2020
2020 ANNUAL REPORT CONTENTS
1 Company Statements / Branch Locations
3 President’s Message
4 Board of Directors
5 About Sierra Bancorp
6 About Bank of the Sierra
8 Results of Operations
10 Financial Condition
12 Executive Officers and Corporate Office
MISSION
STATEMENT
To be responsible stewards
for our shareholders by
targeting top-quartile
financial returns, while
promoting a culture of
fiscal discipline, ingenuity,
and integrity.
OUR BRAND
PROMISE
We will help make every
community we’re part of better.
7 KEY
STRATEGIES
1. KEEP THINKING
Anticipate and meet needs with
a broad range of solutions.
2. KEEP SERVING
Provide quality service on a timely,
competitive basis.
3. KEEP LEARNING
Be passionate about being the
right person on the team.
4. KEEP GROWING
Encourage creativity and maximize
every opportunity to improve.
5. KEEP GIVING
Serve our communities through
involvement and reinvestment.
6. KEEP STRIVING
Be disciplined; aim for excellence.
7. KEEP SMILING
Enjoy the journey and have fun
along the way.
Placer
Fresno
Kings
Tulare
San Luis
Obispo
Santa Barbara
Ventura
Kern
Los Angeles
Selma | 2011
Santa Paula | 2014
Fillmore | 2014
Santa Clarita | 2014
San Luis Obispo | 2016
LOCATIONS
Porterville Main St. | 1978
Porterville West Olive | 1981
Lindsay | 1981
Exeter | 1988
Visalia Mooney | 1991
Three Rivers | 1994
Visalia Main St. | 1995
Dinuba | 1997
Tulare | 1998
Hanford | 1998
Fresno Shaw Ave. | 1999
Arroyo Grande | 2016
Bakersfield Ming Ave. | 2000
Paso Robles | 2016
Tehachapi F St. | 2000
Sanger | 2016
Tehachapi Old Town | 2000
Atascadero | 2016
California City | 2000
Clovis | 2004
Reedley | 2005
Bakersfield Riverlakes | 2006
Delano | 2007
Bakersfield
Mt. Vernon Ave. | 2008
Bakersfield
California Ave. | 2017
Pismo Beach | 2017
Santa Barbara | 2017
Ventura | 2017
Ojai | 2017
Woodlake | 2017
Fresno Sunnyside | 2008
Fresno Palm | 2018
Tulare Prosperity | 2009
Lompoc | 2018
Farmersville | 2010
Rocklin LPO | 2020
2020 ANNUAL REPORT
1
“ Life is like riding a bicycle. To keep your
balance, you must keep moving.”
– Albert Einstein
2
BankoftheSierra.com
President’s Message
April 15, 2021
What a difference a year can make! At the beginning of last
year, we were concerned about low interest rates persisting
over time and potential economic headwinds. Then, a global
pandemic forced our bank and the entire banking sector to
pivot drastically. We saw interest rates plunge even lower
and significant government assistance in many forms,
including the Paycheck Protection Program. Amidst these
many challenges, I am very proud of how our banking team
stepped up! We quickly moved to work-from-home protocols
where possible, modified branch access, fully participated
in the Paycheck Protection Program, and made several
other necessary shifts. We are grateful for the success
we had during 2020 and appreciate the hard work of our
entire banking team, the loyalty of our customers, and the
commitment of our communities!
As part of our board of directors succession plan, in 2020
we conducted a comprehensive search for two additional
people to augment our board. We were thrilled to welcome
two new members in December: Susan Abundis and Julie
Castle. Susan has 40 years of banking experience and
holds a bachelor’s degree from California State University,
Fresno and a Graduate Degree of Banking from the
University of Washington’s Pacific Coast Banking School.
Susan also currently sits on several boards, including
Community Medical Centers, California Health Sciences
University, and Tesoro Viejo Conservancy. Julie joins our
board with over 35 years of financial services experience,
including 11 years in the roles of President and/or CEO
and 10 years of board service for a variety of companies.
Julie earned a bachelor’s degree from the University of
California, Davis and a Graduate Degree of Banking from
the University of Washington’s Pacific Coast Banking School.
Most recently, Julie served as President, Chief Banking
Officer, and Board Member for Rabobank, N.A., a $15 billion
national bank. This is an important step for our bank
in providing durable and consistent governance as we
continue to grow. Both Julie and Susan have quickly proven
to be strong directors, and it is great to have them on board!
Early last year, we welcomed two new lending teams: one
based in Sacramento and another based in Southern
California. In the face of last year’s various challenges,
these new teams, combined with our legacy teams
throughout Central California, created record-setting
growth in loans, deposits, and total assets! This growth
was only possible thanks to the strength, resilience, and
persistence of our entire banking team.
In January 2021, our Chief Credit Officer, Jim Gardunio,
retired after 16 years with Bank of the Sierra. We are
thankful for his contributions over his long time with
the Bank and wish him all the best during a well-earned
retirement. While we will miss Jim, we are excited about our
new Executive Vice President and Chief Credit Officer, Hugh
Boyle. Hugh comes to us with a very strong skill set and
a wealth of credit and risk experience in the banking and
finance industry. Hugh is a great addition to our executive
team, and we are truly pleased to have him on board!
As we look to this coming year, we know there will be
opportunities and challenges that come our way. Through
the pandemic and economic uncertainty, Bank of the
Sierra has become stronger as we continue to position
ourselves so we can realize our full potential. I have long
admired the life of Albert Einstein and the difficulty he
had to overcome as he ultimately became one of the
greatest physicists of all time. He once said, “To keep your
balance, you must keep moving.” That is exactly what
we will continue to do. We are excited about our future
and look forward to partnering with our customers and
communities to keep moving ahead!
Sincerely,
Kevin J. McPhaill
President and Chief Executive Officer
2020 ANNUAL REPORT
3
BOARD OF DIRECTORS
Morris A. Tharp
Chairman
President & Owner,
E.M. Tharp, Inc.
James C. Holly
Vice Chairman
Retired Banker /
Formerly CEO, Bank
of the Sierra and
Sierra Bancorp
Susan M. Abundis
Director
Retired Commercial
Banker
Albert L. Berra
Director
Rancher / Retired
Orthodontist
Julie Castle
Director
Banking Consultant
Vonn Christenson
Director
Partner, Christenson
Law Firm
Laurence S. Dutto
Director
Retired / Formerly
Provost, College
of the Sequoias
Robb Evans
Director
Chairman, Robb Evans
& Associates, LLC
Kevin J. McPhaill
President & CEO
Bank of the Sierra
and Sierra Bancorp
Lynda B. Scearcy
Director
Retired Tax
Professional / Formerly
CPA, McKinley
Scearcy Associates
“ Grittier students are more likely to
earn their diplomas; grittier teachers
are more effective in the classroom.
Grittier soldiers are more likely to
complete their training, and grittier
salespeople are more likely to keep
their jobs. The more challenging the
domain, the more grit seems to matter.”
– Dr. Angela Duckworth
Gordon T. Woods
Director
Owner & Operator,
Gordon T. Woods
Construction; CEO,
Hydrokleen Systems
Robert L. Fields
Director Emeritus
Retired Jeweler
4
BankoftheSierra.com
About
Sierra
Bancorp
Sierra Bancorp (the “Company”) is a bank holding
company headquartered in Porterville, California.
Our common stock trades on the NASDAQ Global
Select Market under the symbol BSRR. 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. References herein
to the “Company” include Sierra Bancorp and its
consolidated subsidiary, the Bank, unless the context
indicates otherwise. Sierra Bancorp’s unconsolidated
subsidiaries include Sierra Statutory Trust II, Sierra
Capital Trust III, and Coast Bancorp Statutory Trust II,
which were formed to facilitate the issuance
of capital trust pass-through securities.
2020 ANNUAL REPORT
5
About
Bank of the Sierra
Bank of the Sierra is a California state-chartered bank headquartered in Porterville,
California. We offer a broad range of retail and commercial banking services via branch
offices located throughout the southern half of California’s Central Valley, the Central
Coast, Ventura County, and neighboring communities. The Bank was incorporated in September
1977 and opened for business in January 1978 as a one-branch bank with $1.5 million in capital
and 11 employees. We have since grown to be the largest bank headquartered in the South San
Joaquin Valley, with 40 full-service branch offices and $3.2 billion in assets at December 31, 2020.
Our growth has largely been organic but includes four whole-bank acquisitions, including most
recently Ojai Community Bank in 2017. Our post-recession branching activity includes the
establishment of the Fresno-Palm branch and the purchase of the Lompoc branch in 2018,
as well as opening de novo branches in Bakersfield and Pismo Beach and the acquisition of
the Woodlake branch in 2017. We also opened a new loan production office in Rocklin in 2020.
In addition to branch offices, the Bank maintains an agricultural credit division, a loan production
office, an SBA lending group, and a mortgage warehouse lending unit. We also provide ATMs at
nearly all branch locations and seven non-branch locations. Moreover, the Bank is a member of
the Allpoint® network, which allows our customers surcharge-free access to 43,000 ATMs across
the nation and another 12,000 ATMs in foreign countries. Our customers also have access to
electronic point-of-sale payment alternatives nationwide via the PULSE® EFT network.
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BankoftheSierra.com
Incorporated in
September 1977
500+ employees
40 full-service
branch offices
$3.2 billion
in assets*
To ensure that account access preferences are addressed for
all customers, we provide the following options: an internet branch
that provides the ability to open deposit accounts online; an online
banking option with bill pay and mobile banking capabilities,
including mobile check deposit; online lending solutions for
consumers and small businesses; a customer service center that
is accessible by toll-free telephone during business hours; and an
automated telephone banking system that is usually accessible 24
hours a day, seven days a week. We offer a variety of other banking
products and services to complement and support our lending and
deposit products, including remote deposit capture and payroll
services for business customers.
The Bank’s lending activities include real estate, commercial
(including small business), mortgage warehouse, agricultural,
and consumer loans. The bulk of our real estate loans are secured
by commercial, professional, and agricultural properties, but
we also offer commercial construction loans and multifamily
credit facilities among other types of loans. At December 31, 2020,
gross loans were $2.5 billion.
Our deposit products include checking accounts, savings
accounts, money market demand accounts, time deposits,
retirement accounts, and business sweep accounts. The Bank’s
deposit accounts are insured by the Federal Deposit Insurance
Corporation (FDIC) up to maximum insurable amounts. We attract
deposits throughout our market area via referrals from other
customers, diverse marketing campaigns, a customer-oriented product mix, competitive pricing, and by offering
convenient locations, drive-through banking, and various other delivery channels. We strive to retain our deposit
customers by providing a consistently high level of service. At December 31, 2020, we had 123,244 deposit accounts
with balances totaling $2.6 billion. Based on June 30, 2020, FDIC combined market share data for the 31 cities in which
the Company maintains branches, Bank of the Sierra ranks sixth with 4.6% of total deposits. In Tulare County, where
the Bank was originally formed, we rank first for deposit market share with 19.78% of total deposits at June 30, 2020,
and have the largest number of branch locations (13, including our online branch).
In summary, we have successfully transitioned from a small single-unit bank at inception into a multi-branch, regional
operation. Our plans have adapted through the years to accommodate situational changes, take advantage of growth
opportunities, and improve financial performance, with the goal of establishing our position as a top-performing bank.
We feel that our rich history, which includes a strong commitment to our communities and a focus on shareholder
returns, provides a solid foundation for continued expansion. Our depth of experience, healthy capital position, and access
to liquidity resources should enable us to continue to take advantage of new and currently unforeseen opportunities,
to the benefit of the Company’s investors, customers, and staff.
* Complete financial information is contained in the Company’s Form 10-K included herewith.
2020 ANNUAL REPORT
7
Results of
Operations*
T he Company recognized net income of $35.4 million in 2020 as compared to net income
of $36.0 million in 2019, a decrease of $0.6 million, or 1.7%. Net income per diluted share
was $2.32 in 2020, as compared to $2.33 in 2019. The Company’s return on average assets
and return on average equity were 1.22% and 10.80%, respectively, in 2020, as compared to 1.40%
and 12.23%, respectively, in 2019. The Company’s efficiency ratio improved in 2020 to 57.18%, on
a fully tax-equivalent basis, as compared to 57.46% in 2019. The following paragraphs summarize
the major factors that impacted the Company’s results of operations in 2020 and 2019.
Net interest income improved by $7.5 million or 7.7% in 2020 over 2019, due primarily to growth
of $335 million, or 14.2%, in average interest-earning assets. The increase in average earning
assets was largely organic, resulting from deliberate efforts of our Northern and Southern
market loan production teams, in addition to an $87.1 million or 65.0% increase in average
balances of the Company’s mortgage warehouse loans during 2020. The positive impact of asset
growth in 2020 was partially offset by a 24 basis point decline in net interest margin to 3.90%
in 2020 compared to 4.14% in 2019. The decrease in net interest margin in 2020 reflected the
economic conditions related to the COVID-19 pandemic, including the five interest rate cuts by the
Federal Open Market Committee since July 1, 2019, totaling 2.25%. With the transition to the lower
interest rate environment, the yield on Company’s average interest-bearing assets decreased
from 4.76% in 2019 to 4.16% in 2020. The Company was able to partially offset the impact to net
interest margin caused by the decrease in earning asset yields, as yields on interest-bearing
liabilities decreased from 0.86% in 2019 to 0.32% in 2020.
8
BankoftheSierra.com
* Complete financial information is contained in the Company’s Form 10-K included herewith.
We recorded a loan loss provision of $8.6 million in 2020 as
compared to a $2.6 million provision in 2019. The larger provision
in 2020 was primarily a result of the economic uncertainty caused
by the COVID-19 pandemic combined with the growth in our loan
portfolio, particularly in non-owner occupied commercial real
estate. Net charge-offs for 2020 were under 4 basis points of
average loans.
Noninterest income increased by $2.7 million, or 11.4%, in 2020
compared to 2019, due mostly to gains recognized from sales
of low-income housing tax credits and debt securities.
Noninterest expense increased by $5.3 million, or 7.6%, in 2020
compared to 2019. Contributing to the year-over-year increase
in noninterest expense was a $4.2 million, or 11.7%, increase in
salaries and benefits expense combined with a $1.2 million, or 4.7%,
increase in other noninterest expense. The increase in salaries
and benefits expense reflects the combined impact of the new
loan production teams in the Northern and Southern California
markets, an increased focus in 2020 on hiring senior-level staff
and management, and merit increases resulting from annual
performance evaluations.
The Company recorded an income tax provision of $11.1 million,
or 23.8% of pre-tax income, in 2020, and an income tax provision
of $11.8 million, or 24.6% of pre-tax income, in 2019. As expected, the
overall tax rate remained relatively stable between 2019 and 2020.
2020 ANNUAL REPORT
9
Income Statement
($000)
2020
Net Interest
Income
Loan Loss
Provision
Noninterest
Income
Noninterest
Expense
Net Income
Before Taxes
Provision
for Taxes
$ 104,835
$ 8,550
$ 26,150
$ 75,912
$ 46,523
$
11,079
Net Income
$ 35,444
Financial
Condition*
T he Company’s assets totaled $3.2 billion at December 31, 2020, compared to $2.6 billion
at December 31, 2019, for an increase of $626.9 million, or 24.2%, during 2020. Total
liabilities were $2.9 billion at the end of 2020 compared to $2.2 billion at the end of 2019.
Shareholders’ equity totaled $343.9 million at December 31, 2020, compared to $309.3 million
at December 31, 2019. The following paragraphs highlight key balance sheet changes during 2020.
Gross loans increased by $700.5 million, or 39.7%, as of December 31, 2020, compared
to December 31, 2019, primarily as the result of the success of our Northern and Southern
California loan production offices in growing loans, with a focus on growth in non-owner
occupied commercial real estate. In addition, during 2020 the Company had a $118.6 million
increase in mortgage warehouse line utilization, and recorded $119.4 million net in Paycheck
Protection Program (“PPP”) loans. Mortgage warehouse line utilization increased in 2020
because of increased consumer mortgage refinancing activity precipitated by historically low
interest rates in conjunction with the increase in housing demand, which also benefited from
the low interest rate environment. Investments in securities available for sale decreased by $56.8
million, or 9.5%, to $544.0 million at December 31, 2020. The decrease in investments was primarily
due to the strategic decision, following the addition of the new loan production teams, to allow
paydowns in the securities portfolio to help fund the growth in loans. Municipal bonds totaled
$227.7 million at December 31, 2020, as compared to $188.3 million at December 31, 2019.
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BankoftheSierra.com
* Complete financial information is contained in the Company’s Form 10-K included herewith.
Balance Sheet ($000)
2020
Net Loans
$ 2,442,226
Investment
Securities
Intangible
Assets
$ 543,974
$
31,664
Total Assets
$ 3,220,742
Deposits
$ 2,624,606
Other Liabilities
$ 252,240
Total
Shareholders’
Equity
Shares
Outstanding
$ 343,896
15,388,423
“ The secret of success is
to do the common thing
uncommonly well.”
– John D. Rockefeller Jr.
The allowance for loan losses to total loans was 0.72% at December 31,
2020, as compared to 0.56% at December 31, 2019. As discussed in the
Company’s Form 10-K, included herewith, the adoption of the current
expected credit losses (“CECL”) standard was deferred to January 1, 2022,
under the Coronavirus Aid, Relief, and Economic Security Act as
amended by the Consolidated Appropriations Act of 2021. We expect
our allowance to increase significantly upon adoption of CECL through
a one-time adjustment to equity in the first quarter of 2022.
December 31, 2020, deposit balances reflect 2020 net growth of $456.2
million, or 21.0%. The Company’s already favorable deposit composition
improved in 2020 due to the $252.7 million, or 36.6%, growth in
noninterest-bearing deposits outpacing strong growth in other interest-
bearing deposit categories. At December 31, 2020, the percent of
noninterest-bearing deposits to total deposits was 36.0%, as compared
to 31.9% at December 31, 2019. Higher-cost time deposits decreased
by $1.4 million during 2020, or 0.3%, while the weighted-average rate
on time deposits decreased by 126 basis points, or 67%.
Total equity increased during 2020 by $34.6 million, or 11.2%,
to $343.9 million at December 31, 2020. The increase in equity during
2020 is due to net income, net of dividends paid, and the increase in
accumulated other comprehensive income due to higher valuations
of the Company’s investment portfolio.
2020 ANNUAL REPORT
11
EXECUTIVE OFFICERS
Kevin J. McPhaill
President & CEO
Hugh F. Boyle
Executive V.P. & CCO
Michael W. Olague
Executive V.P. & CBO
Christopher G. Treece
Executive V.P. & CFO
Matthew Macia
Executive V.P. & CRO
Jennifer Johnson
Executive V.P & CAO
CORPORATE OFFICE
Alexandra Blazar | Corporate Secretary
86 North Main Street | Porterville, CA 93257
559.782.4900 | Info@BankoftheSierra.com
BankoftheSierra.com | SierraBancorp.com
“ There are no shortcuts
to excellence. Developing
real expertise, figuring
out really hard problems,
it all takes time – longer
than most people imagine.
And then, you know,
you’ve got to apply those
skills and produce goods
and services that are
valuable to people.
Rome wasn’t built in
a day. And here’s the
really important thing.
Grit is about working on
something you care about
so much that you’re
willing to stay loyal to it.
It’s doing what you love,
but not just falling in love
– staying in love.”
– Dr. Angela Duckworth
12
BankoftheSierra.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2020
Commission file number: 000-33063
SIERRA BANCORP
(Exact name of registrant as specified in its charter)
California
(State of incorporation)
86 North Main Street, Porterville, California
(Address of principal executive offices)
33-0937517
(I.R.S. Employer Identification No.)
93257
(Zip Code)
(559) 782-4900
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, No Par Value
Trading Symbol
BSRR
Name of each exchange on which registered
The NASDAQ Stock Market LLC (NASDAQ
Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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.
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
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer ☐
Non-accelerated filer ☐
Emerging growth company ☐
Accelerated filer ☒
Smaller reporting 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 pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
As of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $262 million, based on the closing price reported to the registrant on that date of $18.88 per share. Shares of Common Stock
held by each officer and director and each person or control group owning more than ten percent of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of common stock of the registrant outstanding as of March 1, 2021 was 15,389,023.
Documents Incorporated by Reference: Portions of the definitive proxy statement for the 2020 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to SEC Regulation 14A are incorporated by reference in Part III, Items 10-14.
ITEM
PAGE
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART I
ITEM 1. BUSINESS
General
The Company
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
December 31, 2020, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and
Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities
(“TRUPS”). Pursuant to the Financial Accounting Standards Board (“FASB”) standard on the consolidation of variable
interest entities, these trusts are not reflected on a consolidated basis in the financial statements of the Company. References
herein to the “Company” include Sierra Bancorp and its consolidated subsidiary, the Bank, unless the context indicates
otherwise. At December 31, 2020, the Company had consolidated assets of $3.2 billion (including gross loans of $2.5
billion), liabilities totaling $2.9 billion (including deposits of $2.6 billion), and shareholders’ equity of $343.9 million. The
Company’s liabilities include $35.1 million in debt obligations due to its trust subsidiaries, related to TRUPS issued by
those entities.
The Bank
Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a wide range of retail
and commercial banking services via branch offices located throughout California’s South San Joaquin Valley, the Central
Coast, Ventura County, and neighboring communities. The Bank was incorporated in September 1977, and opened for
business in January 1978 as a one-branch bank with $1.5 million in capital. Our growth in the ensuing years has largely
been organic in nature but includes four whole-bank acquisitions: Sierra National Bank in 2000, Santa Clara Valley Bank
in 2014, Coast National Bank in 2016, and Ojai Community Bank in October 2017. See the Recent Developments section
below for details on our latest acquisitions.
Our recent business activity included the establishment of a Sacramento-area (Rocklin, CA) loan production office in
2020, the Fresno-Palm branch and the purchase of the Lompoc branch in 2018, and opening de novo branches in
Bakersfield and Pismo Beach and the acquisition of the Woodlake branch in 2017. With our latest acquisitions and
branching activity, the Bank now maintains administrative offices, a loan production office, and operates 40 full-service
branches in the following California locations:
Porterville:
Administrative Headquarters
86 North Main Street
Main Office
90 North Main Street
West Olive Branch
1498 West Olive Avenue
Arroyo Grande:
Arroyo Grande Office
1360 East Grand Avenue
Atascadero:
Bakersfield:
Atascadero Office
7315 El Camino Real
Bakersfield California Office
4456 California Ave
Bakersfield Riverlakes Office
4060 Coffee Road
Bakersfield Ming Office
8500 Ming Avenue
Bakersfield East Hills Office
2501 Mt. Vernon Avenue
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California City:
California City Office
8031 California City Blvd.
Clovis:
Delano:
Dinuba:
Exeter:
Clovis Office
1835 East Shaw Avenue
Delano Office
1126 Main Street
Dinuba Office
401 East Tulare Street
Exeter Office
1103 West Visalia Road
Farmersville:
Farmersville Office
400 West Visalia Road
Fillmore:
Fresno:
Hanford:
Lindsay:
Lompoc:
Ojai:
Paso Robles:
Pismo Beach:
Rocklin:
Reedley:
Fillmore Office
527 Sespe Avenue
Fresno Palm Office
7391 North Palm Avenue
Fresno Shaw Office
636 East Shaw Avenue
Fresno Sunnyside Office
5775 E. Kings Canyon Rd.
Hanford Office
427 West Lacey Boulevard
Lindsay Office
142 South Mirage Avenue
Lompoc Office
705 West Central Avenue
Ojai Office
402 West Ojai Avenue
Paso Robles Office
1207 Spring Street
Pismo Beach Office
1401 Dolliver Street
Loan Production Office
5701 Lonetree Blvd., Ste. 113
Reedley Office
1095 West Manning Ave.
San Luis Obispo: San Luis Obispo Office
Sanger:
500 Marsh Street
Sanger Office
1500 7th Street
Santa Barbara:
Santa Barbara Office
21 East Carrillo Street
2
Santa Clarita:
Santa Paula:
Selma:
Tehachapi:
Santa Clarita Office
26328 Citrus Street
Santa Paula Office
901 East Main Street
Selma Office
2450 McCall Avenue
Tehachapi Downtown Office
224 West “F” Street
Tehachapi Old Town Office
21000 Mission Street
Three Rivers:
Three Rivers Office
40884 Sierra Drive
Tulare:
Ventura:
Visalia:
Tulare Office
246 East Tulare Avenue
Tulare Prosperity Office
1430 East Prosperity Avenue
Ventura Office
89 South California Street
Visalia Mooney Office
2515 South Mooney Blvd.
Visalia Downtown Office
128 East Main Street
Woodlake:
Woodlake Office
232 N. Valencia Boulevard
Complementing the Bank’s stand-alone offices are specialized lending units which include our Agricultural, SBA and
Mortgage Warehouse lending divisions. We also have ATMs at all but one of our branch locations and seven non-branch
locations. Furthermore, the Bank is a member of the Allpoint network, which provides our deposit customers with
surcharge-free access to over 55,000 ATMs across the United States, Puerto Rico, Mexico, Canada, Australia and the
United Kingdom, and customers have access to electronic point-of-sale payment alternatives nationwide via the Pulse
network. To ensure that account access preferences are addressed for all customers, we provide the following options: an
internet branch which provides the ability to open deposit accounts online; an online banking option with bill-pay and
mobile banking capabilities, including mobile check deposit; online lending solutions for consumers and small businesses;
a customer service center that is accessible by toll-free telephone during business hours; and an automated telephone
banking system that is generally accessible 24 hours a day, seven days a week. We offer a variety of other banking products
and services to complement and support our lending and deposit products, including remote deposit capture and payroll
services for business customers.
Our chief products and services relate to extending loans and accepting deposits. Our lending activities cover real estate,
commercial (including small business), mortgage warehouse, agricultural, and consumer loans. The bulk of our real estate
loans are secured by commercial, professional office and agricultural properties, but we also offer commercial construction
loans and multifamily credit facilities among other types of loans. As noted above, gross loans totaled $2.5 billion at
December 31, 2020, and the percentage of our total loan and lease portfolio for each of the principal types of credit we
extend was as follows: (i) loans secured by real estate (77.0%); (ii) agricultural production loans (1.8%); (iii) commercial
and industrial loans and leases, including SBA loans and Paycheck Protection Program (PPP) loans (8.5%); (iv) mortgage
warehouse loans (12.5%); and (v) consumer loans (0.2%). Interest, fees, and other income on real-estate secured loans,
which is by far the largest segment of our portfolio, totaled $79.2 million, or 60% of net interest plus other income in 2020,
and $79.8 million, or 66% of net interest plus other income in 2019.
In addition to loans, we offer a wide range of deposit products and services for individuals and businesses including
checking accounts, savings accounts, money market demand accounts, time deposits, retirement accounts, and sweep
accounts. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to
3
maximum insurable amounts. We attract deposits throughout our market area via referrals from other customers, direct-
mail campaigns, a customer-oriented product mix, and competitive pricing, and by offering convenient locations, drive-
through banking, and various other delivery channels. We strive to retain our deposit customers by providing a consistently
high level of service. At December 31, 2020, the consolidated Company had 123,200 deposit accounts totaling $2.6 billion,
compared to 125,100 deposit accounts totaling $2.2 billion at December 31, 2019.
We have not engaged in any material research activities related to the development of new products or services during the
last two fiscal years. However, our officers and employees are continually searching for ways to increase public
convenience, enhance customer access to payment systems, and enable us to improve our competitive position. The cost
to the Bank for these development, operations, and marketing activities cannot be calculated with any degree of certainty.
We hold no patents or licenses (other than licenses required by bank regulatory agencies), franchises, or concessions. Our
business has a modest seasonal component due to the heavy agricultural orientation of the Central Valley, but as our branch
network has expanded to include more metropolitan areas, we have become less reliant on the agriculture-related base.
We are not dependent on a single customer or group of related customers for a material portion of our core deposits, but
our time deposit balances at December 31, 2020 include $120 million in deposits from the State of California, comprising
less than 5% of total deposits. Furthermore, loan categories that could be considered to be concentrations include loans to
lessors of non-residential buildings (32% of total loans); loans to facilitate real estate credit, including mortgage warehouse
lending (13% of total loans); and loans in the hotel industry (9% of total loans).
Our efforts to comply with government and regulatory mandates on consumer protection and privacy, anti-terrorism, and
other initiatives have resulted in significant ongoing expense to the Bank, including compliance staffing costs and other
expenses associated with compliance-related software. However, as far as can be determined there has been no material
effect upon our capital expenditures, earnings, or competitive position as a result of environmental regulation at the federal,
state, or local level. The Company is not involved with chemicals or toxins that might have an adverse effect on the
environment, thus its primary exposure to environmental legislation is through lending activities. The Company’s lending
procedures include steps to identify and monitor this exposure in an effort to avoid any related loss or liability.
Recent Developments
On February 1, 2020, the Company added two new loan production teams – one in Northern California and the second
one in Southern California. The Northern team is based in a newly-opened dedicated loan production office in Rocklin,
located in the County of Sacramento. The Southern team is based out of our Santa Clarita Bank branch office located in
Los Angeles County. These two new business development groups created an expansion of the Bank’s footprint throughout
Northern and Southern California, offering business loan services not covered by a branch.
On May 18, 2018, the Company purchased most of the deposits of the Lompoc branch of Community Bank of Santa Maria,
located in Santa Barbara County. The purchase also included the Lompoc branch building, the real property on which the
building is located, and certain other equipment and fixed assets at their aggregate fair value of $1.7 million. The Lompoc
branch is now operating as a full-service branch of Bank of the Sierra. Lompoc branch deposits totaled $38 million at the
time of purchase, consisting of $32 million in non-maturity deposits and $6 million in time deposits. In accordance with
GAAP, the Company recorded a $1.2 million deposit purchase premium in connection with the transaction and is
amortizing that amount on a straight line basis over eight years.
Recent Accounting Pronouncements
Information on recent accounting pronouncements is contained in Note 2 to the consolidated financial statements.
Competition
The banking business in California is generally highly competitive, including in our market areas. Continued consolidation
within the banking industry has heightened competition in recent periods, following on the heels of a relatively large
number of FDIC-assisted takeovers of failed banks and other acquisitions of troubled financial institutions in the aftermath
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of the Great Recession. There are also a number of unregulated companies competing for business in our markets, with
financial products targeted at profitable customer segments. Many of those companies are able to compete across
geographic boundaries and provide meaningful alternatives to banking products and services. These competitive trends
are likely to continue.
With respect to commercial bank competitors, our business is dominated by a relatively small number of major banks that
operate a large number of offices within our geographic footprint. Based on June 30, 2020 FDIC combined market share
data for the 31 cities within which the Company currently maintains branches, the largest portion of deposits belongs to
Wells Fargo Bank with 22.2% of total combined deposits, followed by Bank of America (16.9%), JPMorgan Chase
(11.8%), and Union Bank (7.8%). Bank of the Sierra ranks sixth on the 2020 market share list with 4.6% of total deposits.
In Tulare County, however, where the Bank was originally formed, we rank first for deposit market share with 19.8% of
total deposits at June 30, 2020 and had the largest number of branch locations (13, including our online branch). The larger
banks noted above have, among other advantages, the ability to finance wide-ranging advertising campaigns and allocate
their resources to regions of highest yield and demand. They can also offer certain services that we do not provide directly
but may offer indirectly through correspondent institutions, and by virtue of their greater capitalization those banks have
legal lending limits that are substantially higher than ours. For loan customers whose needs exceed our legal lending limits,
we may arrange for the sale, or participation, of some of the balances to financial institutions that are not within our
geographic footprint.
In addition to other banks our competitors include savings institutions, credit unions, and numerous non-banking
institutions such as finance companies, leasing companies, insurance companies, brokerage firms, asset management
groups, mortgage banking firms and internet companies. Innovative technologies have lowered traditional barriers of entry
and enabled many of these companies to offer services that were previously considered traditional banking products, and
we have witnessed increased competition from companies that circumvent the banking system by facilitating payments
via the internet, mobile devices, prepaid cards, and other means.
Strong competition for deposits and loans among financial institutions and non-banks alike affects interest rates and terms
on which financial products are offered to customers. Mergers between financial institutions have created additional
pressures within the financial services industry to streamline operations, reduce expenses, and increase revenues in order
to remain competitive. Competition is also impacted by federal and state interstate banking laws which permit banking
organizations to expand into other states. The relatively large California market has been particularly attractive to out-of-
state institutions.
For years we have countered rising competition by offering a broad array of products with flexibility in structure and terms
that cannot always be matched by our competitors. We also offer our customers community-oriented, personalized service,
and rely on local promotional activity and personal contact by our employees. As noted above, layered onto our traditional
personal-contact banking philosophy are technology-driven initiatives that improve customer access and convenience.
Human Capital
As of December 31, 2020 the Company had 446 full-time and 66 part-time employees. On a full-time equivalent (“FTE”)
basis staffing stood at 501 at December 31, 2020, down from 513 FTE employees at December 31, 2019.
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At December 31, 2020, the population of our workforce was as follows:
Gender
Women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Men . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ethnicity
Asian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Black or African American . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hispanic or Latino . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Native Hawaiian or Other Pacific Islander . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Two or more races . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
White . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Total
75%
25%
% of Total
3%
1%
45%
1%
5%
45%
The Company recognizes that a diverse workforce brings fresh perspectives that can help strengthen and improve how we
serve our communities.
In response to the COVID-19 pandemic the Company established remote work arrangements with staff in an effort to
consider the health and safety of its employees. At December 31, 2020, the Company had 120 employees working
remotely. The Company is monitoring the current environment surrounding the pandemic and is evaluating all remote
work arrangements. It is anticipated that certain positions may continue with a remote work arrangement once the
pandemic is over due to efficiencies gained from such arrangements. There were no known adverse effects on financial
reporting systems, internal controls over financial reporting and disclosure control and procedures from the remote work
arrangements.
No employees were terminated or suspended due to the COVID-19 pandemic, although certain branch positions that
became vacant because of attrition were not immediately replaced due to temporary lobby closures and limited lobby
hours. It is anticipated that approximately 20 staff vacancies will be filled after branches return to normal lobby hours
sometime in March of 2021, although the exact timing of such cannot be currently determined with any degree of certainty.
The Company has long been committed to comprehensive and competitive compensation and benefits programs as the
Company recognizes that it operates in intensely competitive environments for talent. Retention of skilled and highly
trained employees is critical to the Company’s strategy of being a trusted resource to its communities and strengthening
relationships with its clients through employees. Community banking is often considered a relationship banking model
rather than a purely transactional banking model. The Company’s employees are critical to the Company’s ability to
develop and grow relationships with its clients. Recruiting talent within the Company’s footprint has always been a
fundamental strategy whenever possible and is facilitated by actively participating in and holding community job fairs.
Furthering the Company’s philosophy to attract and retain a pool of talented and motivated employees who will continue
to advance the purpose and contribute to the Company’s overall success, compensation and benefits programs include:
equity based compensation plan, health/dental/vision insurances, supplemental insurance, life insurance, 401(K) plan,
benefits under the Family Medical Leave Act, workers’ compensation, paid vacation and sick days, holiday pay,
training/education, leave for bereavement, military service and jury duty.
The Company invests in its employees’ future by sponsoring and prioritizing continued education throughout its employee
ranks. The Company encourages its employees to participate in educational activities, which improve or maintain their
skills in their current position, as well as to enhance future opportunities at the Company. The Company's employees are
notified periodically of available internal course offerings and educational seminars run by outside parties, including but
not limited to the American Bankers Association and Bankers Compliance Group. Employees are also encouraged to
continue their higher education at accredited colleges and universities and may receive assistance from the Company for
their participation.
In order to develop a workforce that aligns with the Company’s corporate values, it regularly sponsors local community
events so that its employees can better integrate themselves in communities. The Company believes that employees’ well-
6
being and personal and professional development is fostered by outreach to the communities it serves. The Company’s
employees’ desire for active community involvement enables the Company to sponsor a number of local community events
and initiatives, including food drives that resulted in 20,000 pounds of food and resources for local food pantries during
the COVID-19 pandemic.
Regulation and Supervision
Banks and bank holding companies are heavily regulated by federal and state laws and regulations. Most banking
regulations are intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of
shareholders. The following is a summary of certain statutes, regulations and regulatory guidance affecting the Company
and the Bank. This summary is not intended to be a complete explanation of such statutes, regulations and guidance, all
of which are subject to change in the future, nor does it fully address their effects and potential effects on the Company
and the Bank.
Regulation of the Company Generally
The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. As a bank holding company,
the Company is regulated under the Bank Holding Company Act of 1956 (the “BHC Act”), and is subject to supervision,
regulation and inspection by the Federal Reserve Board. The Company is also subject to certain provisions of the California
Financial Code which are applicable to bank holding companies. In addition, the Company is under the jurisdiction of the
SEC and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange
Act of 1934, each administered by the SEC. The Company’s common stock is listed on the NASDAQ Global Select market
(“NASDAQ”) with “BSRR” as its trading symbol, and the Company is subject to the rules of NASDAQ for listed
companies.
The Company is a bank holding company within the meaning of the BHC Act and is registered as such with the Federal
Reserve Board. A bank holding company is required to file annual reports and other information with the Federal Reserve
regarding its business operations and those of its subsidiaries. In general, the BHC Act limits the business of bank holding
companies to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be
so closely related to banking as to be a proper incident thereto, including securities brokerage services, investment advisory
services, fiduciary services, and management advisory and data processing services, among others. A bank holding
company that also qualifies as and elects to become a “financial holding company” may engage in a broader range of
activities that are financial in nature or complementary to a financial activity (as determined by the Federal Reserve or
Treasury regulations), such as securities underwriting and dealing, insurance underwriting and agency, and making
merchant banking investments. The Company has not elected to become a financial holding company but may do so at
some point in the future if deemed appropriate in view of opportunities or circumstances at the time.
The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition of more than five percent of the
voting shares of a commercial bank or its parent holding company. Acquisitions by the Bank are subject instead to the
Bank Merger Act, which requires the prior approval of an acquiring bank’s primary federal regulator for any merger with
or acquisition of another bank. Acquisitions by both the Company and the Bank also require the prior approval of the
California Department of Financial Protection and Innovation (the “DFPI”) pursuant to the California Financial Code.
The Company and the Bank are deemed to be “affiliates” of each other and thus are subject to Sections 23A and 23B of
the Federal Reserve Act as well as related Federal Reserve Regulation W which impose both quantitative and qualitative
restrictions and limitations on transactions between affiliates. The Bank is also subject to laws and regulations requiring
that all extensions of credit to our executive officers, directors, principal shareholders and related parties must, among
other things, be made on substantially the same terms and follow credit underwriting procedures no less stringent than
those prevailing at the time for comparable transactions with persons not related to the Bank.
Under certain conditions, the Federal Reserve has the authority to restrict the payment of cash dividends by a bank holding
company as an unsafe and unsound banking practice, and may require a bank holding company to obtain the approval of
the Federal Reserve prior to purchasing or redeeming its own equity securities. The Federal Reserve also has the authority
to regulate the debt of bank holding companies.
7
A bank holding company is required to act as a source of financial and managerial strength for its subsidiary banks and
must commit resources as necessary to support such subsidiaries. The Federal Reserve may require a bank holding
company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the holding
company’s payment of dividends to the shareholders in such circumstances.
Regulation of the Bank Generally
As a state chartered bank, the Bank is subject to broad federal regulation and oversight extending to all its operations by
the FDIC and to state regulation by the DFPI. The Bank is also subject to certain regulations of the Federal Reserve Board.
Capital Simplification for Qualifying Community Banking Organization
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 (see below for further discussion of the requirements for well capitalized and the Prompt Corrective
Action framework).
A qualifying community banking organization with a leverage ratio of greater than 9 percent may opt into the community
bank leverage ratio framework if it 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 Company and the Bank met the criteria outlined in the
final rule and opted into the community bank leverage ratio framework in the first quarter 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law. Section 4012 of
the CARES Act directs the agencies to issue an interim final rule providing that, for purposes of section 201 of Economic
Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), the community bank leverage ratio shall be 8
percent, and a qualifying community banking organization whose leverage ratio falls below the community bank leverage
ratio requirement established under the CARES Act shall have a reasonable grace period to satisfy the requirement.
