What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-16 · 257 added, 175 removed, 472 unchanged (48% of the section changed)

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● the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses;

● changes in economic conditions in general and in California, Colorado, New Mexico and Washington;

● changes in economic conditions in general and in California, Colorado, New Mexico and Washington specifically, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions;

● changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates;

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We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank.

At March 31, 2022, the Company had approximately $2.8 billion in total assets, $2.0 billion in total loans, $2.3 billion in total deposits and $324.7 million in shareholders’ equity.

At June 30, 2022, the Company had approximately $2.7 billion in total assets, $2.0 billion in total loans, $2.3 billion in total deposits and $320.6 million in shareholders’ equity.

We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth.

At March 31, 2022, our $2.0 billion total loan portfolio included $349.8 million or 17.5 %, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.7 billion, or 82.5%, consisted of loans we originated.

At June 30, 2022, our $2.0 billion total loan portfolio included $330.3 million, or 16.5 %, of acquired loans (all of which were recorded to their estimated fair values at the time of acquisition), and the remaining $1.7 billion, or 83.5%, consisted of loans we originated.

The profitability of our operations depends primarily on our net interest income after provision for loan losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for loan losses.

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Immediately following the Merger, Pacific Enterprise Bank, a wholly-owned subsidiary of PEB, merged with and into United Business Bank, a wholly-owned subsidiary of BayCom (the “Bank Merger”), with United Business Bank as the surviving bank in the Bank Merger.

For additional information regarding the Merger, see “Note 3 – Acquisitions” contained in the Notes to Condensed Consolidated Financial Statements included in “Item 1.

For additional information regarding the PEB Merger, see “Note 3 – Acquisitions” contained in the Notes to Condensed Consolidated Financial Statements included in “Item 1.

Financial Information” of Part I this report.

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Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period.

In March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve”) commenced increasing the target range for the federal funds rate by implementing a 25 basis point increase to a range of 0.25% to 0.50%.

In May 2022, the FOMC implemented a 50 basis point increase to a range of 0.75% to 1.00%.

The FOMC has indicated further increases are to be expected this year.

This recent March increase, however, had limited impact on the current quarter’s net interest margin as the change in rate occurred towards the end of the quarter.

During the second quarter of 2022, the FOMC increased the target range for the federal funds rate by an additional 125 basis points to a range of 1.50% to 1.75% and in July 2022, the FOMC enacted a second consecutive 75 basis point interest rate increase as it seeks to control inflation without creating a recession.

The increase in the average yield on interest-earning assets during the current quarter reflects the lagging benefit of variable rate interest-earnings assets beginning to reprice higher.

We believe our balance sheet is structured to enhance our net interest margin if the FOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent Federal Reserve communications and interest rate forecasts.

Noninterest income.

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and (iii) other noninterest income.

Gain on sale of loans includes income (or losses) from the sale of the guaranteed portion of SBA loans, capitalized loan servicing rights and other related income.

Gain on sale of loans includes income (or losses) from the sale of the guaranteed portion of Small Business Administration (“SBA”) loans, capitalized loan servicing rights and other related income.

Provision for loan losses.

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Additional consideration is given to our historical loan loss experience relative to our loan portfolio concentrations related to industry, collateral and geography.

analysis was also completed on the allowance for loan losses based on the significance of loan modifications in accordance with the Coronavirus Aid, Relief, and Economic Security Act of 2020 or CARES Act and regulatory guidance, loan risk rating downgrades as well as additional risk factors related to COVID-19.

Our evaluation of the allowance for loan losses is inherently subjective and requires estimates that are susceptible to significant change as additional or new information becomes available.

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Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

In situations where such PCI loans have similar risk characteristics, loans may be aggregated into pools to estimate cash flows.

In situations where such purchase credit impaired (“PCI”) loans have similar risk characteristics, loans may be aggregated into pools to estimate cash flows.

A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation.

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Any adverse changes in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our financial condition and results of operations.

As of December 31, 2021, the Company concluded that the goodwill of the Company’s reporting unit, the Bank, is not more likely than not to be impaired.

As of June 30, 2022, the Company concluded that the goodwill of the Company’s reporting unit, the Bank, is not more likely than not to be impaired.

BayCom’s Response to COVID-19

The Company maintains its commitment to supporting its community and clients during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its clients.

As of March 31, 2022, all Bank branches were open with normal hours and substantially all employees had returned to their normal working environments.

As of June 30, 2022, all Bank branches were open with normal hours and substantially all employees had returned to their normal working environments.

The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

Total assets.

Total assets increased $405.3 million, or 17.2%, to $2.8 billion at March 31, 2022, from $2.4 billion at December 31, 2021.

Total assets increased $327.3 million, or 13.9%, to $2.7 billion at June 30, 2022, from $2.4 billion at December 31, 2021.

The increase primarily was due to loans receivable, net, increasing $340.0 million, primarily due to loans acquired in the PEB Merger.

In addition, cash and cash equivalents increased $47.5 million or 12.5%, investment securities available for sale increased $10.2 million or 5.9% and other assets increased $9.3 million or 31.1%.

In addition, investment securities available for sale increased $2.9 million or 1.6% and other assets increased $12.9 million or 43.2%, partially offset by cash and cash equivalents decreasing $25.2 million or 6.6%.

Cash and cash equivalents.

Cash and cash equivalents increased $47.5 million, or 12.5%, to $427.2 million, at March 31, 2022, from $379.7 million at December 31, 2021.

The increase was primarily a result of loan repayments and an increase in total deposits, which exceeded the funds required for loan originations and used for purchases of investment securities.

Investment securities, all of which are classified as available-for-sale, increased $10.2 million, or 5.9%, to $184.7 million at March 31, 2022 from $174.4 million at December 31, 2021.

The increase was primarily due to the purchase of $22.7 million of investment securities during the three months ended March 31, 2022 partially offset by the routine amortization and repayment of investment principal balances and securities called and matured.

Cash and cash equivalents decreased $25.2 million, or 6.6%, to $354.5 million, at June 30, 2022, from $379.7 million at December 31, 2021.

The decrease primarily was due to $39.2 million decrease in the federal funds sold during six months ended June 30, 2022.

Investment securities, all of which are classified as available-for-sale, increased $2.9 million, or 1.6%, to $177.3 million at June 30, 2022 from $174.4 million at December 31, 2021.

The increase primarily was due to the purchase of $24.7 million of investment securities during the six months ended June 30, 2022, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured.

Loans receivable, net.

We originate a wide variety of loans with a focus on commercial real estate (“CRE”) loans and commercial and industrial loans.

Loans receivable, net of allowance for loan losses, increased $339.0 million, or 20.6%, to $2.0 billion at March 31, 2022 from $1.7 billion at December 31, 2021.

The increase was primarily due to $412.9 million of net loans acquired from PEB and $81.6 million of new loan originations, partially offset by $143.3 million of loan repayments, including $51.6 million in PPP loan repayments, and $10.9 million in loan sales.

Loans receivable, net of allowance for loan losses, increased $340.0 million, or 20.6%, to $2.0 billion at June 30, 2022 from $1.7 billion at December 31, 2021.

The increase primarily was due to $412.9 million of net loans acquired from PEB and $246.6 million of new loan originations, partially offset by $300.3 million of loan repayments, including $97.4 million in Paycheck Protection Program (“PPP”) loan repayments, and $15.1 million in loan sales.

The following table provides information about our loan portfolio by type of loan, with PCI loans presented as a separate balance, at the dates presented .

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Allowance for loan losses

(1) Includes $114.6 million and $69.6 million of PPP loans as of March 31, 2022 and December 31, 2021, respectively.

The increase from December 31, 2021 primarily reflects PPP loans acquired in the PEB Merger.

