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, 2024 and 2023, and the results of operations for each year in the three-year period ended December 31, 2024. The discussion is best 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).

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATMENTS

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. These forward-looking statements include, but are not limited to, statements about the Company’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. 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 correct, revise, or 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, and you should not place undue reliance on these forward-looking statements. Risk factors and the Company’s ability to manage that risk 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 Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States and prevailing practices within the banking industry. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior year’s balances to conform to classifications used in 2024. Actual results may differ from those estimates under divergent conditions.

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Critical accounting estimates 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 estimates deal primarily with the establishment of an allowance for credit losses on loans, as explained in detail in Note 2 to the consolidated financial statements and in the “Credit Losses Expense on Loans” and “Allowance for Credit Losses on Loans” sections 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.

The following table presents selected historical financial information concerning the Company, which should be read in conjunction with our audited consolidated financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Selected Financial Data ​ ​ ​ ​ ​ ​ ​ ​ ​

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

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

Selected Balance Sheet Summary ​ ​ ​ ​ ​ ​ ​ ​ ​

Per Share Data ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income per basic share ​ $ 2.84 ​ $ 2.37 ​ $ 2.25

Net income per diluted share ​ $ 2.82 ​ $ 2.36 ​ $ 2.24

Key Operating Ratios: ​ ​ ​ ​ ​ ​ ​ ​ ​

Performance Ratios: (1) ​ ​ ​ ​ ​ ​ ​ ​ ​

Return on average assets ​ ​ 1.12% ​ ​ 0.94% ​ ​ 0.97%

Average equity to average assets ratio ​ ​ 9.61% ​ ​ 8.31% ​ ​ 9.06%

Net interest margin (tax-equivalent) ​ ​ 3.66% ​ ​ 3.37% ​ ​ 3.47%

Efficiency ratio (tax-equivalent) (3) ​ ​ 60.76% ​ ​ 63.90% ​ ​ 60.16%

Asset Quality Ratios: (1) ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-performing loans to total loans ​ ​ 0.84% ​ ​ 0.38% ​ ​ 0.95%

Net (recoveries) charge-offs to average loans ​ ​ 0.15% ​ ​ 0.18% ​ ​ 0.58%

Regulatory Capital Ratios: (2) ​ ​ ​ ​ ​ ​ ​ ​ ​

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Overview of the Results of Operations and Financial Condition

Results of Operations Summary

The Company recognized net income of $40.6 million in 2024 relative to $34.8 million in 2023 and $33.7 million in 2022. Net income per diluted share was $2.82 in 2024, as compared to $2.36 in 2023 and $2.24 for 2022. The Company’s return on average assets and return on average equity were 1.12% and 11.62%, respectively, in 2024, as compared to 0.94% and 11.30%, respectively, in 2023 and 0.97% and 10.66%, respectively, for 2022. 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.

The increase in average earning assets in 2023 over 2022 was due primarily to purchases of investment securities, augmented with increases in the average balance of loans. The average balance of investment securities increased $212.3 million while average gross loan balances increased $57.7 million. We experienced an increase of $22.4 million in real estate loans, $27.1 million increase in mortgage warehouse line utilization, and a $7.9 million increase in other commercial loans. The positive impact of average asset growth in 2023 along with a 100 basis points increase in yield was negatively impacted by a 161 basis points increase in yield on interest bearing liabilities due to a shift by our customers into higher cost certificates of deposits coupled with an increase in more expensive borrowed funds. The net interest margin in 2023 was 10 basis points lower than 2022.

The year over year decrease in 2023 was negatively impacted by 2022 events that did not recur in 2023, including $3.6 million in gains on the sale of other assets, and the $1.0 million recovery of prior period legal expenses. These unfavorable variances were partially offset by favorable fluctuations in income on bank-owned life insurance (BOLI) with underlying investments mapped directly to the Company’s deferred compensation plan. Also favorably impacting noninterest income was a $15.3 million gain on the sale of

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Bank owned branch buildings (subsequently leased back), mostly offset by realizing a $14.5 million loss on a securities strategy which identified $196.7 million in available-for-sale securities sold in January 2024.

The increase in noninterest expense in 2023 was due mostly to a $3.9 million increase in salary and benefits expense for new lending teams and management staff along with reduction in force severance payments as discussed in the quarterly comparison, an unfavorable variance in director’s deferred compensation expense which is linked to the favorable changes in bank-owned life insurance income, mentioned above in the discussion of noninterest income, a $0.8 million increase in FDIC assessment costs and $0.5 million increase in fraud losses primarily due to our debit card conversion from Mastercard to VISA earlier in the year.

Financial Condition Summary

The Company’s assets totaled $3.6 billion at December 31, 2024, as compared to $3.7 billion at December 31, 2023. Total liabilities were $3.3 billion at December 31, 2024, as compared to $3.4 billion at the end of 2023, and shareholders’ equity totaled $357.3 million at December 31, 2024, as compared to $338.1 million at December 31, 2023. The following is a summary of key balance sheet changes during 2024.

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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 includes 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 $120.0 million in 2024 as compared to $112.4 million in 2023, and $109.6 million in 2022. This equates to increases of 7% in 2024, and 3% in 2023. 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, 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.

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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 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.

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

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

AVERAGE BALANCES AND RATES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

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

Loans: (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

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

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

Other liabilities ​ ​ 90,142 ​ ​ ​ ​ ​ ​ ​ 59,317 ​ ​ ​ ​ ​ ​ ​ 58,538 ​ ​ ​ ​ ​

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

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

​

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The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest-earning assets and interest-bearing liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average interest rates. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates, and rate variances are equal to the change in rates multiplied by prior period average balances. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the mix variance.

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

Volume and Rate Variances ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​ ​ Years Ended December 31,

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

Assets: Volume Rate ​ Mix Net Volume Rate ​ Mix Net

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

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

Loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other ​ ​ — ​ ​ (9) ​ ​ — ​ ​ (9) ​ ​ 14 ​ ​ (38) ​ ​ (5) ​ ​ (29)

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

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

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

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

Long term debt ​ ​ 3 ​ ​ 3 ​ ​ — ​ ​ 6 ​ ​ 3 ​ ​ (1) ​ ​ — ​ ​ 2

​

The 2024 favorable volume variance of $8.5 million is due to the favorable loan volume variance and favorable borrowed fund volume variance exceeding the unfavorable volume variances related to investments and deposits. The decline in investment volume and favorable reduction in borrowed funds was facilitated by the balance sheet restructuring strategy in late 2023. The favorable loan volume variance was due to loan growth in 2024, primarily from mortgage warehouse.

The 2024 favorable rate variance of $0.2 million is comprised mostly of favorable rate variances related to earning assets being mostly offset by unfavorable deposit and borrowed fund costs due to overall higher rates on assets being offset by higher funding rates. The 2024 unfavorable mix variance of $1.1 million is driven by lower investment balances, and higher loan balances, compounded by higher rates paid on interest bearing deposits. Some of this unfavorable mix was mitigated by the decrease in borrowed funds.

