SIERRA BANCORP

Sierra Bancorp operates as a bank holding company for Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offering retail and commercial banking services via branch offices throughout California's South San Joaquin Valley, the Central Coast, Ventura County, and neighboring communities. The banking business in California is generally highly competitive, with continued consolidation within the banking industry heightening competition. According to the FDIC's June 30, 2025 combined market share data, the largest portion of combined total deposits in the 27 cities where the Company currently maintains branches belongs to Wells Fargo Bank (18.9%), Bank of America (16.4%), JPMorgan Chase (16.2%), and U.S. Bank (6.4%).

Bank of the Sierra ranked fifth, with 5.4% of total deposits in the 27 cities where the Company maintains branches. In the Bank's primary market and headquarters location of Tulare County, however, it ranked first for deposit market share, with 21.6% of total deposits at June 30, 2025 ¹, and had the largest number of branch locations at 13 ². The Company counters rising competition by offering a broad array of products with flexibility in structure and terms, community-oriented personalized service, local promotional activity, and technology-driven initiatives to improve customer access and convenience.

The Company generates revenue primarily through making loans and accepting deposits. Lending activities cover real estate, commercial (including small business), mortgage warehouse, agricultural, and consumer loans. Interest, fees, and other income on real estate secured loans, the largest segment of the portfolio, totaled $90.7 million ³, or 61% of net interest plus other income in 2025. The Company also offers a wide range of deposit products and services for individuals and businesses, including checking accounts, savings accounts, money market demand accounts, time deposits, retirement accounts, and sweep accounts.

The loan portfolio is segmented into four principal types: loans secured by real estate (72.0%) ⁴, mortgage warehouse loans (20.3%) ⁵, other commercial loans including agricultural production and SBA loans (7.6%) ⁶, and consumer loans (0.1%) ⁷. Gross loans totaled $2.5 billion ⁸ at December 31, 2025. Within real estate loans, commercial buildings represented approximately 75.9% ⁹ of all real estate loans, construction/development and land loans were 0.8% ¹⁰, loans secured by residential properties accounted for 21.0% ¹¹, and loans secured by farmland were 3.7% ¹² of real estate loans. The Company had two loan categories considered concentrations: commercial real estate loans constituted 54.6% ¹³ of total gross loans, with segments in retail (12.1%) ¹⁴, office space (5.9%) ¹⁵, and hospitality (9.4%) ¹⁶; mortgage warehouse made up 20.4% ¹⁷ of total gross loans.

The Company's deposit products include checking accounts, savings accounts, money market demand accounts, time deposits, retirement accounts, and sweep accounts. At December 31, 2025, the Company had 116,570 ¹⁸ deposit accounts, down from 119,388 ¹⁹ at December 31, 2024. Total deposits were $2.9 billion ²⁰ at December 31, 2025, relatively unchanged from the prior year. The Bank estimates it had uninsured deposits of $703 million ²¹, or 25% ²² of total deposits at December 31, 2025. The Bank offers accounts providing multi-million-dollar FDIC insurance using the IntraFi network through the Insured Cash Sweep or Certificate of Deposit Account Registry System.

The Company had consolidated assets of $3.8 billion ²³ (including gross loans of $2.5 billion ²⁴), liabilities totaling $3.5 billion ²⁵ (including deposits of $2.9 billion ²⁶), and shareholders' equity of $364.9 million ²⁷ at December 31, 2025. Liabilities include $36.0 million ²⁸ in debt obligations due to its trust subsidiaries related to TruPS. The Company had 436 ²⁹ full-time and 33 ³⁰ part-time employees at December 31, 2025, with staffing at 465 ³¹ on a full-time equivalent basis, a decrease of 20 ³² FTE from December 31, 2024. The Company repurchased shares under a share repurchase plan during the period. Donations through the Sierra Grant program totaled $630,000 ³³ in 2025, raising total donations since the program's inception 20 years ago to more than $5.4 million ³⁴. The Company planted a total of 30,092 ³⁵ trees since its partnership with One Tree Planted began.

For the fiscal year ended December 31, 2025, the Company's net interest income and overall profitability were influenced by interest rate volatility and competitive pressures. The Company had total net other comprehensive gains of $8.1 million ³⁶, net of tax, primarily as a result of a decline in unrealized losses in the securities portfolio. The Company's nonperforming assets balance was $14.8 million ³⁷ at December 31, 2025, comprised primarily of two agricultural relationships totaling $13.0 million ³⁸ and a single other real estate owned property of $1.6 million ³⁹.

