BSRR US Equity☆

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.

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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.

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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.

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

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Impact of COVID-19 on the Company’s Operations

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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.

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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

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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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Equity ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ —

Loans and Leases: (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other liabilities ​ ​ 39,510 ​ ​ ​ ​ ​ ​ ​ 41,563 ​ ​ ​ ​ ​ ​ ​ 30,383 ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

(2) Yields and net interest margin have been computed on a tax equivalent basis.

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

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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,

​ ​ Increase(decrease) due to ​ Increase(decrease) due to

Assets: Volume Rate Net Volume Rate Net

Investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Equity ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loans and leases: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Savings accounts ​ ​ 50 ​ ​ (137) ​ ​ (87) ​ ​ (9) ​ ​ 3 ​ ​ (6)

Money market ​ ​ — ​ ​ (53) ​ ​ (53) ​ ​ (24) ​ ​ 59 ​ ​ 35

Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Federal funds purchased ​ ​ 5 ​ ​ (2) ​ ​ 3 ​ ​ — ​ ​ 1 ​ ​ 1

Repurchase agreements ​ ​ 50 ​ ​ (1) ​ ​ 49 ​ ​ 31 ​ ​ — ​ ​ 31

Long term borrowings ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

​

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

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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.

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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.

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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) ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

NONINTEREST INCOME: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

OTHER OPERATING EXPENSES: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Occupancy costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loan services costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other operating costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Professional services costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

(1) Tax Equivalent

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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.

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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

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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.

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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

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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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of December 31,

Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Percentage of Total Loans and Leases ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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

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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.

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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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ Three months ​ ​ ​ ​ ​ ​ ​ ​ Floating rate: ​ Fixed rate:

​ or less months years years ​ Total year year

​

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.

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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

​ ​ ​ ​ ​ Less Than ​ ​ ​ ​ ​ ​ ​ More Than

​ Total 1 Year 1-3 Years 3-5 Years 5 Years

Subordinated debentures ​ $ 35,124 ​ $ — ​ $ — ​ $ — ​ $ 35,124

​

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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of December 31,

Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other construction/land ​ $ — ​ $ 31 ​ $ 82 ​ $ 77 ​ $ 558

Multi-family residential ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Agricultural ​ ​ 250 ​ ​ — ​ ​ — ​ ​ — ​ ​ 89

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loans deferred under CARES Act (2) ​ $ 29,500 ​ $ — ​ $ — ​ $ — ​ $ —

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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.

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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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the years ended December 31,

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Allowance for Loan and Lease Losses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Charge-offs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

1-4 family residential construction ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Other construction/land ​ ​ — ​ ​ — ​ ​ 4 ​ ​ — ​ ​ 144

1-4 family - closed-end ​ ​ — ​ ​ — ​ ​ 5 ​ ​ 7 ​ ​ 97

Equity lines ​ ​ — ​ ​ — ​ ​ 125 ​ ​ 58 ​ ​ 94

Multi-family residential ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 50

Commercial real estate - owner occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ 36 ​ ​ 108

Farmland ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Agricultural ​ ​ — ​ ​ — ​ ​ — ​ ​ 154 ​ ​ —

Mortgage warehouse lines ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Recoveries ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

1-4 family residential construction ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Other construction/land ​ ​ 40 ​ ​ 2 ​ ​ — ​ ​ 5 ​ ​ 467

Multi-family residential ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Commercial real estate - owner occupied ​ ​ — ​ ​ — ​ ​ 230 ​ ​ 38 ​ ​ 35

Commercial real estate - non-owner occupied ​ ​ — ​ ​ 347 ​ ​ — ​ ​ 201 ​ ​ 449

Farmland ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Agricultural ​ ​ — ​ ​ — ​ ​ 22 ​ ​ 5 ​ ​ 14

Mortgage warehouse lines ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

RATIOS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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

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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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of December 31,

Unallocated ​ ​ 49 ​ — ​ ​ 132 ​ — ​ ​ 30 ​ — ​ ​ 46 ​ — ​ ​ 457 ​ —

(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

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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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of December 31,

​

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

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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.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

(dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield

​

Cash and Due from Banks

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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of December 31,

​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​

​ ​ ​ ​ ​ and ​ Net Book ​ ​ ​ ​ and ​ Net Book ​ ​ ​ ​ and ​ Net Book

​ Cost Amortization Value Cost Amortization Value Cost Amortization Value

​

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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