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For 2023 as compared to 2022, net interest income was impacted by a favorable rate variance of $15.3 million, partially offset by an unfavorable mix variance of $11.0 million, and an unfavorable volume variance of $1.6 million. The 2023 versus 2022 favorable rate variance is due mostly to a 100 basis point increase in the yield on average earning assets, mostly in higher yielding floating rate commercial loan obligations (CLO), partially offset by a 161 basis point increase in interest expense on interest bearing liabilities. The 2023 versus 2022 unfavorable volume variance mostly is due to larger increases in borrowed funds and interest-bearing deposits over the increases in average earning assets. There was also an unfavorable mix variance of $11.0 million which was mostly from the shift of non or low interest bearing deposits into higher rate time deposits as customers became more rate sensitive and higher volumes of borrowed funds at higher rates than the increases in rates on new volumes of interest earning assets. Increases in higher yielding investment securities and an increase in usage of mortgage warehouse lines offset some of the unfavorable mix variance.

The Company’s net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, increased by 29 basis points to 3.66% in 2024 and declined by 10 basis points to 3.37% in 2023 as compared to 2022. The favorable variance in net interest margin was mostly caused by an increase in yield and volume of higher yielding interest earning assets over the decrease of volume on interest bearing liabilities in 2024 as compared to 2023. The net interest margin compression was mostly caused by an increase in rate and volume (mix) of higher cost of interest bearing liabilities over the increase of volume and yield (mix) on interest earning assets in 2023 as compared to 2022.

Rates paid on non-maturity deposits increased 41 basis points in 2024 over the same period in 2023, and increased 15 points in 2023 over the same period in 2022 as competition for deposits has increased with customers becoming more rate sensitive. Interest bearing demand deposits increased 146 basis points in 2024 over 2023 and increased 75 basis points in 2023 over 2022, an indication of the fierce competition for deposits industry wide. Money market accounts increased 96 basis points in 2024 over 2023 but increased 47 basis points in 2023 over 2022. The weighted average cost of interest-bearing liabilities increased 16 points in 2024 over 2023 and increased 161 basis points in 2023 over 2022. Customer time deposit rates decreased 23 basis points in 2024 over 2023, but increased 285 basis points in 2023 over 2022, due partly to a time deposit product with a rate set to a spread to prime. The current spreads on our floating rate time deposits range from prime minus 500 basis points to prime minus 375 basis points subject to a floor. Three prime rate decreases in 2024, and two prime rate increases earlier in 2023, created rate variances on such accounts.

Rates paid on short-term borrowings, which are tied to short-term borrowing rates, increased 38 basis points during 2024 over 2023, and increased 167 basis points during 2023 over 2022. Rates paid on adjustable-rate trust preferred securities are tied to 3-month CME SOFR and increased 20 basis points during 2024 over 2023 and increased 358 basis points during 2023 over 2022.

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 had no impact on interest income in 2024, totaled $0.9 million of additional interest income in 2023, and amounted to $1.6 million of interest reversals in 2022.

Credit Loss Expense and Provision for Loan Losses

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for credit losses on loans, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for credit losses on loans. The Company recorded credit loss expense on loans of $4.6 million in 2024, $4.1 million in 2023, and $10.9 million in 2022. The Company was subject to the adoption of the Current Expected Credit Loss ("CECL") accounting method under FASB Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) and implemented the update on January 1, 2022.Upon implementation the Company recorded a $10.4 million pre-tax increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes. The Company’s $0.5 million increase in credit loss expense for the year ending 2024 over 2023, was due to a unfavorable increase in the allowance for credit losses on loans individually evaluated, partially offset by the impact of lower net loan charge-offs and a favorable improvement in underlying economic forecasts used as part of our allowance for credit losses model. There was a $6.8 million favorable decrease for the year ending 2023 compared to the same period in 2022 is primarily due to the impact of lower net charge-offs during the year ending 2023.

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With the credit loss expense on loans recorded in 2024 we were able to maintain our allowance for credit losses on loans at a level that, in Management’s judgment, is adequate to absorb expected credit losses over the remaining contractual life on loans related to individually identified loans as well as expected credit losses over the remaining contractual life in the remaining loan portfolio. Specifically identifiable and quantifiable credit losses on loans are immediately charged off against the allowance. The Company experienced net loan charge offs of $3.3 million in 2024, $3.6 million in 2023, and $11.5 million in 2022. The provision for credit losses on loans for 2022 was elevated due to the impact of two loan relationships; one dairy loan relationship with total charge-offs of $8.7 million and a single office building loan relationship that was sold at a $1.9 million discount due to an increased risk of default that would have likely led to a prolonged collection period.

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 credit allowance, are discussed in Note 2 to the consolidated financial statements and below under “Allowance for Credit Losses on Loans.” The process utilized to establish an appropriate allowance for credit losses on loans can result in a high degree of variability in the Company’s provision for credit losses on loans, 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: ​ ​ ​ ​ ​ ​ ​ ​ ​

(Loss) gain on sale of securities ​ ​ (2,681) ​ ​ 396 ​ ​ 1,487

Gain (loss) on sale of fixed assets ​ ​ 3,783 ​ ​ 15,270 ​ ​ (8)

Bank owned life insurance income (loss) ​ ​ 2,650 ​ ​ 1,767 ​ ​ (996)

Realized gain (loss) on available-for-sale securities ​ ​ 66 ​ ​ (14,500) ​ ​ —

As a % of average interest-earning assets ​ ​ 0.95% ​ ​ 0.89% ​ ​ 0.95%

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

NONINTEREST EXPENSES: ​ ​ ​ ​ ​ ​ ​ ​ ​

Advertising and marketing costs ​ ​ 1,422 ​ ​ 2,215 ​ ​ 1,729

Loan services costs ​ ​ ​ ​ ​ ​ ​ ​ ​

Foreclosed assets ​ ​ — ​ ​ 665 ​ ​ 84

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

Other professional services costs ​ ​ 2,883 ​ ​ 2,760 ​ ​ 1,892

Stationery and supply costs ​ ​ 483 ​ ​ 531 ​ ​ 486

As a % of average interest-earning assets ​ ​ 2.79% ​ ​ 2.71% ​ ​ 2.63%

(1) Tax Equivalent

Noninterest income increased $1.1 million, or 4%, in 2024 over 2023, and decreased $0.4 million, or 1%, in 2023 over 2022. Total noninterest income was 0.95% of average interest-earning assets in 2024 as compared to a ratio of 0.89% in 2023. The ratio increased in 2024 mostly due to noninterest income including service charges on deposit accounts increasing 4%, or $1.1 million, along with a decrease in interest-earning assets.

The principal component of the Company’s noninterest income, service charges on deposit accounts increased 5%, or $1.1 million, and were flat in 2023 as compared to 2022. This line item is primarily driven by the volumes of debit card transactions, overdraft transactions, and analysis fees which are driven primarily on the volume of cash orders by money service businesses. As a percent of average transaction account balances, service charge income was 1.6% in 2024, 1.4%

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in 2023, and 1.3% in 2022. Overdraft income on both consumer and corporate accounts totaled $5.5 million in 2024, $5.3 million in 2023; and $4.6 million (net of restitution related to NSF fees) in 2022. The Company stopped charging NSF fees in 2022.

Interchange income from debit cards (included in service charges on deposit accounts) was $8.3 million, and was mostly flat in 2024 over 2023, but decreased in 2023 over 2022 by $0.2 million. The unfavorable variance in 2023 was a result of a brand change later in the year from Mastercard to VISA.