Section 4012 of the CARES Act specifies that the interim final rule is effective during the period beginning on the date on
which the agencies issue the interim final rule and ending on the sooner of the termination date of the national emergency
concerning the coronavirus disease (COVID-19) outbreak declared by the President on March 13, 2020, under the National
Emergencies Act, or December 31, 2020 (termination date). Since the statutory interim final rule could cease to be effective
at any time before December 31, 2020, the agencies issued a separate interim final rule pursuant to section 201(b) of
EGRRCPA that provides a graduated transition from the temporary 8-percent community bank leverage ratio requirement
to the 9-percent community bank leverage ratio requirement as established under the 2019 final rule (transition interim
final rule). Specifically, the transition interim final rule provides that, once the statutory interim final rule ceases to apply,
the community bank leverage ratio will be 8 percent in the second quarter through fourth quarter of calendar year 2020,
8.5 percent in calendar year 2021, and 9 percent thereafter. The transition interim final rule also modifies the two-quarter
grace period for a qualifying community banking organization to account for the graduated increase in the community
bank leverage ratio requirement. The interim final rules do not make any changes to the other qualifying criteria in the
community bank leverage ratio framework. The transition interim final rule extends the 8-percent community bank
leverage ratio through December 31, 2020, in the event the statutory interim final rule terminates before December 31,
2020. Thus, even if the statutory interim final rule had terminated prior to December 31, 2020, the community bank
leverage ratio would have continued to be set at 8 percent for the remainder of 2020. Section 201 of EGRRCPA requires
a qualifying community banking organization to exceed the community bank leverage ratio established by the agencies in
order to be considered to have met the generally applicable rule, any other applicable capital or leverage requirements,
and, if applicable, the “well capitalized” capital ratio requirements, whereas section 4012 of the CARES Act requires that
a qualifying community banking organization meet or exceed an 8 percent community bank leverage ratio to be considered
the same.
8
Capital Adequacy Requirements
The Company and the Bank are subject to the regulations of the Federal Reserve Board and the FDIC, respectively,
governing capital adequacy. These agencies have adopted risk-based capital guidelines to provide a systematic analytical
framework that imposes regulatory capital requirements based on differences in risk profiles among banking organizations,
considers off-balance sheet exposures in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-
risk assets. Capital levels, as measured by these standards, are also used to categorize financial institutions for purposes of
certain prompt corrective action regulatory provisions.
Pursuant to the adoption of final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for
all U.S. banks and bank holding companies with more than $500 million in assets, minimum regulatory requirements for
both the quantity and quality of capital held by the Company and the Bank increased effective January 1, 2015.
Furthermore, a capital class known as Common Equity Tier 1 capital was established in addition to Tier 1 capital and Tier
2 capital, and most financial institutions were given the option of a one-time election to continue to exclude accumulated
other comprehensive income (“AOCI”) from regulatory capital. The Company has exercised its option to exclude AOCI
from regulatory capital. The final rules also increased capital requirements for certain categories of assets, including
higher-risk construction and real estate loans, certain past-due or nonaccrual loans, and certain exposures related to
securitizations. The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred
securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the Tier 1 capital of
banking organizations with total consolidated assets of less than $15 billion at December 31, 2009, subject to a limit of
25% of Tier 1 capital. All of the Company’s trust preferred securities were issued prior to that date and continue to qualify
as Tier 1 capital.
Our Common Equity Tier 1 capital includes common stock, additional paid-in capital, and retained earnings, less the
following: disallowed goodwill and intangibles, disallowed deferred tax assets, and any insufficient additional capital to
cover the deductions. Tier 1 capital is generally defined as the sum of core capital elements, less the following: goodwill
and other intangible assets, accumulated other comprehensive income, disallowed deferred tax assets, and certain other
deductions. The following items are defined as core capital elements: (i) common shareholders’ equity; (ii) qualifying non-
cumulative perpetual preferred stock and related surplus (and, in the case of holding companies, senior perpetual preferred
stock issued to the U.S. Treasury Department pursuant to the Troubled Asset Relief Program); (iii) minority interests in
the equity accounts of consolidated subsidiaries; and (iv) “restricted” core capital elements (which include qualifying trust
preferred securities) up to 25% of all core capital elements. Tier 2 capital includes the following supplemental capital
elements: (i) allowance for loan and lease losses (but not more than 1.25% of an institution’s risk-weighted assets);
(ii) perpetual preferred stock and related surplus not qualifying as core capital; (iii) hybrid capital instruments, perpetual
debt and mandatory convertible debt instruments; and, (iv) term subordinated debt and intermediate-term preferred stock
and related surplus. The maximum amount of Tier 2 capital is capped at 100% of Tier 1 capital.
The final rules established a regulatory minimum of 4.5% for common equity Tier 1 capital to total risk weighted assets
(“Common Equity Tier 1 RBC Ratio”), a minimum of 6.0% for Tier 1 capital to total risk weighted assets (“Tier 1 Risk-
Based Capital Ratio” or “Tier 1 RBC Ratio”), a minimum of 8.0% for qualifying Tier 1 plus Tier 2 capital to total risk
weighted assets (“Total Risk-Based Capital Ratio” or “Total RBC Ratio”), and a minimum of 4.0% for the Leverage Ratio,
which is defined as Tier 1 capital to adjusted average assets (quarterly average assets less the disallowed capital items
noted above). In addition to the other minimum risk-based capital standards, the final rules also require a Common Equity
Tier 1 capital conservation buffer which became fully phased in at 2.5% of risk-weighted assets beginning on January 1,
2019. Effective January 1, 2019, the buffer effectively raises the minimum required Common Equity Tier 1 RBC Ratio to
7.0%, the Tier 1 RBC Ratio to 8.5%, and the Total RBC Ratio to 10.5%. Institutions that do not maintain the required
capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be
paid out in dividends or used for stock repurchases, and on the payment of discretionary bonuses to executive management.
Based on our capital levels at December 31, 2020 and 2019, the Company and the Bank met all capital adequacy
requirements to which they are subject, including utilizing the Capital Simplification for Qualifying Community Bank
Organization as applicable. For more information on the Company’s capital, see Part II, Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operation – Capital Resources. Risk-based capital ratio (“RBC”)
requirements are discussed in greater detail in the following section.
9
Prompt Corrective Action Provisions
Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured
financial institutions, including but not limited to those that fall below one or more of the prescribed minimum capital
ratios. The federal banking agencies have by regulation defined the following five capital categories: “well capitalized”
(Total RBC Ratio of 10%; Tier 1 RBC Ratio of 8%; Common Equity Tier 1 RBC Ratio of 6.5%; and Leverage Ratio of
5%); “adequately capitalized” (Total RBC Ratio of 8%; Tier 1 RBC Ratio of 6%; Common Equity Tier 1 RBC Ratio of
4.5%; and Leverage Ratio of 4%); “undercapitalized” (Total RBC Ratio of less than 8%; Tier 1 RBC Ratio of less than
6%; Common Equity Tier 1 RBC Ratio of less than 4.5%; or Leverage Ratio of less than 4%); “significantly
undercapitalized” (Total RBC Ratio of less than 6%; Tier 1 RBC Ratio of less than 4%; Common Equity Tier 1 RBC Ratio
of less than 3%; or Leverage Ratio less than 3%); and “critically undercapitalized” (tangible equity to total assets less than
or equal to 2%). A bank may be treated as though it were in the next lower capital category if, after notice and the
opportunity for a hearing, the appropriate federal agency finds an unsafe or unsound condition or practice merits a
downgrade, but no bank may be treated as “critically undercapitalized” unless its actual tangible equity to assets ratio
warrants such treatment. As of December 31, 2020 and 2019, both the Company and the Bank qualified as well capitalized
for regulatory capital purposes, including utilizing the Capital Simplification for Qualifying Community Bank
Organization, as applicable.
At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. For
example, a bank is generally prohibited from paying management fees to any controlling persons or from making capital
distributions if to do so would cause the bank to be “undercapitalized.” Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements
(including a guarantee by the parent holding company, if any). “Significantly undercapitalized” banks are subject to broad
regulatory authority, including among other things capital directives, forced mergers, restrictions on the rates of interest
they may pay on deposits, restrictions on asset growth and activities, and prohibitions on paying bonuses or increasing
compensation to senior executive officers without FDIC approval. Even more severe restrictions apply to “critically
undercapitalized” banks. Most importantly, except under limited circumstances, not later than 90 days after an insured
bank becomes critically undercapitalized the appropriate federal banking agency is required to appoint a conservator or
receiver for the bank.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential
actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any
law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the issuance of cease and desist orders, termination of insurance on deposits (in the case
of a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal
agreements, or removal and prohibition orders against “institution-affiliated” parties.
Safety and Soundness Standards
The federal banking agencies have also adopted guidelines establishing safety and soundness standards for all insured
depository institutions. Those guidelines relate to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation, and liquidity and interest rate exposure. In general, the standards are
designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions
before capital becomes impaired. If an institution fails to meet the requisite standards, the appropriate federal banking
agency may require the institution to submit a compliance plan and could institute enforcement proceedings if an
acceptable compliance plan is not submitted or followed.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
Legislation and regulations enacted and implemented since 2008 in response to the U.S. economic downturn and financial
industry instability continue to impact most institutions in the banking sector. Most provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd-Frank”), which was enacted in 2010, are now effective and have been
fully implemented.
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Some aspects of Dodd-Frank are still subject to rulemaking, making it difficult to anticipate the ultimate financial impact
on the Company, its customers or the financial services industry more generally. However, many provisions of Dodd-
Frank are already affecting our operations and expenses, including but not limited to changes in FDIC assessments, the
permitted payment of interest on demand deposits, and enhanced compliance requirements. Some of the rules and
regulations promulgated or yet to be promulgated under Dodd-Frank will apply directly only to institutions much larger
than ours, but could indirectly impact smaller banks, either due to competitive influences or because certain required
practices for larger institutions may subsequently become expected “best practices” for smaller institutions. We could see
continued attention and resources devoted by the Company to ensure compliance with the statutory and regulatory
requirements engendered by Dodd-Frank.
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act made significant changes that
impact corporate taxation, including the reduction of the maximum federal income tax rate for corporations from 35% to
21% and changes or limitations to certain tax deductions. The reduced tax rate had a favorable impact on our tax expense
beginning in 2018, as our blended marginal income tax rate dropped to 29.6% in 2018 from 42.1% in 2017. The tax rate
reduction also resulted in an adjustment to our deferred tax assets and liabilities to reflect their value to the Company at
the lower federal tax rate of 21%, with such revaluation required in the period in which the legislation was enacted. As a
result of this change, we reduced our net deferred tax asset by $2.71 million via a charge to our income tax provision in
December 2017.
Deposit Insurance
The Bank’s deposits are insured up to maximum applicable limits under the Federal Deposit Insurance Act, and the Bank
is subject to deposit insurance assessments to maintain the FDIC’s Deposit Insurance Fund (the “DIF”). In October 2010,
the FDIC adopted a revised restoration plan to ensure that the DIF’s designated reserve ratio (“DRR”) reaches 1.35% of
insured deposits by September 30, 2020, the deadline mandated by the Dodd-Frank Act. In August 2016 the FDIC
announced that the DIF reserve ratio had surpassed 1.15% as of June 30, 2016 and assessment rates for most institutions
were adjusted downward, but institutions with $10 billion or more in assets were assessed a quarterly surcharge which will
continue until the reserve ratio reaches the statutory minimum of 1.35%. Furthermore, the restoration plan proposed an
increase in the DRR to 2% of estimated insured deposits as a long-term goal for the fund. On September 30, 2018, the DIF
ratio reached 1.36 percent. Because the ratio exceeded 1.35 percent, two deposit insurance assessment changes occurred
under FDIC regulations: surcharges on large banks (total consolidated assets of $10 billion or more) ended, with the last
surcharge on large banks being collected on December 28, 2018; and, banks with total consolidated assets of less than $10
billion were awarded credits for the portion of their assessments that contributed to the growth in the reserve ratio from
1.15 percent to 1.35 percent, to be applied when the reserve ratio is at least 1.38 percent. Bank of the Sierra received credits
to reduce our FDIC assessments.
As noted above, the Dodd-Frank Act provided for a permanent increase in FDIC deposit insurance per depositor from
$100,000 to $250,000 retroactive to January 1, 2008. Furthermore, effective in the second quarter of 2011, FDIC deposit
insurance premium assessment rates were adjusted, and the assessment base was established as an institution’s total assets
less tangible equity. We are generally unable to control the amount of premiums that we are required to pay for FDIC
deposit insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, we may
be required to pay higher FDIC premiums, which could have a material adverse effect on our earnings and/or on the value
of, or market for, our common stock.
In addition to DIF assessments, banks were required to pay quarterly assessments that were applied to the retirement of
Financing Corporation bonds issued in the 1980’s to assist in the recovery of the savings and loan industry. The Financing
Corporation bonds matured in September 2019, with a final assessment of 0.12 basis points of insured deposits in
March 2019.
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Community Reinvestment Act
The Bank is subject to certain requirements and reporting obligations involving Community Reinvestment Act (“CRA”)
activities. The CRA generally requires federal banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income neighborhoods. The CRA further requires
the agencies to consider a financial institution’s efforts in meeting its community credit needs when evaluating applications
for, among other things, domestic branches, mergers or acquisitions, or the formation of holding companies. In measuring
a bank’s compliance with its CRA obligations, the regulators utilize a performance-based evaluation system under which
CRA ratings are determined by the bank’s actual lending, service, and investment performance, rather than on the extent
to which the institution conducts needs assessments, documents community outreach activities or complies with other
procedural requirements. In connection with its assessment of CRA performance, the FDIC assigns a rating of
“outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The Bank most recently received a
“needs to improve” CRA assessment rating in December 2020.
On September 21, 2020, the FDIC issued an advance notice of proposed rulemaking on updating the agency’s three-
decade-old CRA regulations. The objectives of the new rules include, more effectively meeting the needs of low-to-
moderate-income communities and address disparities in credit access, increasing the clarity consistency and transparency
of supervisory expectations and standards regarding where activities are assessed, which activities count and how eligible
activities are assessed, while minimizing data collection burden, tailoring CRA supervision based on size, business model,
local market conditions, etc., updating standards to reflect changes in banking over time, including the increased use of
mobile and internet delivery channels, promoting community engagement, strengthening the special treatment of minority
depository institutions, and recognizing that CRA and fair lending responsibilities are mutually reinforcing. The Company
intends to monitor this proposal so that our CRA efforts are in compliance with any changes to the old rules once
implemented.
Privacy and Data Security
The Gramm-Leach-Bliley Act, also known as the Financial Modernization Act of 1999 (the “Financial Modernization
Act”), imposed requirements on financial institutions with respect to consumer privacy. Financial institutions, however,
are required to comply with state law if it is more protective of consumer privacy than the Financial Modernization Act.
The Financial Modernization Act generally prohibits disclosure of consumer information to non-affiliated third parties
unless the consumer has been given the opportunity to object and has not objected to such disclosure. The statute also
directed federal regulators, including the Federal Reserve and the FDIC, to establish standards for the security of consumer
information, and requires financial institutions to disclose their privacy policies to consumers annually.
Overdrafts
The Electronic Funds Transfer Act, as implemented by the Federal Reserve’s Regulation E, governs transfers initiated
through automated teller machines (“ATMs”), point-of-sale terminals, and other electronic banking services. Regulation
E prohibits financial institutions from assessing an overdraft fee for paying ATM and one-time point-of-sale debit card
transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions. The opt-in
provision establishes requirements for clear disclosure of fees and terms of overdraft services for ATM and one-time debit
card transactions. The rule does not apply to other types of transactions, such as check, automated clearinghouse (“ACH”)
and recurring debit card transactions. Additionally, in November 2010 the FDIC issued its Overdraft Guidance on
automated overdraft service programs, to ensure that a bank mitigates the risks associated with offering automated
overdraft payment programs and complies with all consumer protection laws and regulations.
Consumer Financial Protection and Financial Privacy
Dodd-Frank created the Consumer Finance Protection Bureau (the “CFPB”) as an independent entity with broad
rulemaking, supervisory and enforcement authority over consumer financial products and services including deposit
products, residential mortgages, home-equity loans and credit cards. The CFPB’s functions include investigating consumer
complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and
enforcing rules related to consumer financial products and services. CFPB regulations and guidance apply to all financial
12
institutions, including the Bank, although only banks with $10 billion or more in assets are subject to examination by the
CFPB. Banks with less than $10 billion in assets, including the Bank, are examined for compliance by their primary federal
banking agency.
In January 2013, the CFPB issued final regulations governing consumer mortgage lending. Certain rules which became
effective in January 2014 impose additional requirements on lenders, including the directive that lenders need to ensure
the ability of their borrowers to repay mortgages. The CFPB also finalized a rule on escrow accounts for higher priced
mortgage loans and a rule expanding the scope of the high-cost mortgage provision in the Truth in Lending Act. The CFPB
also issued final rules implementing provisions of the Dodd-Frank Act that relate to mortgage servicing. In
November 2013 the CFPB issued a final rule on integrated and simplified mortgage disclosures under the Truth in Lending
Act and the Real Estate Settlement Procedures Act, which became effective in October 2015.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including,
among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices
are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer
financial product or service or take unreasonable advantage of a consumer’s: (i) lack of financial savvy, (ii) inability to
protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered
entity to act in the consumer’s interests.
The Bank continues to be subject to numerous other federal and state consumer protection laws that extensively govern its
relationship with its customers. Those laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the
Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act,
the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt
Collection Practices Act, the Right to Financial Privacy Act, the Service Members Civil Relief Act, and respective state-
law counterparts to these laws, as well as state usury laws and laws regarding unfair and deceptive acts and practices.
These and other laws require disclosures including the cost of credit and terms of deposit accounts, provide substantive
consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide
financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Company’s ability to raise
interest rates and otherwise subject the Company to substantial regulatory oversight.
In addition, as is the case with all financial institutions, the Bank is required to maintain the privacy of its customers’ non-
public, personal information. Such privacy requirements direct financial institutions to: (i) provide notice to customers
regarding privacy policies and practices; (ii) inform customers regarding the conditions under which their non-public
personal information may be disclosed to non-affiliated third parties; and (iii) give customers an option to prevent
disclosure of such information to non-affiliated third parties.
Identity Theft
Under the Fair and Accurate Credit Transactions Act (the “FACT Act”), the Bank is required to develop and implement a
written Identity Theft Prevention Program to detect, prevent and mitigate identity theft “red flags” in connection with
certain existing accounts or the opening of certain accounts. Under the FACT Act, the Bank is required to adopt reasonable
policies and procedures to (i) identify relevant red flags for covered accounts and incorporate those red flags into the
program; (ii) detect red flags that have been incorporated into the program; (iii) respond appropriately to any red flags that
are detected to prevent and mitigate identity theft; and (iv) ensure the program is updated periodically, to reflect changes
in risks to customers or to the safety and soundness of the financial institution or creditor from identity theft. The Bank
maintains a program to meet the requirements of the FACT Act and the Bank believes it is currently in compliance with
these requirements.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”), together with Dodd-
Frank, relaxed prior interstate branching restrictions under federal law by permitting, subject to regulatory approval, state
and federally chartered commercial banks to establish branches in states where the laws permit banks chartered in such
states to establish branches. The Interstate Act requires regulators to consult with community organizations before
13
permitting an interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit
banks from using their interstate branches primarily for deposit production and the federal banking agencies have
implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition. Dodd-Frank effectively eliminated
the prohibition under California law against interstate branching through de novo establishment of California branches.
Interstate branches are subject to certain laws of the states in which they are located. The Bank presently does not have
any interstate branches.
USA Patriot Act of 2001
The impact of the USA Patriot Act of 2001 (the “Patriot Act”) on financial institutions of all kinds has been significant
and wide ranging. The Patriot Act substantially enhanced anti-money laundering and financial transparency laws, and
required certain regulatory authorities to adopt rules that promote cooperation among financial institutions, regulators, and
law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Under the Patriot
Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships,
as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions
and foreign customers. The Patriot Act also requires all financial institutions to establish anti-money laundering programs.
The Bank expanded its Bank Secrecy Act compliance staff and intensified due diligence procedures concerning the
opening of new accounts to fulfill the anti-money laundering requirements of the Patriot Act, and also implemented
systems and procedures to identify suspicious banking activity and report any such activity to the Financial Crimes
Enforcement Network.
Incentive Compensation
In June 2010, the FRB and the FDIC issued comprehensive final guidance on incentive compensation policies intended to
help ensure that banking organizations do not undermine their own safety and soundness by encouraging excessive risk-
taking. The guidance, which covers all employees who have the ability to materially affect the risk profile of an
organization, either individually or as part of a group, is based upon the key principles that incentive compensation
arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to
effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be
supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The regulatory agencies will review, as part of their regular risk-focused examination process, the incentive compensation
arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” Where
appropriate, the regulatory agencies will take supervisory or enforcement action to address perceived deficiencies in an
institution’s incentive compensation arrangements or related risk-management, control, and governance processes. The
Company believes that it is in full compliance with the regulatory guidance on incentive compensation policies.
Sarbanes-Oxley Act of 2002
The Company is subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) which addresses, among other issues,
corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate
information. Among other things, Sarbanes-Oxley mandates chief executive and chief financial officer certifications of
periodic financial reports, additional financial disclosures concerning off-balance sheet items, and accelerated share
transaction reporting for executive officers, directors and 10% shareholders. In addition, Sarbanes-Oxley increased
penalties for non-compliance with the Exchange Act. SEC rules promulgated pursuant to Sarbanes-Oxley impose
obligations and restrictions on auditors and audit committees intended to enhance their independence from Management,
and include extensive additional disclosure, corporate governance and other related rules.
Commercial Real Estate Lending Concentrations
As a part of their regulatory oversight, the federal regulators have issued guidelines on sound risk management practices
with respect to a financial institution’s concentrations in commercial real estate (“CRE”) lending activities. These
guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to
unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. The
guidelines identify certain concentration levels that, if exceeded, will expose the institution to additional supervisory
14
analysis with regard to the institution’s CRE concentration risk. The guidelines, as amended, are designed to promote
appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE
loans. In general, the guidelines, as amended, establish the following supervisory criteria as preliminary indications of
possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent
100% or more of Tier 1 risk-based capital plus allowance for loan and lease losses; or (2) total CRE loans as defined in
the regulatory guidelines represent 300% or more of Tier 1 risk-based capital plus allowance for loan and lease losses, and
the institution’s CRE loan portfolio has increased by 50% or more during the prior 36 month period. At December 31,
2020, the Bank’s total construction, land development and other land loans represented 36% of Tier 1 risk-based capital
plus allowance for loan and lease losses. At December 31, 2020, the Bank’s total CRE loans as defined in the regulatory
guidelines represented 378% of Tier 1 risk-based capital plus allowance for loan and lease losses, and the Bank’s CRE
loan portfolio has increased by more than 50% during the prior 36 month period. Therefore, the Bank believes that the
guidelines are applicable to it as it has a potential concentration in CRE loans. The Bank and its board of directors have
discussed the guidelines and believe that the Bank’s underwriting policies, management information systems, independent
credit administration process, and monitoring of real estate loan concentrations are sufficient to address the risk
management of CRE under the guidelines.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general
are pending, and additional initiatives may be proposed or introduced before the United States Congress, the California
legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure,
regulation and competitive relationship among financial institutions, and may subject the Bank to increased regulation,
disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and
regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such
legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected
thereby.
Article I. ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors and all other information contained in this Annual Report before
making investment decisions concerning the Company’s common stock. The risks and uncertainties described below are
not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company, or that the
Company currently believes are immaterial, may also adversely impact the Company’s business. If any of the events
described in the following risk factors occur, the Company’s business, results of operations and financial condition could
be materially adversely affected. In addition, the market price of the Company’s common stock could decline due to any
of the events described in these risks.
Section 1.01 Risks Relating to the COVID-19 Pandemic
Our business has been and may in the future be adversely affected by volatile conditions in the financial markets
and unfavorable economic conditions generally, including continued impact from the ongoing COVID-19
pandemic. National and global economies are constantly in flux, as evidenced by market volatility both recently and
in years past. Future economic conditions cannot be predicted, and recurrent deterioration in the economies of the nation
as a whole or in the Company’s markets could have an adverse effect, which could be material, on our business, financial
condition, results of operations and future prospects, and could cause the market price of the Company’s stock to decline.
California’s San Joaquin Valley, where the Company is headquartered and has many of its branch locations, was
particularly hard hit by the COVID-19 pandemic and its effect on the economy. Unemployment levels have historically
been elevated in the San Joaquin Valley, including Tulare County which is our geographic center, but recessionary
conditions, precipitated by the COVID-19 Great Lockdown, pushed unemployment rates to exceptionally high levels in
2020. The highest unemployment rate for Tulare County pre-pandemic was 19.3% in March 2010; the unemployment rate
reached that same high of 19.3% again in April 2020. The Tulare county unemployment rate declined to 8.8% by
December 2020, an uptick from the 8.1% unemployment rate for November 2020. In addition, as discussed below in
connection with challenges facing the agricultural industry, the persistence of a California drought could have a significant
15
negative impact on unemployment rates in our market areas. Furthermore, a drop in oil prices like the decline experienced
in recent years could also negatively impact unemployment rates, particularly in Kern County.
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 the ongoing COVID-19 pandemic 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 and lease 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 existing and new assets that exceed the
decline in our cost of interest-bearing liabilities, which may reduce our net interest margin.
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.
The impact of the adoption of the CECL standard in 2022, which is highly dependent on unemployment rate
forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net
income.
While governmental authorities have taken unprecedented measures to provide economic assistance to individual
households and businesses, stabilize the markets, and support economic growth, the success of these measures is unknown,
and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic. Further, some measures,
such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on our business,
while our participation in other measures could result in reputational harm, litigation, or regulatory and government
actions, proceedings, or penalties.
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. For
the most part, branches remain open to serve our customers and local communities, with modified hours and strict social
distancing protocols in place as well as limiting most of our branches to walk-up or drive-up visits. Our customers have
been encouraged to utilize branch alternatives such as our ATMs, online banking, and mobile banking application in lieu
of in-branch transactions. In addition, many employees are working remotely. Travel, as well as face-to-face meeting
restrictions are in effect for Bank personnel. Further, given the increase of the risk of cyber-security incidents during the
pandemic, we have enhanced our cyber-security 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
16
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.
Section 1.02 Risks Relating to the Bank and our Business
Our business has been and may in the future be adversely affected by volatile conditions in the financial markets
and unfavorable economic conditions generally. National and global economies are constantly in flux, as evidenced by
market volatility both recently and in years past. Future economic conditions cannot be predicted, and recurrent
deterioration in the economies of the nation as a whole or in the Company’s markets could have an adverse effect, which
could be material, on our business, financial condition, results of operations and future prospects, and could cause the
market price of the Company’s stock to decline.
Until the recent recession caused by COVID-19, the U.S. economy had undergone a continued and gradual expansion
since 2009. Financial stress on borrowers as a result of an uncertain future economic environment could still have an
unfavorable effect on the ability of the Company’s borrowers to repay their loans, which could adversely affect the
Company’s business, financial condition and results of operations.
Economic conditions are currently stressed although appear relatively stable in most of our local markets. The State of
California has imposed mandatory restrictions on travel and prescribed rules and protocols that have directly and indirectly
impacted many sectors in our local economy. The hospitality segment which is strained due to the stay at home order in
place off and on throughout 2020 and the first 25 days of 2021. Adverse developments, such as, among other things, health
epidemics or pandemics (or expectations about them) like the novel coronavirus, international trade disputes, inflation
risks, oil price volatility, the level of U.S. debt and global economic conditions, could depress business and/or consumer
confidence levels, negatively impact real estate values, and otherwise lead to economic weakness which could have one
or more of the following undesirable effects on our business:
a lack of demand for loans, or other products and services offered by us;
a decline in the value of our loans or other assets secured by real estate;
a decrease in deposit balances due to increased pressure on the liquidity of our customers;
an impairment of our investment securities; or
an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or
default on their loans or other obligations to us, which in turn could result in higher levels of nonperforming
assets, net charge-offs and provisions for credit losses.
Changes in interest rates could adversely affect our profitability, business and prospects. Net interest income, and
therefore earnings, can be adversely affected by differences or changes in the interest rates on, or the repricing frequency
of, our financial instruments. In a period of low-interest rates, yields on new investments or loans may be lower than
existing yields or lower than yields on earning assets that have prepaid or matured. In addition, fluctuations in interest
rates can affect the demand of customers for products and services, and an increase in the general level of interest rates
may adversely affect the ability of certain borrowers to make variable-rate loan payments. The speed and absolute level of
increase or decrease in interest rates can have a material impact on the net interest income and economic value of equity
of the Bank depending on the asset liability profile at any point in time. Changes in market interest rates could have a
material adverse effect on the Company’s asset quality, loan origination volume, financial condition, results of operations,
and cash flows. This interest rate risk can arise from Federal Reserve Board monetary policies, as well as other economic,
regulatory and competitive factors that are beyond our control.
Challenges in the agricultural industry could have an adverse effect on our customers and their ability to make
payments to us, particularly in view of recent drought conditions in California and disruptions involving
international trade. Difficulties experienced by the agricultural industry have led to relatively high levels of
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nonperforming assets in previous economic cycles. This is due to the fact that a considerable portion of our borrowers are
involved in, or are impacted to some extent by, the agricultural industry. While a great number of our borrowers are not
directly involved in agriculture, they would likely be impacted by difficulties in the agricultural industry since many jobs
in our market areas are ancillary to the regular production, processing, marketing and sale of agricultural commodities.
The markets for agricultural products can be adversely impacted by increased supply from overseas competition, a drop
in consumer demand, tariffs and numerous other factors. In recent periods in particular, retaliatory tariffs levied by certain
countries in response to tariffs imposed by the US Government on imports from those countries have created a high degree
of uncertainty and disruption in the agricultural community in California, due to the level of goods that are exported. The
ripple effect of any resulting drop in commodity prices could lower borrower income and depress collateral values.
Weather patterns are also of critical importance to row crop, tree fruit, and citrus production. A degenerative cycle of
weather has the potential to adversely affect agricultural industries as well as consumer purchasing power, and could lead
to higher unemployment throughout the San Joaquin Valley. In recent years, the state of California experienced the worst
drought in its recorded history, and it is difficult to predict if the drought will resume and how long it might last. Another
looming issue that could have a major impact on the agricultural industry involves water availability and distribution rights.
If the amount of water available to agriculture becomes increasingly scarce as a result of diversion to other uses, farmers
may not be able to continue to produce agricultural products at a reasonable profit, which has the potential to force many
out of business. Such conditions have affected and may continue to adversely affect our borrowers and, by extension, our
business, and if general agricultural conditions decline our level of nonperforming assets could increase.
Another significant drop in oil prices could have an adverse impact on our customers and their ability to make
payments to us, particularly in areas such as Kern County where oil production is a key economic driver. As we
have experienced in the past, a drop in oil prices could lead to declines in property values and property taxes, particularly
in Kern County, which is home to about three quarters of California’s oil production. The Company does not have direct
exposure to oil producers, and our exposure via loans outstanding to borrowers involved in servicing oil companies totaled
only $10.1 million at December 31, 2020. However, if cash flows are disrupted for our energy-related borrowers, or if
other borrowers are indirectly impacted and/or non-oil property values decline, our level of nonperforming assets and loan
charge-offs could increase. Furthermore, economic multipliers to a contracting oil industry include the prospects of a
depressed residential housing market and a drop in commercial real estate values.
We may not be able to continue to attract and retain banking customers, and our efforts to compete may reduce
our profitability. The banking business in our market areas is highly competitive with respect to virtually all products
and services, which may limit our ability to attract and retain banking customers. In California generally, and in our service
areas specifically, major banks dominate the commercial banking industry. Such banks have substantially greater lending
limits than we have, offer certain services we cannot offer directly, and often operate with economies of scale that result
in relatively low operating costs. We also compete with numerous financial and quasi-financial institutions for deposits
and loans, including providers of financial services via the internet. Recent advances in technology and other changes have
allowed parties to effectuate financial transactions that previously required the involvement of banks. For example,
consumers can maintain funds in brokerage accounts or mutual funds that would have historically been held as bank
deposits. Consumers can also complete transactions such as paying bills and transferring funds directly without the
assistance of banks. The process of eliminating banks as intermediaries, known as disintermediation, could result in the
loss of customer deposits and the fee income generated by those deposits. The loss of these revenue streams and access to
lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of
operations.
Moreover, with the large number of bank failures in the past decade, some customers continue to be concerned about the
extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to ensure that the
amount they have on deposit with their bank is fully insured. Decreases in deposits may adversely affect our funding costs
and net income. Ultimately, competition can and does increase our cost of funds, reduce loan yields and drive down our
net interest margin, thereby reducing profitability. It can also make it more difficult for us to continue to increase the size
of our loan portfolio and deposit base, and could cause us to rely more heavily on wholesale borrowings which are
generally more expensive than retail deposits.
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The value of the securities in our investment portfolio may be negatively affected by market disruptions, adverse
credit events or fluctuations in interest rates, which could have a material adverse impact on capital levels. Our
available-for-sale investment securities are reported at their estimated fair values, and fluctuations in fair values can result
from changes in market interest rates, rating agency actions, issuer defaults, illiquid markets and limited investor demand,
among other things. Under current accounting rules, as long as the change in the fair value of a security is not considered
to be “other than temporary,” we directly increase or decrease accumulated other comprehensive income in shareholders’
equity by the amount of the change in fair value, net of the tax effect. Because of the size of our fixed income bond
portfolio relative to total assets, a relatively large increase in market interest rates, in particular, could result in a material
drop in fair values and, by extension, our capital. Investment securities that have an amortized cost in excess of their
current fair value at the end of a reporting period are also evaluated for other-than-temporary impairment. If such
impairment is indicated, the difference between the amortized cost and the fair value of those securities will be recorded
as a charge in our income statement, which could also have a material adverse effect on our results of operations and
capital levels.
We are exposed to the risk of environmental liabilities with respect to properties to which we obtain title.
Approximately 77.0% of our loan portfolio at December 31, 2020 consisted of real estate loans. In the normal course of
business we may foreclose and take title to real estate collateral, and could be subject to environmental liabilities with
respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal
injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may
be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated
with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. These costs and claims could adversely affect our business
and prospects.
Section 1.03 Risks Related to our Loans
Concentrations of real estate loans have negatively impacted our performance in the past, and could subject us to
further risks in the event of another real estate recession or natural disaster. Our loan portfolio is heavily concentrated
in real estate loans, particularly commercial real estate. At December 31, 2020, 77.0% of our loan portfolio consisted of
real estate loans, and a sizeable portion of the remaining loan portfolio had real estate collateral as a secondary source of
repayment or as an abundance of caution. Loans on commercial buildings represented approximately 74.1% of all real
estate loans, while construction/development and land loans were 3.8%, loans secured by residential properties accounted
for 15.2%, and loans secured by farmland were 6.9% of real estate loans. The Company’s $8.6 million balance of
nonperforming assets at December 31, 2020 includes nonperforming real estate loans totaling $6.3 million, and $1.0
million in OREO.
In past recessionary periods, the residential real estate market experienced significant deflation in property values and
foreclosures occurred at relatively high rates during and after the recession. While residential real estate values in our
market areas appear to have stabilized, if they were to slide again, or if commercial real estate values were to decline
materially, the Company could experience additional migration into nonperforming assets. An increase in nonperforming
assets could have a material adverse effect on our financial condition and results of operations by reducing our income
and increasing our expenses. Deterioration in real estate values might also further reduce the amount of loans the Company
makes to businesses in the construction and real estate industry, which could negatively impact our organic growth
prospects. Similarly, the occurrence of more natural disasters like those California has experienced recently, including
fires, flooding, and earthquakes, could impair the value of the collateral we hold for real estate secured loans and negatively
impact our results of operations.
Our concentration of commercial real estate, construction and land development, and commercial and industrial
loans exposes us to increased lending risks. Commercial and agricultural real estate, commercial construction and land
development, and commercial and industrial loans and leases (including agricultural production loans but excluding
mortgage warehouse loans), which comprised approximately 75.6% of our total loan portfolio as of December 31, 2020,
expose the Company to a greater risk of loss than residential real estate and consumer loans, which were a
smaller percentage of the total loan portfolio. Commercial real estate and land development loans typically involve
relatively large balances to a borrower or a group of related borrowers, and an adverse development with respect to a larger
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commercial loan relationship would expose us to greater risk of loss than would issues involving a smaller residential
mortgage loan or consumer loan.
Moreover, banking regulators give commercial real estate loans extremely close scrutiny due to risks relating to the cyclical
nature of the real estate market and risks for lenders with high concentrations of such loans. The regulators require banks
with relatively high levels of CRE loans to implement enhanced underwriting standards, internal controls, risk management
policies and portfolio stress testing. If the CRE concentration risk is not properly managed, it could result in higher
allowances for possible loan and lease losses. Expectations for higher capital levels have also emerged. Any required
increase in our allowance for loan and lease losses could adversely affect our net income, and any requirement that we
maintain higher capital levels could adversely impact financial performance measures including earnings per share and
return on equity.
Repayment of our commercial loans is often dependent on the cash flows of the borrowers, which may be
unpredictable, and the collateral securing these loans may fluctuate in value. At December 31, 2020, we had $253.9
million, or 10.3% of total loans, in commercial loans and leases (including SBA PPP loans, agricultural production loans
but excluding mortgage warehouse loans). Commercial lending involves risks that are different from those associated with
real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values, and liquidation of the underlying real estate collateral being viewed as the primary
source of repayment in the event of borrower default. Our commercial loans are primarily extended based on the cash
flows of the borrowers, and secondarily on any underlying collateral provided by the borrowers. A borrower’s cash flows
may be unpredictable, and collateral securing those loans may fluctuate in value. Although commercial loans are often
collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of such collateral in
the event of default is often an insufficient source of repayment for a number of reasons, including uncollectible accounts
receivable and obsolete or special-purpose inventories, among others.
Nonperforming assets adversely affect our results of operations and financial condition, and can take significant
time to resolve. Our nonperforming loans may return to elevated levels, which would negatively impact earnings, possibly
in a material way depending on the severity. We do not record interest income on non-accrual loans, thereby adversely
affecting income levels. Furthermore, when we receive collateral through foreclosures and similar proceedings we are
required to record the collateral at its fair market value less estimated selling costs, which may result in charges against
our allowance for loan and lease losses if that value is less than the book value of the related loan. Additionally, our
noninterest expense has risen materially in adverse economic cycles due to the costs of reappraising adversely classified
assets, write-downs on foreclosed assets resulting from declining property values, operating costs related to foreclosed
assets, legal and other costs associated with loan collections, and various other expenses that would not typically be
incurred in a normal operating environment. A relatively high level of nonperforming assets also increases our risk profile
and may impact the capital levels our regulators believe is appropriate in light of such risks. We have utilized various
techniques such as loan sales, workouts and restructurings to manage our problem assets. Deterioration in the value of
these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely
affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets
requires a significant commitment of time from Management and Staff, which can be detrimental to their performance of
other responsibilities. There can be no assurance that we will avoid increases in nonperforming loans in the future.
We may experience loan and lease losses in excess of our allowance for such losses. We endeavor to limit the risk that
borrowers might fail to repay; nevertheless, losses can and do occur. We have established an allowance for estimated loan
and lease losses in our accounting records based on:
historical experience with our loans;
our evaluation of economic conditions;
regular reviews of the quality, mix and size of the overall loan portfolio;
a detailed cash flow analysis for nonperforming loans;
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regular reviews of delinquencies; and
the quality of the collateral underlying our loans.
At any given date, we maintain an allowance for loan and lease losses that we believe is adequate to absorb specifically
identified probable losses as well as any other losses inherent in our loan portfolio as of that date. While we strive to
carefully monitor credit quality and to identify loans that may become nonperforming, at any given time there may be
loans in our portfolio that could result in losses but have not been identified as nonperforming or potential problem loans.
We cannot be sure that we will identify deteriorating loans before they become nonperforming assets, or that we will be
able to limit losses on loans that have been so identified. Changes in economic, operating and other conditions which are
beyond our control, including interest rate fluctuations, deteriorating collateral values, and changes in the financial
condition of borrowers may lead to an increase in our estimate of probable losses, or could cause actual loan and lease
losses to exceed our current allowance. In addition, the FDIC and the DFPI, as part of their supervisory functions,
periodically review our allowance for loan and lease losses. Such agencies may require us to increase our provision for
loan and lease losses or to recognize further losses based on their judgment, which may be different from that of our
Management. Any such increase in the allowance required by regulators could also hurt our business.
Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value
of the collateral. In considering whether to make a loan secured by real property, we generally require an appraisal of the
property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and an
error in fact or judgment could adversely affect the reliability of the appraisal. In addition, events occurring after the initial
appraisal may cause the value of the real estate to decrease. As a result of any of these factors the value of the collateral
backing a loan may be less than supposed, and if a default occurs we may not recover the entire outstanding balance of the
loan via the liquidation of such collateral.
Section 1.04 Risks Related to our Management
We depend on our executive officers and key personnel to implement our business strategy, and could be harmed
by the loss of their services. We believe that our continued growth and success depends in large part upon the skills of
our management team and other key personnel. The competition for qualified personnel in the financial services industry
is intense, and the loss of key personnel or an inability to attract, retain or motivate key personnel could adversely affect
our business. If we are not able to retain our existing key personnel or attract additional qualified personnel, our business
operations could be impaired.
Section 1.05 Risks Related to our Other Accounting Estimates
We may experience future goodwill impairment. In accordance with GAAP, we record assets acquired and liabilities
assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the
recognition of goodwill. We perform a goodwill evaluation at least annually to test for potential impairment. As part of
our testing, we assess quantitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If we determine that the fair value of a reporting unit is less than its carrying amount
using these quantitative factors, we must record a goodwill impairment charge based on that difference. Adverse conditions
in our business climate, including a significant decline in future operating cash flows, a significant change in our stock
price or market capitalization, or a deviation from our expected growth rate and performance may significantly affect the
fair value of the Company and may trigger goodwill impairment losses, which could be materially adverse to our operating
results and financial position. We cannot provide assurance that we will not be required to take an impairment charge in
the future. Any impairment charge would have an adverse effect on our shareholders’ equity and financial results and
could cause a decline in our stock price.
Changes in accounting standards may affect our performance. Our accounting policies and methods are fundamental
to how we record and report our financial condition and results of operations. From time to time the FASB and SEC change
the financial accounting and reporting standards that govern the preparation of our financial statements. These changes
can be difficult to predict and can materially impact how we report and record our financial condition and results of
operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in a retrospective
adjustment to prior financial statements.
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One significant pronouncement is ASU 2016-13, which was released by the FASB in 2016 and which the Company was
initially required to adopt no later than January 1, 2020 (before statutory optional deferrals as described below). ASU
2016-13 included changes to the methodology for determining the amount of the allowance for credit losses, among other
things. The new credit loss model is a substantial change from the previous standard in place, as it required the Company
to calculate its allowance on the basis of current expected credit losses over the lifetime of its loans (commonly referred
to as the “CECL” model), instead of losses inherent in the portfolio as of a point in time. Upon implementation, institutions
are required to record a cumulative-effect balance sheet adjustment for financial assets carried at amortized cost for any
change in the related allowance for loan and lease losses generated by the adoption of the new standard. The Company’s
preliminary evaluation indicates that when adopted, the provisions of ASU 2016-13 would impact our consolidated
financial statements, particularly the level of our reserve for credit losses and shareholders’ equity, which could materially
affect our financial condition and future results of operations. In March 2020, the Company initially 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. In December 2020, the Consolidated Appropriations Act, 2021
extended the deferral of implementation of CECL from December 31, 2020, to the earlier of the first day of the fiscal year,
beginning after the national emergency terminates or January 1, 2022. The Company will continue to postpone
implementation in order to provide additional time to assess better the impact of the COVID-19 pandemic on the expected
lifetime credit losses. See Note 2 to the consolidated financial statements under “Recent Accounting Pronouncements” for
additional details on ASU 2016-13 and its expected impact on the Company.
Section 1.06 Risks Related to our Growth Strategy
Growing by acquisition entails integration and certain other risks, and our financial condition and results of
operations could be negatively affected if our expansion efforts are unsuccessful or we fail to manage our growth
effectively. In addition to organic growth and the establishment of de novo branches, over the past several years we have
engaged in expansion through acquisitions of branches and whole institutions. We may continue to pursue this growth
strategy, within our current footprint and/or via geographic expansion, but there are risks associated with any such
expansion. Those risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular
transaction, encountering greater than anticipated costs in integrating acquired businesses, facing resistance from
customers or employees, being unable to profitably deploy assets acquired in the transaction, and regulatory compliance
risks. To the extent we issue capital stock in connection with additional transactions, if any, these transactions and related
stock issuances may have a dilutive effect on earnings per share and share ownership.
Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully
integrate the operations of the acquired company. We may be unable to integrate operations successfully or to achieve
expected cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings.
There also may be business disruptions that cause us to lose customers or cause customers to remove their accounts from
us and move their business to competing financial institutions. In addition, our ability to grow may be limited if we cannot
make acquisitions. We compete with other financial institutions with respect to potential acquisitions. We cannot predict
if or when we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms.
Section 1.07 Legislative and Regulatory Risks
We are subject to extensive government regulation that could limit or restrict our activities, which in turn may
adversely impact our ability to increase our assets and earnings. We operate in a highly regulated environment and
are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve,
the DFPI and the FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for
depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to
ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to
engage in, maintenance of adequate capital levels, and other aspects of our operations. These bank regulators possess broad
authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to
the banking industry could change at any time and we cannot predict the effects of these changes on our business,
profitability or growth strategy. Increased regulation could increase our cost of compliance and adversely affect
profitability.
Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties,
as well as imposing limitations on a bank’s ability to implement components of its business plan, such as expansion through
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mergers and acquisitions or the opening of new branch offices. In addition, changes in regulatory requirements may add
costs associated with compliance efforts. Furthermore, government policy and regulation, particularly as implemented
through the Federal Reserve, significantly affect credit conditions. Negative developments in the financial industry and
the impact of new legislation and regulation in response to those developments could negatively impact our business
operations and adversely impact our financial performance.
Our expenses could increase as a result of increases in FDIC insurance premiums or other regulatory assessments.
The FDIC charges insured financial institutions a premium to maintain the DIF at a certain level. In the event that
deteriorating economic conditions increase bank failures, the FDIC ensures payments of deposits up to insured limits from
the DIF. Although the Bank’s FDIC insurance assessments have not increased as a result of changes in recent periods, and
could possibly even be reduced in the near term, there can be no assurance that the FDIC will not increase assessment rates
in the future or that the Bank will not be subject to higher assessment rates as a result of a change in its risk category, either
of which could have an adverse effect on the Bank’s earnings.
Previously enacted and potential future regulations could have a significant impact on our business, financial
condition and results of operations. Dodd-Frank, which was enacted in 2010, is having a broad impact on the financial
services industry, including significant regulatory and compliance changes. Many of the requirements called for in Dodd-
Frank will be implemented over time, and most will be facilitated by the enactment of regulations over the course of
several years. Given the uncertainty associated with the manner in which the provisions of Dodd-Frank will be
implemented, the full extent to which they will impact our operations is unclear. The changes resulting from Dodd-Frank
may impact the profitability of business activities, require changes to certain business practices, impose more stringent
capital, liquidity and leverage requirements or otherwise adversely affect our business. In particular, the potential impact
of Dodd-Frank on our operations and activities, both currently and prospectively, include, among others:
an increase in our cost of operations due to greater regulatory oversight, supervision and examination of
banks and bank holding companies, and higher deposit insurance premiums;
the limitation of our ability to expand consumer product and service offerings due to more stringent consumer
protection laws and regulations;
a negative impact on our cost of funds in a rising interest rate environment, since financial institutions can
now pay interest on business checking accounts;
a potential reduction in fee income, due to limits on interchange fees applicable to larger institutions which
could ultimately lead to a competitive-driven reduction in the fees we receive; and
a potential increase in competition due to the elimination of the remaining barriers to de novo interstate
branching.
Further, we may be required to invest significant management attention and resources to evaluate and make any changes
necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act, which could negatively
impact our results of operations and financial condition. We cannot predict whether there will be additional laws or reforms
that would affect the U.S. financial system or financial institutions, when such changes may be adopted, how such changes
may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional
laws or regulations could have a material adverse effect on our financial condition and results of operations.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse
examination findings. The Federal Reserve, the FDIC and the DFPI periodically examine our business, including our
compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our
financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of
our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number
of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound”
practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess
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civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be
corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership
or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and
results of operations.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and
fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. The CRA, the Equal
Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending
practices by financial institutions. The U.S. Department of Justice, federal banking agencies and other federal agencies are
responsible for enforcing these laws and regulations. A challenge to an institution’s compliance with fair lending laws and
regulations, or receiving a less than satisfactory CRA rating, could result in a wide variety of sanctions, including damages
and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and
restrictions on entering new business lines. Private parties may also challenge an institution’s performance under fair
lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial
condition, results of operations and growth prospects. In addition, federal, state and local laws have been adopted that are
intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering
borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans
and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the
value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability
with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may
prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans
that we do make.
Section 1.08 Risks Related to our Common Stock
You may not be able to sell your shares at the times and in the amounts you want if the price of our stock fluctuates
significantly or the trading market for our stock is not active. The market price of our common stock could be impacted
by a number of factors, many of which are outside our control. Although our stock has been listed on NASDAQ for
many years and our trading volume has increased in recent periods, trading in our stock does not consistently occur in high
volumes and the market for our stock cannot always be characterized as active. Thin trading in our stock may exaggerate
fluctuations in the stock’s value, leading to price volatility in excess of that which would occur in a more active trading
market. In addition, the stock market in general is subject to fluctuations that affect the share prices and trading volumes
of many companies, and these broad market fluctuations could adversely affect the market price of our common stock.
Factors that could affect our common stock price in the future include but are not necessarily limited to the following:
actual or anticipated fluctuations in our operating results and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial
analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
actions by shareholders;
sales of our equity or equity-related securities, or the perception that such sales may occur;
fluctuations in the trading volume of our common stock;
fluctuations in the stock prices, trading volumes, and operating results of our competitors;
market conditions in general and, in particular, for the financial services industry;
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proposed or adopted regulatory changes or developments;
regulatory action against us;
actual, anticipated or pending investigations, proceedings, or litigation that involve or affect us; and
domestic and international economic factors unrelated to our performance.
The stock market and, more specifically, the market for financial institution stocks, has experienced significant volatility
in the past including all of 2020 and the first quarter of 2021. As a result, the market price of our common stock has at
times been unpredictable and could be in the future, as well. The capital and credit markets have also experienced volatility
and disruption over the past several years, at times reaching unprecedented levels. In some cases, the markets have
produced downward pressure on stock prices and adversely impacted credit availability for certain issuers without regard
to the issuers’ underlying financial strength.
We could pursue additional capital in the future, which may or may not be available on acceptable terms, could
dilute the holders of our outstanding common stock, and may adversely affect the market price of our common
stock. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital
markets at the time, which are outside of our control, and our financial performance. Furthermore, any capital raising
activity could dilute the holders of our outstanding common stock, and may adversely affect the market price of our
common stock and performance measures such as return on equity and earnings per share.
Future acquisitions may dilute shareholder ownership and value, especially tangible book value per share. We
periodically evaluate opportunities to acquire other financial institutions and/or bank branches, and could incorporate such
acquisitions as part of our future growth strategy. Such acquisitions may involve cash, debt, and/or equity securities.
Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of
our tangible book value per common share may occur in connection with any future acquisitions. To the extent we issue
capital stock in connection with such transactions, the share ownership of our existing shareholders may be diluted.
The Company relies heavily on the payment of dividends from the Bank. Other than $12.0 million in cash available
at the holding company level at December 31, 2020, the Company’s ability to meet debt service requirements and pay
dividends depends on the Bank’s ability to pay dividends to the Company, as the Company has no other source of
significant income. However, the Bank is subject to regulations limiting the amount of dividends it may pay. For example,
the payment of dividends by the Bank is affected by the requirement to maintain adequate capital pursuant to the capital
adequacy guidelines issued by the Federal Deposit Insurance Corporation. If (i) any capital requirements are increased;
and/or (ii) the total risk-weighted assets of the Bank increase significantly; and/or (iii) the Bank’s income declines
significantly, the Bank’s Board of Directors may decide or be required to retain a greater portion of the Bank’s earnings
to achieve and maintain the required capital or asset ratios. This would reduce the amount of funds available for the
payment of dividends by the Bank to the Company. Further, one or more of the Bank’s regulators could prohibit the Bank
from paying dividends if, in their view, such payments would constitute unsafe or unsound banking practices. The Bank’s
ability to pay dividends to the Company is also limited by the California Financial Code. Whether dividends are paid, and
the frequency and amount of such dividends will also depend on the financial condition and performance of the Bank and
the decision of the Bank’s Board of Directors. Information concerning the Company’s dividend policy and historical
dividend practices is set forth in Item 5 below under “Dividends.” However, no assurance can be given that our future
performance will justify the payment of dividends in any particular year.
Your investment may be diluted because of our ability to offer stock to others, and from the exercise of stock
options. The shares of our common stock do not have preemptive rights, which means that you may not be entitled to buy
additional shares if shares are offered to others in the future. We are authorized to issue up to 24,000,000 shares of common
stock, and as of December 31, 2020 we had 15,388,423 shares of common stock outstanding. Except for certain limitations
imposed by NASDAQ, nothing restricts our ability to offer additional shares of stock for fair value to others in the future.
Any issuances of common stock would dilute our shareholders’ ownership interests and may dilute the per share book
value of our common stock. Furthermore, when our directors and officers exercise in-the-money stock options or receive
restricted stock units, your ownership in the Company is diluted. As of December 31, 2020, there were outstanding options
25
to purchase an aggregate of 495,489 shares of our common stock with an average exercise price of $23.67 per share. There
were also 148,885 shares of restricted stock units outstanding which vest over periods ranging from 1 year to 5 years from
initial issuance. At the same date there were an additional 408,515 shares available to grant under our 2017 Stock Incentive
Plan.
The holders of our debentures have rights that are senior to those of our shareholders. In 2004 we issued $15,464,000
of junior subordinated debt securities due March 17, 2034, and in 2006 we issued an additional $15,464,000 of junior
subordinated debt securities due September 23, 2036 in order to supplement regulatory capital. Moreover, the Coast
Bancorp acquisition included $7,217,000 of junior subordinated debt securities due December 15, 2037. All of these junior
subordinated debt securities are senior to the shares of our common stock. As a result, we must make interest payments on
the debentures before any dividends can be paid on our common stock, and in the event of our bankruptcy, dissolution or
liquidation, the holders of debt securities must be paid in full before any distributions may be made to the holders of our
common stock. In addition, we have the right to defer interest payments on the junior subordinated debt securities for up
to five years, during which time no dividends may be paid to holders of our common stock. In the event that the Bank is
unable to pay dividends to us, we may be unable to pay the amounts due to the holders of the junior subordinated debt
securities and thus would be unable to declare and pay any dividends on our common stock.
Provisions in our articles of incorporation could delay or prevent changes in control of our corporation or our
management. Our articles of incorporation contain provisions for staggered terms of office for members of the board of
directors; no cumulative voting in the election of directors; and the requirement that our board of directors consider the
potential social and economic effects on our employees, depositors, customers and the communities we serve as well as
certain other factors, when evaluating a possible tender offer, merger or other acquisition of the Company. These
provisions make it more difficult for another company to acquire us, which could cause our shareholders to lose an
opportunity to be paid a premium for their shares in an acquisition transaction and reduce the current and future market
price of our common stock.
Shares of any preferred stock issued in the future could have dilutive and other effects on our common stock. Our
Articles of Incorporation authorize us to issue 10,000,000 shares of preferred stock, none of which is presently outstanding.
Although our Board of Directors has no present intention to authorize the issuance of shares of preferred stock, such shares
could be authorized in the future. If such shares of preferred stock are made convertible into shares of common stock, there
could be a dilutive effect on the shares of common stock then outstanding. In addition, shares of preferred stock may be
provided a preference over holders of common stock upon our liquidation or with respect to the payment of dividends, in
respect of voting rights, or in the redemption of our common stock. The rights, preferences, privileges and restrictions
applicable to any series or preferred stock would be determined by resolution of our Board of Directors.
Section 1.09 Risks Related to the Business of Banking in General
If we are not able to successfully keep pace with technological changes in the industry, our business could be hurt.
The financial services industry is constantly undergoing technological change, with the frequent introduction of new
technology-driven products and services. The effective use of technology increases efficiency and enables financial
institutions to better serve clients and reduce costs. Our future success depends, in part, upon our ability to respond to the
needs of our clients by using technology to provide desired products and services and create additional operating
efficiencies. Some of our competitors have substantially greater resources to invest in technological improvements. We
may not be able to effectively implement new technology-driven products and services or be successful in marketing these
products and services to our clients. Failure to keep pace with technological change in the financial services industry could
have a material adverse impact on our business and, in turn, on our financial condition and results of operations.
Unauthorized disclosure of sensitive or confidential customer information, whether through a cyber-attack, other
breach of our computer systems or any other means, could severely harm our business. In the normal course of
business we collect, process and retain sensitive and confidential customer information. Despite the security measures we
have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer
viruses, misplaced or lost data, programming and/or human errors, or other similar events.
In recent periods there has been a rise in fraudulent electronic activity, security breaches, and cyber-attacks, including in
the banking sector. Some financial institutions have reported breaches of their websites and systems which have involved
26
sophisticated and targeted attacks intended to misappropriate sensitive or confidential information, destroy or corrupt data,
disable or degrade service, disrupt operations and/or sabotage systems. These breaches can remain undetected for an
extended period of time. Furthermore, our customers and employees have been, and will continue to be, targeted by parties
using fraudulent e-mails and other communications that may appear to be legitimate messages sent by the Bank, in attempts
to misappropriate passwords, card numbers, bank account information or other personal information or to introduce viruses
or malware to personal computers. Information security risks for financial institutions have increased in part because of
new technologies, mobile services and other web-based products used to conduct financial and other business transactions,
as well as the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others.
The secure maintenance and transmission of confidential information, as well as the secure and reliable execution of
transactions over our systems, are essential to protect us and our customers and to maintain our customers’ confidence.
Despite our efforts to identify, contain and mitigate these threats through detection and response mechanisms, product
improvement, the use of encryption and authentication technology, and customer and employee education, such attempted
fraudulent activities directed against us, our customers, and third party service providers remain a serious issue. The
pervasiveness of cyber security incidents in general and the risks of cyber-crime are complex and continue to evolve.
We also face risks related to cyber-attacks and other security breaches in connection with debit card transactions, which
typically involve the transmission of sensitive information regarding our customers through various third parties. Some of
these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve
third parties and environments that we do not control or secure, future security breaches or cyber-attacks affecting any of
these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses
for breaches or attacks relating to them. We also rely on third party service providers to conduct certain other aspects of
our business operations, and face similar risks relating to them. While we require regular security assessments from those
third parties, we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or
security breach.
Any cyber-attack or other security breach involving the misappropriation or loss of Company assets or those of its
customers, or unauthorized disclosure of confidential customer information, could severely damage our reputation, erode
confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our
operations, and have a material adverse effect on our business.
If our information systems were to experience a system failure, our business and reputation could suffer. We rely
heavily on communications and information systems to conduct our business. The computer systems and network
infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to
minimize service disruptions by protecting our computer equipment, systems, and network infrastructure from physical
damage due to fire, power loss, telecommunications failure or a similar catastrophic event. We have protective measures
in place to prevent or limit the effect of the failure or interruption of our information systems, and will continue to upgrade
our security technology and update procedures to help prevent such events. However, if such failures or interruptions were
to occur, they could result in damage to our reputation, a loss of customers, increased regulatory scrutiny, or possible
exposure to financial liability, any of which could have a material adverse effect on our financial condition and results of
operations.
We are subject to a variety of operational risks, including reputational risk, legal risk, compliance risk, the risk of
fraud or theft by employees or outsiders, and the risk of clerical or record-keeping errors, which may adversely
affect our business and results of operations. If personal, non-public, confidential or proprietary customer information
in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational
damage and financial loss. This could occur, for example, if information was erroneously provided to parties who are not
permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information
is intercepted or otherwise inappropriately taken by third parties.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated
or compounded before they are discovered and successfully remediated. Our necessary dependence upon automated
systems to record and process transactions and our large transaction volume may further increase the risk that technical
flaws or employee tampering or manipulation of those systems could result in losses that are difficult to detect. We also
may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control
27
(for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or
other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss
or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations
(or will be subject to the same risk of fraud or operational errors by their employees) and to the risk that our (or our
vendors’) business continuity and data security efforts might prove to be inadequate. The occurrence of any of these risks
could result in a diminished ability to operate our business (for example, by requiring us to expend significant resources
to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could
adversely affect our business, financial condition and results of operations, perhaps materially.
We may be adversely affected by the financial stability of other financial institutions. Our ability to engage in routine
transactions could be adversely affected by the actions and liquidity of other financial institutions. Financial institutions
are often interconnected as a result of trading, clearing, counterparty, or other business relationships. We have exposure
to many different industries and counterparties, and routinely execute transactions with counterparties in the financial
services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many
of these transactions expose us to credit risk in the event of a default by a counterparty or client. Even if the transactions
are collateralized, credit risk could exist if the collateral held by us cannot be liquidated at prices sufficient to recover the
full amount of the credit or derivative exposure due to us. Any such losses could adversely affect our business, financial
condition or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The Company’s administrative headquarters is housed in a 37,000 square foot, three-story office building located at 86
North Main Street, Porterville, California, and our main office consists of a one-story brick building located at 90 N. Main
Street, Porterville, California, adjacent to our administrative headquarters. Both of those buildings are situated on
unencumbered property owned by the Company. The Company also owns unencumbered property on which 18 of our
other offices are located, namely the following branches: Bakersfield Ming, California City, Dinuba, Exeter, Farmersville,
Fresno Shaw, Hanford, Lindsay, Lompoc, Porterville West Olive, San Luis Obispo, Santa Paula, Tehachapi Downtown,
Tehachapi Old Town, Three Rivers, Tulare, Visalia Mooney and Woodlake. The remaining branches, as well as our
technology center, loan production office in Rocklin, and remote ATM locations, are leased from unrelated parties.
Management believes that existing back-office facilities are adequate to accommodate the Company’s operations for the
immediately foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to claims and legal proceedings arising in the ordinary course of business. After
taking into consideration information furnished by counsel to the Company as to the current status of these claims or
proceedings to which the Company is a party, Management is of the opinion that the ultimate aggregate liability
represented thereby, if any, will not have a material adverse effect on the financial condition of the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
Sierra Bancorp’s Common Stock trades on the NASDAQ Global Select Market under the symbol BSRR, and the CUSIP
number for our stock is #82620P102. Trading in the Company’s Common Stock has not consistently occurred in high
volumes, and such trading activity cannot always be characterized as an active trading market.
The following table summarizes trades of the Company’s Common Stock, setting forth the approximate high and low sales
prices and volume of trading for the periods indicated, based upon information available via public sources:
Calendar
Quarter End
March 31, 2019 . . . . . . . . . . $
June 30, 2019 . . . . . . . . . . . .
September 30, 2019 . . . . . .
December 31, 2019 . . . . . . .
March 31, 2020 . . . . . . . . . .
June 30, 2020 . . . . . . . . . . . .
September 30, 2020 . . . . . .
December 31, 2020 . . . . . . .
Sale Price Of The Company's
Common Stock
High
Low
27.81 $
27.98
27.36
30.15
29.37
21.87
20.13
24.72
Approximate Trading
22.68 $
24.01
23.75
25.78
13.05
14.86
15.84
16.47
Volumes
Shares
1,928,277
1,385,742
1,851,314
2,064,085
2,721,500
3,491,600
2,434,100
2,416,100
(b) Holders
As of January 31, 2021 there were an estimated 6,292 shareholders of the Company’s Common Stock. There were 757
registered holders of record on that date, and per Broadridge, an investor communication company, there were 5,535
beneficial holders with shares held under a street name, including “objecting beneficial owners” whose names and
addresses are unavailable. Since some holders maintain multiple accounts, it is likely that the above numbers overstate the
actual number of the Company’s shareholders.
(c) Dividends
The Company paid cash dividends totaling $12.2 million, or $0.80 per share in 2020 and $11.3 million, or $0.74 per share
in 2019, which represents 34% of annual net earnings for 2020 and 32% for 2019. The Company’s general dividend policy
is to pay cash dividends within the range of typical peer payout ratios, provided that such payments do not adversely affect
the Company’s financial condition and are not overly restrictive to its growth capacity. However, in the past when many
of our peers elected to suspend dividend payments, the Company’s Board determined that we should continue to pay a
certain level of dividends without regard to peer payout ratios, as long as our core operating performance was adequate
and policy or regulatory restrictions did not preclude such payments. That said, no assurance can be given that our financial
performance in any given year will justify the continued payment of a certain level of cash dividend, or any cash dividend
at all.
As a bank holding company that currently has no significant assets other than its equity interest in the Bank, the Company’s
ability to declare dividends depends upon cash on hand as supplemented by dividends from the Bank. The Bank’s dividend
practices in turn depend upon the Bank’s earnings, financial position, regulatory standing, ability to meet current and
anticipated regulatory capital requirements, and other factors deemed relevant by the Bank’s Board of Directors. The
authority of the Bank’s Board of Directors to declare cash dividends is also subject to statutory restrictions. Under
California banking law, the Bank may at any time declare a dividend in an amount not to exceed the lesser of (i) its retained
earnings, or (ii) its net income for the last three fiscal years reduced by distributions to the Bank’s shareholder during such
29
period. However, with the prior approval of the California Commissioner of Department of Financial Protection and
Innovation, the Bank may declare a larger dividend, in an amount not exceeding the greatest of (i) the retained earnings of
the Bank, (ii) the net income of the Bank for its last fiscal year, or (iii) the net income of the Bank for its current fiscal year.
The Company’s ability to pay dividends is also limited by state law. California law allows a California corporation to pay
dividends if its retained earnings equal at least the amount of the proposed dividend plus any preferred dividend arrears
amount. If a California corporation does not have sufficient retained earnings available for the proposed dividend, it may
still pay a dividend to its shareholders if immediately after the dividend the value of the company’s assets would equal or
exceed the sum of its total liabilities plus any preferred dividend arrears amount. In addition, during any period in which
the Company has deferred the payment of interest otherwise due and payable on its subordinated debt securities, it may
not pay any dividends or make any distributions with respect to its capital stock (see “Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Capital Resources”).
(d) Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2020 with respect to stock options and restricted stock units
outstanding, and available under our 2017 Stock Incentive Plan and the now-terminated 2007 Stock Incentive Plan, which
are our only equity compensation plans other than an employee benefit plan meeting the qualification requirements of
Section 401(a) of the Internal Revenue Code:
Plan Category
Equity compensation plans
Number of Securities
to be Issued Upon
Vesting of Restricted
Stock Units
Number of Securities
to be Issued Upon Exercise
of Outstanding Options
Weighted-Average
Exercise Price of
Outstanding Options
Number of Securities
Remaining Available
for Future Issuance
approved by security holders . .
148,885
495,489 $
23.67
408,515
30
(e) Performance Graph
Below is a five-year performance graph comparing the cumulative total return on the Company’s common stock to the
cumulative total returns of the NASDAQ Composite Index (a broad equity market index), the SNL Bank Index, and the
SNL $1 billion to $5 billion Bank Index (the latter two qualifying as peer bank indices), assuming a $100 investment on
December 31, 2014 and the reinvestment of dividends.
Total Return Performance
Sierra Bancorp
NASDAQ Composite Index
SNL Bank $1B-$5B Index
SNL Bank Index
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
Period Ending
Index
Sierra Bancorp . . . . . . . . . . . .
NASDAQ Composite . . . . . .
SNL Bank $1B-$5B . . . . . . .
SNL Bank . . . . . . . . . . . . . . .
12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
155.42
271.64
138.81
145.49
157.99
141.13
153.37
149.21
182.19
187.44
163.35
167.93
146.24
137.12
134.37
124.00
154.87
108.87
143.87
126.35
100.00
100.00
100.00
100.00
Source: S&P Global Market Intelligence
(f) Stock Repurchases
In September 2016 the Board authorized an additional 500,000 shares of common stock for repurchase under the
Company’s existing stock buyback plan initially adopted in 2003. The 2003 repurchase plan has no expiration date, but
from time-to-time, the Company will authorize additional shares to be repurchased if all previous authorizations have been
exhausted. At this time, the Company has 344,862 shares remaining under the 2016 additional authorization, but has
currently suspended repurchasing shares. The Company may resume repurchasing shares at a later date. The authorization
of shares for repurchase does not provide assurance that a specific quantity of shares will be repurchased, and the program
may be suspended at any time at Management’s discretion.
31
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial information concerning the Company, which should be read in
conjunction with our audited consolidated financial statements, including the related notes, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein. The selected
financial data as of December 31, 2020 and 2019, and for each of the years in the three year period ended December 31,
2018, is derived from our audited consolidated financial statements and related notes which are included in this Annual
Report. The selected financial data presented for earlier years is from our audited financial statements which are not
included in this Annual Report. Throughout this Annual Report, information is for the consolidated Company unless
otherwise stated.
32
Selected Financial Data
(dollars in thousands, except per share data)
Operating Data
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income before provision for loan and lease losses . . . . .
Provision (benefit) for loan and lease losses . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Balance Sheet Summary
Total loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Share Data
Net income per basic share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding basic . . . . . . . . . . . .
Weighted average common shares outstanding diluted . . . . . . . . . . .
Key Operating Ratios:
2020
110,243 $
5,408
104,835
8,550
26,150
75,912
46,523
11,079
35,444
As of and for the years ended December 31,
2018
101,638 $
9,244
92,394
4,350
21,564
70,024
39,584
9,907
29,677
2019
110,947 $
13,578
97,369
2,550
23,477
70,578
47,718
11,757
35,961
2017
80,924 $
5,223
75,701
(1,140)
21,779
65,441
33,179
13,640
19,539
2016
68,505
3,323
65,182
—
19,238
58,053
26,367
8,800
17,567
2,442,226
1,755,538
1,724,780
1,551,551
1,255,754
17,738
543,974
71,417
971
27,505
2,989,709
3,220,742
1,898,104
2,624,606
2,876,846
343,896
9,923
600,799
80,077
800
27,435
2,370,858
2,593,819
1,558,080
2,168,374
2,284,534
309,285
9,750
560,479
74,132
1,082
29,500
2,286,952
2,522,502
1,561,039
2,116,340
2,249,478
273,024
9,043
558,329
70,137
5,481
29,388
2,118,875
2,340,298
1,417,590
1,988,386
2,084,356
255,942
9,701
530,083
120,442
2,225
28,893
1,827,192
2,032,873
1,277,416
1,695,471
1,826,995
205,878
2.33
2.32
22.35
0.80
15,216,749
15,280,325
2.35
2.33
20.24
0.74
15,311,113
15,437,111
1.94
1.92
17.84
0.64
15,261,794
15,432,120
1.38
1.36
16.81
0.56
14,172,196
14,357,782
1.30
1.29
14.94
0.48
13,530,293
13,651,804
Performance Ratios: (1)
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest spread (tax-equivalent) (4) . . . . . . . . . . . . . . . . . .
Net interest margin (tax-equivalent) . . . . . . . . . . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity to assets ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio (tax-equivalent) . . . . . . . . . . . . . . . . . . . . . .
Net loans to total Deposits at Period end . . . . . . . . . . . . . . . .
10.80%
1.22%
3.83%
3.95%
34.33%
11.28%
57.18%
93.05%
12.23%
1.40%
3.90%
4.19%
31.49%
11.44%
57.46%
80.96%
11.37%
1.23%
4.03%
4.24%
32.99%
10.80%
60.79%
81.50%
8.82%
0.93%
3.90%
4.04%
40.61%
10.53%
65.52%
78.03%
8.71%
0.95%
3.86%
3.95%
36.97%
10.93%
67.23%
74.07%
Asset Quality Ratios: (1)
Non-performing loans to total loans (2) . . . . . . . . . . . . . . . . .
Non-performing assets to total loans and other real estate
owned (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (recoveries) charge-offs to average loans . . . . . . . . . . . .
Allowance for loan and lease losses to total loans at period
0.31%
0.33%
0.30%
0.25%
0.50%
0.35%
0.04%
0.37%
0.14%
0.36%
0.22%
0.60%
(0.04)%
0.68%
0.06%
end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.72%
0.56%
0.57%
0.58%
0.77%
Allowance for Loan and Lease Losses to Non-Performing
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
233.46%
172.96%
189.10%
228.19%
152.41%
Regulatory Capital Ratios: (3)
Common equity tier 1 capital to risk-weighted assets . . . . . .
Tier 1 capital to adjusted average assets (leverage ratio) . . . .
Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . . . . . .
Total capital to risk-weighted assets . . . . . . . . . . . . . . . . . . .
NA
10.50%
NA
NA
13.27%
11.91%
14.98%
15.48%
12.61%
11.49%
14.38%
14.89%
12.84%
11.32%
14.79%
15.32%
14.09%
11.92%
16.53%
17.25%
(1) Asset quality ratios are end of period ratios. Performance ratios are based on average daily balances during the periods indicated.
(2) Performing TDR’s are not included in nonperforming loans and are therefore not included in the numerators used to calculate these ratios.
(3) For definitions and further information relating to regulatory capital requirements, see “Item 1, Business - Supervision and Regulation - Capital Adequacy
Requirements” herein.
(4) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
33
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion presents Management’s analysis of the Company’s financial condition as of December 31, 2020 and 2019,
and the results of operations for each year in the three-year period ended December 31, 2020. The discussion should be
read in conjunction with the Company’s consolidated financial statements and the notes related thereto presented elsewhere
in this Form 10-K Annual Report (see Item 8 below).
Statements contained in this report or incorporated by reference that are not purely historical are forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, including the
Company’s expectations, intentions, beliefs, or strategies regarding the future. All forward-looking statements concerning
economic conditions, growth rates, income, expenses, or other values which are included in this document are based on
information available to the Company on the date noted, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company’s actual results could materially differ from those in
such forward-looking statements. Risk factors that could cause actual results to differ materially from those in forward-
looking statements include but are not limited to those outlined previously in Item 1A.
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 an allowance for loan and lease losses, as
explained in detail in Note 2 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 2 to the consolidated financial statements; income taxes and deferred tax assets and
liabilities, especially with regard to the ability of the Company to recover deferred tax assets as discussed in the “Provision
for Income Taxes” and “Other Assets” sections of this discussion and analysis; and goodwill and other intangible assets,
which are evaluated annually for impairment and for which we have determined that no impairment exists, as discussed
in Note 2 to the consolidated financial statements and in the “Other Assets” section of this discussion and analysis. Critical
accounting areas are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate the most
recent expectations with regard to those areas.
Overview of the Results of Operations and Financial Condition
Results of Operations Summary
The Company recognized net income of $35.4 million in 2020 relative to $36.0 million in 2019 and $29.7 million in 2018.
Net income per diluted share was $2.32 in 2020, as compared to $2.33 in 2019 and $1.92 for 2018. The Company’s return
on average assets and return on average equity were 1.22% and 10.80%, respectively, in 2020, as compared to 1.40% and
12.23%, respectively, in 2019 and 1.23% and 11.37%, respectively, for 2018. Our financial results have been stable over
the past year despite a higher level of loan and lease loss provisioning and elevated noninterest expenses, due to a higher
volume of loans, and a strong base of core deposits, combined with a higher level of nonrecurring items, as discussed in
greater detail in the applicable sections below. Furthermore, the Company’s financial performance was favorably affected
by a substantially lower corporate income tax rate starting in 2018. The following is a summary of the major factors that
impacted the Company’s results of operations for the years presented in the consolidated financial statements.
Net interest income improved by 8% in 2020 over 2019 and 5% in 2019 over 2018, due primarily to a
lower cost of interest-bearing liabilities and growth in earning assets. The increase in average earning
34
assets in 2020 over 2019 was due primarily to a $170.2 million increase in average balance of real estate
loans, a $62.2 million increase in average balances of commercial loans, and a $87.1 million increase in
average balances of mortgage warehouse loans, partially offset by decreases in other loan categories. The
increase in real estate loans was organic, driven by concerted business development efforts by our loan
production offices in 2020. The increase in commercial loans was due to the Company’s participation in the
SBA Paycheck Protection Program (PPP) lending initiative, in order to assist our customers impacted by the
COVID-19 Pandemic. The increase in average mortgage warehouse loans throughout 2020 was primarily a
result of increased demand for housing and refinancing due to low rates in 2020 coupled with proactive
mortgage warehouse pricing and marketing to mortgage lenders. The positive impact of average asset growth
in 2020 was augmented by a 54 bps decrease in yield on interest bearing liabilities but was partially offset
by a 60 basis point decline in yield on interest earning assets. The net interest margin in 2020 was 24 bps
lower than 2019.
The increase in average earning assets in 2019 over 2018 was due primarily to a $90.0 million increase in
average balance of real estate loans and a $48.1 million increase in average balances of mortgage warehouse
loans, partially offset by decreases in other loan categories. The increase in real estate loans was driven
primarily by organic growth in late 2018 and early 2019 but were offset by paydowns in the second half of
2019. The increase in average mortgage warehouse loans in 2019 was primarily a result of proactive pricing
and marketing to mortgage lenders in the lower mortgage rate cycle in 2019. The positive impact of average
asset growth in 2019 was partially offset by a 5 basis point decline in net interest margin due to the lower
rate environment in the second half of 2019.
Net interest income has also been impacted by nonrecurring interest items, which added $0.38 million to
interest income in 2020 relative to $0.82 million in 2019 and $0.28 million in 2018.
We recorded a loan and lease loss provision of $8.6 million in 2020, as compared to $2.6 million in 2019
and $4.4 million in 2018. The 2020 provision was deemed necessary subsequent to our determination of the
appropriate level for our allowance for loan and lease losses and was driven by strong loan growth in the
second half of 2020 and continued uncertainty surrounding the estimated impact that COVID-19 has had on
the economy and our loan customers overall. In addition, we considered the impacts of credit quality, organic
growth in non-owner occupied commercial real estate loan balances, reserves required for specifically
identified impaired loan balances, and downgrades of certain loans deferred under section 4013 of the
CARES Act. The 2019 and 2018 provisions were deemed necessary subsequent to our determination of the
appropriate level for our allowance for loan and lease losses, taking into consideration overall credit quality,
growth in outstanding loan balances, and reserves required for specifically identified impaired loan balances
(including reserves in 2019 for a $2.8 million loan that was placed on non-accrual status shortly before the
end of the third quarter and partially charged off in the fourth quarter of 2019.)
Noninterest income increased by $2.7 million, or 11%, in 2020, and by $1.9 million or 9%, in 2019 over
2018. The increase in 2020 was primarily due to a $1.5 million gain from the wrap up of low-income housing
tax credit fund investments, a decrease of $0.9 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
$0.6 million increase in the net gain on the sale of debt securities. Fluctuations in BOLI associated with
deferred compensation plans contributed $0.2 million to the increase. The increase in 2019 was primarily
due to favorable fluctuation in bank-owned life insurance (“BOLI”) income associated with deferred
compensation income, and a nonrecurring charge in 2018 as described below.
Noninterest expense increased by $5.3 million, or 8%, in 2020 as compared to 2019, and increased by
$0.55 million, or 1%, in 2019 over 2018. The increase in noninterest expense in 2020 was due mostly to a
$4.2 million increase in salaries and benefits expense. Deposit services and other professional services also
contributed to the difference. The slight increase in noninterest expense in 2019 was due mostly to other real
estate owned (“OREO”) expense and directors deferred compensation expense associated with the BOLI
income described above.
35
The Company recorded income tax provisions of $11.1 million, or 24% of pre-tax income in 2020;
$11.8 million, or 25% of pre-tax income in 2019; and $9.9 million, or 25% of pre-tax income in 2018.
As expected, the overall tax rate remained relatively stable throughout 2020, 2019 and 2018.
Financial Condition Summary
The Company’s assets totaled $3.2 billion at December 31, 2020 as compared to $2.6 billion at December 31, 2019. Total
liabilities were $2.9 billion at December 31, 2020 as compared to $2.3 billion at the end of 2019, and shareholders’ equity
totaled $343.9 million at December 31, 2020 compared to $309.3 million at December 31, 2019. The following is a
summary of key balance sheet changes during 2020.
Total assets increased by $626.9 million, or 24%. The increase resulted primarily from earning asset
growth including $694.5 million of loan growth (net of deferred fees), partially offset by a $56.8 million
decrease in investment securities.