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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,

CDAR's < $100,000 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 251

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Percentage of Total Deposits ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

CDAR's < $100,000 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 0.01%

Brokered deposits ​ ​ 3.81% ​ ​ 2.31% ​ ​ 2.36% ​ ​ — ​ ​ —

​

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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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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,

Repurchase Agreements ​ ​ ​ ​ ​ ​ ​ ​ ​

Maximum amount outstanding at any month end ​ ​ 41,449 ​ ​ 27,712 ​ ​ 17,672

Average interest rate for the year ​ ​ 0.40% ​ ​ 0.40% ​ ​ 0.40%

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Fed funds purchased ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance at December 31 ​ $ 100,000 ​ $ — ​ $ —

Average amount outstanding ​ ​ 1,918 ​ ​ 313 ​ ​ 22

Maximum amount outstanding at any month end ​ ​ 100,000 ​ ​ — ​ ​ 850

Average interest rate for the year ​ ​ 0.21% ​ ​ 0.32% ​ ​ 0.00%

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

FHLB advances ​ ​ ​ ​ ​ ​ ​ ​ ​

Average interest rate for the year ​ ​ 0.19% ​ ​ 2.06% ​ ​ 2.19%

​

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.

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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.

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The following table sets forth the Company’s and the Bank’s regulatory capital ratios at the dates indicated:

​ ​ ​ ​ ​

Tier 1 (Core) Capital to average total assets ​ ​ ​ ​

Sierra Bancorp and subsidiary ​ 10.50% ​ 8.00%

​ ​ ​ ​ ​

Common Equity Tier 1 Capital Ratio ​ ​ ​ ​

Sierra Bancorp and subsidiary ​ 13.27% ​ 6.50%

​ ​ ​ ​ ​

Tier 1 Risk-Based Capital Ratio ​ ​ ​ ​

Sierra Bancorp and subsidiary ​ 14.98% ​ 8.00%

​ ​ ​ ​ ​

Total Risk-Based Capital Ratio ​ ​ ​ ​

Sierra Bancorp and subsidiary ​ 15.48% ​ 10.00%

​ ​ ​ ​ ​

Tier 1 (Core) Capital to average total assets ​ ​ ​ ​

Sierra Bancorp and subsidiary ​ 11.91% ​ 5.00%

​

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

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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.

​ ​ ​ ​ ​ ​ ​

Funds Available through Fed Discount Window ​ ​ 58,127 ​ ​ 59,198

​

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.

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Interest Rate Risk Management

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

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

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:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Base ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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%.

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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:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Base ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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.

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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”.

​

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and independent auditors’ reports listed below are included herein:

​ ​ Page

​ ​ ​ ​

II. Consolidated Balance Sheets – December 31, 2020 and 2019 ​ 72

​ ​ ​ ​

​ ​ ​ ​

​ ​ ​ ​

​ ​ ​ ​

​ ​ ​ ​

VII. Notes to Consolidated Financial Statements ​ 78

​

​

​

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​

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

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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:

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/s/ Eide Bailly LLP

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We have served as the Company’s auditor since 2019.

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San Ramon, California

March 12, 2021

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Report of Independent Registered Public Accounting Firm

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To the Board of Directors and Shareholders

Sierra Bancorp and Subsidiary

Porterville, California

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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.

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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.

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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.

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/s/ Vavrinek, Trine, Day & Co., LLP

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We have served as the Company's auditor since 2004.

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Rancho Cucamonga, California

March 14, 2019

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SIERRA BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2020 and 2019

(dollars in thousands)

​ ​ ​ ​ ​ ​ ​

ASSETS ​ ​ ​ ​ ​ ​

Interest bearing deposits in banks ​ ​ 3,509 ​ ​ 14,521

Loans and leases: ​ ​ ​ ​ ​ ​

Allowance for loan and lease losses ​ ​ (17,738) ​ ​ (9,923)

Deferred loan and lease (fees) costs, net ​ ​ (3,147) ​ ​ 2,896

Foreclosed assets ​ ​ 971 ​ ​ 800

Other intangible assets, net ​ ​ 4,307 ​ ​ 5,381

LIABILITIES AND SHAREHOLDERS' EQUITY ​ ​ ​ ​ ​ ​

Deposits: ​ ​ ​ ​ ​ ​

Commitments and contingent liabilities (Notes 6 & 13) ​ ​ ​ ​ ​ ​

Shareholders' equity ​ ​ ​ ​ ​ ​

Additional paid-in capital ​ ​ 3,736 ​ ​ 3,307

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

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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 ​ ​ ​ ​ ​ ​ ​ ​ ​

