2020, less ~~$0.4~~$0.7 million in net charge-offs during the same period. The additional loan loss provision in the first ~~half~~nine months of 2020 was precipitated primarily by the increase in non-owner occupied commercial real estate loan balances as well as the impact of qualitative factors associated with economic uncertainty during these unprecedented times. No additional loan loss was considered necessary for the ~~$116.2~~$123.6 million in SBA PPP loans added during the ~~quarter~~period ending ~~June~~September 30, 2020, as those loans carry a 100 percent guarantee ~~by the SBA~~ under ~~a new 7(a) loan program titled~~ the “Paycheck Protection Program”., subject to certain diligence requirements by the issuing financial institution. For further information regarding the Company's decision to defer the implementation of CECL under Section 4014 of the CARES Act, as well as further detail on the increase in provision during the ~~second~~third quarter of 2020, please see the discussion above under Provision for Loan and Lease Losses.

The allowance was ~~0.61%~~0.65% of total loans at ~~June~~September 30, 2020, ~~and~~ 0.56% at ~~both~~ December 31, 2019 and ~~June~~0.62% at September 30, 2019. The ratio of the allowance for loan and lease losses to nonperforming loans was ~~233.47%~~216.89% at ~~June~~September 30, 2020, relative to 172.96% at December 31, 2019 and ~~239.88%~~166.69% for ~~June~~September 30, 2019. Management's detailed analysis indicates that the Company's allowance for loan and lease losses should be sufficient to cover credit losses inherent in

Table of Contents

loan and lease balances outstanding as of ~~June~~September 30, 2020, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the allowance. With respect to exposures related to the COVID-19 pandemic, the Company had 83 relationships in the hospitality industry totaling $222.5 million at June 30, 2020. In addition to loans in the hospitality sector, we have approximately $17.0 million of loans in the oil and gas industry, and $66.0 million of loans to retail businesses at June 30, 2020.

A separate allowance of $0.3 million for potential losses inherent in unused commitments is included in other liabilities at ~~June~~September 30, 2020.

5355

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 six months ended		For the six months ended		For the year ended		For the three months ended		For the three months ended		For the nine months ended		For the nine months ended		For the year ended
	June 30,		June 30,		June 30,		June 30,		December 31,		September 30,		September 30,		September 30,		September 30,		December 31,
Balances:	2020		2019		2020		2019		2019		2020		2019		2020		2019		2019
Average gross loans and leases outstanding during period ⁽¹⁾	$	1,912,209	$	1,741,573	$	1,810,397	$	1,727,051	$	1,753,748	$	2,245,172	$	1,773,612	$	1,956,380	$	1,742,742	$	1,753,748
Gross loans and leases outstanding at end of period	$	2,212,097	$	1,777,899	$	2,212,097	$	1,777,899	$	1,762,565	$	2,380,300	$	1,797,660	$	2,380,300	$	1,797,660	$	1,762,565