Loans and leases (net of deferred fees) were up $694.5 million, or 39%. Loan growth consisted mainly
of a $507.9 million increase in non-agricultural real estate loans, as well as a $118.6 million increase in
mortgage warehouse lines, and $119.4 million in SBA PPP loans.
Deposit balances reflect net growth of $456.2 million, or 21%. Deposit growth in 2020 was primarily a
result of organic growth of noninterest bearing or low-cost transaction accounts, including savings accounts.
The increase in brokered deposits offset the decrease in customer time deposits.
Total capital increased by $34.6 million, or 11%, ending the year with a balance of $343.9 million. The
increase in capital is due mostly to the addition of net income and capital from stock options exercised, net
of dividends paid.
IMPACT OF CORONAVIRUS DISEASE 2019 (COVID-19) PANDEMIC ON THE COMPANY’S OPERATIONS
Overview
On January 31, 2020, the United States Department of Health and Human Services declared a public health emergency
with respect to the Coronavirus Disease 2019 (COVID-19). Subsequent to this date, federal, state, and local governmental
agencies, regulatory agencies, and the Federal Reserve Board took actions impacting the Company including these more
significant items:
On March 3, 2020, the Federal Open Market Committee (FOMC) of the Federal Reserve Board lowered the
federal funds rate by 50 basis points in its first emergency move since October 2008.
On March 4, 2020, the Governor of the state of California declared a state of emergency to help make additional
resources available and formalize emergency actions to address COVID-19.
On March 6, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued guidance to financial
institutions reminding them to include pandemic planning in business continuity plans.
Starting on March 9, 2020, the Board of Governors of the Federal Reserve System, Consumer Financial Protection
Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller
of the Currency, and Conference of State Bank Supervisors began issuing various Interagency Guidance
Statements to encourage financial institutions to meet the financial needs of customers affected by the
Coronavirus.
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.
36
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. Effective August 31, 2020, a new simplified, four-tier guideline was implemented for
counties to reopen. Counties must remain in a tier for at least three weeks before moving to the next tier. This
four-tier guideline was suspended and a state-wide shelter-in-place order was reinstated on December 3, 2020,
amid surging cases in California. California returned to its four-tier system on January 25, 2021.
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 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.
On December 21, 2020, the Consolidated Appropriation Act, 2021 was enacted by Congress and signed into law
by the President on December 27, 2020. The bill is one of the largest spending measures ever enacted surpassing
the CARES Act. The pandemic relief portion of the bill includes $284 billion in forgivable loans via the PPP,
extension of the suspension of TDR identification, and the extension of the temporary delay of the implementation
of CECL.
37
Impact of COVID-19 on the Company’s Operations
The Company has had an $18.1 million increase in classified assets, including $1.4 million in non-accrual loans
as a result of 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 have had further modifications or assistance.
Further, we had charge-offs as a result of COVID-19 of less than $0.02 million. Starting in April 2020, the
Company took actions to mitigate the impact on credit losses including permitting short-term payment deferrals
to current customers, as well as providing bridge loans and SBA PPP loans. For further information on the
principal and interest deferrals, please see the “Nonperforming Assets” section below. However, the uncertainty
of national and local economic conditions had a material impact on our provision for loan and lease losses. The
Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier
of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. In December
2020, the Consolidated Appropriations Act, 2021, extended the deferral of implementation of CECL from
December 31, 2020, to the earlier of the first day of the fiscal year, beginning after the national emergency
terminates or January 1, 2022. Although this deferral will still require CECL to be implemented as of January 1,
2022, 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 in our loan and lease portfolio. 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 was 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.
In addition to the expected increase in provision for loan and lease losses, the Company expects that net interest
income could be 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 year ended December 31, 2020,
was 3.95%, compared to a net interest margin of 4.19% for the same period in 2019. New loans booked in 2020
have been at lower rates and although deposit costs have also declined, deposit costs were already low or at their
floors prior to these interest rate cuts. Further, the stay-at-home order and record unemployment resulting from
the COVID-19 pandemic has reduced consumer spending which has reduced our fee income, primarily from
overdraft activity.
The COVID-19 pandemic has not adversely affected our capital or financial resources as of December 31, 2020.
During the year ending 2020, total shareholders’ equity increased by $34.6 million, or 11%, to $343.9 million.
A large component of this was an $12.5 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 $35.4 million in net income
for the year ending 2020 and paid dividends of $12.2 million. The Company also paid a twenty-one cent per
share dividend on February 12, 2021. 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
December 31, 2020, our goodwill was not impaired. The Company performed a qualitative assessment of its
goodwill at December 31, 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 December 31, 2020, we had goodwill of $27.4
million which represented 8% of total equity.
38
The Company continues to serve its customers. Out of our 40 branch locations, four are open with limited lobby
hours, while 8 branches have limited lobby hours and a drive-up or walk-up facility. 23 branches are open for
drive-up or walk-up only and five branches are currently closed except by appointment. 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 significantly 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. As a result of the on-going COVID-19 pandemic, several of our branch lobbies remained closed
as described above. In February 2021, the Board of Directors of the Company decided to explore the possibility
of permanently closing up to five of the branches whose lobbies were closed during the pandemic. The branches
being considered for permanent closure are outside of the bank’s primary market. The total lease breakage fee is
estimated to be less than $0.3 million, in addition to the acceleration of the amortization of certain leasehold
improvements. Any closures would likely occur in the third quarter of 2021 after timely notices are provided to
customers.
To date, the Company did not experience any challenges in implementing its business continuity plans. The
Company’s Risk Management team began preparing in late January and early February with ordering of supplies
such as hand sanitizer, masks and cleaning supplies, as well as laptops for those who did not have one. This
enabled the Company to immediately communicate and implement plans to continue operations in our banking
facilities while enabling those non-customer facing employees to immediately begin working remotely. The
Company did not face any material resource constraints in implementing these plans.
As a financial institution providing essential services, the Company expects continued demand for loans and
deposits. As described above, it is expected that certain services may see declines in demand such as debit and
credit card interchange given lower consumer spending. While overall net income is expected to decline, it
presently is more a function of the interest rate environment than a change in overall demand for loan and deposit
products.
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.
Results of Operations
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 BOLI and
investment gains. The majority of the Company’s noninterest expense is comprised of operating costs that facilitate
offering a full range of banking services to our customers.
Net Interest Income and Net Interest Margin
Net interest income was $104.8 million in 2020 as compared to $97.4 million in 2019 and $92.4 million in 2018. This
equates to increases of 8% in 2020 and 5% in 2019. The level of net interest income we recognize in any given period
depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume
and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits,
and other interest-bearing liabilities. Net interest income is also impacted by the acceleration of net deferred loan fees and
costs for loans paid off early (including SBA PPP loans forgiven), reversal of interest for loans placed on non-accrual
status, and the recovery of interest on loans that had been on non-accrual and were paid off, sold, or returned to accrual
status.
The following table shows average balances for significant balance sheet categories and the amount of interest income or
interest expense associated with each category for each of the past three years. The table also displays calculated yields on
39
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.
Distribution, Rate & Yield
(dollars in thousands, except footnotes)
Assets
Average Income/ Average
Average Income/ Average
Balance(1) Expense Rate/Yield(2) Balance(1) Expense Rate/Yield(2) Balance(1) Expense Rate/Yield(2)
Average Income/ Average
2020
Year Ended December 31,
2019
2018
Investments:
Federal funds sold/due from banks . . . . . . . . . . . . $
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-taxable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . .
25,228 $
379,024
216,387
—
620,639
156
8,199
5,707
—
14,062
Loans and Leases: (3)
79,175
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,610,686
1,887
47,299
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,738
179,924
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,069
6,584
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,135
221,319
Mortgage warehouse . . . . . . . . . . . . . . . . . . . . .
177
2,878
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans and leases . . . . . . . . . . . . . . 2,068,690
96,181
Total interest earning assets (4) . . . . . . . . . . . . . . . 2,689,329 110,243
Other earning assets . . . . . . . . . . . . . . . . . . . . . .
Non-earning assets . . . . . . . . . . . . . . . . . . . . . .
13,103
207,590
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 2,910,022
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . $ 121,867 $
497,984
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
336,620
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . .
124,755
Money market . . . . . . . . . . . . . . . . . . . . . . . . . .
77,119
Certificates of deposit<$100,000 . . . . . . . . . . . . .
359,687
Certificates of deposit>$100,000 . . . . . . . . . . . . .
36,071
Brokered deposits . . . . . . . . . . . . . . . . . . . . . . .
Total interest bearing deposits . . . . . . . . . 1,554,103
Borrowed funds:
1,918
Federal funds purchased . . . . . . . . . . . . . . . . . . .
34,614
Repurchase agreements . . . . . . . . . . . . . . . . . . .
54,244
Short term borrowings . . . . . . . . . . . . . . . . . . . .
35,031
TRUPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total borrowed funds . . . . . . . . . . . . . . .
125,807
Total interest bearing liabilities . . . . . . . . 1,679,910
862,274
39,510
328,328
Total liabilities and shareholders' equity . . $ 2,910,022
Noninterest bearing demand deposits . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . .
278
388
221
128
326
2,361
246
3,948
4
137
102
1,217
1,460
5,408
0.62% $
2.16%
3.34%
—
2.51%
16,346 $
423,453
160,787
—
600,586
376
10,139
4,534
—
15,049
2.30% $
2.39%
3.57%
—
2.71%
13,237 $
422,848
140,300
—
576,385
238
9,548
4,060
—
13,846
79,777
4.92% 1,440,465
2,973
50,042
3.99%
5,918
117,679
3.74%
1,340
8,497
16.24%
5,695
134,171
3.22%
195
6.15%
2,894
4.65% 1,753,748
95,898
4.16% 2,354,334 110,947
12,421
202,810
$ 2,569,565
73,006
5.54% 1,350,425
2,980
52,031
5.94%
5,969
124,809
5.03%
1,251
9,755
15.77%
4,415
86,030
4.24%
171
6.74%
2,682
5.47% 1,625,732
87,792
4.76% 2,202,117 101,638
10,514
204,316
$ 2,416,947
0.23% $
106,849 $
0.08%
444,619
0.07%
289,727
0.10%
124,625
0.42%
88,792
0.66%
396,465
48,392
0.68%
0.25% 1,499,469
316
524
308
181
1,035
7,896
1,120
11,380
1
88
273
1,836
2,198
13,578
313
0.21%
22,090
0.40%
13,229
0.19%
34,853
3.47%
1.16%
70,485
0.32% 1,569,954
664,061
41,563
293,987
$ 2,569,565
364
478
314
146
614
5,039
305
7,260
—
57
196
1,731
1,984
9,244
0.30% $ 119,432 $
425,596
0.12%
298,021
0.11%
149,024
0.15%
81,940
1.17%
1.99%
310,880
16,822
2.31%
0.76% 1,401,715
22
0.32%
14,332
0.40%
8,967
2.06%
34,673
5.27%
3.12%
57,994
0.86% 1,459,709
665,941
30,383
260,914
$ 2,416,947
Interest income/interest earning assets . . . . . . . . .
Interest expense/interest earning assets . . . . . . . . .
Net interest income and margin(5) . . . . .
$ 104,835
4.15%
0.20%
3.95%
$ 97,369
4.76%
0.58%
4.19%
$ 92,394
1.80%
2.26%
2.89%
—
2.40%
5.41%
5.73%
4.78%
12.82%
5.13%
6.38%
5.40%
4.66%
0.30%
0.11%
0.11%
0.10%
0.75%
1.62%
1.81%
0.52%
—
0.40%
2.19%
4.99%
3.42%
0.63%
4.66%
0.42%
4.24%
(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
(2) Yields and net interest margin have been computed on a tax equivalent basis.
(3)
Loans are gross of the allowance for possible loan and lease losses. Net loan fees have been included in the calculation of interest income. Net loan
fees (costs) and loan acquisition FMV amortization were $1.9 million, $(0.4) million, and $0.8 million for the years ended December 31, 2020,
2019, and 2018 respectively.
(4) Non-accrual loans are slotted by loan type and have been included in total loans for purposes of total interest earning assets.
(5) Net interest margin represents net interest income as a percentage of average interest-earning assets (tax-equivalent).
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
40
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)
Years Ended December 31,
Assets:
Investments:
Federal funds sold/due from time . . . . . . $
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-taxable . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . .
2020 over 2019
Increase(decrease) due to
Rate
2019 over 2018
Increase(decrease) due to
Rate
Volume
Net
Volume
204 $
(1,064)
1,568
—
708
(424) $
(876)
(395)
—
(1,695)
(220) $
(1,940)
1,173
—
(987)
55 $
6
593
—
654
83 $
585
(119)
—
549
Net
138
591
474
—
1,203
Loans and leases:
Real estate . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage warehouse . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans and leases . . . . . . . . . . . .
Total interest earning assets . . . . . . . . $ 16,498 $ (17,202) $
(10,029)
(923)
(2,310)
31
(2,259)
(17)
(15,507)
9,427
(163)
3,130
(302)
3,699
(1)
15,790
(602)
(1,086)
820
(271)
1,440
(18)
283
(704) $
4,868
(114)
(341)
(161)
2,471
14
6,737
7,391 $
1,903
107
290
250
(1,191)
10
1,369
1,918 $
6,771
(7)
(51)
89
1,280
24
8,106
9,309
Liabilities:
Interest bearing deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . $
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings accounts . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit < $100,000 . . . . .
Certificates of deposit > $100,000 . . . . .
Brokered deposits . . . . . . . . . . . . . . . . . .
Total interest bearing deposits . . . . . .
44 $
63
50
—
(136)
(732)
(285)
(996)
(82) $
(38) $
(199)
(137)
(53)
(573)
(4,803)
(589)
(6,436)
(136)
(87)
(53)
(709)
(5,535)
(874)
(7,432)
(38) $
21
(9)
(24)
51
1,387
572
1,960
(10) $
25
3
59
370
1,470
243
2,160
(48)
46
(6)
35
421
2,857
815
4,120
Borrowed funds:
Borrowed funds:
Federal funds purchased . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . .
Short term borrowings . . . . . . . . . . . . . .
Long term borrowings . . . . . . . . . . . . . . .
TRUPS . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total borrowed funds . . . . . . . . . . . . .
Total interest bearing liabilities . . . . .
Net interest income . . . . . . . . . . . . . . $ 16,584 $
5
50
846
—
9
910
(86)
(2)
(1)
(1,017)
—
(628)
(1,648)
(8,084)
(9,118) $
3
49
(171)
—
(619)
(738)
(8,170)
7,466 $
—
31
93
—
9
133
2,093
5,298 $
1
—
(16)
—
96
81
2,241
(323) $
1
31
77
—
105
214
4,334
4,975
Net interest income in 2020 as compared to 2019 was impacted by a favorable volume variance of $16.6 million partially
offset by an unfavorable $9.1 million rate variance. For 2019 relative to 2018, net interest income reflects a favorable
volume variance of $5.3 million partially offset by an unfavorable $0.3 million rate variance.
The 2020 volume variance is due mostly to increases in average balances, resulting from the 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 $3.7 million favorable volume variance. The 2019 volume variance is due mostly to increases in
41
average balances of real estate loans and mortgage warehouse lines. However, the ending balance of real estate loans ended
2019 approximately 3% lower than the balance at December 31, 2018.
The Company’s net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning
assets declined by 24 basis points to 3.95% in 2020, and declined by 5 basis points to 4.19% in 2019 as compared to 2018.
There was an unfavorable rate variance of $9.1 million since the weighted average yield on interest-earning assets fell by
60 basis points and the weighted average cost of interest-bearing liabilities decreased by 54 basis points. The change in
the yield on interest-earning assets representing a much larger base than that of the interest-bearing liabilities. The rate
variance was negatively impacted by the following factors: A shift in our earning asset mix into lower-yielding loans and
investments; increased line utilization of mortgage warehouse lines; $54.3 million in average balances of low-yielding
SBA PPP loans; partially offset by lower costs of time-deposits and other interest-bearing liabilities. The 2019 unfavorable
rate variance is due partially to a lower rate environment in 2019, as well as a shift in the mix of earning assets to lower
yielding mortgage warehouse lines and non-taxable investment securities coupled with an increase in rates paid on time
deposits. Investment yields decreased in 2020 but increased in 2019 over 2018. The decrease in 2020 was due to the lower
rate environment and its impact on all debt securities. Net interest margin is expected to be affected by the overall rate
environment. A continued low rate environment will result in lower earning asset yields, which will be offset by the
acceleration of fee income from SBA PPP loans in the near term.
The increase in 2019 over 2018 was primarily due to a continued plan to shift to higher yielding municipal bonds. Rates
paid on non-maturity deposits declined in 2020 but were approximately the same for 2019 over 2018. There was a 5 basis
point decrease on money market accounts in 2020 but was 5 basis points higher in 2019 over 2018. The weighted average
cost of interest-bearing liabilities went down 54 bps in 2020 but was up 23 bps in 2019. Since the Federal Open Markets
Committee of the Federal Reserve System kept the federal funds target rate at historical lows throughout 2020, time deposit
rates in 2020 dropped 126 bps due to the relatively short duration of our time deposit portfolio. The 2019 increase was
primarily because of higher rates paid on time deposits (including brokered deposits added in the last half of 2018).
Overnight borrowings and adjustable-rate trust-preferred securities (“TRUPS”) are also tied to short-term rates which
began lowering in the second half of 2019, but still remained higher overall in 2019 as compared to 2018 and remained
low throughout 2020. During the year, adjustments to interest income occur due to the following adjustments: interest
income recovered upon the resolution of nonperforming loans, the reversal of interest income when a loan is placed on
non-accrual status, and accelerated fees or prepayment penalties recognized for early payoffs of loans. Such adjustments
totaled $0.39 million in 2019, $0.82 million in 2019, and $0.28 million in 2018. Further, discount accretion on loans from
whole-bank acquisitions enhanced our net interest margin by approximately two basis points in 2020, four basis points in
2019, and seven basis points in 2018.
Provision for Loan and Lease Losses
The Company recorded a loan and lease loss provision of $8.6 million in 2020; $2.6 million in 2019, and $4.4 million in
2018. The Company is subject to the adoption of the Current Expected Credit Loss ("CECL") accounting method under
Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial
Instruments – Credit Losses (Topic 326) in 2020. However, in March 2020, 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. In December 2020, the Consolidated Appropriations Act, 2021
extended the deferral of implementation of CECL from December 31, 2020, to the earlier of the first day of the fiscal year,
beginning after the national emergency terminates or January 1, 2022. Therefore, the Company expects to implement
CECL on January 1, 2022.
The Company initially elected in the first quarter of 2020 to postpone implementation and will now continue to postpone
implementation in order to provide additional time to assess better the impact of the COVID-19 pandemic on the expected
lifetime credit losses. At the time of the initial decision, there was a significant economic uncertainty on the local, regional,
and national levels as a result of local and state stay-at-home orders, as well as relief measures provided at a national, state,
and local level. Further, the Company took actions to serve our communities during the pandemic, including permitting
short-term payment deferrals to current customers, as well as originating bridge loans and SBA PPP loans. It was
determined that more time was needed to assess the impact of the uncertainty and related actions on the Company's
allowance for loan and lease losses under the CECL methodology.
42
The growth in the provision for loan and lease losses in 2020, is due to the strong organic non-owner occupied commercial
real estate loan growth generated in the second half of 2020 and the continued uncertainty surrounding the estimated
impact that COVID-19 has had on the economy. The provision was also impacted by downgrades of certain loans deferred
under section 4013 of the CARES Act, including 10 loans for $1.4 million placed on non-accrual at the end of the deferral
period. Management evaluated its qualitative risk factors under our current incurred loss model and adjusted these factors
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, temporary business
shut-downs, and reduced consumer and business spending.
Two separate impaired loans impacted the provision for loan and lease losses in both 2019 and 2018. In 2019, additional
reserve was booked in the third quarter 2019 for a $2.8 million loan placed on nonaccrual status resulting in a $1.2 million
charge-off. The provision for 2018 includes $2.4 million for a large purchased participation loan that was placed on
nonaccrual status in the third quarter 2018.
With the loan and lease loss provision recorded in 2020 we were able to maintain our allowance for loan and lease losses
at a level that, in Management’s judgment, is adequate to absorb probable loan and lease losses related to specifically
identified impaired loans as well as probable incurred losses in the remaining loan portfolio. Specifically identifiable and
quantifiable loan and lease losses are immediately charged off against the allowance. The Company recorded net loan and
lease losses of $0.7 million in 2020. The Company experienced net loan and lease losses of $2.4 million in 2019, including
a $1.2 million charge-off on the loan placed on nonaccrual status in the third quarter 2019 as mentioned above. The
Company experienced net loan and lease losses of $3.6 million in 2018, including a $2.4 million loss on the above-
referenced participation loan. The loan and lease loss provision for 2020, 2019 and 2018 has been favorably impacted by
the following factors: most charge-offs were recorded against pre-established reserves, which alleviated what otherwise
might have been a need for reserve replenishment; loss rates for most loan types have been declining, thus having a positive
impact on general reserves required for performing loans; and, new loans booked have been underwritten using continued
tighter credit standards.
The Company’s policies for monitoring the adequacy of the allowance and determining loan amounts that should be
charged off, and other detailed information with regard to changes in the allowance, are discussed in Note 2 to the
consolidated financial statements and below under “Allowance for Loan and Lease Losses.” The process utilized to
establish an appropriate allowance for loan and lease losses can result in a high degree of variability in the Company’s
loan and lease loss provision, and consequently in our net earnings.
43
Noninterest Revenue and Operating Expense
The table below sets forth the major components of the Company’s noninterest revenue and operating expense for the years
indicated, along with relevant ratios:
Non-Interest Income/Expense
(dollars in thousands)
2020
% of Total
2019
% of Total
2018
% of Total
Year Ended December 31,
NONINTEREST INCOME:
44.99% $ 12,742
Service charges on deposit accounts . . . . . $ 11,765
6,584
26.86%
7,023
Checkcard fees . . . . . . . . . . . . . . . . . . . . . . .
4,231
15.62%
4,084
Other service charges and fees . . . . . . . . . .
2,184
9.22%
2,412
Bank owned life insurance income . . . . . .
(198)
1.49%
390
Gain on sale of securities . . . . . . . . . . . . . .
(2,079)
(4.55)%
(1,189)
Loss on tax credit investment . . . . . . . . . . .
1,665
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
6.37%
Total noninterest income . . . . . . . . .
26,150 100.00%
As a % of average interest-earning
54.28% $ 12,439
5,878
28.04%
5,219
18.02%
591
9.30%
2
(0.84)%
(2,561)
(8.86)%
(4)
0.06%
23,477 100.00%
57.69%
27.26%
24.20%
2.74%
0.01%
(11.88)%
(0.02)%
21,564 100.00%
assets . . . . . . . . . . . . . . . . . . . . . . . .
0.97%
1.00%
0.98%
OTHER OPERATING EXPENSES:
Salaries and employee benefits . . . . . . . . .
Occupancy costs
Furniture and equipment . . . . . . . . . . . .
Premises . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and promotion costs . . . . . . . .
Data processing costs . . . . . . . . . . . . . . . . .
Deposit services costs . . . . . . . . . . . . . . . . .
Loan services costs
Loan processing . . . . . . . . . . . . . . . . . . .
Foreclosed assets . . . . . . . . . . . . . . . . . .
Other operating costs
40,178
52.93%
35,978
50.98%
36,133
51.61%
2,028
7,814
1,889
4,661
8,483
2.67%
10.29%
2.49%
6.14%
11.17%
2,141
7,704
2,568
4,564
7,962
3.03%
10.91%
3.64%
6.47%
11.27%
2,632
7,663
2,748
5,015
5,413
3.76%
10.94%
3.92%
7.16%
7.73%
880
253
1.16%
0.33%
675
35
0.96%
0.05%
1,142
(730)
1.64%
(1.04)%
Telephone and data communications . .
Postage and mail . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,775
321
1,647
2.34%
0.42%
2.17%
1,529
436
1,798
2.17%
0.62%
2.55%
1,479
997
1,408
2.11%
1.42%
2.01%
Professional services costs
Legal and accounting . . . . . . . . . . . . . . .
Acquisition costs . . . . . . . . . . . . . . . . . .
Other professional services costs . . . . .
Stationery and supply costs . . . . . . . . . . . .
Sundry & tellers . . . . . . . . . . . . . . . . . . . . . .
2.76%
0.64%
2.79%
1.98%
0.57%
Total other operating expense . . . . . . . . $ 75,912 100.00% $ 70,578 100.00% $ 70,024 100.00%
As a % of average interest-earning
2.94%
0.03%
3.53%
0.45%
0.40%
2.62%
0.00%
3.94%
0.59%
0.74%
2,072
22
2,492
318
284
1,932
449
1,956
1,387
400
1,989
—
2,990
446
558
assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Net noninterest income as a % of
average interest-earning assets . . . . . .
Efficiency ratio (1) (2) . . . . . . . . . . . . . . . . . .
2.82%
(1.85)%
57.18%
3.00%
(2.00)%
57.46%
3.18%
(2.20)%
60.79%
(1) Tax Equivalent
(2) 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.
44
Noninterest income improved in 2020 with a $2.7 million increase, or 11%, as compared to an increase of $1.9 million, or
9%, in 2019. Total noninterest income was 0.97% of average interest-earning assets in 2020 as compared to a ratio of 1.0%
in 2019 and 0.98% in 2018. The ratio declined in 2020 due to a 14% increase in interest-earning assets.
The principal component of the Company’s noninterest revenue, service charges on deposit accounts, decreased by $1.0
million, or 8%, in 2020 as compared to 2019. The same line item declined by $0.3 million, or 2%, in 2019 over 2018. This
line item is primarily driven by the volume of transaction accounts. As a percent of average transaction account balances,
service charge income was 1.9% in 2020, and 1.0% in 2019 and 2018.
Checkcard fees consists of interchange fees from our customers’ use of debit cards for electronic funds transactions. This
category increased by $0.4 million, or 7%, in 2020 as compared to 2019, and increased by $0.7 million, or 12%, in 2019
over 2018. The increases in 2020 and 2019 are primarily a result of growth in our deposit account base as well as increased
usage of debit cards by our customers.
Other service charges and fees declined by $0.1 million, or 3%, in 2020 over 2019, and by $1.0 million, or 19%, in 2019
over 2018. The decrease in 2019, was due largely to two infrequent items occurring in 2018. In 2018, we had a $1.2 million
write-up of our investment in Pacific Coast Bankers Bank (“PCBB”), due to Accounting Standards Update 2016-01 which
required the Company to write the investment to fair value through earnings, as well as a $0.2 million special dividend
received pursuant to our equity investment in the Federal Home Loan Bank of San Francisco (“FHLB”).
BOLI income generally fluctuates based on the market. In 2020 BOLI income increased by $0.2 million or 10%, and in
2019 BOLI income increased by $1.6 million, or 270%, over 2018. BOLI income is derived from two types of policies
owned by the Company, namely “separate account” and “general account” life insurance, and the year over year variances
are due in large part to fluctuations in income on separate account BOLI. The Company had $9.3 million invested in
separate account BOLI at December 31, 2020, which produces income that helps offset expense accruals for deferred
compensation accounts the Company maintains on behalf of certain directors and senior officers. Those accounts have
returns pegged to participant-directed investment allocations that can include equity, bond, or real estate indices, and are
thus subject to gains or losses which often contribute to significant fluctuations in income (and associated expense
accruals). Gains on separate account BOLI totaled $1.4 million in 2020 as compared to $1.2 million in 2019, and net losses
of $0.4 million in 2018. This resulted in a favorable variance of $0.2 million for 2020 as compared to 2019, and a favorable
variance of $1.6 million in 2019 as compared to 2018. As noted, gains and losses on separate account BOLI are related to
expense accruals or reversals associated with participant gains and losses on deferred compensation balances, thus the
overall net impact on taxable income tends to be minimal. The Company’s books also reflect a net cash surrender value
for general account BOLI of $43.2 million at December 31, 2020 as compared to $42.5 million at year-end 2019. General
account BOLI produces income that is used to help offset expenses associated with executive salary continuation plans,
director retirement plans and other employee benefits. Interest credit rates on general account BOLI do not change
frequently so the income has typically been fairly consistent with $1.0 million, of general account BOLI income recorded
for all three years ending December 31, 2020, 2019, and 2018.
The Company recognized a $0.4 million gain on the sale of investment securities in 2020, as compared to a $0.2 million
loss in 2019 and a nominal gain in 2018. The gain in 2020 was due to a net gain on the sale of debt securities, in an effort
to restructure the portfolio primarily to eliminate small residual balances and reduce potential credit risk on certain
municipal holdings. The loss in 2019 was taken in order to sell several small balance and low-yielding bonds in order to
replace them with fewer higher-yielding bonds. The earn back of the transaction was less than a year.
Loss on tax credit investment reflects pass-through expenses associated with our investments in low-income housing tax
credit funds and other limited partnerships. Those expenses, which are netted out of revenue, decreased by $0.9 million,
or 43%, in 2020 as compared to 2019. In 2019 as compared to 2018, these expenses decreased by $0.5 million, or 19%.
The favorable variance in 2020 is due to the expiration of expense amortization on several funds which had reached the
end of their useful tax benefit life. The largest contribution to the favorable variance in 2019, as well as the unfavorable
variance in 2018 came from a $0.91 million adjustment to accelerate expense amortization on our tax credit investments,
to ensure that the book value of each investment does not exceed its projected remaining tax benefits.
45
The other category, increased to $1.7 million from $0.01 million, in 2020 as compared to 2019. The primary reason for
this increase is due to a $1.5 million gain from the wrap up of low-income housing tax credit fund investments and a $0.2
million valuation gain on restricted equity investments owned by the Company. There was a nominal increase in this
category in 2019 as compared to 2018.
Total operating expense, or noninterest expense, increased by $5.3 million, or 8%, in 2020 as compared to 2019, and
increased by $0.6 million, or 1%, in 2019 over 2018. The primary increase in 2020 was in salaries and benefits as discussed
in further detail below. Although overall noninterest expense did not fluctuate significantly from 2019 to 2018, several
line items fluctuated with the largest single item being deposit service costs of $2.6 million. This increase was mostly
offset by several smaller changes in other line items. Noninterest expense as a percent of average interest-earning assets
trended down each year. This ratio was 2.8% in 2020, 3.0% in 2019 and 3.2% in 2018.
The largest component of noninterest expense, salaries, and employee benefits, increased $4.2 million, or 12%, in 2020 as
compared to 2019. The reason for this increase is due to several factors, including merit increases for employees due to
annual performance evaluations, new loan production teams for the northern and southern California markets, and a focus
on hiring additional senior-level staff and management. The same line item was down $0.2 million, or 0.4%, in 2019 as
compared to 2018. Salary expense declined in 2019 as compared to 2018 in part due to selective staff reductions even
though there was some increase to deferred compensation expenses as well as the normal annual salary increases.
Components of compensation expense that can experience significant variability and are typically difficult to predict
include salaries associated with successful loan originations, which are accounted for in accordance with Financial
Accounting Standards Board (“FASB”) guidelines on the recognition and measurement of non-refundable fees and
origination costs for lending activities, and accruals associated with employee deferred compensation plans. Loan
origination salaries that were deferred from current expense for recognition over the life of related loans totaled $3.3
million in 2020, $3.7 million in 2019, and $4.2 million for 2018. Employee deferred compensation expense accruals totaled
only $0.2 million in 2020, and 2019. Such deferred compensation expenses were nominal in 2018. As noted above in our
discussion of BOLI income, employee deferred compensation plan accruals are related to separate account BOLI income
and losses, as are directors deferred compensation accruals that are included in “other professional services,” and the net
income impact of all income/expense accruals related to deferred compensation is usually minimal. Salaries and benefits
were 53% of total operating expense in 2020, relative to 51% in 2019 and 52% in 2018. The number of full-time equivalent
staff employed by the Company totaled 501 at the end of 2020, as compared to 513 at December 31, 2019 and 541 at
December 31, 2018. Staff attrition throughout 2020, without the need for immediate replacements due to temporary branch
lobby closures or limited branch lobby hours attributed to the COVID-19 pandemic, was the primary reason for the FTE
decline. When branch lobbies resume normal operating hours and public access, full-time equivalent staff are expected to
increase, however the exact timing of this change is not currently known. Efficiency initiatives implemented toward the
end of the 2018 continuing throughout 2019 and 2020 were also drivers of the three year reduction in FTE.
Total rent and occupancy expense, including furniture and equipment costs, were about the same in 2020 as compared to
2019 and decreased by $0.5 million, or 4%, in 2019 over 2018. The decline in 2019 was primarily due to lower depreciation
expenses and lower maintenance/repair costs in 2019.
Advertising and promotion costs decreased by 26% to $1.9 million in 2020 as compared to 2019, and decreased by $0.2
million, or 7%, in 2019 over 2018. The decrease in 2020 came from the cessation of special events and in-branch marketing
campaigns necessitated by the COVID-19 pandemic and the stay in place orders instituted by the Governor of the state of
California, at differing periods during much of 2020.
Data processing costs increased by $0.1 million, or 2%, in 2020 as compared to 2019 and decreased by $0.5 million, or
9%, in 2019 over 2018. Although as a whole the increase in 2020 was minimal, the Company did experience increases in
loan management software expenses due to participation in the SBA PPP program and other costs incurred to implement
remote working arrangements for staff; which was offset by lower core software provider costs and other data processing
costs. The decrease in 2019 was primarily due to lower core software provider costs.
Deposit services costs increased by $0.5 million, or 7%, in 2020 as compared to 2019, and increased by $2.6 million, or
47%, in 2019 over 2018. Deposit costs have been impacted in both 2020 and 2019, by increases in debit card processing
and ATM network costs due to higher customer activity levels. In 2020 we also increased our utilization of armored car
46
services to replenish ATM machines as an increased security precaution. In 2019, approximately $1.5 million of costs
associated with statement printing costs that were previously recorded in other operations expenses and stationary &
supplies expense were reclassified to data processing costs. The purpose of the reclassification was to better track the costs
associated with producing paper statements for our customers so that we could better track progress against our strategy
to lower such costs.
Loan services costs are comprised of loan processing costs, and net costs associated with foreclosed assets. Loan
processing costs, which include expenses for property appraisals and inspections, loan collections, demand and foreclosure
activities, loan servicing, loan sales, and other miscellaneous lending costs, increased by $0.4 million, or 60%, in 2020 as
compared to 2019 and decreased by $0.5 million, or 41%, in 2018 over 2017. The increase in 2020 as well as the decrease
in 2019 was due to smaller amounts in nearly every category of loan servicing. The decrease in 2019 was also due to the
dramatic reduction in the amount of residential first mortgages made by the Company. Foreclosed assets costs are
comprised of write-downs taken subsequent to reappraisals, OREO operating expense (including property taxes), and
losses on the sale of foreclosed assets, net of rental income on OREO properties and gains on the sale of foreclosed assets.
Those costs were just $0.2 million in 2020 as compared to a $0.04 million net gain in 2019 and costs of $0.7 million in
2018. These costs fluctuate based on market conditions of OREO relative to our holding value and the nature of the
underlying property.
The “other operating costs” category includes telecommunications expense, postage, and other miscellaneous costs.
Telecommunications expense increased by 16% to $1.8 million in 2020, as compared to $1.5 million in 2019. The increase
was due to an upgrade of telecommunications circuits, as well as additional costs from work-at-home arrangements during
the COVID-19 pandemic. The increased telecommunication costs in 2020, are not expected to continue at the same rate,
as old duplicative circuits are removed from service. Such expense was $0.1 million, or 3%, higher in 2019 than in 2018.
Postage expense decreased by $0.1 million, or 26%, in 2020 as compared to 2019 and decreased by $0.6 million or 56%,
in 2019 relative to 2018. The decrease in 2020 was due to concentrated efforts to decrease our utilization of overnight mail
services and increase usage of digital technologies. The significant decline in 2019 was due mostly to a reclassification of
nearly the entire annual variance to deposit services costs related to paper statements as described above. The “Other”
category under other operating costs decreased by $0.2 million, or 8%, in 2020 as compared to 2019 and up by $0.4
million, or 28%, in 2019 over 2018. The decrease in 2020 is due to the lack of participation in offsite conferences and
training due to the COVID-19 pandemic. The increase in 2019 is due mostly to higher consulting and training costs as
well as higher recruiting costs.
Total Professional Services costs increased by $0.4 million, or 9%, in 2020 as compared to 2019, as compared to a $0.3
million, or 6%, increase in 2019 as compared to 2018. Professional Services costs consists of legal and accounting,
acquisition, and other professional services costs. Legal and Accounting costs decreased by $0.1 million, or 4%, in 2020
as compared to 2019, and increased by $0.1 million, or 7%, in 2019 as compared to 2018. The decrease in 2020 was due
to lower internal audit costs as a result of moving some third party reviews inhouse. The increase in 2019 was mostly due
to increased audit and compliance costs as a result of an enhanced risk management program. Acquisition costs, or one-
time expenses directly attributable to our whole-bank and branch acquisitions, were nil in 2020, as compared to just $0.02
million in 2019 and $0.5 million in 2018. Acquisition costs are comprised primarily of termination fees for core processing
contracts and certain other contracts, software conversion costs, financial advisor fees, legal costs, severance and retention
amounts paid to employees of the acquired institutions, and the write-off of furniture, fixtures and equipment that were
not utilized by the Company. Other professional services costs include FDIC assessments and other regulatory expenses,
directors’ costs, and certain insurance costs among other things. This category increased by $0.5 million, or 20%, in 2020
as compared to 2019, and increased by $0.5 million, or 27%, in 2019 relative to 2018. The increase in 2020 is primarily
from an increase in FDIC assessment expenses as we utilized all of the available small bank assessment credits after the
first quarter of 2020. There was also a favorable swing in the director’s deferred compensation expense for both 2020 and
2019, which is mostly offset by higher BOLI income, as described above under the separate account BOLI. In addition,
FDIC and State exam assessment expenses declined by $0.3 million in 2019 as compared to 2018.
Stationery and supply costs increased by $0.1 million, or 40%, in 2020 as compared to 2019 due primarily to specialized
supplies attributed to the COVID-19 pandemic. This same category decreased by $1.1 million, or 77%, in 2019 over 2018,
due to a reclassification of customer paper statement expense to deposit services costs as described above.
47
Sundry and teller costs of $0.6 million in 2020, $0.3 million in 2019, and $0.4 million in 2018 primarily reflect operational
losses, including debit card disputes. These costs were $0.3 million higher in 2020 over 2019, mainly because of two large
operational losses, and higher debit card losses, consistent with the higher volume of debit card transactions. In 2019 over
2018, these costs trended downward due to the implementation of new technology and education.
The Company’s tax-equivalent overhead efficiency ratio was 57.2% in 2020, 57.5% in 2019, and 60.8% in 2018. The
overhead efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and
noninterest income, with the provision for loan and lease losses and investment gains/losses excluded from the equation.
The ratio trended downward due to continued efforts to control costs, as well as higher income which is the denominator
of the equation.
Income Taxes
Our income tax provision was $11.1 million, or 23.8% of pre-tax income in 2020 as compared to $11.8 million, or 24.6%
of pre-tax income in 2019, and $9.9 million, or 25.0% of pre-tax income in 2018. The tax accrual rate was slightly lower
in 2020 due to a higher proportion of non-taxable income, and approximately the same in 2019 as it was in 2018.
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.
The Company’s investments in state, county and municipal bonds provided $5.7 million of federal tax-exempt income in
2020, $4.5 million in 2019, and $4.1 million in 2018. Moreover, in addition to life insurance proceeds of $0.07 million in
2020, net increases in the cash surrender value of bank-owned life insurance added $2.4 million to tax-exempt income in
2020; $2.2 million in 2019, and $0.6 million in 2018.
Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds, and California
state employment tax credits. We had a total of $3.5 million invested in low-income housing tax credit funds as of
December 31, 2020 and $4.1 million as of December 31, 2019, which are included in other assets rather than in our
investment portfolio. Those investments have generated substantial tax credits over the past few years, with about $0.5
million in credits available for the 2020 tax year; $0.5 million for the 2019 tax year, and $0.6 million in 2018. The credits
are dependent upon the occupancy level of the housing projects and income of the tenants and cannot be projected with
certainty. Furthermore, our capacity to utilize them will continue to depend on our ability to generate sufficient pre-tax
income. We plan to invest in additional tax credit funds in the future, but if the economics of such transactions do not
justify continued investments then the level of low-income housing tax credits will taper off in future years until they are
substantially utilized by the end of 2028. That means that even if taxable income stayed at the same level through 2028,
our tax accrual rate would gradually increase.