BOLI income generally fluctuates based on the market due to the Company’s “separate account” BOLI being invested in assets that closely mirror investments choices of deferred compensation participants. There is also a part of BOLI that is “general account” and receives a standard crediting rate from the carrier which remains relatively stable year over year. However, the separate-account BOLI used to offset deferred compensation fluctuates significantly from year-to-year as many of our deferred compensation participants are invested in equity-index style funds. In the comparative years ending 2024 over 2023, BOLI income increased $0.9 million; however, in 2023 over 2022, BOLI income increased $2.8 million. The Company had $11.8 million invested in separate account BOLI at December 31, 2024. This separate account BOLI closely matched 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). Net gains on separate account BOLI totaled $1.7 million in 2024, and $0.9 million in 2023, as compared to net losses of $2.0 million in 2022. This resulted in a favorable variance of $0.8 million for the comparative years ending 2024 as compared to 2023, and $2.9 million for the comparative years ending 2023 as compared to 2022. 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 $41.3 million and $41.7 million, respectively for the years ending December 31, 2024 and 2023. 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 the year ending December 31, 2024, $0.9 million recorded for the year ending December 31, 2023, and $1.0 million recorded for the year ending December 31, 2022.

Gain on the sale of fixed assets for $3.8 million, and $15.3 million, for the years ending 2024, and 2023 respectively, was due to the sale of Bank owned branch buildings that were subsequently leased back. Both of these transactions and related gains were part of an overall balance sheet restructuring. A securities strategy identified $196.7 million in bonds yielding 2.61%, sold in January 2024 at a loss of $14.5 million. There were also $53.8 million in bonds sold during the first quarter of 2024, at a loss of $2.9 million. The proceeds from the securities strategy went to paydown a portion of other borrowed funds with an average rate of 5.52%. The Company also realized a $0.2 million and $0.4 million gain on the sale or call of securities during the years ending December 31, 2024 and 2023 respectively, and, a $1.5 million gain for the same period in 2022 from a portfolio restructure to decrease effective duration, taking advantage of slight rallies in the Treasury market in early and late 2022.

The other category, decreased $0.8 million to $3.5 million in 2024, $2.8 million to $4.4 million in 2023 and increased to $7.2 million in 2022. The year over year decrease in 2024 over 2023, and in 2023 over 2022 was a result of events that did not recur in 2024 and 2023. For 2024 over 2023, the variance is mostly due to gain on life insurance proceeds while the variance for 2023 over 2022, was primarily due to a $3.6 million gain on the sale of other assets.

Total operating expense, or noninterest expense, increased slightly by $0.2 million, or 0.2%, in 2024 as compared to 2023, and by $7.9 million, or 9%, in 2023 as compared to 2022.

The largest component of noninterest expense, salaries, and employee benefits decreased $0.6 million, or 1% in 2024 as compared to 2023, and increased $3.9 million, or 8% in 2023 as compared to 2022. The decrease in 2024 was due to strategic decisions in 2023 that created operational efficiencies and reduced noninterest expense, as discussed below. The increase in 2023 was due to the strategic hiring of new loan production teams and certain management positions, and standard annual increases to our employee’s base compensation. Loan origination salaries that were deferred from current expense for recognition over the life of related loans totaled $3.0 million in 2024, $2.7 million in 2023, and $2.3 million in 2022.

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Salaries and benefits were 56% of total operating expense in 2024, and 55% in 2023, and 2022. The number of full-time equivalent staff employed by the Company totaled 485 at the end of 2024, as compared to 489 at December 31, 2023, and 491 at December 31, 2022. The decrease for the years ending 2024, and 2023 in FTE was due to the reduction in force as several management positions were eliminated due to operational efficiencies.

Total rent and occupancy expense, including furniture and equipment costs, increased $2.2 million in 2024 as compared to 2023, and $0.4 million in 2023 as compared to 2022. The increase in 2024 was due to higher rent expense from the sale/leaseback transactions in the fourth quarter of 2023 and first quarter of 2024. The increase in 2023 was due to a one-time payment of $0.2 million for home office stipends for staff that work remotely and regular rent escalations.

Advertising and promotion costs decreased $0.8 million or 36%, in 2024, over 2023, and increased $0.5 million or 28%, in 2023, over 2022. The decrease in 2024 was a result of a change in the Company’s marketing strategy, while the increase in 2023 was mostly due to a $0.3 million increase in deposit program costs due to a deposit acquisition campaign.

Data processing costs increased $0.4 million, or 6% in 2024, as compared to 2023, and decreased by $0.4 million or 6% in 2023 as compared to 2022. The increase in 2024 was primarily from new loan origination software to better serve our customers and create operational efficiencies in the near term, along with increased costs for data storage. The decrease in 2023 was mostly from a $0.6 million decrease in core processing costs and lower internet banking costs, partially offset by higher Visa conversion costs. The Company renegotiated its core processing contract which resulted in overall savings.

Deposit services costs decreased by $0.4 million, or 4% in 2024 as compared to 2023, and decreased by $0.7 million or 8% in 2023 as compared to 2022. The decrease in 2024 was due to favorable variances in debit card processing and ATM networks costs, from a branding change to VISA from Mastercard in 2023. Deposit costs favorable variance in 2023, over 2022 were due to a decrease in deposit statement costs, and lower ATM network 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, decreased by $0.1 million or 11%, in 2024 as compared to 2023, and increased by $0.1 million or 9%, in 2023 as compared to 2022. The decrease in 2024 over 2023, as well as the increase in 2023 over 2022, was due to fluctuations in appraisal costs. 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. There were no expenses in 2024, $0.7 million expenses in 2023 and $0.1 million in expenses in 2022. These costs fluctuate based on market conditions of OREO relative to our holding value, the nature of the underlying properties and the volume of OREO properties in inventory. At the end of 2024, the Company had no OREO properties remaining in inventory.

The “other operating costs” category includes telecommunications expense, postage, and other miscellaneous costs. Telecommunications expense decreased $0.5 million, or 13%, in 2024, as compared to 2023, and was flat at $1.6 million in 2023, as compared to 2022. The decrease in 2024 was due to payments in 2023 that did not reoccur in 2024, mainly restitution payments made in 2023 to analysis customers, and hiring and recruiting costs.

Total Professional Services costs, which consists of legal and accounting, acquisition, directors fees, and other professional services costs, increased by $0.9 million, or 12%, in 2024 as compared to 2023, and $3.1 million in 2023, as compared to 2022. Legal and Accounting costs were flat in 2024, but increased $0.1 million, or 5% in 2023, as compared to 2022. The increase in 2024 was primarily due to an unfavorable variance in directors’ deferred compensation expense while the increase in 2023 was primarily from an increase in audit costs, which were previously outsourced. Directors’ costs increased $0.7 million, or 33%, in 2024 over 2023, and $2.1 million in 2023 as compared to 2022 primarily due to an increase in deferred compensation expense which is linked to the favorable fluctuation in BOLI income. Other professional services costs include FDIC assessments and other regulatory expenses, and certain insurance costs among other things. This category increased $0.1 million, or 4%, in 2024 as compared to 2023, and $0.9 million or 46%, a decrease in interest-earning assets while in 2023, as compared to 2022. The increase in 2024 as compared to 2023, is primarily due to an increase in insurance and bond rating costs. The increase in 2023 was primarily from an increase in FDIC assessment expenses.

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Employee deferred compensation expense accruals totaled $0.4 million in 2024, $0.2 million in 2023, and $0.1 million in 2022, and are included in “salaries and employee benefits’ noted above. Directors deferred compensation plan accruals totaled $1.6 million in 2024, $0.8 million in 2023, and $(1.1) million in 2022, and are included in “other professional services” above. As previously mentioned in our discussion of BOLI income, deferred compensation plan accruals are related to separate account BOLI income and losses and the net income impact of all income/expense accruals related to deferred compensation is usually minimal.

