15. REGULATORY MATTERS

The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The net unrealized loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2019, the Company and the Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end December 31, 2019 and 2018, notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

Actual and required capital amounts (in thousands) and ratios are presented below at year end.


	2019			2018
	Capital Amount		Ratio	Capital Amount		Ratio
Leverage Ratio
Sierra Bancorp and subsidiary	$	306,744	11.91%	$	282,484	11.49%
Minimum requirement for "Well-Capitalized" institutions		128,769	5.0%		122,962	5.0%
Minimum regulatory requirement		103,016	4.0%		98,370	4.0%

Bank of the Sierra	$	301,963	11.73%	$	280,184	11.39%
Minimum requirement for "Well-Capitalized" institutions		128,753	5.0%		140,092	5.0%
Minimum regulatory requirement		103,002	4.0%		98,364	4.0%


	2019			2018
	Capital Amount		Ratio	Capital Amount		Ratio
Common Equity Tier 1 Capital Ratio
Sierra Bancorp and subsidiary	$	271,799	13.27%	$	247,717	12.61%
Minimum requirements for "Well-Capitalized" institutions		133,095	6.5%		127,709	6.5%
Minimum regulatory requirement		92,143	4.5%		88,414	4.5%

Bank of the Sierra	$	301,963	14.75%	$	280,184	14.25%
Minimum requirements for "Well-Capitalized" institutions		133,077	6.5%		127,776	6.5%
Minimum regulatory requirement		92,130	4.5%		88,461	4.5%

Tier 1 Risk-Based Capital Ratio
Sierra Bancorp and subsidiary	$	306,744	14.98%	$	282,484	14.38%
Minimum requirement for "Well-Capitalized" institutions		163,809	8.0%		157,181	8.0%
Minimum regulatory requirement		122,857	6.0%		117,885	6.0%

Bank of the Sierra	$	301,963	14.75%	$	280,184	14.25%
Minimum requirement for "Well-Capitalized" institutions		163,787	8.0%		157,263	8.0%
Minimum regulatory requirement		122,840	6.0%		117,947	6.0%

Total Risk-Based Capital Ratio
Sierra Bancorp and subsidiary	$	316,981	15.48%	$	292,618	14.89%
Minimum requirement for "Well-Capitalized" institutions		204,762	10.0%		196,476	10.0%
Minimum regulatory requirement		163,809	8.0%		157,181	8.0%

Bank of the Sierra	$	312,200	15.25%	$	290,318	14.77%
Minimum requirement for "Well-Capitalized" institutions		204,734	10.0%		196,579	10.0%
Minimum regulatory requirement		163,787	8.0%		157,263	8.0%

Under current rules of the Federal Reserve Board, qualified trust preferred securities are one of several “restricted” core capital elements which may be included in Tier 1 capital in an aggregate amount limited to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. Since the Company had less than $15 billion in assets at December 31, 2019, under the Dodd-Frank Act the Company will be able to continue to include its existing trust preferred securities in Tier 1 Capital to the extent permitted by FRB guidelines.

Dividend Restrictions

The Company’s ability to pay cash dividends is dependent on dividends paid to it by the Bank, and is also limited by state corporation law. California law allows a California corporation to pay dividends if the company’s retained earnings equal at least the amount of the proposed dividend plus any preferred dividend arrears amount. If a California corporation does not have sufficient retained earnings available for the proposed dividend, it may still pay a dividend to its shareholders if immediately after the dividend the value of the company’s assets would equal or exceed the sum of its total liabilities plus any preferred dividend arrears amount.

Dividends from the Bank to the Company are restricted under California law to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the Department of Business Oversight, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of December 31, 2019, the maximum amount available for dividend distribution under this restriction was approximately $48,956,000.