The following table shows as of March 31, 2022, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:

(1) Includes $68.8 million and $69.6 million of PPP loans as of June 30, 2022 and December 31, 2021, respectively.

The following table shows as of June 30, 2022, the geographic distribution of our loan portfolio by type of loan in dollar amounts and percentages:

San Francisco Bay

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(Dollars in thousands)

March 31, 2022

June 30, 2022

Commercial and industrial

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Total real estate

(1) Includes Alameda, Contra Costa, Solano, Napa, Sonoma, Marin, San Francisco, San Joaquin, San Mateo and Santa Clara counties.

(1) Includes Alameda, Contra Costa, Solano, Sonoma, Marin, San Francisco, San Joaquin, San Mateo and Santa Clara counties.

(2) Includes loans located primarily in the states of Colorado, New Mexico and Washington.

At March 31, 2022, loans in Colorado, New Mexico and Washington totaled $103.6 million, $61.7 million and $85.0 million, respectively.

At June 30, 2022, loans in Colorado, New Mexico and Washington totaled $99.6 million, $55.8 million and $92.5 million, respectively.

At December 31, 2021, loans in Colorado, New Mexico and Washington totaled $123.2 million, $69.5 million and $86.6 million, respectively.

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Nonperforming assets consists of nonaccrual loans, accruing loans that are 90 days or more past due and other real estate owned (“OREO”).

Nonperforming assets increased $5.7 million, or 82.0%, to $12.6 million at March 31, 2022 from $6.9 million at December 31, 2021, primarily due to a $5.5 million increase in nonaccrual loans and $117,000 increase in accruing loans 90 days and more past due.

The increase in nonaccrual loans was primarily due to one $4.9 million commercial and industrial loan which was restructured and placed on non-accrual during the current quarter.

The Company had nonperforming loans, consisting of nonaccrual loans and accruing loans that are 90 days or more past due, totaling 62% of total loans, of which $800,000 were guaranteed by governmental agencies at March 31, 2022, compared to $6.9 million or 0.41% of total loans, of which $822,000 were SBA guaranteed at December 31, 2021.

Included in nonperforming loans at March 31, 2022 and December 31, 2021, were $6.4 million and $1.6 million, respectively, of TDR loans.

At March 31, 2022 and December 31, 2021, nonaccrual loans included $5.6 million and $6.9 million of loans 30-89 days past due and $2.2 million and $2.5 million of loans less than 30 days past due, respectively.

At March 31, 2022, nonaccrual loans 30-89 days past due of $5.6 million primarily was comprised of one $4.9 million commercial and industrial loan restructured as a TDR during the three months ended March 31, 2022 and seven smaller loans, and the $2.2 million of loans less than 30 days past due are comprised of two loans.

Nonperforming assets increased $3.8 million, or 54.6%, to $10.7 million at June 30, 2022 from $6.9 million at December 31, 2021, primarily due to a $3.5 million increase in nonaccrual loans and $255,000 increase in accruing loans 90 days and more past due.

The increase in nonaccrual loans primarily was due to one $2.5 million participation interest in a shared national credit, which was restructured as a TDR and placed on non-accrual during the first quarter of 2022.

At June 30, 2022, the Bank had participation interests in two other shared national credit loans totaling $3.5 million, both of which were performing in accordance with their payment terms as of that date.

The Company had nonperforming loans, consisting of nonaccrual loans and accruing loans that are 90 days or more past due, totaling $10.7 million or 0.53% of total loans, of which $780,000 were guaranteed by governmental agencies at June 30, 2022, compared to $6.9 million or 0.41% of total loans, of which $822,000 were guaranteed by governmental agencies at December 31, 2021.

Included in nonperforming loans at June 30, 2022 and December 31, 2021, were $3.9 million and $1.6 million, respectively, of TDR loans.

At June 30, 2022 and December 31, 2021, nonaccrual loans included $2.6 million and $113,000 of loans 30-89 days past due and $2.3 million and $2.5 million of loans less than 30 days past due, respectively.

At June 30, 2022, nonaccrual loans 30-89 days past due of $2.6 million primarily was comprised of one $2.5 million participation interest discussed above, and the $2.3 million of loans less than 30 days past due are comprised of 13 loans.

All of these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers.

There was one loan totaling $117,000 that was 90 days or more past due and still accruing at March 31, 2022, compared to no loans at December 31, 2021.

There was one loan totaling $255,000 that was 90 days or more past due and still accruing at June 30, 2022, compared to no loans at December 31, 2021.

In general, loans are placed on nonaccrual status after being contractually delinquent for more than 90 days, or earlier, if management believes full collection of future principal and interest on a timely basis is unlikely.

When a loan is placed on nonaccrual status, all interest accrued but not received is charged against interest income.

When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the

loan until such time as full collection of the remaining recorded balance is expected.

When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected.

Generally, loans with temporarily impaired values and loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled.

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Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity .

TDR loans as of March 31, 2022 totaled $7.2 million, of which $794,000 were accruing and performing according to their restructuring terms.

TDR loans as of June 30, 2022 totaled $4.7 million, of which $746,000 were accruing and performing according to their restructuring terms.

TDR loans as of December 31, 2021 totaled $3.9 million, of which $765,000 were accruing and performing according to their restructuring terms.

The accruing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status.

The related allowance for loan losses on TDR loans totaled of $878,000 and $31,000 at March 31, 2022 and December 31, 2021, respectively.

The Company provided payment and financial relief programs for borrowers impacted by COVID-19.

All loans modified due to COVID-19 were separately monitored and any request for continuation of relief beyond the initial modification was reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating was appropriate.

At both March 31, 2022 and December 31, 2021, the Company had two commercial real estate loans totaling $2.7 million operating under forbearance agreements due to COVID-19.

Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered to be TDRs at March 31, 2022, pursuant to applicable accounting and regulatory guidance.

The related allowance for loan losses on TDR loans totaled $279,000 and $259,000 at June 30, 2022 and December 31, 2021, respectively.

The following table sets forth the nonperforming loans, nonperforming assets and TDR loans as of the dates indicated:

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Nonperforming loans to total loans (2)

Includes $6.4 million and $1.6 million of nonaccrual TDR loans at March 31, 2022 and December 31, 2021, respectively.

Includes $3.9 million and $1.6 million of nonaccrual TDR loans at June 30, 2022 and December 31, 2021, respectively.

Excludes the performing (accruing) TDR loans which are set forth separately in the table.

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Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above.

At March 31, 2022 we had $117,000 and no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing compared to none at December 31, 2021.

Interest foregone on nonaccrual loans was approximately $84,600 and $88,300 for the three months ended March 31, 2022 and March 31, 2021, respectively, none of which was included in interest income.

At both June 30, 2022 and December 31, 2021 we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.

Interest foregone on nonaccrual loans was approximately $72,700 and $157,000 for the three and six months ended June 30, 2022 and $69,000 and $157,300 for the three and six month ended June 30, 2021, respectively, none of which was included in interest income.

Allowance for loan losses.

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Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

At March 31, 2022, the Company’s allowance for loan losses was $17.7 million, or 0.88% of total loans, compared to $17.7 million, or 1.06% of total loans, at December 31, 2021.

Based on our review of the appropriateness of the allowance for loan losses at March 31, 2022, the Company recorded a provision for loan losses of $7,000 for the three months ended March 31, 2022, compared to none for the three months ended March 31, 2022.

The decline in the allowance for loan losses as a percentage of total loans outstanding was due to our acquisition of loans in the PEB Merger and related acquisition accounting on those loans.

As discussed in more detail below, acquired loans are recorded at their estimated fair value at acquisition and no allowance for loan losses is recorded on the acquired loans.