Financial Condition
Assets totaled $3.2 billion at December 31, 2020, an increase of $626.9 million, or 24%, for the year. Assets increased in
2020 primarily due to 694.5 million, or 39% increase, in net loans and leases. Deposits were up $456.2 million, or 21%.
Total capital increased by $34.6 million, or 11%. The major components of the Company’s balance sheet are individually
analyzed below, along with information on off-balance sheet activities and exposure.
Loan and Lease Portfolio
The Company’s loan and lease portfolio represents the single largest portion of invested assets, substantially greater than
the investment portfolio or any other asset category, and the quality and diversification of the loan and lease portfolio are
important considerations when reviewing the Company’s financial condition.
The Selected Financial Data table in Item 6 above reflects the amount of loans and leases outstanding at December 31 for
each year from 2020 back to 2016, net of deferred fees and origination costs and the allowance for loan and lease losses.
The Loan and Lease Distribution table that follows sets forth by loan type the Company’s gross loans and leases
48
outstanding, and the percentage distribution in each category at the dates indicated. The balances for each loan type include
nonperforming loans, if any, but do not reflect any deferred or unamortized loan origination, extension, or commitment
fees, or deferred loan origination costs. Although not reflected in the loan totals below and not currently comprising a
material part of our lending activities, the Company also occasionally originates and sells, or participates out portions of,
loans to non-affiliated investors.
Loan and Lease Distribution
(dollars in thousands)
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
2020
2019
As of December 31,
2018
2017
2016
48,565 $ 105,979 $
71,980
139,836
38,075
61,865
343,199
91,413
200,181
49,599
54,457
343,883
105,676 $
109,023
236,825
56,320
54,877
301,324
74,256 $
58,779
204,766
62,590
42,930
263,447
32,417
40,650
137,143
43,443
31,631
253,535
occupied . . . . . . . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . .
Mortgage warehouse lines . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . .
244,198
134,480
917,497
46,229
123,595
163,045
12,165
Total loans and leases . . . . . . . . . . . . . . $ 2,463,111 $ 1,762,565 $ 1,731,928 $ 1,557,820 $ 1,262,531
1,062,498
129,905
1,895,923
44,872
209,048
307,679
5,589
438,344
151,541
1,453,930
49,103
128,220
91,813
8,862
379,432
140,516
1,226,716
46,796
135,662
138,020
10,626
412,569
144,033
1,402,114
48,036
115,532
189,103
7,780
Percentage of Total Loans and Leases
Real estate:
1-4 family residential construction . . . . . . .
Other construction/land . . . . . . . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . .
Commercial real estate - owner occupied . .
Commercial real estate - non-owner
occupied . . . . . . . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . .
Mortgage warehouse lines . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . .
1.97%
2.92%
5.68%
1.55%
2.51%
13.93%
43.14%
5.27%
76.97%
1.82%
8.49%
12.49%
0.23%
100.00%
6.01%
5.19%
11.36%
2.81%
3.09%
19.51%
23.41%
8.17%
79.55%
2.73%
6.55%
10.73%
0.44%
100.00%
6.10%
6.29%
13.67%
3.25%
3.17%
17.40%
25.32%
8.75%
83.95%
2.84%
7.40%
5.30%
0.51%
100.00%
4.77%
3.77%
13.14%
4.02%
2.76%
16.91%
24.36%
9.02%
78.75%
3.00%
8.71%
8.86%
0.68%
100.00%
2.57%
3.22%
10.86%
3.44%
2.51%
20.08%
19.34%
10.65%
72.67%
3.66%
9.79%
12.91%
0.96%
100.00%
The Company has experienced net growth in loan and lease balances in each of the last five years, despite fluctuations
caused by variability in outstanding balances on mortgage warehouse lines, reductions associated with the resolution of
impaired loans, weak loan demand in some years, tightened underwriting standards, and intense competition. This growth
is due in part to acquisitions, including Coast National Bank in 2016 and Ojai Community Bank in 2017, as well as whole
loan purchases and participations, and participation in the SBA PPP loan program in 2020. Organic loan growth has also
been extremely robust in recent periods, particularly with regard to non-owner occupied commercial real estate loans.
For 2020, gross loans were up by $700.5 million, or 40%, due largely to $649.9 million of organic growth in non-
agricultural real estate loans. This growth was a deliberate effort of our Northern and Southern market loan production
49
teams and was facilitated by the opening of a loan production office in Northern California (Rocklin, California) and an
expansion of the loan team in Southern California.
Mortgage warehouse lines also contributed to the 2020 increase; up by $118.6 million, or 63%. Commercial and industrial
loans were up by $93.5 million or 81% due to our participation in the SBA PPP loan program. Multi-family residential
loans increased $7.4 million or 14%. These increases were partially offset by declines in all other loan categories. Mortgage
warehouse lines increased by $97.2 million, or 106%, in 2019 primarily due to a strategy to focus on volume given the
short duration of these loans. This growth strategy involved providing more competitive pricing to mortgage originators
coupled with a stronger emphasis on calling efforts. The largest single decline in any other category of loans during 2019
was real estate loans of $51.8 million, or 4%, mostly due to a strategic decision to significantly reduce our activity of
residential mortgages; as a result residential mortgage loan balances declined by approximately $43.4 million in 2019.
As demonstrated by the expansion of the lending teams, management remains focused on organic loan growth, however
at a significantly lower rate than what was experienced in 2020. Our loan pipeline at December 31, 2020, softened due to
a strategic shift to focus on further diversifying our loan mix, especially as it relates to non-owner occupied commercial
real estate. No assurance can be provided with regard to future net growth in aggregate loan balances given occasional
surges in prepayments, including forgiveness of PPP loans; fluctuations in mortgage warehouse lending; and maintaining
concentrations in certain sectors within our risk management parameters.
As a part of their regulatory oversight, the federal regulators have issued guidelines on sound risk management practices
with respect to a financial institution’s concentrations in commercial real estate (“CRE”) lending activities. These
guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to
unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. The
guidelines identify certain concentration levels that, if exceeded, will expose the institution to additional supervisory
analysis with regard to the institution’s CRE concentration risk. The guidelines, as amended, are designed to promote
appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE
loans. In general, the guidelines, as amended, establish the following supervisory criteria as preliminary indications of
possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent
100% or more of Tier 1 risk-based capital plus allowance for loan and lease losses; or (2) total CRE loans as defined in
the regulatory guidelines represent 300% or more of Tier 1 risk-based capital plus allowance for loan and lease losses, and
the institution’s CRE loan portfolio has increased by 50% or more during the prior 36 month period. At December 31,
2020, the Bank’s total construction, land development and other land loans represented 36% of Tier 1 risk-based capital
plus allowance for loan and lease losses. At December 31, 2020, the Bank’s total CRE loans as defined in the regulatory
guidelines represented 378% of Tier 1 risk-based capital plus allowance for loan and lease losses, and the Bank’s CRE
loan portfolio has increased by more than 50% during the prior 36 month period. Therefore, the Bank believes that the
guidelines are applicable to it as it has a potential concentration in CRE loans. The Bank and its board of directors have
discussed the guidelines and believe that the Bank’s underwriting policies, management information systems, independent
credit administration process, and monitoring of real estate loan concentrations are sufficient to address the risk
management of CRE under the guidelines.
50
Loan and Lease Maturities
The following table shows the maturity distribution for total loans and leases outstanding as of December 31, 2020,
including non-accruing loans, grouped by remaining scheduled principal payments:
Loans and Lease Maturity
(dollars in thousands)
As of December 31, 2020
Three months
to twelve
months
One to five Over five
Real estate . . . . . . . . . . . . . . $
Agricultural . . . . . . . . . . . . .
Commercial and industrial .
Mortgage warehouse lines .
Consumer loans . . . . . . . . . .
year
908,876
2,896
156,658
—
3,916
Total . . . . . . . . . . . . . . . . $ 146,067 $ 319,676 $ 287,572 $ 1,709,796 $ 2,463,111 $ 925,022 $ 1,072,346
38,915 $ 131,773 $ 1,676,442 $ 1,895,923 $ 899,339 $
1,244
2,662
24,028
1,478
23,799
28,268
18,713 152,189
—
—
—
237,547
640
2,424
2,132
473
44,872
209,048
307,679
5,589
Three months
or less
48,793 $
16,704
9,878
70,132
560
years
years
Total
year
Floating rate: Fixed rate:
due after one due after one
Generally, the Company’s contractual life of loans matches the loan’s amortization period. Rates on loans longer than
five years typically adjust starting before ten years and each five years thereafter. For a comprehensive discussion of the
Company’s liquidity position, balance sheet repricing characteristics, and sensitivity to interest rates changes, refer to the
“Liquidity and Market Risk” section of this discussion and analysis.
Off-Balance Sheet Arrangements
The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations
of conditions established in the outstanding contractual arrangements. Unused commitments to extend credit totaled $450
million at December 31, 2020 and $492 million at December 31, 2019, although it is not likely that all of those
commitments will ultimately be drawn down. The decrease in 2020 is due in part to a higher utilization of mortgage
warehouse lines in 2020. Unused commitments represented approximately 18% of gross loans outstanding at
December 31, 2020 and 28% at December 31, 2019. The Company also had undrawn letters of credit issued to customers
totaling $8.2 million and $8.6 million at December 31, 2020 and 209, respectively. Off-balance sheet obligations pose
potential credit risk to the Company, and a $0.3 million reserve for unfunded commitments is reflected as a liability in our
consolidated balance sheet at December 31, 2020, which was relatively unchanged from the previous year. The unused
commitments related to mortgage warehouse are unconditionally cancellable at any time. The effect on the Company’s
revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be
reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity”
section in this Form 10-K 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 which are pledged to the FHLB by
the Company. For more information regarding the Company’s off-balance sheet arrangements, see Note 13 to the
consolidated financial statements in Item 8 herein.
51
Contractual Obligations
At the end of 2020, the Company had contractual obligations for the following payments, by type and period due:
Contractual Obligations
(dollars in thousands)
Payments Due by Period
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,124 $
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-3 Years 3-5 Years 5 Years
— $ 35,124
2,612
1,321
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,956 $ 2,164 $ 3,057 $ 1,678 $ 39,057
2,991
66
1,660
18
9,393
1,439
2,130
34
— $
Total
— $
Less Than
1 Year
More Than
Nonperforming Assets
Nonperforming assets (“NPAs”) are comprised of loans for which the Company is no longer accruing interest, and
foreclosed assets which primarily consists of OREO. If the Company grants a concession to a borrower in financial
difficulty, the loan falls into the category of a troubled debt restructuring (“TDR”), which may be designated as either
nonperforming or performing depending on the loan’s accrual status.
The following table presents comparative data for the Company’s NPAs and performing TDRs as of the dates noted:
Nonperforming Assets and Performing TDRs
(dollars in thousands)
Real estate:
2020
2019
As of December 31,
2018
2017
2016
31 $
82 $
— $
558
Other construction/land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
963
1-4 family - closed-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,926
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Multi-family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,572
Commercial real estate - owner occupied . . . . . . . . . . . . . . . . .
67
Commercial real estate - non-owner occupied . . . . . . . . . . . . .
39
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,125
TOTAL REAL ESTATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
692
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
459
TOTAL NONPERFORMING LOANS (1) (2) . . . . . . . . . . . . . . $ 7,598 $ 5,737 $ 5,156 $ 3,963 $ 6,365
741
480
—
1,440
2,105
258
5,055
—
651
31
799
408
—
605
49
1,642
3,585
—
1,425
146
871
922
—
236
123
293
2,522
—
1,301
140
1,193
2,403
—
1,678
582
442
6,298
250
1,026
24
77 $
Foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,225
Total nonperforming assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,569 $ 6,537 $ 6,238 $ 9,444 $ 8,590
Performing TDRs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,382 $ 8,415 $ 10,920 $ 12,413 $ 14,182
Loans deferred under CARES Act (2) . . . . . . . . . . . . . . . . . . . . . . $ 29,500 $
—
Nonperforming loans as a % of total gross loans and leases . . .
0.50%
Nonperforming assets as a % of total gross loans and leases
0.25%
0.30%
0.31%
0.33%
5,481
1,082
— $
— $
— $
800
971
and foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.35%
0.37%
0.36%
0.60%
0.68%
(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.
(2) Loans deferred under the CARES act are not included in nonperforming loans above, nor are they included in the
numerators used to calculate the ratios disclosed in the table.
52
NPAs totaled $8.6 million, or 0.4% of gross loans and leases plus foreclosed assets at the end of 2020, up from $6.5
million, or 0.4% of gross loans and leases plus foreclosed assets at the end of 2019. $1.4 million of the increase in non-
performing loans during 2020, was a result of 10 loans previously deferred under section 4013 of the CARES Act, that
were unable to resume their scheduled payments at the end of the deferral period. NPAs were reduced by $3.2 million, or
34%, during 2018 in response to better economic conditions.
Nonperforming loans secured by real estate comprised $6.3 million of total nonperforming loans at December 31, 2020,
an increase of $1.2 million, or 25%, since December 31, 2019. There were also increases of $0.4 million in commercial &
industrial loans and $0.3 million in agricultural production loans. Consumer nonperforming loans were mostly unchanged
during 2020. Nonperforming loan balances at December 31, 2020 include $3.9 million in TDRs and other loans that were
paying as agreed, but which met the technical definition of nonperforming and were classified as such. We also had $29.5
million in loans deferred under the CARES Act, which are not treated as TDRs and were still accruing interest at December
31, 2020, and $11.4 million in loans classified as performing TDRs for which we were still accruing interest at
December 31, 2020, an increase of $3.0 million, or 35%, relative to December 31, 2019. Notes 2 and 4 to the consolidated
financial statements provide a more comprehensive disclosure of TDR balances and activity within recent periods.
Loan modifications not treated as TDRs were $29.5 million at December 31, 2020. Two loans for $6.3 million were
extensions of loans previously modified, which had matured but needed additional time to resume payments. Of the total
loans modified at year end, $14.7 million, or 50%, are hotels, and $14.0 million, or 47%, are lessors of non-residential
buildings. Approximately 59% of loans currently under modification have maturities within 90 days, with the remaining
41% maturing within 180 days. All loans are well secured based on the most recent appraisal.
The balance of foreclosed assets had a carrying value of $1.0 million at December 31, 2020, comprised of 7 properties
classified as OREO. At the end of 2019 foreclosed assets totaled $0.8 million, consisting of 10 properties classified as
OREO and two mobile homes. 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.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses, a contra-asset, is established through a provision 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. Note 2 to the consolidated financial statements provides a more comprehensive
discussion of the accounting guidance we conform to and the methodology we use to determine an appropriate allowance
for loan and lease losses, including information regarding the Company’s decision to defer implementation of Current
Expected Credit Loss ("CECL") accounting method, which was further extended to the earlier of the first day of the fiscal
year, beginning after the national emergency terminates or January 1, 2022, by the Consolidated Appropriations Act of
2021. It is expected that the Company’s Allowance for Credit Loss under CECL will be approximately 50% higher than
the current Allowance for Loan and Lease Losses, with the initial adjustment being recorded as an adjustment to equity.
The Company’s allowance for loan and lease losses was $17.7 million, or 0.7% of gross loans at December 31, 2020,
relative to $9.9 million, or 0.6% of gross loans at December 31, 2019. The increase in the allowance resulted from the
addition of a $8.6 million loan and lease loss provision in 2020, less $0.7 million in net loan charge-offs. Reserves were
established for losses inherent in incremental loan balances and unanticipated charge-offs in 2020. The net increase in the
allowance might have been even larger if not for the following circumstances: charge-offs were recorded against pre-
established reserves, which alleviated what otherwise might have been a need for reserve replenishment; all acquired loans
were booked at their fair values, and thus did not initially require a loan and lease loss allowance; and loan and lease loss
rates have been declining, having a positive impact on general reserves established for performing loans. The ratio of the
allowance to nonperforming loans was 233% at December 31, 2020, relative to 173% at December 31, 2019, and 189% at
December 31, 2018. As described above, a separate allowance of $0.3 million for potential losses inherent in unused
commitments is included in other liabilities at December 31, 2020.
53
The table that follows summarizes the activity in the allowance for loan and lease losses for the periods indicated:
Allowance for Loan and Lease Losses
(dollars in thousands)
Balances:
Average gross loans and leases outstanding during
2020
As of and for the years ended December 31,
2017
2018
2019
2016
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross loans and leases held for investment . . . . . . . . . $
2,068,690
2,463,111
Allowance for Loan and Lease Losses:
Balance at beginning of period . . . . . . . . . . . . . . . . . $
Provision (benefit) charged to expense . . . . . . . . . . . .
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 .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL REAL ESTATE. . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage warehouse lines . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries
Real estate:
1-4 family residential construction . . . . . . . . .
Other construction/land . . . . . . . . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . .
Commercial real estate - owner occupied . . . .
Commercial real estate - non-owner occupied .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL REAL ESTATE. . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage warehouse lines . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loan charge-offs (recoveries) . . . . . . . . . . . . . . .
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
RATIOS
Net loan and lease charge-offs (recoveries) to average
loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses to gross loans
and leases at end of period . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses to non-
9,923
8,550
—
—
—
—
—
—
—
—
—
—
436
—
1,397
1,833
—
40
13
34
—
—
—
—
87
—
129
—
882
1,098
735
17,738
0.04%
0.72%
$
$
$
$
1,753,748
1,762,565
9,750
2,550
—
—
—
—
—
—
1,190
—
1,190
—
1,274
—
2,409
4,873
—
2
148
150
—
—
347
—
647
—
690
—
1,159
2,496
2,377
9,923
0.14%
0.56%
$
$
$
$
1,625,732
1,731,928
9,043
4,350
—
4
5
125
—
—
2,341
—
2,475
—
608
—
2,225
5,308
—
—
10
134
—
230
—
—
374
22
148
—
1,121
1,665
3,643
9,750
$
$
$
$
1,318,909
1,557,820
$ 1,153,240
$ 1,262,531
9,701
(1,140)
$
10,423
—
—
—
7
58
—
36
—
—
101
154
669
—
2,161
3,085
—
5
1,959
32
—
38
201
—
2,235
5
310
—
1,017
3,567
(482)
9,043
$
—
144
97
94
50
108
469
—
962
—
344
—
1,905
3,211
—
467
15
17
—
35
449
—
983
14
477
—
1,015
2,489
722
9,701
0.22%
0.56%
(0.04)%
0.58%
0.06%
0.77%
performing loans . . . . . . . . . . . . . . . . . . . . . . . . . .
233.46%
172.96%
189.10%
228.19%
152.41%
Net loan and lease charge-offs (recoveries) to
allowance for loan and lease losses at end
of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loan charge-offs (recoveries) to provision
(benefit) for loan and lease losses . . . . . . . . . . . . . .
4.14%
8.60%
23.95%
37.36%
(5.33)%
7.44%
93.22%
83.75%
42.28%
—
As shown in the table above, the Company recorded a loan and lease loss provision of $8.6 million in 2020 compared to
$2.6 million in 2019, and $4.4 million in 2018. Our allowance for probable losses on specifically identified impaired loans
increased $0.2 million, or 20%, during 2020, whereas it was reduced by $1.2 million, or 59%, during 2019. The allowance
54
for probable losses inherent in non-impaired loans increased by $7.6 million, or 84%, as a result of potential economic
conditions, downgrades of certain loans deferred under section 4013 of the Cares Act and the continued uncertainty
surrounding the estimated impact that COVID-19 has had on the economy and our loan customers, potential changes in
collateral values due to reduced cash flows, and external factors such as government actions.
The “Provision for Loan and Lease Losses” section above includes additional details on our provision and its relationship
to actual charge-offs.
Provided below is a summary of the allocation of the allowance for loan and lease losses for specific loan categories at the
dates indicated. The allocation presented should not be viewed as an indication that charges to the allowance will be
incurred in these amounts or proportions, or that the portion of the allowance allocated to a particular loan category
represents the total amount available for charge-offs that may occur within that category.
Allocation of Allowance for Loan and Lease Losses
(dollars in thousands)
2020
Amount
Amount
Loans Amount
Amount
Amount
%Total (1)
Loans
%Total (1)
Loans
%Total (1)
Loans
%Total (1)
Loans
As of December 31,
2018
2017
2016
2019
%Total (1)
Real Estate . . . . . . . . . . . . . . . . . $ 11,766 76.97% $ 5,635 79.55% $ 5,831 83.95% $ 4,786 78.75% $ 3,548 72.67%
Agricultural . . . . . . . . . . . . . . . .
3.66%
Commercial and industrial (2) . . .
4,721 20.98% 2,685 17.28% 2,394 12.70% 2,772 17.57% 4,279 22.71%
0.96%
Consumer loans . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . $ 17,738 100.00% $ 9,923 100.00% $ 9,750 100.00% $ 9,043 100.00% $ 9,701 100.00%
0.68% 1,208
457
0.23% 1,278
132
0.51% 1,231
46
0.44% 1,239
30
720
49
1.82%
2.73%
2.84%
3.00%
193
482
208
209
256
—
—
—
—
(1) Represents percentage of loans in category to total loans
(2)
Includes mortgage warehouse lines
The Company’s allowance for loan and lease losses at December 31, 2020 represents Management’s best estimate of
probable losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience
substantial losses relative to the size of the allowance. Furthermore, fluctuations in credit quality, changes in economic
conditions, updated accounting, or regulatory requirements, and/or other factors could induce us to augment or reduce the
allowance. The Company adopted the current expected credit losses methodology on January 1, 2020, however as
previously noted under the Allowance for Loan and Lease Losses section above in March 2020, 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.
In December 2020, the Consolidated Appropriations Act 2021, extended the deferral of implementation of CECL from
December 31, 2020, to the earlier of the first day of the fiscal year, beginning after the national emergency terminates or
January 1, 2022. The Company initially elected in the first quarter of 2020 to postpone implementation and will now
continue to postpone implementation in order to provide additional time to assess better the impact of the COVID-19
pandemic on the expected lifetime credit losses. At the time the initial decision was made, there was a significant economic
uncertainty on the local, regional, and national levels as a result of local and state stay-at-home orders, as well as relief
measures provided at a national, state, and local level. Further, the Company took actions to serve our communities during
the pandemic, including permitting short-term payment deferrals to current customers, as well as originating bridge loans
and SBA PPP loans. It was determined that more time is still needed to assess the impact of the uncertainty and related
actions on the Company's allowance for loan and lease losses under the CECL methodology.
Investments
The Company’s investments can at any given time consist of debt securities and marketable equity securities (together,
the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our
Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. Surplus FRB balances and fed funds sold to
correspondent banks typically represent the temporary investment of excess liquidity. The Company’s investments serve
several purposes: 1) they provide liquidity to even out cash flows from the loan and deposit activities of customers; 2) they
55
provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which
require collateral; 3) they constitute a large base of assets with maturity and interest rate characteristics that can be changed
more readily than the loan portfolio, to better match changes in the deposit base and other funding sources of the Company;
4) they are another interest-earning option for surplus funds when loan demand is light; and 5) they can provide partially
tax exempt income. Aggregate investments totaled $547.5 million, or 17% of total assets at December 31, 2020, as
compared to $615.3 million, or 24% of total assets at December 31, 2019.
We had no fed funds sold at the end of the reporting periods, and interest-bearing balances held primarily in our Federal
Reserve Bank account totaled $3.5 million at December 31, 2020, as compared to $14.5 million at December 31, 2019.
The Company’s investment securities portfolio had a book balance of $544.0 million at December 31, 2020, compared to
$600.8 million at December 31, 2019, reflecting a net decrease of $56.8 million for 2020. 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 2.4 years at December 31, 2020, as compared to an expected average
life of 4.4 years and an average effective duration of 3.2 years at year-end 2019.
The following Investment Portfolio table reflects the amortized cost and fair market values for each primary category of
investment securities for the past three years:
Investment Portfolio-Available for Sale
(dollars in thousands)
2020
As of December 31,
2019
2018
Fair Market
Value
1,800 $ 12,125 $ 12,145 $ 15,553 $ 15,212
404,733
140,534
Total securities . . . . . . . . . . . . . . . . . . . . $ 517,844 $ 543,974 $ 592,378 $ 600,799 $ 569,942 $ 560,479
U.S. government agencies . . . . . . . . . . . . . $ 1,725 $
Mortgage-backed securities . . . . . . . . . . . .
State and political subdivisions . . . . . . . . .
314,435
227,739
400,389
188,265
398,353
181,900
304,108
212,011
414,208
140,181
Fair Market
Value
Amortized
Cost
Amortized
Cost
Amortized
Cost
Fair Market
Value
The net unrealized gain on our investment portfolio, or the amount by which aggregate fair market values exceeded the
amortized cost, was $26.1 million at December 31, 2020 as compared to $8.4 million at December 31, 2019, an increase
of $17.7 million. The change in 2020 was caused by lower market interest rates on fixed-rate bond values. The balance of
U.S. Government agency securities in our portfolio declined by $10.3 million, or 85%, during 2020 due primarily to bond
maturities and a strategy to utilize bond repayments to fund higher-yielding loans in 2020. Similarly, mortgage-backed
securities decreased by $86.0 million, or 21% due to prepayments not being reinvested for the above-mentioned strategy.
Municipal bond balances increased by $39.5 million, or 21%. The municipal bond purchases were mostly made in the
first half of 2020. Municipal bonds purchased in recent periods have strong underlying ratings, and all municipal bonds
in our portfolio undergo a detailed quarterly review for potential impairment.
Investment securities that were pledged as collateral for Federal Home Loan Bank borrowings, repurchase agreements,
public deposits and other purposes as required or permitted by law totaled $232.0 million at December 31, 2020 and $234.8
million at December 31, 2019, leaving $312.0 million in unpledged debt securities at December 31, 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 $52.9 million at December 31, 2020 and $71.0 million at December 31, 2019.
The table below groups the Company’s investment securities by their remaining time to maturity as of December 31, 2020,
and provides weighted average yields for each segment. Since the actual timing of principal payments may differ from
56
contractual maturities when obligors have the right to prepay principal, maturities for mortgage-backed securities
(including collateralized mortgage obligations) were determined by incorporating expected prepayments.
Maturity and Yield of Available for Sale Investment Portfolio
(dollars in thousands)
Within
One Year
December 31, 2020
After One
But Within
Five Years
After Five Years
But Within
Ten Years
After
Ten Years
Total
U.S. government agencies . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . .
State and political subdivisions . . . . . . . .
Total securities . . . . . . . . . . . . . . . . . $
Cash and Due from Banks
Amount
— $
Yield Amount Yield Amount Yield Amount Yield Amount Yield
1,800 2.71%
— $
— $
1.93%
— 314,435 2.18%
3.49% 187,205 3.41% 227,739 3.46%
280,347 2.18%
1,800 2.71% $
2.30%
4.18%
—
7,417
7,932 4.14% 28,745
$ 36,162
$ 187,205
$ 543,974
$ 290,079
—
—
—
26,671
3,857
30,528
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 is subject to significant fluctuations in
the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and
the Company manages its short-term cash position through the utilization of overnight loans to, and borrowings from,
correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a large “short”
overnight position persist for any length of time, the Company typically raises money through focused retail deposit
gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, we will 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 noninterest earning cash and balances due from correspondent banks totaled $67.9
million, or 2% of total assets at December 31, 2020, and $65.6 million, or 3% of total assets at December 31, 2019. The
average balance of non-earning cash and due from banks, which can be used to determine trends, was $72.0 million for
2020 and 2019 and $61.4 million for 2018.
Premises and Equipment
Premises and equipment are stated on our books at cost, less accumulated depreciation, and amortization. The cost of
furniture and equipment is expensed as depreciation over the estimated useful life of the related assets, and leasehold
improvements are amortized over the term of the related lease or the estimated useful life of the improvements, whichever
is shorter.
The following premises and equipment table reflects the original cost, accumulated depreciation and amortization, and net
book value of fixed assets by major category, for the years noted:
Premises and Equipment
(dollars in thousands)
Cost
2020
Accumulated
Depreciation
and
Amortization
Net Book
Value
Cost
As of December 31,
2019
Accumulated
Depreciation
and
Amortization
Net Book
Value
Cost
Land . . . . . . . . . . . . . . . . . $ 5,751 $
Buildings . . . . . . . . . . . . . . 21,580
Furniture and equipment . . 20,705
Leasehold improvements . . 15,226
—
Construction in progress . .
Total . . . . . . . . . . . . . . . $ 63,262 $
— $ 5,751 $ 5,751 $
11,005 10,575 21,526
5,231 17,798
15,474
5,948 15,357
9,278
44
—
35,757 $ 27,505 $ 60,476 $
—
— $ 5,751 $ 5,751 $
10,407 11,119 21,579
3,433 18,958
14,365
7,088 15,023
8,269
901
—
33,041 $ 27,435 $ 62,212 $
44
57
2018
Accumulated
Depreciation
and
Amortization
Net Book
Value
— $ 5,751
10,140 11,439
3,987
14,971
7,422
7,601
901
—
32,712 $ 29,500
The net book value of the Company’s premises and equipment was 1% of total assets at both December 31, 2020, and
December 31, 2019. Depreciation and amortization included in occupancy and equipment expense totaled $2.8 million in
2020 and 2019.
Other Assets
Goodwill totaled $27.4 million at December 31, 2020, unchanged for the year and other intangible assets were $4.3
million, a decrease of $1.1 million, or 20%, as a result of amortization expense recorded on core deposit intangibles. The
Company’s goodwill and other intangible assets are evaluated annually for potential impairment following FASB
guidelines, and based on those analytics Management has determined that no impairment exists as of December 31, 2020.
The net cash surrender value of bank-owned life insurance policies increased to $52.5 million at December 31, 2020 from
$50.5 million at December 31, 2019, due to the addition of BOLI income to net cash surrender values. Refer to the
“Noninterest Revenue and Operating Expense” section above for a more detailed discussion of BOLI and the income it
generates.
The remainder of other assets consists primarily of right-of-use assets tied to operating leases upon the adoption of
Accounting Standards Update 2016-02 (Topic 842) in 2019, accrued interest receivable, deferred taxes, investments in
bank stocks, other real estate owned, prepaid assets, investments in low income housing credits, and other miscellaneous
assets. The total operating lease right-of-use asset recorded on the books is $10.3 million less accumulated amortization
of $3.1 million. The bank stocks include Pacific Coast Bankers Bank stock and restricted stock related to the Federal Home
Loan Bank of San Francisco stock held in conjunction with our FHLB borrowings and is not deemed to be marketable or
liquid. Our net deferred tax asset is evaluated as of every reporting date pursuant to FASB guidance, and we have
determined that no impairment exists.
Deposits
Deposits represent another key balance sheet category impacting the Company’s net interest margin and profitability
metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved
to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as
demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning
average balances and rates paid by deposit type for the past three fiscal years is contained in the Distribution, Rate, and
Yield table located in the previous section under “Results of Operations–Net Interest Income and Net Interest Margin.” A
58
distribution of the Company’s deposits showing the period-end balance and percentage of total deposits by type is
presented as of the dates noted in the following table:
Deposit Distribution
(dollars in thousands)
Year Ended December 31,
2018
Interest bearing demand deposits . . . . . . . . . . . $
Noninterest bearing demand deposits . . . . . . .
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . .
CDAR's < $100,000 . . . . . . . . . . . . . . . . . . . . .
Customer time deposit < $100,000 . . . . . . . . .
Customer time deposits ≥ $100,000 . . . . . . . . .
Brokered deposits . . . . . . . . . . . . . . . . . . . . . . .
2019
91,212 $ 101,243 $ 118,533 $ 132,586
524,552
690,950
366,238
458,600
215,693
294,317
119,417
118,933
251
—
75,633
81,247
261,101
383,115
—
50,000
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . $ 2,624,606 $ 2,168,374 $ 2,116,340 $ 1,988,386 $ 1,695,471
2020
109,938 $
943,664
558,407
368,420
131,232
—
73,046
339,899
100,000
662,527
434,483
283,953
123,807
—
93,156
367,171
50,000
635,434
405,057
283,126
171,611
—
82,885
291,740
—
2016
2017
Percentage of Total Deposits
Interest bearing demand deposits . . . . . . . . . . .
Noninterest bearing demand deposits . . . . . . .
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . .
CDAR's < $100,000 . . . . . . . . . . . . . . . . . . . . .
Customer Time deposit < $100,000 . . . . . . . . .
Customer Time deposits > $100,000 . . . . . . . .
Brokered deposits . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.19%
35.95%
21.28%
14.04%
5.00%
—
2.78%
12.95%
3.81%
100.00%
4.21%
31.86%
21.15%
13.57%
5.48%
—
3.75%
17.67%
2.31%
100.00%
4.78%
31.31%
20.53%
13.42%
5.85%
—
4.40%
17.35%
2.36%
100.00%
5.96%
31.96%
20.37%
14.24%
8.63%
—
4.17%
14.67%
—
100.00%
7.82%
30.94%
21.60%
12.72%
7.04%
0.01%
4.46%
15.40%
—
100.00%
Deposit balances reflect net growth of $456.2 million, or 21%, in 2020 and $52.0 million, or 2%, during 2019. The increase
in 2020 and 2019 is primarily due to organic growth as both consumer and commercial existing customers increased their
deposit account balances.
Noninterest bearing demand deposit balances were up $252.7 million, or 37%; NOW and interest bearing demand accounts
increased by $118.5 million, or 22% in 2020. Overall non-maturity deposits increased by $457.6 million, or 28%, to $2.1
billion at December 31, 2020.
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.
The scheduled maturity distribution of the Company’s time deposits at the end of 2020 was as follows:
Deposit Maturity Distribution
(dollars in thousands)
As of December 31, 2020
Time certificates of deposit < $100,000 . . . . . .
Other time deposits ≥ $100,000 . . . . . . . . . . . . .
Total
173,046
339,899
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 341,221 $ 48,218 $ 63,680 $ 37,794 $ 22,032 $ 512,945
Three to
six months
10,623
37,595
Six to
twelve
months
13,338
50,342
One to
three
years
3,852
33,942
Over
three
years
1,432
20,600
Three
months or
less
143,801
197,420
59
Other Borrowings
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 FRB, 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 $136.5 million, or 298%, in 2020, due to increases in overnight fed
funds purchased, FHLB advances, and customer repurchase agreements. These increases were primarily to fund
fluctuations in our mortgage warehouse loan balances. Non-deposit interest-bearing liabilities were down by $26.7 million,
or 25%, in 2019, due to decreases in FHLB borrowings, partially offset by increases in customer repurchase agreements.
The Company had $100.0 million in overnight fed funds purchased, $37.9 million in overnight FHLB advances, and $5.0
million in short-term borrowings from the FHLB at December 31, 2020, as compared to $20.0 million in overnight FHLB
borrowings at December 31, 2019. There were no overnight federal funds purchased from other correspondent banks or
advances from the FRB on our books at December 31, 2019. Repurchase agreements totaled over $39.1 million at year-
end 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. The Company had junior subordinated debentures totaling $35.1 million
at December 31, 2020 and $34.9 million December 31, 2019, in the form of long-term borrowings from trust subsidiaries
formed specifically to issue trust preferred securities. The small increase resulted from the amortization of discount on
junior subordinated debentures that were part of our acquisition of Coast Bancorp in 2016.
The details of the Company’s short-term borrowings are presented in the table below, for the years noted:
Short-term Borrowings
(dollars in thousands)
Year Ended December 31,
2019
2020
2018
Repurchase Agreements
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,138 $ 25,711 $ 16,359
14,332
Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,672
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.40%
Average interest rate for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,090
27,712
0.40%
34,614
41,449
0.40%
Fed funds purchased
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,000 $
Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average interest rate for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,918
100,000
0.21%
313
—
0.32%
— $
—
22
850
0.00%
FHLB advances
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,900 $ 20,000 $ 56,100
8,967
Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,100
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.19%
Average interest rate for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,244
195,100
0.19%
13,229
63,700
2.06%
Other Noninterest Bearing Liabilities
Other liabilities are principally comprised of accrued interest payable, other accrued but unpaid expenses, and certain
clearing amounts. The Company’s balance of other liabilities decreased by $0.4 million, or 1%, during 2020.
60
Capital Resources
The Company had total shareholders’ equity of $343.9 million at December 31, 2020 as compared to $309.3 million at
December 31, 2019. The increase of $34.6 million, or 11%, is due to $35.4 million in net income and approximately $1.5
million in additional capital related to stock options, a $12.5 million increase in our accumulated other comprehensive
income, net of $12.2 million in dividends paid and $2.6 million in stock repurchased. We maintained a very strong capital
position throughout the recession and in the ensuing years, and our capital remains at relatively high levels in comparison
to many of our peer banks.
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 it 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 met the qualifying criteria were able to 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 adopted the community
bank leverage ratio framework in the first quarter 2020.The Company uses a variety of measures to evaluate its capital
adequacy, including the community bank leverage ratio, which the Company adopted in 2020, and risk-based capital and
leverage ratios in preceding years, that are 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.
61
The following table sets forth the Company’s and the Bank’s regulatory capital ratios at the dates indicated:
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
(CBLR
Framework)
December 31,
2020 (1)
Tier 1 (Core) Capital to average total assets
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
Common Equity Tier 1 Capital Ratio
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Risk-Based Capital Ratio
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.50%
10.12%
8.00%
8.00%
13.27%
14.75%
14.98%
14.75%
6.50%
6.50%
8.00%
8.00%
Total Risk-Based Capital Ratio
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.48%
15.25%
10.00%
10.00%
Tier 1 (Core) Capital to average total assets
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.91%
11.73%
5.00%
5.00%
(1) The community bank leverage ratio minimum requirement is 8% as of December 31, 2020, 8.5% for calendar year
2021, and 9% for calendar year 2022 and beyond
At the end of 2020, as our Community Bank Leverage Ratio exceeded 8%, the Company and the Bank were both classified
as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal
Deposit Insurance Corporation Improvement Act of 1991, and our regulatory capital ratios remained above the median for
peer financial institutions. Similar, under the Capital Adequacy Guidelines in 2019, the Company and the Bank were both
classified as “well capitalized”. We do not foresee any circumstances that would cause the Company or the Bank to be
less than “well capitalized”, although no assurance can be given that this will not occur. A more detailed table of regulatory
capital ratios, which includes the capital amounts and ratios required to qualify as “well capitalized” as well as minimum
capital ratios, appears in Note 15 to the Consolidated Financial Statements in Item 8 herein. For additional details on risk-
based and leverage capital guidelines, requirements, and calculations and for a summary of changes to risk-based capital
calculations which were recently approved by federal banking regulators, see “Item 1, Business – Supervision and
Regulation – Capital Adequacy Requirements” and “Item 1, Business – Supervision and Regulation – Prompt Corrective
Action Provisions” herein.
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
62
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 short-term needs, we can borrow overnight funds from other financial institutions, draw
advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if customer deposits are not immediately
obtainable from local sources. Availability on lines of credit from correspondent banks and the FHLB totaled $710.4
million at December 31, 2020. The Company was also eligible to borrow approximately $58.1 million at the Federal
Reserve Discount Window based on pledged assets at December 31, 2020. Furthermore, funds can be obtained by drawing
down excess cash that might be available in the Company’s correspondent bank deposit accounts, or by liquidating
unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cash for temporary
needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As
of December 31, 2020, unpledged debt securities plus pledged securities in excess of current pledging requirements
comprised $364.9 million of the Company’s investment balances, as compared to $437.0 million at December 31, 2019.
Other sources of potential liquidity include but are not necessarily limited to any outstanding fed funds sold and vault cash.
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 $104.9 million at December 31, 2020. Management is of
the opinion that available investments and other potentially liquid assets, along with standby funding sources it has
arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.
Primary and Secondary Liquidity Sources
Cash and Due From Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpledged Investment Securities . . . . . . . . . . . . . . . . . . . . . . . .