Stationery and supply costs were mostly unchanged both in 2024, as compared to 2023, and for 2023, as compared to 2022.

Sundry and teller costs were $1.2 million in 2024, $1.3 million in 2023, and $0.7 million in 2022. In 2024, as well as 2023 and 2022, debit card losses are elevated and consistent with the higher volume of debit card transactions. These debit card dispute and fraud costs increased in 2023 with our debit card conversion from Mastercard to Visa earlier in the year and declined 8% or $0.1 million in 2024.

The Company’s tax-equivalent overhead efficiency ratio was 60.8% in 2024, 63.9% in 2023, and 60.2% in 2022. 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 credit losses on loans and gains/losses excluded from the equation. The Company is continually working on efforts to control costs, as well as increase income which is the denominator of the equation.

Income Taxes

Our income tax provision was $13.3 million, or 24.7% of pre-tax income in 2024, $11.6 million, or 25.0% of pre-tax income in 2023, and $11.3 million, or 25.1% of pre-tax income in 2022. The tax accrual rate was lower in 2024 due to an increase in the net benefit from tax credits, but was higher in 2023 and in 2022 due to a lower proportion of non-taxable income to taxable income

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 or loss, and certain book expenses that are not allowed as tax deductions. The Company’s investments in state, county and municipal bonds provided $6.7 million of federal tax-exempt income in 2024, $10.9 million in 2023, and $8.8 million in 2022. Moreover, in addition to life insurance proceeds of $0.2 million in 2024, $0.9 million in 2023 and $0.4 million in 2022, net increases in the cash surrender value of bank-owned life insurance added $2.7 million to tax-exempt income in 2024, and $1.8 million to tax-exempt income in 2023, but reduced tax-exempt income by $1.0 million in 2022.

Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds. We had a total of $25.4 million invested in low-income housing tax credit funds as of December 31, 2024, and $14.4 million as of December 31, 2023, 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 $1.8 million, $0.6 million, and $0.5 million in credits available for the for the tax years 2024, 2023, and 2022, respectively. 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 2036. That means that even if taxable income stayed at the same level through 2036, our tax accrual rate would gradually increase.

Financial Condition

Assets totaled $3.6 billion at December 31, 2024, a decrease of $115.5 million, or 3%, for the year. Assets decreased in 2024 mostly a result of a strategic balance sheet restructuring, substantially offset by loan growth in 2024. Investment

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securities declined $377.8 million, primarily from the sale of bonds from the strategic securities transaction that was part of the balance sheet restructuring, as well as other maturities and calls of investment securities. The decreases in investment securities were partially offset by a $241.3 million increase in gross loans, and a $22.1 million increase in cash on hand.

Deposits increased $130.4 million, or 5%. Total capital increased by $19.2 million, or 6%. The major components of the Company’s balance sheet are individually analyzed below, along with information on off-balance sheet activities and exposure.

Loan Portfolio

The Company’s loan 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 portfolio are important considerations when reviewing the Company’s financial condition.

The Loan Distribution table that follows sets forth by loan type the Company’s gross loans 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 Distribution ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​ ​ As of December 31,

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

Percentage of Total loans ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​

The Company’s loan balances increased $239.7 million, or 12% in 2024. The increase was primarily a result of a $210.4 million increase in mortgage warehouse utilization, $32.2 million increase in commercial real estate loans, $10.1 million increase in farmland loans, and a $20.7 million increase in other commercial loans. Negatively impacting these positive variances were loan paydowns and maturities in many categories despite solid loan production. In particular there was a $30.6 million decrease in residential real estate, a $0.8 million decrease in other construction, and $0.7 million decrease in consumer loans.

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The increase in 2023 was primarily a result of a $50.6 million increase in mortgage warehouse utilization, $17.1 million increase in commercial real estate, and a $53.3 million increase in other commercial loans offset by a $46.1 million decrease in farmland, a $12.2 million decrease in other construction and a $25.4 million decrease in residential real estate. For 2022, the Company had $173.1 million in residential mortgage loan purchases which were designed as a bridge to organic loan growth with the hiring of loan production teams. These new loan production teams were hired to develop relationships within our footprint for both loans and deposits. These new loans provide additional diversification of the loan portfolio and are mostly floating rate loan products which complement the fixed rate real estate loans. As demonstrated by the expansion of the lending teams both in 2023 and 2022, management remains focused on organic loan growth which totaled $216.5 million and $185.3 million, respectively during the years ending 2024 and 2023. No assurance can be provided with regard to future net growth in aggregate loan balances given occasional surges in prepayments, 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 regarding 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 credit losses loans; or (2) total CRE loans as defined in the regulatory guidelines represent 300% or more of Tier 1 risk-based capital plus allowance for credit losses on loans, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36 month period. This ratio was 243% at December 31, 2023, and declined to 236% at December 31, 2024. At December 31, 2024, the Bank’s total construction, land development and other land loans represented 1% of Tier 1 risk-based capital plus allowance for credit losses on loans. The Bank believes that it does not have a concentration in CRE loans at December 31, 2024, above the prudential regulatory guidelines note above. 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.

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

Loan Maturities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

Mortgage warehouse lines ​ ​ 326,584 ​ ​ — ​ ​ — ​ ​ — ​ ​ 326,584 ​ ​ — ​ ​ —

​

Rates on nonresidential loans longer than five years typically adjust starting before ten years and each five years thereafter. Included in the $471.2 million of loans due after 5 years through fifteen years are $150.7 million of adjustable-rate loans subject to periodic rate adjustments. Similarly, included in the $1.2 billion of loans that do not mature for more than fifteen years are $570.9 million of adjustable-rate loans subject to periodic rate adjustments. Generally, the Company’s contractual life of loans matches the loan’s amortization period, which is generally 25 years. 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.

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Off-Balance Sheet Arrangements

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements.

Unused commitments, excluding mortgage warehouse and overdraft lines, were $256.9 million at December 31, 2024, compared to $203.6 million at December 31, 2023. Total line utilization, excluding mortgage warehouse and overdraft lines, was 57% at December 31, 2024, and 62% at December 31, 2023. Including mortgage warehouse utilization, overall utilization was 51% at December 31, 2024, as compared to 53% at December 31, 2023. Mortgage warehouse utilization increased to 51% at December 31, 2024, as compared to 36% at December 31, 2023. Due to new customer growth, total mortgage warehouse availability increased to $311.6 million at December 31, 2024, as compared to $204.5 million at December 31, 2023. The Bank increased the number of mortgage warehouse customers by 60% in 2024. This has facilitated an increase in outstanding balances in 2024 by $210.4 million, or 181%, to $326.4 million at December 31, 2024. It is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 28% of gross loans outstanding at December 31, 2024, and 23% at December 31, 2023. Included in used commitments are undrawn letters of credit issued to customers totaling $5.0 million at both December 31, 2024 and 2023. Off-balance sheet obligations pose potential credit risk to the Company, and a $0.7 million reserve for unfunded commitments is reflected as a liability in our consolidated balance sheet at December 31, 2024, an increase of $0.2 million 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 holds two letters of credit with the Federal Home Loan Bank of San Francisco totaling $127.9 million 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 14 to the consolidated financial statements in Item 8 herein.

Contractual Obligations

At the end of 2024, 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 2-3 Years 4-5 Years 5 Years

Subordinated debentures ​ $ 35,838 ​ $ — ​ $ — ​ $ — ​ $ 35,838

Long term debt ​ ​ 49,393 ​ ​ — ​ ​ — ​ ​ — ​ ​ 49,393

​

​

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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.