The Company continues to focus on organic growth within its existing markets, supported by technology-driven initiatives to improve customer access and convenience, including an online account opening platform, online banking with bill-pay and mobile banking capabilities including mobile check deposit, and online lending solutions for consumers and small businesses. The Company also seeks to grow through the recruitment of diversified lending teams and specialized support personnel including underwriters and portfolio managers to manage commercial real estate concentrations and identify emerging risks in the loan portfolio.

The Company is investing in technology infrastructure to enhance customer delivery channels, including remote deposit capture and payroll services, and maintains ATMs at all but one branch location and at six non-branch locations. The Bank is a member of the Allpoint network, providing deposit customers with surcharge-free access to over 55,000 ATMs across the United States, Puerto Rico, Mexico, Canada, Australia, and the United Kingdom. Customers also have access to electronic point-of-sale payment alternatives nationwide via the Pulse network.

The Company continues to face margin pressure from elevated interest rates and competition for deposits, which has become more fierce in a higher rate environment, with new deposits generally having a higher cost. The Company's efforts to comply with government and regulatory mandates related to consumer protection and privacy, anti-money laundering, and other focus areas have resulted in significant ongoing Bank expense, including for compliance staffing and compliance-related software.

The Company maintains a comprehensive compensation and benefits program to attract and retain talent, including an equity-based compensation plan, health/dental/vision insurance, a 401(k) plan with eligibility for a Company match, and training/education support. The Company continues to offer entry-level employees a minimum wage higher than the California minimum wage and maintains a minimum salary for exempt employees of twice the California minimum wage. The Company had 55 employees working remotely and 141 working in hybrid arrangements at December 31, 2025 ⁴⁰.

The Company's capital allocation strategy includes maintaining capital adequacy under the community bank leverage ratio framework, with the Company and the Bank qualifying as well capitalized for regulatory capital purposes at December 31, 2025 and 2024. The Company has a share repurchase plan in place and pays dividends, though specific authorization amounts and dividend policy figures are not detailed in the filing beyond the share repurchase activity noted in the operational developments.

The Company faces structural headwinds from the highly competitive banking environment in California, including competition from major banks with greater lending limits and economies of scale, as well as from non-banking institutions such as finance companies, leasing companies, insurance companies, brokerage firms, asset management groups, mortgage banking firms, and fintech companies. The Company also faces risks from potential labor shortages, tariffs, natural disasters, and demand for products produced in its markets that could affect local economies.

The Company is subject to regulatory constraints including the potential for higher FDIC deposit insurance premiums, compliance with the Community Reinvestment Act, and evolving consumer protection regulations. The Company is monitoring the impact of Section 1071 of the Dodd-Frank Act requiring data collection on credit applications for women-owned, minority-owned, and small businesses, with compliance required by October 2027 and filing by June 2028. The Company also faces risks from potential changes to overdraft fee regulations, though the Bank does not charge customers for nonsufficient fund fees and limits daily overdraft fees to four per day.

The Company faces material risks from its concentration in commercial real estate loans, which constituted 54.6% ⁴¹ of total gross loans at December 31, 2025, with office properties particularly stressed by interest rate increases and rising vacancies; $30.9 million ⁴², or 20.1% ⁴³, of office real estate loans have the ability to reprice in the next three years. The agricultural industry poses significant risk given the Company's Central California footprint, with two agricultural relationships totaling $13.0 million ⁴⁴ comprising the majority of nonperforming assets. The Company's exposure to borrowers involved in servicing oil companies totaled $110.0 million ⁴⁵ at December 31, 2025, concentrated in Kern County where a drop in oil prices could lead to declines in property values. The Company estimates it had $703 million ⁴⁶, or 25% ⁴⁷, of uninsured deposits at December 31, 2025, which could be vulnerable to withdrawal in a crisis of confidence. Elevated interest rates since 2022 have decreased the value of the Company's held-to-maturity and available-for-sale securities portfolio and certain fixed-rate loans, and the Company would realize losses if required to sell securities or loans originated prior to 2022 to meet liquidity needs.

Management's message emphasizes the Company's position as a community bank focused on relationship-based banking, supported by technology-driven initiatives to improve customer access and convenience. Key strategic priorities include managing commercial real estate concentrations through enhanced underwriting and risk management practices, maintaining capital adequacy under the community bank leverage ratio framework, and investing in employee development and retention through competitive compensation and benefits programs. Management highlights the Company's strong deposit market share position in Tulare County at 21.6% ⁴⁸ and its ranking as fifth in combined total deposits across its 27 branch cities with 5.4% ⁴⁹ market share.