We recorded net charge-offs of $7,000 for the first quarter of 2022 compared to no charge-offs in the same quarter in 2021.

The calculation of the allowance for loan losses at March 31, 2022 and December 31, 2021 excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven .

At June 30, 2022, the Company’s allowance for loan losses was $17.8 million, or 0.89% of total loans, compared to $17.7 million, or 1.06% of total loans, at December 31, 2021.

The decline in the allowance for loan losses as a percentage of total loans outstanding at June 30, 2022, as compared to December 31, 2021, was mostly due to the Company’s acquisition of PEB and related acquisition accounting on those loans, as the acquired loans were recorded at their estimate fair value at acquisition and no allowance for loan losses is recorded for acquired loans.

Based on our review of the appropriateness of the allowance for loan losses at June 30, 2022, the Company recorded a provision for loan losses of $2.6 million for the six months ended June 30, 2022, compared to $507,000 reversal of provision for the six months ended June 30, 2021.

The provision for loan losses for the six months ended June 30, 2022 primarily was due to $2.5 million in net charge-offs during the current quarter, coupled with new loan production.

Based on information received during current quarter from the lead lender, the Company charged-off $2.4 million related to a $4.9 million participation interest in a shared national credit.

We recorded net charge-offs of $2.5 million for the three and six months ended June 30, 2022, respectively, compared to $7,000 recoveries and for the three months and six months ended June 30, 2021.

The calculation of the allowance for loan losses at June 30, 2022 and December 31, 2021 excludes the balance of PPP loans held in portfolio as of those dates as PPP loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven .

In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts.

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The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios.

As of March 31, 2022 , acquired loans net of their discount, totaled $349.8 million and the remaining net discount on these acquired loans was $603,000, compared to $51.3 million of acquired loans and $2.1 million of net discounts at December 31 , 2021 .

As of June 30, 2022 , acquired loans net of their discount, totaled $330.3 million and the remaining net discount on these acquired loans was $481,000, compared to $51.3 million of acquired loans and $2.1 million of net discounts at December 31 , 2021 .

The net discount includes a credit discount based on estimated losses in the acquired loans partially offset a premium, if any, based market interest rates on the date of acquisition.

The decrease in the net discount on acquired loans from December 31, 2021 was due to a net premium on the PEB loans given the higher yielding portfolio compared to current market interest rates.

As part of the acquisition of PEB, the Company acquired loans under various state guarantee programs which PEB was a participant.

PEB was approved by, and the Company has been approved by the California Pollution Control Financing Authority ("CalCAP") to originate loans to qualified small businesses.

Under the program, the borrower, CalCAP and the Company contribute funds to a loss reserve account that is held in a demand deposit account at the Company.

Losses on qualified loans will be charged to this account after approval by CalCAP.

The funds are the property of CalCAP, however, in the event that the Company leaves the program any excess funds, after all loans have been repaid or unenrolled from the program by the Company and there are no pending claims for reimbursement, will be distributed to CalCAP and the Company based on their contributions to the program.

The borrower contributions are included in the Company share.

The Company opted out of this CalCAP Small Business loan program in 2017.

Funds contributed by the Company to the reserve account are treated as a receivable from CalCAP, and evaluated for impairment.

The Company had a receivable from CalCAP of $4,023,000 as of March 31, 2022.

The Company had a loss reserve account of $14,723,000 as of March 31, 2022.

In addition, the Company has been approved by the CalCAP in partnership with the California Air

Resources Board, to originate loans to California truckers in the On-Road Heavy-Duty Vehicle Air Quality Loan Program.

Under the program, the CalCAP solely contributes funds to a loss reserve account that is held in a demand

deposit account at the Company.

Losses are handled in the same manner as noted above.

As part of the acquisition of PEB, the Company acquired certain small business loans to borrowers qualified under The California Capital Access Program for Small Business, a state guaranteed loan program sponsored by the California Pollution Control Financing Authority ("CalCAP").

PEB ceased originating loans under this loan program in 2017.

Under this loan program, the borrower, CalCAP and the Company contributed funds to a loss reserve account that is held in a demand deposit account at the Bank.

The borrower contributions to the loss reserve account are attributed to the Company.

Losses on qualified loans are charged to this account after approval by CalCAP.

Under the program, if a loan defaults, the Company has immediate coverage of 100% of the loss.

The Company must return recoveries from the borrower, less expenses, to the loan loss reserve account.

The funds in the loss reserve account are the property of CalCAP, however, in the event that the Company leaves the program any excess funds, after all loans have been repaid or unenrolled from the program by the Company and provided there are no pending claims for reimbursement, are

distributed to CalCAP and the Company based on their respective contributions to the loss reserve account.

Funds contributed by the Company to the loss reserve account are treated as a receivable from CalCAP and evaluated for impairment quarterly.

As of June 30, 2022, the Company had $35.7 million of loans enrolled in this loan program.

The Company had a loss reserve account of $13.7 million as of June 30, 2022.

In addition, as successor to PEB, the Company was approved by the CalCAP, in partnership with the California Air Resources Board, to originate loans to California truckers in the On-Road Heavy-Duty Vehicle Air Quality Loan Program.

Under this loan program, CalCAP solely contributes funds to a loss reserve account that is held in a demand deposit account at the Bank.

Losses are handled in the same manner as described above.

The funds are the property of CalCAP and are payable upon termination of the program.

When the loss reserve account balance exceeds the total associated loan balance, the excess is to be remitted to the CalCAP.

The Company had a loss reserve account of $5,925,000 as of March 31, 2022.

When the loss reserve account balance exceeds the total associated loan balance, the excess is to be remitted to CalCAP.

The Company has originated $3.5 million of loans under this program during the six months ended June 30, 2022.

As of June 30, 2022, the Company had $31.9 million of loans enrolled in this program.

The Company had a loss reserve account of $5.9 million as of June 30, 2022.

The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s calculations:

Three months ended March 31,

Six months ended June 30,

(Dollars in thousands)

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Commercial and industrial:

Net (recoveries)/charge-offs

Net charge-offs/(recoveries)

Average loans outstanding

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Commercial estate:

Net charge-offs

Net charge-offs/(recoveries)

Average loans outstanding

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Average loans outstanding

Total net charge-offs

Net charge-offs/(recoveries)

Total average loans outstanding

As of March 31, 2022, the Company identified $13.4 million in impaired loans, inclusive of $12.6 million of nonperforming loans and $753,000 of accruing TDR loans.

Of these impaired loans, only $5.9 million had a specific allowance of $1.5 million as of March 31, 2022.

As of June 30, 2022, the Company identified $11.5 million in impaired loans, inclusive of $10.7 million of nonperforming loans and $746,000 of performing (accruing) TDR loans.

Of these impaired loans, only $1.1 million had a specific allowance of $935,000 as of June 30, 2022.

As of December 31, 2021, the Company identified $7.7 million in impaired loans, inclusive of $6.9 million of nonperforming loans and $765,000 of performing (accruing) TDR loans.

Of these impaired loans, only $1.1 million had a specific allowance of $931,000 as of December 31, 2021.

Management considers the allowance for loan losses at March 31, 2022 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio.

Management considers the allowance for loan losses at June 30, 2022 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio.

While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations.

Uncertainties relating to our allowance for loan losses remain heightened as a result of the risks surrounding the lingering effects of COVID-19.

A further decline in national and local economic conditions, as a result of the COVID-19 or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

In addition, the determination of the amount of our allowance for

loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

A decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Deposits are our primary source of funding and consist of core deposits from the communities served by our branch and office locations.

We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses.

Deposits include interest bearing and noninterest bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts.