The following table presents comparative data for the Company’s NPAs as of the dates noted:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Nonperforming Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​ ​ As of December 31,

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

Commercial real estate ​ ​ — ​ ​ 7,457 ​ ​ — ​ ​ 1,234 ​ ​ 2,260

Other construction/land ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Consumer loans ​ ​ — ​ ​ — ​ ​ 7 ​ ​ 22 ​ ​ 24

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Foreclosed assets ​ ​ — ​ ​ — ​ ​ — ​ ​ 93 ​ ​ 971

Loans deferred under CARES Act (1) ​ $ — ​ $ — ​ $ — ​ $ 10,411 ​ $ 29,500

NPAs totaled $19.7 million, or 0.8% of gross loans plus foreclosed assets at the end of 2024, as compared to $8.0 million, or 0.4% of gross loans plus foreclosed assets at the end of 2023. NPAs at the end of 2024 consist primarily of an operating line of credit collateralized with receivables from wine grape production and other assets with a balance of $16.3 million at December 31, 2024, and a current balance of $14.1 million, due to principal paydowns made by the customer during the month of January 2025. NPAs decreased $11.6 million, or 59% in 2023 over 2022.

Nonperforming loans secured by real estate comprised $5.1 million of total nonperforming loans at December 31, 2024, a decrease of $2.7 million, since December 31, 2023. Nonperforming loans secured by real estate at December 31, 2024, is primarily composed of two real estate loans secured by farmland, with a combined book balance of $5.1 million.

The Company had no foreclosed assets at December 31, 2024 and 2023. When the Company has foreclosed assets, they are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

Allowance for Credit Losses/Allowance for Loan Losses

The allowance for credit losses on loans, a contra-asset, is established through a provision for credit losses on loans. The allowance for credit losses on loans is at a level that, in Management’s judgment, is adequate to absorb expected credit losses on loans related to individually identified loans as well as expected credit losses 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 credit losses on loans. The Company’s allowance

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for credit losses on loans was $24.8 million, or 1.07% of gross loans at December 31, 2024, relative to $23.5 million, or 1.12% of gross loans at December 31, 2023. The increase in the allowance resulted from an increase in individual loan reserves, primarily as a result of a downgrade in the fourth quarter of 2024 of one agricultural loan relationship. This increase was partially offset by a 29 basis point decrease in historical loss rates that drive the quantitative reserves. At December 31, 2024, nonaccrual loans totaled $19.7 million compared to $8.0 million at December 31, 2023. All of the Company’s nonperforming assets are periodically reviewed and are either well-reserved based on current loss expectations or are carried at the fair value of the underlying collateral, net of expected disposition costs. The ratio of the allowance to nonperforming loans was 126% at December 31, 2024, relative to 294% at December 31, 2023, and 118% at December 31, 2022. As described above, a separate allowance of $0.7 million for potential losses inherent in unused commitments is included in other liabilities at December 31, 2024.

The Company recorded a provision for credit losses on loans of $4.6 million in 2024 as compared to $4.1 million in 2023, and $10.9 million in 2022. Our credit allowance for expected losses on individually identified loans increased $1.4 million, or 73%, during 2024, and increased $1.5 million, or 351%, during 2023. The allowance for expected losses inherent in the remaining portfolio decreased by $0.1 million, or 0.5%.

​

The following table sets forth the Company’s net charge-offs as a percentage to the average loan balances in each loan category, as well as other credit related ratios at or for the periods indicated:

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

Credit Ratios ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

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

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Provided below is a summary of the allocation of the allowance for credit losses on loans 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 Credit Losses on Loans ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​ ​ As of December 31,

Unallocated ​ ​ 69 ​ — ​ ​ — ​ — ​ ​ 4 ​ — ​ ​ 137 ​ — ​ ​ 49 ​ —

(1) Includes mortgage warehouse lines

The Company’s allowance for credit losses on loans at December 31, 2024 represents Management’s best estimate of expected losses over the remaining contractual life of loans 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.

Investments

The Company’s investments may at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our Federal Reserve Bank of San Francisco (“FRBSF”) account, and overnight fed funds sold. Surplus FRBSF 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 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 $961.5 million, or 27% of total assets at December 31, 2024, as compared to $1.3 billion, or 36% of total assets at December 31, 2023. Approximately $197 million in investments, with an unrealized loss of $14.5 million, were identified with an intent to sell at December 31, 2023, and were sold in January 2024 as part of the balance sheet restructuring discussed above.

We had no federal funds sold at the end of the reporting periods, and interest-bearing balances held primarily in our FRBSF account totaled $19.7 million at December 31, 2024, as compared to $3.7 million at December 31, 2023. The average rate on the interest-bearing balances was 5.34% for 2024.

The Company’s investment securities portfolio had a book balance of $961 million at December 31, 2024, and $1.3 billion at December 31, 2023. The Company carries “available for sale” investments at their fair market values and “held to maturity” investments at amortized cost. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable. The expected effective duration was 1.47 years for available-for-sale investments and 5.98 years for held-to-maturity investments at December 31, 2024, as compared to 1.39 years for available-for-sale investments and 5.92 years for held-to-maturity investments at December 31, 2023. In early 2024, the Company initiated a strategic securities transaction by selling $196.7 million of bonds. These securities were identified as an intent to be sold at December 31, 2023. This transaction realized a $14.5 million loss in the fourth quarter of 2023. The

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average yield on these bonds was 2.61% and the proceeds were used to paydown short-term borrowings at an average rate of 5.52%. In the first quarter of 2024, the Company sold an additional $53.8 million in bonds, at a loss of $2.9 million. Both transactions were part of our strategic balance sheet restructuring and increased our earnings stream in 2024 by increasing net interest income as interest expense on borrowed funds was reduced by more than the reduction in interest income on the securities sold.

The following Investment Portfolio table reflects the carrying amount for each primary category of investment securities for the past three years:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Investment Portfolio ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​ ​ As of December 31,

​ Carrying Amount Percent Carrying Amount Percent Carrying Amount Percent

Available for sale ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Held to maturity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Based on an analysis of its available for sale securities with unrealized losses as of December 31, 2024, and December 31, 2023, the Company determined their decline in value was unrelated to credit loss and was primarily the result of interest rate changes and market spreads subsequent to acquisition. The fair value of debt securities is expected to recover as payments are received and the debt securities approach maturity.

The following points outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of December 31, 2024, and December 31, 2023 was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.

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In addition, the Company determined there was a $0.02 million credit loss expected on the held-to-maturity debt securities portfolio at both December 31, 2024, and December 31, 2023, which was recorded as an allowance for credit losses on held-to-maturity securities.

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 $403.4 million at December 31, 2024 and $551.5 million at December 31, 2023, leaving $558.1 million in unpledged debt securities at December 31, 2024 and $787.8 million in unpledged debt securities at December 31, 2023. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $242.2 million at December 31, 2024, and $383.0 million at December 31, 2023.

The table below groups the Company’s investment securities by their remaining time to maturity as of December 31, 2024, and provides weighted average yields for each segment.

Maturity and Yield of Held-to-Maturity Investment Portfolio

(dollars in thousands)

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

​ Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield

Held to maturity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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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 FRBSF 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 $79.6 million, or 2% of total assets at December 31, 2024, and $73.7 million, or 2% of total assets at December 31, 2023. The average balance of non-earning cash and due from banks, which can be used to determine trends, was $49.8 million for 2024, $80.8 million for 2023 and $79.3 million for 2022.