Allowance for loan and lease losses:
Balance at beginning of period	$	11,453	$	9,438	$	9,923	$	9,750	$	9,750	$	13,560	$	9,883	$	9,923	$	9,750	$	9,750
Provision charged to expense		2,200		400		4,000		700		2,550		2,350		1,350		6,350		2,050		2,550
Charge-offs
Real estate
1-4 family residential construction		—		—		—		—		—		—		—		—		—		—
Other construction/land		—		—		—		—		—		—		—		—		—		—
1-4 family - closed-end		—		—		—		—		—		—		—		—		—		—
Equity lines		—		—		—		—		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		—		—		—		—		—		—		—
Commercial real estate- non-owner occupied		—		—		—		—		1,190		—		—		—		—		1,190
Farmland		—		—		—		—		—		—		—		—		—		—
Total real estate		—		—		—		—		1,190		—		—		—		—		1,190
Agricultural		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		67		254		92		832		1,274		327		57		419		891		1,274
Consumer loans		286		562		903		1,114		2,409		234		640		1,137		1,753		2,409
Total	$	353	$	816	$	995	$	1,946	$	4,873	$	561	$	697	$	1,556	$	2,644	$	4,873
Recoveries
Real estate
1-4 family residential construction		—		—		—		—		—		—		—		—		—		—
Other construction/land		—		—		34		—		2		1		1		35		1		2
1-4 family - closed-end		3		4		6		9		148		3		134		9		143		148
Equity lines		—		2		34		23		150		—		2		34		25		150
Multi-family residential		—		—		—		—		—		—		—		—		—		—
Commercial real estate- owner occupied		—		—		—		—		—		—		—		—		—		—
Commercial real estate- non-owner occupied		—		147		—		297		347		—		50		—		347		347
Farmland		—		—		—		—		—		—		—		—		—		—
Total real estate		3		153		74		329		647		4		187		78		516		647
Agricultural		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		20		431		48		472		690		35		172		83		646		690
Consumer loans		237		277		510		578		1,159		198		305		708		882		1,159
Total	$	260	$	861	$	632	$	1,379	$	2,496	$	237	$	664	$	869	$	2,044	$	2,496
Net loan charge offs	$	93	$	(45)	$	363	$	567	$	2,377	$	324	$	33	$	687	$	600	$	2,377
Balance at end of period	$	13,560	$	9,883	$	13,560	$	9,883	$	9,923	$	15,586	$	11,200	$	15,586	$	11,200	$	9,923

RATIOS
Net charge-offs to average loans and leases (annualized)		0.02%		-0.01%		0.04%		0.07%		0.14%		0.06%		0.01%		0.05%		0.05%		0.14%
Allowance for loan losses to gross loans and leases at end of period		0.61%		0.56%		0.61%		0.56%		0.56%		0.65%		0.62%		0.65%		0.62%		0.56%
Allowance for loan losses to nonperforming loans		233.47%		239.88%		233.47%		239.88%		172.96%		216.89%		166.69%		216.89%		166.69%		172.96%
Net loan charge-offs to allowance for loan losses at end of period		0.69%		-0.46%		2.68%		5.74%		23.95%		2.08%		0.29%		4.41%		5.36%		23.95%
Net loan charge-offs to provision for loan losses		4.23%		-11.25%		9.08%		81.00%		93.22%		13.79%		2.44%		10.82%		29.27%		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.

The Company’s allowance for loan and lease losses at ~~June~~September 30, 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

Table of Contents

conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

~~Table of Contents~~

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 ~~$449.0~~$541.4 million at ~~June~~September 30, 2020 and $492.0 million at December 31, 2019, representing approximately ~~20%~~23% of gross loans outstanding at ~~June~~September 30, 2020 and 28% at December 31, 2019. The ~~drop~~increase in unused commitments is due in large part to the increase in ~~outstanding balances~~unfunded commitments on mortgage warehouse lines. The Company also had undrawn letters of credit issued to customers totaling ~~$9.4~~$8.8 million at ~~June~~September 30, 2020 and $8.6 million at December 31, 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 ~~$88.7~~$84.3 million at ~~June~~September 30, 2020 relative to $65.6 million at December 31, 2019. The increase is primarily due to maintaining higher amounts of cash on hand due to lack of certainty from our armored cash delivery vendor during the COVID-19 pandemic due to potential staffing issues and governmental stay-at-home orders.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.” Net premises and equipment ~~increased~~decreased by ~~$0.3~~$0.2 million during the first ~~six~~nine months of 2020. Goodwill was $27 million at ~~June~~September 30, 2020, unchanged during the first ~~six~~nine months of 2020. As mentioned above, the Company performed a qualitative assessment of goodwill impairment during the ~~second~~third quarter 2020 and determined that a quantitative analysis was not required at this time. The Company will continue to monitor its Goodwill for potential impairment given the COVID-19 pandemic. Bank-owned life insurance, with a balance of ~~$51.3~~$52.1 million at ~~June~~September 30, 2020, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

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

Table of Contents

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 is included in the Average Balances and Rates tables appearing above, in the section titled “Net

~~Table of Contents~~

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.