Deposits include interest bearing and noninterest bearing demand accounts,

savings, money market, certificates of deposit and individual retirement accounts.

These accounts earn interest at rates established by management based on competitive market factors, management’s desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives.

Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits.

Total deposits increased $345.2 million, or 17.4%, to $2.3 billion at March 31, 2022 from $2.0 billion at December 31, 2021.

The increase in deposits from the prior quarter is primarily attributable to the $376.7 million of deposits acquired from PEB.

At March 31, 2022, noninterest bearing demand deposits totaled $783.1 million or 33.6% of total deposits, compared to $710.1 million or 35.8% of total deposits at December 31, 2021.

Total deposits increased $269.6 million, or 13.6%, to $2.3 billion at June 30, 2022 from $2.0 billion at December 31, 2021.

The increase in deposits is primarily attributable to the $376.7 million of deposits acquired from PEB, partially offset by run-off of higher costing money market and time deposits.

At June 30, 2022, noninterest bearing demand deposits totaled $789.3 million or 35.0% of total deposits, compared to $710.1 million or 35.8% of total deposits at December 31, 2021.

The following table sets forth the dollar amount of deposits in the various types of deposit programs offer at the dates indicated.

8 unchanged sentences

These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.

At March 31, 2022 and December 31, 2021, we had the ability to borrow up to $454.4 million and $483.1 million, respectively, from the FHLB of San Francisco.

In addition to the availability of liquidity from the FHLB of San Francisco, the Bank maintained a short-term borrowing line of credit with the FRB of San Francisco, with available credit capacity of $114.6 million and $135.6 million as of March 31, 2022 and December 31, 2021, respectively, based on loans that qualify as collateral for the FRB line of credit.

At both March 31, 2022 and December 31, 2021, there were no FRB borrowings outstanding.

At both March 31, 2022, and December 31, 2021, the Company had no FHLB advances outstanding.

If needed, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding.

At both March 31, 2022 and December 31, 2021, we had a total of $65.0 million in federal funds line available from third-party financial institutions, and no balances outstanding at these dates.

At March 31, 2022 and December 31, 2021, the Company had outstanding junior subordinated debt, net of market-to-market, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions totaling $8.4 million compared to $8.3 million at March 31, 2021.

At March 31, 2022, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.6 million compared to $63.5 million at December 31, 2021.

At June 30, 2022 and December 31, 2021, we had the ability to borrow up to $503.1 million and $483.1 million, respectively, from the FHLB of San Francisco.

In addition to the availability of liquidity from the FHLB of San Francisco, the Bank maintained a short-term borrowing line of credit with the FRB of San Francisco, with available credit capacity of $68.8 million and $135.6 million as of June 30, 2022 and December 31, 2021, respectively, based on loans that qualify as collateral for the FRB line of credit.

At both June 30, 2022 and December 31, 2021, there were no FHLB advances or FRB borrowings outstanding.

We may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding.

At both June 30, 2022 and December 31, 2021, we had a total of $65.0 million in federal funds line available from third-party financial institutions and no balances outstanding at these dates.

At both June 30, 2022 and December 31, 2021, the Company had outstanding junior subordinated debt, net of market-to-market, related to junior subordinated deferrable interest debentures assumed in connection with its previous acquisitions both totaling $8.4 million.

At June 30, 2022, the Company had outstanding subordinated debt, net of costs to issue, totaling $63.6 million compared to $63.5 million at December 31, 2021.

We are required to provide collateral for certain local agency deposits.

At both March 31, 2022 and December 31, 2021, the FHLB of San Francisco had issued a letters of credit on behalf of the Bank totaling $42.0 million as collateral for local agency deposits.

At both June 30, 2022 and December 31, 2021, the FHLB of San Francisco had issued a letters of credit on behalf of the Bank totaling $42.0 million as collateral for local agency deposits.

Shareholders’ equity.

Shareholders’ equity increased $62.5 million, to $324.7 million at March 31, 2022 from $262.6 million at December 31, 2021.

The increase in shareholders’ equity was primarily due to issuance of stock related to our acquisition of PEB and net income, partially offset by the repurchase of $1.3 million of common stock and $685,000 of accrued cash dividends payable.

In addition, shareholder’s equity was adversely impacted by a $7.0 million decrease in accumulated other comprehensive income resulting in a total comprehensive loss of $464,000 due to an increase in the unrealized loss on available for sale securities reflecting the increase in market interest rates during the current quarter.

During the three months ended March 31, 2022, the Company repurchased a total of 57,177 shares of its common stock at a total cost of $1.3 million, or $22.18 per share, leaving 685,355 shares available for future purchases under the current stock repurchase plan.

Shareholders’ equity increased $57.9 million, to $320.6 million at June 30, 2022 from $262.6 million at December 31, 2021.

The increase in shareholders’ equity primarily was due to issuance of stock related

to our acquisition of PEB and net income, partially offset by the repurchase of $5.7 million of common stock and $1.4 million of cash dividends.

In addition, shareholder’s equity was adversely impacted by a $11.4 million decrease in accumulated other comprehensive income during the six months ended June 30, 2022 resulting in a total accumulated other comprehensive loss of $9.2 million, net of tax, due to an increase in the unrealized loss on available for sale securities reflecting the increase in market interest rates during the six months ended June 30, 2022.

During the six months ended June 30, 2022, the Company repurchased a total of 262,221 shares of its common stock at a total cost of $5.7 million, or $21.69 per share, leaving 480,311 shares available for future purchases under the current stock repurchase plan.

For additional information see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”.

Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2022 and 2021

Earnings summary.

Net income was $6.5 million for the three months ended March 31, 2022, compared to $4.5 million for the three months ended March 31, 2021, an increase of $2.0 million or 43.2%.

The increase was the result of a $4.3 million increase in net interest income and a $2.2 million increase in noninterest income, partially offset by a $4.2 million increase in noninterest expense.

Diluted earnings per share were $0.51 for the three months ended March 31, 2022, an increase of $0.11 from diluted earnings per share of $0.40 for the three months ended March 31, 2021.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, was 68.48% and 69.31% for the three months ended March 31, 2022 and 2021, respectively.

The improvement in the efficiency ratio during the three months ended March 31, 2022 compared to the same period in 2021 was due to higher revenues.

Net income was $5.2 million for the three months ended June 30, 2022, compared to $5.3 million for the three months ended June 30, 2021, a decrease of $90,000 or 1.7%.

The decrease was the result of a $3.1 million increase in provision for loan losses, a $432,000 decrease in noninterest income, and a $1.8 million increase in noninterest expense, partially offset by a $5.4 million increase in net interest income.

Diluted earnings per share were $0.38 for the three months ended June 30, 2022, a decrease of $0.11 from diluted earnings per share of $0.49 for the three months ended June 30, 2021.

Net income was $11.7 million for the six months ended June 30, 2022, compared to $9.8 million for the six months ended June 30, 2021, an increase of $1.9 million, or 19.0%, primarily as a result of a $9.7 million increase in net interest income, and a $1.7 million increase in noninterest income, partially offset by a $3.1 million increase in provision for loan losses and a $6.0 million increase in noninterest expense.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, was 60.38% and 64.56% for the three and six months ended June 30, 2022, compared to 66.27% and 67.79% for the three and six months ended June 30, 2021, respectively.

The improvement in the efficiency ratio during the three and six months ended June 30, 2022 compared to the same period in 2021 was due to higher revenues.

Interest income.

Interest income for the three months ended March 31, 2022 was $24.8 million, compared to $20.3 million for the three months ended March 31, 2021, an increase of $4.5 million or 22.4%.

Interest income for the three months ended June 30, 2022 was $25.6 million, compared to $20.0 million for the three months ended June 30, 2021, an increase of $5.6 million or 28.1%.