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

​

The net book value of the Company’s premises and equipment was 0.4% of total assets at December 31, 2024, and 0.5% of total assets at December 31, 2023. Depreciation and amortization included in occupancy and equipment expense totaled $1.9 million in 2024 and $2.2 million in 2023.

In January 2024, the Company sold two Bank owned buildings with a book value of $0.7 million, for a gain of $3.8 million and in December 2023, the Company sold 11 Bank owned branch buildings with a book value of $5.6 million, for a gain on sale of $15.3 million. These branch buildings were subsequently leased back to the Company and are reflected in footnote 6 of the Financial Statements.

Other Assets

Goodwill totaled $27.4 million at December 31, 2024, unchanged for the year and other intangible assets were $0.6 million, a decrease of $0.8 million, or 57%, as a result of amortization expense recorded on core deposit intangibles. The

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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, 2024.

The net cash surrender value of bank-owned life insurance policies increased to $53.2 million at December 31, 2024, from $51.6 million at December 31, 2023, due to the favorable fluctuation in the underlying values of assets in the separate account BOLI policy. Refer to the “Noninterest Revenue and Operating Expense” section above for a more detailed discussion of BOLI and the income/expense it generates.

The remainder of other assets consists primarily of right-of-use assets tied to operating leases, accrued interest receivable, deferred taxes, investments in bank stocks, prepaid assets, investments in low-income housing credits, investments in SBA loan funds, and other miscellaneous assets. The total operating lease right-of-use asset recorded on the books is $34.4 million less accumulated amortization of $6.6 million. The bank stocks include Pacific Coast Bankers Bank (PCBB) stock (marked to market value annually) and restricted stock related to the Federal Home Loan Bank of San Francisco (FHLB SF) stock held in conjunction with our FHLB borrowings. Both the PCBB and FHLB SF stock 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 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,

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​

Deposit balances reflected an increase of $130.4 million, or 5%, in 2024 and a decline of $84.9 million, or 3%, in 2023. The 2024 increase was mostly from brokered deposits as the Company primarily relies on brokered deposits to incrementally fund mortgage warehouse lending. The 2023 decline in deposits came primarily from a $175.1 million decrease in transaction accounts, an $80.4 million decrease in savings and money market accounts offset by an increase in

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customer time deposit balances of $155.5 million as customers moved their funds to higher interest-bearing type accounts and a $15.0 million increase in wholesale brokered deposits.

In 2024, noninterest bearing demand deposit balances declined $13.6 million, or 1%; while interest-bearing NOW and demand accounts increased by $53.8 million, or 10% , as customers again sought a higher rate on a portion of their deposits. Overall non-maturity deposits increased by $12.0 million, or 1%, to $2.1 billion at December 31, 2024.

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, with a focus on small business and consumer deposits.

The following table presents the estimated deposits exceeding the FDIC insurance limit:

​ ​ ​ ​ ​ ​ ​

Estimated Uninsured Deposits ​ ​ ​ ​ ​ ​

(dollars in thousands) ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

​

Included in the above, the estimated aggregate amount of time deposits in excess of the FDIC insurance limit is $148.3 million. The following table presents the maturity distribution of the estimated uninsured time deposits:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​

See Liquidity and Market Risk Management below in this 10-K for a discussion on liquidity management the Company maintains to meet liquidity needs under unusual conditions such as uncommon deposit outflows of uninsured deposits.

​

Other Borrowings

The Company’s non-deposit other borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the FRB, and securities sold under agreements to repurchase. In addition, the Company has long-term debt and 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.

Other borrowings decreased $280.5 million, or 78%, in 2024, due primarily to decreases in higher-cost short-term borrowings as a result of the overall balance sheet restructuring in early 2024. In early 2024, the Company sold approximately $233.2 million in bonds and used the proceeds to pay down overnight and short-term advances. At December 31, 2024,the Company had no overnight fed funds purchased, or short-term FHLB advances, compared to $130.0 million in overnight fed funds purchased and $150.5 million in short-term FHLB advances, respectively, at December 31, 2023. Long-term FHLB borrowings were $80 million at both December 31, 2024, and December 31, 2023.

Repurchase agreements totaled $108.9 million at year-end 2024 relative to a balance of $107.1 million at year-end 2023. 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 $35.8 million at December 31, 2024, and $35.7 million December 31, 2023, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities. The

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small increase resulted from the amortization of discount on junior subordinated debentures that were part of our acquisition of Coast Bancorp in 2016. Long term subordinated debt was $49.4 million at December 31, 2024, as compared to $49.3 million for the year ended December 31, 2023. The small increase resulted from the amortization of debt issuance costs.

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 ​ ​ ​ ​ ​ ​ ​ ​ ​

Average interest rate for the year ​ ​ 0.17% ​ ​ 0.27% ​ ​ 0.29%

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Fed funds purchased ​ ​ ​ ​ ​ ​ ​ ​ ​

Maximum amount outstanding at any month end ​ $ — ​ $ 165,000 ​ $ 125,000

Average interest rate for the year ​ ​ 6.56% ​ ​ 5.25% ​ ​ 4.08%

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

FHLB advances ​ ​ ​ ​ ​ ​ ​ ​ ​

Average interest rate for the year ​ ​ 5.46% ​ ​ 5.40% ​ ​ 3.44%

​

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 increased by $13.1 million, or 17%, during 2024. The primary reason for this increase was due to committed funds to a new Low Income Housing Tax Credit (LIHTC) Fund. Additionally, there was an increase in operating lease liabilities stemming from the sale leaseback transaction of two Bank-owned buildings discussed in “Premises and Equipment.”

Capital Resources

The Company had total shareholders’ equity of $357.3 million at December 31, 2024, as compared to $338.1 million at December 31, 2023. The increase of $19.2 million, or 6%, is due to $40.6 million in net income and a $4.7 million favorable swing in accumulated other comprehensive income (loss) partially offset by $13.6 million in dividends paid, and $15.0 million in share repurchases. The remaining difference was related to stock options exercised and restricted stock activity during the year.

The Company uses a variety of measures to evaluate its capital adequacy, including the community bank leverage ratio, which 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 ​ 10.93% ​ 9.00%

​ ​ ​ ​ ​

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

Sierra Bancorp and subsidiary ​ 10.32% ​ 9.00%

​

At the end of 2024, as our Community Bank Leverage Ratio exceeded 9.0%, 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. 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 16 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.

The Company also looks at the double leverage ratio, which is a measure of the reliance on the holding company’s borrowings that are injected into the subsidiary Bank as capital. As holding company borrowings are primarily serviced by the receipt of dividends from the subsidiary Bank, this ratio is monitored as well as cash at the holding company for purposes of servicing the cash needs at the holding company level. This ratio is calculated by dividing subsidiary Bank capital by the holding company/consolidated capital. The Company generally maintains a double leverage ratio of under 125%. The double leverage ratio was 118.8% at December 31, 2024, as compared to 121.2% at December 31, 2023.

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 quarterly basis, with various stress scenarios applied to assess our ability to meet liquidity needs under unusual or adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored, and we are committed to maintaining adequate liquidity resources to draw upon should unexpected needs arise.

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet 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 $1.1 billion at December 31, 2024. The Company was also eligible to borrow approximately $298.3 million at the Federal Reserve Discount Window based on pledged assets at December 31, 2024. 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

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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, 2024, unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $794.3 million of the Company’s investment balances, as compared to $1.2 billion at December 31, 2023. 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 $127.9 million at December 31, 2024. 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.