Deposit Distribution

(dollars in thousands, unaudited)


	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Non-interest bearing demand deposits	$	949,662	$	690,950
Noninterest bearing demand deposits					$	975,750	$	690,950
Interest bearing demand deposits		144,215		91,212		135,181		91,212
NOW		497,601		458,600		521,741		458,600
Savings		346,262		294,317		361,857		294,317
Money market		125,419		118,933		126,918		118,933
Time, under $250,000		199,061		211,916		192,608		211,916
Time, $250,000 or more		234,534		252,446		227,658		252,446
Brokered deposits		10,000		50,000		50,000		50,000
Total deposits	$	2,506,754	$	2,168,374	$	2,591,713	$	2,168,374

Percentage of Total Deposits
Non-interest bearing demand deposits		37.89%		31.86%
Noninterest bearing demand deposits						37.65%		31.86%
Interest bearing demand deposits		5.75%		4.21%		5.22%		4.21%
NOW		19.85%		21.15%		20.13%		21.15%
Savings		13.81%		13.57%		13.96%		13.57%
Money market		5.00%		5.48%		4.90%		5.48%
Time, under $250,000		7.94%		9.77%		7.43%		9.77%
Time, $250,000 or more		9.36%		11.64%		8.78%		11.64%
Brokered deposits		0.40%		2.31%		1.93%		2.31%
Total		100.00%		100.00%		100.00%		100.00%

Deposit balances reflect net growth of ~~$338.4~~$423.3 million, or ~~16%~~20%, during the first ~~six~~nine months of 2020. Time deposits were ~~$443.6~~$470.3 million at ~~June~~September 30, 2020 as compared to $514.4 million at December 31, 2019. The ~~$70.8~~$44.1 million decline in time-deposits was a result of a ~~$40 million~~ reduction in customer time deposits as brokered deposits ~~and a $30.8 million in other time-deposits. The Company chose not to renew brokered deposits given~~were flat for the ~~growth in non-maturity deposits of $409.1 million, or 24.7%, during the first six months of 2020.~~same period. All of our non-maturity deposit growth was organic in nature.

Management is of the opinion that a relatively high level of core customer deposits is one of the Company’s key strengths, and we continue to strive for core deposit retention and growth. In particular, the Company’s ratio of noninterest-bearing deposits to total deposits was ~~37.9%~~37.7% at ~~June~~September 30, 2020 as compared to 31.9% at December 31, 2019.

OTHER INTEREST-BEARING LIABILITIES

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

Total non-deposit interest-bearing liabilities increased by ~~$158.8~~$149.1 million, or ~~197%~~185%, during the first ~~six~~nine months of 2020 primarily due to an increase in borrowings from the FHLB primarily to support organic growth in non-owner occupied commercial real estate loans, PPP loans, and to fund increased temporary utilization of mortgage warehouse lines. Repurchase agreements totaled ~~$41.4~~$36.7 million at ~~June~~September 30, 2020 relative to a balance of $25.7 million at year-end 2019. Repurchase agreements represent “sweep accounts”, where commercial deposit balances above a specified threshold are transferred at the close of each business day into non-deposit accounts secured by investment securities.

Table of Contents

The Company had junior subordinated debentures totaling $35.0 million at both ~~June~~September 30, 2020 and December

~~Table of Contents~~

31, 2019, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

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 was ~~$36.4~~$41.9 million at ~~June~~September 30, 2020 as compared to $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.