Excess Pledged Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Borrowing Availability . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured Lines of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds Available through Fed Discount Window . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
December 31, 2020
December 31, 2019
71,417
311,983
52,892
535,404
175,000
58,127
1,204,823
$
$
80,077
366,012
70,955
443,200
80,000
59,198
1,099,441
The Company did not experience a change in its ability to access traditional funding sources due to the COVID-19
pandemic. The Company had adequate sources of cash to accommodate pandemic related cash needs such as the ability
to defer $424.0 million in loans under the CARES act and to fund $128.1 million in SBA PPP loans. There were no
material operational expenditures related to the COVID-19 pandemic, other than $0.1 million for software purchased to
accommodate the processing of SBA PPP loans. The Company is approved to borrow from the Federal Reserve’s Paycheck
Protection Program Liquidity Facility (PPPLF) for any current balances of PPP loans at the time of borrowing. Should the
Company wish to draw on the PPPLF, it would be required do so prior to June 30, 2021, and will be required to pledge
individual SBA PPP loans as collateral. The loans are taken as collateral at their face value. Due to the Company's liquidity
at December 31, 2020, and expected liquidity in the first quarter of 2021, it has elected not to utilize the PPPLF at this
time.
The Company’s net loans to assets and available investments to assets ratios were 76% and 11%, respectively, at
December 31, 2020, as compared to internal policy guidelines of “less than 78%” and “greater than 3%.” Other liquidity
ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to
total assets (including ratios and sub-limits for the various components comprising wholesale funding), which were all
well within policy guidelines at December 31, 2020.
The holding company’s primary uses of funds include operating expenses incurred in the normal course of business,
shareholder dividends, and stock repurchases. Its primary source of funds is dividends from the Bank since the holding
company does not conduct regular banking operations. Management anticipates that the Bank will have sufficient earnings
to provide dividends to the holding company to meet its funding requirements for the foreseeable future and the Bank is
not subject to any regulatory restrictions for paying dividends to the holding company, other than the legal and regulatory
limitations on dividend payments, as outlined in Item 5(c) Dividends in this Form 10-K.
63
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, 300, and 400 basis points, and downward shocks of 100, 200, and 300 basis points. Those scenarios may be
supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful
simulations in light of 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. 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:
Immediate change in Interest Rates (basis points)
+400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base
-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020
December 31, 2019
% Change in
Net Interest
Income
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
$ Change in
Net Interest
Income
(1.56)%
(0.77)%
0.03%
0.51%
(7.67)%
$
$
$
$
$
(1,746)
(861)
38
567
3.11%
2.68%
1.80%
1.06%
(8,583)
(4.39)%
$
$
$
$
$
3,193
2,753
1,844
1,085
(4,505)
Our current simulations indicate that the Company’s net interest income will remain relatively flat over the next 12 months
in the up 100 and 200 basis point scenarios but declines after that in a rising rate environment, indicating that the Company
is liability sensitive; furthermore, a drop in interest rates could have a substantial negative impact on earnings. For the
prior year ending December 31, 2019 the simulations projected sizeable increases in net interest income in rising rate
scenarios, but balance sheet changes in 2020 such as the addition of fixed-rate loans and long-term adjustable-rate loans
with longer reset periods, compounded by the Company’s increase in its current overnight borrowing position have
significantly diminished that effect. 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 only $0.6 million,
or 0.51%, relative to a stable interest rate scenario, with the favorable variance diminishing as interest rates rise higher. If
interest rates were to decline by 100 basis points, however, net interest income would likely be around $8.6 million lower
than in a stable interest rate scenario, for a negative variance of 7.7%.
64
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 no balance sheet growth is incorporated and a stable interest rate environment is assumed,
projected annual net interest income is about $3.4 million lower than in our standard simulation. However, the stressed
simulations reveal that the Company’s greatest potential pressure on net interest income would result from excessive non-
maturity deposit runoff and/or unfavorable deposit rate changes in rising rate scenarios.
The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the
interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial
assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in
EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate
fluctuations. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest)
at anticipated replacement interest rates for each account type, while the fair value of non-financial accounts is assumed
to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet
accounts at a given point in time, and the measurement can change substantially over time as the Company’s balance sheet
evolves and interest rate and yield curve assumptions are updated.
The change in economic value under different interest rate scenarios depends on the characteristics of each class of
financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or
spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average
remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios
and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise 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. The table below shows estimated changes in the Company’s EVE as of December 31, 2020,
and 2019, under different interest rate scenarios relative to a base case of current interest rates:
Immediate change in Interest Rates (basis points)
+400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base
-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020
December 31, 2019
% Change in
Fair Value of
Equity
$ Change in
Fair Value of
Equity
% Change in
Fair Value of
Equity
$ Change in
Fair Value of
Equity
32.19%
28.81%
23.69%
14.60%
(7.26)%
$
$
$
$
$
163,713
146,533
120,513
74,251
19.38%
17.47%
14.19%
8.74%
(36,919)
(16.61)%
$
$
$
$
$
106,925
96,382
78,265
48,325
(91,610)
The table shows that our EVE will generally deteriorate in declining rate scenarios but should benefit from a parallel shift
upward in the yield curve. The increase in value of the Company’s large volume of stable DDA balances is expected to
outweigh the decrease in value of the fixed rate assets, causing the overall net increase in EVE in the up-shock scenarios.
Our EVE deltas have increased given the relative starting points of our non-maturity deposits in the current rate
environment. In other words, as the current rates are very low, the value of the non-maturity deposits is lower than it has
been historically. The impact of an increase in rates has an expected greater magnitude impact on the value of such
deposits.
We also run stress scenarios for the unconsolidated Bank’s EVE to simulate the possibility of slower loan prepayment
speeds in the up-shock scenarios and faster prepayment speeds in the down-shock scenarios, as well as, 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.
65
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures of market risk called for by Item 305 of Regulation S-
K is included as part of Item 7 above. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Market Risk Management”.
66
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors’ reports listed below are included herein:
I.
Reports of Independent Registered Public Accounting Firms from Eide Bailly LLP
and Vavrinek, Trine, Day & Co., LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68
Page
II. Consolidated Balance Sheets – December 31, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . 72
III. Consolidated Statements of Income – Years Ended December 31, 2020, 2019, and
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
IV. Consolidated Statements of Comprehensive Income – Years Ended December 31,
2020, 2019, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74
V. Consolidated Statements of Changes in Shareholders’ Equity – Years Ended
December 31, 2020, 2019, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75
VI. Consolidated Statements of Cash Flows – Years Ended December 31, 2020, 2019,
and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
VII. Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
67
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Sierra Bancorp and Subsidiary
Porterville, California
Opinion on the Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Sierra Bancorp and Subsidiary (the Company) as of
December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in
shareholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2020, and the related
notes (collectively referred to as the “consolidated financial statements”).
We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control —Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in
the two year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework:
(2013) issued by COSO.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained
in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
68
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the
critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan and Lease Losses
As discussed in Note 4 to the Company’s consolidated financial statements, the Company has a gross loan and lease
portfolio of $2.4 billion and related allowance for loan and lease losses of $17.7 million as of December 31, 2020. The
Company’s allowance for loan and lease losses is a material and complex estimate requiring significant management’s
judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan and lease portfolio.
The allowance for loan and lease losses includes a general reserve which is determined based on the results of a quantitative
and a qualitative analysis of all loans not measured for impairment at the reporting date.
The Company’s general reserves cover non-impaired loans and are based on historical net loss rates for each portfolio
segment by call report code, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated
credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors
include consideration of the following: changes in lending policies and procedures; changes in international, national,
regional, and local economic and business conditions and developments; changes in the nature and volume of the portfolio;
changes in the experience, ability and depth of lending management and staff; changes in the volume and severity of past
due, nonaccrual and other adversely graded loans; changes in quality of the loan review system; changes in the value of
the underlying collateral for collateral-dependent loans; concentrations of credit; and the effect of the other external factors
such as competition and legal and regulatory requirements...
Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature
and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or
knowledge needed.
The primary procedures we performed to address this critical audit matter included:
Testing the design and operating effectiveness of controls relating to management’s timely identification of
problem loans, appropriate application of loan rating policy, consistency of application of accounting policies
and appropriateness of assumptions used in the allowance for loan and lease losses calculation.
Evaluating the reasonableness of assumptions and sources of data used by management in forming the loss factors
by performing retrospective review of historic loan and lease loss experience and analyzing historical data used
in developing the assumptions.
Evaluating the appropriateness of inputs and factors that the Company used in forming the qualitative loss factors
and assessing whether such inputs and factors were relevant, reliable, and reasonable for the purpose used.
Testing the mathematical accuracy and computation of the allowance for loan and lease losses.
Evaluating the period to period consistency with which qualitative loss factors are determined and applied.
69
/s/ Eide Bailly LLP
We have served as the Company’s auditor since 2019.
San Ramon, California
March 12, 2021
70
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Sierra Bancorp and Subsidiary
Porterville, California
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of income and comprehensive income, changes in
shareholders’ equity, and cash flows, for the year ended December 31, 2018, and the related notes (collectively referred to
as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the results of
its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion
on these financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to Sierra Bancorp
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risk of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ Vavrinek, Trine, Day & Co., LLP
We have served as the Company's auditor since 2004.
Rancho Cucamonga, California
March 14, 2019
71
SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
(dollars in thousands)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest bearing deposits in banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans and leases:
2020
2019
67,908 $
3,509
71,417
543,974
65,556
14,521
80,077
600,799
Gross loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan and lease (fees) costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,463,111
(17,738)
(3,147)
2,442,226
971
27,505
27,357
4,307
52,539
50,446
1,762,565
(9,923)
2,896
1,755,538
800
27,435
27,357
5,381
50,517
45,915
$ 3,220,742 $ 2,593,819
Deposits:
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,680,942
2,624,606
39,138
142,900
35,124
35,078
2,876,846
690,950
1,477,424
2,168,374
25,711
20,000
34,945
35,504
2,284,534
943,664 $
Commitments and contingent liabilities (Notes 6 & 13)
Shareholders' equity
Serial Preferred stock, no par value; 10,000,000 shares authorized; none issued;
Common stock, no par value; 24,000,000 shares authorized; 15,388,423 and
15,284,538 shares issued and outstanding in 2020 and 2019, respectively . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive gain, net of taxes of $(7,725) in 2020 and
113,384
3,736
208,371
113,179
3,307
186,867
$(2,490) in 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,405
343,896
5,932
309,285
$ 3,220,742 $ 2,593,819
The accompanying notes are an integral part of these consolidated financial statements.
72
SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2020, 2019 and 2018
(dollars in thousands, except per share data)
Interest and dividend income
Loans and leases, including fees . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Interest expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan and lease
2020
2019
2018
$
96,181
8,199
5,707
156
110,243
3,948
243
1,217
5,408
104,835
8,550
$
95,898
10,139
4,534
376
110,947
11,380
362
1,836
13,578
97,369
2,550
87,792
9,548
4,060
238
101,638
7,260
253
1,731
9,244
92,394
4,350
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96,285
94,819
88,044
Noninterest income
Service charges on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Checkcard fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains (losses) on sale of securities available-for-sale . . . . .
Increase in cash surrender value of life insurance . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, basic . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, diluted . . . . . . . . . . . . . . . .
11,765
7,023
390
2,412
4,560
26,150
40,178
9,842
—
25,892
75,912
46,523
11,079
35,444
2.33
2.32
15,216,749
15,280,325
$
$
$
12,742
6,584
(198)
2,184
2,165
23,477
35,978
9,845
22
24,733
70,578
47,718
11,757
35,961
2.35
2.33
15,311,113
15,437,111
$
$
$
12,439
5,878
2
591
2,654
21,564
36,133
10,295
449
23,147
70,024
39,584
9,907
29,677
1.94
1.92
15,261,794
15,432,120
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
73
SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2020, 2019 and 2018
(dollars in thousands, except footnotes)
2020
2019
2018
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,444 $ 35,961 $ 29,677
Other comprehensive income, before tax
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for (gains) losses included in net income (1) . . .
Other comprehensive gain (loss), before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit related to items of other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive gain (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,099
(390)
17,709
(5,236)
12,473
47,917
17,686
198
17,884
(5,286)
12,598
48,559
(6,154)
(2)
(6,156)
1,820
(4,336)
25,341
(1) Amounts are included in net (gains) losses on securities available-for-sale on the Consolidated Statements of Income
in noninterest income. Income tax (expense) benefit associated with the reclassification adjustment for the years ended
2020, 2019 and 2018 was $(115,000), $59,000 and $(1,000) respectively.
The accompanying notes are an integral part of these consolidated financial statements.
74
SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Years Ended December 31, 2020
(dollars in thousands, except per share data)
Common Stock
Additional
Paid In
Capital Earnings
Accumulated
Other
Retained Comprehensive Shareholders'
Gain (Loss)
Equity
Amount
Shares
Balance, January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . .
Stock issued-acquisition . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends - $.64 per share . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive gain, net of tax . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . .
Stock repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends - $.74 per share . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2019 . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive gain, net of tax . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . .
Stock repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends - $.80 per share . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2020 . . . . . . . . . . . . . . . . . . . . . .
15,223,360 $ 111,138 $
2,937 $ 144,197 $
(2,330) $
29,677
(4,336)
77,100
1,369
—
—
(238)
373
(6)
15,300,460
112,507
3,066
82,681
1,337
(98,603)
(665)
(249)
490
15,284,538
113,179
3,307
67,050
148,885
(112,050)
1,034
(829)
(259)
688
(9,757)
164,117
35,961
(1,879)
(11,332)
186,867
35,444
(1,733)
(12,207)
(6,666)
12,598
5,932
12,473
15,388,423 $ 113,384 $
3,736 $ 208,371 $
18,405 $
255,942
29,677
(4,336)
1,131
373
(6)
(9,757)
273,024
35,961
12,598
1,088
490
(2,544)
(11,332)
309,285
35,444
12,473
775
688
(2,562)
(12,207)
343,896
The accompanying notes are an integral part of these consolidated financial statements.
75
SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020, 2019, and 2018
(dollars in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities:
(Gain) loss on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Writedown of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization on securities premiums and discounts . . . . . . . . . . . . . . . . . . . . . . .
Accretion of discounts for loans acquired and net deferred loan fees . . . . . . . . . . . .
Increase in cash surrender value of life insurance policies . . . . . . . . . . . . . . . . . . . . .
Amortization of core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in interest receivable and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization of partnership investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Maturities and calls of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal paydowns on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchases of FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan originations and payments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidation of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from BOLI death benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from bank acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
2019
2018
35,444 $
35,961 $
29,677
(390)
—
(10)
124
688
8,550
3,025
4,789
(663)
(2,412)
1,074
(488)
(8,151)
(2,611)
(447)
1,505
40,027
12,385
20,298
(71,816)
109,267
—
(697,305)
(2,916)
—
2,445
(210)
326
274
—
(627,252)
198
28
(107)
77
490
2,550
2,988
4,449
(1,023)
(2,184)
1,074
(9,224)
9,662
(97)
(232)
2,127
46,737
9,809
60,510
(190,168)
92,766
(833)
(32,376)
(783)
10
7,955
(440)
260
—
—
(53,290)
(2)
16
(1,423)
439
373
4,350
3,174
5,452
(1,647)
(591)
1,020
(6,106)
(5,420)
(308)
(1,183)
2,625
30,446
9,730
6,838
(122,818)
92,494
(300)
(183,737)
(3,123)
—
13,188
(454)
—
—
(6)
(188,188)
Cash flows from financing activities:
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in fed funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
456,232
22,900
13,427
100,000
(12,207)
(2,562)
775
578,565
(8,660)
80,077
71,417 $
52,034
(36,100)
9,352
—
(11,332)
(2,544)
1,088
12,498
5,945
74,132
80,077 $
127,954
34,200
8,209
—
(9,757)
—
1,131
161,737
3,995
70,137
74,132
76
SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31, 2020, 2019 and 2018
(dollars in thousands)
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,707
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,490 $ 12,000 $ 11,300
6,007 $ 13,769 $
2020
2019
2018
Supplemental noncash disclosures:
Real estate acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
27 $
Change in unrealized net gains (losses) on securities available-for-sale . . . . $ 17,709 $ 17,884 $
8,308 $
Operating right-of-use asset pursuant to adoption of ASU 2016-02 . . . . . . . $
8,915 $
Operating lease liability pursuant to adoption of ASU 2016-02 . . . . . . . . . . . $
— $
— $
2,562 $
7,805
(6,156)
—
—
The accompanying notes are an integral part of these consolidated financial statements.
77
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS OF SIERRA BANCORP
Sierra Bancorp (the “Company”) is a California corporation registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, and is headquartered in Porterville, California. The Company was
incorporated in November 2000 and acquired all of the outstanding shares of Bank of the Sierra (the “Bank”) in
August 2001. The Company’s principal subsidiary is the Bank, and the Company exists primarily for the purpose of
holding the stock of the Bank and of such other subsidiaries it may acquire or establish. The Company’s only other
direct subsidiaries are 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.
At December 31, 2020, the Bank operated 40 full service branch offices, an online branch and provides specialized
lending services through an agricultural credit center, an SBA center, Mortgage Warehouse lending divisions and a
dedicated loan production office in Rocklin, California. The Bank’s deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) up to applicable legal limits. The Bank maintains a diversified loan portfolio
comprised of agricultural, commercial, consumer, real estate, construction and mortgage loans. Loans are made in
California within the market area of the South Central San Joaquin Valley, the Central Coast, Ventura County and
neighboring communities. These areas have diverse economies with principal industries being agriculture, real estate
and light manufacturing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and the consolidated accounts of its
wholly-owned subsidiary, Bank of the Sierra. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior years’ balances to conform to classifications used in
2020. The accounting and reporting policies of the Company conform to accounting principles generally accepted
in the United States of America (U.S. GAAP) and prevailing practices within the banking industry.
In accordance with U.S. GAAP, the Company’s investments in Sierra Statutory Trust II, Sierra Capital Trust III and
Coast Bancorp Statutory Trust II are not consolidated and are accounted for under the equity method and included
in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the
Company and held by the trusts are reflected on the Company’s consolidated balance sheet.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions based on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and actual results could differ.
Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination
of the allowance for loan and lease losses and the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the determination of the allowances for loan and lease losses and other
real estate, management obtains independent appraisals for significant properties, evaluates the overall loan portfolio
characteristics and delinquencies and monitors economic conditions.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and deposits with other financial
institutions with original maturities within 90 days, and federal funds sold. Net cash flows are reported for customer
78
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
loan and deposit transactions, interest bearing deposits in other financial institutions, and fed funds purchased and
repurchase agreements.
Securities
Debt securities may be classified as held to maturity and carried at amortized cost when management has the positive
ability and intent to hold them to maturity. Debt securities are classified as available for sale when they might be
sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Debt
securities available for sale are carried at fair value with unrealized holding gains and losses reported in other
comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums or discounts on securities are
amortized on the level-yield method without anticipating prepayments. Gains and losses on sales are recorded on
the trade date and determined using the specific identification method.
Management determines the appropriate classification of its investments at the time of purchase and may only
change the classification in certain limited circumstances. All transfers between categories are accounted for at fair
value. 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 currently classified as “available for sale” to allow maximum
flexibility with regard to interest rate risk and liquidity management.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and
more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized
loss position, management considers the extent and duration of the unrealized loss and the financial condition and
near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not
that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If
either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and
fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned
criteria, the amount of the impairment is split into two components as follows: 1) OTTI related to credit loss, which
must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other
comprehensive income. The credit loss is defined as the difference between the present value of the cash flows
expected to be collected and the amortized cost basis.
FHLB Stock and Other Investments
The Bank is a member of the Federal Home Loan Bank ("FHLB") system. Members are required to own a certain
amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB
stock is carried at cost in other assets, and periodically evaluated for impairment based on the ultimate recovery of
par value. Both cash and stock dividends are reported as income. The Bank’s investment in FHLB stock was
approximately $10.7 million at both December 31, 2020 and 2019.
Pursuant to the adoption of ASU 2016-01 on January 1, 2018, the Company elected the measurement alternative for
measuring equity securities without readily determinable fair values at cost less impairment, plus or minus
observable price changes in orderly transactions. The carrying amount of equity securities without readily
determinable fair values is $2.5 million and $2.0 million at December 31, 2020 and 2019, respectively. Equity
securities primarily consist of an investment in Pacific Coast Bankers’ Bank (“PCBB”). A remeasurement gain of
$0.4 million, $0.2 million and $1.2 million was recorded to income during the years ended December 31, 2020, 2019
and 2018, on PCBB stock. $1.8 million in cumulative remeasurement gains have been recorded as of December 31,
79
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2020 on PCBB stock. Adjustments to the carrying value of PCBB stock were based on observable activity in the
stock.
Loans Held for Sale
The Company may originate loans intended to be sold on the secondary market. Loans originated and intended for
sale in the secondary market are carried at cost which approximates fair value since these loans are typically sold
shortly after origination. The loan’s cost basis includes unearned deferred fees and costs, and premiums and
discounts. If loans held for sale remain on our books for an extended period of time the fair value of those loans is
determined using quoted secondary market prices. Net unrealized losses, if any, are recorded as a valuation
allowance and charged to earnings.
Loans that might be held for sale by the Company typically consist of residential real estate loans. Loans classified
as held for sale, if any, are disclosed in Note 4 to the consolidated financial statements.
Gains and losses on sales of loans are recognized at the time of sale and are calculated based on the difference
between the selling price and the allocated book value of loans sold. Book value allocations are determined in
accordance with U.S. GAAP. Any inherent risk of loss on loans sold is transferred to the buyer at the date of sale.
The Company has issued various representations and warranties associated with the sale of loans. These
representations and warranties may require the Company to repurchase loans with underwriting deficiencies as
defined per the applicable sales agreements and certain past due loans within 90 days of the sale. The Company did
not experience losses during the years ended December 31, 2020, 2019, or 2018 regarding these representations and
warranties.
Loans and Leases (Financing Receivables)
Our credit quality classifications of Loans and Leases include Pass, Special Mention, Substandard and Impaired.
These classifications are defined in Note 4 to the consolidated financial statements.
Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, purchase premiums and
discounts, write-downs, and an allowance for loan and lease losses. Loan and lease origination fees, net of certain
deferred origination costs, and purchase premiums and discounts are recognized in interest income as an adjustment
to yield of the related loans and leases over the contractual life of the loan using both the effective interest and
straight line methods without anticipating prepayments.
Interest income for all performing loans, regardless of classification (Pass, Special Mention, Substandard and
Impaired), is recognized on an accrual basis, with interest accrued daily. Costs associated with successful loan
originations are netted from loan origination fees, with the net amount (net deferred loan fees) amortized over the
contractual life of the loan in interest income. If a loan has scheduled periodic payments, the amortization of the net
deferred loan fee is calculated using the effective interest method over the contractual life of the loan. If the loan
does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income
on a straight line basis over the contractual life of the loan. Fees received for loan commitments are recognized as
interest income over the term of the commitment. When loans are repaid, any remaining unamortized balances of
deferred fees and costs are accounted for through interest income.
Generally, the Company places a loan or lease on nonaccrual status and ceases recognizing interest income when it
has become delinquent more than 90 days and/or when Management determines that the repayment of principal and
80
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
collection of interest is unlikely. The Company may decide that it is appropriate to continue to accrue interest on
certain loans more than 90 days delinquent if they are well-secured by collateral and collection is in process. When
a loan is placed on nonaccrual status, any accrued but uncollected interest for the loan is reversed out of interest
income in the period in which the loan’s status changed. For loans with an interest reserve, i.e., where loan proceeds
are advanced to the borrower to make interest payments, all interest recognized from the inception of the loan is
reversed when the loan is placed on non-accrual. Once a loan is on non-accrual status subsequent payments received
from the customer are applied to principal, and no further interest income is recognized until the principal has been
paid in full or until circumstances have changed such that payments are again consistently received as contractually
required. Generally, loans and leases are not restored to accrual status until the obligation is brought current and has
performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability
of the total contractual principal and interest is no longer in doubt.
Impaired loans are classified as either nonaccrual or accrual, depending on individual circumstances regarding the
collectability of interest and principal according to the contractual terms.
Purchased Credit Impaired Loans
The Company purchases individual loans and groups of loans, some of which may 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 and lease losses. After acquisition, additional deterioration in
credit is recognized by an increase in the allowance for loan and lease losses.
Such PCI loans are accounted for individually or aggregated into pools of loans based on common risk
characteristics. The Company estimates the amount and timing of expected cash flows for the loan or pool, and the
expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or
pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows
is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash
flows is less than the carrying amount, a loss is recorded as a provision for loan and lease losses. If the present value
of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income
Loans Modified in a Troubled Debt Restructuring
Loans are considered to have been modified in a troubled debt restructuring (“TDR”) when due to a borrower’s
financial difficulties the Company makes certain concessions to the borrower that it would not otherwise consider.
Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions
intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual
loan that has been modified in a TDR remains on non-accrual status for a period of six months to demonstrate that
the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or
significant events that coincide with the modification, are included in assessing whether the borrower can meet the
new terms and may result in the loan being returned to accrual status at the time of loan modification or after a
shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan
remains on non-accrual status.
A TDR is generally considered to be in default when it appears likely that the customer will not be able to repay all
principal and interest pursuant to the terms of the restructured agreement.
81
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained at a level which, in management’s judgment, is adequate to
absorb loan and lease losses inherent in the loan and lease portfolio. The allowance for loan and lease losses is
increased by a provision for loan and lease losses, which is charged to expense, and by principal recovered on
charged-off balances. It is reduced by principal charge-offs. The amount of the allowance is based on management’s
evaluation of the collectability of the loan and lease portfolio, changes in its risk profile, credit concentrations,
historical trends, and economic conditions. This evaluation also considers the balance of impaired loans and leases.
A loan or lease is impaired when it is probable that the Company will be unable to collect all contractual principal
and interest payments due in accordance with the terms of the loan or lease agreement. The impairment on certain
individually identified loans or leases is measured based on the present value of expected future cash flows
discounted at the original effective interest rate of the loan or lease. As a practical expedient, impairment may be
measured based on the loan’s or lease’s observable market price or the fair value of collateral if the loan or lease is
collateral dependent. The amount of impairment, if any, is recorded through the provision for loan and lease losses
and is added to the allowance for loan and lease losses, with any changes over time recognized as additional bad
debt expense in our provision for loan and lease losses. Impaired loans with homogenous characteristics, such as
one-to-four family residential mortgages and consumer installment loans, may be subjected to a collective evaluation
for impairment, considering delinquency and repossession statistics, historical loss experience, and other factors.
General reserves cover non-impaired loans and are based on historical net loss rates for each portfolio segment by
call report code, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated
credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative
factors include consideration of the following: changes in lending policies and procedures; changes in international,
national, regional, and local economic and business conditions and developments; changes in the nature and volume
of the portfolio; changes in the experience, ability and depth of lending management and staff; changes in the volume
and severity of past due, nonaccrual and other adversely graded loans; changes in quality of the loan review system;
changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit; and the
effect of the other external factors such as competition and legal and regulatory requirements.
Most of the Company’s business activity is with customers located in California within the Southern Central San
Joaquin Valley; in the corridor stretching between Santa Paula and Santa Clarita in Southern California, and on the
Central Coast. Therefore the Company’s exposure to credit risk is significantly affected by changes in the economy
in those regions. The Company considers this concentration of credit risk when assessing and assigning qualitative
factors in the allowance for loan and lease losses. Portfolio segments identified by the Company include Agricultural,
Commercial and Industrial, Real Estate, Small Business Administration, and Consumer loans. Relevant risk
characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios and
financial performance on non-consumer loans; and credit scores, debt-to-income ratios, collateral type and loan-to-
value ratios for consumer loans.
Though management believes the allowance for loan and lease losses to be adequate, ultimate losses may vary from
their estimates. However, estimates are reviewed periodically, and as adjustments become necessary they are
reported in earnings during the periods they become known. In addition, the FDIC and the California Department
of Financial Protection and Innovation, as an integral part of their examination processes, review the allowance for
loan and lease losses. These agencies may require additions to the allowance for loan and lease losses based on their
judgment about information available at the time of their examinations.
82
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Reserve for Off-Balance Sheet Commitments
In addition to the exposure to credit loss from outstanding loans, the Company is also exposed to credit loss from
certain off-balance sheet commitments such as unused commitments from revolving lines of credit, mortgage
warehouse lines of credit, construction loans and commercial and standby letters of credit. Because the available
funds have not yet been disbursed on these commitments the estimated losses are not included in the calculation of
the ALLL. The reserve for off-balance sheet commitments is an estimated loss contingency which is included in
other liabilities on the Consolidated Balance Sheets. The adjustments to the reserve for off-balance sheet
commitments are reported within noninterest expense. This reserve is for estimated losses that could occur when the
Company is contractually obligated to make a payment under these instruments and must seek repayment from a
party that may not be as financially sound in the current period as it was when the commitment was originally made.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the assets. The useful lives of premises
range between twenty-five to thirty-nine years. The useful lives of furniture, fixtures and equipment range between
three to twenty years. Leasehold improvements are amortized over the life of the asset or the term of the related
lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to expense as incurred.
Impairment of long-lived assets is evaluated by management based upon an event or changes in circumstances
surrounding the underlying assets which indicate long-lived assets may be impaired.
Foreclosed Assets
Foreclosed assets include real estate and other property acquired in full or partial settlement of loan obligations.
Upon acquisition, any excess of the recorded investment in the loan balance over the appraised fair market value,
net of estimated selling costs, is charged against the allowance for loan and lease losses. A valuation allowance for
losses on foreclosed assets is maintained to provide for subsequent declines in value. The allowance is established
through a provision for losses on foreclosed assets which is included in other noninterest expense. Subsequent gains
or losses on sales or write-downs resulting from permanent impairments are recorded in other noninterest expense
as incurred. Operating costs after acquisition are expensed.
The Company had one foreclosed residential real estate property recorded at December 31, 2020, as a result of
obtaining physical possession of the property. At December 31, 2020, the recorded investment of consumer
mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process
was $1.2 million.
Goodwill and Other Intangible Assets
The Company acquired Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in
2016, and Ojai Community Bank and the Woodlake Branch of Citizen’s Business Bank in 2017. Goodwill resulting
from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the
consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of
the net assets acquired and liabilities assumed as of the acquisition date.
83
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but are tested for impairment at least annually or more frequently if events and
circumstances exist which indicate that an impairment test should be performed. The Company selected
December 31, 2020 as the date to perform the annual impairment test for 2020. Goodwill is the only intangible asset
with an indefinite life on our balance sheet. There was no impairment recognized for the years ended December 31,
2020, 2019, and 2018.
Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual
values. The Company’s other intangible assets consist solely of core deposit intangible assets (CDI’s) arising from
the acquisitions of Santa Clara Valley Bank, Coast National Bank, a Citizen’s Business Bank Porterville branch
deposit portfolio, Ojai Community Bank, the Woodlake Branch of Citizen’s Business Bank and the Lompoc branch
of Santa Maria Community Bank. All of the CDI’s are being amortized on a straight-line basis over eight years,
except for the Citizen’s Business Bank Porterville branch deposit portfolio which is being amortized on a straight-
line basis over five years.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and
commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents
the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are
recorded when they are funded. Details regarding these commitments and financial instruments are discussed in
detail in Note 13 to the consolidated financial statements.
Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense
represents each entity’s proportionate share of the consolidated provision for income taxes.
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets
and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences
between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded. We have determined that as of December 31, 2020 all tax positions
taken to date are highly certain and, accordingly, no accounting adjustment has been made to the financial
statements.
The Company recognizes interest and penalties related to uncertain tax positions as part of income tax expense.
Salary Continuation Agreements and Directors’ Retirement Plan
The Company has entered into agreements to provide members of the Board of Directors and certain key executives,
or their designated beneficiaries, with annual benefits for up to fifteen years after retirement or death. The Company
accrues for these future benefits from the effective date of the plan until the director’s or executive’s expected
retirement date in a systematic and rational manner. At the consolidated balance sheet date, the amount of accrued
84
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
benefits equals the then present value of the benefits expected to be provided to the director or employee, any
beneficiaries, and covered dependents in exchange for the director’s or employee’s services to that date.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income
includes fluctuations in unrealized gains and losses on securities available for sale, net of an adjustment for the
effects of realized gains and losses and any applicable tax. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive income that historically has not been
recognized in the calculation of net income. Unrealized gains and losses on the Company’s available for sale
securities, net of tax, are included in other comprehensive income after adjusting for the effects of realized gains and
losses. Total comprehensive income and the components of accumulated other comprehensive income (loss) are
presented in the consolidated statements of comprehensive income.
Stock-Based Compensation
At December 31, 2020, the Company had one stock-based compensation plan, the Sierra Bancorp 2017 Stock
Incentive Plan (the “2017 Plan”), which was adopted by the Company’s Board of Directors on March 16, 2017 and
approved by the Company’s shareholders on May 24, 2017. 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 shares
granted under the 2007 Plan that remained outstanding were unaffected by that plan’s termination. The 2017 Plan
covers 850,000 shares of the Company’s authorized but unissued common stock, subject to adjustment for stock
splits and dividends, and provides for the issuance of both “incentive” and “nonqualified” stock options to salaried
officers and employees, and of “nonqualified” stock options to non-employee directors. The 2017 Plan also provides
for the issuance of restricted stock awards to these same classes of eligible participants.
Compensation cost and director’s expense is recognized for stock options and restricted stock awards issued to
employees and directors and is recognized over the required service period, generally defined as the vesting period.
The Company is using the Black-Scholes model to estimate the fair value of stock options, while the market price
of the Company’s common stock at the date of grant is used for restricted stock awards. The “multiple option”
approach for stock options is used to allocate the resulting valuation to actual expense for current period. Expected
volatility is based on historical volatility of the Company’s common stock. The Company uses historical data to
estimate stock option exercise and post-vesting termination behavior. The expected term of stock options granted is
based on historical data and represents the period of time that options granted are expected to be outstanding
subsequent to vesting, which takes into account that the options are not transferable. The risk-free interest rate for
85
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the expected term of the stock option is based on the U.S. Treasury yield curve in effect at the time of the grant. The
fair value of each stock option is estimated on the date of grant using the following assumptions:
2020
Years Ended December 31,
2019
Dividend yield . . . . . . . . . . . . .
Expected Volatility . . . . . . . . .
Risk-free interest rate . . . . . . .
Expected option life . . . . . . . .
3.02%
25.06%
1.47%
6.4 years
2.62%
34.57%
2.70%
5.4 years
2018
2.12%
26.26%
2.38%
5.3 years
Revenue Recognition
Revenue from contracts with customers subject to ASC 606 comprises the noninterest income earned by the
Company in exchange for services provided to customers. Income associated with customer contracts generally
involve transaction prices that are fixed and performance obligations which are satisfied as services are rendered. In
most cases recognition occurs within a single financial reporting period as there is little or no judgement involved in
the timing of revenues. We generally act in a principal capacity, on our own behalf, in most of our contracts with
customers. In such transactions, we recognize revenue and the related costs to provide our services on a gross basis
in our financial statements. Service Charges on Deposit Accounts comprise charges on retail and business accounts.
Business customers can earn credits depending on account type and deposit balances maintained with the Company,
which may be used to offset fees. Fees and credits are based on predetermined, agreed-upon rates. In some cases, we
act in an agent capacity, deriving revenue through assisting other entities in transactions with our customers. In such
transactions, we recognize revenue and those related costs to provide services on a gross basis in our financial
statements. Debit card interchange income is derived from our customers’ use of various interchange and ATM/debit
card networks which are the primary sources of revenue generated in an agent capacity.
Recent Accounting Pronouncements
In January 2016 the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of
Financial Assets and Financial Liabilities. This guidance addresses certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. Among other things, the guidance in this ASU (i) requires
equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in
net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values
by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public entities to
disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use
the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an
entity to present separately in other comprehensive income the portion of the change in fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at
fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of
financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or
in the accompanying notes to the financial statements, and (vii) clarifies that an entity should evaluate the need for
a valuation allowance on a deferred tax asset related to available-for-sale securities. This amendment is effective for
fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are
required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year
of adoption, except for the amendment related to equity securities without readily determinable fair values which
should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted
ASU 2016-01 effective January 1, 2018, and recorded an increase in equity securities without readily determinable
86
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
values and noninterest revenue for $1.2 million. In accordance with (iv) above, the Company measured the fair value
of its loan portfolio at December 31, 2020 and 2019 using an exit price notion. See Note 20 Fair Value.
In February 25, 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). The new
standard was issued to increase the transparency and comparability around lease obligations. Previously unrecorded
off-balance sheet obligations will now be brought more prominently to light by bringing lease liabilities onto the
balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial
statements. This Update is generally effective for public business entities in fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. The Company has several lease agreements,
including 21 branch locations, one administrative office and three offsite ATM locations which fell under the
requirements of Topic 842. Effective January 1, 2019 the Company adopted ASU 2016-02 recording a right of use
asset totaling approximately $10 million, and a corresponding lease liability. See Note 6 to the consolidated financial
statements for more detailed information.
In September 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which eliminates the probable initial recognition threshold
for credit losses in current U.S. GAAP, and instead requires an organization to record a current estimate of all
expected credit losses over the contractual term, adjusted by expected prepayments, 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 estimated for the contractual term of the financial
asset, adjusted by prepayments, based on historical experience, current conditions, and reasonable and supportable
forecasts of future economic conditions. Another change 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, in contrast to acquired loans not identified as purchased credit deteriorated for which the allowance will be
established through a charge to 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 was originally scheduled to become effective for the
Company on January 1, 2020. In March 2020, 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. In December 2020, the
Consolidated Appropriations Act 2021, extended the deferral of implementation of CECL from December 31, 2020,
to the earlier of the first day of the fiscal year, beginning after the national emergency terminates or January 1, 2022.
The Company will now continue to postpone implementation in order to provide additional time to assess better the
impact of the COVID-19 pandemic on the expected lifetime credit losses. 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; any change in the reserve for unfunded commitments, included in
other liabilities; 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 plans to implement CECL on January 1, 2022 and while the exact extent of the impact has not yet been
definitively determined, the Company’s calculation as of December 31, 2020 indicates that our allowance for loan
and lease losses will increase by approximately $8.9 million relative to current levels, under CECL while our reserve
for unfunded commitments will increase by approximately $0.8 million. The Company plans to continue to sensitize
87
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
inputs, assumptions and methodologies within its CECL estimation process during 2021 as we prepare for
implementation on January 1, 2022.
In January 2017 the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the
Accounting for Goodwill Impairment. This guidance removes Step 2 of the goodwill impairment test, which requires
a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill
impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative
assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be
applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required
to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The amendments in
this update are effective for public business entities for fiscal years beginning after December 15, 2019. We have
not been required to record any goodwill impairment to date, and do not expect that this guidance would require us
to do so given current circumstances.
In March 2017 the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic
310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this update shorten the
amortization period for certain callable debt securities held at a premium, by requiring the premium to be amortized
to the earliest call date. Under prior guidance, the premium on a callable debt security was generally amortized as
an adjustment to yield over the contractual life of the instrument, and any unamortized premium was recorded as a
loss in earnings upon the debtor’s exercise of a call provision. Under ASU 2017-08, because the premium is
amortized to the earliest call date, entities no longer recognize a loss in earnings if a debt security is called prior to
the contractual maturity date. The amendments did not require an accounting change for securities held at a discount;
discounts will continue to be amortized as an adjustment to yield over the contractual life of the debt instrument.
ASU 2017-08 became effective for public business entities, including the Company, for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018. ASU 2017-08, required entities to use a
modified retrospective approach, with the cumulative-effect adjustment recognized to retained earnings at the
beginning of the period of adoption. Entities are also required to provide disclosures about a change in accounting
principle in the period of adoption. The Company adopted ASU 2017-08 effective January 1, 2019 with no material
impact on our financial statements or operations.
In August 2018 the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement, as part of its disclosure framework project.
Pursuant to this guidance, disclosures that will no longer be required include the following: transfers between Level
1 and Level 2 of the fair value hierarchy; transfers in and out of Level 3 for nonpublic entities, as well as purchases
and issuances and the Level 3 roll forward; a company’s policy for determining when transfers between any of the
three levels have occurred; the valuation processes used for Level 3 measurements; and, the changes in unrealized
gains or losses presented in earnings for Level 3 instruments held at the balance sheet date for nonpublic entities.