At December 31, 2024, and December 31, 2023, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

​ ​ ​ ​ ​ ​ ​

Funds available through fed discount window ​ ​ 298,296 ​ ​ 392,034

​

The Company’s primary liquidity ratio and net loans to deposits ratio was 21% and 81%, respectively, at December 31, 2024, as compared to internal policy guidelines of “greater than 15%” and “less than 95%.” Other liquidity ratios reviewed periodically by Management and the Board include the Community Bank leverage ratio, net change in overnight position and wholesale funding to total assets (including ratios and sub-limits for the various components comprising wholesale funding). All ratios were within policy guidelines at December 31, 2024. Management closely watches all Company liquidity metrics and will take appropriate action if deemed necessary.

The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, debt servicing, 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. At December 31, 2024, the holding company maintained a cash balance of $13.1 million. Management anticipates 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.

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

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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 eight 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, 300, and 400 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. 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 10% for a 100 basis point (bp) interest rate shock, 15% for a 200 bp shock, 20% for a 300 bp shock, and 25% 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 (dollars in thousands):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Base ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

The instantaneous rate shock simulation for the period ending December 31, 2024, indicates that the Company is asset sensitive, with net interest income increasing in rising rate scenarios and declining in decreasing rate scenarios, with a continued drop in interest rates having the most substantial negative impact. The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at December 31, 2024, as compared to December 31, 2023, is due mostly to the decrease in the level of overnight borrowings both in Fed Funds purchased and overnight FHLB borrowings, which had an average rate of 5.52%. The decrease in these borrowings was facilitated by the sale of bonds in late 2023 and early 2024 having an average book yield of 2.61%. In addition, adding to our asset sensitivity, utilization on variable rate mortgage warehouse lines increased, $210.4 million, at December 31, 2024. The Company had approximately $311.6 million of unfunded mortgage warehouse lines at December 31, 2024. If rates decrease, it would be expected that a significant portion of the unfunded mortgage warehouse lines would become funded and thereby, mitigate the impact of lower rates on the balance sheet through higher utilization.

The instantaneous rate shock simulation for the period ending December 31, 2023, indicates that the Company was asset sensitive, with net interest income increasing in rising rate scenarios and declining in decreasing rate scenarios, with a continued drop in interest rates having the most substantial negative impact. The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at December 31, 2023, as compared to December 31, 2022, is due mostly to the decrease in the level of overnight borrowings both in Fed Funds purchased and overnight FHLB borrowings. In addition, adding to our asset sensitivity, variable rate investment securities in the form of CLOs increased $72.3 million along with a change in the mix of fixed rate versus variable rate loans in 2023 as compared to 2022. At December 31, 2023, the Company had $155.0 million in overnight borrowings as compared to $219.0 million in overnight borrowings at December 31, 2022. The securities strategy enabled most of the overnight borrowings to be paid off in early January 2024, as mentioned earlier. The Company has approximately $204.5 million of unfunded mortgage warehouse lines at December 31, 2023.

​

In addition to the instantaneous 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

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most recent economic cycle, and unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas). These stress tests are run primarily to determine what factors create the most risk to net interest income. When no balance sheet growth is incorporated and a stable interest rate environment is assumed, projected annual net interest income is about $9.4 million lower, or 7% than in our standard simulation. However, the stressed simulations reveal that the Company’s greatest potential pressure on net interest income would result from the declining rate scenarios, in which our net interest income could reduce by 11% in the event of a 300 basis point downward shock.

​

In addition to the stress tests, management also models scenario testing where rates are shocked gradually (i.e., a rate ramp) as well as three scenarios with the short-term and long-term rate curves moving in a non-parallel manner. These non-parallel scenarios include a bear flattener forecast with overnight rates moving up faster than the 10-Year Treasury, a bull flattener where the overnight rates stay the same and long-term rates fall, and a generally accepted economic forecast where overnight and 10-year rates change based on current economic forecasts. The rate ramp shows the Company as being less asset sensitive with less than a 1% increase in net interest income in a rising rate environment and less than half of the decline in a falling rate scenario. For the non-parallel scenarios, net interest income remains at or above the base case scenario of no rate changes. In other words, based on current economic forecasts, there would not be a significant change in net interest income as compared to our base case scenario.

​

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’ report listed below are included herein:

​ ​ Page

​ ​ ​ ​

​ ​ ​ ​

III. Consolidated Balance Sheets – December 31, 2024 and 2023 ​ 67

​ ​ ​ ​

​ ​ ​ ​

​ ​ ​ ​

​ ​ ​ ​

​ ​ ​ ​

VIII. Notes to Consolidated Financial Statements ​ 73

​

​

​

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Sierra Bancorp and Subsidiary

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sierra Bancorp and its subsidiary (the Company) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2024, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 3, 2025, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the 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 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.

Critical Audit Matters

The critical audit matter communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our 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 matters or on the accounts or disclosures to which it relates.

​

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Allowance for Credit Losses—Loans

As described in Notes 2 and 4 to the financial statements, the Company’s allowance for credit losses totaled $24.8 million as of December 31, 2024. The allowance for credit losses represents principal which is not expected to be collected over the contractual life of the loans, adjusted for expected prepayment.

​

The allowance for credit losses for loans consists of a collective reserve evaluation for loans with similar risk characteristics and an individual reserve evaluation for loans without similar risk characteristics. The allowance for the collective reserve evaluation is derived from an estimate of expected loan losses primarily using an expected loss methodology that incorporates certain risk characteristics using either the remaining life or discounted cash flow (DCF) methodology depending on the loan portfolio segment.

​

The discounted cash flow quantitative reserve methodology incorporates the consideration of probability of default (PD) and loss given default (LGD) assumptions to estimate periodic losses, and LGD is derived from the application of the Frye-Jacobs theory which relates LGD to PD based on historical peer data. The Company uses a regression analysis that links historical losses of the Company and its peer group to national unemployment rates, along with real growth domestic product or the housing price index in order to calculate expected default rates. The expected default rates are then applied to expected monthly loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The Company utilizes a four-quarter forecast period, after which the expected default rates revert to the historical average over a four-quarter reversion period on a straight-line basis.

​

For the remaining life quantitative reserve method, the Company’s and peer group’s average historical losses are used to determine the loss rates, and the loss rates are applied to expected loan balances over an estimated remaining life of loans. The estimated remaining life is calculated using the Company’s historical attrition data. Reasonable and supportable forecasts of the national unemployment rate, real growth domestic product and the housing price index are considered through estimation of qualitative reserves on portfolios using the remaining life method.

​

The quantitative estimates are adjusted to incorporate considerations of current and expected conditions that are not captured in the quantitative credit loss estimates through the use of qualitative factors. The qualitative reserve is calculated using a combination of numeric frameworks and management judgment to determine risk categorizations in each of the qualitative factors. The amount of qualitative reserves is also contingent upon the historical peer, life-of-loan equivalent, loss rate ranges and the relative weighting of qualitative factors according to management’s judgment.

​

The estimation of the allowance for credit losses involves many inputs and assumptions. These inputs and assumptions include, among others, the selection, evaluation and measurement of the reasonable and supportable forecasts and the qualitative factors discussed above, which require management to apply judgment and that are subject to change as forecasted economic events or internal assessments evolve.