At ~~June~~September 30, 2020 and December 31, 2019, the Company had the following sources of primary and secondary liquidity ($ in thousands):


Primary and Secondary Liquidity Sources		June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Cash and Due From Banks	$	88,705	$	80,076	$	88,933	$	80,077
Unpledged Investment Securities		356,903		366,012		339,125		366,012
Excess Pledged Securities		60,462		70,955		61,655		70,955
FHLB Borrowing Availability		293,454		443,200		380,600		443,200
Unsecured Lines of Credit		80,000		80,000		80,000		80,000
Funds Available through Fed Discount Window		60,102		59,198		65,125		59,198
Totals	$	939,626	$	1,099,441	$	1,015,438	$	1,099,441

In addition to the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market. At ~~June~~September 30, 2020, the Company had previously applied for and received approval to borrow ~~$116.2~~$126.8 million from the Federal Reserve Bank for a Paycheck Protection Program Lending Facility (PPPLF). through December 31, 2020. The PPPLF provides the Company with the ability to pledge any PPP loan to the Federal Reserve Bank and obtain funding at 35 basis points. Further, any loans pledged to the PPPLF will be excluded from the regulatory leverage capital ratio. Due to the Company’s liquidity throughout the first ~~half~~nine months of 2020 it elected not to utilize the PPPLF during the quarter. The Company will continue to evaluate whether it should utilize the PPPLF in the ~~third~~fourth quarter 2020.

The Company performs regular stress tests on its liquidity and at this time, believes that we have sufficient primary and secondary liquidity sources for operations.

The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $105 million at ~~June~~September 30, 2020 and December 31, 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~~

5759

Table of Contents

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 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 ~~71.0%~~74.3% and ~~15.6%~~12.7%, respectively, at ~~June~~September 30, 2020, as compared to internal policy guidelines of “less than 78%” and “greater than 3%.” Other liquidity ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to total assets, including ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at ~~June~~September 30, 2020. The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current strong levels.

The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, interest on trust preferred securities, shareholder dividends, and stock repurchases. Its primary source of funds is dividends from the Bank, since the holding company does not conduct regular banking operations. As of ~~June~~September 30, 2020, the holding company maintained a cash balance of ~~$15.3~~$11.9 million. Management anticipates that with the available cash and the continued ability for the Bank to provide dividends to the holding company, that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future. Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 considering economic conditions and expectations at the time. Given the current near zero interest rate environment it is unlikely that rates could decline much further beyond the downward shock of 100 basis points, therefore the downward shock scenarios of 200 and 300 basis points are temporarily being suspended after concurrence by the Company’s Board of Directors. We currently utilize an additional upward rate shock scenario of 400 basis points. Pursuant to policy guidelines, we generally attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock.

5860

Table of Contents

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


	June 30, 2020				June 30, 2019				September 30, 2020				September 30, 2019
Immediate change in Interest Rates (basis points)	% Change in Net Interest Income		$ Change in Net Interest Income		% Change in Net Interest Income		$ Change in Net Interest Income		% Change in Net Interest Income		$ Change in Net Interest Income		% Change in Net Interest Income		$ Change in Net Interest Income
+400		5.4%	$	5,373		2.7%	$	2,573		-0.4%	$	(367)		2.6%	$	2,430
+300		4.5%	$	4,477		2.6%	$	2,481		0.1%	$	131		2.4%	$	2,278
+200		3.5%	$	3,529		1.9%	$	1,847		0.7%	$	677		1.8%	$	1,679
+100		2.3%	$	2,308		1.3%	$	1,202		0.9%	$	968		1.1%	$	1,047
Base
(100)		-6.3%	$	(6,235)		-3.9%	$	(3,729)		-5.8%	$	(5,948)		-4.6%	$	(4,331)

~~Our simulations~~In the stable rate environment, expected net interest income over twelve months increased $8.1 million, or 9%, to $103.3 million for ~~both periods represented indicate~~the first nine months of 2020 compared to $95.2 million for the same period in 2019. The primary reason for the increase in expected net interest income despite a lower rate environment was the increase in loan balances, primarily in commercial real estate. Further, the loan-to-deposit ratio increased from 82% at September 30, 2019 to over 91% at September 30, 2020 which demonstrates a greater level of high-earning assets at September 30, 2020. Therefore, even though the rate shocks are not as significant at September 30, 2020 as compared to September 30, 2019, overall projected net interest income remains higher in all scenarios at September 30, 2020.