The increase in interest income between the periods reflects increases in interest income on loans and, to a lesser extent, investment securities due to increases in the average balances of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

Interest income on loans, including fees, increased $3.7 million, or 19.5%, to $22.9 million during the three months ended March 31, 2022, compared to $19.2 million for the three months ended March 31, 2021 primarily due to $275.8 million increase in average loan balance, as well as the higher average yield earned on loans.

The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended March 31, 2022 was 4.89%, compared to 4.79% for the same period in 2021.

Interest income on loans for the quarters ended March 31, 2022 and 2021 included $1.3 million and $675,000, respectively, in accretion of the net discount on acquired loans and revenue from purchase credit impaired loans in excess of discounts.

The remaining net discount on these acquired loans was $603,000 and $2.7 million at March 31, 2022 and March 31, 2021, respectively.

Interest income for the three months ended March 31, 2022 included $1.3 million in fees earned related to PPP loans compared to $1.2 million during the same period in 2021.

As of March 31, 2022, total unrecognized fees on PPP loans were $735,000.

Interest income on loans for the quarters ended March 31, 2022 and 2021, included $235,000 and $562,000, respectively, in fees related to prepayment penalties.

For the three months ended March 31, 2022, average PPP loans were $108.8 million and the average yield, including fees, was 5.89%.

Interest income on loans, including fees, increased $4.3 million, or 22.9%, to $23.0 million during the three months ended June 30, 2022, compared to $18.7 million for the three months ended June 30, 2021, primarily due to a $402.3 million increase in average loan balance, partially offset by a nine basis point decrease in the average yield.

The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for the three months ended June 30, 2022 was 4.62%, compared to 4.71% for the same period in 2021.

Interest income on loans for three months ended June 30, 2022 and 2021 included $198,000 and $363,000, respectively, in accretion of the net discount on acquired loans and revenue from purchase credit impaired loans in excess of discounts.

The remaining net discount on these acquired loans was $481,000 and $2.3 million at June 30, 2022 and June 30, 2021, respectively.

Interest income for the three months ended June 30, 2022 included $351,000 in fees earned related to PPP loans compared to $1.5 million during the three months ended June 30, 2021.

As of June 30, 2022, total unrecognized fees on PPP loans were $388,000.

Interest income on loans for the three months ended June 30, 2022 and 2021, included $487,000 and $152,000, respectively, in fees related to prepayment penalties.

For the three months ended June 30, 2022, average PPP loans were $91.0 million and the average yield, including fees, was 2.55%.

The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but will cease completely after the maturity of the loans.

Approximately two-thirds of the PPP loans are set to mature by the end of 2022, while the remaining loans have a five-year maturity date.

Interest income on investment securities and interest-bearing deposits in banks increased $740,000, or 85.3% to $1.6 million during the three months ended March 31, 2022, compared to $868,000 for the three months ended March 31, 2021, primarily due a $68.1 million increase in the average balance of investment securities, as well as a higher average yield earned on investment securities.

The average yield on investment securities increased 43 basis point to 3.15% for the three months ended March 31, 2022 compared to 2.72% for the same period prior year.

Interest income on investment securities available-for-sale, and interest-bearing deposits in banks increased $1.3 million, or 122.4% to $2.3 million during the three months ended June 30, 2022, compared to $1.1 million for the three months ended June 30, 2021, primarily due a $73.8 million increase in the average balance of investment securities available-for-sale and interest-bearing deposits in banks, as well as a higher average yield earned on investment securities available-for-sale and interest-bearing deposits in banks.

The average yield on investment securities available-for-sale increased 19 basis point to 3.21% for the three months ended June 30, 2022 compared to 3.02% for the three months ended June 30, 2021.

The average yield on interest-bearing deposits in banks increased 69 basis point to 0.84% for the three months ended June 30, 2022 compared to 0.15% for the three months ended June 30, 2021.

Interest income for the six months ended June 30, 2022 was $50.4 million, compared to $40.3 million for the six months ended June 30, 2021, an increase $10.2 million or 25.2%.

The increase in interest income between the periods reflects increases in interest income on loans and, to a lesser extent, investment securities available-for-sale due to increases in the average balance of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

Interest income on loans, including fees, increased $8.0 million, or 21.1%, primarily as a result of a $339.4 million increase in the average loan balance.

The average yield on loans, including the accretion of the net discount and deferred PPP loan fees recognized for both the six months ended June 30, 2022 and 2021 was 4.75%.

Interest income on loans for the six ended June 30, 2022 and 2021 included $1.5 million and $1.1 million, respectively, in accretion of the net discount on acquired loans and revenue from purchase credit impaired loans in excess of discounts.

Interest income for the six months ended June 30, 2022 included $1.7 million in fees earned related to PPP loans compared to $1.4 million during the same period in 2021.

Interest income on loans for the six months ended June 30, 2022 and 2021, included $722,000 and $714,000, respectively, in fees related to prepayment penalties.

Interest income on investment securities available-for-sale and interest-bearing deposits in banks increased $2.0 million, or 105.6% to $3.9 million during the six months ended June 30, 2022, compared to $1.9 million for the six months ended June 30, 2021, primarily due a $69.3 million increase in the average balance of investment securities available-for-sale, as well as a higher average yield earned on investment securities available-for-sale and interest-bearing deposits in banks, partially offset by a $6.7 million decrease in the average balance of interest-bearing deposits in banks.

The average yield on investment securities available-for-sale increased 35 basis point to 3.18% for the six months ended June 30, 2022 compared to 2.83% for the six months ended June 30, 2022.

The average yield on interest-bearing deposits in banks increased 38 basis point to 0.52% for the six months ended June 30, 2022 compared to 0.14% for the six months ended June 30, 2021.

Interest expense.

Interest expense increased $264,000, or 12.1%, to $2.5 million for the three months ended March 31, 2022 compared to $2.2 million for the three months ended March 31, 2021.

The increase was due to the $293.7 million increase in the average balance of deposits.

Total average interest bearing liabilities increased $289.0 million, or 23.0%, to $1.5 billion for the three months ended March 31, 2022, compared to $1.3 billion for the three months ended March 31, 2021.

The average rate paid on interest bearing liabilities decreased by seven basis points to 0.64% for the three months ended March 31, 2022, compared to 0.71% for the same period prior year.

Interest expense on deposits increased $264,000, or 24.9%, to $1.5 million for the three months ended March 31, 2022 compared to $1.2 million for the three months ended March 31, 2021, primarily due to increases in the average balance in all interest bearing deposit categories.

The average balance of deposits totaled $2.2 billion for the three months ended March 31, 2022, compared to $1.9 billion for the same quarter a year ago, respectively.

The average rate paid on interest bearing deposits decreased by one basis point to 0.41% for the three months ended March 31, 2022, from 0.42% for the three months ended March 31, 2021.

The overall average cost of deposits for the three months ended March 31, 2022, increased to 0.27%, compared to 0.26% for the three months ended March 31, 2021.

The average balance of noninterest bearing deposits increased $61.9 million, or 8.51%, to $789.1 million for the three months ended March 31, 2022 compared to $727.4 million for the same period in 2021.

Interest expense on borrowings was $982,000 for both the three months ended March 31, 2022 and 2021, due to decreases in borrowings outstanding offset by increases in the average cost of borrowings.

The average balance of borrowings outstanding decreased $4.8 million to $72.0 million during the three months ended March 31, 2022, compared to $76.7 million during the three months ended March 31, 2021.

The average cost of borrowing increased to 5.53% for the three months ended March 31, 2022, compared to 5.19% for the three months ended March 31, 2021.