​

We identified the determination and evaluation of the economic forecasts and qualitative factors of the allowance for credit losses as a critical audit matter because auditing the underlying assumptions and evaluation of the economic forecasts and qualitative factors used in the allowance for credit losses involved a degree of complexity and high degree of auditor judgment.

​

Our audit procedures related to management’s evaluation and establishment of the economic forecasts and qualitative factors in the allowance for credit losses included the following, among others:

​

​

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​

​

​

​

​

/s/ RSM US LLP

We have served as the Company’s auditor since 2023.

Las Vegas, Nevada

March 3, 2025

​

​

​

​

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Report of Independent Registered Public Accounting Firm

​

To the shareholders and Board of Directors

Sierra Bancorp and Subsidiary

Porterville, California

​

Opinion on the Consolidated Financial Statements

​

We have audited the accompanying consolidated balance sheet of Sierra Bancorp and Subsidiary (the “Company”) as of December 31, 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022, and the consolidated results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

​

Basis for Opinion

​

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 audit 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 consolidated financial statements are free of material misstatement, whether due to error or fraud.

​

Our audit included performing procedures to assess the risks of material misstatement of the consolidated 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 audit 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. We believe that our audit provides a reasonable basis for our opinion.

​

​

​

​

​

We served as the Company’s auditor from 2004 to 2022. Such date incorporates the acquisition of certain assets of Vavrinek, Trine, Day & Co., LLP, by Eide Bailly LLP in 2019.

​

San Ramon, California

March 9, 2023

​

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SIERRA BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2024 and 2023

(dollars in thousands)

​ ​ ​ ​ ​ ​ ​

ASSETS ​ ​ ​ ​ ​ ​

Interest-bearing deposits in banks ​ ​ 21,048 ​ ​ 4,881

Investment securities ​ ​ ​ ​ ​ ​

Loans: ​ ​ ​ ​ ​ ​

Deferred loan costs, net ​ ​ 93 ​ ​ 309

Allowance for credit losses on loans ​ ​ (24,830) ​ ​ (23,500)

Other intangible assets, net ​ ​ 618 ​ ​ 1,399

LIABILITIES AND SHAREHOLDERS' EQUITY ​ ​ ​ ​ ​ ​

Deposits: ​ ​ ​ ​ ​ ​

Allowance for credit losses on unfunded loan commitments ​ ​ 710 ​ ​ 510

Commitments and contingent liabilities (Note 14) ​ ​ ​ ​ ​ ​

Shareholders' equity ​ ​ ​ ​ ​ ​

Additional paid-in capital ​ ​ 4,509 ​ ​ 4,581

Accumulated other comprehensive loss ​ ​ (31,257) ​ ​ (35,980)

​

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, 2024, 2023 and 2022

(dollars in thousands, except per share data)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest and dividend income ​ ​ ​ ​ ​ ​ ​ ​ ​

Federal funds sold and other ​ ​ 2,659 ​ ​ 1,054 ​ ​ 519

Interest expense ​ ​ ​ ​ ​ ​ ​ ​ ​

Federal funds purchased and repurchase agreements ​ ​ 462 ​ ​ 5,219 ​ ​ 1,012

Federal Home Loan Bank advances ​ ​ 3,812 ​ ​ 9,342 ​ ​ 1,057

Credit loss expense (benefit) - unfunded commitments ​ ​ 200 ​ ​ (330) ​ ​ (294)

Noninterest income ​ ​ ​ ​ ​ ​ ​ ​ ​

Net gains (losses) on sale of fixed assets ​ ​ 3,783 ​ ​ 15,270 ​ ​ (8)

Noninterest expense ​ ​ ​ ​ ​ ​ ​ ​ ​

Earnings per share ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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

​

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SIERRA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Years Ended December 31, 2024, 2023 and 2022

(dollars in thousands, except footnotes)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive gain (loss), before tax ​ ​ ​ ​ ​ ​ ​ ​ ​

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

Other comprehensive gain (loss), before tax ​ ​ 6,705 ​ ​ 29,244 ​ ​ (96,176)

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, 2024, 2023 and 2022

(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 ​ — ​ ​ — ​ ​ — ​ ​ 33,659 ​ ​ — ​ ​ 33,659

Restricted stock granted ​ 70,465 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Restricted stock forfeited / cancelled ​ (1,872) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Stock based compensation - stock options ​ — ​ ​ — ​ ​ 84 ​ ​ — ​ ​ — ​ ​ 84

Cash dividends - $0.92 per share ​ — ​ ​ — ​ ​ — ​ ​ (13,919) ​ ​ — ​ ​ (13,919)

Net Income ​ — ​ ​ — ​ ​ — ​ ​ 34,844 ​ ​ — ​ ​ 34,844

Other comprehensive gain, net of tax ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 20,596 ​ ​ 20,596

Restricted stock granted ​ 129,904 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Restricted stock forfeited / cancelled ​ (6,033) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Restricted stock vested in period ​ — ​ ​ 1,316 ​ ​ (1,316) ​ ​ — ​ ​ — ​ ​ —

Stock based compensation - stock options ​ — ​ ​ — ​ ​ 69 ​ ​ — ​ ​ — ​ ​ 69

Excise tax on stock repurchases ​ — ​ ​ (79) ​ ​ — ​ ​ — ​ ​ — ​ ​ (79)

Cash dividends - $0.92 per share ​ — ​ ​ — ​ ​ — ​ ​ (13,714) ​ ​ — ​ ​ (13,714)

Net Income ​ — ​ ​ — ​ ​ — ​ ​ 40,560 ​ ​ — ​ ​ 40,560

Other comprehensive gain, net of tax ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 4,723 ​ ​ 4,723

Restricted stock granted ​ 48,724 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ —

Restricted stock forfeited / cancelled ​ (27,982) ​ ​ — ​ ​ — ​ ​ ​ ​ ​ — ​ ​ —

Restricted stock vested in period ​ — ​ ​ 1,766 ​ ​ (1,766) ​ ​ — ​ ​ — ​ ​ —

Stock based compensation - stock options ​ — ​ ​ — ​ ​ 32 ​ ​ — ​ ​ — ​ ​ 32

Excise tax on stock repurchases ​ — ​ ​ (32) ​ ​ — ​ ​ — ​ ​ — ​ ​ (32)

Cash dividends - $0.94 per share ​ — ​ ​ — ​ ​ — ​ ​ (13,634) ​ ​ — ​ ​ (13,634)

​

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

​

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SIERRA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2024, 2023 and 2022

(dollars in thousands)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

Loss (gain) on sales of securities ​ ​ 2,681 ​ ​ (396) ​ ​ (1,487)

Realized (gain) loss on available-for-sale securities ​ ​ (66) ​ ​ 14,500 ​ ​ —

(Gain) loss on disposal of fixed assets ​ ​ (3,783) ​ ​ (15,270) ​ ​ 8

Gain on sale of foreclosed assets ​ ​ — ​ ​ — ​ ​ (8)

Writedown of foreclosed assets ​ ​ — ​ ​ — ​ ​ 91

Stock based compensation expense ​ ​ 1,956 ​ ​ 1,749 ​ ​ 1,284

Amortization of core deposit intangible ​ ​ 781 ​ ​ 876 ​ ​ 1,000

Deferred income tax provision (benefit) ​ ​ 4,028 ​ ​ (2,343) ​ ​ 311

Decrease in equity securities ​ ​ 293 ​ ​ 291 ​ ​ 332

Net amortization of partnership investment ​ ​ 1,942 ​ ​ 661 ​ ​ 451