The simulation for the period ending September 30, 2020 indicates that the Company’s net interest income will increase over the next 12 months in a rising rate environment, ~~but~~however the increase will diminish as rates rise from +100 bps to +300 bps, with a ~~continued~~decrease in net interest income in the +400 bps scenario. The decrease in net income in the +400 bps scenario is primarily due to the Company’s current $148.0 million overnight borrowing position which will immediately reprice. The immediately repricing of liabilities in each progressively larger rate positive rate shock is more significant than the corresponding gradual increase in asset repricing over the same period given the growth assumption utilized in the model. A drop in interest rates could have a substantial negative ~~impact. However for~~impact as is reflected in the down 100 bps simulation resulting in a decrease of 5.8% in net income.

For the period ended ~~June~~September 30, ~~2020, given~~2019, the Company was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining considerably in the down shocks.

Given the 150-basis point decrease in the target federal funds rate in March 2020 and the drop in the ~~5-year and~~ 10-year Treasury yields in the first ~~six~~nine months of 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 ~~$2.3~~$1.0 million, or ~~2.30%~~0.9%, for the period ending ~~June~~September 30, 2020 and ~~$1.2~~$1.0 million, or ~~1.3%~~1.1%, for the period ended ~~June~~September 30, 2019, relative to a stable interest rate scenario, with the favorable variance decreasing as interest rates rise for the September 30, 2020 and increasing as interest rates rise ~~higher.~~for the period ending September 30, 2019. If interest rates were to decline by 100 basis points, however, net interest income would likely be ~~$6.2~~$5.9 million lower or ~~-6.3%~~5.8% for the period ended ~~June~~September 30, 2020, and ~~$3.7~~$4.3 million lower or ~~–3.9%~~4.6% for the period ended ~~June~~September 30, 2019, than in a stable interest rate scenario. The unfavorable variance increases when rates drop are due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While we view material interest rate reductions as unlikely in the near term, the potential percentage decline in net interest income in the “down 100 basis points” interest rate scenario exceeds our internal policy guidelines for the period ended ~~June~~September 30, 2020, but the risk has been accepted with no immediate plans to address this scenario.

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$2 million lower than in our standard simulation. However, the stressed

Table of Contents

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 is evident in the tables below for the periods ending ~~June~~September 30, 2020 and 2019, respectively, as the Company’s balance sheet evolves and interest rate and yield curve assumptions are updated.

~~Table of Contents~~

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

June 30, 2020

June 30, 2019
Immediate change in Interest Rates (basis points)

% Change in Fair Value of Equity

$ Change in Fair Value of Equity

% Change in Fair Value of Equity

$ Change in Fair Value of Equity
+400

36.5%

$
195,263

15.6%

$
92,095
+300

32.1%

$
171,790

14.2%

$
83,884
+200

25.2%

$
134,702

11.7%

$
69,015
+100

14.5%

$
77,398

7.4%

$
43,571
Base

(100)

-11.1%

$
(59,340)

-14.3%

$
(84,297)


	September 30, 2020				September 30, 2019
Immediate change in Interest Rates (basis points)	% Change in Fair Value of Equity		$ Change in Fair Value of Equity		% Change in Fair Value of Equity		$ Change in Fair Value of Equity
+400		33.5%	$	175,998		18.8%	$	109,170
+300		30.1%	$	158,018		17.0%	$	98,620
+200		24.2%	$	127,038		14.0%	$	81,256
+100		14.4%	$	75,619		8.4%	$	48,999
Base
(100)		-7.9%	$	(41,602)		-15.9%	$	(92,357)

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 rate of increase in EVE accelerates the higher interest rates rise. This increase in sensitivity is caused by the increase in gross deposits, namely, an increase in noninterest bearing deposits. We also run stress scenarios for the unconsolidated Bank’s EVE to simulate the possibility of adverse movement in loan prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular, with material unfavorable variances occurring relative to the standard simulations shown above as decay rates are increased. Furthermore, while not as extreme as the variances produced by increasing non-maturity deposit decay rates, EVE also displays a relatively high level of sensitivity to unfavorable changes in deposit rate betas in rising interest rate scenarios.