Interest expense increased $241,000, or 10.9%, to $2.5 million for the three months ended June 30, 2022 compared to $2.2 million for the three months ended June 30, 2021.

The increase was due to the $282.3 million increase in the average balance of deposits primarily related to the PEB Merger.

Total average interest bearing liabilities increased $280.6 million, or 21.4%, to $1.6 billion for the three months ended June 30, 2022, compared to $1.3 billion for the three months ended June 30, 2021.

The average rate paid on interest bearing liabilities decreased by six basis points to 0.62% for the three months ended June 30, 2022, compared to 0.68% for the same period prior year.

Interest expense on deposits increased $225,000, or 18.3%, to $1.5 million for the three months ended June 30, 2022 compared to $1.2 million for the three months ended June 30, 2021.

The increase primarily was due to a $282.3 million increase in the average balance of deposits, with average balances increasing in all interest bearing deposit categories.

The average balance of deposits totaled $1.5 billion for the three months ended June 30, 2022, compared to $1.2 billion for the same quarter a year ago, respectively.

The average rate paid on interest bearing deposits decreased by two basis point to 0.38% for the three months ended June 30, 2022, from 0.40% for the three months ended June 30, 2021.

The overall average cost of deposits for both the three months ended June 30, 2022 and 2021 was 0.25%.

The average balance of noninterest bearing deposits increased $42.6 million, or 5.7%, to $788.9 million for the three months ended June 30, 2022 compared to $746.3 million for the same period in 2021.

Interest expense on borrowings remained unchanged at $999,000 for the three months ended June 30, 2022, compared to $983,000 for the three months ended June 30, 2021.

The average balance of borrowings outstanding decreased $1.7 million to $72.0 million during the three months ended June 30, 2022, compared to $73.8 million during the three

months ended June 30, 2021.

The average cost of borrowings increased to 5.56% for the three months ended June 30, 2022, compared to 5.34% for the three months ended June 30, 2021.

Interest expense increased $505,000, or 11.5%, to $4.9 million for the six months ended June 30, 2022 compared to $4.4 million for the six months ended June 30, 2021.

The increase primarily was due to the $290.4 million increase in the average balance of interest bearing deposits.

Total average interest bearing liabilities increased $287.4 million, or 22.4%, to $1.6 billion for the six months ended June 30, 2022, compared to $1.3 billion for the six months ended June 30, 2021.

The average rate paid on interest bearing liabilities decreased by six basis points to 0.63% for the six months ended June 30, 2022, compared to 0.69% for the six months ended June 30, 2021.

Interest expense on deposits increased $489,000, or 20.0%, to $2.9 million for the six months ended June 30, 2022 compared to $2.4 million for the six months ended June 30, 2021.

The increase primarily was due to a $290.4 million increase in the average balance of interest bearing deposits, with the average balances increasing in all interest bearing deposit categories, partially offset by a 25 basis point decline in the average rate paid on time deposits to 0.74% during the six months ended June 30, 2022 compared to 0.99% during the six months ended June 30, 2021 .

The average rate paid on interest bearing deposits was 0.39% for both the six months ended June 30, 2022 and June 30, 2021.

The average balance of noninterest bearing deposits increased $59.8 million, or 8.4%, to $773.9 million for the six months ended June 30, 2022 compared to $714.1 million for the same period in 2021.

Interest expense on borrowings was $2.0 million for both the six months ended June 30, 2022 and 2021.

The average balance of borrowings outstanding decreased $3.2 million to $72.0 million for the six months ended June 30, 2022, compared to $75.2 million for the six months ended June 30, 2021.

The average cost of borrowing increased to 5.55% for the six months ended June 30, 2022, compared to 5.27% for the six months ended June 30, 2021.

Net interest income and net interest margin.

Net interest income increased $4.3 million, or 23.6%, to $22.4 million for the three months ended March 31, 2022, compared to $18.1 million for the three months ended March 31, 2021.

The increase in net interest income primarily was due to increases in interest income on loans and, to a lesser extent, investment securities due to increases in the average balances of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

The average yield on interest earning assets for the three months ended March 31, 2022 was 4.03%, a 12 basis point increase from 3.91% for the three months ended March 31, 2021, primarily due to higher market interest rates, while the average cost of interest bearing liabilities for the three months ended March 31, 2022 decreased to 0.64%, or seven basis points from 0.71% for the three months ended March 31, 2021.

The annualized net interest margin for the three months ended March 31, 2022 was 3.63%, compared to 3.49% for first quarter of 2021.

The comparable quarter over quarter increase in net interest margin primarily reflects an improved mix of interest-bearing assets, including increased balances of higher yielding loans and investment securities available for sale.

During the quarter, the recognition of deferred loan fees related to PPP loans and accretion on acquired loans, also had a positive impact on the net interest margin.

Net interest income increased $5.4 million, or 30.3%, to $23.2 million for the three months ended June 30, 2022, compared to $17.8 million for the three months ended June 30, 2021 and increased $9.7 million, or 26.9%, to $45.5 million for the six months ended June 30, 2022, compared to $35.9 million for the six months ended June 30, 2021.

The increase in net interest income primarily was due to increases in interest income on loans and, to a lesser extent, investment securities available-for-sale due to increases in the average balances of these portfolios, partially offset by lower recognition of deferred loan fee income from SBA loan forgiveness related to PPP loans.

The average yield on interest earning assets for the three months ended June 30, 2022 was 3.97%, a 28 basis point increase from 3.69% for the three months ended June 30, 2021, primarily due to higher market interest rates, while the average cost of interest bearing liabilities for the three months ended June 30, 2022 decreased to 0.62%, or two basis points, from 0.68% for the three months ended June 30, 2021.

The average yield on interest earning assets for the six months ended June 30, 2022 was 4.00%, a 20 basis point increase from 3.80% for the six months ended June 30, 2021, primarily due to higher market interest rates, while the average cost of interest bearing liabilities for the six months ended June 30, 2022 decreased to 0.63%, or three basis points, from 0.66% for the six months ended June 30, 2021.

The annualized net interest margin for the three and six months ended June 30, 2022 was 3.59% and 3.61%, compared to 3.29% and 3.38% for three and six months ended June 30, 2021, respectively.

The comparable period over period increases in net interest margin primarily reflect an improved mix of interest-earning assets, including increased balances of higher yielding loans and investment securities available for sale.

During these periods, the recognition of deferred loan fees related to PPP loans and accretion on acquired loans, also had a positive impact on the net interest margin.

PPP loans are originated at an interest rate of 1%, although the effective yield is higher as a result of the origination fees paid to us by the SBA.

The average yield on PPP loans was 5.89%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of eight basis points during the three months ended March 31, 2022, compared to 4.51% with a positive impact of three basis points during the comparable periods in 2021.

The average yield on PPP loans for the three and six months ended June 30, 2022 was 2.55% and 4.35%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of seven basis points and 10 basis points during the three and six months ended June 30, 2022, respectively, compared to 4.74% with a positive impact of eight basis points and 4.59% with six basis points during the comparable periods in 2021, respectively.

The impact of PPP loans on net interest margin will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are net, but will cease completely after the maturity of the loans.

Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts increased our net interest margin by 21 basis points during the three months ended March 31, 2022 and 17 basis points during the three months ended March 31, 2021.

Accretion of acquisition accounting discounts on loans and the recognition of revenue from acquired loans in excess of discounts increased our net interest margin by six and 16 basis points during the three and six months ended June 30, 2022 and ten and 17 basis points during the three and six months ended June 30, 2021, respectively.

Average Balances, Interest and Average Yields/Cost.

4 unchanged sentences

and (v) the net interest margin.

Nonaccruing loans have been included in the table as loans carrying a zero yield.

Yields have been calculated on a pre-tax basis.

The loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.