Federal funds sold and other ​ ​ 156 ​ ​ 376 ​ ​ 238

Interest expense ​ ​ ​ ​ ​ ​ ​ ​ ​

Provision for loan and lease losses ​ ​ 8,550 ​ ​ 2,550 ​ ​ 4,350

Noninterest income ​ ​ ​ ​ ​ ​ ​ ​ ​

Increase in cash surrender value of life insurance ​ ​ 2,412 ​ ​ 2,184 ​ ​ 591

Noninterest expense ​ ​ ​ ​ ​ ​ ​ ​ ​

Acquisition costs ​ ​ — ​ ​ 22 ​ ​ 449

Earnings per share ​ ​ ​ ​ ​ ​ ​ ​ ​

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

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SIERRA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2020, 2019 and 2018

(dollars in thousands, except footnotes)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive income, before tax ​ ​ ​ ​ ​ ​ ​ ​ ​

Unrealized gain (loss) on securities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive gain (loss), before tax ​ ​ 17,709 ​ ​ 17,884 ​ ​ (6,156)

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

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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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​

​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ ​ ​

​ ​ ​ ​ ​ ​ ​ Paid In ​ Retained ​ Comprehensive ​ Shareholders'

​ Shares Amount Capital Earnings Gain (Loss) Equity

Net Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 29,677 ​ ​ ​ ​ ​ 29,677

Stock based compensation expense ​ ​ ​ ​ ​ ​ ​ 373 ​ ​ ​ ​ ​ ​ ​ ​ 373

Stock issued-acquisition ​ — ​ ​ — ​ ​ (6) ​ ​ ​ ​ ​ ​ ​ ​ (6)

Cash dividends - $.64 per share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (9,757) ​ ​ ​ ​ ​ (9,757)

Net Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 35,961 ​ ​ ​ ​ ​ 35,961

Other comprehensive gain, net of tax ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 12,598 ​ ​ 12,598

Stock based compensation expense ​ ​ ​ ​ ​ ​ ​ 490 ​ ​ ​ ​ ​ ​ ​ ​ 490

Cash dividends - $.74 per share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (11,332) ​ ​ ​ ​ ​ (11,332)

Net Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 35,444 ​ ​ ​ ​ ​ 35,444

Other comprehensive gain, net of tax ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 12,473 ​ ​ 12,473

Stock based compensation expense ​ 148,885 ​ ​ ​ ​ ​ 688 ​ ​ ​ ​ ​ ​ ​ ​ 688

Cash dividends - $.80 per share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (12,207) ​ ​ ​ ​ ​ (12,207)

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2020, 2019, and 2018

(dollars in thousands)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

(Gain) loss on sales of securities ​ ​ (390) ​ ​ 198 ​ ​ (2)

Loss on disposal of fixed assets ​ ​ — ​ ​ 28 ​ ​ 16

Gain on sale of foreclosed assets ​ ​ (10) ​ ​ (107) ​ ​ (1,423)

Writedown of foreclosed assets ​ ​ 124 ​ ​ 77 ​ ​ 439

Stock based compensation expense ​ ​ 688 ​ ​ 490 ​ ​ 373

Provision for loan and lease losses ​ ​ 8,550 ​ ​ 2,550 ​ ​ 4,350

Amortization of core deposit intangible ​ ​ 1,074 ​ ​ 1,074 ​ ​ 1,020

(Decrease) increase in other liabilities ​ ​ (8,151) ​ ​ 9,662 ​ ​ (5,420)

Deferred income tax benefit ​ ​ (2,611) ​ ​ (97) ​ ​ (308)

Increase in equity securities ​ ​ (447) ​ ​ (232) ​ ​ (1,183)

Net amortization of partnership investment ​ ​ 1,505 ​ ​ 2,127 ​ ​ 2,625

Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Net purchases of FHLB stock ​ ​ — ​ ​ (833) ​ ​ (300)

Purchases of premises and equipment, net ​ ​ (2,916) ​ ​ (783) ​ ​ (3,123)