CAPITAL RESOURCES

The Company had total shareholders’ equity of ~~$327.4~~$336.2 million at ~~June~~September 30, 2020, comprised of $112.6 million in common stock, ~~$3.5~~$3.6 million in additional paid-in capital, ~~$195.1~~$202.5 million in retained earnings, and accumulated other comprehensive income of ~~$16.2~~$17.5 million. At the end of 2019, total shareholders’ equity was $309.3 million. The increase during the first ~~six~~nine months of 2020 is due to the addition of capital from net income and stock options exercised as well as a ~~$10.3~~$11.6 million favorable swing in accumulated other comprehensive income, net of the impact of cash dividends paid and share repurchases. There were repurchases totaling 112,050 shares at a weighted average cost

Table of Contents

of $22.86 per share executed by the Company during the first quarter of 2020. The Company has 268,301 shares authorized to repurchase under the current repurchase program. The Company suspended its stock repurchase program on March 16, 2020 and continues to evaluate when or if we will restart repurchasing shares.

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

~~Table of Contents~~

Regulatory Capital Ratios


					Minimum		Minimum						Minimum		Minimum
					Requirement		Required						Requirement		Required
	June 30,		December 31,		to be		Community Bank		September 30,		December 31,		to be		Community Bank
	2020		2019		Well Capitalized ⁽³⁾		Leverage Ratio ^{(2) (4)}		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		N/A		13.27	%	6.50	%	N/A
Tier 1 Capital to Risk-weighted Assets ⁽¹⁾	N/A		14.98	%	8.00	%	N/A		N/A		14.98	%	8.00	%	N/A
Total Capital to Risk-weighted Assets ⁽¹⁾	N/A		15.48	%	10.00	%	N/A		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		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		N/A		14.75	%	6.50	%	N/A
Tier 1 Capital to Risk-weighted Assets ⁽¹⁾	N/A		14.75	%	8.00	%	N/A		N/A		14.75	%	8.00	%	N/A
Total Capital to Risk-weighted Assets ⁽¹⁾	N/A		15.25	%	10.00	%	N/A		N/A		15.25	%	10.00	%	N/A
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")	10.87	%	11.73	%	5.00	%	8.00	%	10.29	%	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.

The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital adequacy for qualifying community banking organizations. A qualifying community banking organization that opts into the 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 greater than 9 percent may opt into the community bank leverage ratio framework if has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5 percent or less of total consolidated assets. Further, the bank must not be an advance approaches banking organization.

The final rule became effective January 1, 2020 and banks that meet the qualifying criteria can elect to use the community bank leverage framework starting with the quarter ended March 31, 2020. The CARES Act reduced the required community bank leverage ratio to 8% until the earlier of December 31, 2020, or the national emergency is declared over. The federal bank regulatory agencies adopted an interim final rule to implement this change from the CARES Act. The Company and the Bank meet the criteria outlined in the final rule and the interim final rule and have adopted the community bank leverage ratio framework in the first quarter 2020.

Table of Contents

PART I – FINANCIAL INFORMATION

~~Item~~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.”

~~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 first ~~six~~nine months of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

6264

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

The following risk factors supplement the risks described in the Company’s Form 10-K under Item 1A, “Risk Factors” for its year ended December 31, 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.

•

Our borrowers’ actual payment performance may be worse than anticipated as loan deferrals related to the COVID-19 pandemic expire, and we may experience potential adverse impact from loan modifications and payment deferrals despite their implementation consistent with recent regulatory guidance.

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

Table of Contents

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 through March 2020. ~~The following table provides information concerning the Company’s~~There were no stock repurchase transactions during the ~~second~~third quarter of ~~2020:~~2020. The balance of shares remaining for purchase under the plan was 268,301 at September 30, 2020.

Stock Repurchases

April 30, 2020

May 31, 2020

June 30, 2020
Total shares repurchased

—

—

—
Average per share price

$
N/A

$
N/A

$
N/A
Number of shares purchased as part of a publicly announced plan or program

—

—

—
Maximum number of shares remaining for purchase under a plan or program

380,351

380,351

380,351

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

6466

Table of Contents

ITEM 6: EXHIBITS


Exhibit #		Description
3.1		Restated Articles of Incorporation of Sierra Bancorp (1)
3.2		Amended and Restated By-laws of Sierra Bancorp (2)
4.1		D~~escription~~Description of Securities (3) ~~(3)~~
10.1		Salary Continuation Agreement for Kenneth R. Taylor (4)*
10.2		Salary Continuation Agreement and Split Dollar Agreement for James F. Gardunio (5)**
10.3		Split Dollar Agreement for Kenneth R. Taylor (6)*
10.4		Director Retirement and Split dollar Agreements Effective October 1, 2002, for Albert Berra, Morris Tharp, and Gordon Woods (6)*
10.5		401 Plus Non-Qualified Deferred Compensation Plan (6)*
10.6		Indenture dated as of March 17, 2004 between U.S. Bank N.A., as Trustee, and Sierra Bancorp, as Issuer (7)
10.7		Amended and Restated Declaration of Trust of Sierra Statutory Trust II, dated as of March 17, 2004 (7)
10.8		Indenture dated as of June 15, 2006 between Wilmington Trust Co., as Trustee, and Sierra Bancorp, as Issuer (8)
10.9		Amended and Restated Declaration of Trust of Sierra Capital Trust III, dated as of June 15, 2006 (8)
10.10		2007 Stock Incentive Plan (9)
10.11		Sample Retirement Agreement Entered into with Each Non-Employee Director Effective January 1, 2007 (10)*
10.12		Salary Continuation Agreement for Kevin J. McPhaill (10)*
10.13		First Amendment to the Salary Continuation Agreement for Kenneth R. Taylor (10)*
10.14		Second Amendment to the Salary Continuation Agreement for Kenneth R. Taylor (11)*
10.15		First Amendment to the Salary Continuation Agreement for Kevin J. McPhaill (12)*
10.16		Indenture dated as of September 20, 2007 between Wilmington Trust Co., as Trustee, and Coast Bancorp, as Issuer (13)
10.17		Amended and Restated Declaration of Trust of Coast Bancorp Statutory Trust II, dated as of September 20, 2007 (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 (13)
10.19		2017 Stock Incentive Plan (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 (15)*
10.21		Employment agreement dated as of March 15, 2019 for Matthew Macia, Chief Risk Officer (16)*
10.22		Employment agreement dated as of November 15, 2019 for Christopher Treece, Chief Financial Officer (17)*
10.23		Employment agreement dated as of January 17, 2020 for Jennifer Johnson, Chief Administrative Officer (18)*
31.1		Certification of Chief Executive Officer (Section 302 Certification)
31.2		Certification of Chief Financial Officer (Section 302 Certification)
32		Certification of Periodic Financial Report (Section 906 Certification)
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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

(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.

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

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

(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.

(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.

(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.

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

(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.

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

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

(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.

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

(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.

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

(17)	Filed as Exhibit 99.1 to the Form 8-K filed with the SEC on November 11, 2019 and incorporated by reference.

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

*Indicates management contract or compensatory plan or arrangement.

6567

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:


~~August 6,~~November 5, 2020		/s/ Kevin J. McPhaill
Date		SIERRA BANCORP
		Kevin J. McPhaill
		President & Chief Executive Officer
		(Principal Executive Officer)

~~August 6,~~November 5, 2020		/s/ Christopher G. Treece
Date		SIERRA BANCORP
		Christopher G. Treece
		Chief Financial Officer
~~August 6,~~November 5, 2020		/s/ Cindy L. Dabney
Date		SIERRA BANCORP
		Cindy L. Dabney
		Principal Accounting Officer

6668


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