Three months ended March 31,

Loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.

Three months ended June 30,

(Dollars in thousands)

25 unchanged sentences

(3) Net interest margin is calculated as net interest income divided by total average interest earning assets.

Six months ended June 30,

(Dollars in thousands)

Interest earning assets

Interest bearing deposits in banks

Investments securities available-for-sale

Total interest earning assets

Noninterest earning assets

Total average assets

Interest bearing liabilities

Time deposits

Total deposit accounts

Subordinated debt, net

Junior subordinated debentures, net

Other borrowings

Total interest bearing liabilities

Noninterest bearing deposits

Other noninterest bearing liabilities

Noninterest bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Interest rate spread (2)

Net interest margin (3)

Ratio of average interest earning assets to average interest bearing liabilities

(1) Average balances are computed using average daily balances.

(2) Interest rate spread is calculated as the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

(3) Net interest margin is calculated as net interest income divided by total average interest earning assets.

Rate/Volume Analysis.

3 unchanged sentences

Changes applicable to both volume and rate have been allocated to volume.

Yields have been calculated on a pre-tax basis.

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

2022 compared to 2021

Increase/(Decrease)

Attributable to

(Dollars in thousands)

Interest earning assets

12 unchanged sentences

Provision for loan losses.

We recorded $7,000 provision for loan losses for the three months ended March 31, 2022, compared to no provision for the three months ended March 31, 2021.

The provision for loan losses recorded in the first quarter March 31, 2022 related primarily to new loan production.

We had net charge-offs on loans of $7,000 for the three months ended March 31, 2022 , compared to zero net charge-offs on loans for the three months ended March 31, 2021.

We recorded a $2.6 million provision for loan losses for both the three and six months ended June 30, 2022, compared to a $507,000 reversal of the provision for loan losses for both the three and six months ended June 30, 2021.

The provision for loan losses recorded in the three months June 30, 2022 related primarily to $2.5 million in net charge-offs during the current quarter, coupled with new loan production.

Based on information received during the current quarter from the lead lender, the Company charged-off $2.4 million related to a $4.9 million participation interest in a shared national credit as discussed above.

We had net charge-offs on loans of $2.5 million for both the three and six months ended June 30, 2022 , compared to $7,000 of net recoveries for both the three and six months ended June 30, 2021.

Noninterest income.

Noninterest income increased $2.2 million, or 96.6%, to $4.4 million for the three months ended March 31, 2022 compared to $2.2 million for the three months ended March 31, 2021.

The increase in noninterest income primarily was due to the $1.6 million bargain purchase gain related to the PEB Merger and a $561,000 increase in gain on sale of loans due to an increase in the volume of loans sold, partially offset by $66,000 decrease in income from our investment in a SBIC fund.

During the three months ended March 31, 2022, the Company sold $10.9 million of SBA loans (guaranteed portion), resulting in a gain on sale of $1.1 million, compared to the sale of $6.8 million of SBA loans (guaranteed portion) resulting in a gain on sale of $643,000 during the three months ended March 31, 2021.

Noninterest income decreased $432,000, or 17.6%, to $2.0 million for the three months ended June 30, 2022 compared to $2.5 million for the three months ended June 30, 2021.

The decrease in noninterest income primarily was due to a $654,000 decrease in gain on sale of loans and a $211,000 decrease in income from our investment in a Small Business Investment Company (“SBIC”) fund.

During the three months ended June 30, 2022, the Company sold $4.2 million of SBA loans (guaranteed portion), resulting in a gain on sale of $330,000, compared to the sale of $9.0 million of SBA loans (guaranteed portion) resulting in a gain on sale of $953,000 during the three months ended June 30, 2021.

Partially offsetting these decreases in noninterest income was a $171,000 increase in loan servicing and other loan fees, a $148,000 increase in other income and fees, and a $114,000 increase in service charges and other fees.

Noninterest income increased $1.7 million, or 36.9% to $6.4 million for the six months ended June 30, 2022 compared to $4.7 million for the six months ended June 30, 2022.

The increase in noninterest income primarily was due to the $1.6 million bargain purchase gain related to the PEB Merger, as well as increases of $216,000 in loan servicing and other loan fees, $140,000 increase in service charges and other fees, and $127,000 in other income and fees.

These increases were partially offset by a $93,000 decrease in gain on sale of loans due to an increase in the volume of loans sold and a $277,000 decrease in income from our investment in a SBIC fund.

During the six months ended June 30, 2022, the Company sold $15.2 million of SBA loans (guaranteed portion), resulting in a gain on sale of $1.5 million, compared to

the sale of $15.8 million of SBA loans (guaranteed portion) resulting in a gain on sale of $1.5 million during the six months ended June 30, 2021.

The following table presents the key components of noninterest income for the periods indicated:

Three months ended March 31,

Three months ended June 30,

(Dollars in thousands)

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Income on investment in SBIC fund

Other income and fees

Total noninterest income

Six months ended June 30,

(Dollars in thousands)

Gain on sale of loans

Service charges and other fees

Loan servicing and other loan fees

Gain on sale of premises

Income on investment in SBIC fund

Gain on sale of OREO

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Noninterest expense.

Noninterest expense increased $4.2 million, or 30.1%, to $18.3 million for the three months ended March 31, 2022 compared to $14.1 million for the three months ended March 31, 2021.

Noninterest expense for the first quarter of 2022 included $3.1 million of nonrecurring acquisition-related expenses related to the PEB Merger, which were comprised of $555,000 in salary and employee benefits, $1.1 million in data processing expenses, $725,000 in professional and legal fees, $375,000 in occupancy and equipment expense and $347,000 in other expenses.

Excluding acquisition-related expenses for each of the periods, noninterest expense for the first quarter of 2022 increased $1.2 million, or 8.2%, compared to the same quarter a year ago primarily due to an $870,000 increase in salary and employee benefits as a result of normal year end salary increases and an increase in the number of full time equivalent employees, a $236,000 increase in occupancy and equipment expense and a $340,000 increase in other noninterest expense, partially offset by a $284,000 decrease in data processing expense.

Noninterest expense increased $1.8 million, or 13.4%, to $15.2 million for the three months ended June 30, 2022 compared to $13.4 million for the three months ended June 30, 2021.

The increase primarily was due to $1.2 million increase in salaries and employee benefits as a result of an increase in the number of full-time equivalent employees due to the PEB acquisition, higher data processing fees of $397,000 and higher other expenses of $165,000.

Noninterest expense for the six months ended June 30, 2022 increased $6.0 million, or 22.0%, to $33.5 million from $27.5 million in the same period in 2021.

Noninterest expense for the six months ended June 30, 2022 included $3.1 million of nonrecurring acquisition-related expenses related to the PEB Merger recorded in the first quarter of 2022, which were comprised of $555,000 in salary and employee benefits, $1.1 million in data processing expenses, $725,000 in professional and legal fees, $375,000 in occupancy and equipment expense and $347,000 in other expenses.

Excluding acquisition-related expense, noninterest expense for the six months ended June 30, 2022 increased $2.9 million compared to the six months ended June 30, 2021 primarily due to a $2.0 million increase in salary and employee benefits due to increase in the number of full-time equivalent employees and a $306,000 increase in occupancy costs, both primarily due to the PEB Merger, and a $86,000 increase in data processing expense due to higher account activity, and a $505,000 increase in other noninterest expense reflecting increased operations as businesses reopened from COVID-19 related closures.

The following table details the components of noninterest expense for the periods indicated:

Three months ended March 31,

Three months ended June 30,

(Dollars in thousands)

Salaries and related benefits

Occupancy and equipment

Data processing

Total noninterest expense

Six months ended June 30,

(Dollars in thousands)

Salaries and employee benefits

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Income taxes.