The following are additional disclosure requirements: for public entities, the changes in unrealized gains and losses
for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet
date; for public entities, the range and weighted average of significant unobservable inputs used for Level 3
measurements, although for certain unobservable inputs the entity will be allowed to disclose other quantitative
information in place of the weighted average to the extent that it would be a more reasonable and rational method to
reflect the distribution of unobservable inputs; for nonpublic entities, some form of quantitative information about
significant unobservable inputs used in Level 3 fair value measurements; and, for certain investments in entities that
calculate the net asset value, disclosures will be required about the timing of liquidation and redemption restrictions
lapsing if the latter has been communicated to the reporting entity. The guidance also clarifies that the Level 3
measurement uncertainty disclosure should communicate 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
88
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
periods. 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 with no material impact on our financial statements or operations.
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
processed short-term modifications for 311 loans and $424.9 million made in response to COVID-19 to borrowers
who were 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 4 for further information on remaining 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.
89
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of the securities available-for-sale are as follows (dollars in thousands):
Amortized
Cost
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
U.S. government agencies . . . . . . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
State and political subdivisions . . . . . . . . . . . . . . . .
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,725 $
304,108
212,011
517,844 $
75 $
10,389
15,728
26,192 $
— $
(62)
—
(62) $
1,800
314,435
227,739
543,974
U.S. government agencies . . . . . . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
State and political subdivisions . . . . . . . . . . . . . . . .
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amortized
Cost
12,125 $
398,353
181,900
592,378 $
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
124 $
3,354
6,478
9,956 $
(104) $
(1,318)
(113)
(1,535) $
12,145
400,389
188,265
600,799
For the years ended December 31, 2020, 2019, and 2018, proceeds from sales of securities available-for-sale were
$20.3 million, $60.5 million, and $6.8 million, respectively. Gains and losses on the sale of investment securities
are recorded on the trade date and are determined using the specific identification method.
Gross gains and losses from the sales and calls of securities for the years ended were as follows (dollars in
thousands):
Gross gains on sales and calls of securities . . . . . . . . . . . . . . . . . . . $ 433 $ 230 $
Gross losses on sales and calls of securities . . . . . . . . . . . . . . . . . .
Net gains (losses) on sales and calls of securities . . . . . . . . . . . . . . $ 390 $ (198) $
(428)
(43)
2018
21
(19)
2
2020
December 31,
2019
The Company has reviewed all sectors and securities in the portfolio for impairment. During the year ended
December 31, 2020 the Company realized gains through earnings from the sale and call of 60 debt securities for
$0.43 million. The securities were sold with 9 other debt securities, for which a $0.04 million loss was realized.
During the year ended December 31, 2019, the Company realized gains through earnings from the sale and call of
74 debt securities for $0.2 million. The securities were sold with 108 other debt securities, for which a $0.4 million
loss was realized, to improve the structure of the portfolio at year-end. During the year ended December 31, 2018
the Company realized gains through earnings from the sale and call of 11 debt securities for $0.02 million. The
securities were sold with 8 other debt securities, for which a $0.02 million loss was realized, to improve the structure
of the portfolio at year end.
90
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2020 and 2019, the Company had 2 and 198 securities with unrealized gross losses, respectively.
Information pertaining to these securities aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows (dollars in thousands):
December 31, 2020
Less than twelve months
Gross
Unrealized
Losses
Fair Value
Twelve months or longer
Gross
Unrealized
Losses
Fair Value
U.S. government agencies . . . . . . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
State and political subdivisions . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
(62)
—
(62) $
— $
4,286
—
4,286 $
— $
—
—
— $
—
—
—
—
December 31, 2019
Less than twelve months
Gross
Unrealized
Losses
Fair Value
Twelve months or longer
Gross
Unrealized
Losses
Fair Value
U.S. government agencies . . . . . . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
State and political subdivisions . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(32) $
(494)
(113)
(639) $
3,240 $
100,518
19,762
123,520 $
(72) $
(824)
—
(896) $
2,689
78,538
—
81,227
The Company has concluded as of December 31, 2020 that all remaining securities, currently in an unrealized loss
position, are not other-than-temporarily-impaired. This assessment was based on the following factors: 1) the
Company has the ability to hold the securities, 2) the Company does not intend to sell the securities, 3) the Company
does not anticipate it will be required to sell the securities before recovery, 4) and the Company expects to eventually
recover the entire amortized cost basis of the securities.
The amortized cost and estimated fair value of securities available-for-sale at December 31, 2020 by contractual
maturity are shown below. Expected maturities will differ from contractual maturities because the issuers of the
securities may have the right to call or prepay obligations with or without penalties (dollars in thousands):
Maturing within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Maturing after one year through five years . . . . . . . . . . . . . . . . . . . . .
Maturing after five years through ten years . . . . . . . . . . . . . . . . . . . .
Maturing after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized Cost Fair Value
3,812 $ 3,857
9,732
9,475
27,250
28,745
187,205
173,199
157,201
163,029
151,406
146,907
517,844 $ 543,974
$
Securities available-for-sale with amortized costs totaling $224.1 million and estimated fair values totaling $232.0
million were pledged to secure other contractual obligations and short-term borrowing arrangements at
December 31, 2020 (see Note 10).
Securities available-for-sale with amortized costs totaling $233.0 million and estimated fair values totaling $234.8
million were pledged to secure other contractual obligations and short-term borrowing arrangements at
December 31, 2019 (see Note 10).
91
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2020, the Company’s investment portfolio included securities issued by 282 different government
municipalities and agencies located within 29 states with a fair value of $227.7 million. The largest exposure to any
single municipality or agency was $4.0 million (fair value) in three bonds issued for the purpose of paying costs to
acquire and construct improvements of various township facilities by the Charter Township of Washington, to be
repaid by future tax revenues.
The Company’s investments in bonds issued by states, municipalities and political subdivisions are evaluated in
accordance with Supervision and Regulation Letter 12-15 (SR 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.
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 (dollars in thousands):
December 31, 2020
December 31, 2019
Amortized Cost
Fair Value
Amortized Cost
Fair Value
General obligation bonds
State of Issuance:
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (21 and 24 states, respectively) . . . . . . . . . . .
Total general obligation bonds . . . . . . . . . . . . . . . . .
Revenue bonds
State of Issuance:
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (14 and 13 states, respectively) . . . . . . . . . . .
Total revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Total obligations of states and political
76,794 $
31,122
22,896
51,827
182,639
82,888 $
33,100
25,072
55,352
196,412
59,439 $
23,882
23,392
49,326
156,039
61,519
25,030
24,313
50,725
161,587
7,023
2,249
363
19,737
29,372
7,516
2,406
379
21,026
31,327
6,035
1,737
365
17,724
25,861
6,298
1,856
380
18,144
26,678
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
212,011 $
227,739 $
181,900 $
188,265
92
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the amortized cost and fair value of revenue bonds in the Company’s investment
securities portfolio at the indicated dates, identifying the revenue source of repayment for our largest source
concentrations (dollars in thousands):
December 31, 2020
December 31, 2019
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Revenue bonds
Revenue Source:
Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (8 and 9 sources, respectively) . . . . . . . . . . . .
Total revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . $
12,609 $
4,584
3,083
2,707
6,389
29,372 $
13,526 $
4,891
3,308
2,773
6,829
31,327 $
7,515 $
4,760
1,949
3,596
8,041
25,861 $
7,775
4,811
1,995
3,678
8,419
26,678
4. LOANS AND LEASES
The composition of the loan and lease portfolio is as follows (dollars in thousands):
Real estate:
Secured by commercial and professional office properties,
December 31,
2020
2019
including construction and development . . . . . . . . . . . . . . . . . . $ 1,477,677 $
Secured by residential properties . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured by farm land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage warehouse lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan and lease origination (fee) cost, net . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . .
847,865
410,216
144,033
1,402,114
48,036
115,532
189,103
7,780
1,762,565
2,896
(9,923)
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,442,226 $ 1,755,538
288,341
129,905
1,895,923
44,872
209,048
307,679
5,589
2,463,111
(3,147)
(17,738)
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 and qualify the associated credit
risk. Loans classified as “loss” are immediately charged-off. The Company uses the following definitions of risk
classifications:
Pass – Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions
below and smaller, homogeneous loans not assessed on an individual basis.
Special Mention – Loans classified as special mention have the potential weakness that deserves
management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the
repayment prospects for the loan or of the institution’s credit position at some future date.
93
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Substandard – Loans classified as substandard are those loans with clear and well-defined weaknesses such
as a highly leveraged position, unfavorable financial operating results and/or trends, or uncertain repayment sources
or poor financial condition, which may jeopardize ultimate recoverability of the debt.
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.
Additionally, all loans classified as troubled debt restructurings are considered impaired.
Credit quality classifications as of December 31, 2020 were as follows (dollars in thousands):
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
Pass
Special
Mention
Substandard
Impaired
Total
40,044 $
61,809
130,559
30,479
57,934
308,819
8,521 $
7,478
4,922
2,581
3,597
21,148
— $
— $
2,148
1,356
58
—
5,652
545
2,999
4,957
334
7,580
48,565
71,980
139,836
38,075
61,865
343,199
occupied . . . . . . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage warehouse lines . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . .
Total gross loans and leases . . . . . . . . . . . . . . $ 2,307,780 $
1,026,041
104,826
1,760,511
39,391
194,876
307,679
5,323
10,827
21,468
80,542
3,617
11,819
—
58
96,036 $
25,048
3,169
37,431
1,614
1,259
—
11
40,315 $
582
442
17,439
250
1,094
—
197
1,062,498
129,905
1,895,923
44,872
209,048
307,679
5,589
18,980 $ 2,463,111
94
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Credit quality classifications as of December 31, 2019 were as follows (dollars in thousands):
Pass
Special
Mention
Substandard
Impaired
Total
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
105,979 $
90,761
194,572
43,111
54,104
334,460
— $
98
2,425
1,995
—
4,005
occupied . . . . . . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage warehouse lines . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . .
Total gross loans and leases . . . . . . . . . . . . . . $ 1,719,616 $
409,289
142,594
1,374,870
47,814
100,584
189,103
7,245
1,164
1,048
10,735
217
13,415
—
85
24,452 $
— $
—
164
72
—
3,384
11
132
3,763
—
556
—
25
4,344 $
— $
554
3,020
4,421
353
2,034
105,979
91,413
200,181
49,599
54,457
343,883
2,105
259
12,746
5
977
—
425
412,569
144,033
1,402,114
48,036
115,532
189,103
7,780
14,153 $ 1,762,565
Loans may or may not be collateralized, and collection efforts are continuously pursued. Loans or leases may be
restructured by management when a borrower has experienced some change in financial status causing an inability
to meet the original repayment terms and where the Company believes the borrower will eventually overcome those
circumstances and make full restitution. Loans and leases are charged off when they are deemed to be uncollectible,
while recoveries are generally recorded only when cash payments are received subsequent to the charge-off.
The following tables present the activity in the allowance for loan and lease losses and the recorded investment in
loans and impairment method by portfolio segment for each of the years ending December 31, 2020, 2019, and 2018
(dollars in thousands):
Real Estate Agricultural
Industrial (1)
Consumer
Unallocated
Total
Commercial and
Allowance for credit losses:
Balance, December 31, 2017 . $
Charge-offs . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . .
Balance, December 31, 2018 .
Charge-offs . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . .
Balance, December 31, 2019 .
Charge-offs . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . .
Balance, December 31, 2020 . $
4,786
(2,474)
374
3,145
5,831
(1,190)
647
347
5,635
—
87
6,044
11,766 $
(1)
Includes mortgage warehouse lines
208
—
23
25
256
—
—
(63)
193
—
—
289
482 $
95
2,772
(608)
148
82
2,394
(1,274)
690
875
2,685
(436)
129
2,343
4,721 $
1,231
(2,226)
1,120
1,114
1,239
(2,409)
1,159
1,289
1,278
(1,397)
882
(43)
720 $
46
—
—
(16)
30
—
—
102
132
—
—
(83)
49 $
9,043
(5,308)
1,665
4,350
9,750
(4,873)
2,496
2,550
9,923
(1,833)
1,098
8,550
17,738
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Loans evaluated for impairment:
December 31, 2020
December 31, 2019
December 31, 2018
Individually Collectively Individually Collectively Individually Collectively
Real estate . . . . . . . . . . . . . . . . . . . . . . . $ 17,439 $ 1,878,484 $ 12,745 $ 1,389,368 $ 13,501 $ 1,440,429
49,097
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial (1) . . . . . . . .
218,289
8,041
Consumer . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . $ 18,980 $ 2,444,131 $ 14,153 $ 1,748,412 $ 16,072 $ 1,715,856
44,622
515,633
5,392
48,031
303,658
7,355
6
1,744
821
250
1,094
197
5
977
426
(1)
Includes mortgage warehouse lines
96
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Reserves based on method of evaluation for impairment:
December 31, 2020
December 31, 2019
December 31, 2018
Specific
Specific
General
Specific
General
Real estate . . . . . . . . . . . . . . . . . . . . . . . . $
Agricultural . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial (1) . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . .
Total loan and lease loss reserves . . . . . $
(1)
Includes mortgage warehouse lines
General
525 $ 11,241 $
250
202
19
—
232
4,519
701
49
996 $ 16,742 $
493 $
1
219
114
—
827 $
5,142 $
192
2,466
1,164
132
9,096 $
937 $
2
918
151
—
2,008 $
4,894
254
1,476
1,088
30
7,742
The following tables present the recorded investment in nonaccrual loans and loans past due over 30 days as of
December 31, 2020 and December 31, 2019 (dollars in thousands, except footnotes):
December 31, 2020
Real Estate:
30-59 Days 60-89 Days
Past Due Past Due Due(2)
90 Days Or
More Past
Total Past Due
Current
Receivables
Total Financing
Non-
Accrual
Loans(1)
1-4 family residential
construction . . . . . . . . . . $
Other construction/land . .
1-4 family - closed-end . .
Equity lines . . . . . . . . . . . .
Multi-family residential . .
Commercial real estate
— $
—
210
1,409
—
— $
—
37
—
—
— $
—
150
551
—
— $
—
397
1,960
—
48,565 $
71,980
139,439
36,115
61,865
48,565 $
71,980
139,836
38,075
61,865
—
—
1,193
2,403
—
owner occupied . . . . . . .
101
1,187
78
1,366
341,833
343,199
1,678
Commercial real estate
non-owner occupied . . .
Farmland . . . . . . . . . . . . . .
Total real estate loans .
—
—
1,720
—
211
1,435
152
442
1,373
152
653
4,528
1,062,346
129,252
1,891,395
1,062,498
129,905
1,895,923
582
442
6,298
Agricultural . . . . . . . . . . . . . .
Commercial and industrial . .
Mortgage warehouse lines . .
Consumer loans . . . . . . . . . . .
Total gross loans and leases . $ 2,083 $ 1,435 $ 1,860 $
—
325
—
38
250
237
—
—
—
—
—
—
250
562
—
38
250
1,026
—
24
5,378 $ 2,457,733 $ 2,463,111 $ 7,598
44,872
209,048
307,679
5,589
44,622
208,486
307,679
5,551
(1)
Included in Total Financing Receivables
(2) As of December 31, 2020 there were no loans over 90 days past due and still accruing.
97
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2019
Real Estate:
30-59 Days 60-89 Days
Past Due Past Due Due(2)
90 Days Or
More Past
Total Past Due
Current
Receivables
Total Financing
Non-
Accrual
Loans(1)
1-4 family residential
construction . . . . . . . . . . $
Other construction/land . .
1-4 family - closed-end . .
Equity lines . . . . . . . . . . . .
Multi-family residential . .
Commercial real estate
$
—
16
485
177
—
— $
—
380
10
—
owner occupied . . . . . . .
1,552
Commercial real estate
non-owner occupied . . .
Farmland . . . . . . . . . . . . . .
Total real estate loans .
500
—
2,730
—
—
—
390
—
—
659
78
—
88
1,605
—
2,430
$
— $ 105,979
91,397
16
198,657
1,524
49,334
265
54,457
—
$
105,979 $
91,413
200,181
49,599
54,457
—
31
741
480
—
1,640
342,243
343,883
1,440
2,105
—
5,550
410,464
144,033
1,396,564
412,569
144,033
1,402,114
2,105
258
5,055
—
Agricultural . . . . . . . . . . . . . .
160
Commercial and industrial . .
—
Mortgage warehouse lines . .
Consumer loans . . . . . . . . . . .
55
Total gross loans and leases . $ 2,945
$
—
215
—
12
—
—
—
2
617 $ 2,432
$
—
375
—
69
48,036
115,157
189,103
7,711
5,994 $ 1,756,571
48,036
115,532
189,103
7,780
—
651
—
31
$ 1,762,565 $ 5,737
(1)
Included in Total Financing Receivables
(2) As of December 31, 2019 there were no loans over 90 days past due and still accruing.
Generally, the Company places a loan or lease on nonaccrual status and ceases recognizing interest income when it
has become delinquent more than 90 days and/or when Management determines that the repayment of principal and
collection of interest is unlikely. The Company may decide that it is appropriate to continue to accrue interest on
certain loans more than 90 days delinquent if they are well-secured by collateral and collection is in process. When
a loan is placed on nonaccrual status, any accrued but uncollected interest for the loan is reversed out of interest
income in the period in which the loan’s status changed. Subsequent payments received from the customer are
applied to principal, and no further interest income is recognized until the principal has been paid in full or until
circumstances have changed such that payments are again consistently received as contractually required. As of
December 31, 2020 there were 13 customers, for a total of $29.5 million, with payment deferrals either under section
4013 of the CARES Act or the April 7, 2020 Interagency Statement, that are not included in the table above.
98
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Individually impaired loans as of December 31, 2020, December 31, 2019 and December 31, 2018 were as follows
(dollars in thousands):
Unpaid Principal
Balance(1)
December 31, 2020
Recorded
Average Recorded Interest Income
Investment(2) Related Allowance
Investment
Recognized(3)
With an Allowance Recorded
Real estate:
1-4 family residential construction . $
Other construction/land . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . .
Multifamily residential . . . . . . . . . . .
Commercial real estate - owner
occupied . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
With no Related Allowance
Recorded
Real estate:
1-4 family residential construction . $
Other construction/land . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . .
Multifamily residential . . . . . . . . . . .
Commercial real estate - owner
occupied . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
— $
— $
545
2,078
2,875
334
545
2,077
2,875
334
6,076
6,076
—
—
11,908
250
945
235
13,338
—
—
11,907
250
935
197
13,289
171
51
233
16
54
—
—
525
250
202
19
996
565
2,141
2,989
343
6,135
—
—
12,173
250
1,152
221
13,796
— $
114
942
2,160
—
— $
—
922
2,082
—
— $
—
—
—
—
— $
5
960
2,127
—
1,624
1,504
—
1,590
582
442
5,864
—
189
5
6,058
19,396 $ 18,980 $
582
442
5,532
—
159
—
5,691
—
—
—
—
—
—
—
996 $
617
446
5,745
—
165
5
5,915
19,711 $
—
40
104
98
23
226
—
—
491
—
6
16
513
—
—
—
3
—
—
—
—
3
—
—
2
5
518
(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.
99
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2019
Unpaid Principal
Balance(1)
Recorded
Investment(2) Related Allowance
Average Recorded
Investment
Interest Income
Recognized(3)
With an Allowance Recorded
Real estate:
1-4 family residential construction . $
Other construction/land . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . .
Multifamily residential . . . . . . . . . . .
Commercial real estate- owner
occupied . . . . . . . . . . . . . . . . . . . . .
Commercial real estate- non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
With no Related Allowance
Recorded
Real estate:
1-4 family residential construction . $
Other construction/land . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . .
Equity Lines . . . . . . . . . . . . . . . . . . .
Multifamily residential . . . . . . . . . . .
Commercial real estate- owner
— $
— $
— $
— $
656
2,298
4,173
353
537
2,298
4,120
353
593
593
—
237
8,310
5
915
464
9,694
—
237
8,138
5
896
426
9,465
157
58
252
17
6
—
3
493
1
219
114
827
563
2,365
4,185
361
606
—
256
8,336
6
1,140
469
9,951
— $
52
755
326
—
— $
17
722
301
—
— $
—
—
—
—
— $
577
726
310
—
occupied . . . . . . . . . . . . . . . . . . . . .
1,560
1,440
—
1,477
Commercial real estate- non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
3,295
22
6,010
—
102
9
6,121
15,815 $ 14,153 $
2,105
22
4,607
—
81
—
4,688
—
—
—
—
—
—
—
827 $
3,267
25
6,382
—
162
140
6,684
16,635 $
(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.
—
32
146
200
23
38
—
—
439
—
29
35
503
—
4
—
5
—
—
—
—
9
—
—
15
24
527
100
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2018
Unpaid Principal
Balance(1)
Recorded
Investment(2) Related Allowance
Average Recorded
Investment
Interest Income
Recognized(3)
With an Allowance Recorded
Real estate:
1-4 family residential construction . $
Other construction/land . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . .
Multifamily residential . . . . . . . . . . .
Commercial real estate- owner
occupied . . . . . . . . . . . . . . . . . . . . .
Commercial real estate- non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
With no Related Allowance
Recorded
Real estate:
1-4 family residential construction . $
Other construction/land . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . .
Equity Lines . . . . . . . . . . . . . . . . . . .
Multifamily residential . . . . . . . . . . .
Commercial real estate- owner
occupied . . . . . . . . . . . . . . . . . . . . .
Commercial real estate- non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
593
3,325
4,603
373
438
3,325
4,550
373
— $
44
75
656
25
— $
648
3,182
4,368
359
842
723
135
740
1,572
—
11,308
6
1,724
813
13,851
1,425
—
10,834
6
1,534
764
13,138
3
—
938
1
918
151
2,008
1,644
—
10,941
6
1,965
909
13,821
— $
54
357
224
—
— $
50
307
166
—
— $
—
—
—
—
— $
58
375
221
—
502
502
—
478
—
1,642
2,779
—
238
182
3,199
17,050 $ 16,072 $
—
1,642
2,667
—
211
56
2,934
—
—
—
—
—
—
—
2,008 $
—
1,538
2,670
—
838
273
3,781
17,602 $
—
40
175
206
20
40
107
—
588
—
40
61
689
—
—
3
—
—
—
—
—
3
—
—
1
4
693
(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.
101
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Included in loans above are troubled debt restructurings that were classified as impaired. The Company had $0.4
million and $0.5 million in commercial loans, $13.0 million and $8.2 million in real estate secured loans and $0.2
million and $0.4 million in consumer loans, which were modified as troubled debt restructurings and consequently
classified as impaired at December 31, 2020 and 2019, respectively.
Additional commitments to existing customers with restructured loans totaled $0.05 million and $0.04 million at
December 31, 2020 and 2019, respectively.
Interest income recognized on impaired loans was $0.5 million, $0.5 million, and $0.7 million, for the years ended
December 31, 2020, 2019, and 2018, respectively. There was no interest income recognized on a cash basis on
impaired loans for the years ended December 31, 2020, 2019, and 2018, respectively.
The following is a summary of interest income from non-accrual loans in the portfolio at year-end that was not
recognized (dollars in thousands):
Non accrual loans
Interest that would have been recorded under the loans’ original
Years Ended December 31,
2018
2020 2019
terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 605 $ 650 $ 484
Less gross interest recorded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167
Foregone interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 404 $ 361 $ 317
289
201
Certain loans have been pledged to secure short-term borrowing arrangements (see Note 10). These loans totaled
$1.1 billion and $777.7 million at December 31, 2020 and 2019, respectively.
Salaries and employee benefits totaling $3.3 million, $3.7 million, and $4.2 million, have been deferred as loan and
lease origination costs to be amortized over the estimated lives of the related loans and leases for the years ended
December 31, 2020, 2019, and 2018, respectively.
During the periods ended December 31, 2020 and 2019, the terms of certain loans were modified as troubled debt
restructurings. Types of modifications applied to these loans include a reduction of the stated interest rate, a
modification of term, an agreement to collect only interest rather than principal and interest for a specified period,
or any combination thereof.
102
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following tables present troubled debt restructurings by type of modification during the period ending
December 31, 2020, December 31, 2019 and December 31, 2018 (dollars in thousands):
December 31, 2020
Rate
Term
Interest Only Rate & Term
Term & Interest
Modification Modification Modification Modification Modification
Total
Troubled debt restructurings
Real estate:
Other construction/land . . . . . . . . . . $
1-4 family - closed-end . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . .
Commercial real estate owner
occupied . . . . . . . . . . . . . . . . . . . . .
Commercial real estate non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
$
$
— $
—
—
—
85
1,325
—
—
—
—
—
—
5,515
443
—
7,368
—
—
—
— $
—
143
—
7,511
$
—
—
—
—
—
—
—
—
—
—
—
—
$
— $
—
—
—
—
—
—
—
—
—
—
— $
$
—
—
—
—
$
85
1,325
—
—
338
5,853
—
—
338
—
—
—
338
443
—
7,706
—
143
—
7,849
$
December 31, 2019
Rate
Term
Interest Only Rate & Term
Term & Interest
Modification Modification Modification Modification Modification
Total
Troubled debt restructurings
Real estate:
Other construction/land . . . . . . . . . . $
1-4 family - closed-end . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . .
Commercial real estate owner
occupied . . . . . . . . . . . . . . . . . . . . .
Commercial real estate non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
$
— $
—
—
—
—
—
—
—
—
94
—
94 $
163
—
344
—
—
—
—
507
—
255
9
771
$
$
—
—
—
—
—
—
—
—
—
—
—
—
$
— $
—
—
—
—
—
—
—
—
52
50
$
102 $
—
—
—
—
—
—
—
—
—
—
—
—
$
$
163
—
344
—
—
—
—
507
—
401
59
967
103
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2018
Rate
Term
Interest Only Rate & Term
Term & Interest
Modification Modification Modification Modification Modification
Total
Troubled debt restructurings
Real estate:
Other construction/land . . . . . . . . . . $
1-4 family - closed-end . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . .
Commercial real estate owner
occupied . . . . . . . . . . . . . . . . . . . . .
Commercial real estate non-owner
occupied . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
$
— $
—
—
—
—
—
—
—
—
—
—
— $
—
—
460
—
—
—
—
460
7
73
—
540
$
$
—
—
504
—
—
—
—
504
—
25
10
539
$
— $
—
—
—
—
—
—
—
—
225
—
$
225 $
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
964
—
—
—
—
964
7
323
10
1,304
$
The following tables present loans by class modified as troubled debt restructurings including any subsequent
defaults during the period ending December 31, 2020, December 31, 2019 and December 31, 2018 (dollars in
thousands):
December 31, 2020
Real estate:
Other construction/land . . . . . . . . . . . . . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - owner occupied . . . . . . . .
Commercial real estate - non-owner occupied . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-
Modification
Outstanding
Post-
Modification
Outstanding
Number of
Loans
Recorded
Investment
Recorded
Investment
Reserve
Difference(1)
1
1
—
—
4
1
—
—
3
—
$
$
86
1,325
—
—
5,853
443
—
7,707
—
143
—
7,850
$
$
85
1,325
—
—
5,853
443
—
7,706
—
143
—
7,849
$
$
40
10
—
—
8
—
—
58
—
3
—
61
(1) This represents the increase or (decrease) in the allowance for loans and lease losses 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 and lease loss methodology.
104
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2019
Real estate:
Other construction/land . . . . . . . . . . . . . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - owner occupied . . . . . . . .
Commercial real estate - non-owner occupied . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-
Modification
Outstanding
Post-
Modification
Outstanding
Number of
Loans
Recorded
Investment
Recorded
Investment
Reserve
Difference(1)
1
—
2
—
—
—
—
—
7
2
$
$
163
—
344
—
—
—
—
507
—
401
59
967
$
$
163
—
344
—
—
—
—
507
—
401
59
967
$
$
74
—
—
—
—
—
—
74
—
(59)
(47)
(32)
(1) This represents the increase or (decrease) in the allowance for loans and lease losses 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 and lease loss methodology.
December 31, 2018
Real estate:
Other construction/land . . . . . . . . . . . . . . . . . . . . . .
1-4 family - closed-end . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - owner occupied . . . . . . . .
Commercial real estate - non-owner occupied . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-
Modification
Outstanding
Post-
Modification
Outstanding
Number of
Loans
Recorded
Investment
Recorded
Investment
Reserve
Difference(1)
—
—
8
—
—
—
—
1
4
1
$
$
$
—
—
964
—
—
—
—
964
$
—
—
964
—
—
—
—
964
7
323
10
1,304
$
7
323
10
1,304
$
—
—
4
—
—
—
—
4
2
—
—
6
(1) This represents the increase or (decrease) in the allowance for loans and lease losses 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 and lease loss methodology.
In the tables above, there were no TDRs that subsequently defaulted necessitating an increase in the allowance for
loan and lease losses for the years ended December 31, 2020, 2019 and 2018. The total allowance for loan and lease
105
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
losses specifically allocated to the balances that were classified as TDRs during the year ended December 31, 2020
and 2019 is $0.6 million and $0.6 million, respectively.
Purchased Credit Impaired Loans
The Company has purchased loans from past acquisitions, some of which have shown evidence of credit
deterioration since origination and it was probable at acquisition that all contractually required payments would not
be collected. The carrying amount and unpaid principal balance of those loans are as follows (dollars in thousands):
Unpaid Principal Balance
Carrying Value
December 31, 2020
Real estate secured . . . . . . . . . . . . . . . . . . . . . $
Commercial and industrial . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchased credit impaired loans . . . . . . $
78
—
—
78
$
$
Unpaid Principal Balance
Carrying Value
December 31, 2019
Real estate secured . . . . . . . . . . . . . . . . . . . . . $
Commercial and industrial . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchased credit impaired loans . . . . . . $
88
—
—
88
$
$
—
—
—
—
—
—
—
—
For those purchased credit impaired loans disclosed above, the Company did not increase the allowance for loan and
lease losses during 2020, 2019 and 2018. There is no accretable yield, or income expected to be collected on these
purchased credit impaired loans. During the years ended December 31, 2020 and 2019, there were no purchased
credit impaired loans acquired.
5. PREMISES AND EQUIPMENT
Premises and equipment at cost consisted of the following (dollars in thousands):
December 31,
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
5,751
21,580
20,705
15,226
63,262
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,757
—
$ 27,505
$
2019
5,751
21,526
17,798
15,357
60,432
33,041
44
$ 27,435
Depreciation and amortization included in occupancy and equipment expense totaled $2.8 million, $2.8 million, and
$3.0 million, for the years ended December 31, 2020, 2019, and 2018, respectively.
106
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. OPERATING LEASES
On January 1, 2019, we adopted a new accounting standard which required the recognition of certain operating
leases on our balance sheet as lease right-of-use assets (reported as a component of other assets) and related lease
liabilities (reported as a component of other liabilities). See Note 2–Summary of Significant Accounting Policies.
The Company leases space under non-cancelable operating leases for 21 branch locations, three off-site ATM
locations, one administrative building 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 $2.2 million for the years ended December 31, 2020 and 2019. Lease expense for the year ending December 31,
2018 prior to the adoption of ASU 2016-02, was $2.3 million. Most leases include one or more renewal options
available to exercise. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore,
the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as
they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably
certain of exercise, we include the renewal period in our lease term. As most of our leases do not provide an implicit
rate, we used our incremental borrowing rate in determining the present value of the lease payments.
There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the
years ending December 31, 2020 and 2019.
At December 31, 2020, the Company’s right-of-use assets and operating lease liabilities were $7.2 million and $7.8
million, respectively. The weighted average remaining lease term for the lease liabilities was 6.8 years, and the
weighted average discount rate of remaining payments was 5.5 percent. At December 31, 2019, the Company’s
right-of-use assets and operating lease liabilities were $8.3 million and $8.9 million, respectively. The weighted
average remaining lease term for the lease liabilities was 7.1 years, and the weighted average discount rate of
remaining payments was 5.5 percent for the year ended December 31, 2019. Lease liabilities from new right-of-use
assets obtained during the year ending December 31, 2020 and December 31, 2019 were $0.6 million and $0,
respectively . There were no variable lease costs for the years ending December 31, 2020 and 2019. Cash paid on
operating leases was $2.2 million for both years ending December 31, 2020 and 2019.
Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31,
2020 are as follows (dollars in thousands):
Year Ending December 31,
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total undiscounted lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,130
1,722
1,269
910
750
2,612
9,393
(1,633)
7,760
The Company generally has options to renew its facilities leases after the initial leases expire. The renewal options
range from one to ten years.
107
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The rollforward of goodwill for each of the preceding three years is included in the table below (dollars in
thousands):
Years Ended December 31,
2019
2018
2020
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,357 $ 27,357 $ 27,357
—
Acquired goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,357 $ 27,357 $ 27,357
—
—
—
—
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Bank of the Sierra (the
“Bank”) is the only subsidiary of the Company that meets the materiality criteria necessary to be deemed an
operating segment, and because the Company exists primarily for the purpose of holding the stock of the Bank we
have determined that only one unified operating segment or reporting unit (the consolidated Company) exists. The
fair value of the consolidated Company is its market capitalization, as determined by quoted prices in active markets.
If the Company’s market capitalization exceeds recorded shareholders’ equity, the book value, it can be reasonably
presumed that no impairment exists. At December 31, 2020 (the measurement date that the Company selected), the
Company’s stock closed at $23.92 which resulted in a market capitalization in excess of shareholders book equity.
Therefore it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no
impairment at December 31, 2020.
Acquired Intangible Assets
Acquired intangible assets were as follows at year-end (dollars in thousands):
Years Ended December 31,
2020
2019
Core deposit intangibles . . . . . . . . . . . . . . . . . . . . $ 8,401 $
4,094 $ 8,401 $
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
3,020
Aggregate amortization expense was $1.1 million, $1.1 million, and $1.0 million for 2020, 2019, and 2018.
Estimated amortization expense for each of the next five years and thereafter (dollars in thousands):
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,032
1,000
876
781
566
52
4,307
108
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. OTHER ASSETS
Other assets consisted of the following (dollars in thousands):
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,074
839
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,473
Investment in qualified affordable housing projects . . . . . . . . . . . . . . . . .
1,848
Investment in limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,727
Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . .
17,485
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 50,446
2020
$
2019
8,229
3,463
4,104
2,722
10,727
16,670
$ 45,915
December 31,
The Company has invested in limited partnerships that operate qualified affordable housing projects to receive tax
benefits in the form of tax deductions from operating losses and tax credits. The Company accounts for these
investments under the cost method and management analyzes these investments annually for potential impairment.
The Company had $0.1 million in remaining capital commitments to these partnerships at December 31, 2020.
The Company holds certain equity investments that are not readily marketable securities and thus are classified as
“other assets” on the Company’s balance sheet. These include investments in Pacific Coast Bankers Bancshares,
California Economic Development Lending Initiative, and the Federal Home Loan Bank (“FHLB”). The largest of
these is the Company’s $10.7 million investment in FHLB stock, carried at cost. Quarterly, the FHLB evaluates and
adjusts the Company’s minimum stock requirement based on the Company’s borrowing activity and membership
requirements. Any stock deemed in excess is automatically repurchased by the FHLB at cost.
9. DEPOSITS
Interest-bearing deposits consisted of the following (dollars in thousands):
December 31,
Interest bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time, under $250,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time, $250,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
109,938 $
558,407
368,420
131,232
287,530
225,415
2019
91,212
458,600
294,317
118,933
261,916
252,446
$ 1,680,942 $ 1,477,424
109
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Aggregate annual maturities of time deposits were as follows (dollars in thousands):
Year Ending December 31,
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 453,119
14,313
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,481
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,358
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
968
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
706
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 512,945
Interest expense recognized on interest-bearing deposits consisted of the following (dollars in thousands):
Interest bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . $
NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2019
2020
278 $
388
221
128
2,687
246
316
524
308
181
8,931
1,120
$ 3,948 $ 11,380
2018
$ 364
478
314
146
5,653
305
$ 7,260
10. OTHER BORROWING ARRANGEMENTS
At year end, short-term borrowings consisted of the following (dollars in thousands):
2020
Average
balance
outstanding Amount
Average
interest rate
during the year
Maximum
month-end
balance during
the year
Weighted
average
interest rate
at year-end
As of December 31:
Repurchase
Average
balance
2019
Average
interest rate
outstanding Amount
during the year
Maximum
month-end
balance during
the year
Weighted
average
interest rate
at year-end
agreements . . . $
34,614
$ 39,138
.40%
$
41,449
.40%
$
22,090
$ 25,711
.40%
$
27,712
.40%
Short term
borrowings . . .
$
53,593
88,207
142,900
$ 182,038
.19%
195,100
236,549
$
.12%
13,543
35,633
20,000
$ 45,711
$
2.02%
63,700
91,412
$
1.69%
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances
were collateralized by $1.1 billion of first mortgage loans under a blanket lien arrangement at year end 2020. Based
on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow up to the total
of $642.0 million at year-end 2020, with a remaining borrowing capacity of $652.1 million if sufficient additional
collateral was pledged.
The Company had no borrowings at December 31, 2020 and 2019, respectively from the FRB. The Company was
eligible to borrow up to $58.1 million from FRB at year end 2020, which was collateralized by $75.2 million in first
mortgage loans under a blanket lien arrangement.
The Company had no long-term borrowings at December 31, 2020 and 2019, respectively.
The Company had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to
$275.0 million and $80.0 million at December 31, 2020 and 2019, respectively, at interest rates which vary with
110
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
market conditions. There was $100.0 million and $0 outstanding under these lines of credit at December 31, 2020
and December 31, 2019, respectively.
11. INCOME TAXES
The provision for income taxes follows (dollars in thousands):
Year Ended December 31,
2019
2020
2018
Federal:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,979
(1,697)
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,282
$ 7,081 $ 5,780
179
5,959
(228)
6,853
State:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,711
(914)
4,797
$ 11,079
4,771
133
4,904
3,819
129
3,948
$ 11,757 $ 9,907
The components of the net deferred tax asset, included in other assets, are as follows (dollars in thousands):
December 31,
2020
2019
Deferred tax assets:
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan fair value adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital losses carried forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,244
126
4,147
325
403
2,283
956
29
1,751
1,170
986
17,420
$
2,934
200
3,895
312
181
2,461
1,192
87
1,909
1,019
1,233
15,423
Deferred tax liabilities:
Deferred loan costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right-of-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain on securities available-for-sale . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2,482)
(2,127)
(832)
(750)
(7,725)
(2,665)
(16,581)
839
(2,656)
(2,456)
(1,248)
(325)
(2,490)
(2,785)
(11,960)
3,463
$
111
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The expense for income taxes differs from amounts computed by applying the statutory Federal income tax rates to
income before income taxes. The significant items comprising these differences consisted of the following (dollars
in thousands):
Year Ended December 31,
2019
2018
2020
Income tax expense at federal statutory rate . . . . . . . . . . . . . . $ 9,770 $ 10,021 $ 8,313
Increase (decrease) resulting from:
State franchise tax expense, net of federal tax effect . . . . . .
Tax exempt municipal income . . . . . . . . . . . . . . . . . . . . . . . .
Affordable housing tax credits . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit of stock-based compensation . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,790
(1,199)
(518)
(90)
(674)
11,079
23.81%
3,872
(952)
(538)
(133)
(513)
11,757
24.64%
3,390
(852)
(632)
(177)
(135)
9,907
25.03%
The Company is subject to federal income tax and income tax of the state of California. Our federal income tax
returns for the years ended December 31, 2017, 2018 and 2019 are open to audit by the federal authorities and our
California state tax returns for the years ended December 31, 2016, 2017, 2018 and 2019 are open to audit by the
state authorities.
The Company has net operating loss carry forwards of approximately $5.6 million for federal income and
approximately $6.9 million for California franchise tax purposes. Net operating loss carry forwards, to the extent
not used will begin to expire in 2031. Net operating loss carry forwards available from acquisitions are substantially
limited by Section 382 of the Internal Revenue Code and benefits not expected to be realized due to the limitation
have been excluded from the deferred tax asset and net operating loss carry forward amounts noted above.
There were no recorded interest or penalties related to uncertain tax positions as part of income tax for the years
ended December 31, 2020, 2019, and 2018, respectively. We do not expect the total amount of unrecognized tax
benefits to significantly increase or decrease within the next twelve months.
12. SUBORDINATED DEBENTURES
Sierra Statutory Trust II (“Trust II”), Sierra Capital Trust III (“Trust III”), and Coast Bancorp Statutory Trust II
(“Trust IV”), (collectively, the “Trusts”) exist solely for the purpose of issuing trust preferred securities fully and
unconditionally guaranteed by the Company. For financial reporting purposes, the Trusts are not consolidated and
the Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) held by the
Trusts and issued and guaranteed by the Company are reflected in the Company’s consolidated balance sheet in
accordance with provisions of ASC Topic 810. Under applicable regulatory guidance, the amount of trust preferred
securities that is eligible as Tier 1 capital is limited to twenty-five percent of the Company’s Tier 1 capital on a pro
forma basis. At December 31, 2020, all $35.1 million of the Company’s trust preferred securities qualified as Tier 1
capital.
During the first quarter of 2004, Sierra Statutory Trust II issued 15,000 Floating Rate Capital Trust Pass-Through
Securities (TRUPS II), with a liquidation value of $1,000 per security, for gross proceeds of $15,000,000. The entire
proceeds of the issuance were invested by Trust II in $15,464,000 of Subordinated Debentures issued by the
Company, with identical maturity, re-pricing and payment terms as the TRUPS II. The Subordinated Debentures,
purchased by Trust II, represent the sole assets of the Trust II. Those Subordinated Debentures mature on March 17,
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SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2034, bear a current interest rate of 2.98% (based on 3-month LIBOR plus 2.75%), with re-pricing and payments
due quarterly.
Those Subordinated Debentures are currently redeemable by the Company, subject to receipt by the Company of
prior approval from the Federal Reserve Bank, on any March 17th, June 17th, September 17th, or December 17th. The
redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event
which is defined in the debenture.
The TRUPS II are subject to mandatory redemption to the extent of any early redemption of the related Subordinated
Debentures and upon maturity of the Subordinated Debentures on March 17, 2034.
Trust II has the option to defer payment of the distributions for a period of up to five years, subject to certain
conditions, including that the Company may not pay dividends on its common stock during such period. The TRUPS
II issued in the offering were sold in private transactions pursuant to an exemption from registration under the
Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the TRUPS II.
During the second quarter of 2006, Sierra Capital Trust III issued 15,000 Floating Rate Capital Trust Pass-Through
Securities (TRUPS III), with a liquidation value of $1,000 per security, for gross proceeds of $15,000,000. The
entire proceeds of the issuance were invested by Trust III in $15,464,000 of Subordinated Debentures issued by the
Company, with identical maturity, repricing and payment terms as the TRUPS III. The Subordinated Debentures,
purchased by Trust III, represent the sole assets of the Trust III. Those Subordinated Debentures mature on
September 23, 2036, bear a current interest rate of 1.64% (based on 3-month LIBOR plus 1.40%), with repricing
and payments due quarterly.
Those Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior
approval from the Federal Reserve Bank, on any March 23rd, June 23rd, September 23rd, or December 23rd. The
redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event
which is defined in the debenture. The TRUPS III are subject to mandatory redemption to the extent of any early
redemption of the related Subordinated Debentures and upon maturity of the Subordinated Debentures on
September 23, 2036.
Trust III has the option to defer payment of the distributions for a period of up to five years, subject to certain
conditions, including that the Company may not pay dividends on its common stock during such period. The TRUPS
III issued in the offering were sold in private transactions pursuant to an exemption from registration under the
Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the TRUPS III.
During the third quarter of 2016, the Company acquired Coast Bancorp Statutory Trust II, which had issued 7,000
Floating Rate Capital Trust Pass-Through Securities (TRUPS IV), with a liquidation value of $1,000 per security,
for gross proceeds of $7,000,000. The entire proceeds of the issuance were invested by Trust IV in $7,217,000 of
Subordinated Debentures issued by Coast Bancorp with identical maturity, re-pricing and payment terms as the
TRUPS IV. The Subordinated Debentures, purchased by Trust IV, represent the sole assets of the Trust IV. Those
Subordinated Debentures mature on December 15, 2037, bear a current interest rate of 1.72% (based on 3-month
LIBOR plus 1.50%), with re-pricing and payments due quarterly.
Those Subordinated Debentures are currently redeemable by the Company, subject to receipt by the Company of
prior approval from the Federal Reserve Bank, on any March 15th, June 15th, September 15th, or December 15th. The
113
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event
which is defined in the debenture.
The TRUPS IV are subject to mandatory redemption to the extent of any early redemption of the related
Subordinated Debentures and upon maturity of the Subordinated Debentures on December 15, 2037.
Coast Bancorp Statutory Trust II has the option to defer payment of the distributions for a period of up to five years,
subject to certain conditions, including that the Company may not pay dividends on its common stock during such
period. The TRUPS IV issued in the offering were sold in private transactions pursuant to an exemption from
registration under the Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis,
distributions and other payments due on the TRUPS IV.
13. COMMITMENTS AND CONTINGENCIES
Letter of Credit
The Company holds two letters of credit with the Federal Home Loan Bank of San Francisco totaling $104,854,000.
A $100,000,000 letter of credit is pledged to secure public deposits at December 31, 2020 and a $4,854,000 standby
letter of credit was obtained on behalf of one of our customers to guarantee financial performance. Should the
standby letter of credit be drawn upon, the customer would reimburse the Company from an existing line of credit.
Federal Reserve Requirements
Banks are normally required to maintain reserves with the Federal Reserve Bank equal to a specified percentage of
their reservable deposits less vault cash. The Federal Reserve Bank has temporarily eliminated the reserve
requirement in response to the COVID-19 pandemic, in an effort to free up available cash for lending purposes.
There were no reserve balances required to be maintained at the Federal Reserve Bank by the Company at December
31, 2020 and 2019.
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. These
financial instruments consist of commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend
credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and letters of credit as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit risk (dollars in thousands):
Fixed-rate commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . $ 75,291 $ 80,674
Variable-rate commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . $ 366,525 $ 411,366
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,104 $ 8,619
December 31,
2020
2019
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SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. Commitments to extend credit are made at both fixed and variable rates of interest as stated in the
table above. Standby letters of credit are generally unsecured and are issued by the Company to guarantee the
performance of a customer to a third party, while commercial letters of credit represent the Company’s commitment
to pay a third party on behalf of a customer upon fulfillment of contractual requirements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loans to customers.
Concentration in Real Estate Lending
At December 31, 2020, in management’s judgment the Company had, a concentration of loans secured by real estate.
At that date, approximately 77% of the Company’s loans were real estate related. Balances secured by commercial
buildings and construction and development loans represented 78% of all real estate loans, while loans secured by
non-construction residential properties accounted for 15%, and loans secured by farmland were 7% of real estate
loans. Although management believes the loans within these concentrations have no more than the normal risk of
collectability, a decline in the performance of the economy in general or a decline in real estate values in the
Company’s primary market areas, in particular, could have an adverse impact on collectability.
Concentration by Geographic Location
The Company extends commercial, real estate mortgage, real estate construction and consumer loans to customers
primarily in the South Central San Joaquin Valley of California, specifically Tulare, Fresno, Kern, Kings and Madera
counties; the Southern California corridor between Santa Paula and Santa Clarita in the counties of Ventura and Los
Angeles; and the Coastal counties of San Luis Obispo, Ventura and Santa Barbara. The ability of a substantial portion
of the Company’s customers to honor their contracts is dependent on the economy in these areas. Although the
Company’s loan portfolio is diversified, there is a relationship in those regions between the local agricultural
economy and the economic performance of loans made to non-agricultural customers.
Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion
of management, the amount of ultimate liability with respect to such actions, of which the Company is aware, will
not materially affect the consolidated financial position or results of operations of the Company.
14. SHAREHOLDERS’ EQUITY
Share Repurchase Plan
At December 31, 2020, the Company had a stock repurchase plan which has no expiration date. During the year
ended December 31, 2020, the Company repurchased 112,050 shares. The total number of shares available for
repurchase at December 31, 2020 was 268,301. Repurchases are generally made in the open market at market prices.
115
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as
follows:
For the Years Ended December 31,
2019
2020
2018
Basic Earnings Per Share
Net income (dollars in thousands) . . . . . . . . . . . . $
Weighted average shares outstanding . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . $
35,444 $
35,961 $
15,216,749
15,311,113
29,677
15,261,794
1.94
2.35 $
Diluted Earnings Per Share
Net income (dollars in thousands) . . . . . . . . . . . . $
Weighted average shares outstanding . . . . . . . . .
Effect of dilutive stock options . . . . . . . . . . . . . .
Weighted average shares outstanding . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . $
35,961 $
15,216,749
63,576
15,280,325
15,311,113
125,998
15,437,111
2.32 $
2.33 $
29,677
15,261,794
170,326
15,432,120
1.92
2.33 $
35,444 $
Stock options for 348,328, 243,657, and 157,532 shares of common stock were not considered in computing diluted
earnings per common share for 2020, 2019, and 2018, respectively, because they were antidilutive.
Stock Options
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 pursuant to the approval of 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 323,289 shares that were granted under the 2007 Plan were still outstanding
as of December 31, 2020, and remain unaffected by that plan’s expiration. The 2017 Plan provides for the issuance
of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options
to non-employee directors and consultants of the Company. The 2017 Plan also provides for the issuance of restricted
stock awards to these same classes of eligible participants. The total 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 December 31, 2020 was 408,515.
All options granted under the 2017 and 2007 Plans have been or will be granted at an exercise price of not less than
100% of the fair market value of the stock on the date of grant, exercisable in installments as provided in individual
stock option agreements. In the event of a “Change in Control” as defined in the Plans, all outstanding options shall
become exercisable in full (subject to certain notification requirements), and shall terminate if not exercised within
a specified period of time unless such options are assumed by the successor corporation or substitute options are
granted. Options also terminate in the event an optionee ceases to be employed by or to serve as a director of the
Company or its subsidiaries, and the vested portion thereof must be exercised within a specified period after such
cessation of employment or service.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of the Company’s stock option activity follows (shares in thousands, except exercise price):
2020
2019
2018
Shares
Weighted Average
Exercise Price
Aggregate
Intrinsic
Value (1) Shares
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
Outstanding,
beginning of year . . . . . . . . .
Exercised . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . .
Outstanding, end of year . . . . . .
Exercisable, end of year (2) . . . .
458 $
(67) $
126 $
(21) $
(1) $
495 $
324 $
21.08
11.65
27.11
26.01
10.73
23.67 $ 1,340
21.97 $ 1,323
453 $
(83) $
102 $
(14) $
— $
458 $
322 $
18.45
13.07
26.97
26.77
—
21.08
18.89
455 $
(77) $
84 $
(9) $
— $
453 $
330 $
16.33
14.67
27.35
26.73
—
18.45
15.77
(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 December 31, 2020. This amount
changes based on changes in the market value of the Company’s stock.
(2) The weighted average remaining contractual life of stock options outstanding and exercisable on December 31, 2020
was 5.7 years and 6.1 years, respectively.
Information related to stock options during each year follows (dollars in thousands, except per share data):
Weighted-average grant-date fair value per share . . . . . . . . . . . $ 4.76 $ 6.60 $ 5.94
988
Total intrinsic value of stock options exercised . . . . . . . . . . . . . $
55
Total fair value of stock options vested . . . . . . . . . . . . . . . . . . . . $
705 $ 1,150 $
489 $ 438 $
2020
2019
2018
$0.8 million in cash was received from the exercise of 66,470 shares during the period ended December 31, 2020
with a related tax benefit of $0.5 million.
The Company is using the Black-Scholes model to value stock options. In accordance with U.S. GAAP, charges of
$0.4 million, $0.5 million, and $0.4 million are reflected in the Company’s income statements for the years ended
December 31, 2020, 2019, and 2018, respectively, as pre-tax compensation and directors’ expense related to stock
options. The related tax benefit of these options is $0.1 million, for each of the years ended December 31, 2020,
2019, and 2018.
Unamortized compensation expense associated with unvested stock options outstanding at December 31, 2020 was
$0.4 million, which will be recognized over a weighted average period of 3.4 years.
Restricted Stock Grants
The Company’s restricted stock awards are 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 year ending 2020,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 December 31, 2020, there was $2.4 million of unamortized compensation
and directors’ 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 4.1 years.
A summary of the Company’s nonvested shares for the year follows (shares in thousands, except grant date fair
value):
Nonvested Shares
Nonvested at January 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
—
149
—
—
149
$
$
15. REGULATORY MATTERS
Weighted Average
Grant-Date Fair
Value
—
18.00
—
—
18.00
The Company and the Bank are subject to regulatory capital requirements administered by the Board of Governors
of the Federal Reserve System and the FDIC. Capital adequacy guidelines and, additionally for banks, prompt
corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items
calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.
Management believes as of December 31, 2020, the Company and Bank meet all capital adequacy requirements to
which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized , significantly undercapitalized , and critically undercapitalized, although these terms are not used
to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital
restoration plans are required. At year-end December 31, 2020 and 2019, notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the Bank's categorization.
In 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of
capital adequacy, the community bank leverage ratio framework (CBLR framework), for qualifying community
banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act. The final rule became effective on January 1, 2020 and was elected by the Bank at that time. In April
2020, the federal banking agencies issued an interim final rule that makes temporary changes to the CBLR
framework, pursuant to section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and a
second interim final rule that provides a graduated increase in the community bank leverage ratio requirement after
the expiration of the temporary changes implemented pursuant to section 4012 of the CARES Act.
The community bank leverage ratio removes the requirement for qualifying banking organizations to calculate and
report risk-based capital but rather only requires a Tier 1 to average assets (leverage) ratio. Qualifying banking
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of
greater than required minimums will be considered to have satisfied the generally applicable risk based and leverage
capital requirements in the agencies' capital rules (generally applicable rule) and, if applicable, will be considered
to have met the well capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act.
Under the interim final rules the community bank leverage ratio minimum requirement is 8% as of December 31,
2020, 8.5% for calendar year 2021, and 9% for calendar year 2022 and beyond. The interim rule allows for a two-
quarter grace period to correct a ratio that falls below the required amount, provided that the bank maintains a
leverage ratio of 7% as of December 31, 2020, 7.5% for calendar year 2021, and 8% for calendar year 2022 and
beyond.
Under the final rule, an eligible banking organization can opt out of the CBLR framework and revert back to the
risk-weighting framework without restriction. As of December 31, 2020, both the Company and Bank were
qualifying community banking organizations as defined by the federal banking agencies and elected to measure
capital adequacy under the CBLR framework.
Actual and required capital amounts (in thousands) and ratios are presented below at year end.
To Be Well Capitalized
Under Prompt
Corrective Action
Regulations (CBLR
Framework)
Actual
2020
Tier 1 (Core) Capital to average total assets
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 330,200 10.50% $ 251,595
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 318,194 10.12% $ 251,572
Ratio
8.00%
8.00%
Capital
Amount
Capital
Amount
Ratio
Actual
Capital
Amount
Required for Capital
Adequacy Purposes
Capital
Amount
Ratio
To Be Well Capitalized
Under Prompt
Corrective Action
Regulations
Capital
Amount
Ratio
2019
Common Equity Tier 1 Capital Ratio
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . $ 271,799 13.27% $ 92,143 4.50% $ 133,095
133,077
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . .
301,963 14.75%
92,130 4.50%
Ratio
Tier 1 Risk-Based Capital Ratio
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . $ 306,744 14.98% $ 122,857 6.00% $ 163,809
163,787
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . .
301,963 14.75%
122,840 6.00%
6.50%
6.50%
8.00%
8.00%
Total Risk-Based Capital Ratio
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . $ 316,981 15.48% $ 163,809 8.00% $ 204,762 10.00%
204,734 10.00%
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . .
312,200 15.25%
163,787 8.00%
Tier 1 (Core) Capital to average total assets
Sierra Bancorp and subsidiary . . . . . . . . . . . . . . . . . $ 306,744 11.91% $ 103,016 4.00% $ 128,769
128,753
Bank of the Sierra . . . . . . . . . . . . . . . . . . . . . . . . . . .
301,963 11.73%
103,002 4.00%
5.00%
5.00%
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Dividend Restrictions
The Company’s ability to pay cash dividends is dependent on dividends paid to it by the Bank, and is also limited
by state corporation law. California law allows a California corporation to pay dividends if the company’s retained
earnings equal at least the amount of the proposed dividend plus any preferred dividend arrears amount. If a
California corporation does not have sufficient retained earnings available for the proposed dividend, it may still
pay a dividend to its shareholders if immediately after the dividend the value of the company’s assets would equal
or exceed the sum of its total liabilities plus any preferred dividend arrears amount.
Dividends from the Bank to the Company are restricted under California law to the lesser of the Bank’s retained
earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during that
period, or, with the approval of the Department of Financial Protection and Innovation, to the greater of the retained
earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current
fiscal year. As of December 31, 2020, the maximum amount available for dividend distribution under this restriction
was approximately $59.1 million.
16. BENEFIT PLANS
Salary Continuation Agreements, Directors’ Retirement and Officer Supplemental Life Insurance Plans
The Company has entered into salary continuation agreements with its executive officers, and has established
retirement plans for qualifying members of the Board of Directors. The plans provide for annual benefits for up to
fifteen years after retirement or death. The benefit obligation under these plans totaled $5.1 million and $5.3 million
and was fully accrued for the years ended December 31, 2020 and 2019, respectively. The expense recognized under
these arrangements totaled $0.2 million, $0.3 million and $0.4 million for the years ended December 31, 2020, 2019
and 2018, respectively. Salary continuation benefits paid to former directors or executives of the Company or their
beneficiaries totaled $0.4 million, $0.3 million and $0.3 million for the years ended December 31, 2020, 2019 and
2018. Certain officers of the Company have supplemental life insurance policies with death benefits available to the
officers’ beneficiaries.
In connection with these plans the Company has purchased, or acquired through merger, single premium life
insurance policies with cash surrender values totaling $43.2 million and $42.5 million at December 31, 2020 and
2019, respectively.
Officer and Director Deferred Compensation Plan
The Company has established a deferred compensation plan for certain members of the management group and a
deferred fee plan for directors for the purpose of providing the opportunity for participants to defer compensation.
The Company bears the costs for the plan’s administration and the interest earned on participant deferrals. The
related administrative expense was not material for the years ended December 31, 2020, 2019 and 2018. In
connection with this plan, life insurance policies with cash surrender values totaling $9.3 million and $8.0 million
at December 31, 2020 and 2019, respectively, are included on the consolidated balance sheet in other assets.
401(k) Savings Plan
The 401(k) savings plan (the “Plan”) allows participants to defer, on a pre-tax basis, up to 15% of their salary (subject
to Internal Revenue Service limitations) and accumulate tax-deferred earnings as a retirement fund. The Bank may
120
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
make a discretionary contribution to match a specified percentage of the first 6% of the participants’ contributions
annually. The amount of the matching contribution was 90%, 95% and 75% for the years ended December 31, 2020,
2019 and 2018, respectively. The matching contribution is discretionary, vests over a period of five years from the
participants’ hire date, and is subject to the approval of the Board of Directors. The Company contributed $1.1
million, $1.1 million, and $1.0 million to the Plan in 2020, 2019 and 2018, respectively.
17. NONINTEREST INCOME
The major grouping of noninterest revenue on the consolidated income statements includes several specific items:
service charges on deposit accounts, gains on the sale of loans, credit card fees, check card fees, the net gain (loss)
on sales and calls of investment securities available for sale, and the net increase (decrease) in the cash surrender
value of life insurance.
Noninterest income also includes one general category of “other income” of which the following are major
components (dollars in thousands):
Year Ended December 31,
2019
2020
2018
Included in other income:
Amortization of limited partnerships . . . . . . . . . . . . . . . . . . . . . . $ (1,189) $ (2,079) $ (2,561)
961
Dividends on equity investments . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains recognized on equity investments . . . . . . . . . .
1,183
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,071
Total other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,560 $ 2,165 $ 2,654
789
232
3,223
664
447
4,638
18. OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following (dollars in thousands):
Year Ended December 31,
2019
2018
2020
Legal, audit and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,263 $ 4,039 $ 3,032
5,015
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,748
Advertising and promotional . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,413
Deposit services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,387
Stationery and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,479
Telephone and data communication . . . . . . . . . . . . . . . . . . . . .
1,142
Loan and credit card processing . . . . . . . . . . . . . . . . . . . . . . . . .
(730)
Foreclosed assets expense (income), net . . . . . . . . . . . . . . . . . .
997
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,808
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
856
Total other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,892 $ 24,733 $ 23,147
4,661
1,889
8,483
446
1,775
879
253
321
2,205
717
4,564
2,568
7,962
318
1,529
675
35
436
2,082
525
19. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into loans with related parties, including executive officers
and directors. These loans are made with substantially the same terms, including rates and collateral, as loans to
121
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
unrelated parties. The following is a summary of the aggregate activity involving related party borrowers (dollars in
thousands):
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,731 $
Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts repaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,794 $
Undisbursed commitments to related parties . . . . . . . . . . . . . $ 2,635 $
7,114
(8,051)
2020
2018
Year Ended December 31,
2019
2,544 $ 3,047
13,873
18,681
(14,376)
(18,494)
2,731 $ 2,544
1,829 $ 2,130
Deposits from related parties held by the Bank at December 31, 2020 and 2019 amounted to $6.1 million and $7.6
million, respectively.
20. FAIR VALUE
Fair value is defined by U.S. GAAP 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. U.S. GAAP also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
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 use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair values for each category of
financial asset noted below:
Securities: The fair values of securities available for sale 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: A specific loss allowance is created for collateral dependent impaired
loans, representing the difference between the face value of the loan and the current appraised value of its
associated collateral, less estimated disposition costs.
Foreclosed assets: Repossessed real estate (OREO) and other 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, and for all other assets fair value is represented by the 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
122
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):
Fair Value Measurements at December 31, 2020, using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Realized
Gain/(Loss)
Securities:
U.S. government agencies . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . .
State and political subdivisions . . . . . . . .
Total available-for-sale securities . . . . . . $
—
—
—
—
$
$
1,800
314,435
227,739
543,974
$
$
—
—
—
—
$
$
1,800
314,435
227,739
543,974
$
$
—
—
—
—
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)
Securities:
U.S. government agencies . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . .
State and political subdivisions . . . . . . . .
Total available-for-sale securities . . . . . . $
—
—
—
—
$
$
12,145
400,389
188,265
600,799
$
$
—
—
—
—
$
$
12,145
400,389
188,265
600,799
$
$
—
—
—
—
Assets and liabilities measured at fair market value on a non-recurring basis are summarized below (dollars in
thousands):
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Year Ended December 31, 2020
Significant
Unobservable
Inputs
(Level 3)
Significant
Observable
Inputs
(Level 2)
Collateral dependent impaired loans . $
Foreclosed assets . . . . . . . . . . . . . . . . . $
— $
— $
550 $
971 $
— $
— $
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Year Ended December 31, 2019
Significant
Unobservable
Inputs
(Level 3)
Significant
Observable
Inputs
(Level 2)
Collateral dependent impaired loans . $
Foreclosed assets . . . . . . . . . . . . . . . . . $
— $
— $
1,692 $
800 $
— $
— $
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Total
550
971
Total
1,692
800
Disclosures include estimated fair values for financial instruments for which it is practicable to estimate fair value.
These estimates are made as of the respective balance sheet dates based on relevant market data and information
123
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
about the financial instruments. These estimates do not reflect any premium or discount that could result from
offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt
to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have
not been considered in any of these estimates.
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are
based on judgments regarding current economic conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values
presented. The following methods and assumptions were used by the Company to estimate the fair value of its
financial instruments at December 31, 2020 and 2019:
Cash and cash equivalents, and fed funds sold: For cash and cash equivalents and fed funds sold, the carrying amount
is estimated to be fair value.
Securities: The fair values of investment securities are determined by obtaining quoted prices on nationally
recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry
to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for
specific securities are not readily available.
Loans and leases: Fair values of loans, excluding loans held for sale, are based on the exit price notion set forth by
ASU 2016-01 effective January 1, 2018 and estimated using discounted cash flow analyses. The estimation of fair
values of loans results in a Level 3 classification as it requires various assumptions and considerable judgement to
incorporate factors relevant when selling loans to market participants, such as funding costs, return requirements of
likely buyers and performance expectations of the loans given the current market environment and quality of loans.
Loans held for sale: Since loans designated by the Company as held-for-sale are typically sold shortly after making
the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in
fair values are thus not relevant for reporting purposes. If held-for-sale loans stay on our books for an extended
period of time, the fair value of those loans is determined using quoted secondary-market prices.
Deposits: Fair values for non-maturity deposits are equal to the amount payable on demand at the reporting date,
which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a cash flow
analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar
remaining maturities.
Short-term borrowings: The carrying amounts approximate fair values for federal funds purchased, overnight FHLB
advances, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days
of the reporting dates. Fair values of other short-term borrowings are estimated by discounting projected cash flows
at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Long-term borrowings: The fair values of the Company’s long-term borrowings are estimated using projected cash
flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Subordinated debentures: The fair values of subordinated debentures are determined based on the current market
value for like instruments of a similar maturity and structure.
124
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Carrying amount and estimated fair values of financial instruments were as follows (dollars in thousands):
Year Ended December 31, 2020
Estimated Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Total
Financial Assets:
Cash and cash equivalents . . . . . . . . . . . . . $
Securities available for sale . . . . . . . . . . . .
Loans and leases held for investment . . . .
Collateral dependent impaired loans . . . . .
71,417 $
543,974
2,441,676
550
71,417 $
—
—
—
Financial Liabilities:
Deposits:
— $
543,974
—
550
— $
—
2,450,340
—
71,417
543,974
2,450,340
550
Noninterest bearing . . . . . . . . . . . . . . . . $ 943,664 $
Interest bearing . . . . . . . . . . . . . . . . . . . .
1,680,942
943,664 $
— $
—
1,680,814
— $
—
943,664
1,680,814
Fed funds purchased and repurchase
agreements . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . .
39,138
142,900
35,124
—
—
—
39,138
142,896
24,364
—
—
—
39,138
142,896
24,364
Off-balance-sheet financial instruments:
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Notional
Amount
441,816
8,104
125
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Carrying amount and estimated fair values of financial instruments were as follows (dollars in thousands):
Year Ended December 31, 2019
Estimated Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Total
Financial Assets:
Cash and cash equivalents . . . . . . . . . . . . . $
Securities available for sale . . . . . . . . . . . .
Loans and leases held for investment . . . .
Collateral dependent impaired loans . . . . .
80,077 $
600,799
1,753,846
1,692
80,076 $
—
—
—
Financial Liabilities:
Deposits:
— $
600,799
—
1,692
— $
—
1,761,461
—
80,076
600,799
1,761,461
1,692
Noninterest bearing . . . . . . . . . . . . . . . . $ 690,950 $
Interest bearing . . . . . . . . . . . . . . . . . . . .
1,477,424
690,950 $
— $
—
1,477,497
— $
—
690,950
1,477,497
Fed funds purchased and repurchase
agreements . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . .
25,711
20,000
34,945
—
—
—
25,711
20,000
30,564
—
—
—
25,711
20,000
30,564
Off-balance-sheet financial instruments:
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Notional
Amount
492,040
8,619
22. QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS
The Company invests in qualified affordable housing projects. At December 31, 2020 and 2019, the balance of the
investment for qualified affordable housing projects totaled $3.5 million and $4.1 million, respectively. These
balances are reflected in the other assets line on the consolidated balance sheet. Unfunded commitments related to
these investments in qualified affordable housing projects totaled $0.1 million and $1.3 million at December 31,
2020 and 2019, respectively.
During the years ended December 31, 2020, 2019 and 2018, the Company recognized amortization expense on these
investments of $0.6 million, $1.8 million, and $2.5 million, respectively which was included within pretax income
on the consolidated statements of income.
Additionally, during the years ended December 31, 2020 and 2019, the Company recognized tax credits and other
benefits from its investment in affordable housing tax credits of $0.5 million. The Company had no impairment
losses during the years ended December 31, 2020 and 2019.
126
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
23. REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within
Noninterest Income. The following table presents the Company’s sources of Noninterest Income for the
twelve months ended December 31, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.
Noninterest income
Service charges on deposits
Returned item and overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other service charges on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debit card interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on limited partnerships(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on equity investments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains recognized on equity investments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains (losses) on sale of securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2020
2019
5,078 $
6,687
7,023
(1,189)
664
447
390
7,050
26,150 $
6,854
5,888
6,584
(2,079)
789
232
(198)
5,407
23,477
Noninterest expense
Salaries and employee benefits(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Occupancy expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sale or OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
40,178 $
9,842
(10)
25,902
75,912 $
35,978
9,845
(107)
24,862
70,578
(1) Not within the scope of ASC 606. Revenue streams are not related to contracts with customers and are accounted for
on an accrual basis under other provisions of GAAP.
127
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
24. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEETS
Years Ended December 31, 2020 and 2019
(dollars in thousands)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investments in bank subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in trust subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2020
2019
12,000 $
367,014
1,145
22
380,181 $
4,818
339,449
1,145
21
345,433
Liabilities:
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,161 $
35,124
36,285
1,203
34,945
36,148
Shareholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive gain, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
117,120
208,371
18,405
343,896
380,181 $
116,486
186,867
5,932
309,285
345,433
STATEMENTS OF INCOME
Years Ended December 31, 2020, 2019 and 2018
(dollars in thousands)
Income:
2020
2019
2018
Dividend from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,000 $ 17,200 $
Gain on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
43
23,043
—
—
17,200
7,750
—
—
7,750
Expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed income of subsidiary . . . . . . . . . . . . .
Equity in undistributed income of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
516
2,533
3,049
4,701
(1,150)
5,851
23,826
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,444 $ 35,961 $ 29,677
856
1,971
2,827
20,216
(823)
21,039
14,405
582
2,664
3,246
13,954
(1,138)
15,092
20,869
128
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020, 2019 and 2018
(dollars in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,444 $ 35,961 $ 29,677
Adjustments to reconcile net income to net cash provided by operating
2020
2019
2018
activities:
Undistributed net income of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,405)
178
(41)
21,176
(20,869)
178
(2)
15,268
(23,826)
183
28
6,062
Cash flows from investing activities:
Cash paid in acquisitions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
(6)
(6)
Cash flows from financing activities:
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,000 $
775
(2,562)
(12,207)
(13,994)
7,182
4,818
1,088
(2,544)
(11,332)
(12,788)
2,480
2,338
4,818 $
1,131
—
(9,757)
(8,626)
(2,570)
4,908
2,338
25. CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the Company’s unaudited results of operations for the four quarters of 2020 and 2019. In
management’s opinion, the results of operations reflect all adjustments (which include only recurring adjustments)
necessary to present fairly the condensed results for such periods (dollars in thousands, except per share data).
2020 Quarter Ended
Interest income . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . .
Net income before taxes . . . . . . . . . . . . . . . . .
Provision for taxes . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, September 30, June 30, March 31,
29,044 $ 25,386 $ 26,051
2,264
1,244
970
23,787
24,142
28,074
1,800
2,200
2,350
6,106
6,900
7,104
17,818
18,033
19,304
10,275
10,809
13,524
3,169
2,468
2,506
10,355 $ 8,303 $ 7,807
29,762 $
930
28,832
2,200
6,040
20,757
11,915
2,936
8,979 $
Diluted earnings per share . . . . . . . . . . . . . . . $
Cash dividend per share . . . . . . . . . . . . . . . . . $
0.58 $
0.20 $
0.68 $
0.20 $
0.54 $
0.20 $
0.52
0.20
129
SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2019 Quarter Ended
Interest income . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . .
Net income before taxes . . . . . . . . . . . . . . . . .
Provision for taxes . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, September 30, June 30, March 31,
27,901 $ 27,788 $ 27,483
3,510
3,589
3,526
23,973
24,199
24,375
300
400
1,350
5,906
5,855
5,869
17,852
17,656
17,088
11,727
11,998
11,806
2,854
2,832
3,169
8,952 $ 8,829 $ 8,895
27,775 $
2,953
24,822
500
5,847
17,982
12,187
2,902
9,285 $
Diluted earnings per share . . . . . . . . . . . . . . . $
Cash dividend per share . . . . . . . . . . . . . . . . . $
0.60 $
0.19 $
0.58 $
0.19 $
0.57 $
0.18 $
0.58
0.18
130
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 13(a)–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 annual 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.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for the preparation, integrity, and reliability of the consolidated financial
statements and related financial information contained in this annual report. The consolidated financial statements of the
Company have been prepared in accordance with accounting principles generally accepted in the United States of America
and, as such, include some amounts that are based on judgments and estimates of Management.
Management has established and is responsible for maintaining effective internal control over financial reporting. The
Company’s internal control over financial reporting includes those policies and procedures that:
(i)
(ii)
(iii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the Company are being made only in accordance with authorizations of
Management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material effect on the financial
statements.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of
internal control may vary over time. The system contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2020. This assessment was based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. This assessment included controls over the
preparation of regulatory financial statements in accordance with the Federal Financial Institutions Examination Council’s
Instructions for Preparation of Consolidated Reports of Condition and Income, and in accordance with the Board of
131
Governors of the Federal Reserve System’s Instructions for Preparation of Financial Statements for Bank Holding
Companies (Consolidated and Parent Company Only). Based on this assessment, Management believes that the Company
maintained effective internal control over financial reporting as of December 31, 2020.
Management is responsible for compliance with the federal and state laws and regulations concerning dividend restrictions
and federal laws and regulations concerning loans to insiders designated by the FDIC as safety and soundness laws and
regulations. Management assessed compliance by the Company’s insured financial institution, Bank of the Sierra, with
the designated laws and regulations relating to safety and soundness. Based on this assessment, Management believes that
Bank of the Sierra complied, in all significant respects, with the designated laws and regulations related to safety and
soundness for the year ended December 31, 2020.
Our assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020
has been audited by Eide Bailly, an independent registered public accounting firm, as stated in their report appearing above
in Item 8, Financial Statements and Supplementary Data.
Changes in Internal Control
There were no significant changes in the Company’s internal control over financial reporting or in other factors in the
fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
132
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be furnished pursuant to this item with respect to Directors and Executive Officers of the
Company will be set forth under the caption “Election of Directors” in the Company’s proxy statement for the 2021 Annual
Meeting of Shareholders (the “Proxy Statement”), which the Company will file with the SEC within 120 days after the
close of the Company’s 2020 fiscal year in accordance with SEC Regulation 14A under the Securities Exchange Act of
1934. Such information is hereby incorporated by reference.
The information required to be furnished pursuant to this item with respect to compliance with Section 16(a) of the
Exchange Act will be set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement, and is incorporated herein by reference.
The information required to be furnished pursuant to this item with respect to the Company’s Code of Ethics and corporate
governance matters will be set forth under the caption “Corporate Governance” in the Proxy Statement, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item will be set forth under the captions “Executive Officer and
Director Compensation” and “Compensation Discussion and Analysis” in the Proxy Statement, and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
The information required by Item 12 with respect to securities authorized for issuance under equity compensation plans is
set forth under “Item 5 – Market for Registrant’s Common Equity and Issuer Repurchases of Equity Securities” above.
Other Information Concerning Security Ownership of Certain Beneficial Owners and Management
The remainder of the information required by Item 12 will be set forth under the captions “Security Ownership of Certain
Beneficial Owners and Management” and “Election of Directors” in the Proxy Statement, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required to be furnished pursuant to this item will be set forth under the captions “Related Party
Transactions” and “Corporate Governance – Director Independence” in the Proxy Statement, and is incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required to be furnished pursuant to this item will be set forth under the caption “Ratification of
Appointment of Independent Registered Public Accounting Firm – Fees” in the Proxy Statement, and is incorporated
herein by reference.
133
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit #
2.1
Description
Agreement and Plan of Reorganization and Merger, dated as of April 24, 2017 by and between Sierra
Bancorp and OCB Bancorp, as amended by Amendment No. 1 thereto dated May 4, 2017 and Amendment
No. 2 thereto dated June 6, 2017 (1)
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Restated Articles of Incorporation of Sierra Bancorp (2)
Amended and Restated By-laws of the Company (3)
Description of Securities
Salary Continuation Agreement for Kenneth R. Taylor (4)*
Salary Continuation Agreement and Split Dollar Agreement for James F. Gardunio (5)*
Split Dollar Agreement for Kenneth R. Taylor (6)*
Director Retirement and Split dollar Agreements Effective October 1, 2002, for Albert Berra, Morris
Tharp, and Gordon Woods (6)*
401 Plus Non-Qualified Deferred Compensation Plan (6)*
Indenture dated as of March 17, 2004 between U.S. Bank N.A., as Trustee, and Sierra Bancorp, as Issuer
(7)
Amended and Restated Declaration of Trust of Sierra Statutory Trust II, dated as of March 17, 2004 (7)
Indenture dated as of June 15, 2006 between Wilmington Trust Co., as Trustee, and Sierra Bancorp, as
Issuer (8)
Amended and Restated Declaration of Trust of Sierra Capital Trust III, dated as of June 15, 2006 (8)
2007 Stock Incentive Plan (9)*
Sample Retirement Agreement Entered into with Each Non-Employee Director Effective January 1, 2007
(10)*
Salary Continuation Agreement for Kevin J. McPhaill (10)*
First Amendment to the Salary Continuation Agreement for Kenneth R. Taylor (10)*
Second Amendment to the Salary Continuation Agreement for Kenneth R. Taylor (11)*
First Amendment to the Salary Continuation Agreement for Kevin J. McPhaill (12)*
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,
10.18
10.19
10.20
2007 (13)
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)
2017 Stock Incentive Plan (14)*
Employment agreements dated as of December 27, 2018 for Kevin McPhaill, CEO, James Gardunio, Chief
Credit Officer, and Michael Olague, Chief Banking Officer (15)*
Employment agreement dated as of March 15, 2019 for Matthew Macia, EVP and CRO (16)*
Employment agreement dated as of November 15, 2019 for Christopher Treece, EVP and CFO (17)*
Employment agreement dated as of January 17. 2020 for Jennifer Johnson, EVP and CAO (18)*
Subsidiaries of Sierra Bancorp
10.21
10.22
10.23
21
23.1
23.2
31.1
31.2
32
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
Consent of Eide Bailly
Consent of Vavrinek, Trine, Day & Co., LLP
Certification of Chief Executive Officer (Section 302 Certification)
Certification of Chief Financial Officer (Section 302 Certification)
Certification of Periodic Financial Report (Section 906 Certification)
134
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) Original agreement filed as an exhibit to the Form 8-K filed with the SEC on April 25, 2017 and incorporated herein
by reference, and amendments thereto filed as appendices to the proxy statement/prospectus included in the
Form S-4/A filed with the SEC on July 24, 2017 and incorporated herein by reference.
(2) Filed as Exhibit 3.1 to the Form 10-Q filed with the SEC on August 7, 2009 and incorporated herein by reference.
(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, 99.3 and 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.
(b) Financial Statement Schedules
Schedules to the financial statements are omitted because the required information is not applicable or because the required
information is presented in the Company’s Consolidated Financial Statements or related notes.
ITEM 16. FORM 10-K SUMMARY
Not Applicable.
135
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 12, 2021
SIERRA BANCORP,
a California corporation
By: /s/ Kevin J. McPhaill
Kevin J. McPhaill
President &
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Christopher G. Treece
Christopher G. Treece
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
136
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Susan M. Abundis
Susan M. Abundis
/s/ Albert L. Berra
Albert L. Berra
/s/ Julie Castle
Julie Castle
/s/ Vonn R. Christenson
Vonn R. Christenson
/s/ Laurence S. Dutto, PhD
Laurence S. Dutto, PhD
/s/ Robb Evans
Robb Evans
/s/ James C. Holly
James C. Holly
/s/ Kevin J. McPhaill
Kevin J. McPhaill
/s/ Lynda B. Scearcy
Lynda B. Scearcy
/s/ Morris A. Tharp
Morris A. Tharp
/s/ Gordon T. Woods
Gordon T. Woods
/s/ Christopher G. Treece
Christopher G. Treece
/s/ Cindy L. Dabney
Cindy L. Dabney
Director
Director
Director
Director
Director
Director
Date
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
Vice Chairman of the Board
March 12, 2021
President, Chief Executive
Officer & Director
(Principal Executive Officer)
Director
March 12, 2021
March 12, 2021
Chairman of the Board
March 12, 2021
Director
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
Senior Vice President &
Chief Accounting Officer
(Principal Accounting Officer)
March 12, 2021
March 12, 2021
March 12, 2021
137
A copy of the Company’s 2020 Annual Report on Form 10-K, including financial
statements but without exhibits filed with the Securities and Exchange
Commission, is enclosed herewith. Quarterly financial reports and other
news releases may also be obtained by visiting: SierraBancorp.com.