The provision for income taxes increased $232,000, or 13.6%, to $1.9 million for the three months ended March 31, 2022 compared to $1.7 million for the three months ended March 31, 2021.

The Company’s effective tax rate was 23.0% for three months ended March 31, 2022 compared to 27.3% for the three months ended March 31, 2021.

The effective tax rate was lower for the first quarter of 2022 compared same quarter a year ago primarily due to the non-taxable bargain purchase gain in the current quarter.

The provision for income taxes increased $112,000, or 5.5%, to $2.1 million for the three months ended June 30, 2022 compared to $2.0 million for the three months ended June 30, 2021.

For the six months ended June 30, 2022, income tax expense increased $344,000, or 9.2%, to $4.1 million, compared to $3.7 million for the six months ended June 30, 2021.

The Company’s effective tax rate was 29.1% and 25.8% for three and six months ended June 30, 2022 compared to 27.6% and 27.5% for the three and six months ended June 30, 2021.

The effective tax rate was higher for the second quarter of 2022 compared to the same quarter a year ago due to higher capitalization of non-deductible merger related costs during the current quarter.

The effective tax rate was lower for the six months ended June 30, 2022 compared same quarter a year ago primarily due to the non-taxable bargain purchase gain in the first quarter 2022.

Liquidity and Capital Resources

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Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans.

During the three months ended March 31, 2022, the Bank sold $10.9 million in loans and loan participation interests and received $129.4 million in principal loan repayments.

While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition.

During the six months ended June 30, 2022, the Bank sold $15.2 million in loans and loan participation interests and received $300.3 million in principal loan repayments.

While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition.

Recently, the Bank’s liquidity has been positively impacted by an increase in deposit levels.

During the three months ended March 31, 2022, deposits increased by $345.2 million due to the closing of the PEB Merger.

As a result, our liquid assets in the form of cash and cash equivalents, interest bearing deposits in banks, and investment securities available for sale increased to $615.2 million at March 31, 2022 from $557.7 million at December 31, 2021.

During the six months ended June 30, 2022, deposits increased by $269.6 million, primarily due to the closing of the PEB Merger.

Liquid assets in the form of cash and cash equivalents, interest bearing deposits in banks, and investment securities available for sale totaled $534.7 million at June 30, 2022.

Management believes that our security portfolio is of high quality and the securities would therefore be marketable.

Securities purchased during the three months ended March 31, 2022, totaled $22.7 million and securities repayments, maturities and sales in the period were $2.5 million.

Certificates of deposit scheduled to mature in one year or less at March 31, 2022, totaled $241.1 million.

Securities purchased during the three and six months ended June 30, 2022, totaled $2.0 million and $24.7 million, respectively, and securities repayments, maturities and sales in the period were $3.0 million and $5.5 million, respectively.

Certificates of deposit scheduled to mature in one year or less at June 30, 2022, totaled $227.5 million.

It is management’s policy to manage deposit rates that are competitive with other local financial institutions.

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In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements.

As of March 31, 2022, the Bank had an available borrowing capacity of $454.4 million with the FHLB of San Francisco and $114.6 million with the FRB of San Francisco, with no borrowings outstanding at that date.

As of June 30, 2022, the Bank had an available borrowing capacity of $503.1 million with the FHLB of San Francisco and $68.8 million with the FRB of San Francisco, with no borrowings outstanding at that date.

Federal Funds lines with available commitments totaling $65.0 million with four correspondent banks.

There were no amounts outstanding under these facilities at March 31, 2022 and December 31, 2021.

There were no amounts outstanding under these facilities at June 30, 2022 and December 31, 2021.

Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

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We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments.

Loan commitments and letters of credit were $89.1 million, including $3.4 million of undisbursed construction and development loan commitments, at March 31, 2022.

Loan commitments and letters of credit were $105.2 million, including $3.4 million of undisbursed construction and development loan commitments, at June 30, 2022.

For information regarding our commitments, see “Note 18 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in “Item 1.

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cash flows from operating activities, investing activities, and financing activities.

Net cash provided by operating activities for the three months ended March 31, 2022 was $2.8 million, compared to $651,000 provided by operating activities for the three months ended March 31, 2021.

During the three months ended March 31, 2022, net cash provided by investing activities was $77.5 million, which consisted primarily of net change in loans receivable, compared to $70.4 million of cash provided by investing activities for the three months ended March 31, 2021.

Net cash used in financing activities for the three months ended March 31, 2022 was $32.8 million, which was comprised primarily of net change in deposits, compared to $87.4 million provided by financing activities during the three months ended March 31, 2021.

Net cash provided by operating activities for the six months ended June 30, 2022 was $10.8 million, compared to $8.5 million provided by operating activities for the six months ended June 30, 2021.

During the six months ended June 30, 2022, net cash provided by investing activities was $76.8 million, which consisted primarily of net change in loans receivable, compared to $37.0 million of cash provided by investing activities for the six months ended June 30, 2021.

Net cash used in financing activities for the six months ended June 30, 2022 was $112.8 million, which was comprised primarily of net change in deposits, compared to $123.8 million provided by financing activities during the six months ended June 30, 2021.

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our liquidity and capital resources since the information disclosed in our 2021 Annual Form 10-K other than set forth above.

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The Company is a separate legal entity from the Bank and must provide for its own liquidity.

At March 31, 2022, the Company, on an unconsolidated basis, had liquid assets of $30.4 million.

At June 30, 2022, the Company, on an unconsolidated basis, had liquid assets of $21.3 million.

In addition to its operating expenses, the Company is responsible for paying any dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, and payments on trust-preferred securities and subordinated notes held at the Company level.

The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.

In February 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share on the Company’s outstanding common stock, payable on April 15, 2022 to shareholders of record as of the close of business on March 11, 2022.

The Company expects to continue to pay quarterly cash dividends on its common stock subject to the Board of Director’s discretion to modify or terminate this practice at any time and for any reason

without prior notice.

In May 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share on the Company’s outstanding common stock, payable on July 15, 2022 to shareholders of record as of the close of business on June 17, 2022.

The Company expects to continue to pay quarterly cash dividends on its common stock subject to the Board of Director’s discretion to modify or terminate this practice at any time and for any reason without prior notice.

Assuming continued payment of the cash dividend at this rate of $0.05 per share, our average total dividend paid each quarter would be approximately $677,000 based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).

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Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

In December 2021, the Company’s board of directors approved its fifth stock repurchase program pursuant to which the Company may repurchase up to seven percent of the Company’s common stock, or approximately 747,000 shares, of which 685,355 shares remained available for repurchase at March 31, 2022.

The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

In December 2021, the Company’s board of directors approved its fifth stock repurchase program pursuant to which the Company may repurchase up to seven percent of the Company’s common stock, or approximately 747,000 shares, of which 480,311 shares remained available for repurchase at June 30, 2022.

The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares,

the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

The repurchase program does not obligate the Company to purchase any particular number of shares.

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Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain “Well Capitalized” status under the Federal Reserve regulations.

Based on capital levels at March 31, 2022 and 2021, the Bank was considered to be Well Capitalized.

Based on capital levels at June 30, 2022 and December 31, 2021, the Bank was considered to be Well Capitalized.

The table below shows the capital ratios under the Basel III capital framework as of the dates indicated:

At March 31, 2022

At June 30, 2022

At December 31, 2021

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In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 capital greater than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions.

At March 31, 2022, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.

At June 30, 2022, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary banks to be Well Capitalized under the prompt corrective action regulations.

If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2022, the Company would have exceeded all regulatory capital requirements.

If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2022, the Company would have exceeded all regulatory capital requirements.

For additional information, see “Item 1.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis